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. |
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 20172019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
☐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 0001-34145001-34145
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.) |
| | |
| | |
Dallas, Texas | | 75201 |
(Address of Principal Executive Offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (214) (214) 740-5600
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common Stock, $0.0001 par value | PRIM | The Nasdaq Stock Market LLC |
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| | |
Large accelerated filer |
| Accelerated filer ☐ |
| | |
Non-accelerated filer ☐ | | Smaller reporting company ☐ |
| | |
| | Emerging growth company ☐ |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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 6, 2017, 51,448,7534, 2019, 50,982,098 shares of the registrant’s common stock, par value $0.0001 per share, were outstanding.outstanding.
PRIMORIS SERVICES CORPORATION
INDEX
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| Page No. | |
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| 3 | |
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| 4 | |
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| 5 | |
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| 6 | |
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—Notes to Condensed Consolidated Financial Statements (Unaudited) | |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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| 45 | |
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| 46 | |
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| 46 | |
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| 46 | |
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| 47 | |
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| 48 |
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRIMORIS SERVICES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
(Unaudited)
| | | | | | | |
| | September 30, | | | December 31, | | |
|
| 2019 |
| 2018 |
| ||
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 43,837 | | $ | 151,063 | |
Accounts receivable, net | |
| 551,543 | |
| 372,695 | |
Contract assets | |
| 331,910 | |
| 364,245 | |
Prepaid expenses and other current assets | |
| 34,222 | |
| 36,444 | |
Total current assets | |
| 961,512 | |
| 924,447 | |
Property and equipment, net | |
| 379,739 | |
| 375,884 | |
Operating lease assets | | | 228,100 | | | — | |
Deferred tax assets | | | 888 | | | 1,457 | |
Intangible assets, net | |
| 72,581 | |
| 81,198 | |
Goodwill | |
| 215,103 | |
| 206,159 | |
Other long-term assets | |
| 11,046 | |
| 5,002 | |
Total assets | | $ | 1,868,969 | | $ | 1,594,147 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | | $ | 219,792 | | $ | 249,217 | |
Contract liabilities | |
| 189,664 | |
| 189,539 | |
Accrued liabilities | |
| 219,472 | |
| 117,527 | |
Dividends payable | |
| 3,059 | |
| 3,043 | |
Current portion of long-term debt | |
| 60,104 | |
| 62,488 | |
Total current liabilities | |
| 692,091 | |
| 621,814 | |
Long-term debt, net of current portion | |
| 307,397 | |
| 305,669 | |
Noncurrent operating lease liabilities, net of current portion | | | 162,418 | | | — | |
Deferred tax liabilities | |
| 3,611 | |
| 8,166 | |
Other long-term liabilities | |
| 49,289 | |
| 51,515 | |
Total liabilities | |
| 1,214,806 | |
| 987,164 | |
Commitments and contingencies (See Note 17) | | | | | | | |
Stockholders’ equity | | | | | | | |
Common stock—$.0001 par value; 90,000,000 shares authorized; 50,982,098 and 51,715,518 issued and outstanding at September 30, 2019 and December 31, 2018 | |
| 5 | |
| 5 | |
Additional paid-in capital | |
| 146,765 | |
| 144,048 | |
Retained earnings | |
| 507,269 | |
| 461,075 | |
Accumulated other comprehensive loss | | | (338) | | | (908) | |
Noncontrolling interest | |
| 462 | |
| 2,763 | |
Total stockholders’ equity | |
| 654,163 | |
| 606,983 | |
Total liabilities and stockholders’ equity | | $ | 1,868,969 | | $ | 1,594,147 | |
See Accompanying Notes to Condensed Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
| September 30, |
|
| December 31, |
| |
|
| 2017 |
| 2016 |
| ||
ASSETS |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents ($67,034 and $7,045 related to VIEs. See Note 11) |
| $ | 143,235 |
| $ | 135,823 |
|
Short-term investments |
|
| 19,304 |
|
| — |
|
Customer retention deposits |
|
| 926 |
|
| 481 |
|
Accounts receivable, net |
|
| 356,851 |
|
| 388,000 |
|
Costs and estimated earnings in excess of billings |
|
| 177,662 |
|
| 138,618 |
|
Inventory and uninstalled contract materials |
|
| 39,617 |
|
| 49,201 |
|
Prepaid expenses and other current assets |
|
| 14,529 |
|
| 19,258 |
|
Total current assets |
|
| 752,124 |
|
| 731,381 |
|
Property and equipment, net |
|
| 305,046 |
|
| 277,346 |
|
Intangible assets, net |
|
| 48,655 |
|
| 32,841 |
|
Goodwill |
|
| 151,118 |
|
| 127,226 |
|
Other long-term assets |
|
| 4,749 |
|
| 2,004 |
|
Total assets |
| $ | 1,261,692 |
| $ | 1,170,798 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Accounts payable |
| $ | 153,677 |
| $ | 168,110 |
|
Billings in excess of costs and estimated earnings |
|
| 159,120 |
|
| 112,606 |
|
Accrued expenses and other current liabilities |
|
| 125,626 |
|
| 108,006 |
|
Dividends payable |
|
| 2,829 |
|
| 2,839 |
|
Current portion of capital leases |
|
| 214 |
|
| 188 |
|
Current portion of long-term debt |
|
| 62,697 |
|
| 58,189 |
|
Current portion of contingent earnout liabilities |
|
| 1,252 |
|
| — |
|
Total current liabilities |
|
| 505,415 |
|
| 449,938 |
|
Long-term capital leases, net of current portion |
|
| 245 |
|
| 15 |
|
Long-term debt, net of current portion |
|
| 191,948 |
|
| 203,381 |
|
Deferred tax liabilities |
|
| 9,830 |
|
| 9,830 |
|
Other long-term liabilities |
|
| 13,007 |
|
| 9,064 |
|
Total liabilities |
|
| 720,445 |
|
| 672,228 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
Stockholders’ equity |
|
|
|
|
|
|
|
Common stock—$.0001 par value; 90,000,000 shares authorized; 51,448,753 and 51,576,442 issued and outstanding at September 30, 2017 and December 31, 2016 |
|
| 5 |
|
| 5 |
|
Additional paid-in capital |
|
| 160,277 |
|
| 162,128 |
|
Retained earnings |
|
| 376,537 |
|
| 335,218 |
|
Non-controlling interest |
|
| 4,428 |
|
| 1,219 |
|
Total stockholders’ equity |
|
| 541,247 |
|
| 498,570 |
|
Total liabilities and stockholders’ equity |
| $ | 1,261,692 |
| $ | 1,170,798 |
|
3
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, | | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
Revenue | | $ | 865,064 | | $ | 908,902 | | $ | 2,316,551 | | $ | 2,061,808 | |
Cost of revenue | |
| 756,643 | |
| 802,397 | |
| 2,075,139 | |
| 1,839,324 | |
Gross profit | |
| 108,421 | |
| 106,505 | |
| 241,412 | |
| 222,484 | |
Selling, general and administrative expenses | |
| 49,827 | |
| 51,604 | |
| 141,477 | |
| 132,049 | |
Merger and related costs | | | — | | | 3,827 | | | — | | | 13,190 | |
Operating income | |
| 58,594 | |
| 51,074 | |
| 99,935 | |
| 77,245 | |
Other income (expense): | | | | | | | | | | | | | |
Foreign exchange (loss) gain | |
| (136) | |
| (69) | |
| (724) | |
| 1,444 | |
Other income (expense), net | |
| (2,928) | |
| 32 | |
| (3,121) | |
| (751) | |
Interest income | |
| 42 | |
| 932 | |
| 610 | |
| 1,544 | |
Interest expense | |
| (5,186) | |
| (6,448) | |
| (17,494) | |
| (11,637) | |
Income before provision for income taxes | |
| 50,386 | |
| 45,521 | |
| 79,206 | |
| 67,845 | |
Provision for income taxes | |
| (14,560) | |
| (10,716) | |
| (22,620) | |
| (14,633) | |
Net income | | | 35,826 | | | 34,805 | | | 56,586 | | | 53,212 | |
| | | | | | | | | | | | | |
Less net income attributable to noncontrolling interests | | | (178) | |
| (2,114) | | | (1,204) | | | (8,118) | |
| | | | | | | | | | | | | |
Net income attributable to Primoris | | $ | 35,648 | | $ | 32,691 | | $ | 55,382 | | $ | 45,094 | |
| | | | | | | | | | | | | |
Dividends per common share | | $ | 0.06 | | $ | 0.06 | | $ | 0.18 | | $ | 0.18 | |
| | | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | | |
Basic | | $ | 0.70 | | $ | 0.64 | | $ | 1.09 | | $ | 0.88 | |
Diluted | | $ | 0.70 | | $ | 0.63 | | $ | 1.08 | | $ | 0.87 | |
Weighted average common shares outstanding: | | | | | | | | | | | | | |
Basic | |
| 50,976 | |
| 51,403 | |
| 50,887 | |
| 51,471 | |
Diluted | |
| 51,215 | |
| 51,735 | |
| 51,210 | |
| 51,760 | |
See Accompanying Notes to Condensed Consolidated Financial Statements
34
PRIMORIS SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands, Except Per Share Amounts)Thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Revenue |
| $ | 608,311 |
| $ | 507,828 |
| $ | 1,800,978 |
| $ | 1,395,085 |
|
Cost of revenue |
|
| 537,890 |
|
| 457,699 |
|
| 1,591,021 |
|
| 1,262,394 |
|
Gross profit |
|
| 70,421 |
|
| 50,129 |
|
| 209,957 |
|
| 132,691 |
|
Selling, general and administrative expenses |
|
| 42,559 |
|
| 35,994 |
|
| 128,390 |
|
| 101,150 |
|
Impairment of goodwill |
|
| — |
|
| 2,716 |
|
| — |
|
| 2,716 |
|
Operating income |
|
| 27,862 |
|
| 11,419 |
|
| 81,567 |
|
| 28,825 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
| 6,066 |
|
| — |
|
| 6,066 |
|
| — |
|
Foreign exchange gain (loss) |
|
| 167 |
|
| (92) |
|
| 299 |
|
| 288 |
|
Other expense |
|
| (39) |
|
| (278) |
|
| (52) |
|
| (278) |
|
Interest income |
|
| 228 |
|
| 31 |
|
| 411 |
|
| 122 |
|
Interest expense |
|
| (2,198) |
|
| (2,246) |
|
| (6,605) |
|
| (6,754) |
|
Income before provision for income taxes |
|
| 32,086 |
|
| 8,834 |
|
| 81,686 |
|
| 22,203 |
|
Provision for income taxes |
|
| (9,952) |
|
| (4,078) |
|
| (28,644) |
|
| (9,244) |
|
Net income |
| $ | 22,134 |
| $ | 4,756 |
| $ | 53,042 |
| $ | 12,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less net income attributable to noncontrolling interests |
|
| (1,537) |
|
| (252) |
| $ | (3,209) |
| $ | (706) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Primoris |
| $ | 20,597 |
| $ | 4,504 |
| $ | 49,833 |
| $ | 12,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share |
| $ | 0.055 |
| $ | 0.055 |
| $ | 0.17 |
| $ | 0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.40 |
| $ | 0.09 |
| $ | 0.97 |
| $ | 0.24 |
|
Diluted |
| $ | 0.40 |
| $ | 0.09 |
| $ | 0.96 |
| $ | 0.24 |
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 51,441 |
|
| 51,780 |
|
| 51,491 |
|
| 51,759 |
|
Diluted |
|
| 51,707 |
|
| 52,034 |
|
| 51,751 |
|
| 51,978 |
|
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
Net income | | $ | 35,826 | | $ | 34,805 | | $ | 56,586 | | $ | 53,212 | |
Other comprehensive income, net of tax: | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | (166) | |
| 200 | | | 570 | | | 577 | |
Comprehensive income | | | 35,660 | | | 35,005 | | | 57,156 | | | 53,789 | |
Less net income attributable to noncontrolling interests | | | (178) | | | (2,114) | | | (1,204) | | | (8,118) | |
Comprehensive income attributable to Primoris | | $ | 35,482 | | $ | 32,891 | | $ | 55,952 | | $ | 45,671 | |
See Accompanying Notes to Condensed Consolidated Financial Statements
4
5
PRIMORIS SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ EQUITY
(In Thousands)Thousands, Except Share and Per Share Amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | | | | | |
| | | | | | | Additional | | | | | Other | | Non | | Total |
| ||||
| | Common Stock | | Paid-in | | Retained | | Comprehensive | | Controlling | | Stockholders’ |
| ||||||||
|
| Shares |
| Amount |
| Capital |
| Earnings | 0 | Loss |
| Interest |
| Equity |
| ||||||
Balance, June 30, 2019 |
| 50,965,221 | | $ | 5 | | $ | 146,064 | | $ | 474,684 | | $ | (172) | | $ | 284 | | $ | 620,865 | |
Net income |
| — | |
| — | |
| — | |
| 35,648 | | | — | |
| 178 | |
| 35,826 | |
Foreign currency translation adjustments, net of tax | | — | | | — | | | — | | | — | | | (166) | | | — | | | (166) | |
Issuance of shares to directors |
| 16,877 | |
| — | |
| 337 | |
| — | | | — | |
| — | |
| 337 | |
Amortization of Restricted Stock Units | | — | | | — | | | 360 | | | — | | | — | | | — | | | 360 | |
Dividend equivalent Units accrued - Restricted Stock Units | | — | | | — | | | 4 | | | (4) | | | — | | | — | | | — | |
Dividends declared ($0.06 per share) |
| — | |
| — | |
| — | |
| (3,059) | | | — | |
| — | |
| (3,059) | |
Balance, September 30, 2019 |
| 50,982,098 | | $ | 5 | | $ | 146,765 | | $ | 507,269 | | $ | (338) | | $ | 462 | | $ | 654,163 | |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Nine Months Ended |
| ||||
|
| September 30, |
| ||||
|
| 2017 |
| 2016 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
Net income |
| $ | 53,042 |
| $ | 12,959 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation |
|
| 43,064 |
|
| 46,430 |
|
Amortization of intangible assets |
|
| 6,184 |
|
| 5,015 |
|
Goodwill and intangible asset impairment |
|
| 477 |
|
| 2,716 |
|
Stock-based compensation expense |
|
| 911 |
|
| 1,169 |
|
Unrealized gain on short-term investments |
|
| (5,980) |
|
| — |
|
Gain on sale of property and equipment |
|
| (3,880) |
|
| (3,361) |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
Customer retention deposits |
|
| (445) |
|
| (451) |
|
Accounts receivable |
|
| 41,870 |
|
| 27,093 |
|
Costs and estimated earnings in excess of billings |
|
| (38,464) |
|
| (39,936) |
|
Other current assets |
|
| 17,210 |
|
| 13,865 |
|
Other long-term assets |
|
| (2,745) |
|
| (1,963) |
|
Accounts payable |
|
| (17,813) |
|
| 10,036 |
|
Billings in excess of costs and estimated earnings |
|
| 46,067 |
|
| (41,584) |
|
Accrued expenses and other current liabilities |
|
| 17,858 |
|
| 18,580 |
|
Other long-term liabilities |
|
| 4,076 |
|
| 49 |
|
Net cash provided by operating activities |
|
| 161,432 |
|
| 50,617 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
Purchase of property and equipment |
|
| (57,346) |
|
| (52,137) |
|
Proceeds from sale of property and equipment |
|
| 7,027 |
|
| 7,763 |
|
Purchase of short-term investments |
|
| (13,588) |
|
| — |
|
Sale of short-term investments |
|
| 350 |
|
| — |
|
Cash paid for acquisitions |
|
| (66,205) |
|
| (4,108) |
|
Net cash used in investing activities |
|
| (129,762) |
|
| (48,482) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
| 30,000 |
|
| 30,000 |
|
Repayment of capital leases |
|
| (191) |
|
| (626) |
|
Repayment of long-term debt |
|
| (41,088) |
|
| (36,867) |
|
Payment of debt issuance costs for amended and restated credit agreement |
|
| (631) |
|
| — |
|
Proceeds from issuance of common stock purchased under a long-term incentive plan |
|
| 1,148 |
|
| 1,439 |
|
Repurchase of common stock |
|
| (4,999) |
|
| — |
|
Dividends paid |
|
| (8,497) |
|
| (8,536) |
|
Net cash used in financing activities |
|
| (24,258) |
|
| (14,590) |
|
Net change in cash and cash equivalents |
|
| 7,412 |
|
| (12,455) |
|
Cash and cash equivalents at beginning of the period |
|
| 135,823 |
|
| 161,122 |
|
Cash and cash equivalents at end of the period |
| $ | 143,235 |
| $ | 148,667 |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | | | | | |
| | | | | | | Additional | | | | | Other | | Non | | Total |
| ||||
| | Common Stock | | Paid-in | | Retained | | Comprehensive | | Controlling | | Stockholders’ |
| ||||||||
|
| Shares |
| Amount |
| Capital |
| Earnings | 0 | Loss |
| Interest |
| Equity |
| ||||||
Balance, December 31, 2018 |
| 50,715,518 | | $ | 5 | | $ | 144,048 | | $ | 461,075 | | $ | (908) | | $ | 2,763 | | $ | 606,983 | |
Net income |
| — | |
| — | |
| — | |
| 55,382 | | | — | |
| 1,204 | |
| 56,586 | |
Foreign currency translation adjustments, net of tax | | — | | | — | | | — | | | — | | | 570 | | | — | | | 570 | |
Issuance of shares to employees and directors | | 144,261 | | | — | | | 2,998 | | | — | | | — | | | — | | | 2,998 | |
Conversion of Restricted Stock Units, net of shares withheld for taxes |
| 122,319 | |
| — | |
| (1,519) | |
| — | | | — | |
| — | |
| (1,519) | |
Amortization of Restricted Stock Units | | — | | | — | | | 1,218 | | | — | | | — | | | — | | | 1,218 | |
Dividend equivalent Units accrued - Restricted Stock Units | | — | | | — | | | 20 | | | (20) | | | — | | | — | | | — | |
Distribution of noncontrolling entities | | — | | | — | | | — | | | — | | | — | | | (3,505) | | | (3,505) | |
Dividends declared ($0.18 per share) |
| — | |
| — | |
| — | |
| (9,168) | | | — | |
| — | |
| (9,168) | |
Balance, September 30, 2019 |
| 50,982,098 | | $ | 5 | | $ | 146,765 | | $ | 507,269 | | $ | (338) | | $ | 462 | | $ | 654,163 | |
See Accompanying Notes to Condensed Consolidated Financial Statements
5
6
PRIMORIS SERVICES CORPORATION
SUPPLEMENTAL DISCLOSURESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW INFORMATIONSTOCKHOLDERS’ EQUITY (Continued)
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, |
| ||||
|
| 2017 |
| 2016 |
| ||
|
| (Unaudited) |
| ||||
Cash paid: |
|
|
|
|
|
|
|
Interest |
| $ | 6,236 |
| $ | 6,654 |
|
|
|
|
|
|
|
|
|
Income taxes, net of refunds received |
| $ | 25,618 |
| $ | 2,079 |
|
(In Thousands, Except Share and Per Share Amounts)
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES(Unaudited)
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, |
| ||||
|
| 2017 |
| 2016 |
| ||
|
| (Unaudited) |
| ||||
Obligations incurred for the acquisition of property |
| $ | 4,163 |
| $ | — |
|
|
|
|
|
|
|
|
|
Dividends declared and not yet paid |
| $ | 2,829 |
| $ | 2,848 |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | | | | | |
| | | | | | | Additional | | | | | Other | | Non | | Total |
| ||||
| | Common Stock | | Paid-in | | Retained | | Comprehensive | | Controlling | | Stockholders’ |
| ||||||||
|
| Shares |
| Amount |
| Capital |
| Earnings | 0 | Loss |
| Interest | 0 | Equity |
| ||||||
Balance, June 30, 2018 |
| 51,530,572 | | $ | 5 | | $ | 162,928 | | $ | 402,158 | | $ | 377 | | $ | 11,719 | | $ | 577,187 | |
Net income |
| — | |
| — | |
| — | |
| 32,691 | |
| — | |
| 2,114 | |
| 34,805 | |
Foreign currency translation adjustments, net of tax | | — | | | — | | | — | | | — | | | 200 | | | — | | | 200 | |
Issuance of shares to directors |
| 10,092 | |
| — | |
| 271 | |
| — | |
| — | |
| — | |
| 271 | |
Amortization of Restricted Stock Units | | — | | | — | | | 318 | | | — | | | — | | | — | | | 318 | |
Dividend equivalent Units accrued - Restricted Stock Units | | — | | | — | | | 13 | | | (13) | | | — | | | — | | | — | |
Distribution of noncontrolling entities | | — | | | — | | | — | | | — | | | — | | | (8,750) | | | (8,750) | |
Repurchase of stock |
| (335,705) | |
| — | |
| (8,479) | |
| — | |
| — | |
| — | |
| (8,479) | |
Dividends declared ($0.06 per share) |
| — | |
| — | |
| — | |
| (3,072) | |
| — | |
| — | |
| (3,072) | |
Balance, September 30, 2018 |
| 51,204,959 | | $ | 5 | | $ | 155,051 | | $ | 431,764 | | $ | 577 | | $ | 5,083 | | $ | 592,480 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | | | | | |
| | | | | | | Additional | | | | | Other | | Non | | Total |
| ||||
| | Common Stock | | Paid-in | | Retained | | Comprehensive | | Controlling | | Stockholders’ |
| ||||||||
|
| Shares |
| Amount |
| Capital |
| Earnings | 0 | Loss |
| Interest | 0 | Equity |
| ||||||
Balance, December 31, 2017 |
| 51,448,753 | | $ | 5 | | $ | 160,502 | | $ | 395,961 | | $ | — | | $ | 5,715 | | $ | 562,183 | |
Net income |
| — | |
| — | |
| — | |
| 45,094 | |
| — | |
| 8,118 | |
| 53,212 | |
Foreign currency translation adjustments, net of tax | | — | | | — | | | — | | | — | | | 577 | | | — | | | 577 | |
Issuance of shares to employees and directors |
| 91,911 | |
| — | |
| 2,245 | |
| — | |
| — | |
| — | |
| 2,245 | |
Amortization of Restricted Stock Units | | — | | | — | | | 748 | | | — | | | — | | | — | | | 748 | |
Dividend equivalent Units accrued - Restricted Stock Units | | — | | | — | | | 35 | | | (35) | | | — | | | — | | | — | |
Distribution of noncontrolling entities | | — | | | — | | | — | | | — | | | — | | | (8,750) | | | (8,750) | |
Repurchase of stock |
| (335,705) | |
| — | |
| (8,479) | |
| — | |
| — | |
| — | |
| (8,479) | |
Dividends declared ($0.18 per share) |
| — | |
| — | |
| — | |
| (9,256) | |
| — | |
| — | |
| (9,256) | |
Balance, September 30, 2018 |
| 51,204,959 | | $ | 5 | | $ | 155,051 | | $ | 431,764 | | $ | 577 | | $ | 5,083 | | $ | 592,480 | |
See Accompanying Notes to Condensed Consolidated Financial Statements
7
6PRIMORIS SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
| | | | | | | |
| | Nine Months Ended September 30, | | ||||
|
| 2019 |
| 2018 |
| ||
Cash flows from operating activities: | | | | | | | |
Net income | | $ | 56,586 | | $ | 53,212 | |
Adjustments to reconcile net income to net cash used in operating activities (net of effect of acquisitions): | | | | | | | |
Depreciation | |
| 55,936 | |
| 47,708 | |
Amortization of intangible assets | |
| 8,617 | |
| 8,287 | |
Stock-based compensation expense | |
| 1,218 | |
| 748 | |
Gain on sale of property and equipment | |
| (7,017) | |
| (3,212) | |
Other non-cash items | | | 240 | | | 180 | |
Changes in assets and liabilities: | | | | | | | |
Accounts receivable | |
| (177,942) | |
| (78,819) | |
Contract assets | |
| 32,274 | |
| (85,817) | |
Other current assets | |
| 1,219 | |
| 11,061 | |
Other long-term assets | | | 167 | | | (957) | |
Accounts payable | |
| (29,757) | |
| 24,099 | |
Contract liabilities | |
| (3,915) | |
| (11,061) | |
Operating lease assets and liabilities, net | |
| (1,489) | |
| — | |
Accrued liabilities | |
| 17,662 | |
| 16,400 | |
Other long-term liabilities | |
| 6,085 | |
| 5,298 | |
Net cash used in operating activities | |
| (40,116) | |
| (12,873) | |
Cash flows from investing activities: | | | | | | | |
Purchase of property and equipment | |
| (78,255) | |
| (80,766) | |
Issuance of a note receivable | |
| — | |
| (15,000) | |
Proceeds from a note receivable | | | — | | | 15,000 | |
Proceeds from sale of property and equipment | |
| 24,393 | |
| 9,655 | |
Cash paid for acquisitions, net of cash and restricted cash acquired | |
| — | |
| (111,030) | |
Net cash used in investing activities | |
| (53,862) | |
| (182,141) | |
Cash flows from financing activities: | | | | | | | |
Borrowings under revolving line of credit | | | 212,880 | | | 170,000 | |
Payments on revolving line of credit | |
| (212,880) | |
| (170,000) | |
Proceeds from issuance of long-term debt | |
| 55,008 | |
| 239,467 | |
Repayment of long-term debt | |
| (55,824) | |
| (127,291) | |
Proceeds from issuance of common stock purchased under a long-term incentive plan | |
| 1,804 | |
| 1,498 | |
Payment of taxes on conversion of Restricted Stock Units | |
| (1,519) | |
| — | |
Payment of contingent earnout liability | | | — | | | (1,200) | |
Cash distribution to noncontrolling interest holders | |
| (3,505) | |
| (8,750) | |
Repurchase of common stock | |
| — | |
| (8,479) | |
Dividends paid | |
| (9,152) | |
| (9,271) | |
Other | | | (328) | |
| (1,113) | |
Net cash (used in) provided by financing activities | |
| (13,516) | |
| 84,861 | |
Effect of exchange rate changes on cash and cash equivalents | | | 268 | | | (193) | |
Net change in cash and cash equivalents | |
| (107,226) | |
| (110,346) | |
Cash and cash equivalents at beginning of the period | |
| 151,063 | |
| 170,385 | |
Cash and cash equivalents at end of the period | | $ | 43,837 | | $ | 60,039 | |
See Accompanying Notes to Condensed Consolidated Financial Statements
8
PRIMORIS SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands)
(Unaudited)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
| | | | | | | |
| | Nine Months Ended September 30, |
| ||||
|
| 2019 |
| 2018 |
| ||
| | (Unaudited) | | ||||
Cash paid for interest | | $ | 12,400 | | $ | 11,658 | |
Cash (received) paid for income taxes, net | | $ | (1,421) | | $ | 5,379 | |
Leased assets obtained in exchange for new operating leases | | $ | 118,755 | | $ | — | |
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
| | | | | | | |
| | Nine Months Ended September 30, |
| ||||
|
| 2019 |
| 2018 |
| ||
| | (Unaudited) | | ||||
Dividends declared and not yet paid | | $ | 3,059 | | $ | 3,072 | |
See Accompanying Notes to Condensed Consolidated Financial Statements
9
PRIMORIS SERVICES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSTATEMENTS
(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 isWe are incorporated in the State of Delaware, and itsour corporate headquarters isare located at 2100 McKinney Avenue,2300 N. Field Street, Suite 1500,1900, Dallas, Texas 75201. 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.
Reportable Segments — Through the end of the year 2016, the Company segregated itsWe segregate our business into three5 reportable segments: the Energy segment, the East Construction Services segment and the West Construction Services segment. In the first quarter 2017, the Company changed its reportable segments in connection with a realignment of the Company’s internal organization and management structure. The segment changes during the quarter reflect the focus of our chief operating decision maker (“CODM”) on the range of services we provide to our end user markets. Our CODM regularly reviews the Company’s operating and financial performance based on these segments.
The current reportable segments include the Power, Industrial and Engineering (“Power”) segment, the Pipeline and Underground (“Pipeline”) segment, the Utilities and Distribution (“Utilities”) segment, the Transmission and Distribution (“Transmission”) segment, and the Civil segment. Segment information for prior periods have been restated to conform to the new segment presentation. See Note 18 – “Reportable Segments”“Reportable Segments” for a brief description of the reportable segments and their operations.
The classification of revenuesrevenue and gross profit for segment reporting purposes can at times require judgment on the part of management. Our segments may perform services across industries or perform joint services for customers in multiple industries. To determine reportable segment gross profit, certain allocations, including allocations of shared and indirect costs, such as facility costs, equipment costs and indirect operating expenses were made.
Acquisition of Willbros Group, Inc. — On June 1, 2018, we completed our acquisition of Willbros Group, Inc. (“Willbros”) for approximately $110.6 million, net of cash and restricted cash acquired. Willbros was a specialty energy infrastructure contractor serving the oil and gas and power industries through its utility transmission and distribution, oil and gas, and Canadian operations, which principally provides unit-price maintenance services in existing operating facilities and executes industrial and power projects. The utility transmission and distribution operations formed the Transmission segment, the oil and gas operations are included in the Pipeline segment, and the Canadian operations are included in the Power segment. See Note 5— “Business Combinations”.
7
The following table lists the Company’s primary business units and their reportable segment:
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The Company ownsJoint Ventures — We own a 50%50% interest in two separate joint ventures, both formed in 2015. Thethe Carlsbad Power Constructors joint venture (“Carlsbad”) is engineering, which engineered and constructingconstructed a gas-fired power generation facility and the “ARB Inc. & B&M Engineering Co.” joint venture (“Wilmington”) is also engineering and constructing a gas-fired power generation facility. Both projects are located in Southern California. The joint ventureCalifornia, and its operations are included as part of the Power segment. As a result of determining that the Company iswe are the primary beneficiary of the two variable interest entitiesentity (“VIEs”VIE”), the results of the Carlsbad and Wilmington joint venturesventure are consolidated in the Company’sour financial statements. Both projects are expected to beThe project was substantially complete as of December 31, 2018, and the warranty period expires in December 2020.
We owned a 50% interest in the “ARB Inc. & B&M Engineering Co.” joint venture (“Wilmington”), which engineered and constructed a gas-fired power generation facility in Southern California, and its operations were included as part of the Power segment. As a result of determining that we were the primary beneficiary of the VIE, the results of the Wilmington joint venture were consolidated in our financial statements. The project has been completed, the project warranty period expired, and dissolution of the joint venture was completed in 2018. the first quarter of 2019.
Financial information for the joint ventures is presented in Note 11 – “Noncontrolling Interests”.
On January 29, 2016, the Company acquired the net assets of Mueller Concrete Construction Company (“Mueller”) for $4.1 million, and on November 18, 2016, the Company acquired the net assets of Northern Energy & Power (“Northern”) for $6.8 million. On May 26, 2017, the Company acquired the net assets of Florida Gas Contractors (“FGC”) for $37.7 million; on May 30, 2017, the Company acquired certain engineering assets for approximately $2.3 million; and on June 16, 2017, the Company acquired the net assets of Coastal Field Services (“Coastal”) for $27.5 million. Both Mueller and FGC operations are included in the Utilities segment, Northern operations are included in the Power segment, and Coastal operations are included in the Pipeline segment. 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 condensed consolidated financial statements— The interim condensed consolidated financial statements for the three and nine month periods ended September 30, 20172019 and 20162018 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’sour Annual Report on Form 10-K, filed on February 28, 2017,2019, which contains the Company’sour audited consolidated financial statements for the year ended December 31, 2016,2018, have been omitted.
8
This Third Quarter 20172019 Report on Form 10-Q should be read in concertconjunction with the Company’sour 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.
10
Short-term investmentsCustomer concentration — We operate in multiple industry segments encompassing the construction of commercial, industrial and public works infrastructure assets primarily throughout the United States. Typically, the top 10 customers in any 1 calendar year generate revenue that is approximately 50% of total revenue; however, the group that comprises the top 10 customers varies from year to year.
During the three and nine months ended September 30, 2019, revenue generated by the top 10 customers was approximately $415.7 million and $1,112.1 million, respectively, which represented 48.0% and 48.0%, respectively of total revenue during the period. During the three and nine months ended September 30, 2019, a Midwest utility customer represented 9.0% and 7.6% of total revenue, respectively, and a Texas utility customer represented 5.6% and 7.3% of total revenue, respectively.
During the three and nine months ended September 30, 2018, revenue generated by the top 10 customers was approximately $483.0 million and $1,045.9 million, respectively, which represented 53.1% and 50.7%, respectively, of total revenue during the period. During the three and nine months ended September 30, 2018, a California utility customer represented 8.2% and 8.6% of total revenue, respectively, and a Midwest utility customer represented 7.9% and 8.4% of total revenue, respectively.
At September 30, 2019, approximately 12.2% of our accounts receivable was due from a state department of transportation customer, and that customer provided 5.5% of our revenue for the nine months ended September 30, 2019.
On January 29, 2019, 1 of our California utility customers filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As of September 30, 2019, the utility customer’s pre-petition accounts receivable comprised approximately 9.3% of our total accounts receivable. For the three and nine months ended September 30, 2019, the customer accounted for approximately 8.4% and 6.7%, respectively, of our total revenue. In the third quarter of 2019, we entered into an agreement with a financial institution to sell, on a non-recourse basis, except in limited circumstances, substantially all of our pre-petition bankruptcy receivables with the customer. We received approximately $48.3 million upon the closing of this transaction in October 2019. During the three and nine months ended September 30, 2019, we recorded a loss of approximately $2.9 million in “Other income (expense), net” on the Condensed Consolidated Statements of Income related to the sale agreement. Additionally, we are continuing to perform services for the customer while the bankruptcy case is ongoing and the amounts billed for post-petition services continue to be collected in the ordinary course of the customer’s post-petition business.
Note 3—Recent Accounting Pronouncements
Recently adopted accounting pronouncements
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, with several clarifying updates. ASU 2016-02 requires 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 Company classifiesASU also requires disclosures that provide qualitative and quantitative information for the lease assets and liabilities recorded in the financial statements. The standard is effective for fiscal years beginning after December 15, 2018, and requires a modified retrospective transition method where a company applies the new lease standard at (i) the beginning of the earliest period presented in the financial statements, or (ii) the adoption date and recognizes a cumulative effect adjustment to the opening balance of retained earnings. We adopted the new standard as of January 1, 2019 using the modified retrospective transition method and elected to apply the new lease standard at the adoption date. See Note 16 — “Leases” for further details.
In January 2017, the FASB issued ASU 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". ASU 2017-04 removes the second step of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. We adopted the standard on January 1, 2019, and it did not have an impact on our financial position, results of operations, or cash flows.
11
Recently issued accounting pronouncements not yet adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which introduced an expected credit loss methodology for the measurement and recognition of credit losses on most financial assets, including trade accounts receivables. The expected credit loss methodology under ASU 2016-13 is based on historical experience, current conditions and reasonable and supportable forecasts, and replaces the probable/incurred loss model for measuring and recognizing expected losses under current GAAP. The ASU also requires disclosure of information regarding how a company developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. The ASU and its related clarifying updates are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. Based on our historical experience, we do not currently expect this ASU to have a material impact on our estimate of the allowance for uncollectable accounts.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”, which eliminates certain disclosure requirements for recurring and nonrecurring fair value measurements. The ASU eliminates such disclosures as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and adds new disclosure requirements for Level 3 measurements. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for any eliminated or modified disclosures. We do not expect the adoption of this ASU to have a material impact on our disclosures.
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.
The following table presents, for each of the fair value hierarchy levels identified under ASC Topic 820, our financial assets and liabilities that are required to be measured at fair value at September 30, 2019 and December 31, 2018 (in thousands):
| | | | | | | | | | |
| | Fair Value Measurements at Reporting Date |
| |||||||
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| | |
| Significant |
| | |
| |
| | Quoted Prices | | Other | | Significant |
| |||
| | in Active Markets | | Observable | | Unobservable |
| |||
| | for Identical Assets | | Inputs | | Inputs |
| |||
|
| (Level 1) |
| (Level 2) |
| (Level 3) |
| |||
Assets as of September 30, 2019: | | | | | | | | | | |
Cash and cash equivalents | | $ | 43,837 |
| $ | — |
| $ | — | |
Contingent consideration | | $ | — | | $ | — | | $ | 938 | |
Liabilities as of September 30, 2019: | | | | | | | | | | |
Interest rate swap | | $ | — | | $ | 7,683 | | $ | — | |
| | | | | | | | | | |
| | | | | | | | | | |
Assets as of December 31, 2018: | | | | | | | | | | |
Cash and cash equivalents | | $ | 151,063 |
| $ | — |
| $ | — | |
Liabilities as of December 31, 2018: | | | | | | | | | | |
Interest rate swap | | $ | — | | $ | 2,829 | | $ | — | |
Other financial instruments 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 investments all securities or othernature. The
12
carrying value of our long-term debt approximates fair value based on comparison with current prevailing market rates for loans of similar risks and maturities.
In the second quarter of 2019, we sold certain assets acquiredthat included an earnout of $2.0 million, contingent upon the buyer meeting a certain performance target. The estimated fair value of the contingent consideration on the sale date was approximately $0.9 million. We measured the fair value of the contingent consideration using the income approach, which have ready marketabilitydiscounts the future cash payments expected upon meeting the performance target to present value. The fair value of the contingent consideration was impacted by two unobservable inputs, management’s estimate of the probability of meeting the performance target and can be liquidated, if necessary, within the current operating cycle and which have readily determinableestimated discount rate (a rate that approximates our cost of capital). Significant changes in either of those inputs in isolation would result in a different fair values. Short-term investments are classified as trading and are recordedvalue measurement. During the third quarter of 2019, there was 0 change to the fair value of the contingent consideration.
The interest rate swap is measured at fair value using the first-in, first-out method.income approach, which discounts the future net cash settlements expected under the derivative contracts to a present value. These valuations primarily utilize indirectly observable inputs, including contractual terms, interest rates and yield curves observable at commonly quoted intervals. See Note 10 – “Derivative Instruments” for additional information.
Note 5 — Business Combinations
2018 Acquisition
Acquisition of Willbros Group, Inc.
On June 1, 2018, we acquired all of the outstanding common stock of Willbros, a specialty energy infrastructure contractor serving the oil and gas and power industries for approximately $110.6 million, net of cash and restricted cash acquired. The Company’s short-term investmentstotal purchase price was funded through a combination of existing cash balances and borrowings under our revolving credit facility.
During the second quarter of 2019, we finalized the estimate of fair values of the assets acquired and liabilities assumed of Willbros. The tables below represent the purchase consideration and estimated fair values of the assets acquired and liabilities assumed. Significant changes since our initial estimates reported in the second quarter of 2018 primarily relate to fair value adjustments to our acquired contracts, which resulted in an increase to contract liabilities of $23.7 million. In addition, fair value adjustments to our acquired lease obligations and insurance liabilities reduced our liabilities assumed by approximately $11.9 million and $6.0 million, respectively, and fair value adjustments to our acquired intangible assets decreased our assets acquired by $6.8 million. As a result of these and other adjustments to the initial estimated fair values of the assets acquired and liabilities assumed, goodwill increased by approximately $18.0 million since the second quarter of 2018. Adjustments recorded to the estimated fair values of the assets acquired and liabilities assumed are generally short-term dollar-denominated bank deposits, U.S. Treasury Billsrecognized in the period in which the adjustments are determined and marketable equity securities.calculated as if the accounting had been completed as of the acquisition date.
13
| | | | |
Purchase consideration (in thousands) | | | | |
Total purchase consideration | | $ | 164,758 | |
Less cash and restricted cash acquired | | | (54,138) | |
Net cash paid | | | 110,620 | |
Revenue recognition
| | | | |
Identifiable assets acquired and liabilities assumed (in thousands) | | | | |
Cash and restricted cash | | $ | 54,138 | |
Accounts receivable | | | 103,186 | |
Contract assets | | | 30,762 | |
Other current assets | | | 18,255 | |
Property, plant and equipment | | | 30,522 | |
Intangible assets: | |
| | |
Customer relationships | | | 47,500 | |
Tradename | | | 200 | |
Deferred income taxes | | | 27,954 | |
Other non-current assets | |
| 2,261 | |
Accounts payable and accrued liabilities | | | (122,692) | |
Contract liabilities | | | (68,104) | |
Other non-current liabilities | | | (20,953) | |
Total identifiable net assets | | | 103,029 | |
Goodwill | | | 61,729 | |
Total purchase consideration | | $ | 164,758 | |
We separated the operations of Willbros among 2 of our existing segments, and created a new segment for the utility transmission and distribution operations called the Transmission segment. The oil and gas operations are included in the Pipeline segment, and the Canadian operations are included in the Power segment. Goodwill associated with the Willbros acquisition principally consists of expected benefits from the expansion of our services into electric utility-focused offerings and the expansion of our geographic presence. Goodwill also includes the value of the assembled workforce. We allocated $59.0 million of goodwill to the Transmission segment, $1.8 million to the Power segment, and $0.9 million to the Pipeline segment. Based on the current tax treatment, goodwill is not expected to be deductible for income tax purposes.
Fixed-price contracts — Historically,
As part of the Willbros acquisition, we acquired approximately $40.2 million of restricted cash that was pledged by Willbros to secure letters of credit. Subsequent to the acquisition, we issued new letters of credit under our Credit Facility to replace the Willbros letters of credit secured by the restricted cash. As of September 30, 2019, substantially all of the restricted cash had been released.
For the three and nine months ended September 30, 2019, Willbros contributed revenue of $173.7 million and $513.7 million, respectively, and gross profit of $9.3 million and $31.3 million, respectively. For the three months ended September 30, 2018, Willbros contributed revenue of $175.8 million and gross profit of $18.6 million. For the period June 1, 2018, the acquisition date, to September 30, 2018, Willbros contributed revenue of $236.8 million and gross profit of $25.4 million.
Acquisition related costs were $3.8 million and $13.1 million for the three and nine months ended September 30, 2018, respectively, related to the acquisition of Willbros and are included in “Merger and related costs” on the Condensed Consolidated Statements of Income. Such costs primarily consisted of severance and retention bonus costs for certain employees of Willbros, professional fees paid to advisors, and exiting or impairing certain duplicate facilities.
14
Supplemental Unaudited Pro Forma Information for the three and nine months ended September 30, 2018
The following pro forma information for the three and nine months ended September 30, 2018 presents our results of operations as if the acquisitions of Willbros had occurred at the beginning of 2018. 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; |
● | the pro forma impact of nonrecurring merger and related costs directly attributable to the acquisition; |
● | the pro forma impact of interest expense relating to the acquisition; and |
● | the pro forma tax effect of both income before income taxes, and the pro forma adjustments, calculated using a tax rate of 28.0% for the three and nine months ended September 30, 2018. |
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 Willbros acquisition been completed on January 1, 2018. For example, the pro forma results do not reflect any operating efficiencies and associated cost savings that we might have achieved with respect to the acquisition.
| | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||
| | September 30, 2018 |
| September 30, 2018 |
| ||
| | (unaudited) | | (unaudited) | | ||
Revenue | | $ | 908,902 | | $ | 2,388,020 | |
Income before provision for income taxes | | $ | 45,521 | | $ | 61,917 | |
Net income attributable to Primoris | | $ | 32,691 | | $ | 40,826 | |
| | | | | | | |
Weighted average common shares outstanding: | | | | | | | |
Basic | |
| 51,403 | |
| 51,471 | |
Diluted | |
| 51,735 | |
| 51,760 | |
| | | | | | | |
Earnings per share: | | | | | | | |
Basic | | $ | 0.64 | | $ | 0.79 | |
Diluted | | $ | 0.63 | | $ | 0.79 | |
Note 6—Revenue
We generate revenue under a range of contracting types, including fixed-price, unit-price, time and material, and cost reimbursable plus fee contracts. A substantial portion of our revenue is derived from contracts that are fixed-price or unit-price and is recognized over time as work is completed because of the Company’scontinuous transfer of control to the customer (typically using an input measure such as costs incurred to date relative to total estimated costs at completion to measure progress). For time and material and cost reimbursable plus fee contracts, revenue has been generated under fixed-priceis recognized primarily on an input basis, based on contract costs incurred as defined within the respective contracts. Costs to obtain contracts are generally not significant and are expensed in the period incurred.
We evaluate whether two or more contracts should be combined and accounted for as one single performance obligation and whether a single contract should be accounted for as more than one performance obligation. ASC 606 defines a performance obligation as a contractual promise to transfer a distinct good or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Our evaluation requires significant judgment and the decision to combine a group of contracts or separate a contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. The majority of our contracts have a single performance obligation, as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contract and, therefore, is not distinct. However, occasionally we have contracts with multiple performance obligations. For fixed-price contracts with multiple performance obligations, we allocate the Company recognizes revenues primarilycontract’s transaction price to each performance obligation using the percentage-of-completionobservable standalone selling price, if available, or alternatively our best estimate of the standalone selling price of each distinct
15
performance obligation in the contract. The primary method which may result in unevenused to estimate standalone selling price is the expected cost plus a margin approach for each performance obligation.
As of September 30, 2019, we had $1.92 billion of remaining performance obligations. We expect to recognize approximately 72% of our remaining performance obligations as revenue during the next four quarters and irregular results. Insubstantially all of the percentage-of-completion method, estimated contract values,remaining balance by the third quarter of 2021.
Accounting for long-term contracts involves the use of various techniques to estimate total transaction price and costs. For long-term contracts, transaction price, estimated cost at completion and total costs incurred to date are used to calculate revenuesrevenue 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 revenuesrevenue 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.
OtherThe nature of our contracts gives rise to several types of variable consideration, including contract forms — The Company also uses unitmodifications (change orders and claims), liquidated damages, volume discounts, performance bonuses, incentive fees, and other terms that can either increase or decrease the transaction price. We estimate variable consideration as the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price timeto the extent we believe we have an enforceable right, and material,it is probable that a significant reversal of cumulative revenue recognized will not occur. Our estimates of variable consideration and cost reimbursable plus fee contracts. For these jobs, revenue is recognized primarilythe determination of whether to include estimated amounts in the transaction price are based on contractual terms. Generally, time and material and cost reimbursement contract revenues are recognizedlargely on an input basis, based on labor hours incurredassessment of our anticipated performance and on purchases made. Unit price contracts generally recognize revenue on an output based measurement such as the completion of specific unitsall information (historical, current and forecasted) that is reasonably available to us at a specified unit price.this time.
The Company considersContract modifications result from changes in contract specifications or requirements. We consider unapproved change orders to be contract variationsmodifications for which customers have not agreed to both scope and price. Costs associated with unapproved change orders are included in the estimated cost to complete and are treated as project costs as incurred. The Company will recognize revenue if we believe it is probable that the contract price will be adjusted and can be reliably estimated. 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 considersWe consider claims to be amounts it seeks,contract modifications for which we seek, 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. Claims can also be caused by non-customer-caused changes, such as rain or other weather delays or rain.delays. Costs associated with claimscontract modifications are included in the estimated costs to complete the contracts and are treated as project costs when incurred. ClaimsIn most instances, contract modifications are included infor goods or services that are not distinct, and, therefore, are accounted for as part of the existing contract. The effect of a contract modification on the transaction price, and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue to the extent we haveon a reasonable legal basis, the related costs have been incurred, realization is probable, and amounts can be reliably estimated. Revenue in excesscumulative catch-up basis. In some cases, settlement of contract costs from claims is recognized when an agreement is reached with customers as to the value of the claims, which in some instancesmodifications may not occur until after completion of work under the contract.
As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the cumulative impact of the profit adjustment is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. In the three and nine months ended September 30, 2019, revenue recognized from performance obligations satisfied in previous periods was $9.5 million and $20.2 million, respectively. If at any time the estimate of contract profitability indicates an anticipated loss on a contract, the projected loss is recognized in full, including any previously recognized profit, in the period it is identified and recognized as an “accrued loss provision” which is included in “Contract liabilities” on the Condensed Consolidated Balance Sheets. For contract revenue recognized over time, the accrued loss provision is adjusted so that the gross profit for the contract remains zero in future periods.
At September 30, 2017,2019, we had approximately $67.8 million of unapproved change orders and claimscontract modifications included in the aggregate transaction prices. These contract value that totalled approximately $87.6 million, whichmodifications were in the process of being negotiated in the normal course of business. Approximately $74.2$56.0 million of unapproved change orders and claimsthe contract modifications had been recognized as revenue on a cumulative percentage-of-completioncatch-up basis through September 30, 2017.2019.
For all contracts, if an estimate of total contract cost and estimated total revenue indicates a loss on a contract, the projected loss is recognized in full at that time and recognized as an “accrued loss provision” which is included in the accrued expenses and other current liabilities amount on the balance sheet. For fixed price contracts, as the percentage-
9
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.
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 as changes in accounting estimates in the period in which the revisions are identified.
In all forms of contracts, we estimate the Company estimates its collectability of contract amounts at the same time that it estimateswe estimate project costs. If the Company anticipateswe anticipate that there may be issues associated with the collectability of the full amount calculated as revenues, the Company
16
transaction price, we 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 timing of when we bill our customers is generally dependent upon agreed-upon contractual terms, milestone billings based on the Company may choose to defer recognitioncompletion of a portioncertain phases of the work, or when services are provided. Sometimes, billing occurs subsequent to revenue until the client pays for the services.recognition, resulting in unbilled revenue, which is a contract asset. Also, we sometimes receive advances or deposits from our customers before revenue is recognized, resulting in deferred revenue, which is a contract liability.
The caption “Costs and estimated earnings“Contract assets” in excess of billings” in the Condensed Consolidated Balance Sheets 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 usefollowing:
● | unbilled revenue, which arise when revenue has been recorded but the amount will not be billed until a later date; |
● | retainage amounts for the portion of the contract price earned by us for work performed, but held for payment by the customer as a form of security until we reach certain construction milestones; and |
● | contract materials for certain job specific materials not yet installed, which are valued using the specific identification method relating the cost incurred to a specific project. |
Contract assets consist of the percentage-of-completion methodfollowing (in thousands):
| | | | | | | |
| | September 30, | | December 31, | | ||
|
| 2019 |
| 2018 | | ||
Unbilled revenue | | $ | 234,118 | | $ | 249,577 | |
Retention receivable | | | 86,513 | | | 88,953 | |
Contract materials (not yet installed) | |
| 11,279 | |
| 25,715 | |
| | $ | 331,910 | | $ | 364,245 | |
Contract assets decreased by $32.3 million compared to December 31, 2018 due primarily to lower unbilled revenue and a reduction in contract materials net yet installed.
The caption “Contract liabilities” in the Condensed Consolidated Balance Sheets represents deferred revenue on billings in excess of accounting which may not be billed under the terms of the contract until a later date or project milestone; (b) incurred costs to be billed under cost reimbursement type contracts; (c) amounts arising from routine lags in billing; or (d) the revenue associated with unapproved change orders or claims when realization is probable and amounts can be reliably determined. For those contracts in which billings exceed contract revenues recognized to date, and the excess amounts are included in the caption “Billings in excess of costs and estimated earnings”.accrued loss provision.
In accordance with applicable terms of certain construction contracts, retainage amounts may be withheld by customers until completion and acceptanceContract liabilities consist of the project. Some payments offollowing (in thousands):
| | | | | | | |
| | September 30, | | December 31, | | ||
|
| 2019 |
| 2018 | | ||
Deferred revenue | | $ | 183,672 | | $ | 182,232 | |
Accrued loss provision | |
| 5,992 | |
| 7,307 | |
| | $ | 189,664 | | $ | 189,539 | |
Contract liabilities were comparable to 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.balance at December 31, 2018.
Significant revisions in contract estimates—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 a 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 engineering and construction of commercial, industrial and public works infrastructure assets primarily throughout 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, 2017, revenues generated by the top ten customers were approximately $317.2 million and $1,058.5 million, respectively, which represented 52.2% and 58.8%, respectively, of total revenues during the period. During the periods, a California utility project represented 10.6% and 8.8% of total revenues, respectively and Texas Department of Transportation (“TXDOT”) represented 8.4% and 9.8% of total revenues, respectively.
During the three and nine months ended September 30, 2016, revenues generated by the top ten customers were $272.0 million and $805.0 million, respectively, which represented 53.5% and 57.7%, respectively, of total revenues during the period. During the periods, a Louisiana petrochemical project represented 10.3% and 11.6% of total revenues, respectively and TXDOT represented 7.9% and 10.4% of total revenues, respectively.
At September 30, 2017, approximately 10.8% 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, 2017. 2019, that was included in the contract liability balance at December 31, 2018 was approximately $143.6 million.
10
17
The following tables present our revenue disaggregated into various categories.
Master Service Agreements (“MSA”) and Non-MSA revenue was as follows (in thousands):
| | | | | | | | | | |
| | For the three months ended September 30, 2019 |
| |||||||
Segment | | MSA | | Non-MSA | | Total | | |||
Power | | $ | 43,680 |
| $ | 156,977 |
| $ | 200,657 | |
Pipeline | | | 29,110 | | | 104,480 | | | 133,590 | |
Utilities | |
| 189,606 |
|
| 91,955 |
|
| 281,561 | |
Transmission | | | 103,421 | | | 25,363 | | | 128,784 | |
Civil | |
| 1,074 |
|
| 119,398 |
|
| 120,472 | |
Total | | $ | 366,891 |
| $ | 498,173 |
| $ | 865,064 | |
| | | | | | | | | | |
| | For the nine months ended September 30, 2019 |
| |||||||
Segment |
| MSA |
| Non-MSA |
| Total | | |||
Power | | $ | 136,564 |
| $ | 381,646 |
| $ | 518,210 | |
Pipeline | | | 71,112 | | | 334,535 | | | 405,647 | |
Utilities | |
| 481,439 |
|
| 168,640 |
|
| 650,079 | |
Transmission | | | 316,019 | | | 66,562 | | | 382,581 | |
Civil | |
| 2,949 |
|
| 357,085 |
|
| 360,034 | |
Total | | $ | 1,008,083 |
| $ | 1,308,468 |
| $ | 2,316,551 | |
| | | | | | | | | | |
| | For the three months ended September 30, 2018 |
| |||||||
Segment | | MSA | | Non-MSA | | Total | | |||
Power | | $ | 48,004 |
| $ | 133,818 |
| $ | 181,822 | |
Pipeline | | | 14,986 | | | 198,087 | | | 213,073 | |
Utilities | |
| 227,192 |
|
| 42,460 |
|
| 269,652 | |
Transmission | | | 100,227 | | | 21,299 | | | 121,526 | |
Civil | |
| — |
|
| 122,829 |
|
| 122,829 | |
Total | | $ | 390,409 |
| $ | 518,493 |
| $ | 908,902 | |
| | | | | | | | | | |
| | For the nine months ended September 30, 2018 |
| |||||||
Segment |
| MSA |
| Non-MSA |
| Total | | |||
Power | | $ | 90,074 |
| $ | 425,304 |
| $ | 515,378 | |
Pipeline | | | 34,479 | | | 326,782 | | | 361,261 | |
Utilities | |
| 515,295 |
|
| 149,919 |
|
| 665,214 | |
Transmission | | | 135,744 | | | 28,236 | | | 163,980 | |
Civil | |
| — |
|
| 355,975 |
|
| 355,975 | |
Total | | $ | 775,592 |
| $ | 1,286,216 |
| $ | 2,061,808 | |
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Revenue by contract type was as follows (in thousands):
| | | | | | | | | | | | | |
| | For the three months ended September 30, 2019 |
| ||||||||||
Segment | | Fixed-price | | Unit-price | | Cost reimbursable (1) | | Total | | ||||
Power | | $ | 136,040 |
| $ | 2,954 |
| $ | 61,663 |
| $ | 200,657 | |
Pipeline | | | 13,860 | | | 21,949 | | | 97,781 | | | 133,590 | |
Utilities | |
| 31,462 |
|
| 165,183 |
|
| 84,916 |
|
| 281,561 | |
Transmission | | | 13,034 | | | 110,869 | | | 4,881 | | | 128,784 | |
Civil | |
| 19,957 |
|
| 79,586 |
|
| 20,929 |
|
| 120,472 | |
Total | | $ | 214,353 |
| $ | 380,541 |
| $ | 270,170 |
| $ | 865,064 | |
(1) | Includes time and material and cost reimbursable plus fee contracts. |
| | | | | | | | | | | | | |
| | For the nine months ended September 30, 2019 |
| ||||||||||
Segment |
| Fixed-price |
| Unit-price |
| Cost reimbursable (1) |
| Total | | ||||
Power | | $ | 316,288 |
| $ | 13,609 |
| $ | 188,313 |
| $ | 518,210 | |
Pipeline | | | 45,196 | | | 32,453 | | | 327,998 | | | 405,647 | |
Utilities | |
| 84,349 |
|
| 352,679 |
|
| 213,051 |
|
| 650,079 | |
Transmission | | | 35,748 | | | 332,389 | | | 14,444 | | | 382,581 | |
Civil | |
| 61,643 |
|
| 241,985 |
|
| 56,406 |
|
| 360,034 | |
Total | | $ | 543,224 |
| $ | 973,115 |
| $ | 800,212 |
| $ | 2,316,551 | |
(1) | Includes time and material and cost reimbursable plus fee contracts. |
| | | | | | | | | | | | | |
| | For the three months ended September 30, 2018 |
| ||||||||||
Segment | | Fixed-price | | Unit-price | | Cost reimbursable (1) | | Total | | ||||
Power | | $ | 85,561 |
| $ | 10,371 |
| $ | 85,890 |
| $ | 181,822 | |
Pipeline | | | 41,772 | | | 7,924 | | | 163,377 | | | 213,073 | |
Utilities | |
| 42,763 |
|
| 144,611 |
|
| 82,278 |
|
| 269,652 | |
Transmission | | | 20,259 | | | 84,646 | | | 16,621 | | | 121,526 | |
Civil | |
| 21,380 |
|
| 90,418 |
|
| 11,031 |
|
| 122,829 | |
Total | | $ | 211,735 |
| $ | 337,970 |
| $ | 359,197 |
| $ | 908,902 | |
(1) | Includes time and material and cost reimbursable plus fee contracts. |
| | | | | | | | | | | | | |
| | For the nine months ended September 30, 2018 |
| ||||||||||
Segment |
| Fixed-price |
| Unit-price |
| Cost reimbursable (1) |
| Total | | ||||
Power | | $ | 310,599 |
| $ | 36,015 |
| $ | 168,764 |
| $ | 515,378 | |
Pipeline | | | 82,394 | | | 58,247 | | | 220,620 | | | 361,261 | |
Utilities | |
| 148,126 |
|
| 339,225 |
|
| 177,863 |
|
| 665,214 | |
Transmission | | | 28,259 | | | 110,103 | | | 25,618 | | | 163,980 | |
Civil | |
| 45,803 |
|
| 269,630 |
|
| 40,542 |
|
| 355,975 | |
Total | | $ | 615,181 |
| $ | 813,220 |
| $ | 633,407 |
| $ | 2,061,808 | |
(1) | Includes time and material and cost reimbursable plus fee contracts. |
Each of these contract types has a different risk profile. Typically, we assume more risk with whomfixed-price contracts. Unforeseen events and circumstances can alter the Company is currently in dispute resolution. See Note 17 – “Commitments and Contingencies”.
At September 30, 2016, approximately 15.4%estimate of the Company’s accounts receivable were duecosts and potential profit associated with a particular fixed-price contract. However, these types of contracts offer additional profits when we complete the work for less cost than originally estimated. Unit-price and cost reimbursable contracts generally subject us to lower risk. Accordingly, the associated fees are usually lower than fees earned on fixed-price contracts. Under these contracts, our profit may vary if actual costs vary significantly from one customer,the negotiated rates.
19
Note 7—Goodwill and that customer provided 11.6% of the Company’s revenuesIntangible Assets
The change in goodwill by segment for the nine months ended September 30, 2016. In addition, approximately 11.2% of total accounts receivable at September 30, 2016 were in dispute resolution.2019 was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | |
| | Power | | Pipeline | | Utilities | | Transmission | | Civil | | Total |
| ||||||
Balance at January 1, 2019 | | $ | 25,933 | | $ | 52,285 | | $ | 37,312 | | $ | 50,479 | | $ | 40,150 | | $ | 206,159 | |
Adjustments to identifiable assets acquired and liabilities assumed | | | 261 | | | 130 | | | — | | | 8,553 | | | — | | | 8,944 | |
Balance at September 30, 2019 | | $ | 26,194 | | $ | 52,415 | | $ | 37,312 | | $ | 59,032 | | $ | 40,150 | | $ | 215,103 | |
Multiemployer plans— Various subsidiaries 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.
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 net realizable value. Uninstalled contract materials are certain job specific materials not yet installed, 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 is able to invoice a state agency for the materials, but title will not pass to the state agency until the materials are installed.
Note 3—Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, with several clarifying updates issued during 2016 and 2017. The new standard is effective for reporting periods beginning after December 15, 2017. The new standard will supersede all current revenue recognition standards and guidance. Revenue recognition will occur when promised goods or services are transferred to customers in amounts that reflect the consideration to which the company expects to be entitled to in exchange for those goods or services. The mandatory 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 standard permits the “modified retrospective method”, which requires prospective application of the new standard as a cumulative-effect adjustment. The Company expects to adopt this new standard using the modified retrospective method that will result in a cumulative-effect adjustment to retained earnings as of the date of adoption. The adoption will only apply to customer contracts that are not substantially complete as of January 1, 2018.
The Company is currently evaluating the impact of adopting the standard on the Company’s financial position, results of operations, cash flows and related disclosures. While we are still in our evaluation process, we do not expect Topic 606 to have a material impact on our financial statements, though internal documentation and record keeping may be significantly impacted. The impact to our results is not believed to be material because Topic 606 generally supports the recognition of revenue over time under the cost-to-cost method for the majority of our contracts, which is consistent with our current percentage of completion revenue recognition model. In most of our fixed price contracts, the customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to payment for work performed to date to deliver services that do not have an alternative use to us.
The Company does not expect the new standard to materially affect the total revenue that can be recognized over the life of a construction project; however, the revenue recognized on a quarterly basis during the construction period may change. We believe that Topic 606 is likely to be more impactful to certain of our lump sum projects as a result of the following potential changes from our current practices:
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11
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We expect significant expanded disclosures relating to revenue recognized during each period. We do not expect Topic 606 to have a material impact on our consolidated balance sheet.
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 is reviewing the impact of the ASU and 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. The Company adopted the ASU as of January 1, 2017, which did not have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business" which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. ASU 2017-01 requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. ASU 2017-01 is effective for interim and annual reporting periods beginning after December 15, 2017. The Company does not expect the adoption of ASU 2017-01 to have an impact on its financial position, results of operations or cash flows.
In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment". ASU 2017-04 removes the second step of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019 and will be applied prospectively. The Company does not expect the adoption of ASU 2017-04 to have an impact on its financial position, results of operations or cash flows.
In May 2017, the FASB issued ASU 2017-09, “Compensation — Stock Compensation (Topic 718) — Scope of Modification Accounting”. The ASU amends the scope of modification accounting for share-based payment arrangements. The amendments in the ASU provide guidance on types of changes to the terms or conditions of share-based payment awards would be required to apply modification accounting under ASC 718, “Compensation — Stock Compensation”. The ASU is effective for interim and annual reporting periods beginning after December 15, 2017 with early adoption permitted. The Company does not expect the adoption of ASU 2017-09 to have an impact on its financial position, results of operations or cash flows.
12
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.
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, 2017 and December 31, 2016:
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|
|
|
| Fair Value Measurements at Reporting Date |
| ||||||
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| Significant |
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|
|
|
|
| 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, 2017: |
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|
|
|
|
|
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|
|
Cash and cash equivalents |
| $ | 143,235 |
| $ | 143,235 |
| — |
|
| — |
|
Short-term investments |
|
| 19,304 |
|
| 19,304 |
| — |
|
| — |
|
Liabilities as of September 30, 2017: |
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|
|
|
|
|
|
|
|
|
|
|
Contingent consideration |
| $ | 1,252 |
|
| — |
| — |
|
| 1,252 |
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|
|
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|
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|
|
Assets as of December 31, 2016: |
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|
|
|
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|
|
Cash and cash equivalents |
| $ | 135,823 |
| $ | 135,823 |
| — |
|
| — |
|
Liabilities as of December 31, 2016: |
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None |
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|
Other financial instruments of the Company not listed in the table consist of accounts receivable, accounts payable and certain accrued liabilities. These financial instruments generally approximate fair value based on their short-term nature. The carrying value of the Company’s long-term debt approximates fair value based on comparison with current prevailing market rates for loans of similar risks and maturities.
The following table provides changes to the Company’s contingent consideration liability Level 3 fair value measurements during the nine months ended September 30, 2017 and 2016:
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|
|
|
| Significant Unobservable Inputs |
| ||||
|
| (Level 3) |
| ||||
Contingent Consideration Liability |
| 2017 |
| 2016 |
| ||
Beginning balance, January 1, |
| $ | — |
| $ | — |
|
Additions to contingent consideration liability: |
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|
|
|
|
Florida Gas Contractors acquisition |
|
| 1,200 |
|
| — |
|
Change in fair value of contingent consideration liability during year |
|
| 52 |
|
| — |
|
Ending balance, September 30, |
| $ | 1,252 |
| $ | — |
|
On a quarterly basis, the Company assesses the estimated fair value of the contractual obligation to pay the contingent consideration and any changes in estimated fair value are recorded in Other expense in the Company’s Consolidated Statements of Income. Fluctuations in the fair value of contingent consideration are impacted by two unobservable inputs, management’s estimate of the probability of the acquired company meeting the contractual operating performance target and the estimated discount rate (a rate that approximates the Company’s cost of capital). Significant changes in either of those inputs in isolation would result in a 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.
13
Note 5—Accounts Receivable
The following is a summary of the Company’s accounts receivable:
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|
|
| September 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
Contracts receivable, net of allowance for doubtful accounts of $480 at September 30, 2017 and $1,030 at December 31, 2016, respectively |
| $ | 292,281 |
| $ | 340,871 |
|
Retention receivable |
|
| 59,388 |
|
| 46,394 |
|
|
|
| 351,669 |
|
| 387,265 |
|
Other accounts receivable |
|
| 5,182 |
|
| 735 |
|
|
| $ | 356,851 |
| $ | 388,000 |
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Note 6—Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts consist of the following:
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| September 30, |
| December 31, | ||
|
| 2017 |
| 2016 | ||
Costs incurred on uncompleted contracts |
| $ | 5,475,483 |
| $ | 5,391,124 |
Gross profit recognized |
|
| 458,018 |
|
| 456,871 |
|
|
| 5,933,501 |
|
| 5,847,995 |
Less: billings to date |
|
| (5,914,959) |
|
| (5,821,983) |
|
| $ | 18,542 |
| $ | 26,012 |
This amount is included in the accompanying consolidated balance sheets under the following captions:
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|
|
| September 30, |
| December 31, | ||
|
| 2017 |
| 2016 | ||
Costs and estimated earnings in excess of billings |
| $ | 177,662 |
| $ | 138,618 |
Billings in excess of cost and estimated earnings |
|
| (159,120) |
|
| (112,606) |
|
| $ | 18,542 |
| $ | 26,012 |
Note 7 — Business Combinations
On January 29, 2016, the Company’s subsidiary, Primoris AV, acquired certain assets and liabilities of Mueller Concrete Construction Company 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 Primoris AV, within the Utilities segment. Goodwill largely consists of expected benefits from providing foundation expertise for Primoris AV’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 Primoris AV business. Based on the current tax treatment, goodwill will be deductible for income tax purposes over a fifteen-year period.
On June 24, 2016, the Company’s subsidiary, Vadnais Trenchless, 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.
On November 18, 2016, the Company’s subsidiary, Primoris AV, acquired certain assets and liabilities of Northern Energy & Power for $6.8 million. The acquired business unit name was changed to Primoris Renewable Energy (“PRE”). PRE operates in the Power segment and serves the renewable energy sector with a specific focus on solar photovoltaic installations in the United States. The purchase was accounted for using the acquisition method of
14
accounting. During the second quarter of 2017, the Company finalized its estimated fair value of the acquired assets of PRE, which resulted in a $0.1 million reduction in goodwill compared to amounts previously recorded. The allocation of the total purchase price included fixed assets of $0.1 million; intangible assets of $3.0 million; and goodwill of $3.7 million. Intangible assets consist of customer relationships. Goodwill largely consists of synergies expected from expanded operations as well as the value of the assembled workforce that PRE provides. Based on the current tax treatment, goodwill will be deductible for income tax purposes over a fifteen-year period.
On May 26, 2017, the Company’s subsidiary, PDS, acquired certain assets of Florida Gas Contractors, a utility contractor specializing in underground natural gas infrastructure, for approximately $33.0 million in cash. In addition, the sellers could receive a contingent earnout amount of up to $1.5 million over a one-year period ending May 26, 2018, based on the achievement of certain operating targets. The estimated fair value of the potential contingent consideration on the acquisition date was $1.2 million. FGC operates in the Utilities segment and expands the Company’s presence in the Florida and Southeast markets. The purchase was accounted for using the acquisition method of accounting. The preliminary allocation of the total purchase price consisted of $4.8 million of fixed assets; $4.2 million of working capital; $10.5 million of intangible assets; and $14.7 million of goodwill. The Company continues to assess the final cutoff data and expects to finalize its estimate of fair value of the acquired assets of FGC during the fourth quarter of 2017. In connection with the FGC acquisition, the Company also paid $3.5 million to acquire certain land and buildings. Intangible assets primarily consist of customer relationships. Goodwill associated with the FGC acquisition principally consists of expected benefits from providing expertise for the Company’s construction efforts in the underground utility business as well as the expansion of the Company’s geographic presence. Goodwill also includes the value of the assembled workforce that the FGC acquisition provides to the Company. Based on the current tax treatment, goodwill will be deductible for income tax purposes over a fifteen-year period.
On May 30, 2017, the Company’s subsidiary, PD&C, acquired certain engineering assets for approximately $2.3 million in cash. PD&C operates in the Power segment and the acquisition futher enhances its ability to provide quality service for engineering and design projects. The purchase was accounted for using the acquisition method of accounting. The preliminary allocation of the total purchase price consisted of $0.2 million of fixed assets and $2.1 million of intangible assets. Intangible assets primarily consist of customer relationships.
On June 16, 2017, the Company acquired certain assets and liabilities of Coastal Field Services for approximately $27.5 million in cash. Coastal provides pipeline construction and maintenance, pipe and vessel coating and insulation, and integrity support services for companies in the oil and gas industry. Coastal operates in the Pipeline segment and increases the Company’s market share in the Gulf Coast energy market. The purchase was accounted for using the acquisition method of accounting. The preliminary allocation of the total purchase price consisted of $4.0 million of fixed assets; $4.6 million of working capital; $9.9 million of intangible assets; $9.3 million of goodwill; and $0.3 million of long-term capital leases. The Company continues to assess the final cutoff data and expects to finalize its estimate of fair value of the acquired assets of Coastal during the fourth quarter of 2017. Intangible assets primarily consist of customer relationships and tradename. Goodwill associated with the Coastal acquisition principally consists of expected benefits from providing expertise for the Company’s expansion of services in the pipeline construction and maintenance business. Goodwill also includes the value of the assembled workforce that the Coastal acquisition provides to the Company. Based on the current tax treatment, goodwill will be deductible for income tax purposes over a fifteen-year period.
Supplemental Unaudited Pro Forma Information for the three and nine months ended September 30, 2017 and 2016
The following pro forma information for the three and nine months ended September 30, 2017 and 2016 presents the results of operations of the Company as if these acquisitions had occurred at the beginning of 2016. The supplemental pro forma information has been adjusted to include:
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15
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, 2016. For example, the pro forma results do not reflect any operating efficiencies and associated cost savings that the Company might have achieved with respect to the acquisitions.
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| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
|
| (unaudited) |
| (unaudited) |
| (unaudited) |
| (unaudited) |
| ||||
Revenues |
| $ | 608,311 |
| $ | 533,609 |
| $ | 1,827,045 |
| $ | 1,441,319 |
|
Income before provision for income taxes |
| $ | 32,086 |
| $ | 12,977 |
| $ | 83,458 |
| $ | 24,752 |
|
Net income attributable to Primoris |
| $ | 20,597 |
| $ | 6,816 |
| $ | 52,068 |
| $ | 13,675 |
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Weighted average common shares outstanding: |
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Basic |
|
| 51,441 |
|
| 51,780 |
|
| 51,491 |
|
| 51,759 |
|
Diluted |
|
| 51,707 |
|
| 52,034 |
|
| 51,751 |
|
| 51,978 |
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Earnings per share: |
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Basic |
| $ | 0.40 |
| $ | 0.13 |
| $ | 1.01 |
| $ | 0.26 |
|
Diluted |
| $ | 0.40 |
| $ | 0.13 |
| $ | 1.01 |
| $ | 0.26 |
|
Note 8—Goodwill and Intangible Assets
Goodwill by segment was recorded as follows:
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|
|
|
| September 30, |
| December 31, |
| ||
Reporting Segment |
| 2017 |
| 2016 |
| ||
Power |
| $ | 24,391 |
| $ | 24,512 |
|
Pipeline |
|
| 51,521 |
|
| 42,252 |
|
Utilities |
|
| 35,056 |
|
| 20,312 |
|
Civil |
|
| 40,150 |
|
| 40,150 |
|
Total Goodwill |
| $ | 151,118 |
| $ | 127,226 |
|
At September 30, 2017 and December 31, 2016, intangible assets other than goodwill totaled $48.7 million and $32.8 million, 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:basis (in thousands):
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|
| |||||||||||||||||||||
|
| Amortization |
| September 30, |
| December 31, |
| |||||||||||||||||||||||
|
| Period |
| 2017 |
| 2016 |
| |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |||||||||
| | | | September 30, 2019 | | December 31, 2018 | | |||||||||||||||||||||||
|
| Weighted |
| Gross Carrying |
| Accumulated |
| Intangible assets, net |
| Gross Carrying |
| Accumulated |
| Intangible assets, net |
| |||||||||||||||
Tradename |
| 3 to 10 years |
| $ | 10,918 |
| $ | 11,754 |
| | 9 years | | $ | 31,390 | | $ | (27,808) | | $ | 3,582 | | $ | 31,390 | | $ | (25,156) | | $ | 6,234 | |
Customer relationships |
| 3 to 15 years |
|
| 36,306 |
|
| 20,136 |
|
| 16 years | |
| 97,400 | |
| (28,877) | |
| 68,523 | |
| 97,400 | |
| (23,079) | |
| 74,321 | |
Non-compete agreements |
| 2 to 5 years |
|
| 1,186 |
|
| 951 |
| | 5 years | |
| 1,900 | |
| (1,485) | |
| 415 | |
| 1,900 | |
| (1,387) | |
| 513 | |
Other |
| 3 years |
|
| 245 |
|
| — |
| | 3 years | | | 275 | | | (214) | | | 61 | | | 275 | | | (145) | | | 130 | |
|
|
|
| $ | 48,655 |
| $ | 32,841 |
| |||||||||||||||||||||
Total |
| 15 years | | $ | 130,965 | | $ | (58,384) | | $ | 72,581 | | $ | 130,965 | | $ | (49,767) | | $ | 81,198 | |
16
Amortization expense of intangible assets was $2.6$2.9 million and $1.8$3.1 million for the three months ended September 30, 20172019 and 2016,2018, respectively, and amortization expense$8.6 million and $8.3 million for the nine months ended September 30, 20172019 and 2016 was $6.2 million and $5.0 million,2018, respectively. Estimated future amortization expense for intangible assets is as follows:follows (in thousands):
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|
|
|
| Estimated |
| |
|
| Intangible |
| |
For the Years Ending |
| Amortization |
| |
December 31, |
| Expense |
| |
2017 (remaining three months) |
| $ | 2,505 |
|
2018 |
|
| 9,741 |
|
2019 |
|
| 9,393 |
|
2020 |
|
| 6,650 |
|
2021 |
|
| 5,413 |
|
Thereafter |
|
| 14,953 |
|
|
| $ | 48,655 |
|
| | | | |
| | Estimated |
| |
| | Intangible |
| |
| | Amortization |
| |
For the Years Ending December 31, |
| Expense |
| |
2019 (remaining three months) | | $ | 2,755 | |
2020 | | | 8,814 | |
2021 | |
| 7,577 | |
2022 | |
| 6,416 | |
2023 | |
| 5,581 | |
Thereafter | |
| 41,438 | |
| | $ | 72,581 | |
Note 9—8—Accounts Payable and Accrued Liabilities
At September 30, 20172019 and December 31, 2016,2018, accounts payable were $153.7included retention amounts of approximately $10.2 million and $168.1$13.2 million, respectively. These balances included retention amounts for the same periods of approximately $11.8 million and $10.6 million, respectively. The retention amounts are dueowed 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:liabilities (in thousands):
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| ||||||
|
| September 30, |
| December 31, | ||||||||
|
| 2017 |
| 2016 | ||||||||
| | | | | | | ||||||
| | September 30, | | December 31, | ||||||||
|
| 2019 |
| 2018 | ||||||||
Payroll and related employee benefits |
| $ | 52,755 |
| $ | 43,768 | | $ | 82,307 | | $ | 60,509 |
Current operating lease liability | | | 70,250 | | | — | ||||||
Insurance, including self-insurance reserves |
|
| 46,835 |
|
| 42,546 | |
| 13,189 | |
| 21,224 |
Reserve for estimated losses on uncompleted contracts |
|
| 12,562 |
|
| 12,801 | ||||||
Corporate income taxes and other taxes |
|
| 8,553 |
|
| 3,368 | |
| 20,227 | |
| 5,040 |
Accrued administrative cost |
|
| 1,719 |
|
| 2,741 | ||||||
Other |
|
| 3,202 |
|
| 2,782 | |
| 33,499 | |
| 30,754 |
|
| $ | 125,626 |
| $ | 108,006 | ||||||
| | $ | 219,472 | | $ | 117,527 |
20
Note 10—9—Credit Arrangements
Long-term debt and credit facilities consistconsists of the following:following (in thousands):
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|
|
| |||||||||
|
| September 30, |
| December 31, |
| |||||||||
|
| 2017 |
| 2016 |
| |||||||||
| | | | | | | ||||||||
| | September 30, | | December 31, | | |||||||||
|
| 2019 |
| 2018 |
| |||||||||
Term loan | | $ | 206,250 | | $ | 214,500 | | |||||||
Revolving credit facility | | | — | | | — | | |||||||
Commercial equipment notes |
| $ | 153,987 |
| $ | 161,148 |
| | | 118,201 | | 127,458 | | |
Mortgage notes |
|
| 11,372 |
|
| 7,564 |
| |
| 43,891 | |
| 27,200 | |
Revolving credit facility |
|
| — |
|
| — |
| |||||||
Senior secured notes |
|
| 89,286 |
|
| 92,858 |
| |||||||
|
| $ | 254,645 |
| $ | 261,570 |
| |||||||
Total debt | | | 368,342 | | | 369,158 | | |||||||
Unamortized debt issuance costs | | | (841) | | | (1,001) | | |||||||
Total debt, net | | $ | 367,501 | | $ | 368,157 | | |||||||
Less: current portion |
|
| (62,697) |
|
| (58,189) |
| |
| (60,104) | |
| (62,488) | |
Long-term debt, net of current portion |
| $ | 191,948 |
| $ | 203,381 |
| | $ | 307,397 | | $ | 305,669 | |
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. AtThe weighted average interest rate on total debt outstanding at September 30, 2017, interest rates ranged from 1.78% to 3.51% per annum2019 and maturity dates range from June 15,December 31, 2018 to August 22, 2022. The notes are secured by certain construction equipment of the Company.was 4.0% and 4.1%, respectively.
17
Credit Agreement
The Company also entered into two secured mortgage notes payable to a bank in December 2015 totaling $8.0 million, with interest rates of 4.3% per annum and maturity dates of January 1, 2031. The mortgage notes are secured by two buildings.
During the nine months ended September 30, 2017, the Company acquired three properties from a related party and assumed mortgage notes secured by the properties totaling $4.2 million, with interest rates of 5.0% per annum and maturity dates of October 1, 2038.
Revolving Credit Facility
On September 29, 2017, the Company entered into an amended and restatedOur credit agreement (the “Credit Agreement”) with CIBC Bank USA, as administrative agent (the “Administrative Agent”) and co-lead arranger, The Bank of the West, as co-lead arranger, and Branch Banking and Trust Company, IBERIABANK, Bank of America, and Simmons Bank (the “Lenders”), which increased its borrowing capacity from $125.0 million to $200.0 million. The Credit Agreement consists of a $220.0 million term loan and a $200.0 million revolving credit facility (“Revolving Credit Facility”), whereby the Lenderslenders agreed to make loans on a revolving basis from time to time and to issue letters of credit for up to the $200.0 million committed amount. The terminationcredit agreement also includes the ability to increase the borrowing capacity thereunder by $75.0 million, subject to obtaining additional or increased lender commitments. The maturity date of the Credit Agreementcredit agreement is July 9, 2023. At September 29, 2022. The Company capitalized $0.6 million of debt issuance costs during the third quarter of 2017 that is being amortized as interest expense over the life of the Credit Agreement.
The principal amount of any loans30, 2019, there were 0 outstanding borrowings under the Revolving 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 defined in the Credit Agreement), or (ii) the Base Rate (which is the greater of (a) the Federal Funds Rate plus 0.50% 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 at any time, with a minimum prepayment of $5.0 million.
The Credit Agreement includes customary restrictive covenants for facilities of this type, as discussed below.
CommercialFacility, commercial letters of credit outstanding were $19.5$37.3 million, at September 30, 2017 and $16.2 million at December 31, 2016. Other than commercial letters of credit, there were no borrowings under the Credit Agreement or the previous credit agreement during the nine months ended September 30, 2017, and available borrowing capacity at September 30, 2017 was $180.5$162.7 million.
Senior Secured Notes and Shelf Agreement
On December 28, 2012, the Company entered into a $50.0 million Senior Secured Notes purchase agreement (“Senior Notes”) and a $25.0 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 $75.0 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 $5.0 million, at any time, subject to make-whole provisions.
On July 25, 2013, the Company drew $25.0 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 $25.0 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.
18
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 containcredit agreement contains various restrictive and financial covenants including, among others, a senior debt/EBITDA ratio and debt service coverage requirements. In addition, the agreements includecredit agreement includes restrictions on investments, change of control provisions and provisions in the event the Company disposeswe dispose of more than 20% of itsour total assets.
The Company was We were in compliance with the covenants for the Credit Agreement and Notes Agreement at September 30, 2017.2019.
Canadian Credit Facility
The Company hasWe have a demand credit facility for $8.0$4.0 million 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 ofAt September 30, 2019, commercial letters of credit for a term of up to five years. The facility provides for an annual fee of 1.0% for any issued and outstanding commercial letters of credit. Letters of credit can be denominated in either Canadian or U.S. dollars. At December 31, 2016, there were no letters of credit outstanding. Letters of credit outstanding was $0.5 million$0.6 in Canadian dollars, at September 30, 2017, and the available borrowing capacity was $7.5$3.4 million in Canadian dollars. The credit facility contains a working capital restrictive covenant for OnQuest Canada, ULC.ULC, our wholly owned subsidiary. At September 30, 2017,2019, OnQuest Canada, ULC was in compliance with the covenant.
Note 10 — Derivative Instruments
We are exposed to certain market risks related to changes in interest rates. To monitor and manage these market risks, we have established risk management policies and procedures. We do not enter into derivative instruments for any purpose other than hedging interest rate risk. NaN of our derivative instruments are used for trading purposes.
Interest Rate Risk. We are exposed to variable interest rate risk as a result of variable-rate borrowings under our Credit Agreement. To manage fluctuations in cash flows resulting from changes in interest rates on a portion of our variable-rate debt, we entered into an interest rate swap agreement on September 13, 2018 with an initial notional amount of $165.0 million, or 75% of the debt outstanding under our Term Loan, which was not designated as a hedge for accounting purposes. The notional amount of the swap will be adjusted down each quarter by 75% of the required principal payments made on the Term Loan. The swap effectively changes the variable-rate cash flow exposure on the debt obligations to fixed rates. The fair value of outstanding interest rate swap derivatives can vary significantly from period to period depending on the total notional amount of swap derivatives outstanding and fluctuations in market interest rates
21
compared to the interest rates fixed by the swaps. As of September 30, 2019, and December 31, 2018, our outstanding interest rate swap agreement contained a notional amount of $154.7 million and $160.9 million, respectively, with a maturity date of July 10, 2023.
Credit Risk. By using derivative instruments to economically hedge exposures to changes in interest rates, we are exposed to counterparty credit risk. Credit risk is the failure of a counterparty to perform under the terms of a derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, we do not possess credit risk. We minimize the credit risk in derivative instruments by entering into transactions with high quality counterparties. We have entered into netting agreements, including International Swap Dealers Association (“ISDA”) Agreements, which allow for netting of contract receivables and payables in the event of default by either party.
The following table summarizes the fair value of our derivative contracts included in the Condensed Consolidated Balance Sheets (in thousands):
| | | | | | | | | |
| | | | Liability Derivatives |
| ||||
|
|
|
| September 30, |
| December 31, |
| ||
| | Balance Sheet Location | | 2019 | | 2018 |
| ||
Interest rate swap | | Other long-term liabilities | | $ | 7,683 | | $ | 2,829 | |
Total derivatives | | | | $ | 7,683 | | $ | 2,829 | |
The following table summarizes the amounts recognized with respect to our derivative instruments within the Condensed Consolidated Statements of Income (in thousands):
| | | | | | | | | | | | | | | |
| | | | Three Months Ended | | Nine Months Ended | | ||||||||
| | Location of Loss Recognized | | September 30, | | September 30, | | ||||||||
|
| on Derivatives |
| 2019 |
| 2018 | | 2019 |
| 2018 |
| ||||
Interest rate swap |
| Interest expense | | $ | 920 | | $ | 33 | | $ | 5,428 | | $ | 33 | |
Cash flows from derivatives settled are reported as cash flows from operating activities.
Note 11 — Noncontrolling Interests
The Company is currently participatingWe own a 50% interest in twothe Carlsbad joint ventures,venture and we owned a 50% interest in the Wilmington joint venture, each of which hasoperates in the Power segment. Both joint ventures have been determined to be a variable interest entity (“VIE”), with the Company asVIE and we were determined to be the primary beneficiary as a result of itsour significant influence over the joint venture operations.
Each joint venture is a partnership, and consequently, noonly the tax effect has beenof our share of the income was recognized for the income.by us. The net assets of the joint ventures are restricted for use by the specific project and are not available for our general operations of the Company.operations.
Carlsbad Joint Venture
The Carlsbad joint ventureventure’s operating activities began in 2015 and are included in the Company’s consolidated statementsour Condensed Consolidated Statements of incomeIncome as follows:follows (in thousands):
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| |||||||||||||
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| |||||||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| |||||||||||||||||
Revenues |
| $ | 28,722 |
| $ | 608 |
| $ | 65,725 |
| $ | 7,276 |
| |||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | |||||||||||||||||||||
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
| |||||||||||||||||
Revenue | | $ | 541 | | $ | 18,415 | | $ | 4,792 | | $ | 89,672 | | |||||||||||||
Net income attributable to noncontrolling interests |
|
| 550 |
|
| 41 |
|
| 930 |
|
| 327 |
| | $ | 178 | | $ | 2,101 | | $ | 1,204 | | $ | 7,545 | |
The Carlsbad joint venture made no distributions of $3.5 million to the partners,noncontrolling interest and $3.5 million to us during the Companynine months ended September 30, 2019. The Carlsbad joint venture made nodistributions of $5.0 million to the noncontrolling interest and $5.0 million to us during the three and nine months ended September 30, 2018. In addition, we did not make any capital contributions to the Carlsbad joint venture during the nine months ended September 30, 2017.2019 and 2018. The project is expected to be completedwas substantially complete as of December 31, 2018 and the warranty period expires in 2018.December 2020.
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22
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 sheetsour Condensed Consolidated Balance Sheets as follows:follows (in thousands):
jjjjjj |
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| |||||||
|
| September 30, |
| December 31, |
| |||||||||
|
| 2017 |
| 2016 |
| |||||||||
| | | | | | | | |||||||
| | September 30, | | December 31, | | |||||||||
|
| 2019 |
| 2018 |
| |||||||||
Cash |
| $ | 51,869 |
| $ | 4,630 |
| | $ | 2,145 | | $ | 3,117 | |
Accounts receivable |
| $ | 10,832 |
| $ | — |
| | $ | — | | $ | 4,451 | |
Costs and estimated earnings in excess of billings |
| $ | — |
| $ | 124 |
| |||||||
Billings in excess of costs and estimated earnings |
| $ | 42,964 |
| $ | 3,426 |
| |||||||
Contract assets | | $ | — | | $ | 8,158 | | |||||||
Accounts payable |
| $ | 16,882 |
| $ | 286 |
| | $ | 15 | | $ | 2,279 | |
Contract liabilities | | $ | 1,102 | | $ | 5,946 | | |||||||
Due to Primoris |
| $ | — |
| $ | 46 |
| | $ | 98 | | $ | 1,979 | |
Wilmington Joint Venture
The Wilmington joint ventureventure’s operating activities began in October 2015 and are included in our Condensed Consolidated Statements of Income as follows (in thousands):
| | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | ||||||||
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
Revenue | | $ | — | | $ | — | | $ | — | | $ | 1,921 | |
Net income attributable to noncontrolling interests | | $ | — | | $ | 13 | | $ | — | | $ | 573 | |
The project has been completed, the Company's consolidated statementsproject warranty period has expired, and the dissolution of income as follows:
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| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Revenues |
| $ | 5,143 |
| $ | 6,140 |
| $ | 29,742 |
| $ | 11,057 |
|
Net income attributable to noncontrolling interests |
|
| 987 |
|
| 211 |
|
| 2,279 |
|
| 379 |
|
the joint venture was completed in the first quarter of 2019. The Wilmington joint venture made no distributionsa final immaterial distribution to the partners,noncontrolling interest and to us during the Companyfirst quarter of 2019. The Wilmington joint venture made nodistributions of $3.8 million to the noncontrolling interest and $3.8 million to us during the three and nine months ended September 30, 2018. In addition, we did not make any capital contributions to the Wilmington joint venture during the nine months ended September 30, 2017. The project is expected to be completed in2019 and 2018.
The carrying value of the assets and liabilities associated with the operations of the Wilmington joint venture arewere included in the Company’s consolidated balance sheets as follows:our Condensed Consolidated Balance Sheet and were immaterial at December 31, 2018.
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|
| September 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
Cash |
| $ | 15,165 |
| $ | 2,415 |
|
Accounts receivable |
| $ | 239 |
| $ | 4,242 |
|
Billings in excess of costs and estimated earnings |
| $ | 1,822 |
| $ | 2,572 |
|
Accounts payable |
| $ | 2,766 |
| $ | 602 |
|
Due to Primoris |
| $ | 4,809 |
| $ | 2,035 |
|
Summary – Joint Venture Balance Sheets
The following table summarizes the total balance sheet amounts for the twoCarlsbad and Wilmington joint ventures, which are included in our Condensed Consolidated Balance Sheets, and the Company’s condensedtotal consolidated balance sheets:sheet amounts (in thousands):
|
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| |||||||
|
| Joint Venture |
| Consolidated |
| |||||||||
At September 30, 2017 |
| Amounts |
| Amounts |
| |||||||||
| | | | | | | | |||||||
| | Joint Venture | | Consolidated | | |||||||||
At September 30, 2019 |
| Amounts |
| Amounts |
| |||||||||
Cash |
| $ | 67,034 |
| $ | 143,235 |
| | $ | 2,145 | | $ | 43,837 | |
Accounts receivable |
| $ | 11,071 |
| $ | 356,851 |
| | $ | — | | $ | 551,543 | |
Costs and estimated earnings in excess of billings |
| $ | — |
| $ | 177,662 |
| |||||||
Contract assets | | $ | — | | $ | 331,910 | | |||||||
Accounts payable |
| $ | 19,648 |
| $ | 153,677 |
| | $ | 15 | | $ | 219,792 | |
Billings in excess of costs and estimated earnings |
| $ | 44,786 |
| $ | 159,120 |
| |||||||
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|
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| |||||||
At December 31, 2016 |
|
|
|
|
|
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| |||||||
Contract liabilities | | $ | 1,102 | | $ | 189,664 | | |||||||
| | | | | | | | |||||||
At December 31, 2018 | | | | | | | | |||||||
Cash |
| $ | 7,045 |
| $ | 135,823 |
| | $ | 3,127 | | $ | 151,063 | |
Accounts receivable |
| $ | 4,242 |
| $ | 388,000 |
| | $ | 4,451 | | $ | 372,695 | |
Costs and estimated earnings in excess of billings |
| $ | 124 |
| $ | 138,618 |
| |||||||
Contract assets | | $ | 8,158 | | $ | 364,245 | | |||||||
Accounts payable |
| $ | 888 |
| $ | 168,110 |
| | $ | 2,279 | | $ | 249,217 | |
Billings in excess of costs and estimated earnings |
| $ | 5,998 |
| $ | 112,606 |
| |||||||
Contract liabilities | | $ | 5,946 | | $ | 189,539 | |
20
23
Note 12—Related Party Transactions
Prior to March 2017, Primoris leased three properties in California from Stockdale Investment Group, Inc. (“SIGI”). Our Chairman of the Board of Directors, who is our largest stockholder, and his family hold a majority interest of SIGI. In March 2017, the Company exercised a right of first refusal and purchased the SIGI properties. The purchase was approved by the Company’s Board of Directors for $12.8 million. The Company assumed three mortgage notes totaling $4.2 million with the remainder paid in cash.
During the three months ended September 30, 2017 and 2016, the Company paid $0 and $0.2 million, respectively, in lease payments to SIGI for the use of these properties. During the nine months ended September 30, 2017 and 2016, the Company paid $0.2 million and $0.6 million, respectively, in lease payments to SIGI for the use of these properties.
Primoris leases properties from other individuals that are current employees. The amounts leased are not material and each arrangement was approved by the Board of Directors.
Note 13—Stock-Based Compensation
In July 2008,May 2013, the shareholders approved and the Companywe 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. Our Board of Directors has granted 259,065423,105 Restricted Stock Units (“Units”), net of forfeitures, to executivesemployees 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.employee. The Units are subject to earlier acceleration, termination, cancellation or forfeiture as provided in the underlying RSU Award Agreement. During the nine months ended September 30, 2017 and 2016, the Company issued 10,000 Units and 100,553 Units, respectively
At September 30, 2017,2019, a total of 173,650257,295 Units were vested. The vesting schedule for the remaining Units are as follows:
|
|
|
|
| Number of Units |
For the Years Ending December 31, |
| to Vest |
2017 (remaining three months) |
| — |
2018 |
| 28,471 |
2019 |
| 51,552 |
2020 |
| 5,392 |
|
| 85,415 |
| | |
| | Number of Units |
For the Years Ending December 31, |
| to Vest |
2019 (remaining three months) | | 2,053 |
2020 | | 11,067 |
2021 | | 122,649 |
2022 | | 27,700 |
2023 | | 2,341 |
| | 165,810 |
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. The CompanyWe recognized $0.2 million and $0.5$0.3 million in compensation expense for each of the three months ended September 30, 20172019 and 2016, respectively, and $0.9 million2018, and $1.2 million in compensation expenseand $0.7 million for the nine months ended September 30, 20172019 and 2016,2018, respectively. At September 30, 2017,2019, approximately $1.4$2.5 million of unrecognized compensation expense remained for the Units, which will be recognized over a weighted average period of 1.82.0 years.
Vested Units accrue “Dividend Equivalent Units” (as defined in the Equity Plan), which will be accrued as additional Units.Units until the Units are converted to Common Stock. At September 30, 2017,2019, a total of 2,7071,949 Dividend Equivalent Units were accrued.
21
Note 14—13—Income Taxes
The Company determines itsWe are subject to tax liabilities imposed by multiple jurisdictions. We determine our 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 andwhich can be a source ofcause variability in the effective tax rate from quarter to quarter. The Company recognizesWe recognize interest and penalties related to uncertain tax positions, if any, as an income tax expense.
We do not include the income tax expense or benefit related to the net earnings or loss attributable to noncontrolling interest in our income tax expense as the entities are considered pass-through entities and, as such, the income tax expense or benefit is attributable to its owners. The effective tax rate on income including noncontrolling interests for the nine months ended September 30, 20172019 and 20162018 was 35.1%28.6% and 42.1%21.6%, respectively. TheExcluding noncontrolling interest, the effective tax rate on income attributable to Primoris (excluding noncontrolling interests) for the nine months ended September 30, 20172019 and 20162018 was 36.5%29.0% and 43.0%24.5%, respectively. OurFor the first nine months of 2019, our tax rates differrate differs from the U.S. federal statutory rate of 35%21.0% primarily due to the impact of state income taxes and nondeductible components of per diem expenses, partially offset by benefits recordedexpenses. For the first nine months of 2018, our tax rate differs from the U.S. federal statutory rate of 21.0% primarily due to the third quarter rate for prior year provision-to-return adjustments, including the 2017 impact of state income taxes, investment tax credits, to be claimed in all open years.and nondeductible components of per diem expenses.
The Company’sOur U.S. federal income tax returns are generally no longer subject to examination for tax years before 2014.2015. The statutes of limitation of state and foreign jurisdictions generally vary between 3 to 5 years. Accordingly, theour state and foreign income tax returns are generally no longer subject to examination for tax years 2012 through 2016 remain open to examination by the other taxing jurisdictions in which the Company operates.before 2013.
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 basisbases and tax basisbases of the Company’s assets and liabilities. Deferred tax assets and liabilities are measured using based on
24
enacted tax rates expected to applybe in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the years in which thoseextent that it is more likely than not that they will be realized based upon consideration of available evidence, including future reversals of existing taxable temporary differences, are expected to reverse.future projected taxable income, the length of the tax asset carryforward periods, and tax planning strategies. 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 15—14—Dividends and Earnings Per Share
The Company hasWe have paid or declared cash dividends during 20162019 and 20172018 as follows:
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|
|
Declaration Date |
| Record Date |
| Payable Date |
| Amount Per Share | |
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 16, 2017 |
| $ | 0.055 |
March 21, 2017 |
| March 31, 2017 |
| April 15, 2017 |
| $ | 0.055 |
May 5, 2017 |
| June 30, 2017 |
| July 14, 2017 |
| $ | 0.055 |
August 2, 2017 |
| September 29, 2017 |
| October 14, 2017 |
| $ | 0.055 |
November 2, 2017 |
| December 29, 2017 |
| January 15, 2018 |
| $ | 0.060 |
| | | | | | | |
Declaration Date |
| Record Date |
| Payable Date |
| Amount Per Share | |
February 21, 2018 | | March 30, 2018 | | April 13, 2018 | | $ | 0.060 |
May 4, 2018 | | June 29, 2018 | | July 13, 2018 | | $ | 0.060 |
August 2, 2018 | | September 28, 2018 | | October 15, 2018 | | $ | 0.060 |
November 2, 2018 | | December 31, 2018 | | January 15, 2019 | | $ | 0.060 |
February 26, 2019 | | March 29, 2019 | | April 15, 2019 | | $ | 0.060 |
May 3, 2019 | | June 28, 2019 | | July 15, 2019 | | $ | 0.060 |
August 2, 2019 | | September 30, 2019 | | October 15, 2019 | | $ | 0.060 |
The payment of future dividends is contingent upon our revenuesrevenue and earnings, capital requirements and our 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 three and nine months ended September 30, 20172019 and 2016.2018 (in thousands, except per share amounts).
| | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | ||||||||
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
Numerator: | | | | | | | | | | | | | |
Net income attributable to Primoris | | $ | 35,648 | | $ | 32,691 | | $ | 55,382 | | $ | 45,094 | |
| | | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | | |
Weighted average shares for computation of basic earnings per share | |
| 50,976 | |
| 51,403 | |
| 50,887 | |
| 51,471 | |
Dilutive effect of shares issued to independent directors | |
| 6 | |
| 4 | |
| 4 | |
| 3 | |
Dilutive effect of restricted stock units (1) | |
| 233 | |
| 328 | |
| 319 | |
| 286 | |
Weighted average shares for computation of diluted earnings per share | |
| 51,215 | |
| 51,735 | |
| 51,210 | |
| 51,760 | |
| | | | | | | | | | | | | |
Earnings per share attributable to Primoris: | | | | | | | | | | | | | |
Basic | | $ | 0.70 | | $ | 0.64 | | $ | 1.09 | | $ | 0.88 | |
Diluted | | $ | 0.70 | | $ | 0.63 | | $ | 1.08 | | $ | 0.87 | |
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|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Numerator: |
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|
|
|
|
|
|
|
|
|
|
Net income attributable to Primoris |
| $ | 20,597 |
| $ | 4,504 |
| $ | 49,833 |
| $ | 12,253 |
|
|
|
|
|
|
|
|
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|
|
|
|
Denominator (shares in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares for computation of basic earnings per share |
|
| 51,441 |
|
| 51,780 |
|
| 51,491 |
|
| 51,759 |
Dilutive effect of shares issued to independent directors |
|
| 4 |
|
| 4 |
|
| 4 |
|
| 4 |
Dilutive effect of restricted stock units (1) |
|
| 262 |
|
| 250 |
|
| 256 |
|
| 215 |
Weighted average shares for computation of diluted earnings per share |
|
| 51,707 |
|
| 52,034 |
|
| 51,751 |
|
| 51,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Primoris: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.40 |
| $ | 0.09 |
| $ | 0.97 |
| $ | 0.24 |
Diluted |
| $ | 0.40 |
| $ | 0.09 |
| $ | 0.96 |
| $ | 0.24 |
(1) | Represents the dilutive effect of |
Note 16—15—Stockholders’ Equity
Common stock —The Company
We issued 65,429114,106 and 71,757 shares of common stock in February 2017the nine months ended September 30, 2019 and 85,907 shares of common stock in February 20162018, respectively, under the Company’sour long-term retention plan (“LTR Plan”). The shares were purchased by the participants in the LTR Plan with payment made to the Companyus of $1.1$1.8 million and $1.5 million in February 2017the nine months ended September 30, 2019 and $1.4 million in February 2016. The Company’s2018, respectively. Our LTR Plan for managers and executives allows participants to use a portion of their annual bonus amount to purchase Companyour common stock at a discount from the market price. The shares purchased in February 2017the nine months ended
25
September 30, 2019 were fora portion of bonus amounts earned in 2016,2018, and the number of shares purchased was calculated atbased on 75% of the average daily closing market price of our common stock during December 2018. The shares purchased in the nine months ended September 30, 2018 were a portion of bonus amounts earned in 2017, and the number of shares purchased was calculated based on 75% of the average closing market price of Januaryour common stock during of December 2017.
In February 20172019 and 2016, the Company2018, we issued 11,784 shares13,278 and 10,45010,062 shares of common stock, respectively, as part of the quarterly compensation of the non-employee members of the Board of Directors. In August 20172019 and 2016, the Company2018, we issued 11,448 shares16,877 and 11,74510,092 shares of common stock, respectively, as part of the quarterly compensation of the non-employee members of the Board of Directors.Directors
During the nine months ended September 30, 2019, a total of 122,319 Units, net of forfeitures for tax withholdings, were converted to common stock. There were 0 Units converted to common stock during the nine months ended September 30, 2018.
As discussed in Note 1312 — “Stock–Based Compensation”, as of September 30, 2017,2019, the Board of Directors has granted a total of 259,065423,105 shares of Units, net of forfeitures under the Equity Plan and these Units have accrued 2,707a total of 1,949 Dividend Equivalent Units.Units were accrued at September 30, 2019.
Share repurchase plan —Note 16—Leases
We lease administrative and various operational facilities, which are generally longer-term, project specific facilities or yards, and construction equipment under non-cancelable operating leases. On January 1, 2019, we adopted ASC 842, “Leases” using the modified retrospective method and elected to apply the new lease standard at the adoption date. The cumulative impact of adopting ASC 842 was immaterial and did not require an adjustment to retained earnings. In February 2017,adopting ASC 842, we changed our accounting policy for leases. Under the Company's Boardmodified retrospective method, results for periods prior to January 1, 2019, are not adjusted and continue to be reported in accordance with our historic accounting under ASC 840, “Leases”.
We elected certain transition practical expedients permitted with the new standard, which among other things, allowed us to carry forward the historical lease classification. In addition, we elected the hindsight practical expedient to determine the reasonably certain lease term for existing leases. We also made an accounting policy election in which leases with an initial term of Directors authorized a $5.0 million share repurchase program under which the Company could, depending on market conditions, share price and other factors, acquire shares of its common stock12 months or less are not recorded on the open marketbalance sheet and lease payments are recognized in the Condensed Consolidated Statements of Income on a straight-line basis over the lease term.
We determine if an arrangement is a lease at inception. We have lease agreements with lease and non-lease components, which are generally accounted for separately. Operating leases are included in operating lease assets, accrued liabilities, and noncurrent operating lease liabilities on our Condensed Consolidated Balance Sheets.
Operating lease assets and operating lease liabilities are recognized at commencement date based on the present value of the future minimum lease payments over the lease term. In determining our lease term, we include options to extend or in privately negotiated transactions. Duringterminate the periodlease when it is reasonably certain that we will exercise that option. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date to determine the present value of future payments. Lease expense from March 23, 2017 through March 28, 2017,minimum lease payments is recognized on a straight-line basis over the Company purchased and cancelled 216,350 shares of stock for $5.0 million at an average cost of $23.10 per share.lease term.
Note 17—Commitments and Contingencies
Leases — The CompanyOur leases certain property and equipment under non-cancellable operating leases whichhave remaining lease terms that expire at various dates through 2023.2030, some of which may include options to extend the leases for up to 5 years. The leases requireexercise of lease extensions is at our sole discretion. Periodically, we sublease excess facility space, but any sublease income is generally not significant. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
26
The components of lease expense are as follows (in thousands):
| | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | ||||||||
| | 2019 |
| 2018 |
| 2019 |
| 2018 | | ||||
Operating lease expense | | $ | 21,478 | (1) | $ | 15,689 | (2) | $ | 55,645 | (1) | $ | 32,357 | (2) |
(1) | Includes short-term leases and variable lease costs, which are immaterial. |
(2) | Reported in accordance with our historical accounting under ASC 840, “Leases”. |
Our operating lease liabilities are reported on the Company to pay all taxes, insurance, maintenance and utilities and are classifiedCondensed Consolidated Balance Sheet as follows (in thousands):
| | | | |
| | September 30, | | |
|
| 2019 |
| |
Accrued liabilities | | $ | 70,250 | |
Noncurrent operating lease liabilities, net of current portion | |
| 162,418 | |
| | $ | 232,668 | |
The future minimum lease payments under non-cancelable operating leases in accordance with ASC Topic 840 “Leases”.are as follows (in thousands):
| | | |
| | Future Minimum | |
For the Years Ending December 31, | | Lease Payments | |
2019 (remaining three months) |
| $ | 20,412 |
2020 | |
| 74,654 |
2021 | | | 59,016 |
2022 | | | 42,523 |
2023 | | | 31,564 |
Thereafter | | | 23,642 |
Total lease payments | | $ | 251,811 |
Less imputed interest | |
| (19,143) |
Total | | $ | 232,668 |
TotalOther information related to operating leases is as follows (in thousands, except lease expense during the threeterm and nine months ended September 30, 2017 was $6.8 milliondiscount rate):
| | | | |
| | Nine Months Ended |
| |
|
| September 30, 2019 |
| |
Cash paid for amounts included in the measurement of lease liabilities | | | | |
Operating cash flows from operating leases | | $ | 55,922 | |
Weighted-average remaining lease term on operating leases (years) | | | 4.06 | |
Weighted-average discount rate on operating leases | | | 3.96% | |
Note 17—Commitments and $18.8 million, respectively, compared to $5.7 million and $16.5 million, respectively for the same periods in 2016. The
23
amounts for the three and nine months ended September 30, 2017 included lease payments made to related parties of $0.2 million and $0.7 million, respectively compared to $0.4 million and $1.1 million, respectively, for the same periods in 2016. Contingencies
Letters of credit — At September 30, 2017, the Company had letters of credit outstanding of $19.8 million, and at December 31, 2016, the Company had letters of credit outstanding of $16.2 million. The outstanding amounts include the U.S. dollar equivalents for letters of credit issued in Canadian dollars.
Bonding — At September 30, 2017 and December 31, 2016, the Company had bid and completion bonds issued and outstanding totaling approximately $2.03 billion and $1.53 billion, respectively.
NTTA settlement — On February 7, 2012, the Company waswe were 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, and the Companywe recorded a liability for $17.0 million. 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 CompanyWe will use its settlement obligation to pay for a third-party contractor approved by the NTTA. At September 30, 2017,NTTA to complete the remaining accrual balance was $15.4 million.remediation. In the event that the total remediation costs exceed the $22.4 million, the second defendant would pay 20% of the excess amount and the Companywe would pay for 80% of the excess amount. During the nine months ended September 30, 2019, we increased our liability by $1.6 million. We also spent $5.9 million for remediation during the nine months ended September 30, 2019. While we continue to monitor the progress toward remediation and the total remediation costs, at this time we cannot determine the total eventual remediation cost. At September 30, 2019, the remaining accrual balance was $14.2 million.
Legal proceedings —The Company has been engaged in dispute resolution to collect money it believes it is owed for one construction project completed in 2014. Because of uncertainties associated with the project, 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 the project.
For the project, a cost reimbursable contract, the Company recorded a receivable of $32.9 million with a reserve of approximately $17.8 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 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. A trial date has been tentatively set for the first quarter of 2018.
The Company had been engaged in dispute resolution to collect money it believed was owed for another construction project completed in 2014. During the third quarter 2016, the Company settled the dispute with an exchange of general releases and receipt of $38.0 million in cash. The Company changed its zero estimate of profit and 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 isWe are subject to other claims and legal proceedings arising out of itsour business. The Company providesWe provide for costs related to contingencies when a loss from such claims is probable and the amount is reasonably determinable.estimable. In determining whether it is possible to provide an estimate of loss, or range of possible loss, the Company reviewswe review and evaluates itsevaluate our litigation and regulatory matters on a quarterly basis in light of potentially relevant factual and legal developments. If we
27
determine an unfavorable outcome is not probable or probable but not 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 defenses to thesuch claims and believes that the reasonably possible outcome of such claims will not, individually or in the aggregate, have a materiallymaterial adverse effect on theour consolidated results of operations, financial condition or cash flows of the Company.flow.
SEC InquiryBonding — The Company has been cooperating with an inquiry by the staff of the Securities At September 30, 2019 and Exchange Commission, which appears to be focused on certain percentage-of-completion contract revenue recognition practices ofDecember 31, 2018, the Company during the time period 2013had bid 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.completion bonds issued and outstanding totaling approximately $638.9 million and $554.9 million, respectively.
Withdrawal liability for multiemployer pension plan — In November 2011, members of the Pipe Line Contractors Association (“PLCA”), including ARB, Rockford and Q3C (prior to the Company’s acquisition in 2012),
24
withdrew from the Central States, Southeast and Southwest Areas Pension Fund multiemployer pension plan (“Plan”) in order to mitigate additional liability in connection with the significantly underfunded Plan. During the first quarter of 2016, the Company received a final payment schedule for its withdrawal liability. Based on this schedule, the liability recorded at September 30, 2017 was $4.9 million. The Company has no plans to withdraw from any other agreements.
Note 18—Reportable Segments
Through the end of the year 2016, the Company segregated itsWe segregate our business into three5 reportable segments: the Energy segment, the East Construction Services segment and the West Construction Services segment. In the first quarter 2017, the Company changed its reportable segments in connection with a realignment of the Company’s internal organization and management structure. The segment changes during the quarter reflect the focus of our CODM on the range of services we provide to our end user markets. Our CODM regularly reviews the Company’s operating and financial performance based on these segments.
The current reportable segments include the Power segment, the Pipeline segment, the Utilities segment, the Transmission segment, and the Civil segment. Segment information for prior periods have been restated to conformEach of our reportable segments is comprised of similar business units that specialize in services unique to the new segment presentation.
segment. Driving the new end-user focused segments are differences in the economic characteristics of each segment, the nature of the services provided;provided by each segment; the production processes of each segment; the type or class of customer using the segment’s services; the methodmethods used by the segment to provide the services; and the regulatory environment of itseach segment’s customers.
Each of the Company’s reportable segments are comprised of similar business units that specialize in services unique to the segment. The reportable segments are managed separately because each serves different types of customers, use different methods to obtain services, and the nature of the regulatory environment are different for each reportable segment.
The classification of revenuesrevenue and gross profit for segment reporting purposes can at times require judgment on the part of management. Our segments may perform services across industries or perform joint services for customers in multiple industries. To determine reportable segment gross profit, certain allocations, including allocations of shared and indirect costs, such as facility costs, equipment costs and indirect operating expenses, were made.
The following is a brief description of the reportable segments:
The Power segment operates throughout the United States and in Canada and specializes in a range of services that include full EPC project delivery, turnkey construction, retrofits, upgrades, repairs, outages, specialty services, fabrication, material lining, and maintenance for entities in the power, solar, petroleum, petrochemical, water, and other industries.
The Pipeline segment operates throughout the United States and specializes in a range of services, including pipeline construction, pipeline maintenance, pipeline integrity, pipeline facility work, compressor stations, pump stations, metering facilities, and other pipeline related services for entities in the petroleum and petrochemical industries.
The Utilities segment operates primarily in California, and the Midwest, the Atlantic Coast, and the Southeast regions of the United States and specializes in a range of services, including gas utility line installation, replacement and maintenance, gas and electric distribution, streetlight construction, substation work, and fiber optic cable installation.
The Transmission segment operates primarily in the Southeastern, Midwest, Atlantic Coast, and Gulf Coast regions of the United States and specializes in a range of services in electric transmission and distribution, streetlight maintenance and construction, substation construction and specialty services, fiber optic cable installation, comprehensive engineering, procurement, maintenance and construction, repair, and restoration of utility infrastructure.
The Civil segment operates primarily in the Southeastern and Gulf Coast regions of the United States and specializes in highway and bridge construction, airport runway and taxiway construction, demolition, site clearing and grading, heavy earthwork, soil stabilization, mass excavation, and drainage projects.
All intersegment revenuesrevenue and gross profit, which were immaterial, have been eliminated in the following tables.
25
28
Segment Revenue
Segment Revenues
Revenue by segment for the three and nine months ended September 30, 2017 and 2016 werewas as follows:follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
| For the three months ended September 30, |
| |||||||||||||||||||
|
| 2017 |
| 2016 |
| |||||||||||||||||
|
|
|
|
| % of |
|
|
|
| % of |
| |||||||||||
|
|
|
|
| Total |
|
|
|
| Total |
| |||||||||||
| | | | | | | | | | | | |||||||||||
| | For the three months ended September 30, | | |||||||||||||||||||
| | 2019 | | 2018 | | |||||||||||||||||
| | | | | % of | | | | | % of | | |||||||||||
| | | | | Total | | | | | Total | | |||||||||||
Segment |
| Revenue |
| Revenue |
| Revenue |
| Revenue |
|
| Revenue |
| Revenue |
| Revenue |
| Revenue |
| ||||
Power |
| $ | 154,178 |
| 25.3% |
| $ | 101,811 |
| 20.0% |
| | $ | 200,657 |
| 23.2% | | $ | 181,822 |
| 20.0% | |
Pipeline |
|
| 84,357 |
| 13.9% |
|
| 106,042 |
| 20.9% |
| | | 133,590 | | 15.4% | | | 213,073 | | 23.4% | |
Utilities |
|
| 246,524 |
| 40.5% |
|
| 186,985 |
| 36.8% |
| |
| 281,561 |
| 32.6% | |
| 269,652 |
| 29.7% | |
Transmission | | | 128,784 | | 14.9% | | | 121,526 | | 13.4% | | |||||||||||
Civil |
|
| 123,252 |
| 20.3% |
|
| 112,990 |
| 22.3% |
| |
| 120,472 |
| 13.9% | |
| 122,829 |
| 13.5% | |
Total |
| $ | 608,311 |
| 100.0% |
| $ | 507,828 |
| 100.0% |
| | $ | 865,064 |
| 100.0% | | $ | 908,902 |
| 100.0% | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the nine months ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| ||||||
|
|
|
|
| % of |
|
|
|
| % of |
|
|
|
|
|
| Total |
|
|
|
| Total |
|
Segment |
| Revenue |
| Revenue |
| Revenue |
| Revenue |
| ||
Power |
| $ | 443,191 |
| 24.6% |
| $ | 367,025 |
| 26.3% |
|
Pipeline |
|
| 402,425 |
| 22.4% |
|
| 217,182 |
| 15.6% |
|
Utilities |
|
| 576,446 |
| 32.0% |
|
| 447,858 |
| 32.1% |
|
Civil |
|
| 378,916 |
| 21.0% |
|
| 363,020 |
| 26.0% |
|
Total |
| $ | 1,800,978 |
| 100.0% |
| $ | 1,395,085 |
| 100.0% |
|
| | | | | | | | | | | |
| | For the nine months ended September 30, | | ||||||||
| | 2019 | | 2018 | | ||||||
| | | | | % of | | | | | % of | |
| | | | | Total | | | | | Total | |
Segment |
| Revenue |
| Revenue |
| Revenue |
| Revenue |
| ||
Power | | $ | 518,210 |
| 22.4% | | $ | 515,378 |
| 25.0% | |
Pipeline | | | 405,647 | | 17.5% | | | 361,261 | | 17.5% | |
Utilities | |
| 650,079 |
| 28.1% | |
| 665,214 |
| 32.3% | |
Transmission | | | 382,581 | | 16.5% | | | 163,980 | (1) | 7.9% | |
Civil | |
| 360,034 |
| 15.5% | |
| 355,975 |
| 17.3% | |
Total | | $ | 2,316,551 |
| 100.0% | | $ | 2,061,808 |
| 100.0% | |
(1) | Represents results from the June 1, 2018 acquisition date of Willbros to September 30, 2018. |
Segment Gross Profit
Gross profit by segment for the three and nine months ended September 30, 2017 and 2016 werewas as follows:follows (in thousands):
| | | | | | | | | | | |
| | For the three months ended September 30, |
| ||||||||
| | 2019 | | 2018 |
| ||||||
|
| | |
| % of |
| | |
| % of |
|
| | | | | Segment | | | | | Segment | |
Segment | | Gross Profit | | Revenue | | Gross Profit | | Revenue |
| ||
Power | | $ | 15,525 |
| 7.7% | | $ | 32,077 |
| 17.6% | |
Pipeline | | | 19,657 | | 14.7% | | | 24,999 | | 11.7% | |
Utilities | |
| 48,892 |
| 17.4% | |
| 35,348 |
| 13.1% | |
Transmission | | | 4,836 | | 3.8% | | | 13,958 | | 11.5% | |
Civil | |
| 19,511 |
| 16.2% | |
| 123 |
| 0.1% | |
Total | | $ | 108,421 |
| 12.5% | | $ | 106,505 |
| 11.7% | |
| | | | | | | | | | | |
| | For the nine months ended September 30, | | ||||||||
| | 2019 | | 2018 | | ||||||
| | | | | % of | | | | | % of |
|
| | | | | Segment | | | | | Segment | |
Segment |
| Gross Profit |
| Revenue |
| Gross Profit |
| Revenue | | ||
Power | | $ | 58,890 |
| 11.4% | | $ | 76,674 |
| 14.9% | |
Pipeline | | | 46,204 | | 11.4% | | | 43,568 | | 12.1% | |
Utilities | |
| 87,999 |
| 13.5% | |
| 78,963 |
| 11.9% | |
Transmission | | | 21,664 | | 5.7% | | | 19,679 | (1) | 12.0% | |
Civil | |
| 26,655 |
| 7.4% | |
| 3,600 |
| 1.0% | |
Total | | $ | 241,412 |
| 10.4% | | $ | 222,484 |
| 10.8% | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the three months ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| ||||||
|
|
|
|
| % of |
|
|
|
| % of |
|
|
|
|
|
| Segment |
|
|
|
| Segment |
|
Segment |
| Gross Profit |
| Revenue |
| Gross Profit |
| Revenue |
| ||
Power |
| $ | 18,842 |
| 12.2% |
| $ | 10,893 |
| 10.7% |
|
Pipeline |
|
| 12,084 |
| 14.3% |
|
| 32,402 |
| 30.6% |
|
Utilities |
|
| 36,081 |
| 14.6% |
|
| 33,925 |
| 18.1% |
|
Civil |
|
| 3,414 |
| 2.8% |
|
| (27,091) |
| (24.0%) |
|
Total |
| $ | 70,421 |
| 11.6% |
| $ | 50,129 |
| 9.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the nine months ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| ||||||
|
|
|
|
| % of |
|
|
|
| % of |
|
|
|
|
|
| Segment |
|
|
|
| Segment |
|
Segment |
| Gross Profit |
| Revenue |
| Gross Profit |
| Revenue |
| ||
Power |
| $ | 52,498 |
| 11.8% |
| $ | 36,570 |
| 10.0% |
|
Pipeline |
|
| 79,575 |
| 19.8% |
|
| 43,870 |
| 20.2% |
|
Utilities |
|
| 76,701 |
| 13.3% |
|
| 68,651 |
| 15.3% |
|
Civil |
|
| 1,183 |
| 0.3% |
|
| (16,400) |
| (4.5%) |
|
Total |
| $ | 209,957 |
| 11.7% |
| $ | 132,691 |
| 9.5% |
|
(1) | Represents results from the June 1, 2018 acquisition date of Willbros to September 30, 2018 |
2629
Segment Goodwill
The amount of goodwill recorded by each segment at September 30, 20172019 and at December 31, 20162018 is presented in Note 87 – “Goodwill and Intangible Assets”.
Geographic Region — RevenuesRevenue and Total Assets
The Company’s revenues aremajority of our revenue is derived from customers primarily in the United States with less than 1.0%approximately 5.3% and 2.5% generated from sources outside of the United States.States during the nine months ended September 30, 2019 and 2018, respectively, principally in Canada. At September 30, 2017,2019 and December 31, 2018, approximately 1.0%3.9% of total assets were located outside of the United States.
Note 19—Subsequent Events
Cash Dividend –
On November 2, 2017,October 31, 2019, the Board of Directors declared a cash dividend of $0.06 per share of common sharestock for stockholders of record as of December 29, 2017,31, 2019, payable on or about January 15, 2018.2020.
27
30
PRIMORIS SERVICES CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS
Item 2. Management’s Discussion and AnalysisAnalysis of Financial Condition and Results of Operations
Forward Looking Statements
This Quarterly Report on Form 10-Q for the quarterly period ended September 30, 20172019 (“Third Quarter 20172019 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, 20162018 and our other filings with the Securities and Exchange Commission (“SEC”). You should read this Third Quarter 20172019 Report, our Annual Report on Form 10-K for the year ended December 31, 20162018 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 20172019 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 20172019 Report and our Annual Report on Form 10-K for the year ended December 31, 2016.2018.
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, weWe provide a wide range of construction, specialty services, fabrication, maintenance, replacement, water and wastewater, and engineering services to major public utilities,through our five segments: Power, Industrial, and Engineering (“Power”), Pipeline and Underground (“Pipeline”), Utilities and Distribution (“Utilities”), Transmission and Distribution (“Transmission”), and Civil.
The Power segment operates throughout the United States and in Canada and specializes in a range of services that include full EPC project delivery, turnkey construction, retrofits, upgrades, repairs, outages, specialty services, fabrication, material lining, and maintenance for entities in the power, solar, petroleum, petrochemical, companies, energy companies, municipalities, state departments of transportationwater, and other customers. We install, replace, repairindustries.
The Pipeline segment operates throughout the United States and rehabilitate natural gas, refined product, water and wastewaterspecializes in a range of services, including pipeline systems; large diameter gas and liquidconstruction, pipeline facilities; and heavy civil projects, earthwork and site development. We also construct mechanicalmaintenance, pipeline integrity, pipeline facility work, compressor stations, pump stations, metering facilities, and other structures,pipeline related services for entities in the petroleum and petrochemical industries.
The Utilities segment operates primarily in California, the Midwest, the Atlantic Coast, and the Southeast regions of the United States and specializes in a range of services, including power plants, petrochemical facilities, refineries, watergas utility line installation, replacement and wastewater treatment facilitiesmaintenance, gas distribution, and parking structures. Finally, we provide specialized processfiber optic cable installation.
The Transmission segment operates primarily in the Southeastern, Midwest, Atlantic Coast, and productGulf Coast regions of the United States and specializes in a range of services in electric transmission and distribution, streetlight
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maintenance and construction, substation construction and specialty services, fiber optic cable installation, comprehensive engineering, services.procurement, maintenance and construction, repair, and restoration of utility infrastructure.
The Civil segment operates primarily in the Southeastern and Gulf Coast regions of the United States and specializes in highway and bridge construction, airport runway and taxiway construction, demolition, site clearing and grading, heavy earthwork, soil stabilization, mass excavation, and drainage projects
We have longstanding customer relationships with major utility, refining, petrochemical, power, and engineering companies.companies, and state departments of transportation. We have completed major underground and industrial projects for a number of large natural gas transmission and petrochemical companies in the United States, major electrical and gas projects for a number of large utility companies in the 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 weeksdaily work orders to as long as 4860 months, or longer, 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.revenue in any given year.
We recognize revenues and profitability on our contracts depending on the typegenerate revenue under a range 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
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expected to complete the contract. Fixed price contracts may include retainage provisions under which customers withhold a percentage of the contract price until the project is complete. For our unit price,contracting options, including fixed-price, unit-price, time and material, and cost-pluscost reimbursable plus fee contracts. A substantial portion of our revenue is derived from contracts we recognize revenuethat are fixed-price or unit-price and is recognized over time as units arework is completed or services are performed.
Through the endbecause of the year 2016,continuous transfer of control to the Company segregated its business into three reportable segments: the Energy segment, the East Construction Services segmentcustomer. For time and the West Construction Services segment. In the first quarter 2017, the Company changed its reportable segments in connection with a realignment of the Company’s internal organizationmaterial and management structure. The segment changes during the quarter reflect the focus of our chief operating decision maker (“CODM”)cost reimbursable plus fee contracts, revenue is recognized primarily on the range of services we provide to our end user markets. Our CODM regularly reviews the Company’s operating and financial performancean input basis, based on these segments.contract costs incurred as defined within the respective contracts.
The current reportable segments include the Power, Industrial, and Engineering (“Power”) segment, the Pipeline and Underground (“Pipeline”) segment, the Utilities and Distribution (“Utilities”) segment, and the Civil segment. See Note 18 – “Reportable Segments” for a brief description of the reportable segments and their operations.
The classification of revenuesrevenue and gross profit for segment reporting purposes can at times require judgment on the part of management. Our segments may perform services across industries or perform joint services for customers in multiple industries. To determine reportable segment gross profit, certain allocations, including allocations of shared and indirect costs, such as facility costs, equipment costs and indirect operating expenses were made.
On June 1, 2018, we acquired Willbros Group Inc. (“Willbros”) for approximately $110.6 million, net of cash and restricted cash acquired. Willbros was a specialty energy infrastructure contractor serving the oil and gas and power industries through its utility transmission and distribution, oil and gas, and Canadian operations, which principally provides unit-price maintenance services in existing operating facilities and executes industrial and power projects. The following table listsutility transmission and distribution operations formed the Company’s primary business unitsTransmission segment, the oil and their reportable segment:gas operations are included in the Pipeline segment, and the Canadian operations are included in the Power segment. Willbros expands our services into electric utility-focused offerings and increases our geographic presence in the United States and Canada.
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The Company ownsWe own a 50% interest in two separate joint ventures, both formed in 2015. Thethe Carlsbad Power Constructors joint venture (“Carlsbad”) is engineering, which engineered and constructingconstructed a gas-fired power generation facility and the “ARB Inc. & B&M Engineering Co.” joint venture (“Wilmington”) is also engineering and constructing a gas-fired power generation facility. Both projects are located in Southern California. The joint ventureCalifornia, and its operations are included as part of the Power segment. As a result of determining that the Company iswe are the primary beneficiary of the two variable interest entitiesentity (“VIEs”VIE”), the results of the Carlsbad and Wilmington joint venturesventure are consolidated in the Company’sour financial statements. Both projects are expected to beThe project was substantially complete as of December 31, 2018 and the warranty period expires in December 2020.
We owned a 50% interest in the “ARB Inc. & B&M Engineering Co.” joint venture (“Wilmington”), which engineered and constructed a gas-fired power generation facility in Southern California, and its operations were included as part of the Power segment. As a result of determining that we were the primary beneficiary of the VIE, the results of the Wilmington joint venture were consolidated in our financial statements. The project has been completed, the project warranty period expired, and dissolution of the joint venture was completed in 2018.the first quarter of 2019.
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On January 29, 2016, the Company acquired the net assets of Mueller Concrete Construction Company (“Mueller”) for $4.1 million, and on November 18, 2016, the Company acquired the net assets of Northern Energy & Power (“Northern”) for $6.8 million. On May 26, 2017, the Company acquired the net assets of Florida Gas Contractors (“FGC”) for $37.7 million; on May 30, 2017, the Company acquired certain engineering assets for approximately $2.3 million; and on June 16, 2017, the Company acquired the net assets of Coastal Field Services (“Coastal”) for $27.5 million. Both Mueller and FGC operations are included in the Utilities segment, Northern operations are included in the Power segment, and Coastal operations are included in the Pipeline segment.
In August 2017, the Company announced it is investing approximately $22.0 million to build, own, and operate a portfolio of solar projects in a California School District acquired from the developers, Spear Point Energy, LLC, and PFMG Solar, LLC. This investment amount includes the estimated cost of EPC work on the projects, which is projected to be completed in 2018. The solar projects are expected to generate a 25-year recurring revenue stream from the District's signed power purchase agreement. As an investment in a renewable energy project, the solar assets should provide Primoris with investment tax credits valued at over $5.0 million. The Company’s initial investmentFinancial information for the solar projects was $3.1 million.joint ventures is presented in Note 11 – “Noncontrolling Interests”.
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 and electric 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, periodically, each of these industries and government agencies areis adversely affected by
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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.
Fluctuations in market prices of oil, gas and other fuel sources have affected demand for our services. The currentsignificant volatility in the price of oil, gas and liquid natural gas has createdthat occurred in the past few years could create uncertainty with respect to demand for our oil and gas pipeline services both in the near term, with additional uncertainty resulting over the length of time that prices will remain at current levels.near-term and for future projects. We believe thathave started to see increased activity in 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 stability in the price of oil in the first nine months of 2017, that stability has not resulted in a significant change in the contracting activities of our customers. Weand 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, butservices. However, a prolonged period of depressed oil prices could delay midstream pipeline opportunities.
We are also monitoring the impact of recently imposed domestic and foreign trade tariffs, which could raise the low oil prices andprice of raw materials, such as steel, utilized on construction projects or delay the bankruptcystart of some smaller oil and gas producers may delay midstream pipeline opportunities.certain projects. The continuing changes in the regulatory environment also affect the demand for our services, either by increasing our work or delaying projects. For example, environmental laws and regulation can provide challenges to major pipeline projects, resulting in delays that impact the timing of revenue recognition. In addition, 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 regulatedand specialty services such as the need for battery storage and the construction of renewable power production facilities.
On January 29, 2019, one of our California utility customers willfiled for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As of September 30, 2019, the utility customer’s pre-petition accounts receivable comprised approximately 9.3% of our total accounts receivable. For the three and nine months ended September 30, 2019, the customer accounted for approximately 8.4% and 6.7%, respectively, of our total revenue. In the third quarter of 2019, we entered into an agreement with a financial institution to sell, on a non-recourse basis, except in limited circumstances, substantially all of our pre-petition bankruptcy receivables with the customer. We received approximately $48.3 million upon the closing of this transaction in October 2019. During the three and nine months ended September 30, 2019, we recorded a loss of approximately $2.9 million in “Other income (expense), net” on the Condensed Consolidated Statements of Income related to the sale agreement. Additionally, we are continuing to perform services for the customer while the bankruptcy case is ongoing and the amounts billed for post-petition services continue to investbe collected in our maintenance and replacement services.the ordinary course of the customer’s post-petition business.
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 and specialty services. While the majority of the Company’s work is in the southern half of the United States, theseThese seasonal impacts can affect revenuesrevenue and profitability in all of our businesses 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 calendar year due to clients’ internal budget cycles. As a result, the Company generally experienceswe usually experience higher revenuesrevenue and earnings in the third and fourth quarters of the year as compared to the first two quarters.
Our project values range in size from a few hundred dollars to much larger projects. The Companybulk of our work is comprised of project sizes that average less than $10.0 million. We also dependent onperform 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
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projects or by client project schedules. Because of the seasonal and cyclical nature of our business, the financial results for any period may fluctuate from prior periods, and the Company’sour financial condition and operating results may vary from quarter-to-quarter.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.
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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 revenuesrevenue 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 Our critical accounting policies are described in our Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016, 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.2018. There have been no material changes to our critical accounting policies since December 31, 2016.2018.
Results of Operations
Consolidated Results
The following discussion compares the results of the three and nine months ended September 30, 20172019 to the three and nine months ended September 30, 2016.2018.
Revenue
Revenue for the three months ended September 30, 2017 was $608.3 million, an increase of $100.5 million, or 19.8%, compared to the same period in 2016. Projects from our major utility clients in California and the Midwest increased revenues by $52.1 million, and our Southern California joint venture power plant projects and our Mid-Atlantic power plant project increased revenues by $40.4 million. In addition, acquisitions completed subsequent to the third quarter of 2016 increased revenues by $20.6 million, and increased volume for Texas DOT projects increased revenue by $14.7 million. The increases were partially offset by $27.5 million of revenue recognized in the third quarter of 2016 from the collection of a disputed receivable.
For the nine months ended September 30, 2017, revenue increased by $405.9 million, or 29.1%, compared to the same period in 2016. Three major pipeline jobs increased revenues by $213.7 million, and our major utility clients in California and the Midwest increased revenue by $110.0 million. In addition, our Southern California joint venture power plant projects and our Mid-Atlantic power plant project increased revenues by $106.0 million, and our Texas DOT projects and Louisiana methanol plant project increased revenues by $66.1 million. The increases were partially offset by decreases of $78.5 million from projects substantially completed in 2017 and $27.5 million of revenue recognized in the third quarter of 2016 from the collection of a disputed receivable.
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Gross Profit
Gross profit was $70.4$865.1 million for the three months ended September 30, 2017, an increase2019, a decrease of $20.3$43.8 million, or 40.5%4.8%, compared to the same period in 2016. Gross profit increased by $37.3 million from the third quarter 2016 write-down of the Belton area jobs and by $5.1 million from2018. The decrease was primarily due to lower revenue in our Southern California joint venture power plant projects and our Mid-Atlantic power plant project. In addition, acquisitions completed subsequent to the third quarter of 2016 increased gross profit by $3.8 million. The increases werePipeline segment, partially offset by $26.7growth in our Power and Utilities segments.
Revenue was $2,316.6 million of gross profit recognized in the third quarter of 2016 from the collection of a disputed receivable.
Forfor the nine months ended September 30, 2017, gross profit increased by $77.32019, an increase of $254.7 million, or 58.2%12.4%, compared to the same period in 2016. Smaller write-downs on2018. The increase was primarily due to incremental revenue from the Belton area jobsWillbros acquisition ($276.9 million) and two large pipeline projectsorganic growth in Florida increased gross profit by $52.2 million and $50.6 million, respectively. In addition, our Southern California joint venture power plant projects and our Mid-Atlantic power plant project increased gross profit by $11.0 million.the Pipeline segment. The increases wereoverall increase was partially offset by $26.7lower revenue in our Utilities segment.
Gross Profit
Gross profit was $108.4 million for the three months ended September 30, 2019, an increase of $1.9 million, or 1.8%, compared to the same period in 2018. The increase was primarily due to increases in our Civil and Utilities segments, partially offset by lower gross profit recognizedin our Power, Transmission, and Pipeline segments. Gross profit as a percentage of revenue increased to 12.5% in the third quarter of 2016 from the collection of a disputed receivable and a $25.9 million decrease due to increased costs on DOT projects.
As discussed in Note 2 — “Basis of Presentation”, we had unapproved change orders and claims included in contract value that totalled approximately $87.6 million atthree months ended September 30, 2017. Of this amount, approximately $50.1 million was2019 from 11.7% in the same period in 2018 due primarily to a favorable impact from partial claims related toresolution in our Civil segment associated with the Belton area projects, partially offset by higher costs associated with two industrial projects in our Power segment.
Gross profit was $241.4 million for the nine months ended September 30, 2019, an increase of $18.9 million, or 8.5%, compared to the same period in 2018. The increase was primarily due to revenue growth. The increase in gross profit for the nine months ended September 30, 2019 from the Willbros acquisition totaled $5.9 million. Gross profit as a percentage of revenue decreased to 10.4% in the nine months ended September 30, 2019 from 10.8% in the same period in 2018 due primarily to higher costs associated with two industrial projects in our Power segment and $22.2 million wasunfavorable weather conditions in the Transmission and Pipeline segments, partially offset by a favorable impact from two completed jobs that are currentlypartial claims resolution in legal dispute.our Civil segment associated with the Belton area projects.
Selling, general and administrative expenses
Selling, general and administrative (“SG&A”) expenses of $42.6were $49.8 million during the three months ended September 30, 2017, increased by $6.62019, a decrease of $1.8 million, or 18.2%3.4%, compared to the third quarter of 2016. Approximately $4.52018 primarily due to a $2.0 million of the increase in SG&A is related to businesses acquired subsequent to the third quarter of 2016. The primary reason for the remaining increase was a $2.2 million increasedecrease in compensation related expenses. SG&A expense as a percentage of revenue was consistent with the same period in 2018.
SG&A expenses including incentivewere $141.5 million during the nine months ended September 30, 2019, an increase of $9.4 million, or 7.1%, compared to 2018 primarily due to $10.9 million of incremental expense from the Willbros acquisition,
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partially offset by a $1.6 million decrease in compensation accruals.related expenses. SG&A expense as a percentage of revenue decreased slightly to 7.0%6.1% compared to 7.1%6.4% for the corresponding period in 20162018 due primarily to the increase inincreased revenue.
SG&A expense of $128.4 million increased $27.2 million, or 26.9%,Merger and related costs
No merger and related costs were incurred for the three and nine months ended September 30, 2017,2019, compared to the same period in 2016. Approximately $8.0$3.8 million of the increase in SG&A is related to businesses acquired subsequent to the third quarter of 2016. The remaining increase was primarily due to a $13.1 million increase in compensation related expenses, including incentive compensation accruals; a $1.2 million increase in advisory fees for acquisitions; a $1.0 million benefit in the prior year from an adjustment to the pension withdrawal liability; and a $0.8 million increase in legal costs. SG&A as a percentage of revenue for the nine months ended September 30, 2017 decreased slightly to 7.1% compared to 7.3% for the corresponding period in 2016, as a result of the increase in revenue.
Planned JCG Texas Heavy Civil division divestiture and impairment of goodwill
In October 2016, the Company announced that it planned to divest its Texas heavy civil business unit, which operates as a division of JCG. The Company planned to continue to operate the business unit until completion of a sale. The Company engaged a financial advisor to assist in the sale and marketed the business unit. In April 2017, the Board of Directors determined that based on the information available, the Company would attain the best long-term value by withdrawing from the sales process and continuing to operate the business unit. Primoris will aggressively pursue claims that will be made for five Texas Department of Transportation projects that resulted in significant losses recorded in 2016. However, there can be no assurance as to the final amounts collected.
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$13.2 million in the third quartersame periods in 2018, which consisted primarily of 2016.severance and retention bonus costs for certain employees of Willbros, professional fees paid to advisors, and exiting or impairing certain duplicate facilities.
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Other income and expense
Non-operating income and expense items for the three and nine months ended September 30, 20172019 and 20162018 were as follows:
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| Nine Months Ended |
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| September 30, |
| September 30, |
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
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| (Thousands) |
| (Thousands) |
| ||||||||
Investment income |
| $ | 6,066 |
| $ | — |
| $ | 6,066 |
| $ | — |
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Foreign exchange gain (loss) |
|
| 167 |
|
| (92) |
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| 299 |
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| 288 |
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Other expense |
|
| (39) |
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| (278) |
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| (52) |
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| (278) |
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Interest income |
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| 228 |
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| 31 |
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| 411 |
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| 122 |
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Interest expense |
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| (2,198) |
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| (2,246) |
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| (6,605) |
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| (6,754) |
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Total other income (expense) |
| $ | 4,224 |
| $ | (2,585) |
| $ | 119 |
| $ | (6,622) |
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follows (in thousands):
Investment income in the three months ended September 30, 2017 is related to a $6.0 million unrealized gain from a short-term investment in marketable equity securities.
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| | September 30, | | September 30, | | ||||||||
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| 2019 |
| 2018 |
| 2019 |
| 2018 |
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Foreign exchange (loss) gain | | | (136) | | | (69) | | $ | (724) | | $ | 1,444 | |
Other income (expense), net | |
| (2,928) | |
| 32 | |
| (3,121) | |
| (751) | |
Interest income | |
| 42 | |
| 932 | |
| 610 | |
| 1,544 | |
Interest expense | |
| (5,186) | |
| (6,448) | |
| (17,494) | |
| (11,637) | |
Total other income (expense) | | $ | (8,208) | | $ | (5,553) | | $ | (20,729) | | $ | (9,400) | |
For the three and nine months ended September 30, 2017 and 2016, foreignForeign exchange gains reflect currency exchange fluctuations of theassociated with our Canadian engineering operation, which operates principally in 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.dollars.
InterestThe change in Other income is derived from interest earned on excess cash invested primarily in short-term U.S. Treasury bills, which are backed by the federal government, and other investments that may not be backed by the federal government.
Interest expense(expense), net for the three and nine months ended September 30, 2017 remain relatively unchanged2019 compared to the same periods in 20162018 is primarily due to relatively similar levelsa $2.9 million loss recognized in the three and nine months ended September 30, 2019, related to the sale of long-term debtour utility customer’s pre-petition accounts receivable to a financial institution.
Interest expense for the periods.three months ended September 30, 2019, decreased compared to the same period in 2018 due primarily to $2.3 million of additional interest during the three months ended September 30, 2018, related to the early extinguishment of senior notes, partially offset by a $0.6 million unrealized loss on the change in the fair value of our interest rate swap agreement during the three months ended September 30, 2019.
Interest expense for the nine months ended September 30, 2019 increased compared to the same period in 2018 due to higher average debt balances and weighted average interest rates in 2019. In addition, we had a $4.9 million unrealized loss on the change in the fair value of our interest rate swap agreement during the nine months ended September 30, 2019. These amounts were partially offset by $2.3 million of additional interest during the nine months ended September 30, 2018, related to the early extinguishment of senior notes.
Provision for income taxes
The Company determines itsWe are subject to tax liabilities imposed by multiple jurisdictions. We determine our 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 andwhich can be a source ofcause variability in the effective tax rate from quarter to quarter. We recognize interest and penalties related to uncertain tax positions, if any, as an income tax expense.
The Companyeffective tax rate on income attributable to Primoris (excluding noncontrolling interests) was 29.0% for the nine months ended September 30, 2019. The rate differs from the U.S. federal statutory rate of 21.0% primarily due to state income taxes and nondeductible components of per diem expenses.
We recorded income tax expense for the three months ended September 30, 20172019 of $10.0$14.6 million compared to $4.1$10.7 million for the three months ended September 30, 2016.2018. The $5.9$3.9 million increase in income tax expense was primarily driven by a $22.0$6.8 million increase in pre-tax income (excluding noncontrolling interests); partially offset by, and a 14.9% decrease in effectiveincome tax ratebenefit from 47.5% to 32.6%. The decrease in the effective tax rate was driven by favorable prior year provision-to-return adjustments, including the 2017 impact ofinvestment tax credits to be claimed in all open years.claimed.
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The CompanyWe recorded income tax expense for the nine months ended September 30, 20172019 of $28.6$22.6 million compared to $9.2$14.6 million for the nine months ended September 30, 2016.2018. The $19.4$8.0 million increase in income tax expense was primarily driven by a $57.0an $18.3 million increase in pre taxpre-tax income (excluding noncontrolling interests); partially offset by, and a 6.5% decrease in effectiveincome tax ratebenefit from 43.0% to 36.5%. The decrease in effective tax rate was primarily due to favorable prior year provision-to-return adjustments, including the 2017 impact ofinvestment tax credits to be claimed in all open years.claimed.
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Segment results
Power Industrial and Engineering Segment
Revenue and gross profit for the Power segment for the three and nine months ended September 30, 20172019 and 20162018 were as follows:
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Power Segment |
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|
|
|
|
|
|
|
|
|
|
Revenue |
| $ | 154,178 |
|
|
| $ | 101,811 |
|
|
|
Gross profit |
| $ | 18,842 |
| 12.2% |
| $ | 10,893 |
| 10.7% |
|
|
|
|
|
|
|
|
|
|
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|
| Nine Months Ended September 30, | |||||||||
|
| 2017 |
| 2016 |
| ||||||
|
|
|
|
| % of |
|
|
|
| % of |
|
|
|
|
|
| Segment |
|
|
|
| Segment |
|
|
| (Thousands) |
| Revenue |
| (Thousands) |
| Revenue |
| ||
Power Segment |
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $ | 443,191 |
|
|
| $ | 367,025 |
|
|
|
Gross profit |
| $ | 52,498 |
| 11.8% |
| $ | 36,570 |
| 10.0% |
|
| | | | | | | | | | | |
| | Three Months Ended September 30, | | ||||||||
| | 2019 | | 2018 | | ||||||
|
| | |
| % of |
| | |
| % of |
|
| | | | | Segment | | | | | Segment | |
| | (Thousands) | | Revenue | | (Thousands) | | Revenue | | ||
Power Segment | | | | | | | | | | | |
Revenue | | $ | 200,657 | | | | $ | 181,822 | | | |
Gross profit | | $ | 15,525 |
| 7.7% | | $ | 32,077 |
| 17.6% | |
| | | | | | | | | | | |
| | Nine Months Ended September 30, | | ||||||||
| | 2019 | | 2018 | | ||||||
| | | | | % of | | | | | % of |
|
| | | | | Segment | | | | | Segment | |
|
| (Thousands) |
| Revenue |
| (Thousands) |
| Revenue | | ||
Power Segment | | | | | | | | | | | |
Revenue | | $ | 518,210 | | | | $ | 515,378 | | | |
Gross profit | | $ | 58,890 |
| 11.4% | | $ | 76,674 |
| 14.9% | |
Revenue increased by $52.4$18.8 million, or 51.4%10.4%, for the three months ended September 30, 2017,2019, compared to the same period in 2016.2018. The increase is primarily due to a $27.1 millionWest Texas solar facility project that began in 2019 ($47.4 million) and a carbon monoxide and hydrogen plant project that began in 2019 ($13.1 million). The overall increase from our joint venture power plantwas partially offset by the substantial completion of refinery projects in Southern California and a $13.3 million increase from a power plant constructionour Carlsbad joint venture project in the Mid-Atlantic region that began late in the third quarter of 2016. In addition, acquisitions completed subsequent to the third quarter of 2016 contributed $6.82018 ($41.9 million to the increase.combined).
Revenue increased by $76.2$2.8 million, or 20.8%0.5%, duringfor the nine months ended September 30, 2017,2019, compared to the same period in 2016.2018. The increase is primarily due to a $77.1 millionWest Texas solar facility project that began in 2019 ($93.9 million) and the acquisition of Willbros in June of 2018 ($68.5 million). The overall increase fromwas partially offset by the substantial completion of our Carlsbad joint venture power plantproject, refinery projects in Southern California, and a $28.8 million increase from a power plant constructionWest Texas solar facility project in the Mid-Atlantic region that began late in the third quarter of 2016, and a $16.82018 ($152.4 million increase from a project at a methane plant in Texas that began in 2017. These increases are partially offset by a $26.0 million reduction from the substantial completion of a large petrochemical plant in Louisiana in the second quarter of 2017 and a $24.8 million decrease due to the completion of two large parking structures in 2016.combined).
Gross profit for the three months ended September 30, 2017, increased2019, decreased by $7.9$16.6 million, or 73.0%,51.6% compared to the same period in 2016.2018. The increasedecrease is primarily due to a $5.0$6.2 million increase from the additional revenue provided by the joint venture projects in Southern California and the power plant project in the Mid-Atlantic and a $1.1 million increase from the acquisitions completed subsequent to the third quarter of 2016. These are partially offset by a $2.7 million decrease from the substantial completion of the petrochemical plant in the second quarter of 2017. Additionally,partial settlement in the third quarter of 2016,2018 of a disputed receivable and higher costs onassociated with two industrial projects in the third quarter of 2019. Gross profit as a percentage of revenue decreased to 7.7% during the three months ended September 30, 2019, compared to 17.6% in the same period in 2018 primarily due to the reasons above and a strong performance and favorable margins realized by our Carlsbad joint venture project in Texas resulted in a $4.0 million reduction in gross profit. 2018.
Gross profit increasedfor the nine months ended September 30, 2019, decreased by $15.9$17.8 million, or 43.6%,23.2% compared to the same period in 2018 due primarily to a $6.2 million partial settlement in 2018 of a disputed receivable and higher costs associated with two industrial projects in 2019. Gross profit as a percentage of revenue decreased to 11.4% during the nine months ended September 30, 2017,2019, compared to 14.9% in the same period in 2016. The increase is2018 primarily due to the reasons above and a $11.0 million increase from the additional revenue providedstrong performance and favorable margins realized by theour Carlsbad joint venture projects in Southern California and the power plant project in the Mid-Atlantic and a $1.1 million increase from acquisitions completed subsequent to the third quarter of 2016. In addition, we had higher costs on a project in Texas during the nine months ended September 30, 2016 that resulted in a $4.5 million write down. These increases are partially offset by a $4.2 million decrease from the substantial completion of the petrochemical plant in the second quarter of 2017.2018.
Gross profit as a percent of revenues increased to 12.2% and 11.8% during the three and nine months ended September 30, 2017, respectively, from 10.7% and 10.0% in the same periods in 2016, primarily as a result of the higher costs on a project in Texas during the three and nine months ended September 30, 2016.
34
36
Pipeline Segment
Pipeline and Underground Segment
Revenue and gross profit for the Pipeline segment for the three and nine months ended September 30, 20172019 and 20162018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| ||||||
|
|
|
|
| % of |
|
|
|
| % of |
|
|
|
|
|
| Segment |
|
|
|
| Segment |
|
|
| (Thousands) |
| Revenue |
| (Thousands) |
| Revenue |
| ||
Pipeline Segment |
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $ | 84,357 |
|
|
| $ | 106,042 |
|
|
|
Gross profit |
| $ | 12,084 |
| 14.3% |
| $ | 32,402 |
| 30.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, | |||||||||
|
| 2017 |
| 2016 |
| ||||||
|
|
|
|
| % of |
|
|
|
| % of |
|
|
|
|
|
| Segment |
|
|
|
| Segment |
|
|
| (Thousands) |
| Revenue |
| (Thousands) |
| Revenue |
| ||
Pipeline Segment |
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $ | 402,425 |
|
|
| $ | 217,182 |
|
|
|
Gross profit |
| $ | 79,575 |
| 19.8% |
| $ | 43,870 |
| 20.2% |
|
| | | | | | | | | | | |
| | Three Months Ended September 30, | | ||||||||
| | 2019 | | 2018 | | ||||||
|
| | |
| % of |
| | |
| % of |
|
| | | | | Segment | | | | | Segment | |
| | (Thousands) | | Revenue | | (Thousands) | | Revenue | | ||
Pipeline Segment | | | | | | | | | | | |
Revenue | | $ | 133,590 | | | | $ | 213,073 | | | |
Gross profit | | $ | 19,657 |
| 14.7% | | $ | 24,999 |
| 11.7% | |
| | | | | | | | | | | |
| | Nine Months Ended September 30, | | ||||||||
| | 2019 | | 2018 | | ||||||
|
| | |
| % of |
| | |
| % of |
|
| | | | | Segment | | | | | Segment | |
| | (Thousands) | | Revenue | | (Thousands) | | Revenue | | ||
Pipeline Segment | | | | | | | | | | | |
Revenue | | $ | 405,647 | | | | $ | 361,261 | | | |
Gross profit | | $ | 46,204 |
| 11.4% | | $ | 43,568 |
| 12.1% | |
In the third quarter of 2016, we collected a disputed receivable (the “Collection”) related to a major pipeline project completed in 2014, which resulted in recognizing revenue of approximately $27.5 million and gross profit of approximately $26.7 million. The following discussion excludes the impact of the Collection, which was a one-time item.
Revenue increaseddecreased by $5.8$79.5 million, or 7.4%37.3%, for the three months ended September 30, 2017,2019, compared to the same period in 2016.2018. The increasedecrease is primarily due to the substantial completion of a $46.6major pipeline project in West Texas in the second quarter of 2019 and reduced activity on a major pipeline project in the Mid-Atlantic ($92.2 million increase from pipeline projects in Texas and Pennsylvania that began in 2017,combined). These amounts were partially offset by a $42.3 million decrease frompipeline project in the substantial completion of pipeline jobsPacific Northwest that began in Florida and North Carolina during the first half of 2017.2019.
Revenue increased by $212.7$44.4 million, or 112.2%12.3%, for the nine months ended September 30, 2017,2019, compared to the same period in 2016.2018. The increase is primarily due to a $181.7 million increase from two largeincreased pipeline jobs in Florida, which beganmaintenance, facility construction and specialty services activity ($93.9 million), partially offset by decreased activity on major pipeline projects in the third quarter of 2016,Mid-Atlantic and a $32.0 million increase from a pipeline project in PennsylvaniaWest Texas that began in 2017. 2018 ($37.5 million combined) and the completion of pipeline projects in Florida in 2018.
Gross profit for the three months ended September 30, 2017 increased2019 decreased by $6.4$5.3 million, or 111.9%21.4%, compared to the same period in 2016. The increase is2018 due to lower revenue, partially offset by higher margins. Gross profit as a percentage of revenue increased to 14.7% during the three months ended September 30, 2019, compared to 11.7% in the same period in 2018 primarily attributabledue to a $4.2 million increasethe favorable impact from the closeout of multiple pipeline projects in Texas and Pennsylvania that began in 2017, and a $1.2 million increase from the Coastal acquisition that was completed in the second quarter of 2017.2019.
Gross profit for the nine months ended September 30, 20172019 increased by $62.4$2.6 million compared to the same period in 2016. The increase is primarily attributable2018 due to a $50.6 million increase from the two pipeline jobs in in Florida, which experienced good weather conditions resulting in no weather delays and high productivity.
revenue growth, partially offset by lower margins. Gross profit as a percentpercentage of revenues increasedrevenue decreased to 14.3% and 19.8%11.4% during the three months and nine months ended September 30, 2017, respectively from 7.3% and 9.1%2019, compared to 12.1% in the same periodsperiod in 2016 for the reasons noted above.2018 primarily due to higher costs in 2019 on a West Texas pipeline project driven by unfavorable weather conditions.
35
37
Utilities Segment
Utilities and Distribution Segment
Revenue and gross profit for the Utilities segment for the three and nine months ended September 30, 20172019 and 20162018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| ||||||
|
|
|
|
| % of |
|
|
|
| % of |
|
|
|
|
|
| Segment |
|
|
|
| Segment |
|
|
| (Thousands) |
| Revenue |
| (Thousands) |
| Revenue |
| ||
Utilities Segment |
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $ | 246,524 |
|
|
| $ | 186,985 |
|
|
|
Gross profit |
| $ | 36,081 |
| 14.6% |
| $ | 33,925 |
| 18.1% |
|
| | | | | | | | | | | |
| | Three Months Ended September 30, | | ||||||||
| | 2019 | | 2018 | | ||||||
|
| | |
| % of |
| | |
| % of |
|
| | | | | Segment | | | | | Segment | |
| | (Thousands) | | Revenue | | (Thousands) | | Revenue | | ||
Utilities Segment | | | | | | | | | | | |
Revenue | | $ | 281,561 | | | | $ | 269,652 | | | |
Gross profit | | $ | 48,892 |
| 17.4% | | $ | 35,348 |
| 13.1% | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, | |||||||||
|
| 2017 |
| 2016 |
| ||||||
|
|
|
|
| % of |
|
|
|
| % of |
|
|
|
|
|
| Segment |
|
|
|
| Segment |
|
|
| (Thousands) |
| Revenue |
| (Thousands) |
| Revenue |
| ||
Utilities Segment |
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $ | 576,446 |
|
|
| $ | 447,858 |
|
|
|
Gross profit |
| $ | 76,701 |
| 13.3% |
| $ | 68,651 |
| 15.3% |
|
| | | | | | | | | | | |
| | Nine Months Ended September 30, | | ||||||||
| | 2019 | | 2018 | | ||||||
|
| | |
| % of |
| | |
| % of |
|
| | | | | Segment | | | | | Segment | |
| | (Thousands) | | Revenue | | (Thousands) | | Revenue | | ||
Utilities Segment | | | | | | | | | | | |
Revenue | | $ | 650,079 | | | | $ | 665,214 | | | |
Gross profit | | $ | 87,999 |
| 13.5% | | $ | 78,963 |
| 11.9% | |
Revenue increased by $59.5$11.9 million, or 31.8%4.4%, for the three months ended September 30, 2017,2019, compared to the same period in 2016. The increase is2018 primarily due to a $32.0 million increase in work for two major utility customers in California and a $12.9 million increase forincreased activity with two major utility customers in the Midwest. In addition, revenue increasedMidwest and a utility customer in Texas ($19.5 million combined), partially offset by $7.2 million from a collaboration Master Service Agreement (“MSA”) arrangement fordecreased activity with a major utility customer in California, and the acquisition of FGC in the second quarter of 2017 increased revenueCalifornia.
Revenue decreased by $6.1 million.
Revenue$15.1 million, or 2.3%, for the nine months ended September 30, 2017 increased by $128.6 million, or 28.7%,2019, compared to the same period in 2016. The increase is2018 primarily due to a $50.3 million increase in work fordecreased activity with two major utility customers in California and($32.1 million combined), partially offset by increased activity with a $23.5 million increase for two major utility customers in the Midwest. In addition, revenue increased by $36.2 million from a collaboration MSA arrangement for a major utility customer in California, and the acquisition of FGC in the second quarter of 2017 increased revenue by $8.3 million.Texas.
Gross profit for the three months ended September 30, 20172019 increased by $2.2$13.5 million, or 6.4%38.3%, compared to the same period in 2016. The increase is2018 primarily due to higher revenue and margins. Gross profit as a percent of revenue increased to 17.4% during the acquisition of FGCthree months ended September 30, 2019, compared to 13.1%, in the second quarter of 2017 and the growthsame period in revenue, partially offset by lower gross margins on the collaboration MSA work.2018 primarily due to an increase in higher margin projects in 2019.
Gross profit for the nine months ended September 30, 20172019 increased $8.1by $9.0 million, or 11.7%11.4%, compared to the same period in 20162018 primarily due to the acquisition of FGC in the second quarter of 2017 and the growth in revenue,higher margins, partially offset by lower gross margin on the collaboration MSA work.
revenue. Gross profit as a percent of revenues decreasedrevenue increased to 14.6%13.5% during the nine months ended September 30, 2019, compared to 11.9%, in the same period in 2018 primarily due to an increase in higher margin projects in 2019 and 13.3% duringthe impact of a client delay and unfavorable weather conditions experienced by a major utility customer in the Midwest in 2018.
38
Transmission Segment
Revenue and gross profit for the Transmission segment for the three and nine months ended September 30, 2017, respectively,2019 and 2018 were as follows:
| | | | | | | | | | | |
| | Three Months Ended September 30, | | ||||||||
| | 2019 | | 2018 | | ||||||
|
| | |
| % of |
| | |
| % of |
|
| | | | | Segment | | | | | Segment | |
| | (Thousands) | | Revenue | | (Thousands) | | Revenue | | ||
Transmission Segment | | | | | | | | | | | |
Revenue | | $ | 128,784 | | | | $ | 121,526 | | | |
Gross profit | | $ | 4,836 |
| 3.8% | | $ | 13,958 |
| 11.5% | |
| | | | | | | | | | | |
| | Nine Months Ended September 30, | | ||||||||
| | 2019 | | 2018 | | ||||||
|
| | |
| % of |
| | |
| % of |
|
| | | | | Segment | | | | | Segment | |
| | (Thousands) | | Revenue | | (Thousands) | | Revenue | | ||
Transmission Segment | | | | | | | | | | | |
Revenue | | $ | 382,581 | | | | $ | 163,980 | | | |
Gross profit | | $ | 21,664 |
| 5.7% | | $ | 19,679 |
| 12.0% | |
The Transmission segment was created in connection with the acquisition of Willbros in the second quarter of 2018. Revenue and gross profit for nine months ended September 30, 2018, represent results from 18.1%June 1, 2018, the acquisition date, to September 30, 2018.
Revenue increased by $7.3 million, or 6.0%, for the three months ended September 30, 2019, compared to the same period in 2018 primarily due to increased activity with a major utility customer in the Midwest and 15.3%Southeast ($14.7 million), partially offset by the substantial completion of a major project in the Southeast in 2018.
Revenue increased by $218.6 million for the nine months ended September 30, 2019, compared to the same periods in 2016. The decrease is driven2018 primarily due to the Willbros acquisition in June 2018, resulting in nine months of revenue recognized in 2019 compared to four months in 2018.
Gross profit for the three months ended September 30, 2019, decreased by $9.1 million, or 65.4%, due primarily to lower margins, partially offset by higher revenue. Gross profit as a percentage of revenue decreased to 3.8% during the three months ended September 30, 2019, compared to 11.5% in the same period in 2018 primarily due to a reduction in higher margin storm work, upfront costs to expand our operations and relocation costs to move crews in 2019, along with strong performance on a major project in the Southeast in 2018.
Gross profit for the nine months ended September 30, 2019, increased by $2.0 million due primarily to nine months of activity in 2019 compared to four months in 2018, partially offset by lower marginsmargins. Gross profit as a percentage of revenue decreased to 5.7% during the nine months ended September 30, 2019, compared to 12.0%, in the same period in 2018 primarily due to a reduction in higher margin storm work, unfavorable weather conditions experienced, and upfront costs to expand our operations and relocation costs to move crews in 2019, along with strong performance on a major project in the collaboration MSA work.Southeast in 2018.
36
39
Civil Segment
Revenue and gross profit for the Civil segment for the three and nine months ended September 30, 20172019 and 20162018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| ||||||
|
|
|
|
| % of |
|
|
|
| % of |
|
|
|
|
|
| Segment |
|
|
|
| Segment |
|
|
| (Thousands) |
| Revenue |
| (Thousands) |
| Revenue |
| ||
Civil Segment |
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $ | 123,252 |
|
|
| $ | 112,990 |
|
|
|
Gross profit |
| $ | 3,414 |
| 2.8% |
| $ | (27,091) |
| (24.0%) |
|
| | | | | | | | | | | |
| | Three Months Ended September 30, | | ||||||||
| | 2019 | | 2018 | | ||||||
|
| | |
| % of |
| | |
| % of | |
| | | | | Segment | | | | | Segment | |
| | (Thousands) | | Revenue | | (Thousands) | | Revenue | | ||
Civil Segment | | | | | | | | | | | |
Revenue | | $ | 120,472 | | | | $ | 122,829 | | | |
Gross profit | | $ | 19,511 |
| 16.2% | | $ | 123 |
| 0.1% | |
| | | | | | | | | | | |
| | Nine Months Ended September 30, | | ||||||||
| | 2019 | | 2018 | | ||||||
|
| | |
| % of |
| | |
| % of |
|
| | | | | Segment | | | | | Segment | |
| | (Thousands) | | Revenue | | (Thousands) | | Revenue | | ||
Civil Segment | | | | | | | | | | | |
Revenue | | $ | 360,034 | | | | $ | 355,975 | | | |
Gross profit | | $ | 26,655 |
| 7.4% | | $ | 3,600 |
| 1.0% | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, | |||||||||
|
| 2017 |
| 2016 |
| ||||||
|
|
|
|
| % of |
|
|
|
| % of |
|
|
|
|
|
| Segment |
|
|
|
| Segment |
|
|
| (Thousands) |
| Revenue |
| (Thousands) |
| Revenue |
| ||
Civil Segment |
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $ | 378,916 |
|
|
| $ | 363,020 |
|
|
|
Gross profit |
| $ | 1,183 |
| 0.3% |
| $ | (16,400) |
| (4.5%) |
|
In the third quarter of 2016, the Company recorded a $37.3 million write-down related to the Belton area projects. The following discussion excludes the impact of the write-down.
Revenue increaseddecreased by $10.3$2.4 million, or 9.1%1.9%, for the three months ended September 30, 2017,2019, compared to the same period in 2016.2018. The increasedecrease is primarily due to a $14.7 million increase in Texas DOT projects and a $6.6 million increase from a methanolthe substantial completion of an ethylene plant project in Louisiana that began in 2017.the second quarter of 2019 and lower Texas Department of Transportation (“DOT”) volumes ($12.8 million combined). These increasesamounts are partially offset by a $6.7 million decrease from three projectsmethanol plant project and a project with a major refining customer that were substantially completed prior to the third quarter of 2017.both began in 2019 and higher Louisiana DOT volumes.
Revenue increased by $15.9$4.1 million, or 4.4%1.1%, for the nine months ended September 30, 2017,2019, compared to the same period in 2016.2018. The increase is primarily due to a $34.8 million increase in Texas DOT projects,project with a $31.3 million increase from a methanol plant project in Louisianamajor refining customer that began in 2017,2019 ($20.6 million), higher Louisiana DOT volumes, and progress on a $12.8 millionport project that began in 2018. The overall increase in Arkansas DOT projects. These increases arewas partially offset by a $27.7 million decrease from four projects that were substantially completed prior to the third quarter of 2017, a $16.7 million decrease in Louisiana DOTD projects, and a $9.5 million decrease in Florida mine work.lower Texas DOT volumes.
Gross profit decreasedincreased by $6.8$19.4 million for the three months ended September 30, 2017,2019, compared to the same period in 20162018 primarily due to a $5.2 million decreasefavorable impact from the resolution of claims associated with three of the Belton area projects in 2019 and increased profit on Louisiana DOT projects. Gross profit as a resultpercentage of revenue increased costs on Arkansas DOT, Louisiana DOTD, and other Texas DOT projects, partially offset by a $2.3 million increase fromto 16.2% during the methanol plant projectthree months ended September 30, 2019, compared to 0.1% in Louisiana that beganthe same period in 2017.2018 due primarily to the reasons noted above.
Gross profit decreasedincreased by $19.7$23.1 million for the nine months ended September 30, 2017,2019, compared to the same period in 2016. The decrease was2018 primarily due to a $25.9 million decrease as a result of higher costs on Arkansas DOT, Louisiana DOTD, and other Texas DOT projects and a $6.2 million decreasefavorable impact from the substantial completionresolution of a large petrochemical plant in Louisiana in the second quarterclaims associated with three of 2017. The decrease was partially offset by a $14.9 million increase from lower write downs on the Belton area projects which experiencedin 2019, increased profit on Louisiana DOT projects, and higher costs on an airport project in the first nine months of 2016.
2018. Gross profit as a percentpercentage of revenue decreasedincreased to 2.8% and 0.3%7.4% during the three and nine months months ended September 30, 2017, respectively, from 9.0% and 5.8%2019, compared to 1.0% in the same periodsperiod in 2016 for2018 due primarily to the reasons noted above.
Revenue at the five Belton area projects was $34.4$20.0 million and $114.1$51.9 million for the three and nine months ended September 30, 2017, respectivily,2019, respectively, representing 27.9%16.6% and 30.1%14.4% of total Civil revenue. Revenue for which no margin was recognized was $37.5 million and $98.1 million, respectively, forrevenue, respectively. During the three and nine months ended September 30, 2017, of which $21.1 million and $62.8 million was from2019, gross profit at the Belton area projects. Thefive Belton area jobs in a loss position contributed $2.5was $12.9 million gross profit, and the remaining Belton area job contributed ($0.2)$14.4 million, gross profit during the nine-month period ended September 30, 2017. At September 30, 2017, the accrued loss provision forrespectively. Two of the Belton area projects was $6.6 millionwere substantially complete during 2017, two were substantially complete in the first half of 2019, and the remaining project is scheduled to be substantially complete in the fourth quarter of 2019. At September 30, 2019, estimated remaining revenue for the four jobs in a loss positionproject was $63.7$5.2 million.
37
Completion2019, we resolved the claims associated with three of the jobs is scheduled for the latter half of 2018.Belton area projects. At September 30, 2017, estimated revenue for2019, we had approximately $13.1 million of unapproved contract modifications included in the aggregate transaction prices associated with the remaining Belton area job was $101.7 million, with completiontwo projects, all of the job scheduled forwhich had been recognized as revenue on a cumulative catch-up basis through September 30, 2019.
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Geographic area financial information
The majority of the Company’s revenues areour revenue is derived from customers in the United States with approximately 1%5.3% generated from sources outside of the United States.States during the nine months ended September 30, 2019, principally in Canada.
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. We define backlog as a combination of: (1) anticipated revenue from the uncompleted portions of existing contracts for which we have known revenue amounts for fixedfixed-price and unit priceunit-price contracts (“Fixed Backlog”), and (2) the estimated revenuesrevenue on MSA work 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. However, 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, 20162018 and September 30, 20172019 and the changes in Fixed Backlog for the nine months ended September 30, 20172019 are as follows (in millions) are as follows::
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| Revenue |
| Backlog |
| Recognized from |
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| December 31, |
| Additions to |
| Recognized from |
| at September 30, |
| Non-Fixed Backlog |
| ended September 30, |
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Reportable Segment |
| 2016 |
| Fixed Backlog |
| Fixed Backlog |
| 2017 |
| Projects |
| 2017 |
| ||||||
Power |
| $ | 469.6 |
| $ | 352.3 |
| $ | 403.4 |
| $ | 418.5 |
| $ | 39.8 |
| $ | 443.2 |
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Pipeline |
|
| 1,019.4 |
|
| 169.3 |
|
| 381.0 |
|
| 807.7 |
|
| 21.4 |
|
| 402.4 |
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Utilities |
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| 31.5 |
|
| 187.8 |
|
| 153.5 |
|
| 65.8 |
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| 423.0 |
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| 576.5 |
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Civil |
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| 605.9 |
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| 449.4 |
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| 371.9 |
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| 683.4 |
|
| 7.0 |
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| 378.9 |
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Total |
| $ | 2,126.4 |
| $ | 1,158.8 |
| $ | 1,309.8 |
| $ | 1,975.4 |
| $ | 491.2 |
| $ | 1,801.0 |
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| Beginning Fixed |
| | |
| | |
| Ending Fixed |
| | Revenue |
| | Total Revenue |
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| | Backlog at | | Contract | | Revenue | | Backlog at | | | Recognized from | | | for Nine Months |
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| | December 31, | | Additions to | | Recognized from | | September 30, | | | Non-Fixed | | | ended September 30, |
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Reportable Segment | | 2018 | | Fixed Backlog | | Fixed Backlog | | 2019 | 00 | 00 | Backlog Projects | 00 | 00 | 2019 |
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Power | | $ | 245.3 | | $ | 536.7 | | $ | 381.7 | | $ | 400.3 | | | $ | 136.5 | | | $ | 518.2 | |
Pipeline | | | 672.5 | | | 374.4 | | | 334.5 | | | 712.4 | | | | 71.1 | | | | 405.6 | |
Utilities | |
| 31.1 | |
| 190.4 | |
| 165.0 | |
| 56.5 | | |
| 485.1 | | |
| 650.1 | |
Transmission | | | 21.5 | | | 66.6 | | | 64.2 | | | 23.9 | | | | 318.4 | | | | 382.6 | |
Civil | |
| 505.6 | |
| 446.7 | |
| 348.4 | |
| 603.9 | | |
| 11.7 | | |
| 360.1 | |
Total | | $ | 1,476.0 | | $ | 1,614.8 | | $ | 1,293.8 | | $ | 1,797.0 | | | $ | 1,022.8 | | | $ | 2,316.6 | |
RevenuesRevenue recognized from non-Fixed Backlog projects shown above are generated by MSA projects and projects completed under time-and-equipment, time-and-materialstime and cost-reimbursable-plus-feematerial and cost reimbursable plus fee contracts, or are revenuegenerated from the sale of construction materials, such as rock or asphalt to outside third parties or sales of water services by BW Primoris.services.
At September 30, 2017,2019, our total Fixed Backlog was $1.98$1.80 billion, representing a decreasean increase of $151.0$321.0 million, or 3.3%21.7%, compared to $2.13$1.48 billion as ofat December 31, 2016.2018.
MSA Backlog
The following table outlines historical MSA revenuesrevenue for the past seven quarters ($ in(in millions):
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| Quarterly MSA Revenues | ||
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| 2016 |
| 2017 |
First Quarter |
| 105.2 |
| 105.5 |
Second Quarter |
| 142.2 |
| 181.0 |
Third Quarter |
| 160.2 |
| 197.9 |
Fourth Quarter |
| 168.6 |
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| | Quarterly MSA Revenue | ||||
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| 2018 |
| 2019 | ||
First Quarter | | $ | 146.4 | | $ | 292.9 |
Second Quarter | | $ | 238.7 |
| $ | 348.3 |
Third Quarter | | $ | 390.4 |
| $ | 366.9 |
Fourth Quarter | | $ | 353.1 | | | |
MSA Backlog includes anticipated MSA revenuesrevenue for the next twelve months. We estimate MSA revenuesrevenue based on historical trends, anticipated seasonal impacts and estimates of customer demand based on information from our customers.
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41
The following table shows our estimated MSA Backlog at September 30, 20172019 by reportable segment (in millions):
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| MSA Backlog |
| |
| at September 30, |
| |
Reportable Segment: | 2017 |
| |
Power | $ | 40.6 |
|
Pipeline |
| 42.8 |
|
Utilities |
| 557.2 |
|
Civil |
| — |
|
Total | $ | 640.6 |
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| | | | |
| | MSA Backlog | | |
| | at September 30, | | |
Reportable Segment: |
| 2019 | | |
Power | | $ | 111.7 | |
Pipeline | | | 141.8 | |
Utilities | |
| 707.8 | |
Transmission | | | 445.9 | |
Civil | |
| 6.4 | |
Total | | $ | 1,413.6 | |
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):
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Reportable Segment: |
| September 30, 2016 |
| December 31, 2016 |
| March 31, 2017 |
| June 30, 2017 |
| September 30, 2017 |
| |||||
Power |
| $ | 533.6 |
| $ | 511.9 |
| $ | 577.4 |
| $ | 491.3 |
| $ | 459.1 |
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Pipeline |
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| 1,030.3 |
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| 1,052.6 |
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| 917.1 |
|
| 927.5 |
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| 850.5 |
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Utilities |
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| 519.0 |
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| 606.5 |
|
| 672.3 |
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| 664.1 |
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| 623.0 |
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Civil |
|
| 612.1 |
|
| 626.9 |
|
| 631.7 |
|
| 667.5 |
|
| 683.4 |
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Total |
| $ | 2,695.0 |
| $ | 2,797.9 |
| $ | 2,798.5 |
| $ | 2,750.4 |
| $ | 2,616.0 |
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| | | | | | | | | | | | |||||
Reportable Segment: |
| September 30, 2018 |
| December 31, 2018 |
| March 31, 2019 |
| June 30, 2019 |
| September 30, 2019 | | |||||
Power | | $ | 358.7 | | $ | 367.1 | | $ | 557.8 | | $ | 498.8 | | $ | 512.0 | |
Pipeline | | | 868.6 | |
| 702.8 | |
| 659.5 | |
| 866.3 | |
| 854.2 | |
Utilities | |
| 698.0 | |
| 789.3 | |
| 802.3 | |
| 782.4 | |
| 764.3 | |
Transmission | | | 341.1 | | | 394.9 | | | 468.9 | | | 473.0 | | | 469.8 | |
Civil | |
| 440.2 | |
| 505.6 | |
| 451.5 | |
| 576.0 | |
| 610.3 | |
Total | | $ | 2,706.6 | | $ | 2,759.7 | | $ | 2,940.0 | | $ | 3,196.5 | | $ | 3,210.6 | |
We expect that during the next four quarters, we will recognize as revenue approximately 71%83% of the total backlog at September 30, 2017,2019, comprised of backlog of approximately: 78%89% of the Power segment; 55%67% of the Pipeline segment; 100% of the Utilities segment; 100% of the Transmission segment; and 61%67% of the Civil segment.
Backlog should not be considered a comprehensive indicator of future revenues,revenue, as a percentage of our revenues arerevenue is derived from projects that are not part of a backlog calculation. The backlog estimates include amounts from estimated MSA revenues,contracts, but our customers are not contractually obligated to purchase an amount of services from us under the MSAs. Any of our contracts, MSA, fixed pricefixed-price or fixed unit price,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 revenuesrevenue 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 revenuesrevenue from projects completed under time-and-equipment, time-and-materialstime and cost-reimbursable-plus-feematerial and cost reimbursable plus fee contracts may not be included in our estimated backlog amount.
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. At September 30, 2019, there were no outstanding borrowings under the Revolving Credit Facility, commercial letters of credit outstanding were $37.3 million, and available borrowing capacity was $162.7 million. 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 $143.2$43.8 million at September 30, 20172019, compared to $135.8$151.1 million at December 31, 2016.2018. During October 2019, we collected over $100 million in connection with the resolution of claims associated with three of the Belton area projects, and the closing of the sale of substantially all of our pre-petition bankruptcy receivables with a California utility customer. 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
42
enable us to meet our operating needs, our planned capital expenditures, and settle our ability to growcommitments and contingencies for at least the next twelve months. In evaluating our liquidity, needs, we do not consider cash and cash equivalents held by our consolidated VIEs. These amounts, which totaled $67.0$2.1 million and $7.0$3.1 million as of September 30, 20172019 and December 31, 2016,2018, respectively, were not available for general corporate purposes.
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
39
and amortization expenses plus proceeds from equipment sales. During the nine months ended September 30, 2017,2019, we spent approximately $78.3 million for capital expenditures, were approximately $57.3 million. In addition, the companies acquired during the period added $12.4which included $55.1 million to property, plant and equipment, and we assumed $4.2 millionfor construction equipment. The total of mortgage debt during the period. For the first nine months of 2017, total construction equipment purchases were $38.2 million, while the amount ofour depreciation, amortization and equipment sales proceeds werewas approximately $56.3$88.9 million. Capital expenditures for the remaining three months of 20172019 are expected to total between $5.0$15.0 million and $10.0$20.0 million.
Cash Flows
Cash flows during the nine months ended September 30, 20172019 and 20162018 are summarized as follows:follows (in thousands):
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| September 30, | |||||
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| 2017 |
| 2016 |
| ||
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| (Thousands) |
| (Thousands) |
| ||
Change in cash: |
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|
Net cash provided by operating activities |
| $ | 161,432 |
| $ | 50,617 |
|
Net cash used in investing activities |
|
| (129,762) |
|
| (48,482) |
|
Net cash used in financing activities |
|
| (24,258) |
|
| (14,590) |
|
Net change in cash and cash equivalents |
| $ | 7,412 |
| $ | (12,455) |
|
| | | | | | | |
| | Nine months ended | | ||||
| | September 30, | | ||||
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| 2019 |
| 2018 |
| ||
Change in cash: | | | | | | | |
Net cash used in operating activities | | $ | (40,116) | | $ | (12,873) | |
Net cash used in investing activities | |
| (53,862) | |
| (182,141) | |
Net cash (used in) provided by financing activities | |
| (13,516) | |
| 84,861 | |
Effect of exchange rate changes | | | 268 | | | (193) | |
Net change in cash and cash equivalents | | $ | (107,226) | | $ | (110,346) | |
Operating Activities
The source of our cash flows from operating activities for the nine months ended September 30, 20172019 and 20162018 were as follows:follows (in thousands):
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| Nine months ended |
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| September 30, |
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| 2017 |
| 2016 |
| Change |
| |||
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| (Thousands) |
|
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| |||||
Operating Activities: |
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|
Operating income |
| $ | 81,567 |
| $ | 28,825 |
| $ | 52,742 |
|
Depreciation and amortization |
|
| 49,248 |
|
| 51,445 |
|
| (2,197) |
|
Stock-based compensation expense |
|
| 911 |
|
| 1,169 |
|
| (258) |
|
Unrealized gain on short-term investments |
|
| (5,980) |
|
| — |
|
| (5,980) |
|
Gain on sale of property and equipment |
|
| (3,880) |
|
| (3,361) |
|
| (519) |
|
Goodwill and intangible asset impairment |
|
| 477 |
|
| 2,716 |
|
| (2,239) |
|
Changes in assets and liabilities |
|
| 67,614 |
|
| (14,311) |
|
| 81,925 |
|
Net other income (expense) and tax provision |
|
| (28,525) |
|
| (15,866) |
|
| (12,659) |
|
Net cash provided by operating activities |
| $ | 161,432 |
| $ | 50,617 |
| $ | 110,815 |
|
| | | | | | | | | | |
| | Nine months ended | | | | | ||||
| | September 30, | | | | | ||||
|
| 2019 |
| 2018 |
| Change |
| |||
Operating Activities: | | | | | | | | | | |
Net income | | $ | 56,586 | | $ | 53,212 | | $ | 3,374 | |
Depreciation and amortization | |
| 64,553 | |
| 55,995 | |
| 8,558 | |
Changes in assets and liabilities | |
| (155,696) | |
| (119,796) | |
| (35,900) | |
Other | |
| (5,559) | |
| (2,284) | |
| (3,275) | |
Net cash used in operating activities | | $ | (40,116) | | $ | (12,873) | | $ | (27,243) | |
The net changeNet cash used in assets and liabilities duringoperating activities for the nine months ended September 30, 2017 resulted in cash provided by the net change of $67.62019 was $40.1 million compared to a net use of cash of $14.3$12.9 million infor the nine months ended September 30, 2016,2018. The change year-over-year was primarily due to an improvementunfavorable impact from the changes in cash flowsassets and liabilities.
The significant components of $81.9 million. The primary reasonthe $155.6 million change in assets and liabilities for the improvementnine months ended September 30, 2019 are summarized as follows:
● | Accounts receivable increased by $177.9 million from December 31, 2018, due primarily to an increase in revenue and an increase from the delay in payments of pre-petition bankruptcy receivables from one of our utility customers while they go through bankruptcy proceedings. In October 2019, we closed on the sale of our pre-petition bankruptcy receivables. In addition, we resolved claims associated with three of the Belton area projects during the third quarter of 2019 and billed the customer, which increased accounts receivable. Both of these were collected in October 2019; |
● | Accounts payable and accrued liabilities decreased by $12.1 million from December 31, 2018, due to the timing of payments; |
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● | Contract assets decreased by $32.3 million from December 31, 2018, primarily due to a decrease in unbilled revenue from the resolution of claims associated with three of the Belton area projects. |
Investing activities
For the nine months ended September 30, 2017,2019, we used $53.9 million in cash from investing activities compared to $182.1 million for the $67.6 million of cash provided by the changes in assets and liabilities are outlined as follows:nine months ended September 30, 2018.
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Investing activities
During the nine months ended September 30, 2017,2019, we purchased property and equipment for $57.3$78.3 million in cash (which is net of assumed mortgage notes of $4.2 million) compared to $52.1$80.8 million during the same period in the prior year. In addition, we received proceeds from the sale of property and equipment of $24.4 million during the nine months ended September 30, 2019, compared to $9.7 million during the same period in the prior year. We believe thatthe 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 projects when needed. In the past,addition, ownership has historically resulted in lower overall equipment costs.
We paid $13.6 million during the nine months ended September 30, 2017 for a short-term investment in marketable equity securities. We did not have any purchases of investments during the nine months ended September 30, 2016.
During the nine months ended September 30, 2017,2018, we used $66.2$111.0 million of cash for acquisitions, primarily relatedthe acquisition of Willbros.
In connection with the acquisition of Willbros, we agreed to FGCprovide, at our discretion, up to $20.0 million in secured bridge financing to support Willbros’ working capital needs through the closing date. In March 2018 and Coastal. May 2018, we provided $10.0 million and $5.0 million, respectively, in secured bridge financing to Willbros. The $15.0 million was repaid in its entirety on June 1, 2018.
Financing activities
Financing activities used cash of $24.3$13.5 million for the nine months ended September 30, 2017,2019, which was primarily due to the net of several transactions, including:following:
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| Dividend payments |
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Financing activities usedprovided cash of $14.6$84.9 million for the nine months ended September 30, 2016,2018, which was primarily due to the net of several transactions, including:following:
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● | Proceeds from the issuances of debt secured by our |
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| Dividend payments to our stockholders of $9.3 million; |
● | Cash distributions to non-controlling interest holders of $8.8 million; and |
● | Repurchase of common stock of $8.5 million |
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41
Credit Agreements
For a description of our credit agreements, see Note 109 — “Credit Arrangements” in Item 1, Financial Statements of this Third Quarter 20172019 Report.
Related party transactions
For a discussion of related party transactions, please see Note 12 — “Related Party Transactions” in Item 1, Financial Statements of this Third Quarter 2017 Report.
Common stock
For a discussion of items affecting our common stock, please see Note 1615 — “Stockholders’ Equity” in Item 1, Financial Statements of this Third Quarter 20172019 Report.
Contractual Obligations
As of September 30, 2017, we had $255.1 million of outstanding long-term debt and capital lease obligations, and there were no short-term borrowings.
A summary of contractual obligations as of September 30, 2017 was as follows:
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| Total |
| 1 Year |
| 2 - 3 Years |
| 4 - 5 Years |
| After 5 Years |
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| (In Millions) |
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Long-term debt and capital lease obligations |
| $ | 255.1 |
| $ | 62.9 |
| $ | 106.6 |
| $ | 52.2 |
| $ | 33.4 |
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Interest on long-term debt (1) |
|
| 24.3 |
|
| 6.8 |
|
| 9.2 |
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| 4.4 |
|
| 3.9 |
|
Pension plan withdrawal liability |
|
| 4.9 |
|
| 1.1 |
|
| 2.2 |
|
| 1.6 |
|
| — |
|
Equipment operating leases |
|
| 30.9 |
|
| 11.5 |
|
| 15.5 |
|
| 3.9 |
|
| — |
|
Contingent consideration obligations |
|
| 1.3 |
|
| 1.3 |
|
| — |
|
| — |
|
| — |
|
Real property leases |
|
| 11.4 |
|
| 4.2 |
|
| 5.5 |
|
| 1.6 |
|
| 0.1 |
|
Real property leases—related parties |
|
| 1.9 |
|
| 0.5 |
|
| 0.8 |
|
| 0.6 |
|
| — |
|
|
| $ | 329.8 |
| $ | 88.3 |
| $ | 139.8 |
| $ | 64.3 |
| $ | 37.4 |
|
Letters of credit |
| $ | 19.8 |
| $ | 19.8 |
| $ | — |
| $ | — |
| $ | — |
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|
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 would 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 amount 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”) in order to mitigate additional liability in connection with the significantly underfunded Plan. During the first quarter of 2016, the Company received a final payment schedule for its withdrawal liability. Based on this schedule, the liability recorded at September 30, 2017 was $4.9 million. The Company has no plans to withdraw from any other agreements.
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Off-balance sheet transactions
As is common in our industry, weWe 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.VIEs. The following represents transactions, obligations or relationships that could be considered material off-balance sheet arrangements.
| At September 30, |
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| 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, |
| Certain of our subsidiaries are parties to collective bargaining agreements with |
● | We enter into employment agreements with certain employees which provide for compensation and benefits under certain circumstances and which may |
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Receivable Collection Actions
As do all construction contractors, we negotiate payments with our customers from time to time, and we may encounter delays in receiving payments from our customers. The Company has been engaged in dispute resolution to collect money it believes it is owed for one construction project completed in 2014. Because of uncertainties associated with the project, 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 the project.
For the project, a cost reimbursable contract, the Company recorded a receivable of $32.9 million with a reserve of approximately $17.8 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 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. A trial date has been tentatively set for the first quarter of 2018.
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. To date, our operations have not been materially impacted by the effects of increases in prices.
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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.
Interest rate risk. Our revolving credit facility and term loan bear interest at a variable rate and exposes us to interest rate risk. From time to time, we may use certain derivative instruments to hedge our exposure to variable interest
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rates. As of September 30, 2019, $154.7 million of our variable rate debt outstanding was economically hedged. Based on our variable rate debt outstanding as of September 30, 2019, a 1.0% increase or decrease in interest rates would change annual interest expense by approximately $0.5 million.
We do not execute transactions or use financial derivative instruments for trading or speculative purposes. We generally enter into transactions with counter parties that are generally financial institutions inas a mattermeans to limit significant exposure with any one party.
At September 30, 2017, 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, 2017 and December 31, 2016, due to the generally short maturities of these items.
At September 30, 2017, 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, 2017,2019, 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, 2017,2019, 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’sOur 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, 2017, thereThere 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.reporting during the three months ended September 30, 2019.
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Part II. Other Information
Item 1. Legal Proceedings
The information required for this item is provided in Note 17 — “Commitments and Contingencies”, included in the unaudited notes to our condensed consolidated financial statements included under Part I of this Form 10-Q, which is incorporated herein by reference.
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, 2016,2018, 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.
Amended and Restated Credit Agreement
On September 29, 2017, the Company entered into an amended and restated credit agreement (the “Credit Agreement”) with CIBC Bank USA, as administrative agent (the “Administrative Agent”) and co-lead arranger, The Bank of the West, as co-lead arranger, and Branch Banking and Trust Company, IBERIABANK, Bank of America, and Simmons Bank (the “Lenders”), which increased its borrowing capacity from $125.0 million to $200.0 million. The Credit Agreement consists of a $200.0 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 $200.0 million committed amount. The termination date of the Credit Agreement is September 29, 2022.
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 defined in the Credit Agreement), or (ii) the Base Rate (which is the greater of (a) the Federal Funds Rate plus 0.50% 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 at any time, with a minimum prepayment of $5.0 million.
The Credit Agreement includes various restrictive and financial covenants including, among others, senior debt/EBITDA ratio and debt service coverage requirements. In addition, the Credit Agreement include restrictions on investments, change of control provisions and provisions in the event the Company disposes more than 20% of its total assets.
The Credit Agreement is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q, and the description of the agreement is qualified in its entirety by reference to the full and complete terms of the agreement.
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The following exhibits are filed as part of this Quarterly Report on Form 10-Q.
Exhibit | Description | |
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31.1 | | Rule 13a-14(a)/15d-14(a) Certification by the Registrant’s Chief Executive Officer (*) |
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31.2 | | Rule 13a-14(a)/15d-14(a) Certification by the Registrant’s Chief Financial Officer (*) |
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32.1 | | Section 1350 Certification by the Registrant’s Chief Executive Officer (**) |
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32.2 | | Section 1350 Certification by the Registrant’s Chief Financial Officer (**) |
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101 INS | | Inline XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document (*) |
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101 SCH | | Inline XBRL Taxonomy Extension Schema Document (*) |
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101 CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document (*) |
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101 LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document (*) |
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101 PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document (*) |
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101 DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document (*) |
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104 | | Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
(*) | Filed herewith. |
(**) | Furnished herewith. |
(*)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 |
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Date: November | /s/ |
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| Executive Vice President, Chief Financial Officer (Principal Financial |
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