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EX-31.1 - EX-31.1 - Primoris Services Corpprim-20180331ex311f4f187.htm
EX-32.2 - EX-32.2 - Primoris Services Corpprim-20180331ex3227c55e1.htm
EX-32.1 - EX-32.1 - Primoris Services Corpprim-20180331ex321894a83.htm
EX-31.2 - EX-31.2 - Primoris Services Corpprim-20180331ex312c9b95e.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2018

 

OR

 

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

 

For the transition period from                    to                      .

 

Commission file number 0001-34145

 

Primoris Services Corporation

(Exact name of registrant as specified in its charter)

 

Delaware

    

20-4743916

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

2100 McKinney Avenue, Suite 1500

 

 

Dallas, Texas

 

75201

(Address of Principal Executive Offices)

 

(Zip Code)

 

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

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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  ☐

Do not check if a 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 May 7, 2018, 51,530,572 shares of the registrant’s common stock, par value $0.0001 per share, were outstanding.

 

 

 

 


 

PRIMORIS SERVICES CORPORATION

 

INDEX

 

 

 

 

 

    

Page No.

 

 

 

Part I. Financial Information 

 

 

 

 

 

Item 1. Financial Statements:

 

 

 

 

 

—Condensed Consolidated Balance Sheets at March 31, 2018 and December 31, 2017 (Unaudited) 

 

3

 

 

 

—Condensed Consolidated Statements of Income for the three months ended March 31, 2018 and 2017 (Unaudited) 

 

4

 

 

 

— Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017 (Unaudited) 

 

5

 

 

 

—Notes to Condensed Consolidated Financial Statements (Unaudited) 

 

7

 

 

 

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

 

26

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

 

40

 

 

 

Item 4. Controls and Procedures 

 

40

 

 

 

Part II. Other Information 

 

 

 

 

 

Item 1. Legal Proceedings 

 

42

 

 

 

Item 1A. Risk Factors 

 

42

 

 

 

Item 6. Exhibits 

 

42

 

 

 

Signatures 

 

43

 

2


 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

December 31, 

 

 

    

2018

    

2017

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents ($68,188 and $ 60,256 related to VIEs. See Note 10)

 

$

134,172

 

$

170,385

 

Accounts receivable, net

 

 

260,920

 

 

291,589

 

Contract assets

 

 

262,932

 

 

265,902

 

Note receivable

 

 

10,000

 

 

 —

 

Prepaid expenses and other current assets

 

 

21,694

 

 

15,338

 

Total current assets

 

 

689,718

 

 

743,214

 

Property and equipment, net

 

 

313,937

 

 

311,777

 

Intangible assets, net

 

 

42,376

 

 

44,800

 

Goodwill

 

 

153,374

 

 

153,374

 

Other long-term assets

 

 

3,042

 

 

2,575

 

Total assets

 

$

1,202,447

 

$

1,255,740

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

130,956

 

$

140,943

 

Contract liabilities

 

 

137,380

 

 

169,101

 

Accrued liabilities

 

 

99,909

 

 

102,168

 

Dividends payable

 

 

3,092

 

 

3,087

 

Current portion of long-term debt

 

 

63,975

 

 

65,464

 

Total current liabilities

 

 

435,312

 

 

480,763

 

Long-term debt, net of current portion

 

 

181,972

 

 

193,351

 

Deferred tax liabilities

 

 

13,577

 

 

13,571

 

Other long-term liabilities

 

 

6,090

 

 

5,872

 

Total liabilities

 

 

636,951

 

 

693,557

 

Commitments and contingencies (See Note 16)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Common stock—$.0001 par value; 90,000,000 shares authorized; 51,530,572 and 51,448,753 issued and outstanding at March 31, 2018 and December 31, 2017

 

 

 5

 

 

 5

 

Additional paid-in capital

 

 

162,701

 

 

160,502

 

Retained earnings

 

 

393,547

 

 

395,961

 

Noncontrolling interest

 

 

9,243

 

 

5,715

 

Total stockholders’ equity

 

 

565,496

 

 

562,183

 

Total liabilities and stockholders’ equity

 

$

1,202,447

 

$

1,255,740

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

3


 

PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

 

2018

    

2017

 

Revenue

$

504,119

 

$

561,502

 

Cost of revenue

 

459,559

 

 

506,449

 

Gross profit

 

44,560

 

 

55,053

 

Selling, general and administrative expenses

 

38,651

 

 

39,854

 

Operating income

 

5,909

 

 

15,199

 

Other income (expense):

 

 

 

 

 

 

Foreign exchange gain

 

257

 

 

23

 

Other income (expense), net

 

(12)

 

 

 —

 

Interest income

 

272

 

 

69

 

Interest expense

 

(1,998)

 

 

(2,262)

 

Income before provision for income taxes

 

4,428

 

 

13,029

 

Provision for income taxes

 

(212)

 

 

(4,517)

 

Net income

$

4,216

 

$

8,512

 

 

 

 

 

 

 

 

Less net income attributable to noncontrolling interests

$

(3,528)

 

$

(821)

 

 

 

 

 

 

 

 

Net income attributable to Primoris

$

688

 

$

7,691

 

 

 

 

 

 

 

 

Dividends per common share

$

0.060

 

$

0.055

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

Basic

$

0.01

 

$

0.15

 

Diluted

$

0.01

 

$

0.15

 

Weighted average common shares outstanding:

 

 

 

 

 

 

Basic

 

51,479

 

 

51,594

 

Diluted

 

51,747

 

 

51,851

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

4


 

 

PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2018

    

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

4,216

 

$

8,512

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation

 

 

14,368

 

 

14,134

 

Amortization of intangible assets

 

 

2,424

 

 

1,727

 

Stock-based compensation expense

 

 

215

 

 

459

 

Gain on sale of property and equipment

 

 

(1,104)

 

 

(1,308)

 

Other non-cash items

 

 

40

 

 

44

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

30,669

 

 

36,383

 

Contract assets

 

 

2,970

 

 

(4,671)

 

Other current assets

 

 

(6,356)

 

 

1,102

 

Other long-term assets

 

 

(499)

 

 

(147)

 

Accounts payable

 

 

(9,987)

 

 

(43,997)

 

Contract liabilities

 

 

(31,721)

 

 

38,525

 

Accrued expenses and other current liabilities

 

 

(1,806)

 

 

(1,752)

 

Other long-term liabilities

 

 

231

 

 

77

 

Net cash provided by operating activities

 

 

3,660

 

 

49,088

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(19,125)

 

 

(19,222)

 

Issuance of a note receivable

 

 

(10,000)

 

 

 —

 

Proceeds from sale of property and equipment

 

 

3,734

 

 

1,984

 

Net cash used in investing activities

 

 

(25,391)

 

 

(17,238)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Repayment of long-term debt and capital leases

 

 

(12,893)

 

 

(12,498)

 

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

 

 

1,498

 

 

1,148

 

Repurchase of common stock

 

 

 —

 

 

(4,999)

 

Dividends paid

 

 

(3,087)

 

 

(2,839)

 

Net cash used in financing activities

 

 

(14,482)

 

 

(19,188)

 

Net change in cash and cash equivalents

 

 

(36,213)

 

 

12,662

 

Cash and cash equivalents at beginning of the period

 

 

170,385

 

 

135,823

 

Cash and cash equivalents at end of the period

 

$

134,172

 

$

148,485

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

5


 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2018

    

2017

 

Cash paid:

 

 

 

 

 

 

 

Interest

 

$

1,965

 

$

2,262

 

 

 

 

 

 

 

 

 

Income taxes, net of refunds received

 

$

88

 

$

1,872

 

 

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2018

    

2017

 

 

 

 

 

 

 

 

 

Obligations incurred for the acquisition of property

 

$

 —

 

$

4,163

 

 

 

 

 

 

 

 

 

Dividends declared and not yet paid

 

$

3,092

 

$

2,829

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

6


 

PRIMORIS SERVICES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

 

Note 1—Nature of Business

 

Organization and operations  Primoris Services Corporation is a holding company of various construction and product engineering subsidiaries. The Company’s underground and directional drilling operations install, replace and repair natural gas, petroleum, telecommunications and water pipeline systems, including large diameter pipeline systems. The Company’s industrial, civil and engineering operations build and provide maintenance services to industrial facilities including power plants, petrochemical facilities, and other processing plants; construct multi-level parking structures; and engage in the construction of highways, bridges and other environmental construction activities. The Company is incorporated in the State of Delaware, and its corporate headquarters is located at 2100 McKinney Avenue, Suite 1500, Dallas, Texas 75201. Unless specifically noted otherwise, as used throughout these condensed 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 — We segregate our business into four reportable segments: 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 17 – “Reportable Segments” for a brief description of the reportable segments and their operations.

 

The classification of revenue 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.

 

We own a 50% interest in two separate joint ventures, both formed in 2015.  The Carlsbad Power Constructors joint venture (“Carlsbad”) is engineering and constructing 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 venture operations are included as part of the Power segment.  As a result of determining that we are the primary beneficiary of the two variable interest entities ("VIEs”), the results of the Carlsbad and Wilmington joint ventures are consolidated in our financial statements.  The Wilmington project was substantially complete as of December 31, 2017, and the Carlsbad project is expected to be completed in 2018.  Financial information for the joint ventures is presented in Note 10 – “Noncontrolling Interests”.

 

On May 26, 2017, we acquired the net assets of Florida Gas Contractors (“FGC”) for $37.7 million; on May 30, 2017, we acquired certain engineering assets for approximately $2.3 million; and on June 16, 2017, we acquired the net assets of Coastal Field Services (“Coastal”) for $27.5 million.  FGC operations are included in the Utilities segment, the engineering assets are included in the Power segment, and Coastal operations are included in the Pipeline segment.  See Note 6— “Business Combinations”.

 

Note 2—Basis of Presentation

 

Interim consolidated financial statements  The interim condensed consolidated financial statements for the three month periods ended March 31, 2018 and 2017 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 our Annual Report on Form 10-K, filed on February 26, 2018, which contains our audited consolidated financial statements for the year ended December 31, 2017, have been omitted. 

 

This First Quarter 2018 Report should be read in concert with our 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. 

 

Reclassification Certain previously reported amounts have been reclassified to conform to the current year presentation.

7


 

 

Short-term investments — We classify as short-term investments all securities or other assets acquired which have ready marketability and can be liquidated, if necessary, within the current operating cycle and which have readily determinable fair values. Short-term investments are classified as trading and are recorded at fair value using the first-in, first-out method. Our short-term investments are generally short-term dollar-denominated bank deposits, U.S. Treasury Bills and marketable equity securities.

 

Customer 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 ten customers in any one calendar year generate revenue in excess of 50% of total revenue; however, the group that comprises the top ten customers varies from year to year.

 

During the three months ended March 31, 2018, revenue generated by the top ten customers were approximately $261.7 million, which represented 51.9% of total revenue during the period. During the period, a California utility customer represented 9.3% of total revenue, and a state department of transportation customer represented 9.2% of total revenue.

 

During the three months ended March 31, 2017, revenue generated by the top ten customers were $384.0 million, which represented 68.4% of total revenue during the period.  During the period, two large pipeline projects represented 28.5% of total revenue.

 

At March 31, 2018, approximately 6.2% of our accounts receivable were due from one customer, and that customer provided 7.4% of our revenue for the three months ended March 31, 2018. In addition, of total accounts receivable, approximately 12.6% are from one customer with whom we are currently in dispute resolution. See Note 16 – “Commitments and Contingencies”.

 

At March 31, 2017, approximately 12.0% of our accounts receivable were due from one customer, and that customer provided 9.5% of our revenue for the three months ended March 31, 2017. In addition, approximately 8.9% of total accounts receivable at March 31, 2017 were from one customer with whom we are currently in dispute resolution.

 

Multiemployer plans  Various subsidiaries are signatories to collective bargaining agreements. These agreements require that we participate in and contribute to a number of multiemployer benefit plans for our 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. To the extent that any plans are underfunded, the Employee Retirement Income Security Act of 1974, as amended by the Multi-Employer Pension Plan Amendments Act of 1980, requires that if we were to withdraw from an agreement or if a plan is terminated, we may 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.

 

Note 3—Recent Accounting Pronouncements

 

Recently adopted 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 and supersedes all prior revenue recognition standards including the guidance in ASC Topic 605, “Revenue Recognition”.  Under Topic 606, 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. We adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method. See Note 4 — “Revenue” for further details.

 

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 acquired 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

8


 

periods beginning after December 15, 2017. We adopted the ASU as of January 1, 2018, and it did not have a material impact on our consolidated financial statements.

 

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 that 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.  We adopted the ASU as of January 1, 2018, and it did not have a material impact on our consolidated financial statements.

 

In March 2018, the FASB issued ASU No. 2018-05, “Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118”, to add various SEC paragraphs pursuant to the issuance of SEC Staff Accounting Bulletin No. 118 (“SAB 118”), to ASC 740 “Income Taxes”.  SAB 118 was issued by the SEC in December 2017 to provide immediate guidance for accounting implications of U.S. tax reform under the Tax Cuts and Jobs Act (the “Tax Act”), which became effective for us on January 1, 2018. We have evaluated the potential impacts of SAB 118 and have applied this guidance to our consolidated financial statements and related disclosures beginning in the second quarter of its fiscal year 2018. See Note 13 for additional information on SAB 118 and the impacts of the Tax Act.

 

Recently issued accounting pronouncements not yet adopted

 

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 standard is effective for fiscal years beginning after December 15, 2018. We have already revised our credit agreements to address the impact of ASU 2016-02 and continue to assess the effect the guidance will have on our existing accounting policies and consolidated financial statements. We expect there will be an increase in assets and liabilities on the Consolidated Balance Sheets at adoption due to the recording of right-of-use assets and corresponding lease liabilities. We are currently in the process of inventorying embedded leases and have not yet determined the impact to our consolidated financial statements.

 

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. We do not expect the adoption of ASU 2017-04 to have an impact on our financial position, results of operations or cash flows.

 

Note 4—Revenue

 

On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. Adoption changed our accounting policy for revenue recognition. Results for periods prior to January 1, 2018 are not adjusted and continue to be reported in accordance with our historic accounting under ASC Topic 605. The cumulative impact of adopting Topic 606 was immaterial and did not require an adjustment to retained earnings. However, we have reclassified prior year balance sheet and cash flow amounts to conform to current year presentation.

 

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 continuous 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 is 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.

 

9


 

To determine the proper revenue recognition method for contracts, 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. Topic 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 contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using the observable standalone selling price, if available, or alternatively our best estimate of the standalone selling price of each distinct performance obligation in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach for each performance obligation. 

 

As of March 31, 2018, we had $1.88 billion of remaining performance obligations. We expect to recognize approximately 64% of our remaining performance obligations as revenue during the next four quarters and the remaining balance thereafter.

 

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

 

The nature of our contracts give rise to several types of variable consideration, including contract modifications (change orders and claims), liquidated damages, volume discounts, performance bonuses, incentive fees, and other terms that can either increase or decrease the transaction price. Contracts are often modified to account for changes in contract specifications or requirements. We consider unapproved change orders to be contract modifications for which customers have not agreed to both scope and price. We consider claims to be 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. Costs associated with contract modifications are included in the estimated costs to complete the contracts and are treated as project costs when incurred. In most instances, contract modifications are for 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 on a cumulative catch-up basis. In some cases, settlement of contract modifications may not occur until after completion of work under the contract.

 

We estimate variable consideration as the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent we believe we have an enforceable right and it is probable that a significant reversal of cumulative revenue recognized will not occur. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us.

 

At March 31, 2018, we had unapproved contract modifications included in aggregate transaction prices that totaled approximately $81.0 million. These contract modifications were in the process of being negotiated in the normal course of business. Approximately $68.8 million of the contract modifications had been recognized as revenue on a cumulative catch-up basis through March 31, 2018.

 

10


 

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 months ended March 31, 2018, revenue recognized from performance obligations satisfied in previous periods was  $21.3 million. If at any time the estimate of contract profitability indicates an anticipated loss on a contract, the projected loss is recognized in full 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.

 

In all forms of contracts, we estimate the collectability of contract amounts at the same time that we estimate project costs.  If we anticipate that there may be issues associated with the collectability of the full amount calculated as the 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.

 

The timing of when we bill our customers is generally dependent upon agreed-upon contractual terms, milestone billings based on the completion of certain phases of the work, or when services are provided. Sometimes, billing occurs subsequent to revenue recognition, resulting in unbilled revenue, which is a contract asset. However, we sometimes receive advances or deposits from our customers before revenue is recognized, resulting in deferred revenue, which is a contract liability.

 

The caption “Contract assets” in the Condensed Consolidated Balance Sheets represents the following:

 

·

unbilled revenue (formerly costs and estimated earnings in excess of billings) 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 following (in thousands):

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2018

    

2017

 

Unbilled revenue

 

$

160,649

 

$

160,092

 

Retention receivable

 

 

64,155

 

 

66,586

 

Contract materials (not yet installed)

 

 

38,128

 

 

39,224

 

 

 

$

262,932

 

$

265,902

 

 

Contract assets decreased by $3.0 million compared to December 31, 2017 due primarily to reductions in our retention receivable from the completion of certain construction milestones.

 

The caption “Contract liabilities” in the Condensed Consolidated Balance Sheets represents deferred revenue (formerly billings in excess of costs and estimated earnings) on billings in excess of contract revenue recognized to date, and the accrued loss provision.

 

Contract liabilities consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2018

    

2017

 

Deferred revenue

 

$

129,679

 

$

159,034

 

Accrued loss provision

 

 

7,701

 

 

10,067

 

 

 

$

137,380

 

$

169,101

 

 

11


 

Contract liabilities decreased $31.7 million compared to December 31, 2017 primarily due to lower deferred revenue.

 

Revenue recognized for the three months ended March 31, 2018, that was included in the contract liability balance at the beginning of the year was approximately $120.0 million.

 

The following tables present our revenue disaggregated into various categories.

 

MSA and Non-MSA revenue was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2018

 

Segment

    

MSA

    

Non-MSA

    

Total

 

Power

 

$

19,398

 

$

147,157

 

$

166,555

 

Pipeline

 

 

7,280

 

 

50,303

 

 

57,583

 

Utilities

 

 

119,767

 

 

46,943

 

 

166,710

 

Civil

 

 

 —

 

 

113,271

 

 

113,271

 

Total

 

$

146,445

 

$

357,674

 

$

504,119

 

 

Revenue by contract type was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2018

 

Segment

    

Fixed-price

    

Unit-price

    

Cost reimbursable (1)

    

Total

 

Power

 

$

116,655

 

$

11,112

 

$

38,788

 

$

166,555

 

Pipeline

 

 

12,520

 

 

18,645

 

 

26,418

 

 

57,583

 

Utilities

 

 

64,064

 

 

66,751

 

 

35,895

 

 

166,710

 

Civil

 

 

9,643

 

 

87,080

 

 

16,548

 

 

113,271

 

Total

 

$

202,882

 

$

183,588

 

$

117,649

 

$

504,119

 


(1)

Includes time and material and cost reimbursable plus fee contracts.

 

Each of these contract types presents advantages and disadvantages. Typically, we assume more risk with fixed-price contracts. Unforeseen events and circumstances can alter the estimate of the costs and potential profit associated with a particular contract. However, these types of contracts offer additional profits when we complete the work for less than originally estimated. Unit-price and cost reimbursable contracts generally subject us to lower risk. Accordingly, the associated base fees are usually lower than fees earned on fixed-price contracts. Under these contracts, our profit may vary if actual costs vary significantly from the negotiated rates.

 

 

Note 5—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.

 

12


 

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 March 31, 2018 and December 31, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

 

    

 

 

    

Significant

    

 

 

 

 

 

Quoted Prices

 

Other

 

Significant

 

 

 

in Active Markets

 

Observable

 

Unobservable

 

 

 

for Identical Assets

 

Inputs

 

Inputs

 

 

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Assets as of March 31, 2018:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

134,172

 

$

 —

 

$

 —

 

Liabilities as of March 31, 2018: 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 —

 

$

 —

 

$

728

 

 

 

 

 

 

 

 

 

 

 

 

Assets as of December 31, 2017:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

170,385

 

$

 —

 

$

 —

 

Liabilities as of December 31, 2017: 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 —

 

$

 —

 

$

716

 

 

Other financial instruments not listed in the table consist of accounts receivable, note receivable, accounts payable and certain accrued liabilities.  These financial instruments generally approximate fair value based on their short-term nature.  The 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. 

 

The following table provides changes to our contingent consideration liability Level 3 fair value measurements during the three months ended March 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

Significant Unobservable Inputs

 

 

 

(Level 3)

 

Contingent Consideration Liability

    

2018

 

Beginning balance, January 1,

 

$

716

 

Change in fair value of contingent consideration liability during year

 

 

12

 

Ending balance, March 31, 

 

$

728

 

 

On a quarterly basis, we assess the estimated fair value of the contractual obligation to pay the contingent consideration and any changes in estimated fair value are recorded as a non-operating charge in our Statement of Income.  Fluctuations in the fair value of contingent consideration are impacted by two unobservable inputs, management’s estimate of the probability (which has ranged from 33% to 100%) of the acquired company meeting the contractual operating performance target and the estimated discount rate (a rate that approximates our 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 of the estimated discount rate is accompanied by a directionally opposite change in the fair value of contingent consideration liability.

 

 

 

Note 6 — Business Combinations

 

On May 26, 2017, we acquired certain assets of FGC, 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 as of the acquisition date was $1.2 million.  FGC operates in the Utilities segment and expands our presence in the Florida and Southeast markets.  The purchase was accounted for using the acquisition method of accounting.  During the fourth quarter of 2017, we finalized the estimate of fair value of the acquired assets of FGC, which included $4.8 million of fixed assets; $3.3 million of working capital; $9.1 million of intangible assets; and $17.0 million of goodwill. In connection with the FGC acquisition, we 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 our construction efforts in the underground utility business as well as the expansion of our geographic presence.  Goodwill

13


 

also includes the value of the assembled workforce that FGC provides to us.  Based on the current tax treatment, goodwill will be deductible for income tax purposes over a fifteen-year period. For the three months ended March 31, 2018, FGC contributed revenue of $7.6 million and gross profit of $2.2 million.

 

On May 30, 2017, we acquired certain engineering assets for approximately $2.3 million in cash, which further enhances our ability to provide quality service for engineering and design projects.  The purchase was accounted for using the acquisition method of accounting.  The 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. The operations of this acquisition were fully integrated into our Power segment operations and no separate financial results were maintained. Therefore, it is impracticable for us to report separately the amounts of revenue and gross profit included in the Condensed Consolidated Statements of Income.

 

On June 16, 2017, we acquired certain assets and liabilities of Coastal 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 our 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. We continue to assess the final cutoff data and expect to finalize the estimate of fair value of the acquired assets of Coastal during the second quarter of 2018. Intangible assets primarily consist of customer relationships and tradename. Goodwill associated with the Coastal acquisition principally consists of expected benefits from providing expertise for our expansion of services in the pipeline construction and maintenance business. Goodwill also includes the value of the assembled workforce that Coastal provides to us. Based on the current tax treatment, goodwill will be deductible for income tax purposes over a fifteen-year period. For the three months ended March 31, 2018, Coastal contributed revenue of $5.0 million and gross profit of $0.4 million.

 

Supplemental Unaudited Pro Forma Information for the three months ended March 31, 2018 and 2017

 

The following pro forma information for the three months ended March 31, 2018 and 2017 presents our results of operations as if the acquisitions of FGC and Coastal had occurred at the beginning of 2017.  The supplemental pro forma information has been adjusted to include:

 

·

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

 

·

the pro forma tax effect of both income before income taxes, and the pro forma adjustments, calculated using a tax rate of 23.5% and 37.0% for the three months ended March 31, 2018 and 2017, respectively.

 

14


 

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, 2017.  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 acquisitions.

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2018

    

2017

 

 

 

(unaudited)

 

(unaudited)

 

Revenue

 

$

504,119

 

$

577,142

 

Income before provision for income taxes

 

$

4,428

 

$

14,156

 

Net income attributable to Primoris

 

$

688

 

$

8,401

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

Basic

 

 

51,479

 

 

51,594

 

Diluted

 

 

51,747

 

 

51,851

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

Basic

 

$

0.01

 

$

0.16

 

Diluted

 

$

0.01

 

$

0.16

 

 

Pending merger with Willbros Group, Inc.

 

On March 27, 2018, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with  Waco Acquisition Vehicle, Inc., our wholly owned subsidiary (“Merger Sub”) and Willbros Group, Inc., (“Willbros”), pursuant to which Merger Sub will merge with and into Willbros (the “Merger”), with Willbros surviving the Merger as our wholly-owned subsidiary. The Merger Agreement includes customary representations, warranties and covenants. At the effective time of the Merger, we will pay $0.60 per share for all of Willbros’ outstanding common stock and will settle all of the existing Willbros debt obligations, for a purchase price of approximately $100.0 million. The Merger Agreement is expected to close in the second quarter of 2018, subject to satisfaction of customary closing conditions, including approval of the Merger Agreement by the requisite vote of Willbros’ stockholders.

 

In connection with the Merger, we agreed to provide, at our discretion, up to $20.0 million in secured bridge financing to support Willbros’ working capital needs through the Closing Date (as defined in the Merger Agreement). At March 31, 2018, we had provided $10.0 million in secured bridge financing which is shown as a Note receivable on the Condensed Consolidated Balance Sheets. We are under no obligation to provide any future advances. In the event the Merger does not close, we expect the note to be repaid in 2018.

 

 

 

15


 

Note 7—Goodwill and Intangible Assets

 

Goodwill by segment was recorded as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

    

March 31, 

 

December 31, 

 

Reporting Segment

 

2018

 

2017

 

Power

 

$

24,391

 

$

24,391

 

Pipeline

 

 

51,521

 

 

51,521

 

Utilities

 

 

37,312

 

 

37,312

 

Civil

 

 

40,150

 

 

40,150

 

Total Goodwill

 

$

153,374

 

$

153,374

 

 

At March 31, 2018 and December 31, 2017, intangible assets other than goodwill totaled $42.4 million and $44.8 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 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

 

    

Weighted

Average Life

    

Gross Carrying

Amount

    

Accumulated

Amortization

    

Gross Carrying

Amount

    

Accumulated

Amortization

 

Tradename

 

9 years

 

$

31,790

 

$

(22,836)

 

$

32,175

 

$

(22,238)

 

Customer relationships

 

10 years

 

 

49,900

 

 

(17,661)

 

 

49,900

 

 

(16,338)

 

Non-compete agreements

 

5 years

 

 

1,900

 

 

(915)

 

 

1,900

 

 

(820)

 

Other

 

3 years

 

 

275

 

 

(77)

 

 

275

 

 

(54)

 

 

 

 

 

$

83,865

 

$

(41,489)

 

$

84,250

 

$

(39,450)

 

 

Amortization expense of intangible assets was $2.4 million and $1.7 million for the three months ended March 31, 2018 and 2017, respectively. Estimated future amortization expense for intangible assets is as follows (in thousands):

 

 

 

 

 

 

 

    

Estimated

 

 

 

Intangible

 

For the Years Ending

 

Amortization

 

December 31, 

 

Expense

 

2018 (remaining nine months)

 

$

7,084

 

2019

 

 

9,193

 

2020

 

 

6,442

 

2021

 

 

5,202

 

2022

 

 

4,048

 

Thereafter

 

 

10,407

 

 

 

$

42,376

 

 

 

Note 8—Accounts Payable and Accrued Liabilities

 

At March 31, 2018 and December 31, 2017, accounts payable were $131.0 million and $140.9 million, respectively. These balances included retention amounts for the same periods of approximately $14.0 million and $13.5 million, respectively.  The retention amounts are due to subcontractors and have been retained pending contract completion and customer acceptance of jobs.

 

The following is a summary of accrued expenses and other current liabilities (in thousands):

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

2018

 

2017

Payroll and related employee benefits

 

$

41,530

 

$

45,708

Insurance, including self-insurance reserves

 

 

47,282

 

 

47,256

Corporate income taxes and other taxes

 

 

3,051

 

 

2,843

Other

 

 

8,046

 

 

6,361

 

 

$

99,909

 

$

102,168

 

16


 

Note 9—Credit Arrangements

 

Long-term debt and credit facilities consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2018

    

2017

 

Commercial equipment notes

 

$

152,759

 

$

165,532

 

Mortgage notes

 

 

11,145

 

 

11,242

 

Revolving credit facility

 

 

 —

 

 

 —

 

Senior secured notes

 

 

82,143

 

 

82,143

 

Total debt

 

 

246,047

 

 

258,917

 

Unamortized debt issuance costs

 

 

(100)

 

 

(102)

 

Total debt, net

 

$

245,947

 

$

258,815

 

Less: current portion

 

 

(63,975)

 

 

(65,464)

 

Long-term debt, net of current portion

 

$

181,972

 

$

193,351

 

 

 

 

 

 

 

 

 

The weighted average interest rate on total debt outstanding at March 31, 2018 and December 31, 2017 was 3.0%.

 

Commercial Notes Payable and Mortgage Notes Payable

 

From time to time, we enter into commercial equipment notes payable with various equipment finance companies and banks. At March 31, 2018, interest rates ranged from 1.78% to 3.51% per annum and maturity dates ranging from June 15, 2018 to December 15, 2022. The notes are secured by certain construction equipment.

 

We 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 2017, we 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, we 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 our 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, and contains an accordion feature that will allow us to increase the borrowing capacity thereunder from $200.0 million up to $250.0 million, subject to obtaining additional or increased lender commitments. The termination date of the Credit Agreement is September 29, 2022. We capitalized $0.6 million of debt issuance costs during the third quarter of 2017 that are being amortized as interest expense over the life of the Credit Agreement.

 

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 our 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). 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.

 

17


 

Commercial letters of credit outstanding were $20.3 million at March 31, 2018. Other than commercial letters of credit, there were no borrowings under the Credit Agreement during the three months ended March 31, 2018, and available borrowing capacity at March 31, 2018 was $179.7 million.

 

Senior Secured Notes and Shelf Agreement

 

On December 28, 2012, we 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 us, 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, we 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, we 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.

 

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

 

Both the Credit Agreement and the Notes Agreement contain various restrictive and financial covenants including, among others, senior debt/EBITDA ratio and debt service coverage requirements. In addition, the agreements include restrictions on investments, change of control provisions and provisions in the event we dispose more than 20% of our total assets.

 

We were in compliance with the covenants for the Credit Agreement and Notes Agreement at March 31, 2018.

 

Canadian Credit Facility

 

We have a demand credit facility for $8.0 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 of 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 March 31, 2018, letters of credit outstanding was $0.5 million in Canadian dollars, and the available borrowing capacity was $7.5 million in Canadian dollars.  The credit facility contains a working capital restrictive covenant for OnQuest Canada, ULC.  At March 31, 2018, OnQuest Canada, ULC was in compliance with the covenant.

 

 

Note 10 — Noncontrolling Interests

 

We are currently participating in two joint ventures, each of which operates in the Power segment. Both joint ventures have been determined to be a VIE and we were determined to be the primary beneficiary as a result of our significant influence over the joint venture operations.

 

Each joint venture is a partnership, and consequently, the tax effect of only our share of the income was recognized 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.

 

18


 

Carlsbad Joint Venture

 

The Carlsbad joint venture operating activities began in 2015 and are included in our Condensed Consolidated Statements of Income as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2018

    

2017

 

Revenue

 

$

41,820

 

$

10,800

 

Net income attributable to noncontrolling interests

 

$

3,114

 

$

368

 

 

The Carlsbad joint venture made no distributions to the partners, and we made no capital contributions to the Carlsbad joint venture during the three months ended March 31, 2018. The project is expected to be completed in 2018.

 

The carrying value of the assets and liabilities associated with the operations of the Carlsbad joint venture are included in our Condensed Consolidated Balance Sheets as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2018

 

2017

 

Cash

 

$

51,862

 

$

44,308

 

Accounts receivable

 

$

18,621

 

$

15,343

 

Contract liabilities

 

$

34,092

 

$

42,743

 

Accounts payable

 

$

6,220

 

$

12,352

 

Due to Primoris

 

$

19,385

 

$

 —

 

 

Wilmington Joint Venture

 

The Wilmington joint venture operating activities began in October 2015 and are included in our Condensed Consolidated Statements of Income as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2018

    

2017

 

Revenue

 

$

1,484

 

$

12,310

 

Net income attributable to noncontrolling interests

 

$

414

 

$

453

 

 

The Wilmington joint venture made no distributions to the partners, and we made no capital contributions to the Wilmington joint venture during the three months ended March 31, 2018. The project was substantially complete as of December 31, 2017.

 

The carrying value of the assets and liabilities associated with the operations of the Wilmington joint venture are included in our Condensed Consolidated Balance Sheets as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2018

 

2017

 

Cash

 

$

16,326

 

$

15,948

 

Accounts receivable

 

$

467

 

$

598

 

Contract liabilities

 

$

606

 

$

1,480

 

Accounts payable

 

$

83

 

$

759

 

Due to Primoris

 

$

8,397

 

$

7,428

 

 

 

 

 

 

 

 

 

 

 

19


 

Summary – Joint Venture Balance Sheets

 

The following table summarizes the total balance sheet amounts for the two joint ventures, which are included in our Condensed Consolidated Balance Sheets, and the total consolidated balance sheet amounts (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Joint Venture

 

Consolidated

 

At March 31, 2018

    

Amounts

    

Amounts

 

Cash

 

$

68,188

 

$

134,172

 

Accounts receivable

 

$

19,088

 

$

260,920

 

Accounts payable

 

$

6,303

 

$

130,956

 

Contract liabilities

 

$

34,698

 

$

137,380

 

 

 

 

 

 

 

 

 

At December 31, 2017

 

 

 

 

 

 

 

Cash

 

$

60,256

 

$

170,385

 

Accounts receivable

 

$

15,941

 

$

291,589

 

Accounts payable

 

$

13,111

 

$

140,943

 

Contract liabilities

 

$

44,223

 

$

169,101

 

 

Note 11—Related Party Transactions

 

Prior to March 2017, we 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 in SIGI.  In March 2017, we exercised a right of first refusal and purchased the SIGI properties.  The purchase was approved by our Board of Directors for $12.8 million.  We assumed three mortgage notes totaling $4.2 million with the remainder paid in cash. During the three months ended March 31, 2018 and 2017, we paid $0 and $0.2 million, respectively, in lease payments to SIGI for the use of these properties. 

 

We lease 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 12—Stock-Based Compensation

 

In May 2013, the shareholders approved and we adopted the Primoris Services Corporation 2013 Long-term Incentive Equity Plan (“Equity Plan”). Our Board of Directors has granted 259,065 Restricted Stock Units (“Units”) to executives under the Equity Plan.  The grants were documented in RSU Award Agreements, which provide for a vesting schedule and require continuing employment of the executive.  The Units are subject to earlier acceleration, termination, cancellation or forfeiture as provided in the underlying RSU Award Agreement.

 

At March 31, 2018, a total of 173,650 Units were vested.  The vesting schedule for the remaining Units are as follows:

 

 

 

 

 

Number of Units

For the Years Ending December 31, 

 

to Vest

2018 (remaining nine months)

 

28,471

2019

 

51,552

2020

 

5,392

 

 

85,415

 

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.  We recognized $0.2 million and $0.5 million in compensation expense for the three months ended March 31, 2018 and 2017, respectively.  At March 31, 2018, approximately $1.0 million of unrecognized compensation expense remained for the Units, which will be recognized over a weighted average period of 1.4 years.

 

20


 

Vested Units accrue “Dividend Equivalent Units” (as defined in the Equity Plan), which will be accrued as additional Units.  At March 31, 2018, a total of 3,521 Dividend Equivalent Units were accrued.

 

Note 13—Income Taxes

 

We are subject to extensive tax liabilities imposed by multiple jurisdictions. We determine our best 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 which can cause 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 Tax Act was signed into law on December 22, 2017. This legislation makes significant changes to the U.S. Internal Revenue Code including a reduction of the U.S. federal corporate income tax rate from 35% to 21% beginning on January 1, 2018. Other changes require complex computations not previously provided in U.S. tax law.  Given the significance of the legislation, the SEC staff issued SAB 118 which provides guidance on accounting for uncertainties of the effects of the Tax Act.  Specifically, SAB 118 allowed companies to record provisional estimates of the impact of the Tax Act in the period ended December 31, 2017. The provisional estimates are to be finalized during a one year “measurement period” similar to that used when accounting for business combinations. Our measurement period remains open as we continue to evaluate the effects of the Tax Act on our deductions for tax depreciation and executive compensation accruals. No changes to the provisional estimates occurred during the three months ended March 31, 2018.

 

The effective tax rate on income including noncontrolling interests for the three months ended March 31, 2018 and 2017 was 4.8% and 34.7%, respectively. Excluding noncontrolling interest, the effective tax rate on income attributable to Primoris for the three months ended March 31, 2018 and 2017 was 23.5% and 37.0%, respectively. Our 2018 tax rate differs from the U.S. federal statutory rate of 21% primarily due to the impact of state income taxes, investment tax credits, and nondeductible components of per diem expenses. Our 2017 tax rate differs from the U.S. federal statutory rate of 35% primarily due to state income taxes, the Domestic Production Activity Deduction, and nondeductible components of per diem expenses.

 

Our U.S. federal income tax returns are generally no longer subject to examination for tax years before 2014. The statutes of limitation of state and foreign jurisdictions generally vary between 3 to 5 years. Accordingly, our state and foreign income tax returns are generally no longer subject to examination for tax years before 2012.

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the financial reporting basis and tax basis of our assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to reverse. The effects of remeasurement of deferred tax assets and liabilities resulting from changes in tax rates are recognized in income in the period of enactment.

 

Note 14—Dividends and Earnings Per Share

 

We have paid or declared cash dividends during 2018 and 2017 as follows:

 

 

 

 

 

 

 

 

 

Declaration Date

 

Record Date

    

Payable Date

    

Amount Per Share

February 21, 2017

 

March 31, 2017

 

April 15, 2017

 

$

0.055

May 5, 2017

 

June 30, 2017