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PRIM > SEC Filings for PRIM > Form 10-Q on 5-Nov-2013All Recent SEC Filings

Show all filings for PRIMORIS SERVICES CORP

Form 10-Q for PRIMORIS SERVICES CORP


5-Nov-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS

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

Forward Looking Statements

This Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013 ("Third Quarter 2013 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, 2012 and our other filings with the Securities and Exchange Commission ("SEC"). Also, forward-looking statements represent our management's beliefs and assumptions only as of the date of this Third Quarter 2013 Report. You should read this Third Quarter 2013 Report, our Annual Report on Form 10-K for the year ended December 31, 2012 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. 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 2013 Report and our Annual Report on
Form 10-K for the year ended December 31, 2012.

Introduction

Primoris Services Corporation ("Primoris", the "Company", "we", "us" or "our") is a holding company of various subsidiaries, which form one of the largest publicly traded specialty contractor and infrastructure companies in the United States. Serving diverse end-markets, Primoris provides a wide range of construction, fabrication, maintenance, replacement, water and wastewater, and engineering services to major public utilities, petrochemical companies, energy companies, municipalities, state departments of transportation and other customers. We install, replace, repair and rehabilitate natural gas, refined product, water and wastewater pipeline systems, large diameter gas and liquid pipeline facilities, heavy civil projects, earthwork and site development and also construct mechanical facilities and other structures, including power plants, petrochemical facilities, refineries and parking structures. In addition, we provide maintenance services, including inspection, overhaul and emergency repair services, to cogeneration plants, refineries and similar mechanical facilities. One of our subsidiaries provides engineering and design services for fired heaters and furnaces primarily used in refinery applications.

Including our predecessor companies, we have been in business for more than 65 years. We became a publicly traded company in 2008. At that time, our operations were focused primarily on the West Coast through our subsidiaries ARB, Inc. ("ARB") and ARB Structures, Inc. We also provided product engineering services through a subsidiary, OnQuest, Inc. and its wholly owned subsidiary, OnQuest Canada, ULC (formerly Born Heaters Canada, ULC) to international customers and water and waste water construction services in Florida through Cardinal Contractors, Inc. ARB and ARB Structures, Inc. are headquartered in Lake Forest, CA, OnQuest is headquartered in San Dimas, CA, OnQuest Canada, ULC is headquartered in Calgary, Canada and Cardinal Contractors is headquartered in Sarasota, FL.

Since July 2008, we have continued to strategically expand both our capabilities and our geographic presence. This expansion has resulted in significant increases in revenues and profitability. The following is a discussion of the major acquisitions.

On December 18, 2009, we acquired James Construction Group, LLC, a privately-held Florida limited liability company ("JCG"). JCG is one of the largest general contractors based in the Gulf Coast states and is engaged in highway, industrial and environmental construction, primarily in Louisiana, Texas and Florida. JCG is the successor company to T. L. James and Company, Inc., a Louisiana company that has been in business for over 80 years. Headquartered in Baton Rouge, Louisiana, JCG serves government and private clients in a broad geographical region that includes the entire Gulf Coast region of the United States.


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On November 8, 2010, we acquired privately-held Rockford Corporation ("Rockford). Based in Hillsboro (outside Portland), Oregon, Rockford specializes in construction of large diameter natural gas and liquid pipeline projects and related facilities throughout most of North America.

In 2012, we made four acquisitions:

On March 12, 2012, we purchased certain assets of Sprint Pipeline Services, L.P. ("Sprint"), headquartered in Pearland (outside Houston), Texas. Sprint provides a comprehensive range of pipeline construction, maintenance, upgrade, fabrication and specialty services primarily in Texas and the southeastern United States.

On May 30, 2012, we purchased certain assets of Silva Contracting Company, Inc., Tarmac Materials, LLC and C3 Interest, LLC (collectively, "Silva"). Based outside of Houston, Texas, Silva provides transportation infrastructure maintenance, asphalt paving, and material sales in the Gulf Coast region of the United States. Following this acquisition, Silva was merged with the operations of JCG.

On September 28, 2012, we purchased certain assets of The Saxon Group, Inc. ("Saxon"). Based in Suwannee, Georgia (outside Atlanta), Saxon is a full service industrial construction enterprise with special expertise in the industrial gas processing and power plant sectors.

On November 17, 2012, we purchased all of the stock of Q3 Contracting, Inc., a privately-held Minnesota corporation ("Q3C"). Based in Little Canada, Minnesota, north of St. Paul, Minnesota, Q3C specializes in small diameter pipeline and gas distribution construction, restoration and other services, primarily for utilities in the upper Midwest region of the United States.

In March 2013, the Company's subsidiary, Primoris Energy Services Inc. (PES) purchased the assets of Force Specialty Services, Inc. ("FSSI") which specializes in turn-around work at refineries and chemical plants in the Gulf Coast area.

The Company is a party to the Blythe Power Constructors ("Blythe") joint venture for the installation of a parabolic trough solar field and steam generation system in California.

During the past five years, we have also created legal entities to consolidate or focus our efforts. For example, in 2009 we created Primoris Renewables, Inc. to focus on alternative energy projects, and in 2012, we created PES which is the legal entity that owns Sprint, Saxon and FSSI. Additionally, some of our subsidiaries have increased their focus on certain industries or geographies. For example, during the past year, Cardinal Contractors has opened a facility near Dallas to better serve water and wastewater construction opportunities in Texas.

Historically, we have longstanding relationships with major utility, refining, petrochemical, power and engineering companies. We have completed major underground and industrial projects for a number of large natural gas transmission and petrochemical companies. With our acquisitions of JCG and Q3C we have expanded our ability to provide services to our historical customers in additional geographies. Our diversified customer base includes many of the leading pipeline, power generation and utility companies in the United States. We often provide services under multi-year master service agreements ("MSA").

In the second quarter of 2013, we made the decision to close two of our small subsidiaries, Calidus and All Day Electric Company, Inc. Operations should cease by year end. For the nine months ended September 30, 2013 and for the year of 2012, their combined revenue was less than 0.5% and 0.3% of total consolidated Primoris revenues, respectively. The costs of closure are not expected to be material.

Additional information about us can be found in our press releases and other public filings. We make our press releases, our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and all other required filings with the SEC available free of charge through our Internet website, as soon as reasonably practical after they are electronically filed with, or furnished to, the SEC. Our principal executive offices are located at 2100 McKinney Avenue, Suite 1500, Dallas, Texas 75201, and our telephone number is (214) 740-5600. Our website address is www.prim.com. The information on our Internet website is neither part of nor incorporated by reference into this Third Quarter 2013 Report.

End-Markets

We are a diversified specialty construction company, and our strategy is to serve customers in different end markets. Our primary focus is on the following end markets:

Underground construction. This market consists of two types of projects. The first is the construction of major capital projects primarily underground infrastructure for the oil and gas, telecommunication and water and wastewater industries. The second is installation, repair and maintenance of underground services, typically for utility customers. Our subsidiaries ARB and Sprint serve both end markets while our subsidiary Rockford provides construction services primarily to the major capital projects market and Q3C provides services primarily to utility customers.


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Industrial construction. In this market we provide construction services in such facilities as power plants, refineries and industrial gas and petrochemical facilities. Our subsidiaries ARB, JCG and Saxon are providers of services in this market.

Heavy civil construction. We provide construction for highways and bridges, primarily to state agencies. We also sell aggregates and asphalt. Our subsidiary JCG is focused on this market, primarily in the states of Louisiana, Texas and Mississippi.

Water and wastewater construction. Our subsidiary Cardinal Contractors provides construction services to the water and wastewater industry, primarily in Florida and Texas.

Engineering services. We provide product engineering services primarily for the energy industry. Our Engineering group specializes in designing, supplying, and installing high-performance furnaces, heaters, burner management systems, and related combustion and process technologies for clients in the oil refining, petrochemical, and power generation industries. It furnishes turnkey project management with technical expertise and the ability to deliver custom engineering solutions worldwide.

Other construction services. Our subsidiary ARB Structures, Inc. builds poured-in-place parking structures in Southern California and our subsidiary FSSI provides turnaround services in the Houston market at refineries and chemical plants.

As opportunities change in our end markets and as we have grown the company, the amount of work we do in any of our end markets fluctuates. The following table shows the approximate percentage of revenues derived from the major end markets for the twelve-month periods listed:

                                Twelve Months Ended    Twelve Months Ended    Twelve Months Ended
                                  September 2013          December 2012         September 2012

Underground capital projects                     22 %                   14 %                   11 %
Utility services                                 31 %                   28 %                   27 %
Industrial                                       21 %                   25 %                   25 %
Heavy Civil                                      16 %                   21 %                   24 %
Engineering                                       2 %                    2 %                    3 %
Other                                             8 %                   10 %                   10 %
Total                                         100.0 %                100.0 %                100.0 %

Reportable Segments

We present our operations in three reportable segments: West Construction Services ("West"), East Construction Services ("East") and Engineering. Our segment structure has been determined in accordance with ASC 280, Segment Reporting. All of our segments derive their revenues primarily from construction and product engineering in the United States.

Our East and West segments provide the following:

installation of underground pipeline, cable and conduits for entities in the petroleum, petrochemical and water industries;

installation and maintenance of industrial facilities for entities in the petroleum, petrochemical and water industries;

installation of complex commercial and industrial cast-in-place structures; and

construction of highways and industrial and environmental construction.

The East segment consists of businesses located primarily in the southeastern United States and along the Gulf Coast. The West segment consists of businesses located primarily in the western United States. The West segment also includes the operations of the Blythe joint venture. The Engineering segment includes both domestic and international project work.


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

Subsidiary                                                Operating Segment
ARB, Inc. ("ARB")                                     West Construction Services
ARB Structures, Inc.                                  West Construction Services
Q3 Contracting, Inc. ("Q3C"); acquired 2012           West Construction Services
Rockford Corporation ("Rockford")                     West Construction Services
Stellaris, LLC.                                       West Construction Services
OnQuest, Inc.                                         Engineering
OnQuest, Canada, ULC (Born Heaters Canada, ULC        Engineering
prior to 2013)
Cardinal Contractors, Inc.                            East Construction Services
Force Specialty Services, Inc. ("FSSI"); acquired     East Construction Services
2013
James Construction Group, LLC ("JCG")                 East Construction Services
Sprint Pipeline Services, L.P. ("Sprint");            East Construction Services
acquired 2012
Silva Group ("Silva"); acquired 2012                  East Construction Services
The Saxon Group ("Saxon"); acquired 2012              East Construction Services

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 a number of factors, many of which are not within our control. Business in the construction industry is cyclical. We depend in part on spending by companies in the energy and oil and gas industries, as well as on 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 strength of the oil and gas industry; however, each of these industries and the government agencies periodically are adversely affected by macroeconomic conditions. Economic factors outside of our control affect the amount and size of contracts in any particular period.

We and our customers are operating in a challenging business environment in light of the on-going economic uncertainty, fluctuations in capital markets and potential regulatory changes and uncertainties. We are closely monitoring our customers and the effect that changes in economic and market conditions and regulatory environment may have on them. We have experienced delays in project awards and the start of awarded projects as customers carefully consider their overall environment prior to investing in new infrastructure. However, we believe that most of our customers, some of whom are regulated utilities, remain financially stable and will be able to continue with their business plans in the long-term without substantial constraints.

Within these trends for the economy in general, we believe that there are positive opportunities within our end markets over the next five-year horizon. The development of shale oil and gas has a positive impact on the capital projects in our underground market both in large diameter pipeline projects and the well fields. The increased emphasis on pipeline integrity by utility companies provides growth potential in our utility underground markets. The apparent long-term nature of reduced natural gas prices should lead to increased opportunities for our industrial markets in the Gulf Coast region, and the impact of regulatory rules in California provides an opportunity for continuing upgrades to power plants. At present, the heavy civil market growth is moderate as state funding is restrained and the timing of any federal funding growth is uncertain. Finally, the continuing drought in the western United States may lead to future opportunities in the water and wastewater market.

The opportunities in our end markets may lead to both increases in unit labor costs and shortages in availability of qualified personnel, especially in the Gulf Coast region. Depending on contractual terms, cost increases or reductions in efficiency, could reduce our margins. Furthermore, the uncertain impact of the Affordable Care Act on our current and future employees could also increase our cost structure.

We believe that we will be able to take advantage of the opportunities in our end market segments; however, these opportunities may not occur in a linear fashion. As a contractor, we are dependent on the owners for project development, project funding and project timing. Owners' decisions and market opportunities tend to cause significant fluctuations in revenues, profits and cash flows.

Seasonality and cyclicality

Our results of operations can be subject to quarterly variations. Some of the variation is the result of weather, particularly rain, which can impact our ability to perform construction services. The weather also limits our ability to bid for and perform pipeline integrity testing and routine maintenance for our utility customers' underground systems since the systems are used for heating. The acquisitions of Sprint and Q3C have added to the seasonality of our business. Q3C's primary operations are in the Midwest United States, an area usually affected by inclement weather during the first quarter. Similarly, a significant portion of Sprint's revenue is derived from utility customers. In most years, utility owners obtain bids and award contracts for major maintenance, integrity and replacement work after the heating season, and the work must be completed by the following winter. In addition, demand for new projects can be lower during the early part of the year due to clients' internal budget cycles. As a result, we usually experience higher revenues and earnings in the third and fourth quarters of the year as compared to the first two quarters.

We are also dependent on large construction projects which tend not to be seasonal, but can fluctuate from year to year based on general economic conditions. Because of the cyclical nature of our business, the financial results for any period may fluctuate from prior periods, and our financial condition and operating results may vary from quarter-to-quarter.


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Our volume of business may be adversely affected by declines or delays in new projects in various geographic regions in the United States. Project schedules, in particular in connection with larger, longer-term projects, can also create fluctuations in the services provided, which may adversely affect us in a given period. The financial condition of our customers and their access to capital, variations in the margins of projects performed during any particular period, regional, national and global economic and market conditions, timing of acquisitions, the timing and magnitude of acquisition assimilation costs, interest rate fluctuations and other factors may also materially affect our periodic results. Accordingly, our operating results for any particular period may not be indicative of the results that can be expected for any other period.

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 also affect the amounts of revenues and expenses reported for each period. These estimates and assumptions must be made because certain information that is used in the preparation of our financial statements cannot be calculated with a high degree of precision from data available, is dependent on future events, or is not capable of being readily calculated based on generally accepted methodologies. Often, these estimates are particularly difficult to determine, and we must exercise significant judgment. We use estimates in our assessments of revenue recognition under percentage-of-completion accounting, 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 there were made under different assumptions or conditions.

Our critical accounting policies, as described in our Annual Report on Form 10-K for the year ended December 31, 2012, relate primarily to revenue recognition for fixed price contracts, income taxes, goodwill, long-lived assets, reserves for uninsured risks and litigation and contingencies. There have been no material changes to our critical accounting policies since December 31, 2012.

Results of operations

In the discussion of our results of operations, we provide separate information for the results of the companies that we have acquired since September 2012. Saxon, Q3C and FSSI are identified as "Acquired Companies." For the business units that were part of Primoris at the end of September 2012, results of operations are identified as "Comparable Companies."

Revenues, gross profit, operating income and net income for the three months ended September 30, 2013 and 2012 were as follows:

                                               Three Months Ended September 30,
                                              2013                          2012
                                                      % of                          % of
                                    (Thousands)      Revenue      (Thousands)      Revenue
Revenues                           $     551,333        100.0 %  $     431,842        100.0 %
Gross profit                              75,465         13.7 %         56,291         13.0 %
Selling, general and
administrative expense                    36,478          6.6 %         26,014          6.0 %
Operating income                          38,987          7.1 %         30,277          7.0 %
Other income (expense)                    (1,719 )       (0.3 )%        (1,364 )       (0.3 )%
Income before income taxes                37,268          6.8 %         28,913          6.7 %
Income tax provision                     (14,075 )       (2.6 )%       (10,965 )       (2.5 )%
Net income                         $      23,193          4.2 %  $      17,948          4.2 %
Net income attributable to
noncontrolling interests                  (1,348 )       (0.2 )%          (432 )       (0.1 )%
Net income attributable to
Primoris                           $      21,845          4.0 %  $      17,516          4.1 %

Revenues, gross profit, operating income and net income for the nine months ended September 30, 2013 and 2012 were as follows:

                                              Nine months Ended September 30,
                                             2013                         2012
                                                     % of                         % of
                                   (Thousands)      Revenue     (Thousands)      Revenue
Revenues                           $  1,406,341        100.0 %  $  1,060,851        100.0 %
Gross profit                            181,098         12.9 %       137,891         13.0 %
Selling, general and
administrative expense                   96,657          6.9 %        69,684          6.6 %
Operating income                         84,441          6.0 %        68,207          6.4 %
Other income (expense)                   (5,043 )       (0.4 )%       (2,997 )       (0.3 )%
Income before income taxes               79,398          5.6 %        65,210          6.1 %
Income tax provision                    (30,272 )       (2.1 )%      (24,875 )       (2.3 )%
Net income                         $     49,126          3.5 %  $     40,335          3.8 %
Net income attributable to
noncontrolling interests                 (1,947 )       (0.1 )%         (600 )       (0.1 )%
Net income attributable to
Primoris                           $     47,179          3.4 %  $     39,735          3.7 %


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Revenues

Revenues for the three months ended September 30, 2013 increased by $119.5 million, or 27.7%, compared to the same period in 2012. The Acquired Companies contributed $76.4 million, or 17.7%, while the Comparable Companies . . .

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