Business Combinations

3 Months Ended

Mar. 31, 2013

Business Combinations

Business Combinations

Note 8 — Business Combinations

2013 Acquisition - FSSI

On March 11, 2013, the Company’s subsidiary, 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.  Based in the greater Houston, Texas area, FSSI’s location provides a presence and convenient access to refineries in south Texas, the Houston ship channel and Louisiana.

The fair value of the consideration for the acquisition amounted to $2,513.  The consideration consisted of cash of $1,025 paid the sellers on the closing date and PES expects to pay an additional $650 in the second quarter 2013.  The agreement provides for other payments, contingent upon FSSI meeting certain operating performance targets for the remainder of calendar year 2013 and for the twelve months ending December 31, 2014 and 2015.

The contingent consideration consists of additional payments of (1) $500 in cash for the achievement of pretax income of at least $553 for the remainder of the year ending December 31, 2013; (2) a payment of $500 in cash if pretax income for the year 2014 is at least $2,502; and (3), a payment of $500 in cash if pretax income for the year 2015 is at least $4,227.  The estimated fair value of the potential contingent consideration on the acquisition date and March 31, 2013 was $838.

Finally, the acquisition includes an agreement for a key employee whereby PES will pay $1,000 for a five-year employment, non-competition and non-solicitation agreement.  If the employee violates the agreement or terminates his employment prior to the end of the five-year period, he is required to repay the unamortized amount of the $1,000 payment.  We will account for this agreement as a current and long-term prepaid asset and will amortize it equally over the five-year period.

The acquisition was accounted for using the acquisition method of accounting.  The assets acquired and liabilities assumed were measured at their estimated fair value at the acquisition date.  The estimates are preliminary and subject to change.  The final determination of the fair value of the assets acquired and liabilities assumed, primarily the estimated intangible assets, has not been completed because of the short period of time from the date of the FSSI acquisition to the end of the quarter.  The FSSI purchase was included in the Company’s consolidated balance sheet as of March 31, 2013.  FSSI contributed revenues of $483 and gross profit of $128 during the period subsequent to March 11, 2013.

As part of the asset purchase agreement, the Company received $302 in small tools inventory, $448 in property, plant and equipment, and recorded accounts payable of $1,060.

The customer relationships were valued at $500 utilizing the “excess earnings method” of the income approach.  The estimated discounted cash flows associated with existing customers and projects were based on historical and market participant data.  Such discounted cash flows were net of fair market returns on the various tangible and intangible assets that are necessary to realize the potential cash flows.

The fair value of the tradename of $300 was determined based on the “relief from royalty” method.  A royalty rate was selected based on consideration of several factors, including external research of third party tradename licensing agreements and their royalty rate levels, and management estimates.  The useful life was estimated at five years based on management’s expectation for continuing value of the tradename in the future.

Goodwill of $2,023 largely consists of expected benefits from the greater presence and convenient access to south Texas, the Houston ship channel and Louisiana and FSSI’s expertise in turn-around work for refineries and chemical plants.  Goodwill also includes the value of the assembled workforce of the FSSI business.  Based on the current tax treatment of the FSSI acquisition, goodwill and other intangible assets are deductible for income tax purposes over a fifteen-year period.

2012 Acquisition - Sprint Pipeline Services, L.P.

The March 12, 2012 acquisition of Sprint was accounted for using the acquisition method of accounting.  The fair value of the consideration transferred to the sellers totaled $28,377, and included Company stock valued at $980 (or 62,052 shares of our restricted common stock) and contingent consideration of $6,200.

If income before interest, taxes, depreciation and amortization (“EBITDA”) for 2012, as defined in the purchase agreement, was at least $7,000, we agreed to pay $4,000 in cash to the sellers. The earnout target was achieved in 2012 and the $4,000 liability is reflected on the balance sheet at both December 31, 2012 and March 31, 2013, and was paid in April 2013.

The 2013 earnout target provides for an additional cash payment of $4,000 to the sellers if 2013 EBITDA is at least $7,750.  The estimated fair value of the 2013 potential contingent consideration as of the acquisition date was $2,745 and at March 31, 2013 and December 31, 2012, the estimated fair value was $3,109 and $3,020, respectively.

2012 Acquisition - Silva Companies

The May 30, 2012 acquisition of Silva Contracting Company, Inc., Tarmac Materials, LLC and C3 Interests, LLC (collectively “Silva”) was accounted for using the acquisition method of accounting.  The fair value of the consideration transferred to the sellers was $14,090.

2012 Acquisition - The Saxon Group

The September 28, 2012 acquisition of The Saxon Group (“Saxon”) was accounted for using the acquisition method of accounting.  The fair value of the consideration transferred to the sellers was $550 in cash, paid off a note for $2,429, and provided contingent consideration valued at $1,950 for total consideration of $4,929.

The contingent consideration included an earnout where the Company would pay $2,500 to the sellers, contingent upon Saxon meeting one of the following two targets:  (1) EBITDA for the fifteen month period ending December 31, 2013 of at least $4,000 or; (2) EBITDA for the twenty-one month period ending June 30, 2014 of at least $4,750.  The estimated fair value of the potential contingent consideration on the acquisition date was $1,950.  The estimated fair value was $2,106 and $2,028 at March 31, 2013 and December 31, 2012, respectively.

2012 Acquisition — Q3 Contracting

The November 17, 2012 acquisition of Q3C was accounted for using the acquisition method of accounting.  The fair value of the consideration transferred to the sellers totaled $55,994, and included a cash payment of $48,116, a contingent earnout with a fair value of $7,448 and a commitment to issue $430 in Company common stock, based on the average December 2012 closing price, or 29,273 shares of unregistered stock, which were provided to the sellers in January 2013.

The contingent consideration included an earnout where the Company would pay additional cash to the sellers, contingent upon Q3C meeting certain operating performance targets.  The targets are based on the achievement of meeting certain levels of Q3C’s EBITDA.  The targets are as follows:

1. If EBITDA for the period November 18, 2012 through December 31, 2013 is at least $17,700, the Company agreed to pay $3,750 in cash to the sellers, with an additional cash payment of $1,250 if EBITDA exceeds $19,000.

2. If EBITDA for the calendar year 2014 is at least $19,000, the Company agreed to pay $3,750 in cash to the sellers, with an additional cash payment of $1,250 if EBITDA exceeds $22,000.

The fair value of the contingent consideration was estimated to be $7,450 as of the purchase date and is included on the Company’s balance sheet as a liability.  The fair value is based on management’s evaluation of the probability of Q3C meeting the EBITDA targets for the two periods, discounted at the Company’s estimated average cost of capital.  The estimated fair value at March 31, 2013 and December 31, 2012 was $7,672 and $7,490, respectively.

Supplemental Unaudited Pro Forma Information for the three months ended March 31, 2013 and 2012

In accordance with ASC Topic 805 we are combining the FSSI, Sprint, Silva, Saxon and Q3C acquisition (“the Acquisitions”) information.  The following pro forma information for the three months ended March 31, 2013 and 2012 presents the combined results of operations of the Acquisitions combined, as if the Acquisitions had each occurred at the beginning of 2012. 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;

· the pro forma impact of the expense associated with the amortization of the discount for the fair value of the contingent consideration for potential earnout liabilities that may be achieved in 2013 for the Sprint acquisition and 2013 or 2014 for the Saxon and Q3C acquisitions;

· the pro forma tax effect of both the income before income taxes and the pro forma adjustments, calculated using a tax rate of 39.0% for the three months ended March 31, 2012 and the applicable periods in 2013; and

· the pro forma increase in weighted average shares outstanding including 62,052 unregistered shares of common stock issued as part of the Sprint acquisition and the 29,273 shares of unregistered shares of common stock issued as part of the Q3C acquisition.

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 Acquisitions been completed on January 1, 2012.  The pro forma results do not reflect any operating efficiencies and associated cost savings that the Company might have achieved with respect to the combined companies.

	Three months ended March 31,
	2013		2012
Revenues	412,794		318,415
Income before provision for income taxes	16,162		14,241
Net income attributable to Primoris	9,718		8,746
Weighted average common shares outstanding:
Basic	51,456		51,145
Diluted	51,467		51,386
Earnings per share:
Basic	$	0.19	$	0.17
Diluted	$	0.19	$	0.17