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Business Combinations - 2010 and 2009 | 12 Months Ended
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Dec. 31, 2011
Business Combinations - 2010 and 2009 |
Business Combinations - 2010 and 2009 |
Note 4—Business Combinations — 2010 and 2009 2010 Acquisition - Rockford Holdings Corporation On November 8, 2010, the Company entered into a stock purchase agreement (“Rockford Agreement”) to acquire the stock of privately held Rockford Corporation (“Rockford”). Upon completion of the acquisition on November 12, 2010, Rockford became a wholly owned subsidiary. Based in Hillsboro (Portland), Oregon, Rockford specializes in construction of large diameter natural gas and liquid pipeline projects and related facilities. Rockford’s results of operations and estimated fair value of assets acquired and liabilities assumed have been included in the Company’s consolidated financial statements from November 1, 2010. While November 12, 2010 was considered the acquisition date, the net change between November 1, 2010 and the acquisition date was not material. The revenue and operating results of Rockford during the period November 1, 2010 to December 31, 2010 included in the Company’s results of operations were revenues of $85,309, income from continuing operations, before provision for income taxes of $8,218 and net income of $4,962. Acquisition costs related to the acquisition of $360 were expensed in the year ended December 31, 2010. Merger Consideration The fair value of the consideration provided to the sellers as of the acquisition date of November 12, 2010 consisted of the following:
Cash |  | $ | 35,039 |
Company common stock |  | 13,600 |
Subordinated promissory note |  | 16,712 |
Earnout consideration |  | 14,272 |
Total fair value of consideration |  | $ | 79,623 |
Details of the consideration follow: Cash Payment at Closing — On the closing date, we paid the sellers approximately $35,039 in cash. However, $400 of the cash consideration was placed in an escrow account (the “Escrow Amount”). As discussed in the Rockford Agreement, the Escrow Amount will be used to provide a source of indemnity against specified, post closing, damages to us. The Escrow Amount will remain until the later of 18 months after the closing date or the date that our audited financial statements for the fiscal year ended December 31, 2011 are released and distributed, unless all or a portion of the Escrow Amount becomes payable to us. Issuance of Closing Shares —We agreed to issue the sellers a number of shares of our unregistered common stock equal to approximately $12,476 divided by the average closing price of our common stock for the 20 business days prior to the closing date. As a result, we issued to the sellers an aggregate total of 1,605,709 shares of common stock on the closing date based on a contractually calculated value of $7.77 per share, with a fair value of $13,600 based on the stock price on the closing date. Execution of Subordinated Promissory Note — On the closing date, we executed an unsecured promissory note (the “Rockford Note”) with an initial principal amount of $16,712. The principal amount of the Rockford Note was divided into two portions. Approximately $9,669 on the Rockford Note was designated as “Note A” and approximately $7,043 of the Rockford Note was designated as “Note B.” Note B was paid in full on March 10, 2011. Note A is due and payable on October 31, 2013 and bears interest at different rates until maturity, averaging 6.67% over its life. The Rockford Note is subordinated to amounts owed on the line of credit and our bonding agencies. Management believes the face amount of the Rockford Note approximates fair value at the date of the acquisition. Details of further terms of the Rockford Note are presented in Note 13 — “Credit Arrangements”. Earnout Consideration As part of the acquisition, the Company agreed to issue additional cash and common stock to the sellers, contingent upon Rockford meeting certain operating performance targets for the fourth quarter 2010 and for the five quarters ending December 31, 2011 and for 2012. The maximum amount of this consideration was $18.4 million which when measured on a fair value basis as of the acquisition date, was estimated at $14.3 million and was classified as a liability in the Company’s consolidated balance sheet as of December 31, 2010. The 2010 earnout target for the fourth quarter 2010 was achieved and the liability of $4,600 was recorded as of December 31, 2010. In March 2011 the Company issued 494,095 shares of common stock to the sellers, reduced the liability and increased Stockholders’ Equity. The Company determined that the 2011 earnout target was achieved and recorded the full value of the $6,900 liability on the balance sheet at December 31, 2011. As a result, a charge of $650 was recorded in Selling, General and Administration expense in 2011. In March 2012, the liability is anticipated to be settled by issuing 232,637 shares of common stock to the sellers and making a cash payment of $3.45 million. The stock component of the earnout was based on the Company’s average closing stock price during the month of December 31, 2011 of $14.83 per share. The estimated fair value of the 2012 contingency was $5,818 and $4,076 at December 31, 2011 and 2010, respectively, and if achieved, will result in a cash payment of $6.9 million in March 2013. 2009 Acquisition - James Construction Group, LLC On December 18, 2009, the Company acquired JCG, a privately-held Florida limited liability company, following which JCG became a wholly owned subsidiary. 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 and has been in business for over 80 years. Headquartered in Baton Rouge, Louisiana, JCG serves government and private clients. JCG’s heavy civil division provides services in heavy civil construction projects, including highway and bridge construction, concrete paving, levee construction, airport runway and taxiway construction and marine facility construction. JCG’s infrastructure and maintenance division provides large earthwork and site development, landfill construction, site remediation and mining support services. JCG’s industrial division, with a client base comprised primarily of private industrial companies, provides all phases of civil and structural construction, mechanical equipment erection, process pipe installation and boiler, furnace and heater installation and repair. JCG’s results of operations and estimated fair value of assets acquired and liabilities assumed were included in the Company’s consolidated financial statements beginning December 18, 2009. The revenue and operating results contributed by JCG during the period December 18, 2009 to December 31, 2009 were not material. Acquisition costs related to the acquisition of JCG of $1.25 million were expensed as in the year ended December 31, 2009. Acquisition Consideration The fair value of the consideration provided to the sellers consisted of the following:
Cash |  | $ | 7,000 |
Company stock |  | 64,500 |
Subordinated promissory note |  | 53,500 |
Earnout consideration |  | 8,190 |
Total fair value of consideration |  | $ | 133,190 |
Details of the consideration follow: Cash. On the closing date, the Company paid the sellers $7.0 million in cash. Stock. The Company issued the sellers Series A Non-Voting Contingent Convertible Preferred Stock (“Preferred Stock”) equal to $64.5 million. The number of shares, in accordance with the purchase agreement, was determined as $64.5 million divided by the average closing price of our common stock, as reported on NASDAQ, for the 20 business days prior to the closing date, divided by 100. We issued 81,852.78 shares of Preferred Stock to the sellers based on an average closing price of $7.88 per share, which approximated the fair value of the stock consideration. On April 12, 2010, at a special meeting of Primoris stockholders, the stockholders approved the conversion of the Preferred Stock into 8,185,278 shares of Company common stock. Of the originally issued shares of Preferred Stock, 11,897.20 shares were placed in escrow (1,189,720 shares of common stock subsequent to conversion of the Preferred Stock to common stock in April 2010) for a period of three years to provide a source of funding to satisfy our rights to indemnification (“Escrow Shares”) under the Purchase Agreement. The Escrow Shares may be released to the sellers according to specific formulas. In April 2011, the Company released 951,781 of the Escrow Shares, with 237,937 shares remaining in escrow until December 18, 2012. Promissory Note. The Company executed an unsecured promissory note in favor of the sellers with a principal amount of $53.5 million (the “JCG Note”). The JCG Note is subordinated to amounts owed on the line of credit and our bonding agencies. The JCG Note is due and payable on December 15, 2014 and bears interest at differing rates until maturity, averaging 6.95% over the life of the note. Management believes the face amount of the JCG Note approximates fair value at the date of the acquisition. Details of further terms of the JCG Note are presented in Note 13 — “Credit Arrangements”. Earnout Consideration. The Company agreed to issue additional shares of common stock to the sellers equal to $10.2 million, contingent upon JCG meeting a specific operating performance target for 2010. The fair value of the contingent consideration at the date of the acquisition was estimated to be $8.19 million and was classified as a liability in the Company’s consolidated balance sheet. As of December 31, 2010, the earnout target was achieved, and as a result, the Company recorded an expense of $2.0 million in 2010 to increase the liability to $10.2 million. This liability was settled by issuing 1,095,646 shares of common stock in March 2011. Schedule of Assets acquired and liabilities assumed for 2010 Rockford Acquisition and 2009 JCG Acquisition Both the Rockford and the JCG acquisitions are accounted for under the acquisition method of accounting. Accordingly, assets and liabilities are measured at their estimated fair value at the acquisition date. We requested the assistance of third-parties to determine the fair value of the intangible assets acquired for the acquisitions. In 2010, the Company finalized its estimates of the fair value of the acquired assets and liabilities of JCG. The final revisions resulted in an increase in casualty and health insurance liabilities assumed and adjustments to deferred income tax liabilities. These changes resulted in an increase in goodwill of $2.0 million. The 2009 financial statements were adjusted to reflect these changes as if the accounting was finalized at that date. In 2011, the Company finalized its estimates of the fair value of the acquired assets and liabilities of Rockford which resulted in no adjustments to the amounts originally recorded as of the acquisition date. The following table summarizes the fair value of the assets acquired and the liabilities assumed:
|  | 2010 Rockford Acquisition |  | 2009 JCG Acquisition |
Cash |  | $ | 19,623 |  | $ | 34,548 |
Accounts receivable |  | 57,505 |  | 29,543 |
Cost and earnings in excess of billings |  | 2,132 |  | 659 |
Inventory |  | — |  | 18,868 |
Deferred tax assets |  | 3,383 |  | 337 |
Prepaid expense |  | 813 |  | 1,765 |
Property, plant and equipment |  | 24,107 |  | 61,511 |
Other assets |  | 2,400 |  | 452 |
Intangible assets |  | 15,510 |  | 31,650 |
Goodwill |  | 32,079 |  | 58,131 |
Accounts payable |  | (14,525 | ) | (15,619 | )
Billing in excess of costs and earnings |  | (35,408 | ) | (57,757 | )
Accrued expenses |  | (13,324 | ) | (16,978 | )
Note payable |  | (4,684 | ) | (1,966 | )
Capital lease liabilities |  | — |  | (11,954 | )
Deferred tax liability |  | (9,988 | ) | — |
Total |  | $ | 79,623 |  | $ | 133,190 |
Identifiable Tangible Assets. Significant identifiable tangible assets include accounts receivable, inventory and fixed assets, consisting primarily of construction equipment, for both acquisitions. The Company determined that the recorded value of accounts receivable and inventory reflect fair value of those assets. The Company estimated the fair value of fixed assets on the effective dates of the acquisitions. The valuations were based on comparable market values for similar equipment of similar condition and age. Identifiable Intangible Assets. To determine the estimated fair value of intangible assets acquired, we engaged a third party valuation specialist to assist management. The valuation for the 2010 Rockford acquisition was finalized in the fourth quarter 2011 and there were no changes to the values as of the acquisition date. The fair value measurements of the intangible assets were based primarily on significant unobservable inputs and thus represent a Level 3 measurement as defined in Note 3 — “Fair Value Measurements”. Based on the Company’s assessment, the acquired intangible asset categories, fair value and average amortization periods, generally on a straight-line basis, are as follows:
|  | Amortization Period |  | Fair Value 2010 Rockford Acquisition |  | Fair Value 2009 JCG Acquisition |
Tradename |  | 10 years |  | $ | 7,450 |  | $ | 15,350 |
Non-compete agreements |  | 5 years |  | 2,100 |  | 5,200 |
Customer relationships |  | 10 years |  | 2,750 |  | 6,400 |
Backlog |  | 0.75 to 2.25 years |  | 3,210 |  | 4,700 |
Total |  |  |  | $ | 15,510 |  | $ | 31,650 |
The fair value of the tradename 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 trade name licensing agreements and their royalty rate levels, and management estimates. The estimated economic useful life was based on management’s expectation for continuing value of the tradename in the future. The fair value for the non-compete agreements was valued based on a discounted “income approach” model (based on the weighted average cost of capital, or “WACC”) including estimated financial results with and without the non-compete agreements in place. The agreements were analyzed based on the potential impact competition from certain individuals could have on the financial results of the Company, assuming the agreements were not in place. An estimate of the probability associated with the likelihood of competition was then applied and the results were compared to a similar model assuming the agreements were in place. The customer relationships and backlog were valued utilizing the “excess earnings method” of the income approach. The estimated cash flows associated with existing customers and projects were based on historical and market participant data and were discounted, utilizing the WACC. 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. Goodwill. Goodwill largely consists of expected benefits from the geographic expansion and presence of Rockford in the Pacific Northwest and JCG in the southern United States, the addition of expanded pipeline capabilities of Rockford and the addition of JCG’s heavy civil construction capabilities, the opportunity to extend our infrastructure operations and other synergies of the combined companies. Goodwill also includes the assembled workforce of the JCG and Rockford businesses. Based on the current tax treatment of the acquisitions, the goodwill associated with the Rockford acquisition of $32.1 million is not expected to be deductible for income tax purposes while the JCG goodwill of $58.1 million is deductible for income tax purposes over a fifteen-year period. Supplemental Unaudited Pro Forma Information The following pro forma information presents the results of operations as if the acquisitions of Rockford and JCG had occurred on January 1, 2009. 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 allocation; · the pro forma impact of interest expense on the Rockford Note and the JCG Note; and · the pro forma tax effect of both the income before income taxes and the pro forma adjustments, calculated using the statutory corporate tax rate of 39.8% for the periods presented. 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 transaction been consummated as of the dates indicated or that may be achieved in the future. The pro forma results do not reflect any operating efficiencies and associated cost savings that the Company may, or may not achieve with respect to the combined companies.
|  | 2010 |  | 2009 |
|  | (unaudited) |  | (unaudited) |
Revenues |  | $ | 1,071,056 |  | $ | 993,835 |
Income from continuing operations, before provision for income taxes |  | $ | 56,632 |  | $ | 79,920 |
Income from continuing operations |  | $ | 34,585 |  | $ | 49,697 |
Net income |  | $ | 34,585 |  | $ | 45,848 |
Weighted average common shares outstanding: |  |  |  |  |
Basic — (1 & 2) |  | 44,300 |  | 40,539 |
Diluted — (1 & 2) |  | 49,029 |  | 45,482 |
Earnings per share: |  |  |  |  |
Basic — income from continuing operations |  | $ | 0.78 |  | $ | 1.23 |
Basic — net income |  | $ | 0.78 |  | $ | 1.13 |
Diluted — income from continuing operations |  | $ | 0.71 |  | $ | 1.09 |
Diluted — net income |  | $ | 0.71 |  | $ | 1.01 |
(1) Because the 2010 contingent earnout targets were met for both Rockford and JCG, 494,095 shares of common stock for Rockford and 1,095,646 shares of common stock for JCG were issued in March 2011. Additionally, Rockford also met the 2011 contingent earnout targets and 232,637 shares of common stock are to be issued in March 2012. The pro forma adjustment to earnings per share includes the impact of these earnout shares. (2) The adjustment to earnings per share reflects the conversion of the preferred stock related to the JCG acquisition as if such shares were converted into common stock, at a conversion rate of 100 common shares per preferred share, in order to reflect the additional dilution. On April 12, 2010, at a special meeting of the Primoris stockholders, the stockholders approved the conversion of the preferred stock into 8,185,278 shares of common stock. Pro forma basic shares outstanding include 8,185,278 shares of common stock (converted from the preferred stock related to the JCG acquisition) less the original 1,189,718 Escrow Shares converted to common stock, totaling 6,995,560 shares of common stock. Shares included in pro forma diluted shares outstanding represent the 8,185,278 shares of common stock.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 141 -Paragraph 51, 52 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 6 -URI http://asc.fasb.org/extlink&oid=6909870&loc=d3e1500-128463 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6911361&loc=d3e7000-128479 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6911361&loc=d3e6927-128479 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=6911361&loc=d3e7008-128479 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=6909870&loc=d3e1490-128463 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6911361&loc=d3e6996-128479 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6910749&loc=d3e4922-128472 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=6910749&loc=d3e4934-128472 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 141R -Appendix F -Paragraph F4 -Subparagraph e Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6910749&loc=d3e4926-128472 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6909870&loc=d3e1383-128463 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6909870&loc=d3e1392-128463 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=6909870&loc=d3e1497-128463 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 141R -Paragraph 67-73 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 7 -URI http://asc.fasb.org/extlink&oid=6909870&loc=d3e1524-128463 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Emerging Issues Task Force (EITF) -Number 88-16 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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