Exhibit 99.5
PRIMORIS SERVICES CORPORATION
SEPTEMBER 30, 2012
AND DECEMBER 31, 2011
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Primoris Services Corporation
Index to Unaudited Pro Forma Combined Financial Statements
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| Page |
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Unaudited Pro Forma Combined Financial Statements: |
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Introduction to Unaudited Pro Forma Combined Financial Statements |
| 1 |
Pro Forma Combined Balance Sheet as of September 30, 2012 (Unaudited) |
| 2 |
Pro Forma Combined Statement of Income for the Nine Months Ended September 30, 2012 (Unaudited) |
| 3 |
Pro Forma Combined Statement of Income for the Year Ended December 31, 2011 (Unaudited) |
| 4 |
Notes to Pro Forma Combined Financial Statements (Unaudited) |
| 5-6 |
PRIMORIS SERVICES CORPORATION
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Transaction Summary
On November 19, 2012, Primoris Services Corporation, a Delaware corporation (“we,” “us,” “our,” “Primoris” or the “Company”),
purchased all of the issued and outstanding shares of stock of Q3 Contracting, Inc., a privately-held Minnesota corporation (“Q3C”).
The material terms of the transaction were previously disclosed in our Current Report on Form 8-K filed with the Securities and Exchange Commission (the “Commission”) on November 15, 2012. The following description of the Purchase Agreement is not intended to be complete and is qualified in its entirety by the complete text of the Purchase Agreement, which was filed as Exhibit 2.1 to our Current Report on Form 8-K as filed with the Commission on November 15, 2012, and which is incorporated herein by reference.
Pursuant to the Stock Purchase Agreement, dated November 8, 2012 (the “Purchase Agreement”) with Q3C, all of the shareholders of Q3C (collectively the “Shareholders”) and Jay P. Osborn, as representative of the Shareholders (the “Representative”), the issued and outstanding shares of Q3C were sold and transferred by the Shareholders to Primoris on November 19, 2012 and Primoris paid approximately $48.12 million in initial cash consideration. Additionally, the Company committed to issue Primoris stock valued at $0.43 million based on the average closing price of our stock for the month of December 2012. We will issue 29,273 shares of common stock in February 2013 based on that formula. Of the initial cash amount, $4 million was placed in an escrow or held back to secure certain obligations and agreements of the Shareholders under the Purchase Agreement. In December 2012, $1 million of the holdback amount was release to shareholders. Additional cash will be provided subject to Q3C’s attaining certain specified financial goals, with a maximum potential payout of $10 million. The incentive provisions are based on Q3C’s achieving certain financial targets using income before interest, taxes, depreciation and amortization (“EBITDA”), as that term is defined in the Purchase Agreement. As a result, and assuming that the earnout consideration is earned, the total consideration payable to the Shareholders pursuant to the Purchase Agreement may be approximately $58.12 million.
The Purchase Agreement contains covenants, representations and warranties of the Company, Q3C and the Shareholders that are customary for transactions of this type. Prior to the closing of the transaction, and other than with respect to the Purchase Agreement, neither we nor any of our officers, directors, affiliates or any of their associates had any material relationship with Q3C, the Shareholders or the Representative.
Consideration
Cash
On November 19, 2012, we paid the Shareholders approximately $48.12 million in cash. Of that amount, we placed $3.0 million of the cash consideration in an escrow account and held back $1.0 million, as discussed below.
Earnout Consideration
First Earnout Period
Subject to certain specified adjustments, if Q3C’s EBITDA for the period commencing November 18, 2012 and ending December 31, 2013 is equal to or greater than $17.7 million, we have agreed to pay the Shareholders $3.75 million in cash. An additional cash payment of $1.25 million will be paid if Q3C’s EBITDA equals or exceeds $19.7 million for the same period.
Second Earnout Period
Subject to certain specified adjustments, if Q3C’s EBITDA for the twelve month period commencing January 1, 2014 and ending December 31, 2014 is equal to or greater than $19.0 million, we have agreed to pay the Shareholders $3.75 million in cash. An additional cash payment of $1.25 million will be paid if Q3C’s EBITDA equals or exceeds $22.0 million for the same period.
Potential Adjustment to Consideration
The Purchase Agreement provided that the cash paid at closing will be reduced by the amount, if any, by which the stockholders equity, as indicated on Q3C’s balance sheet as of the closing date, is less than approximately $18.86 million.
Escrow Account
An additional $3.0 million of the cash consideration was placed in an escrow account until the earlier of 18 months after the closing date or the date that the audit of our financial statements for the fiscal year ended December 31, 2013 is completed. This amount will be used to provide a source of indemnity against specified damages to us, as described in the Purchase Agreement.
Management
In connection with the Purchase Agreement, certain of Q3C’s key employees entered into employment and noncompetition agreements with us, effective as of the closing date. Prior to the closing of the transaction, and other than with respect to the Purchase Agreement, neither we nor any of our officers, directors, affiliates or any of their associates had any material relationship with Q3C, the Shareholders or the Representative.
Pro Forma for Q3C
The following unaudited pro forma combined consolidated financial statements are based on the historical financial statements of Primoris and Q3C after giving effect to the acquisition, and the assumptions, reclassifications and adjustments described in the accompanying notes to the unaudited pro forma combined financial statements, as prescribed by the Securities and Exchange Commission guidelines.
The following unaudited pro forma combined balance sheet as of September 30, 2012 is presented as if the purchase had occurred on September 30, 2012. The unaudited pro forma combined statements of income for the nine months ended September 30, 2012, and the year ended December 31, 2011, are presented as if the purchase had occurred on January 1, 2011 with recurring acquisition-related adjustments reflected in each of these periods.
The historical consolidated financial information has been adjusted in the unaudited pro forma combined financial data to give effect to pro forma events that are, based upon available information and certain assumptions, (i) directly attributable to the acquisition, (ii) factually supportable and reasonable under the circumstances, and (iii) with respect to the statement of income, expected to have a continuing impact on the combined results.
Pro Forma for Other Acquisitions
During the nine months ended September 30, 2012, the Company completed three other acquisitions. Individually or in the aggregate, these acquisitions are not considered significant under ASC Topic 805 and SEC guidelines. The acquisitions were as follows:
1. On March 12, 2012, the Company entered into an asset purchase agreement with Sprint Pipeline Services, L.P. (“Sprint”) for consideration valued at $28.4 million.
2. On May 30, 2012, the Company entered into an asset purchase agreement with Silva Contracting Company, Inc., Tarmac Materials, LLC and C3 Interest, LLC (collectively “Silva”) for consideration valued at $14.1 million.
3. On September 28, 2012, the Company executed an asset purchase agreement with The Saxon Group (“Saxon”) for consideration valued at $3.0 million.
The Sprint, Silva and the Saxon acquisitions (the “Other Acquisitions”) are described more fully in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.
Our historical results for the periods prior to the above acquisition dates do not include the effects of the Other Acquisitions. The following unaudited pro forma combined financial statements present pro forma information of the acquisitions for the twelve months ended December 31, 2011 and for the periods prior to their acquired dates during the nine months ended September 30, 2012, as if the Other Acquisitions had occurred on January 1, 2011.
The Q3C and Other Acquisitions are being accounted for under the acquisition method of accounting in accordance with the Financial Accounting Standard Board (“FASB”), Accounting Standard Codification or ASC 805-10 topic for “Business Combinations”. Management has estimated the fair value of tangible and intangible assets acquired and liabilities assumed based on preliminary estimates and assumptions. These preliminary estimates and assumptions could change significantly during the purchase price measurement period as we finalize the valuations of the net tangible assets and intangible assets. Any change could result in material variances between our future financial results and the amounts presented in these unaudited combined financial statements, including variances in fair values recorded, as well as expenses associated with these items.
The following unaudited pro forma combined financial statements are prepared for illustrative purposes only and are not necessarily indicative of or intended to represent the results that would have been achieved had the acquisition been consummated as of the dates indicated or that may be achieved in the future. For example, the unaudited pro forma combined financial statements do not reflect any operating efficiencies, associated cost savings or additional costs that we may achieve with respect to the combined companies.
The unaudited pro forma combined financial statements should be read in conjunction with Primoris’ historical consolidated financial statements and accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 2011, Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, the historical consolidated financial statements of Q3C for the year ended December 31, 2011 (Exhibit 99.2 to this Form 8-K/A), the historical unaudited consolidated financial statements of Q3C as of and for the nine months ended September 30, 2012 (Exhibit 99.4 to this Form 8-K/A) and other information contained in this Form 8-K/A.
Primoris Services Corporation
Pro Forma Combined Balance Sheet
As of September 30, 2012
(Unaudited)
(Amounts in thousands)
|
| (Note A) |
| (Note B) |
| Pro Forma |
| Notes |
| Proforma |
| ||||
Current assets: |
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|
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|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 76,654 |
| 256 |
| (48,116 | ) | D |
| $ | 28,794 |
| ||
Short term investments |
| 6,380 |
| — |
|
|
|
|
| 6,380 |
| ||||
Customer retention deposits & restricted cash |
| 34,814 |
| — |
|
|
|
|
| 34,814 |
| ||||
Accounts receivable, net |
| 263,144 |
| 15,347 |
|
|
|
|
| 278,491 |
| ||||
Costs and estimated earnings in excess of billings |
| 63,931 |
| 4,646 |
|
|
|
|
| 68,577 |
| ||||
Inventory |
| 37,334 |
| 186 |
|
|
|
|
| 37,520 |
| ||||
Deferred tax assets |
| 10,659 |
| — |
|
|
|
|
| 10,659 |
| ||||
Prepaid expenses and other current assets |
| 7,992 |
| 658 |
|
|
|
|
| 8,650 |
| ||||
Total current assets |
| 500,908 |
| 21,093 |
| (48,116 | ) |
|
| 473,885 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Property and equipment, net |
| 159,369 |
| 18,322 |
| 2,300 |
| E |
| 179,991 |
| ||||
Other assets |
| — |
| 22 |
|
|
|
|
| 22 |
| ||||
Investment in non-consolidated entities |
| 12,322 |
| 432 |
|
|
|
|
| 12,754 |
| ||||
Goodwill |
| 104,019 |
| — |
| 14,726 |
| F |
| 118,745 |
| ||||
Intangible assets |
| 32,452 |
|
|
| 21,550 |
| G |
| 54,002 |
| ||||
Total assets |
| $ | 809,070 |
| $ | 39,869 |
| $ | (9,540 | ) |
|
| $ | 839,399 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
| ||||
Accounts Payable |
| $ | 133,098 |
| 2,151 |
|
|
|
|
| $ | 135,249 |
| ||
Billings in excess of costs and estimated earnings |
| 145,582 |
| — |
|
|
|
|
| 145,582 |
| ||||
Accrued expenses and other current liabilities |
| 84,783 |
| 6,208 |
| 640 |
| D & H |
| 91,631 |
| ||||
Distributions and dividends payable |
| 1,542 |
| — |
|
|
|
|
| 1,542 |
| ||||
Current portion of long-term debt and capital leases |
| 19,763 |
| 517 |
| — |
|
|
| 20,280 |
| ||||
Contingent consideration - earnout – current portion |
| 10,050 |
| — |
| — |
|
|
| 10,050 |
| ||||
Total current liabilities |
| 394,818 |
| 8,876 |
| 640 |
|
|
| 404,334 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Long-term debt and capital leases, net of current portion |
| 61,942 |
| 13,575 |
|
|
|
|
| 75,517 |
| ||||
Deferred tax liabilities |
| 21,079 |
| — |
|
|
|
|
| 21,079 |
| ||||
Other long-term liabilities |
| 10,104 |
| — |
|
|
|
|
| 10,104 |
| ||||
Contingent consideration - earnout liability |
| 4,879 |
| — |
| 7,448 |
| I |
| 12,327 |
| ||||
Total liabilities |
| 492,822 |
| 22,451 |
| 7,088 |
|
|
| 523,361 |
| ||||
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| ||||
Stockholders equity: |
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| ||||
Common Stock |
| 5 |
| — |
|
|
|
|
| 5 |
| ||||
Additional paid-in capital |
| 155,605 |
| 560 |
| (560 | ) | J |
| 155,605 |
| ||||
Retained earnings |
| 160,038 |
| 16,858 |
| (17,068 | ) | J & H |
| 159,828 |
| ||||
Noncontrolling interest |
| 600 |
| — |
|
|
|
|
| 600 |
| ||||
Total stockholder’s equity |
| 316,248 |
| 17,418 |
| (17,628 | ) |
|
| 316,038 |
| ||||
Total liabilities and stockholders’ equity |
| $ | 809,070 |
| $ | 39,869 |
| $ | (9,540 | ) |
|
| $ | 839,399 |
|
PRIMORIS SERVICES CORPORATION
PRO FORMA COMBINED STATEMENT OF INCOME
For the nine months ended September 30, 2012
(Unaudited)
(Amounts in thousands, except per share amounts)
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|
| (Note C) |
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| |||||
|
| (Note A) |
| (Note B) |
| Other |
| Pro Forma |
| Notes |
| Pro Forma |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Revenues |
| $ | 1,060,851 |
| $ | 76,774 |
| $ | 41,697 |
|
|
|
|
| $ | 1,179,322 |
| |
Cost of revenues |
| 922,960 |
| 62,240 |
| 37,798 |
| 525 |
| E |
| 1,023,523 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Gross Profit |
| 137,891 |
| 14,534 |
| 3,899 |
| (525 | ) |
|
| 155,799 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Selling, general and administrative expenses |
| 69,684 |
| 5,720 |
| 6,570 |
| 2,166 |
| I & G |
| 84,140 |
| |||||
Operating income |
| 68,207 |
| 8,814 |
| (2,671 | ) | (2,691 | ) |
|
| 71,659 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income from non-consolidated entities |
| 895 |
| — |
| — |
|
|
|
|
| 895 |
| |||||
Foreign exchange gain (loss) |
| (30 | ) | — |
| — |
|
|
|
|
| (30 | ) | |||||
Other income (expense), net |
| (961 | ) | 433 |
| (660 | ) | (653 | ) | I |
| (1,841 | ) | |||||
Interest income |
| 143 |
| — |
| — |
|
|
|
|
| 143 |
| |||||
Interest (expense) |
| (3,044 | ) | (153 | ) | (217 | ) | — |
|
|
| (3,414 | ) | |||||
Total other income (expense) |
| (2,997 | ) | 280 |
| (877 | ) | (653 | ) |
|
| (4,247 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income before income taxes |
| 65,210 |
| 9,094 |
| (3,548 | ) | (3,344 | ) |
|
| 67,412 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Provision for income taxes |
| (24,875 | ) | (3,547 | ) | 1,384 |
| 1,304 |
| K |
| (25,734 | ) | |||||
|
|
|
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|
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|
|
|
|
|
|
|
| |||||
Net income (loss) |
| $ | 40,335 |
| $ | 5,547 |
| $ | (2,164 | ) | $ | (2,040 | ) |
|
| $ | 41,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income attributable to noncontrolling interests |
| (600 | ) | — |
| — |
| — |
|
|
| (600 | ) | |||||
|
|
|
|
|
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|
|
|
|
|
|
|
| |||||
Net income (loss) attrib to Primoris |
| $ | 39,735 |
| $ | 5,547 |
| $ | (2,164 | ) | $ | (2,040 | ) |
|
| $ | 41,078 |
|
|
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|
|
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|
|
|
|
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|
|
| |||||
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Basic |
| $ | 0.77 |
|
|
|
|
|
|
|
|
| $ | 0.80 |
| |||
Diluted |
| $ | 0.77 |
|
|
|
|
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|
|
|
| $ | 0.80 |
| |||
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| |||||
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Basic |
| 51,387 |
|
|
|
|
| 12 |
| L |
| 51,399 |
| |||||
Diluted |
| 51,402 |
|
|
|
|
| 12 |
| L |
| 51,414 |
|
PRIMORIS SERVICES CORPORATION
PRO FORMA COMBINED STATEMENT OF INCOME
For the year ended December 31, 2011
(Unaudited)
Amounts in thousands, except per share amounts
|
|
|
|
|
| (Note C) |
|
|
|
|
|
|
| |||||
|
| (Note A) |
| (Note B) |
| Other |
| Pro Forma |
|
|
| Pro Forma |
| |||||
|
| Primoris |
| Q3C |
| Acquisitions |
| Adjustment |
| Notes |
| Combined |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Revenues |
| $ | 1,460,150 |
| $ | 83,824 |
| $ | 130,432 |
|
|
|
|
| $ | 1,674,406 |
| |
Cost of revenues |
| 1,274,947 |
| 67,441 |
| 123,045 |
| 1,251 |
| E |
| 1,466,684 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Gross Profit |
| 185,203 |
| 16,383 |
| 7,387 |
| (1,251 | ) |
|
| 207,722 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Selling, general and administrative expenses |
| 86,204 |
| 7,395 |
| 14,957 |
| 3,018 |
| I & G |
| 111,574 |
| |||||
Operating income |
| 98,999 |
| 8,988 |
| (7,570 | ) | (4,269 | ) |
|
| 96,148 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income from non-consolidated entities |
| 4,018 |
| — |
| — |
|
|
|
|
| 4,018 |
| |||||
Foreign exchange gain (loss) |
| (96 | ) | — |
| — |
|
|
|
|
| (96 | ) | |||||
Other income (expense), net |
| (1,088 | ) | 53 |
| (37 | ) | (1,678 | ) | I |
| (2,750 | ) | |||||
Interest income |
| 331 |
| — |
| 2 |
|
|
|
|
| 333 |
| |||||
Interest (expense) |
| (5,431 | ) | (93 | ) | (1,263 | ) | — |
|
|
| (6,787 | ) | |||||
Total other income (expense) |
| (2,266 | ) | (40 | ) | (1,298 | ) | (1,678 | ) |
|
| (5,282 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income before income taxes |
| 96,733 |
| 8,948 |
| (8,868 | ) | (5,947 | ) |
|
| 90,866 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Provision for income taxes |
| (38,174 | ) | (3,490 | ) | 3,459 |
| 2,319 |
| K |
| (35,886 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income (loss) |
| $ | 58,559 |
| $ | 5,458 |
| $ | (5,409 | ) | $ | (3,628 | ) |
|
| $ | 54,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income attributable to noncontrolling interests |
| — |
| — |
| — |
| — |
|
|
| — |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income (loss) attrib to Primoris |
| $ | 58,559 |
| $ | 5,458 |
| $ | (5,409 | ) | $ | (3,628 | ) |
|
| $ | 54,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Basic |
| $ | 1.15 |
|
|
|
|
|
|
|
|
| $ | 1.08 |
| |||
Diluted |
| $ | 1.14 |
|
|
|
|
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|
|
| $ | 1.07 |
| |||
|
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| |||||
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Basic |
| 50,707 |
|
|
|
|
| 62 |
| L |
| 50,769 |
| |||||
Diluted |
| 51,153 |
|
|
|
|
| 62 |
| L |
| 51,215 |
|
Primoris Services Corporation
Notes to Pro Forma Combined Financial Statements (Unaudited)
(Amounts in Thousands)
The unaudited pro forma combined balance sheet as of September 30, 2012 is presented as if the acquisition of Q3C had occurred on September 30, 2012. The unaudited pro forma combined statements of operations for the nine months ended September 30, 2012, and the year ended December 31, 2011 are presented as if the acquisition of Q3C and the Other Acquisitions had occurred on January 1, 2011 with recurring acquisition-related adjustments for all of the acquisitions in each of the periods.
For Q3C, the statement of assets acquired and liabilities assumed as of the date of the acquisition is based on preliminary estimates of fair value as follows, in thousands:
Accounts receivable, net |
| 17,947 |
|
Cost and earnings in excess of billings |
| 4,358 |
|
Inventory and prepaid expenses |
| 305 |
|
Property, plant and equipment |
| 20,526 |
|
Investment in non-consolidated entities |
| 573 |
|
Goodwill |
| 13,287 |
|
Intangible assets |
| 21,550 |
|
Accounts payable |
| (4,448 | ) |
Accrued expenses |
| (7,851 | ) |
Short term debt |
| (10,253 | ) |
Total fair value of the consideration transferred |
| 55,994 |
|
For the Other Acquisitions, the statements of assets acquired and liabilities assumed are included in our Form 10Q for September 30, 2012.
(A) The columns for Primoris represent the financial statements as reported for the period shown.
(B) This column represents the historical financial information for Q3C. It is based on the information provided by the historical statements included as Exhibit 99.2 of this Form 8K/A for the December 31, 2011 information and Exhibit 99.4 of this Form 8K/A for the September 30, 2012 information.
The December 2011 combined statement in Exhibit 99.2 includes both Q3C and Quality Real Estate Partners, LLC (“QREP”). QREP was not included in the purchase by the Company of Q3C. The following table is derived from the exhibit and provides the Q3C only information for inclusion in our pro forma statements:
|
| Combined |
|
|
|
|
| |||
|
| Q3C & QREP |
|
|
|
|
| |||
|
| Reported |
|
|
| Q3C Only |
| |||
|
| December 31, |
|
|
| December 31, |
| |||
|
| 2011 |
| Less QREP |
| 2011 |
| |||
|
|
|
|
|
|
|
| |||
Revenues |
| $ | 83,824 |
| $ | 0 |
| $ | 83,824 |
|
Cost of revenues |
| 67,490 |
| (49 | ) | 67,441 |
| |||
|
|
|
|
|
|
|
| |||
Gross Profit |
| 16,334 |
| 49 |
| 16,383 |
| |||
|
|
|
|
|
|
|
| |||
Selling, general and administrative expenses |
| 7,168 |
| 227 |
| 7,395 |
| |||
Operating income |
| 9,166 |
| (178 | ) | 8,988 |
| |||
|
|
|
|
|
|
|
| |||
Other income |
| 53 |
| 0 |
| 53 |
| |||
Interest (expense) |
| (141 | ) | 48 |
| (93 | ) | |||
Total other income (expense) |
| (88 | ) | 48 |
| (40 | ) | |||
|
|
|
|
|
|
|
| |||
Income before income taxes |
| 9,078 |
| (130 | ) | 8,948 |
| |||
(C) The column for the Other Acquisitions represents the combined historical financial statements of the three acquired companies for the periods ended September 30, 2012 and December 31, 2011. Sprint was acquired on March 12, 2012, Silva on May 30, 2012 and Saxon on September 28, 2012.
The 2012 results of operations for the Other Acquisitions from January 1, 2012 to the date of acquisition are included in the “Pro Forma Adjustments” column. The results from the date of acquisition through September 30, 2012 are included in the consolidated Primoris Statement of Income column.
Note that the Primoris balance sheet on September 30, 2012 (Column A) includes the balance sheets of the Other Acquisitions.
(D) As part of the Q3C acquisition, the Company paid cash of $48.1 million and we committed to issue Primoris stock valued at $0.43 million based on the average closing price of our stock for the month of December 2012. We will issue 29,273 shares of common stock in February 2013 based on that formula.
(E) In accordance with the Financial Accounting Standard Board (“FASB”), Accounting Standard Codification or ASC topic 805-10 for “Business Combinations”, the Q3C assets and liabilities were measured at fair value at the date of the acquisition. On a preliminary basis, we increased the book value of Q3C’s fixed assets by $2.3 million, primarily machinery and equipment.
The resulting adjustment to depreciation expense is approximately $0.43 million for the pro forma nine months ended September 30, 2012 and $0.58 million for the pro forma year ended December 31, 2011. The adjustment is charged to cost of revenues.
In a similar manner, we increased the book value for the fixed assets of the Other Acquisitions by $3.7 million. Increased depreciation expense for the pro forma year ended December 31, 2011 was $0.576 million and increased depreciation expense for the pro forma nine months ended September 30, 2012 was increased by $0.093 million for the periods from January 1, 2012 to the date of the acquisition. For the Other Acquisitions, depreciation expense from their acquisition dates to September 30, 2012 is included in the Primoris consolidated amounts.
(F) Goodwill of $13.3 million for Q3C largely consists of expected benefits from the geographic expansion and presence of Q3C primarily in the upper Midwest region of the United States and expanded pipeline capabilities, the opportunity to extend our infrastructure operations and other synergies of the combined companies, the value of the assembled workforce, other intangible assets that did not qualify for separate recognition and other intangible assets that were not individually identified because they cannot be reliably measured. Based on the terms of the purchase agreement, we expect that goodwill will be deductible for Federal or state tax purposes over a 15-year period.
Goodwill for the Other Acquisitions is included in the Primoris balance sheet at September 30, 2012.
(G) To determine the estimated fair value of intangibles acquired, Primoris engaged a third party valuation specialist to assist management. Our valuation estimates are preliminary and subject to change. Based on our preliminary assessment, the acquired intangible asset categories, fair value and average amortization periods, generally on a straight-line basis, are as follows:
|
| Q3C |
| |||
|
| Amortization |
| Fair |
| |
|
| Period |
| Value (thousands) |
| |
|
|
|
|
|
| |
Tradename |
| 10 years |
| $ | 6,650 |
|
Non-compete agreements |
| 5 years |
| $ | 450 |
|
Customer relationships |
| 15 years |
| $ | 14,450 |
|
Total |
|
|
| 21,550 |
|
Pro forma amortization expense is approximately $1.287 million for the nine months ended September 30, 2012, included in selling, general and administrative expenses, with no expense included in cost of revenues. For the year ended December 31, 2011, pro forma amortization expense was $1.72 million included in selling, general and administrative (“SG&A”) expenses.
The fair value of the tradename was determined based on the “relief from royalty” method, an approach under which fair value is estimated to be the present value of royalties saved because we own the intangible asset and therefore do not have to pay a royalty for its use. The fair value for the non-compete agreements was valued based on a discounted “income approach” model 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. The customer relationships were valued utilizing the “excess earnings method” of income approach. Estimated discounted cash flow associated with existing customers and projects was based on historical and market participant data.
For the Other Acquisitions, intangibles were identified by the Company in a manner similar to the Q3C process. Intangible amortization expense for the pro forma year ended December 31, 2011 was increased by $0.93 million. Intangible amortization expense for the pro forma nine months ended September 30, 2012 was increased by $0.38 million through the dates of the acquisition. After the acquisition dates, the amortization expense is included in the Primoris consolidated amounts.
(H) Q3C incurred certain costs, including legal, accounting and tax consulting expenses relating to the sale of the business to Primoris, and amounted to $0.09 million in estimated costs.
Additionally, Primoris’ acquisition-related costs, consisting primarily of legal, accounting, tax consulting and due diligence expenses, were approximately $0.12 million.
(I) The Company provided for additional cash consideration to the Q3C sellers in the form of an earnout. The earnout is subject to Q3C attaining certain specified financial goals, with a maximum potential payout of $10 million. The incentive provisions are based on Q3C achieving certain financial targets using income before interest, taxes, depreciation and amortization (“EBITDA”), as that term is defined in the Purchase Agreement. The amounts are as follows:
First Earnout Period
Subject to certain specified adjustments, if Q3C’s EBITDA for the period commencing November 18, 2012 and ending December 31, 2013 is equal to or greater than $17.7 million, we have agreed to pay the Shareholders $3.75 million in cash. An additional cash payment of $1.25 million will be paid if Q3C’s EBITDA equals or exceeds $19.7 million for the same period.
Second Earnout Period
Subject to certain specified adjustments, if Q3C’s EBITDA for the twelve month period commencing January 1, 2014 and ending December 31, 2014 is equal to or greater than $19.0 million, we have agreed to pay the Shareholders $3.75 million in cash. An additional cash payment of $1.25 million will be paid if Q3C’s EBITDA equals or exceeds $22.0 million for the same period.
The estimated fair value of the total earnout consideration (adjusting to reflect the time value of money and a contingent probability factor) as of the closing date was approximately $7.45 million and is reflected as a liability on the Pro Forma Combined Balance Sheet. The Company will record the amortization of the discount for the fair value of the contingent consideration of a potential payout of the liability as an “other expense”.
Upon meeting all of the contingency targets in the First Earnout Period, the sellers will receive $5.0 million and the Company will record an SG&A expense of $0.37 million. Similarly, upon meeting all of the targets in the Second Earnout Period, the sellers would receive $5 million and the Company will record an SG&A expense of $0.93 million.
The Company provided additional contingent consideration for the Other Acquisitions, providing additional cash to the sellers, subject to achieving certain EBITDA targets. The estimated fair value of the earnout contingencies at the time of each acquisition was approximately $5.4 million. The Company records the amortization of the discount for the fair value of the contingent consideration of a potential payout of the liability as an “other expense”.
(J) Reflects the elimination of Q3C’s equity and represents the book value of net assets acquired by Primoris.
(K) The tax effect of both the income before income taxes for all of the acquisitions and the pro forma adjustments for the acquisitions are calculated using the Company’s corporate statutory rate of 39.0%.
(L) The adjustment to earnings per share reflects the 62,052 shares of common stock issued to the sellers of Sprint in order to reflect the additional pro forma dilution. Dilution for the nine months ended September 30, 2012 was increased for the period of January 1, 2012 to March 12, 2012, the date Sprint was acquired.