Primoris Services Corp (PRIM) 2011 Q3 法說會逐字稿

Greetings, and welcome to the Primoris Services Corporation 2011 third quarter financial results conference. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Devin Sullivan. Thank you, Mr. Sullivan, you may now begin.

Good morning, everyone. Thank you. Thank you for joining us today. Our speakers for today' will be Brian Pratt, Chairman, President, and Chief Executive Officer of Primoris Services Corporation, and Peter Moerbeek, the Executive Vice President and Chief Financial Officer.

Before we get started, I'd like to remind everyone that statements made during today's call may contain certain forward-looking statements, including with regards to the company's future performance. Words such as estimated, believes, expects, projects, may, and future or similar expressions are intended to identify forward-looking statements.

Forward-looking statements inherently involve risks and uncertainties, including, without limitation, those discussed during this call and those detailed in the risk factors section and other portions of Primoris' quarterly report on form 10-Q for the period ended September 30th, 2011, which was filed today, November 8th, 2011, and other filings with the Securities and Exchange Commission. Primoris does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

I'd now like to turn the call over to Brian Pratt. Brian, please go ahead.

Thanks, Devin, and good morning, everyone. The third quarter of 2011, was a record period for our company's history. We reported the highest ever revenue for the nine-month period exceeding $1 billion for the first time in our 60-plus year history. Our earnings were the best we've ever achieved, with quarterly EPS topping $0.38 per share. Each of our business segments performed exceptionally well on almost every basis. Our backlog grew to a record $1.1 billion. We announced a number of new contracts for heavy highway work, underground, and pipeline projects, including additional shale-related work.

We also experienced a substantial increase in pipeline integrity work from our gas utility clients. We are pleased with almost every aspect of our company's performance with this quarter. I will begin with the West Construction Segment, where revenues increased by $144 million quarter-to-quarter. As all of you know, Rockford is part of the West Segment, and the Ruby Pipeline Project contributed significant revenues in the third quarter. With the exception of minimal remaining environmental remediation work, the Ruby Project was essentially completed by the end of the quarter.

I'm sure I'm going to bore you to death when I say this again. But as it relates to Rockford, we didn't buy a $300 million revenue company. We bought $120 million-plus-or-minus company with somewhat unique $300 million job. This in mind, legacy Rockford performed well or better than we'd expected in all three pieces of their business.

First, the California piece was merged rather seamlessly with our existing northern California pipeline industrial operations, and is selling, winning, and performing very substantial workload. Second, Patrick Rockford's ACP in Washington, Oregon component of the legacy Rockford, has managed to transition gracefully onto our team and is performing well in their market. We are seeing and beginning to explore good avenues for these guys to penetrate into new markets.

And lastly, Frank Welch's large capital projects group has managed to win three significant jobs post-Ruby. And in doing so, we have repositioned two of our equipment spreads to make us more competitive in the Bakken, Marcellus, and Utica shale plays.

In terms of gross profit, Rockford contributed 100 million -- I'm sorry -- $10 million to overall segment profits.

Now I'd like to focus on the growth attributed to the California-based underground and industrial businesses, which together accounted for nearly 36%, or $51 million, of the total $144 million revenue increase for this segment. These two groups generated a combined gross profit increase of $12 million for the quarter. ARB Industrial continued their work on three power plants, including the El Segundo generating station located in southern California, which is off to a slow start pending some design issues outside our control.

Tim Healy's Industrial Group work execution is going very well, and many of their problems [that muted] the group's results last quarter are being successfully managed. We are experiencing good prospect flow in both our traditional markets as well as renewables. We are confident that announcements will be forthcoming very soon for significant new work in both of these markets.

Scott Summers' Underground Group continues to effectively service, among other things, our customers' pipeline integrity requirements, which usually reaches seasonal crescendo in Q3 and 4. The vast majority of the work performed for pipeline integrity is executed under master service agreements. As I've overemphasized before, we do not recognize MSA work in the backlog, as the ultimate revenue generator from this type of delivery system is indeterminate until realized.

We remain bullish on integrity work in our geographic markets and see a component of our service offering having a positive effect on our Underground Group for the foreseeable future. Underground continues to win our fair share of capital work outside the pipeline integrity market, including work within the oil and gas product and utility industries.

As for our Structures Group, this quarter brought the completion of a Long Beach Airport parking structure. We were able to recognize a substantial profit for the closeout and settlement with the owner of residual issues. Because of the project closeout, structures was a very significant financial contributor for the quarter. Looking forward, structures market continues to be extremely competitive. However, we're experiencing a modicum of [its] success in winning enough work to maintain our core assets. We feel it will sometime until this market recovers to a point, we will see contribution from this group at a more historical level. It is our and many of our clients' opinion that our guys are the very best at what they do, but demand in their core market remains abysmal.

All that said, I am pleased with the West Segment's project execution and work acquisition results. Backlog at the West at the quarter end was approximately 45% better than December 31st of 2010.

Engineering revenues were down by about $3 million Q-to-Q, reflecting the completion of several projects during the quarter. These closeouts helped improve gross profit by about $100,000. [Backlog] for this group was also down from $43 million at year end to $28 million at quarter three end. Business development for both Onquest and Born is turning over a decent quantity and quality of good work.

In the East Construction Segment, most business units continue to perform very well. James Construction Group has recorded the highest backlog since our merger. Most of the growth is a validation of our strategy to increase our presence in Texas, especially around our sweet spot in Austin. In September, we were awarded a $70 million contract for TexDOT to continue work on I-35. This highway award is for work near our Belton office, and is the most recent new contract added. Work has commenced on the project and is expected to run through the middle of 2014. This represents the third I-35 contract signed by James in the last 15 months. In total, these contracts have a value to us of more than $300 million. Also just recently we were notified we are apparent low bidder on another portion of I-35 reconstruction in the same proximity, which if the contract is executed, will add an additional $121 million of new work.

[Tommy Lesane's] and [Conrad Borb's] I&M and Industrial Groups have continued to perform well. We've announced recently several new projects which are evidence of their ability to sell and win work in tougher market climates. James Houston office was awarded contracts totaling $7 million for work in Anahuac and Harris County to construct drainage systems [and chilled] water lines. The James office in Mulberry, Florida, was awarded a contract valued at approximately $6 million for reclamation work associated with phosphate mining activities in central Florida. This contract is modest in size, but it reflects the vast scope of services we can provide our customers all over the country. Each of these projects should begin within the third quarter of 2011, and be completed by the second quarter of 2012.

The water and wastewater markets in our Cardinal Group remain very competitive, however, we continue to operate profitably. Recently Bill [McDivitt's] group won several smaller awards, and we are cautiously optimistic at what appears to be incremental improvements in the competitive environment. We are experiencing good success in our modest, but rewarding penetration to other parts of the southeast with Bill's group.

Backlog in the East Group at the end of the quarter was $77 million. This represents a change from the December 2010 total of $630 million, an increase of about 18%. We're not only pleased, very pleased with Danny [Hester's] East Group's execution, but the size and the quality of his backlog.

As to our financial position, we remain well capitalized at the end of the quarter with nearly $119 million cash and equivalents. We have traveled a good distance in reinforcing our financial condition after the impact of the Rockford purchase. Our healthy financial statement offers us the flexibility and freedom to aggressively execute projects that produce acceptable returns, while continuing to pursue both traditional and non-traditional growth opportunities.

Somewhat uncertain financial times continue to provide a plentiful field of opportunities for acquisitions. Our strong balance sheet and savvy management allow us to maintain our course of additional growth through the purchase of great niche companies.

In sum, we had an exceptional quarter. Our guys performed and continue to perform in a manner that over the years has made our operating groups leaders in their perspective industries. To the guys that I have had the privilege to work for the past 38 years at ARB, James, Rockford, Onquest, Born, and Cardinal, it is an honor -- it is because of you we claim the best quarter in our history. I thank you. Let's do it again real soon.

Thank you for your attention. Now I'd like to turn the call over to Pete Moerbeek, our Chief Financial Officer.

Thank you, Brian, and thanks to each of you for taking time to join us on this call. We are proud of the achievements that the company has made this quarter. Brian has provided you some information on our revenue growth, so I'll start with our gross margin and then comment on the other areas of our financial performance. As Devin mentioned earlier, we filed our third quarter form 10-Q this morning.

Our overall gross profit for third quarter of 2011 rose by 87%, or $24 million, to $52 million, from $28 million in the third quarter of 2010. Rockford contributed $10.6 million of the increase. The rest of the West Construction Segment's gross profit increased by $11.1 million. The East Construction Segment increased by $2.4 million, and the Engineering Segment grew slightly by $100,000.

As a percentage of revenues, gross profit grew to 13.9% from 12.1% in last year's third quarter. The improvement in gross profit as a percentage of revenues was primarily attributable to the increased activity at the Underground and Industrial Groups with increased profitability this quarter also in the Structures Group. The improvement in the East Segment was due to improved margins realized on heavy civil projects.

To help you understand the third quarter performance better, it may help to look at the sequential performance from the second quarter of 2011. Our revenues increased by $33.8 million, while our gross margin increased by $10.7 million quarter-to-quarter. The most significant improvement was from our California-based ARB subsidiary, where the gross margin increased by approximately $12 million. ARB consists of our Underground Group and our Industrial Group. For the quarter, the Underground Group added $4.1 million to its margin, reflecting primarily its increased level of pipeline integrity and maintenance work. The Industrial Group gross margin increased by approximately $8 million, which included both an increased level of activity and the favorable impact of a change order for the power plant project for which we'd recorded a loss provision in the previous quarter.

Going from operational performance to selling, general, and administrative, or SG&A expenses, for the third quarter of 2011, SG&A expenses increased by $5.5 million, or 37.9% from last year's third quarter. Of the increase, approximately $2.8 million was associated with the additions of Rockford and all the electric, and an additional $1.8 million was due to a non-cash charge for an increase in the [par] value of the Rockford contingent earn-out consideration, while the balance of the increase was primarily due to approximately a million dollar increase in employee compensation-related expenses.

As a percentage of revenues, SG&A expenses declined to 5.4%, from 6.3%, in the 2010 third quarter. Excluding the impact of Rockford, SG&A expense as a percentage of revenues would have been 6%, a 0.3% improvement from the prior year quarter. On a sequential basis, SG&A decreased slightly from the second quarter, and for the current year we've remained at a constant level of approximately $21 million SG&A expenses in each quarter.

Included in our financial results for the third quarter 2011, are the accounting expenses associated with our acquisitions. For the quarter, our cost of revenues included $886,000 in amortization of acquired backlog compared to $548,000 in third quarter of 2010. Our SG&A expenses for the third quarter included amortization of intangible assets totaling $1.2 million, compared to $866,000 in the third quarter of 2010. Over the next quarter, we anticipate recording additional backlog amortization of $0.5 million of cost of revenues and an additional SG&A charge for intangible amortization of $1.2 million.

During the third quarter, we recorded the full amount of the 2011 Rockford contingent consideration. At this time our assumption is that they will make -- that we will make a full payment of $6.9 million, of which 50% will be in cash, and 50% will be in stock based on average closing prices for December 2011. During the quarter, we also adjusted the probability that Rockford will attain the 2012 earn-out target. Based on Rockford's 2012 performance, we would pay an additional $6.9 million in cash in any -- in early 2013.

Operating income for the 2011 third quarter was $32 million, or 8.5% of total revenues, compared to $13.3 million, or 5.7% of total revenues for the same period last year. In the current quarter, the amortization of intangible assets from the acquisitions reduced operating income by about $2.1 million.

Net other income in 2011 third quarter of $74,000, compared to net other expense of $81,000 in the third quarter of 2010. While the change is small, it's the result of some fairly larger items as follows. A $1.6 million increase in income earned from the St. Bernard Levy Partners Joint Venture in Louisiana, compared to last year. We anticipate this project will be wound up by the end of the year. Second, during the third quarter 2011, we included a $900,000 expense for our portion of WesPac's impairment charges related to two projects. Third, during the quarter, interest expense increased by $200,000 over the prior year quarter. Interest expense for Q3 2011, was approximately $515,000 for our subordinated debt and approximately a million dollars for our notes and capital leases secured by equipment.

Also included in other expenses in both last year and this year is an expense of $314,000 related to the fair market value adjustments for the potential earn-out amounts associated with our acquisitions. We anticipate recording additional earn-out charges of $170,000 for this fair market value adjustment during the fourth quarter of 2011.

The provision for income taxes for the third quarter of 2011 was $12.7 million, for an effective rate of 39.7%, compared to $5.6 million, for an effective tax rate of 42.7% in the prior year quarter. We expect the effective tax rate will remain at about the current year-to-date level for the remainder of the year.

Fully diluted weighted average shares outstanding for the third quarter of 2011, increased by 12.1%, to 51 million shares, from 45.5 million shares in last year's third quarter. The increase is due to the 1.6 million shares issued as part of the Rockford acquisition, the impact of the shares issued to fully convert the warrants in October 2010, and the shares issued when both Rockford and James attained their 2010 earn-out targets. And for those of us who dealt with the warrants last year, I can proudly announce that for the third quarter, our number of outstanding shares for basic EPS is exactly the same as the number for diluted EPS.

The bottom line of this discussion is that net income for the third quarter of 2011 was a record setting $19.3 million, or $0.38 per diluted share, compared to net income of $7.6 million, or $0.17 per diluted share for the same period in 2010. That's an increase of $11.8 million, or 155%.

As Brian noted, we have a strong balance sheet. At September 30th, 2011, we had $119 million in cash and the cash equivalent. Working capital at quarter end was $72 million. Total notes and capital leases secured by equipment was $78 million. And stockholder equity was $264 million.

For the year, we have increased our tangible net worth by $46 million, from approximately $91 million at December 31st, 2010, to approximately $137 million at the end of the quarter.

For the first nine months of 2011, operating cash flows provided $25 million. We used $11 million in our investing activities, primarily the purchase of PP&E, and $33 million in financing activities, primarily due to pay down our debt. For the first nine months, operating cash flow was impacted by the following major changes. We recorded a $43.2 million increase in costs and estimated earnings in excess of billings. We recorded a $59.7 million reduction in billings in excess of cost and estimated earnings. We also have an increase of $8.9 million in customer retention deposits, and a reduction in accounts payable of $4.5 million.

While an increase in CIE could serve as a warning because costs have been incurred without corresponding billings and collections, approximately two-thirds of the increase is a result of the pipeline integrity work that we're performing for a large California gas utility. As we have ramped up our efforts, their infrastructure for approving and making payments has not quite kept pace. We do not anticipate any issues, and we're already seeing some improvements in the approval process.

The large reduction in BIE was primarily the result of Rockford's Ruby Pipeline Project. At the end of last year, Rockford's BIE balance was $78.7 million, and at September 30th, it was $22.3 million, a reduction of $56.4 million, which accounts for most of the $59.7 million reduction. Rockford also had an impact on a positive part of the cash flow calculation. For the year, accounts receivable were reduced by $50.2 million, of which Rockford accounted for $49.2 million, primarily because of the Ruby Project.

At September 30, 2011, our subordinated acquisition debt fell to $26 million, from $43 million at the end of 2010. The reduction in debt included a payment in March of $6.4 million, which eliminated that portion of the Rockford subordinated debt that had a convertible feature. Our long-term debt and capital leases were reduced from $60 million at year end 2010, to $52 million at the end of third quarter.

As usual, let me conclude with a discussion of our backlog. At the end of September, backlog was $1.09 billion, an increase of $194 million, or 21.7%, from total backlog of $896 million at December 31st, 2010. For the year, we have added $879 million to backlog in the form of newer expanded projects, and we converted $683 million of backlog to revenue. Since our total revenue for the year was $1.09 billion, $404 million, or 37% of our revenue did not flow through backlog.

I remind you that it is our policy to not book a job into backlog unless we know the contractual revenue amounts. That means we do not include cost reimbursable projects such as the Ruby Project, or anticipated MSA revenues in our backlog amount. As a result, the amount of our backlog is not as comprehensive an indicator as it may be for others. And as always, I remind you that customers have the ability to cancel contracts, sometimes even after we have started a job. Given that, we do expect that approximately $197 million, or 18% of our September 30th, 2011 backlog amount will be recognized as revenue in the fourth quarter this year.

And with that, let me turn the call over to the operator so that we can get to your questions. Thank you very much.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) One moment, please, while we poll for questions. Our first question comes from the line of Lee Jagoda with CJS Securities. Please proceed with your question. Your line is live.

Hi. Good morning. Congratulations on the quarter.

Thanks, Lee.

Can you give us a breakdown between the Ruby revenue and the other revenue related to Rockford in the quarter?

We really don't break that out. There -- obviously a significant portion of Rockford's revenue was from Ruby, fairly close to the total, but not -- we are seeing encouraging movement on some other jobs.

Where I was sort of going with that --

I'm going to guess, Lee, about 60% Ruby and 40% the other jobs that they're building.

Got it. So is that to say that the other jobs that are roughly $50 million of revenue that you previously announced are still on track to be completed by the end of 2011?

Oh, yes. Oh, yes. Probably by the end of this month, so.

Okay. Great. And then one more question, and I'll hop back in --

That may be a little -- no, that's about right. That's with ACP and everything, that's about right, yes.

And then --

Go ahead.

-- with Ruby essentially complete, does that have any impact on your SG&A dollars going forward?

Not really. They're very small dollars in SG&A Rockford. So there'll be some potential reductions, but nothing that would be material. If we added $2.5 million or so to SG&A with the acquisition of Rockford, you're probably not going to see a dramatic change in it.

Most of the savings won't come from ending the Ruby project. It'll come from incorporating the two offices in northern California together, carving out some insurances and things like that. But none of them are really directly related too much to Ruby.

And has that been done, or do you expect to do that in Q4?

That's in the process. It's something that takes a while. You've got some leases that wind up and some small little things you have to figure out why exactly they were done the way they were done and you got to rationalize and figure out how to eliminate them. But it's something that we -- you constantly look at and you constantly improve upon.

Great. Thanks very much. I'll give others a chance.

Thank you. Our next question comes from the line of Richard Paget with WJB Capital. Please proceed with your question. Your line is live.

Good morning, guys.

Hey, Richard.

Morning, Richard.

Well, I guess these days a company has to triple the street's estimates for it to go up post-earnings.

Either that or impair the heck out of something.

I was just telling Pete that thank God we didn't earn $0.50, or the price would be down $1.50.

Yes. Brian, you talked about how the pipeline integrity work is ramping up. And I wondered if you could give us a little bit more information on whether this is a multi-quarter cycle with this kind of spending or is this something that could have longer legs beyond that.

It's -- I think, from what I understand from the public information, that it's a longer term issue. The increases that utilities most -- more PG&E than the others, have asked for, go way beyond the next year or two. They've got an immediate need to do a lot of hydrostatic testing, which means filling the lines with water and testing them, which isn't the most optimal way to test pipelines. But they've got an immediate need to do that, and they've made commitments to test, I'm thinking about 30% of their lines this year and about twice that next year and back to 30% the following year, until they can put other methods in place to test these lines.

And then you've got, after that you've got the beginning of the -- well, next year I think we'll see much more of the traditional reconfiguration of the systems to accept the smart tools. And then the year after that, you'll start to see an aggressive replacement process because some of these lines obviously need to be replaced. So I think it's a multi-year project. I think it's going to be typically seasonal to PG&E. They use their gas lines much more in the winter than in the summer. So they will work hard in the summer months when they don't need the preponderance of their system, to do the work and the replacement, and then they'll slow down in the winter months, which has traditionally been the way they have done the work.

Okay. But it sounds like if they're kind of doing the preliminary testing phase, that this might actually continue to ramp up as we go through the process.

Yes. There's only a portion of their system that they can test that way. It's very expensive because they have to do something with the water when it comes out of the pipe. They have to take the pipe out of service longer term. So they're only testing, I believe, about -- it's a very small -- with water, a very, very small portion of their system. I think the most critical older that gives them the most amount of exposure systems are the ones they're going to hydro test. The rest they're going to reconfigure and do with smart tools.

Okay. And then I know it's a relatively smaller contract. But the phosphate mining, I mean, that sounds like kind of a somewhat of a new end market for you guys. Is -- and you said you could do this in other parts of the country. Is phosphate the only mining opportunity that we should pay attention to or is there a bigger end market for you down the line potentially?

Well, if I can pick on you analysts for a minute. When we bought James, you guys focused on the highway business. When we bought Rockford, you guys all focused on Ruby. I'm hoping we can buy something else so we can quit talking about Ruby one of these days. But when we bought James, we bought a very vigorous group that Tommy Lesane runs there that does -- they call it the I&M Group. And they do a lot of mining work. Some of it is reclamation. Some of it's opening up new areas. A lot of it is water support for all the phosphate mines around the gulf there.

To they work the mines from Texas over to mid-Florida or so. And it's something they've done exceptionally well. It's something they really focused on. We work for mines other than phosphate mines. But this is something that we acquired with James, and we're very optimistic and we like the business a lot. It's equipment intensive. It's not your typically body shop-type maintenance work. It's got a limited potential. I mean, who would dare open a new mine in the United States now with all the environmental overhang. But we like it. It gets us next to clients. It's ongoing. It's not particularly weather -- or seasonality is less. So it's a good business.

I think Tommy, I&M, does about $60, $70 million or so, and most of it related to mining.

All right. Great. And I got one more just before I jump back in queue. A competitor of yours was talking about how some flooding and other weather-related issues in the Marcellus had some impact. I know you guys have a contract there. Any issues that you're facing there or that was more regional to someone else?

It's rained about every day up there. It's just that time of year, and it came early. But our contract is kind of performing as we predicted. It was never going to be a real fat job, but we wanted to get our equipment up into that area and it's a long ways from Oregon to Pennsylvania. So it was a great opportunity to move it out there, make a little bit of money, and service the client.

Since we've been there, we've already picked up some additional work. We're doing some work for Williams and some other guys there that they said, well, we're glad you're here, can you do -- can you take care of some things for us. But we're not taking an ass whooping on the job or anything. You just, if you go up there and you don't figure it's going to rain, then you kind of ought to think about opening up a dry cleaning store or something someplace else, because it's kind of the pipeline business in that part of the world this time of year.

All right. Thanks. That's all I got.

Thank you. Our next question comes from the line of Tahira Afzal with KeyBanc. Please proceed with your question. Your line is live.

Good afternoon, gentlemen. Glad to know you haven't lost your sense of humor, even though you've left Laguna Beach.

It's Newport Beach, Tahira. It's not Laguna Beach. That's a different breed of people down there in Newport -- in Laguna.

Yes. The northeasterners don't know any better, so. Well, congratulations on a very good quarter. And I guess the one question that I get the most is, obviously Ruby's finished. You've got a couple of really good offsets coming up. Could you talk, provide a little more color, in terms of the offsets and how you see them playing out in terms of the shale plays as you go into 2012, as well as the pipeline integrity business?

Wow. That's not a simple answer. We're seeing a lot of the mid-size projects next year. We have some small pieces of portions and snippets of Keystone if it ever gets built. But we certainly [aren't] predicating our business plan on it. We are not going to get a big piece of the pipeline work at this point, unless something drastically changes. And I think I've kind of foreshadowed that with everybody.

But there are some good moderate-priced or moderate capital projects coming. Another one, the piece up in the Bakken, the two pieces that us and Price Gregory are laying this year are small -- are a portion of the ultimate project. The next two pieces get built next year. We're optimistic that being there with an equipment spread we're going to have a pretty good advance -- advantage on that work. There's a lot of ongoing and future projects there. This is a CO2 flood project where they're using CO2 to keep the pressure up on the structure to move the oil towards the producing wells.

The Marcellus and the Utica up there, I mean, the Utica's just beginning to get tapped. And I think there's going to be work there for a gazillion years. I was looking at the -- yesterday I was looking at the Haynes, and it's about half spoken for. And they've been producing that shale play for a long time. So they're still -- and these shale places you know are pretty prevalent. If it's in one area, it's kind of in another area. There isn't as much risk to producing it. If you can get into that structure, you're pretty well going to get a decent well unless you screw up the fracking or something.

So these gas plays -- or they're shale plays -- there is one oil shale play or several oil shale plays. But these shale plays are going to be around for a long time. And it's our intent to really dig in like a tic and really optimize what Primoris can earn in these plays. We've got the geography. What we didn't have we established this year. We're going to -- with James' footprint, we can pretty much attack any of the shale plays below the Mason-Dixon Line. And that's going to be our intent, to really, really optimize our exposure to shale. That's on the energy side along with continuing to do the power.

We are I think real close to a couple of non-traditional renewable projects, which I told you, the solar and the wind are pretty obvious and a lot of people chasing them. We're not giving up on solar. We think we're going to have a couple good announcements there fairly soon. But we do like the process side, municipal waste to ethanol, municipal waste to gas, and those kinds of things. And we think there's some real upside there. There's some risk because some of these developers are lightly, more lightly capitalized. But we like the renewable market still.

The James guys are continuing to win, and I'm sure some of our competitors say, oh, you better watch their backlog. Well, we're comfortable with our backlog. It probably isn't as lucrative as it was three, four years ago, but that's when all the contractors had died and gone to Heaven. It's more back to reasonable times. And we're very comfortable with the backlog we've booked in that area, particularly over in the Belton area where we have certain advantages, which is around Austin, Texas. We have certain advantages with some rock assets and things like that.

So we're going to continue to do what we know how to do well. We're going to buy something soon, so we can quit talking about Ruby. I don't think it'll be the size of Ruby, but who knows. And we're going to look at new ways to use our existing assets to penetrate the kind of markets that we think can continue to give us great margins.

Great. That was very helpful. And I just have a follow-on, and then I'll jump back in the queue. The follow-on is, obviously, if you look at Rockford, margins have essentially been a bit of a drag on your West Construction Services business. So obviously we see probably some lumpiness as [as you draw out of] Ruby and into the new ventures you're seeing ramp up. But what about profitability, should we see that actually be lumpy in the right direction going forward?

Well, Ruby, as you know, we committed to a flat fee on Ruby in spite of the revenue -- well, I won't say creep because it exploded. Originally when we purchased Rockford, the job was contracted on a shared savings basis at 180, plus or -- $186 million, plus or minus. And ultimately we billed well in excess of $400 million. And we, out of the relationship with the client, who's -- they're good guys. Of course, they're now being bought by Kinder Morgan. But out of that relationship, we fixed the fee. So that actually suppressed margins pretty significantly. If I had to live with those kind of margins on all the work going forward, I don't think I'd be a very happy camper.

So I think on the new work we're going to get, we're anticipating better margins on the large capital projects. So the stuff that Frank Welch is running around all over the country trying to bid and do, I think we'd hopefully see better margins than what we achieved on Ruby.

The ACP guys, their margins are going to be good. I think they're going to be very typical to what we see in northern California. They do Washington and Oregon. And then the northern California guys, those guys all worked with us in years past -- or years prior. So I think we're going to continue to see an improvement in margins there, particularly as the utilities, PG&E specifically, begins to really become better -- more effective at administrating their end of this integrity work.

But keep in mind, you will continue to see that seasonality. So it's not -- it's lumpiness in a different way. Nothing really gets done second half of the first quarter and second quarter. So the real work on integrity is third and fourth quarter. And even in the pipeline, the large capital stuff, you don't bill projects typically in Q1. There's -- the preponderance of your revenues are going to occur in third and fourth quarter, and then you dribble some into first quarter of the following year.

Got it. Thanks, Brian and Pete. And I'll hop back in the queue.

Thanks, Tahira.

Thank you. (Operator Instructions) Our next question comes from the line of Rich Wesolowski with Sidoti and Company. Please proceed with your question. Your lines is live.

Thanks, Brian and Pete. Good morning.

Morning.

Hi, Rich.

I'm sorry to ask Pete to repeat himself. But I was wondering if there were any material changes to your profitability assumptions regarding the three power plant construction projects discussed last quarter.

No, I think they'll -- we're seeing the benefit of reversing the loss provision that we had to take last quarter with -- that helped us some in this quarter, as we were able to negotiate a change order. I think that we're going to be back to more traditional margins going forward. And obviously they had a good quarter in third quarter even on top of that.

Was it a complete reversal of the loss or partial?

I think we took the loss provision -- I think we got rid of the loss provision, but I'm not so sure that we're back to full -- our full margin yet. I think we're still negotiating.

Great.

There's a lot of hurdles to get over there yet -- left, Rich. But we turned the corner, I think, in terms of the clients positions and attitudes and -- but there's a lot of work left to do. So as you guys know, we're very cautious about what we recognize, and once we take one down, we don't like ever doing it again on the same project. You know, fool me once, so.

Right. Because this is the first material revenue contribution from Rockford's non-Ruby business outside of the consolidated piece in California, we're kind of guessing what Ruby's gross margin was. Is it appropriate to affix a segment average gross margin of around 13%, 14% onto that $38 million of Rockford revenue that wasn't Ruby?

No.

[That] got a smile from him.

Yes. As I -- you're getting a little definite here, aren't you? The project in Wyoming is still a bit early. We -- you're very susceptible to weather right now. So we currently have them on our work-in-process at a very low margin. The project in Pennsylvania, that one is -- we spent quite a bit of money moving the fleet back there. We moved additional pieces, more than we needed, for that precise job because we wanted a real presence in that area. Some of the stuff we took off of Ruby was for bigger pipe. The stuff back there in the Marcellus is smaller pipe.

So those margins won't be typical to what we think we'll achieve in the future, just based on the fact that the Wyoming job started later, it's -- we kind of wanted to be there for the second spread that goes next year. We wanted a spread there to be ready for the new work. And then you've got guys that have been on a three-year cost-plus job, on a big job. I mean, 42 inch is about as big as you can lay in the United States. There's a little bit of 48 around, but there's not much. So you got guys that are out there working cost-plus for a client, who's working as directed, who's skipping all around because environmental issues. Now they've got to adjust to a lot smaller job in a more competitive hard-dollar climate. So there's going to be a little bit of an adaptation by the guys [and] a change to a different kind of job.

So we didn't anticipate those kinds of margins. But I think in the future those are ones we'd certainly try and envision on that kind of work.

Would you characterize the Pacific Northwest piece of Rockford's business as exceptionally lumpy line the Nomadic pipeline, the Ruby [crews], or is it relatively stable such as that in California?

Well, it's made up of smaller, more annual jobs. A lot of these clients, they replace or relocate a certain amount of pipe every year and they do so much integrity work, so much replacement work. So you've got kind of an ongoing recurring revenue base to it. But again, it's mostly in the summer. I mean, it really gets nasty up in that part of the world in the winter. It starts raining about this time, doesn't quit until around March.

So most of the guys try and gear up to do their work in the spring, summer, and early fall. So you've got a lot more seasonality to it than you do in other places. But, no, it's not nearly as lumpy.

Now, there is big project -- there are big projects that get built out there. And if you run across one of the clients at Williams or somebody like that, that's going to do a bigger replacement in a year, then it can get lumpy from that aspect. But that's not the business we built -- we built or we kind of bought, and then designed in the after-purchase. And that was one that's really more based on recurring traditional clients, building a relationship with those guys instead of doing one-off projects.

And then we got a great footprint there. And we think right now the ACP guys, they just basically do pipe. And for PG&E in northern California and southern California, we do a lot of underground electric. We do a lot of other things for those same utilities. And we think we can bring those aspects of our skills to the guys up in the northwest. And so having that footprint, even the industrial side of it, a lot of these clients, they lay pipe, but they also build pump stations, compressor stations, valve sets, and all kinds of things that aren't traditionally what some of these pipe-liner guys do. And our guys are exceptionally good at that, and we like that additional [wrinkle] we can bring to the clients up there.

So we think there'll be good growth. It won't be as lumpy as the big capital guys.

Lastly, given that much of the ARB underground business is union, from my understanding, are there any hurdles to expanding the workforce if the integrity spending forecast by the utilities translates to a commensurate increase in the activity for Primoris?

Yes, there's -- right now there's an integrity push across the country. The industry tried to get ahead of the regulators on kind of self-policing or self-regulating. That isn't working out because the drama of these larger accidents have really tuned up the public. The publicity over Keystone has even made that more acute.

We can do the other work outside of those union areas with James and people like that. There are some areas you're just simply not going to penetrate with union people. To be honest with you, I think unless things change on the west coast, I'm not sure I want to go too far from there right now. We've got in the neighborhood of maybe 800 or 900 guys out for one client out there. And when you go from 200 guys last year to 800 guys this year, it's hard to hire 600 guys. And the last thing you want to do is exacerbate a client's problem by hiring a guy that's going to cause an accident or do something foolish.

Right.

And so we're going to be pretty disciplined in our growth in that area. Now, we are looking at ways to service the rest of that because we do have such a good reputation in that area, and we've got some great programs that the clients love. We are looking at expanding that through acquisition into some of these other areas. And that's kind of one of the main thrusts of our acquisition strategy right now.

There is a union contract expiring as we speak with the Teamsters in the central states, which, incidentally is going to impact Keystone significantly. Their pension fund is in such disastrous position that the contractors have decided not to renew the contract. We have -- I do owe it to our investors to disclose that. We have a tiny bit of exposure with them. Traditionally in the other areas, the other crafts have replaced the Teamsters -- the operators, laborers, and carpenters have always replaced the Teamsters when they don't -- when they -- there isn't a lot of labor peace out there right now. But that is an impact and it should be mentioned. But I -- [you have] potential impact. But most of our work is we're going to be done by the time the agreement is -- any strike would be forthcoming, we'll be done with 95% of the work that's exposed to it.

Appreciate it. Best of luck.

Thanks.

Thank you. Our next question comes from the line of John Rogers with D.A. Davidson. Please proceed with your question. Your line is live.

Hi. Good morning.

Hey, John.

Hi, John.

Just one quick question. Pete, on your comments relative to the Long Beach Airport, the settlement and gain there, how significant was it in the quarter? I assume you won't give me the number, but.

I'm sorry. The Long Beach Airport structures --

Yes.

-- and that's not one that was a settlement, but that was just completion of a job and removal of contingencies. The other one was one of the power plant jobs where we had taken a reserve last quarter and --

Right.

-- [put] the job down, and we've now been able to negotiate the start of a change order that got us back to a more comfortable level.

Okay. But was it a substantial portion of the profits ex-Rockford?

Not a substantial -- no, not ex-Rockford.

Okay. And then --

It was very significant for them, but not as significant for the whole segment.

Okay. I was just trying to get an understanding of the run rates. And then, Brian, without Ruby or whatever that pipeline project was called that we're not talking about anymore --

Very good, John.

Do you have to make an acquisition to grow earnings next year?

No.

Okay.

You mean grow it -- now remember, we've --

Yes.

-- kind of normalized our earnings this year, taking a good part of Ruby out --

Right.

-- based on our plan. But, no, I think we're going to -- we've got a lot of really great opportunities out there. We've got more backlog at James than they've ever had on the heavy highway. The industrial and the pipelines guys in California, their backlog's up, and that doesn't even account for the MSA work, which will -- I think will be incrementally more than it was this year. And the Ruby margins were kind of modest. But I'll let you guys wrestle over what to model for us.

Sure.

But I think we've got great opportunity to grow. I mean right now we're not even looking at anything in the pipe -- other than stuff in -- below the Mason-Dixon Line for pipeline guys. Most of what we're looking at for acquisitions are kind of nice little tuck-ins like a solar guy, a -- there's a small pipeline guy down in the Eagleford. There's a offshore guy that catered to their rigs and things like that. I mean, we're looking at a lot of various things that will be incremental. But we're planning on growing organically. These things are kind of tuck-in, that fit well, that aren't too dramatic or traumatic in terms of absorption. But, no, we don't need an acquisition to grow.

Okay. And then just in terms of the bid market that you see out there, you spend a lot of time talking about the pipeline business and what's out there. But in terms of the industrial versus the civil versus commercial markets, have -- from the comments, you don't hold out much for the commercial structures business for you. But the industrials market, the renewables market, I mean, that's where you're seeing most of the activity now in terms of --

Yes --

-- bidding opportunities?

Yes. The power market is good. I mean, we've really -- we're barely starting the El Segundo job. We're probably halfway through the northern California job and the -- the same thing with the job down in the Imperial. I -- we're hoping to be able to announce another small job here in the next couple weeks, a little [peaker]. But there's going to be the traditional power. But we don't -- really we don't even have capacity for anything more for the next 12 months if we get this little peaker. So the power's kind of -- and we're still seeing increase in revenues there because, like I say, El Segundo hasn't even really started yet.

The refinery work's going to come back. They haven't really done much. The spread hasn't been that good. It's getting better. They've delayed some environmental work that they have to do. That market's going to come back. The pipeline market, there's way beyond the integrity side. The renewables, like I said, I mentioned a couple of -- obliquely a couple of opportunities. But we're seeing a really good prospect flow on what we would deem as less-than-traditional renewables like household waste to ethanol, household waste to gas, ag waste, which are things we kind of like more. And even the larger solar ones are starting to come on, although the thermal stuff, based on the cheap panels, just isn't -- I think it's going to be a tough go for those guys trying to bid the big thermal plants. But there are still a few out there.

I just think we just -- I'm just really pleased with the opportunity we have. And even in the southeast with McDivvit down in Florida, he's starting to see kind of the, what we call the track rats, they're kind of disappearing. The bonding companies are kind of helping them disappear because they're not writing any more bonds. And the real contractors that know how to do the work are starting to come to the forefront again. And so the numbers are starting to improve a little bit and become a little more realistic.

The heavy highway business remains tough, but we've got such an advantage in the areas we're in, we're just not having to knock the bottom out of the work to get it. So there's very few things I'm pessimistic about. The pipeline business is -- it's out there. It's not the big orange busses going down the road that everybody can see. You got to work a little harder to find them. You got to work a little harder to be competitive on them. But it's out there. And I think the margins will be okay in t kind of work.

I mean, I've done this for 38 years. I've been through all kinds of these cycles. And I'm telling you, we'll find a way to make a good living at it and continue to grow, and that's just what we do, without having to add one big swallow next year of a swallow next year of a $0.5 billion company or something. We'll do it organically and with some small tack-ons.

Okay.

And gracefully without stressing our balance sheet, without having to write off any goodwill. We're going to do it right.

Okay. Thanks. I appreciate the color.

You bet.

Thank you. Our next question comes from the line of Adam Thalhimer with BB&T Capital Markets. Please proceed with your question. Your line is live.

Good morning, guys. Nice quarter.

(Inaudible)

Hey, spread it around, will you?

Yes, really. Well, I think some of your comments about the growth outlook for 2012 will help. Most of my questions have been answered. I just -- hey, can you remind us what Rockford's earn-out hurdle is for 2012?

Yes, it's EBITDA as that term is defined, of $14 million.

Great. Thank you very much.

Thank you. Mr. Moerbeek and Mr. Pratt, there are no further questions at this time. I'd like to turn the floor back over to you for any closing comments you may have.

Well, I'd like to thank everybody for dialing in. More than that, I'd like to thank you for your interest and support of our company. Good-bye.

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time. And we thank you all for your participation. Good day.