Primoris Services Corp (PRIM) 2013 Q2 法說會逐字稿

Greetings, and welcome to the Primoris reports second-quarter financial results conference call. At this time, all participants are in a listen-only mode. A brief 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, Kate Tholking, Director of Investor Relations. Thank you. Ms. Tholking, you may begin.

Thank you, Stacy. Good morning, everyone, and 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 Pete Moerbeek, Executive Vice President and Chief Financial Officer.

Before we start, I'd like to remind everyone that statements made during today's call may contain certain forward-looking statements, including with regard 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 in this morning's press release, and our quarterly report on Form 10-Q for the period ended June 30, 2013, which we filed this morning, those detailed in the risk factors section and other portions of our annual report on form 10K for the period ended December 31, 2012, 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 our CEO, Brian Pratt.

Thank you, Kate. And thank all of you for joining us today, just a week after we marked our fifth anniversary as a public company. Primoris demonstrated a solid performance in the second quarter of our year, our total revenue of $445 million, an increase of 32% over last year. We earned a gross margin of 13.4% for the quarter, and saw backlog grow by nearly $100 million from last quarter. At quarter end, our backlog stands at an all-time high of $1.8 billion. This growth was distributed across our reporting segments with Company beginning to fire on all cylinders.

We saw revenue growth in our pipeline subsidiaries driven by not just seasonal ramp, but by growth in our end markets and better penetration of our sub markets. Our industrial subsidiaries demonstrated strong margin expansion, which helped us grow our Company gross profit by more than 35% over last year. Our heavy Civil division had another good quarter of new-work capture, again, making the largest contribution to our overall backlog growth. This broad expansion really demonstrates the benefits of how we built our Business, as our different end markets make us a balanced company, stronger than the sum of its parts.

We ended the quarter with $117 million in cash and equivalents. Although it's a slightly lower balance than you've seen in past quarters, it is a product of our additional workload, and the fact that we have made larger proportional investment in our equipment fleet from prior years. This investment reflects our bullishness in our end markets.

In the East segment, Cardinal Contract has continued to build on the momentum of the last several quarters. Bill McDevitt, having firmly established our presence in Texas, has seen his margins return to more traditional levels. His growth continues to see plentiful opportunity in both our traditional water and wastewater markets, along with a very significant opportunity and projects we are pursuing to help alleviate the drought-stricken municipalities and industries of West Texas.

Sprint revenue more than tripled last year's second-quarter revenue. The traditional lower margins of the first half of the year due to weather, competition and client budgeting are beginning to give way to the higher margins of the second half. Robert's team is busy from the Panhandle down to the Eagle Ford, where winning a mix of both new capital projects and MSA work have no doubt they will be strong contributors in the second half.

Saxon saw sequential revenue growth in the second quarter, but we suffered from poor execution, which produced lower-than-acceptable margins. We are actively working to address this, and I think we will see better results in the near term.

Our first-quarter acquisition, FSSI, had a strong second quarter. While this business unit was just purchased, because of its size, we view it more as a startup. It will be several quarters before we see earnings benefit here, which, due to the seasonal nature of their markets, will be heavily weighted towards the fourth and first quarters. We are very confident Toby's group will be a significant long-term contributor to Primoris.

James Industrial, under Conrad Bourg, had a strong quarter, and has an even stronger near- and intermediate-term outlook. In the first two quarters of the year, they enjoyed a significant revenue increase with commensurate margin results, mostly influenced by very demanding civil and mechanical project, working day and night shifts to meet a very tough schedule.

As all of you know, Louisiana and Texas --the refining and petro-chem industries are at the cusp of a dramatic boom. And we are working with traditional and new clients to meet the huge demand we are anticipating for our services. For the first time since circa 2008, we are experiencing clients seeking firm commitments for our services two and three years into the future. Danny Hester's heavy civil group continues the start up, ramp-up mode for the bulk of their l-35 Belton projects.

These large highway jobs can be delayed in start due to work area clearances, among other issues. When these issues are resolved, we receive our notice to proceed, and the yet-to-start projects will ramp up relatively slowly. That being said, we remain pleased with the way the jobs are shaping up.

In the meantime, we continue to book new heavy civil job awards, most significantly in Texas and Mississippi, which have more than offset continued weakness in the Louisiana market. Backlog on our heavy civil work now stands at over $1 billion, an all-time high.

I should note that we are pleased with the overall composition and gross margin of the work in our backlog. I also remain very optimistic about the opportunity for our heavy civil group will share related to the efforts to serve the energy process industries in the Gulf. Jonas Beatty's I&M group will either work directly with our clients, or team with other of our groups to perform civil works needed for the construction of our clients' facilities.

Our engineering segment continues to benefit from capture and execution of smaller projects. Randy Kessler, while winning enough solo work to maintain a reasonable backlog, continues to explore ways to join efforts with our industrial subsidiaries to offer more complete EPC packages to our clients. We are confident we will see substantial results from this collaboration in the near future. We are also very confident OnQuest will win more of its share in the surge of work we are looking at around the Gulf of Mexico.

In the West, ARB industrial is nearing completion of its successful power project for NRG at El Segundo. Tim's margins continue to be very good, and during the quarter he announced over $80 million of new awards for his group. Most of his work is related to solar projects, which in general are smaller jobs that we will look at until the larger process and power jobs come along that we prefer. However, we continue to pursue these smaller opportunities, there appears to be a very, very significant pipeline of the larger projects in various stages of permitting and contracting maturity.

The larger scale, at least for us, West Coast power market continues to look exceptionally robust from late '14 on, but remains a bit laggard in the near term. This market will be even more attractive than we had previously discussed, as the state will need to replace generating capacity lost from the shuttering of the San Onofre nuclear power generating station -- wow. Work for Scott's ARB underground group in northern California has been a little lighter than expected. Several of our clients were slow to get started this year.

We continue to expect a strong, full year from our utility clients, both with PSIP Capital and ongoing maintenance work. The slow start will mean just a more frantic finish to the year. PSIP work in Southern California has slowed in '13 as we anticipated. It is expected to expand significantly in '14, and even more so in '15. The balance of our underground clients' capital and maintenance workload for the same area looks to be close to what we would consider a normal year.

Jay Osborn's Q3C had a solid second quarter after the challenging weather of the first quarter put a damper on our margins. As I've stated before, Q3C is based in Little Canada, Minnesota -- no explanation required. The balance of the year for Q3 looks very promising, as Jason Osborn in Denver, and [Mike Russell] in Little Canada scramble to jam a year's worth of work into seven or eight months. This is a company that joined us at the end of last year, and I'm very pleased to have them part of the team.

Also in the West segment, Rockford has been doing a lot of smaller pipelines for Williams in the Marcellus, and we built a strong working relationship with them. Nurturing this partnership assisted us in winning the larger 50-Mile project for them in early June. As you know, we put a lot of emphasis on client relations, and success in winning and executing projects like this is in a good part depending on these relations. Rockford has been working on several other builds in Pennsylvania, West Virginia, and of course, the Atex pipeline in Ohio.

As you may have noticed, well at least one analyst did, it rained. And it rained a lot in Ohio second quarter. However, our work is going fine considering the weather, and is only a little bit behind schedule, as some of the work simply just can't be performed in the rain. I do want to take this opportunity to personally thank Mickey and Dickey Langston and their crews for working through some pretty tough conditions and still getting the job done. You and your guys make us proud.

Frank Welch and Josh Ramsey are still busy cranking out bids for their work to be built the remainder of the year. We are pleased with the year they are having, and their near- and intermediate-term prospects. Overall for Q2, some of our guys saw revenue growth, some saw improved margins, and others grew their backlog. Some went two for three, others three for three, but all the groups have very promising outlooks.

Now I'd like to turn the call over to Pete so he can share more details with you about our numbers. Pete?

Thanks, Brian. Thanks all of you for joining us on the call today. We filed our Form 10-Q this morning. While I will touch on some key items regarding our financial statements and backlog, I will leave it to you to read the Q for the finer details.

We ended the second quarter with a tangible net worth of over $190 million, a $38-million increase over the past 18 months. This is more impressive when considering that during those 18 months we acquired five companies -- Sprint, Silva, Saxon, Q3C and FSSI, which added $52 million to our goodwill and intangible assets. We have structured these acquisitions with potential earn-out payments, and in the second quarter of 2013 we expensed $382,000 for contingent consideration, and for the remainder of 2013 we expect to expense an additional $1.8 million.

During the second quarter, we also recorded $1.9 million for amortization of intangible assets, and we expect to record additional intangible amortization of $3.7 million during the rest of 2013. While it's nice not to have to do the accounting for an acquisition for the first time in the past six quarters, I can assure you that we remain very active and in the market for continuing growth through acquisitions. In the quarter, we did continue to make investments in our growth, only they're characterized as capital expenditures. Since the start of this year, we've increased our gross property and equipment by investment of $52.2 million, reduced by dispositions of $5.6 million. The resulting net of $46.6 million is nearly twice our combined depreciation and amortization of $23.6 million for the six-month period.

While we've continued purchasing side booms and other equipment for our large capital underground business, the most significant investment has been $22.3 million at Q3C, primarily for construction equipment. The additional equipment has allowed Q3C to grow its business to our -- even with slow weather-related start to the second quarter, Q3C's quarterly revenues of $40.7 million are more than 40% of what their revenues were for all of 2012. Most of the CapEx additions will be depreciated over an average of 4.5 to 5 years. We believe that there is greater value in owning equipment rather than renting it, especially when there's sufficient end-market demand to keep it working. We do expect that with the front-half loading of capital expenditures, we will spend closer to our depreciation and amortization in the second half of 2013.

Our cash balance at quarter end was $113.8 million. We had $174.4 million in total debt, and our blended interest rate of the debt was 2.7%. In late July, we drew down the remaining $25 million from our senior secured note shelf agreement at a fixed rate of 3.85%. If we were to need additional cash, we have almost $70 million of borrowing capacity remaining under our current line of credit. And there's the ability to add an incremental $50 million to that line, if we choose.

Turning to highlights from the income statement, we earned $0.30 per share in the second quarter compared to $0.23 per share in the second quarter of 2012. Revenue in the quarter grew 32% to $455 million, and gross profit margin expanded from 13.0% to 13.4%. The second quarter historically marks the start of a reversal from winter seasonal effects on our business, and this quarter was no different. What was different was not just the regular seasonal upswing, but the strong year-over-year growth at both Rockford and ARB Industrial.

Rockford benefited from an upswing in activity level throughout Pennsylvania, Ohio and West Virginia, while ARB Industrial saw margins boosted by the approaching completion of a major power plant. This type of margin boost at the tail end of a project is a reflection of the conservative nature of our accounting. For most projects, construction risks remain until the end of the work. Once such area of risk is liquidated damages. While we may be hopeful that we are ahead of schedule, it is only toward the end of a project that we'd reduce any contingencies associated with LDs.

Our largest customer in the quarter was a large gas pipeline company, which represented 8.2% of our revenues, or $36.5 million. We did not have a material contribution to revenue for the same customer in the 2012 second quarter. Northern California utility represented 7.6% of our second-quarter revenue, or $33.8 million, compared to the second quarter of 2012 when the same customer generated $40.8 million in revenue. The cost of [Bruesman] and ramping up with its new alliance partners, and we do not expect a decline in annual revenue.

The past few quarters I've given you our estimated end-market breakdown in the quarterly call. That information is now available at the start of the MD&A section of the queue. SG&A in the quarter increased by $8.2 million, with around $4.2 million from the acquired companies, and the remaining $4 million primarily from increased compensation and compensation-related expenses.

At 6.3% for the quarter, our operating margin is 200 basis points better than the first quarter of this year, and 20 basis points better than the second quarter of 2012. The effective tax rate for income attributable to Primoris was 39.0% for the first six months of 2013, a 0.5% increase over first half of 2012, with the increase primarily from the variability of estimated non-deductible per diem expenses. We anticipate that the effective tax rate for the rest of 2013 will be at 39% for income attributable to Primoris.

Finally, we are continuing to improve our backlog calculation and presentation method. As I said last quarter, it seems that there are as many different approaches to backlog as there are companies in our industry. When we analyze our revenue since the start of 2012, we found that MSA revenues have been between 24% and 29% of quarterly revenues. While MSAs do not guarantee a level of work excluding more than a quarter of anticipated revenues doesn't make a lot of sense. Using the old calculation for backlog, that is firm signed contract with specifically identified revenues, brought us to a backlog level of almost $1.4 billion at the end of the quarter. Adding a net number of approximately $420 million of four quarters' estimated MSA revenue brings us to our $1.8 billion backlog that we announced.

By segment, backlog is as follows. $109.1 million backlog in the East segment, $690 million in the West, and $22 million in engineering. We expect to recognize those revenues over the next four quarters -- 50% of the East backlog, 98% of the West backlog, and 100% of the engineering segment backlog. Please remember that even under the new calculation, certain contracts such as time and equipment, time and materials, and cost reimbursable plus fee contracts are not included in our backlog number.

With that, I'll hand the call over to the operator for your questions.

Thank you. We will now be conducting a question-and-answer session.

(Operator Instructions)

One moment please while we pull for questions. Our first question comes from Lee Jagoda with CJS Securities.

Good morning and congratulations on another good quarter.

Hey, Jagoda.

So on that note. [laughter] What was the revenue for Beltman Q2 and how should we expect it to trend in the next couple quarters?

I think we announced that are TxDOT revenues were up. And that is not just Beltman, that's all the rest of it. But TxDOT revenues sequentially went from $26 million to $35 million. And I think we will see some continued trending up over that -- of that over the rest of the year.

What's the seasonality in there?

You're still going to have some impact of weather in the fourth -- end of the fourth quarter and start of the first, but because is Texas, not going to have quite the same seasonality as you do in Little Canada, Minnesota.

Okay, and then looking at the margins in the West, can you discuss if there were any meaningful contingencies, either positively or negatively, that impacted the margin in Q2?

The answer to that is yes. As we said in the queue link, we are starting to see the benefit of the large projects that many of you got to see in El Segundo. At the end of the quarter we are still working on the project. We will work on the project some probably through the rest of this year. But, for example, LDs is one thing that we no longer have to worry about. So yes, you saw some improvement in margin related to the end of that very large project.

Okay. And then one more, and I'll hop back in queue. Brian, can you talk a little bit more about the potential opportunities for James industrial in terms of the project pipeline and potential timing? You know, the timing of potential awards. And then maybe talk a little bit more about the development agreement in West Texas? -- For water?

Okay. The James Industrial guys are at the cusp of being ready to announce a couple of fairly large projects. One's very prominent and one isn't as prominent. How quickly that comes -- I'm talking in the $100 millions kind of category. How quickly that comes is kind of dependent on engineering. Engineering's the first bottleneck we have to get past and then procurement. The good news on the projects that we've got -- we think we have MOUs ready to execute on -- it's civil and concrete. So procurement isn't a big a problem as it would be if it were an installation of equipment or piping or something like that with exotics.

We think we will start to see some real benefit of this stuff fourth quarter, although Conrad's plenty busy right now. We think we are going to be at a full dead run by first quarter of next year. This is just up there in Louisiana. We hired a new guy down in Texas, and Jim came on board. He's really going to run that group. And I look for the Houston work to really improve under Mr. Hendry's direction. He's a longtime guy. He has a long history down there. We are really happy to have him on board. So, I think you'll see pretty much we will be in full swing on most of these projects by first quarter of next year.

As far as the work in West Texas, it is really not ready to disclose yet, Lee. We are working with a guy that's really been quite successful in getting in the doors and getting some preliminary agreements executed. But it is really too early to discuss the details on that yet. But it could be very, very significant for us. And over about a three- or four- year period.

Great thanks very much

You bet

Thank you our next question comes from Adam Thalhimer with BB&T capital markets please proceed

Good morning everybody, nice quarter.

Hey Adam thanks

I wanted to ask some questions about margins for the back half of the year. Back half of 2012 gross margins averaged about 12%. Do you feel like you can keep margins flattish year-over-year in the back half?

Well, we are hoping they improve. I won't mention his name, but you got kind of a Goldilocks there among you analysts that it's either too cold or too hot or too hard or too soft. We are pretty conservative on how we recognize margins. And when you had the ever loving crap beat out of you by the weather for a quarter or two, you're naturally conservative to begin with on how you reflect what you think you might earn. Particularly on the pipeline work up in the Northeast. We think there's some real upside in those jobs. But like I say, after four or five months of rain every other day, we are pretty reticent to start taking that to the bottom line. You know that's just our nature anyway so you can imagine what it's like after the whipping we've been taking up there.

I think that guys have done a remarkable job of controlling our costs and dealing with the issues and staying relatively on schedule, a tiny bit behind. But, you know, every job we have for Rockford is literally within a two mile -- two hour driving radius. When we get weather, we get weather. I would hope that the margins would improve significantly through the year. They typically do for us.

Okay and then is there any El Segundo--you said you're working on job--you'll be working on a job in Q3 and Q4. Can you release additional profit as we move through the year?

Well we are getting back some pretty good -- getting by some pretty good milestones. I mean we they basically power plants been accepted, it's making electrons. The utilities accepted the condition of the power plant. That was a pretty significant milestone. We just got by that about a week ago. In fact, that reminds me I'm supposed to write some nice emails to the guys, because they really did a fabulous job on that plant. So, hopefully there'll be some more milestones that can release risk and release -- we can release some contingency into margin.

Okay. And then, Brian, what are your thoughts broadly speaking on the pipeline cycle. I know there's some fear that crude by rail was going to cause some pipelines to be postponed or canceled. And where do you feel like we are in the cycle so to speak?

Well, the work has gotten smaller. A couple years ago it was all real big diameter pipe and you were laying a lot of big gas lines. Now, the work is more centered on the liquids and the extracts from the wet side of the gas stream. So the pipe is smaller. They are still as long. There's always going to be need for rail, particularly into small markets like California. They basically -- their crude production is dropping dramatically.

And we were working on projects a couple years ago, one for planes and one for a group that we are involved with for terminal for tankers to bring in more from overseas. Well we are producing so much in this country and we are awash in that product in that oil and in the ethane and the propane and the byproducts of the gas, that you know there's no need to import oil to the West Coast. Particularly with the Bakken because it's light and sweet and they need that on the West Coast to blend with the local California production.

So their will always be a need for rail there, because there's never going to be enough need. I say never, there currently -- I don't see enough need for a big pipeline in there. Apparently the owners didn't see that and the refiners didn't see that need either, because Kinder Morgan couldn't fulfill their open season on their pipeline proposed to go out there. I don't look at rail as a meaningful threat to the Pipeline business. Pipeline is still drastically lower in cost than shipping by rail. And you look at the amount of time that that crude is on rail cars, versus a pipeline. And after it gets to a terminal someplace, then its got to go through a pipeline to get to a refinery or some other use.

I just don't see ultimately were rail is a huge threat. It never has been other than the original days before they built pipelines out of wood. But it will always be a factor. We participate in a lot of that. Some of the work we are doing right now, we were doing a little work for Kinder on a rail terminal down in Houston. So, we do a lot of work on the rail side of the it, too.

But I think pipelines -- I think the business -- you know, we bought 30 side booms, 36 side booms over the last 12 months for smaller diameter pipe. There were 572 side booms that are about $450,000 bucks apiece. I wouldn't have made that investment had I not really been bullish on where the industry is going to go. It's not going to be -- there is still going to be the1000 mile pipeline projects. But a lot of what we're seeing is in the flow lines in the intermediate projects.

But Adam, I've been to almost every producing area in this country in the last two months. In every area from the Bakken to West Texas to the Eagle Ford. There is one common thing. The producers are awash in oil and gas, and they can't get it to market. You go to Cushing, Cushing is up to their eyebrows in oil. They can't get it the market and the market isn't there to absorb it. So a lot of this is going to be predicated on the big industrial and petro-chem build in the Gulf. And then the shorter pipeline runs like out of West Texas into the Gulf to get that crude market. We have got to build some refineries and some chemical plants to use this stuff. It's a high-quality problem, but we've got to get the stuff built.

Well, it seems like it's happening. You have had good presence in the Gulf with James. I saw Worley Parsons got selected to work on a huge chemical facility in Southwest Louisiana. And you guys worked for Worley on the El Segundo job. So that means like you have the relationships and the work is coming

Well, it certainly is. We are trading one set of problems for another. I mean the problems you have when you don't have work are difficult problems. The problems when you do have work are different, but they are a lot more fun to deal with, of course, but they are different kind of problems. We are looking forward to dealing with different problems at this point.

But you know the challenge is going to be picking the right plant, picking the right project. Getting the margin that this stuff deserves, because we are -- our industry is going to be in short supply. And I think it's going to reflect in higher margins and more demanding clients and tougher schedules and working people that don't know how to work safe that don't have your culture. So it's very exciting, but I can't tell you how much work it's going to be -- hard work is going to be for our managers. They've done it before. I've been through four or five of these cycles and our guys are up for it.

Okay, thanks a bunch

You bet.

Thank you our next question comes from John Rogers with DA Davidson.

Hi, good morning.

Good morning, John

Couple of things. First of all, Brian you were talking about the pipeline market. In terms of your schedule of work right now and projects, does it line up pretty well? I mean, have you got gaps or is it pretty smooth now out in '14? With all the different operations?

You mean on just the pipeline side?

Well yes, let's start on the pipeline. If there's others I'd love to hear about it.

Well, you know the piece at work and the safety work out in California is going to be strong and continued to build. One of the utilities out there is kind of shifting gears. They hired a program manager. They are getting their feet on the ground. But '14 I understand is going to be frantic for them. They've really got to go to a big spin. That's in Southern California. Northern California, they're still ramping up. Still feeling their way along. They've had a massive change in management there. I mean everybody there has only been there a year or two at most. So California looks to continue to be strong.

You've got competition out there obviously. One of them' s actually listening in on the call today. (laughter) You've got-- Q3 is going to be, I think a (expletive) and elbows for the next three or four years. They've got huge build outs their clients want to participate in. And I think they are going to be very, very busy. And Jay and his guys are very confident. I am really, really proud to have them part of the team. They did about 100 million plus or minus last year. They are on a run rate to be 50% greater than that this year. I think they can continue to grow.

You know, spread down in the Southeast, I think there in the heart of it. You know we -- they are not typically real big capital project guys. They have those abilities, but they're doing more small change outs and small relocations. Stuff like that. We are kind of mustering them up to do the bigger capital jobs. Trying to do that organically instead of buying somebody. But I think they're volume will continue to grow. I mean Robert's -- that guys is a journeyman. He knows what he is doing and he will get us to where we want to go down there.

So, that leaves Rockford, and again, Rockford is large capital work, and every year in that business, historically, at the end of the year you got no backlog. I think we are doing a little better than that. We've got clients like Williams that are going to continue their builds and I think we are going to be able to continue to be one of their favored contractors because of the way we've been able to execute and save them money up there. And we've got new friends like Enterprise that have got -- they've got big builds coming. And I think they're pretty pleased with us the fact that we've been able to motor through this muddy winter, wet winter we've had and still reasonably stay within a coin throw of finishing on time.

So I look for pipeline. Do we have backlog that's continuous through '15 or '16? Never have had that far out. But you know, Rockford's up to their ruby run rate this year. Q3 is an adder, but they are just doing a fabulous job, although you know, they go pretty dark in the first quarter and half or so of the year. California's going to pump hard, so I'm pretty pleased where that whole business is.

Okay.

And we haven't talked about the amount of pipe work that is maybe available out in West Texas to us if the stars all align on these projects out there.

Okay. You mentioned very briefly, I think in your opening remarks, Saxon was under performed in the quarter. What was the issue there? Or did I miss hear that?

Yes, they under performed. They have some work -- tough client. You know, when you build these projects, typically the stuff comes in the way the client represents it. And instead of 1 piece, the equipment all came in in 1000 pieces, and we had to assemble it. Typically you try and get a client to acknowledge this and do what he's supposed to do. Some of them will do that, some of them won't.

Your choice is to be kind of crappy about it and dig your heels in and say no, we're stopping. Or work with a guy, work through it and try to resolve it as we go. Traditionally, we've been pretty conservative in this. We dig our heels in pretty hard and try to settle this stuff as we go. They didn't do that. So now we're having to fight that battle. But the way we booked this stuff and the way we recognize these profits we are conservative in doing that. So I'm not going to recognize something I'm not relatively positive we are going to be able to achieve.

That these were for what types of projects?

This one is gas-related.

Okay

You know, they are good guys. They struggle a little bit. They are smaller. They don't have the strongest systems. They are still getting to know our guys. They are still getting to know our legal staff and this may be one we pull the attorneys out on. Who knows. It's not a big issue. It's under $2 million. It's barely material. But obviously it's more material for them than it is for Primoris. (multiple speakers)

There's no lingering issues here than?

Not really. I mean, obviously, if you pull the attorneys out you have extended costs and things. Those guys aren't cheap any more. They never were I guess.

Okay. Lastly, in terms of acquisitions, Pete mentioned you're active in the market. Where do you see opportunities or needs for capacity skill sets to add and are there prospects available to you?

Yes, we got a couple pages of prospects, whether they're good or not we are kind of ferreting through that. We are looking at either -- as I said on a previous call, I'm not trying to get into--I'm not trying to buy a big engineering or turnaround company in the Gulf because that market is pretty well known. That's been reflected in the cost of buying somebody down there. These prices have gotten -- you know, EME bought a company down there. In my opinion they paid a lot of money. So did Zachary, a private company. Both the companies were in the same market. Then Aegion bought a company down in California. A guy we see every now and then. They're more into refinery turn around stuff, which we don't do a lot of.

But those multiples are really high. And they're higher than those public companies that were buying them. So when you could buy your stock back, which I'm not inclined to do. But when you can buy your stock back for cheaper than you can buy a company on a multiple basis I'm not sure you're doing the right thing unless you see a huge upside.

So we're looking at the next step. We will look at somebody to augment the markets we are in, but I'm more inclined to look at where the next markets going to be. And that's not easily found. But the petro-chem market, hell everybody knows that's there. So prices are higher. It's pretty picked over. You've got companies like Repcom that E&E bought. I got a kick out of one of the questions the guy asked. He says--why are they for sale now? And I thought, my God they have been for sale for five years. So, and they couldn't sell it for a number of years. Well, now it sells because it's a hot market.

But you know we're looking at places where we can get a new footprint. We are still not that active in the Bakken. We've done a lot of work in the Williston. I spent some time up there. Which is an amazing, amazing story. You got kids that were driving fence posts in the ground five years ago and now are multi millionaires. It is truly the American dream. But it's a tough place to get into, because everybody's making so much money and everybody thinks they're made of gold. We're looking at new footprints. We are looking at new opportunities. We are looking at some technology stuff. You know, engineering companies that actually have great processing patents and know how. Things are a little bit different for us.

Okay, we will leave it there. Thank you, a nice quarter.

Thanks

Our next question comes from Dan Mannes with Avondale Partners

Hi, good morning, everyone.

Hi, Goldilocks

Goldilocks? (laughter) We will take that one off line. A couple of follow up questions here. First, you've been talking about the downstream market and maybe a follow up to some prior questions. We're obviously seeing the EPCs getting led on some of these big projects. Can you just talk about your process in terms of getting involved with sort of the EPC providers? Do you generally have to bid to them? Do you partner up front? How does that play out and how does that play into your expected timing on your go-forwards?

Well, it's cats and dogs, a lot of it. A lot of the clients, since we do their smaller capital work want to see us get included in the bigger project. So we have the clients require us to be part of their projects. That's one way we squeezed into a deal.

Another way is one of our engineering partners had a very successful project in the Southeast and it was well publicized how successful it was and they want to replicate that. We were part of that original project on a refinery expansion. And then you have general shortage of manpower. So a lot of the big engineering firms have been actually asking us to travel around with them and assure their clients that if they award the work to them that we will provide the resources to do the risk work. The big EPC guys like to transfer risk to us little guys. You know and of course we like that too, because with more risk comes more profit.

But you have that and you have just--you know a lot of what we do is around the bigger projects. So you take a refinery build or refinery expansion or chemical plant expansion, it will need industrial gas. So we have alliances with Lendy and Air products and people at Mathieson and people like that. And we will build the facilities around these big plants. And you say well how big is that? That could be $100 million, $200 million on one of these air separation units or something like that.

So, and quite honestly, we like those markets better because we are not competing with our engineering partners, and its a little less competitive. Because it takes a longer resume, a better resume, to build an separation unit because of the exotic material that goes into it than it does a carbon steel refinery plant or something like that.

Got it. Two more quick ones. First, you mentioned the shutdown at San Onofre and the potential opportunity on the ARB industrial side. Two follow ups. On is, have you seen any inclination yet from CPC to start proving some of those legacy PBAs? And then two, do you see opportunities maybe in some other parts of your Business, whether it's underground or you know underground gas or maybe underground transmission, to help with that replacement?

Well, I'm going to do two and then one. You are not going to see a lot of greenfield gas-fired power plants in California. Most of what you are going to see is repowers. You can't -- I don't have enough lifetime left in me to try and work somebody through a permit on a greenfield basis to build a plant there.

And then your second question. We moved from California because I couldn't figure out what those guys were going to do. I mean the PUC is a difficult group to try and extrapolate from their past actions where they're going to go. They're hell bent for leather to get their electrons from renewables but they are just too intermittent. You've got that, you've got the one through law. We are active. Our guys are working hard right now generating proposals for big plants that are yet to be permitted.

And so we literally can't bid anymore work than we're bidding right now in California. And the unfortunate thing is some of it is the solar stuff. It's good work, other than the fact that our clients are a little bit screwed up and they're trying to deliver parts from Turkey and Spain and everywhere else, and you can't get them when you need him. It's really pretty good work. The margins are okay for us. But our guys couldn't bid anymore work than they currently are because of the amount of work that's going to get built in '14 and beyond. You know, San Onofre is 2000 mega watt. That's five plants the size of El Segundo, six plants the size of El Segundo. That's a huge opportunity. That's just that opportunity. That replacement.

But you have got all these technologies now and the owners, you know, they want us to price it all before they pick technology. Whether it be Siemens, or GE, or Mitsubishi. It's just a lot of work. But we're in the middle of it. We are one of the favored guys out there, if not the favored guy, and I've no doubt Tim is going to win at least his share of this power work that's coming down the pike. He's got a lot of other opportunities beyond that, which I don't want to get into, because some of it is confidential.

Okay and one last quick one just to follow up on the Pipe business, because it wouldn't be a call unless we talked about pipe. If you look out to '14, I know, obviously, you are a little bit more open just given the nature of contracting. But we've seen a lot of award activity, especially some longer-term award activity. How do you view industry capacity playing out for '14. And do you like the potential for pricing better next year than what you're able to pull this year?

I really do for probably different reasons than you might expect. We bought 36 of these 572 side booms. Caterpillar sold 300 of them. So the average guy, you talk to anybody, I know you know who the guys are. And you say-- okay, what's your capacity? And they say--well, I can stand so many spreads. Well, you know, if you look at that, if it takes on average say 50 side booms to muster a spread, that's 6 spreads. Well that's great. 6 more spreads our of maybe 40 to 50. Well, you would think that would be a lot more competition and price suppressing. But as I've said on many of these calls, you can run all the equipment in the world but if you don't have the right guys to run the work and drive the tractors you're in trouble, and you're not going to get your share.

And we have those guys. I mean our Rockford guys, our ARB guys, our Q3 guys, our Spread guys are the very best. And we have a lot of internal capacity, and we can be very aggressive and very competitive with those guys. Although a lot of the work seems to be going the reimbursable route, so I'm really bullish on where we are. Now will we do twice what we are going to do this year? No. We are running about as hard as we can run, but I look for some real margin expansion and maybe a little less rain next year.

We'll do all we can. Thanks.

Hey, thanks.

Thank you next question comes from Rich Wesolowski from Sidoti and Company.

Thank you, good morning.

Hey Rich.

The release lists Sprints revenue, but I am wondering if you have the company's profit relative to last year?

I don't think we usually get into that level of detail, Rich.

I ask only because it's on there for a few of the subsidiaries. But if you don't have it, you don't have it.

Yes I can dig while your talking.

Is it relative to last year?

Yes, in any event.

I'd say probably on par with last year. (multiple speakers)

First quarter, second quarter, it's right at the same level gross margin

Gross margin or profit, Pete?

Gross margin

Great Brian, you had mentioned a difficulty in getting into the NTPs for some of your building projects. And I'm wondering if that affects your ability later on to beat the bid margin out in having '14 and '15?

No, not really. Not unless if you got your whole team up and running and your waiting for your notice to proceed. Some of it is our doing. A lot of times the clients will want to release you a portion of the job. And of course that's great if they're willing to not start the clock. Because all these jobs have, by law have, liquidated damages with -- time-related liquidated damages. So the last thing you want to do is have them start the clock when you've only got a partial release, and then have them delay in the release of the rest of the job. And so you start looking to liquidated damages down the road. So we are pretty careful before we allow them to give us a partial notice to proceed.

Most of this work that we are doing in the Belton area--the bigger area has got discrete pockets of work because it's largely structures. Were doing elevated structure over the whole town of Belton and then the ramps related to that. So you could actually do quite a bit of work on a partial release. But the liquidated damages on a $250 million job are substantial. So, it hurts you a little on the front end possibly if you've got a crew standing around waiting to get started, but we don't typically gear those things up until we are a lot closer than we have been on some of these jobs.

Would you mind fleshing out the municipal water infrastructure opportunity in Texas over the next couple years?

I don't know. Pete keeps writing little messages and handing them to me. I'm not supposed to get into the details on that. It's very well publicized, the issues out there. And it's a bifurcated solution because the industrial users, the big processors need water for their processes and their workers need water to flush their toilets in their houses. So it's pretty symbiotic, because if you don't have jobs you don't need to flush your toilet because you won't be living there.

So the guy we are working with is well-financed. He's very successful developer. He was in a different industry of development, another utility kind of industry. And I've got a lot of confidence. We spent a lot of time with him and we have an agreement with the guy that if he gets it, we get it. And so every dollar of his build is our build. And he's got hard commitments from a couple of municipalities and industries and he's got soft commitments from a bunch more. That's about as far as I want to take it. It's a lot of pipe, a lot of -- a significant number of reverse-osmosis plants, because a lot of that water's pretty brackish out in that part of the state and some well field development.

Over the West, if I could. You spoke about the Southern California utility having recently hired engineering firm and have the hustle there. Integrity work in 2014--I was under the impression that you're big customer was behind the curve, and that the other utilities have already completed a lot of what the regulators are demanding. Is that not the case?

Well, the regulators are demanding a couple of things. In the Northern California area they're demanding a whole different set of criteria than the Southern California area, because of the incidences they've had up there. Their demands now are for some water testing, some hydro testing. A replacement of hundreds of miles of pipe. And then this process where they go through where they run the smart tools. And Dan you know about this, some of the other guys don't.

The second step is to put a program in place that ensures that this system will maintain its integrity. Now in Southern California, and in some of the oil guys in Northern California, because this just isn't utilities, this is anybody that puts a product through the pipe that has public safety issue here. So it's oil and gas guys. Most of those guys are entering phase II. And phase II will be where they run these smart tools and they begin this kind of scheduled program, this PSIP to ensure the long-term integrity of the system. Basically utilities don't get behind the curve again as they have in the past, at least that's the PUCs perception, not mine.

Sanfer and some of the other guys are entering phase II. And I think, and I'm speculating at this point and forgive me, but I think most of these utilities don't want to build a whole company to effectuate the PSIP program. They'd rather hire a program manager, a Jacobs or somebody like that to come in, set the program up, run it through a number of years and then just hand it over to utility so they're not reinventing the wheel. That's kind of where Sanfer and some of the other guys are. Phase II for them starts. Their kind of getting into a little bit this year. I think they are going to be a lot more aggressive next year and the following year, based on what they published in their rate case.

Appreciate your time. Best of luck the rest of the year.

Thanks.

Thank you our next question comes from Tahira Afzal, KeyBanc Capital Markets

Good morning folks.

Hi, Tahira.

Congratulations on the quarter.

Thank you

Most of my questions have been answered. In fact, many more than the ones I thought of. But I guess I'll ask you something very basic. You grew 15% organically. It seems you are more positive on the outlook for some of the pipeline integrity work in California. And you have more visibility on the industrial side, where I know you have a lot of surface capacity. So, is this a rate potentially that you feel you can now freely sort of perform organically as we going to 2014? Or are you going to continue to need some acquisitions to really see improvement like this going forward?

We are in our fifth year as a--sixth year as a public Company. We committed internally to satisfy the needs of the public shareholders. Which means we've committed to internally do the pain and suffering it takes to grow the Business in the high teens. We are way ahead of the curve. That's a good news. The bad news is as we get ahead of the curve you guys draw a new curve. So, we have to go even faster.

So, we are going to continue to be organic. Growth I think we've got two really fabulous years of organic growth. I don't see a huge need. But I hate to be a acquiring companies out of need, incidentally. But I don't see a huge need to satisfy our growth the next couple years through acquisition. Which is a nice problem. It's a nice place to be, because we can be pretty selective. We've got some cash. We've got some long-term financing we used to generate it. We've managed to do these acquisitions by maintaining our balance sheet. I think we have a very strong balance sheet for our weight class. And I think we will continue to look at acquisitions again. I think we may kind of launch into a new direction with something. That's where we're bent, although we are looking a lot a little tuck-in guys.

There's a need for a lot more capacity in the Gulf of Mexico, around the Gulf of Mexico, and I think we are looking at things that are synergistic to our current operations. We got a little turnaround guy there. We think Toby is going to be a good prospect in the future to grow. He needs a fairly sophisticated shop to support him, because a lot of what he does, what Jim Hendry is going to do what the groups of James, and Don Patrick and those guys, they deal with exotics, and they deal with difficult to work with materials. And it's much more suitable to do that in a shop than to try to do it in the field. So that's one area we are kind of looking.

Chris and I are still looking at acquisitions. It's probably a third of my time, other than the third I spent preparing for this call obviously. But, I see no reason we shouldn't. We are not at all pleased with some of the assimilation we've done with the groups that we have this last year. Assimilating a smaller company is almost as hard as assimilating a bigger company. And we are working hard to kind of remedy that and we will get there. We done this enough and we've got really, really good people. It will eventually get figured out the way we want to figure it out. But we are going to look at anything that fits our current business plan and anything that takes us to the next step. We are excited about what we see, although the multiples have expanded greatly. So it's tougher decision to look at buying somebody.

So that actually seems much more positive than I thought, to be honest. And squeezing in a last question from me, which is more along the lines of what you talked about earlier. You guys have been very good at identifying trends to a great degree before they happen. One of the ones you talked about in the past, Brian, is in regards to micro LNG. Incidentally, we saw Clean Energy get such an award, a $35 million award for micro LNG in China. Could you talk a bit about that opportunity here? Are you seeing anything here in the US yet that could materialize?

Yes, but it's a tiny bit early. I'm hoping to have an announcement there in the next 30 days or so. I was in--I spent a couple days in the Bakken a couple weeks ago and I've never seen so many flares in my life. One of the statistics that I read while I was up is that they are flaring $100 million of gas a month, at today's prices. And to be doing that, and generating the CO2 that goes along with that, is just a travesty. There's so much opportunity, and Clean Energy saw this years ago, whether they can capture a large portion of that market or not, who knows?

There's a lot of different technologies out there to exploit stranded gas and flared gas and this and that. But what it's going to take, it's going to take some commitment on the users' parts to fund the trucks that will use LNG. You've also got an opportunity. What eventually will compete with LNG is the gas-to-liquids business. And the technology isn't there yet, but I think it's maybe right behind it, three or four years behind it. That's actually some of the areas that we are looking acquisitively, to kind of get ahead of the market is to see where the opportunities are on micro-LNG, because even though it's kind of an old business, making the stuff cold to get it liquid is not new technology, although there are some pretty cool technologies out there that can reduce the cost in doing it.

But then the gas to liquids part of it is the next step in my opinion, and I'm pretty excited about where that technology will take the country. One of the things that I've noticed over the years that I firmly believe is that I think methane is going to be cheap for a long time. And it would be a shame if we didn't exploit that somehow.

Thanks a lot Brian, and I'll follow up more on that off line, as well. Thank you

Thanks, Tahira.

Thank you our next question comes from Jason Wangler with Wunderlich Securities.

Good morning. Dovetailed on that question, you were talking about the Williston and other areas were having so much oil and gas almost effectively stranded. Obviously, it takes sometime to permit and build the pipelines and everything. But what is the -- what do you see as the major like a slowdown right now? Or are we just going through a very long process? Is it the permitting, or is it the procurement of everything, or where are you seeing the ramp as we go out these next few years where there should be a lot of demand?

I look at this, it is mostly anecdotal for me. There's a lot smarter guys than me out there that hypothecate based on these facts. What I'm seeing is a rig count that's dropping. I'm seeing guys -- if you make liquid, if you make natural gas and it's wet, you're going to get ethane, you're going to get propane, you're going to get a lot of constituents. Well, if you don't have a market for that what do you do? And so it's a whole series of new issues that have come about and it's really kind of surprised the industry because it's only come about in the last three or four years. And so if you're producing gas up in the Marcellus and you don't have fractionation plant up there to strip the liquids, or even if you do, what are you going to do with the liquids? Because if you make ethane, which is now cheaper than methane still, what you do with that if you can't make it into poly?

So you've got a whole misallocation or something. I don't know how you'd refer to it. But a huge dynamics that are changing in the market and we're structurally not able to accommodate it with the way we process crude and gas. So that's why you have $50 billion plus of projects in Louisiana that need to get built and probably twice that in Texas. If it was just making gasoline out of oil, we could say, well were going to use domestic oil instead of foreign oil. That's kind of easy. But then you have to do all the build out to take it from the mid continent to the refineries instead of off of a boat. That's what we've gone through the last couple years.

But this gas -- natural gas market and that industry is really topsy-turvy right now. And since we don't have an energy policy in this country, that exacerbates it. So you've got everybody else, everybody in the world in the business trying to find their own solutions to this opportunity.

Sure, so the way to look at it is you guys being set up pretty well for it. It's not just going to be simply build oil pipeline here, build gas line here. It's also the changing streams and what we have coming out of them and really getting your arms and hands around where to go with that stuff. Where you can take it to in order to actually make a return or even get it processed. So it's a twofold situation. We need not only the old stuff, but we need something new, as well.

Yes we do. Who would've ever thought ethane would be cheaper than methane. I mean, I remember one guy when I was going to school he said we're going to look back at the last 60 years and say shame on us for burning ethane instead of making it into plastics and doing the things that have higher value. So, I think we are there. You've got actually people prior to Obama lifting the moratorium on natural gas exportation or LNG exportation. They were looking at exporting ethane and burning ethane, because it was cheaper than methane and there wasn't a limitation on exporting it.

That's just a shame because of the value it has in the chemical industry. I think this all came about in the last three years. These things are not -- I mean, these are capital expenditures. I mean Sasol, their projects, $7 billion or $8 billion. You don't make that decision lightly. You don't finance it easily, and you don't build it quickly. So when you got that much changing as quickly as it's changed, it's really changed a lot of people's decision processes. And I just thank God I don't have to decide on this stuff. I just have to build it.

I agree. It sounds like it will be fun. I appreciate your time.

You bet. And thanks for picking us up too, Jason.

My pleasure.

Thank you. I'll turn the floor back over to Brian Pratt for closing comments.

Well in closing, I'd like to expand a little bit on how I opened the call. We just ended our 67th year as a Company, my 39th year as an employee, my 30th year as CEO, and our 5th year as a public Company. Incidentally, my third month as an expecting grandfather.

Our five years as a public Company has been, to say the least, interesting. Each year has been filled with a lot of hard work and effort for all of us, but no more work than the previous 34 years. The hard work has been worthwhile because of the quality of the people with which we have the privilege of working, and the confidence our shareholders have placed in us. I'd like to sincerely thank both of you. Goodbye.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.