Primoris Services Corporation (PRIM) Q4 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Primoris Services Corporation 2015 Full-Year and Fourth Quarter Financial Results. 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. Thank you. You may begin.

Thank you, Adam. Good morning, everyone and thank you for joining us today. Our speakers for today will be David King, President and Chief Executive Officer of Primoris; Peter Moerbeek, Executive Vice President and Chief Financial Officer. Before I go into the Safe Harbor language, I would like to let you know that we had a typographical error in this morning’s press release. Therefore, the release was re-issued this morning just about 10 minutes ago. Now going into Safe Harbor, I would 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 in this morning’s press release and those detailed in the Risk Factors section and other portions in our Annual Report on Form 10-K for the period ending December 31, 2015, which we anticipate filing this coming Monday, February 29. So you can also refer to our Form 10-K for the period ending December 31, 2014, our Quarterly Reports of Form 10-Q 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. And now I would like to turn the call over to our CEO, David King.

Good morning, everyone. Thank you for joining us this morning. We’re pleased with our solid fourth quarter results, and I believe we’re going to enter into 2016 from a position of strength. Our Q4 2015 results improved over Q4 2014, and I’ll let Pete give you some details, but I did want to highlight a few items. As you’re aware, our cash balance in 2015 was lower during most of the year than is normal for us. We focused our efforts on not just cash collections, but also cash terms in our contracts, and I’m pleased to report, we ended the year with a strong cash balance of $161 million. We achieved this while awaiting resolution on two collection issues, which we have a combined $51 million receivable. Those two issues remain in dispute resolution and while there are no guarantees, we believe is likely that one will be resolved this calendar year. There were lots of headlines this year about energy prices and fears of large projects being canceled, but I don’t believe there was enough attention paid to MSA work, especially ours. MSA revenues are not splashy, headline-grabbing news but they are steady dependable revenues on which Primoris has built a solid base of business with the good margin performance. Our MSA work is for very creditworthy companies with which we have built long-standing working relationships. We grew our MSA revenues by 12.6% to $565 million in 2015, almost 30% of our total revenues. While majority of our MSAs are for distribution work with utilities, we have been expanding our MSA presence into additional markets such as the industrial maintenance services MSA we announced in December. MSA work provides Primoris with a solid book of business, it helps move out the inherent lumpiness in our larger project awards and I believe its significant factor in why Primoris’ continues to have steady profitability. I believe this is a distinct differentiator for Primoris in our marketplace. The growth in our MSA work helped our total backlog grow to $2.1 billion, a 5% year-over-year increase even without some of the significant project announcements we had hoped to finalize in the fourth quarter. Those awards have not gone away. It’s just taking longer than anticipated to finalize the terms. That being said, there remains several opportunities that could add material to our backlog early in 2016. The prospect pipeline of new awards for Primoris is as large as ever with billions of dollars of new work set to be awarded in the coming years, especially in the pipeline, power and industrial sectors of the oil, gas and chemical markets. As more of our existing and new clients realize the expanded services we offer, our opportunity funnel continues to grow. We are confident that Primoris will get our fair share of the work as we continue building and upgrading America’s infrastructure. This is a good place for me to start talking about our operating units because one area where we see the opportunity for significant backlog expansion is in the pipeline market with our Rockford Group. The large California project we announced last year is still scheduled to start this June. We’ve begun setting up offices on location, giving people in place, so that we can hit the ground running. We have another large project anticipated to start at roughly the same time. This award is not in our backlog yet as we’re awaiting the final release, but we have negotiated terms and conditions and recently met with the customer’s executive management team who expect the late summer start date. It is worth noting that both of these projects are bringing natural gas down along the East Coast for power generation. So we’re working for utilities, not the MLPs that are recently getting all the bad press. The financing for these projects have not been fundamentally altered by the decline in the energy prices. Each of these clients are very solid financially, maintain investment-grade status and are well respected in the marketplace. Remember, one of our key focus points in backlog growth and business development is the selection of the right client. We’ve also picked up some smaller work in 2016 which should help Rockford’s revenue in the second quarter because these larger projects don’t kick-off until mid-year. In addition to the projects mentioned, Rockford has some very impressive opportunities ahead of them to grow their business well into 2017 and 2018. I would like to give a special recognition to Rockford’s President Frank Welch, who this week was elected President of the Pipeline Contractors Association. It was a big honor for him and very well deserved plus it was just a lot of fun and honor for me to see Frank in a tuxedo instead of a blue jeans giving his acceptance speech. Continuing with the West segment, ARB Structures had a challenging quarter as I wrapped up an old heritage project that just didn’t finish with the performance we had hoped. However, Mark Thurman and his group enters 2016 with this project behind them and with $62 million in new awards we announced for them last year, they’re set for a good year this year. Tim Healy’s ARB Industrial Group is busy with power work with the Pasadena plant on schedule for completion later this summer. They have begun demolition and site preparation work on the Carlsbad power project and recently kicked off the engineering phase of ExxonMobil cogen facility in Southern California. In addition to their power work, ARB Industrial signed the MSA I mentioned earlier to provide maintenance services for a major California E&P and are pursuing additional work with refineries and utility station work Tim’s growth opportunities look good for 2016 and 2017. Q3C’s utility and distribution work continues to be a powerhouse for us. The weather in the fourth quarter cooperated somewhat in our favor and Jason Osborn’s team was able to work deeper into the winter than normal. Q3C is continuing to add new customers and increasing their scope and existing customers and their MSA work should continue on pace into 2016. Jason Osborn is doing a great job for us as President of this organization, freeing up Jay Osborn, the past Q3C President, to focus his efforts in market growth for Primoris’ utilities and distribution worldwide. I would also like to mention that both of these gentlemen were recently highlighted in an article by the North American Oil & Gas Pipelines about utilities and distribution growth in the United States. ARB Underground has also had and continues to add substantial MSA work. This work helped them deliver strong results, both on revenues and margin in the fourth quarter. For the year as a whole, delayed rulings from the CPUC cost some utilities to conserve cash and delay some projects into 2016. While Scott Summers’ group will see a seasonal slowdown in the first quarter, we feel the delays of 2015 give us more insight into 2016 and that the first half of the year should be stronger than 2015’s first half. There is sizable opportunities for new award, including utility work that would involve both ARB Underground and ARB Industrial. California utilities continue their pipeline safety enhancement programs and their ramp-up for capital projects. I would also like to congratulate ARB on the set on the award from Sempra for Contractor of the Year for 2015. This is a second time ARB has won this safety award in the last five years and it’s a testament to our safety culture. The Energy segment results were a mixed bag with some of our business units not performing up to our expectations. Specifically, there were three areas where we struggled in the fourth quarter. Jim Henry and the Primoris Energy Services Group had some headwinds in two of their groups. The first was our open shop power work with Saxon. A combination of lack of opportunities and aggressive competition caused us to reevaluate our strategy for this group. We feel we’ve addressed the issues and redirected the group toward projects and markets where we believe we can be more competitive without compromising our margins. The second area that contributed to the decline in the Energy segment revenue and profits was a Primoris pipeline and maintenance group’s open shop distribution work in the East Coast. This was a market we began to explore in 2014, but we did not get the benefits of scale needed to make the type of margins expected. And so in 2015, we shifted our focus away from this market. However, overall, the Primoris pipeline and maintenance group, which we normally knew it as Sprint continuing to improve right through years end, [indiscernible] work remained strong and even through the holidays, every maintenance office stayed busy with very little standby. In 2015, this group faced excessive competition moving into the pipeline construction market from the various shale zones, but we’re beginning to see things turnaround. This month, we’ve announced $38 million in new capital projects and we’ve identified several other opportunities that could lead to growth in 2016. Robert Grimes has recently moved [Patrick McGarry] as Vice President of Primoris’ pipeline and I want to congratulate on him on this well-deserved promotion. The last area within the Energy segment that caused some difficulty was our OnQuest Group. Early in the year, we received a cancellation notice on a heater award that would have been completed in the fourth quarter, which led to a year-over-year decline in revenue for OnQuest. While we are never pleased when a project is canceled, the silver lining in this case was that we had negotiated a strong contract that required a significant cancellation fee and while OnQuest’s gross profit declined in absolute terms, their profit as a percentage of revenues actually increased. OnQuest LNG work, however, is on track. They completed one micro plant in 2015 and a second plant came online just this last month. This recent plant that came online became the first U.S. entity to export LNG from the United States, an important milestone not only for our client, but also for our OnQuest and James Industrial groups, which jointly performed the EPC for the plant. Randy Kessler’s team continues to pursue a number of LNG plant opportunities that I’ve mentioned previously that are in the FEED phases for both 2016 and 2017, some of which are significantly larger in size than 100,000 gallon per day plants we built in 2015. In addition to its LNG work, OnQuest currently has a number of ongoing furnace projects in the execution stage. However, much of our target process for the furnace projects is found in the Energy sector, which has been depending on oil price market factors. To address the potential slowdown in new furnace projects, we focused our sales team toward environmentally driven projects, as well as a relatively stable refinery maintenance and turnaround budgets. Cardinal Mechanical, which focuses on box-style tunneling in Texas continues to have outstanding performance. The margin Don Patrick has been able to consistently achieve are exceptional. In fact, I was so impressed with his results and management that in the fourth quarter I promoted Don as President of our Cardinal Group and he now oversees both Cardinal Mechanical and Cardinal Contractors, our Water Group in the East segment. The Electrical Construction company they’ve acquired last year, Aevenia, continues to deal with the impact of the slowdown in the Bakken oil field in Western Dakota, but Mike Hanson’s team is performing solidly on the work they do have. We expect 2016 to be a turnaround year for this group because of their focus last year to penetrate markets and work outside the Bakken. James Industrial also had a good fourth quarter. The overall market along the Gulf Coast continues to remain active with many opportunities in the industrial sector, but some uncertainties persist about which projects will or will not go forward. The Sasol project is still the largest current project for Conrad Bourg and his team and as the work ramped up in the fourth quarter, we continued to expand our concrete and underground piping works scopes. We’re still increasing manpower on the job and anticipate adding as many as 800 active employees for this group in 2016. With the increase in manpower comes increased opportunity for safety excellence and I’m proud to say that in November, James Industrial reached 1 million man hours without an OSHA recordable, which is a great accomplishment. I’ll wrap things up by talking about the East segment. Cardinal Contractors went through some changes in the fourth quarter. As I mentioned earlier, Don Patrick was promoted to President of Cardinal in November. The group experienced underperformance on a couple of its challenging legacy projects that will be complete in the first half of this year and now Don can focus execution on the sizable backlog of new projects the group obtained in 2015. Mike Killgore who oversees the James Construction Group in the overall group saw improved profitability in the fourth quarter. Heavy civil work is like a battleship, slow moving, slow to change course. However, the tide began to turn for us in the fourth quarter. Rodney James’ team met several milestones on the challenging I-35 work in the Belton area and we anticipate completing two of those major prospects in 2016. Early in Q4, Rodney added new management and resources into our Texas operation and has begun to show positive effects. Just this week, we received an e-mail from a Belton area driver about slow traffic on Sunday afternoon, but what she wanted to let us know was not about the slowdown, was not from any poor planning on James part, but from drivers slowing the checkout and admire the new bridge. That’s customer feedback we like getting. As these projects roll off, the prospects for new heavy civil work looks promising. Texas passed the prop 7 initiative in November and we expect an additional $70 billion of highway funds to flow to construction over the next 15 years. While this additional funding should create significant opportunities, the projects will not materialize we believe until 2017 and beyond. The standout performer of the quarter was the James I&M Group. As you know, James I&M is also working on the Sasol project. An extraordinary performance of Jonas Beatty’s team was one of the major contributors to their fourth quarter results. There are several major industrial projects in both planning and execution stages for South Louisiana and Texas, including multiple large-scale LNG facilities where Jonas group provides service as a subcontractor to the general EPC contractor. As these projects successfully move through the funding and bid phases to construction, we should be able to realize some good opportunities. James I&M also reached an impressive safety milestone in November, three years without an OSHA recordable. This is a true testament that when we take care of the small things, both in the field and the office, the big things just do not happen. As I look at our overall performance in 2015, I’m proud that we continue to make money, grow our backlog and improve our balance sheet, but I do know that we can do better in 2016. Throughout the year, we returned profits to our shareholders through quarterly dividends, which we increased 38% in the second quarter to $5.05 per share. While we’ve been quiet on the acquisition front, let me assure you that does not mean we’re not looking. I believe our investors trust us to make a deal, not just for a deal sake, but we’re committed to finding the right acquisition at the right price at the right time. As I’ve been speaking, I’ve mentioned safety awards for several of our business units. I want to highlight just a tremendous achievement we achieved for the entire company in 2015. The Primoris organizations achieved a lost-time incident rate of 0.02 and a total recordable incident rate was 0.83. It’s through this approach to zero injuries that Primoris corporate-wide injury rate is 75% lower than the U.S. construction industry average and our lost workday incident rate is over 95% lower than the U.S. construction industry average. This achievement is a result of hard work and commitment to teamwork and strong support throughout all levels of our company. Looking forward into the next few quarters, our focus will continue on project execution, backlog growth, lowering and controlling our SG&A cost and other distinct areas in which to improve the overall Company performance. We’re poised to grow our company revenue profitably. I’d like to end by thanking all of our Primoris employees for their dedicated work and our investors who placed their trust in our company. With that, I’ll let Pete give you the finer details of our results. Pete?

Thank you, David. And thanks to everyone for joining us today. We expect to file our Form 10-K for the year ended December 31, 2015 on Monday morning, just so that we can have it dated February 29. Please bear with me as I run through more numbers than usual. In the 2015 fourth quarter, we earned $0.24 per share on revenue of $497.1 million. This compares to $0.17 per share on revenues of $487.6 million in the 2014 fourth quarter. Our largest customer in 2015 was TxDOT accounting for 9.5% of total revenues. For the year, the second largest customer was a large electric and gas utility, one based in the Midwest part of the U.S. and served by Q3C. The third largest customer was a large petrochem project in Louisiana. For 2015, our top 10 customers represented almost 60% of our revenues. That’s our normal pattern. However, from year-to-year, the specific customers that are part of that top 10 vary considerably. For the fourth quarter, our largest customer was a large petrochem project in Louisiana with the second largest a large electric and gas utility based in Northern California and TxDOT, the third largest. The Midwest utility, it was the fourth largest for the quarter. MSA revenues do provide a solid base of business for Primoris. From an end market perspective, underground capital project markets accounted for 12% of our 2015 revenues. Utility services 34%, industrial work was 16%, heavy civil 30% with engineering and other, the remaining 8%. Our gross margins saw a substantial increase from 10.2% in the 2014 fourth quarter to 12.8% in the 2015 fourth quarter, driven by margin improvements in the East and West operating segments. In the East, gross margins improved from 0.9% in 2014 fourth quarter to 5.9% in 2015 fourth quarter. Obviously, the large petrochemical project in Louisiana was the main force behind this improvement and its contribution helped to offset some weakness in the heavy civil part of our business. In the West, gross margins improved from 12.8% in the 2014 fourth quarter to 16.8% in the 2015 fourth quarter. The improvement was driven by both increased revenues and profitability at our ARB Underground division and at Rockford where we did not have a large project with negative margin in this year’s fourth quarter. For the Energy segment, gross margin declined from 14.6% in the fourth quarter of 2014 to 13.8%, primarily from losses on projects at the Primoris Energy Services Saxon division. Our SG&A expenses increased $8.1 million in the 2015 fourth quarter and $19.9 million for the full year. These results are not acceptable and while most of the increase was associated with professional fees and other one-time items, we expect that our - we anticipate and expect that our SG&A expenses will decrease in 2016. One of the contributors to the professional fees was the ongoing litigation to collect for the work that we completed in 2014 on two projects for which we have a receivable balance totaling more than $51 million. The snail’s pace of the process should be added to [deferred] taxes as absolute certainties. While our tax expense for 2015 was reduced from 2014, our effective tax rate increased to 39.2%, up from 37.8% in 2014. One of the primary drivers for the increase in the rate was the impact of the non-deductibility of part of per diem expenses. As pre-tax earnings decreased, the impact of the per diems on the tax rate increased. This was notable in the fourth quarter were our effective tax rate increased to 41.2% from 39.5% in the fourth quarter of 2014 as we trued up the annual provision amount. We expect that our tax rate for 2016 will be approximately 39%. This year, we brought our CapEx back in line with our historical norm of equating capital expenditures with our depreciation and amortization. For the year, our total CapEx spend was a net of $57.2 million, which was right at the annual depreciation amount of $58.4 million. Of the total amount invested, $45.2 million net was spent on construction equipment. We expect that our net CapEx in 2016 will be in the $55 million to $60 million range. Depreciation and amortization in the 2015 fourth quarter were $16.7 million for a full year D&A of $65.2 million. Our intangibles balance at year-end was $36.4 million and we expect to amortize $6.5 million in 2016. We had no acquisitions in the fourth quarter and for the first time since 2009, we do not have any earnout contingencies on our balance sheet. We determined in the fourth quarter of 2015 that with the state of their current end markets, Vadnais and Silva were not likely be achieved their aggressive earnout targets and the remaining balance of $1.5 million was credited to non-operating income. At year-end, our cash balance was $161 million as we drew down $25 million from our shop facility and completed an approximately $8 million mortgage financing for two of our buildings. All of these are long-term loans. Our weighted average interest rate now stands at 2.9% on total debt of $275.3 million. At year-end, our tangible net worth was $322.6 million, a 9% year-over-year increase. We enter 2016 with a strong backlog and backlog did increase both for the year and for the fourth quarter. While it did not increase as much as we all would have liked, we know that we are in the waiting process for several large awards. At year-end, fixed backlog was $1.5 billion, MSA backlog was $571 million, and total backlog was $2.1 billion. By segment, West total backlog was $1.1 billion, East $756 million, and Energy $254 million. The good news is that the West backlog also carries traditionally the highest margins. We expect that during 2016 we’ll recognize approximately 86% of the West total backlog, 52% of the East total backlog and 99% of the Energy total backlog. David mentioned the OnQuest refinery job that was canceled in early 2015. And to-date, we have had one other project deferral, also at OnQuest. While the decline in energy prices has not led to mass cancellations of projects, the turmoil of the past couple of months in end markets has led us to leave our guidance for the next 12 months at $1.15 to $1.30. We believe that we have the ability to do better, but that unfortunately will depend on the overall market. Our guidance does not include any recovery for the two large prior year projects. And with that, I’ll turn it back to you for your questions. Thank you.

Thank you. Ladies and gentlemen we will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Lee Jagoda from CJS Securities. Please go ahead.

Hi, good morning.

Good morning, Lee.

So starting with Sasol, can you give us the split of revenue between East and Energy in the fourth?

In which, I’m sorry.

Between East and Energy on Sasol.

In Q4 or for the whole year?

Both would be great.

About - see if I can do the math here. Almost 60% went to I&M and 40% went to JIC. And for the whole year, I&M did dramatically more than that, probably about 75% to 80%.

Do you have the dollar contribution in Q4?

On revenues?

Yes.

Okay. Approximately - the year was $171 million and Q4 approximately $61 million.

Okay.

And no, I can’t give you gross margin.

I mentioned, that’s the one on my comments that I mentioned Conrad Bourg’s group, the JIC part, will be adding additional 800 or so people because that will be the - that will be the group that’s beginning to grow more on that particular project. As you know, Jonas’ group kicked off first on that project and then Conrad’s group will be the next one to gear up. Jonas will continue through most of this year burning revenue on that project, but he’s pretty much at the peak and will start coming down where Conrad is definitely not at the peak and on the upward side of the hill.

Okay. And then switching to the large diameter pipeline side, how long does it typically take to mobilize on a project once it’s awarded? And at what point, if we don’t see a project announced, would a stark push out beyond mid-year?

We’re pretty much - when we decided the day to mobilize, we pretty much mobilized very quickly. That’s nearly an overnight thing, pipelines moved extremely fast. The first thing you want to do is get over there and set up your offices and the yards and things of that nature where you have your equipment and things like that set and stored, so that you can move extremely fast on them. Okay, because we got to move all of our Sideboom equipment and everything else over into that area where the physical project will take place. So the pre-planning of it may go over for two or three months to get all the equipment and things over there. I think the second part of your question is on - I think if I understood it, Lee, ask your second part of the question again.

So at what point, if we don’t see an award that you expect to get, does the start date push out beyond mid-year?

Probably, when we start - if we haven’t started the planning now, the planning process is part of the bid process, but if we haven’t started mobilizing and things like that. So in other words we would - you’d need to see an announcement a couple of months before we really start moving equipment. So if we weren’t announcing something in the first quarter, start of second quarter, then we would begin to look at that by date, mid-summer skipping out a little bit.

Okay. And then one more from me and I’ll hop back in the queue. The small amount of income from non-controlling interest, I assumed at the beginning of the call that JV, how should we think about accounting for that line on a go-forward basis, Pete?

We’ll be doing the same thing, which is that as we start to increase the work that we do on that, that’s where you’ll see it. But I need to comment that it’s actually going to show up because we are the party that controls both of those as we did with [indiscernible]. So what you’re really going to see is the revenue and costs will be sitting in - for the whole project, will sit in our financials and our balance sheet and what you’re seeing on the non-controlling part is the 50% that goes to the other party.

Got it. Okay, thanks very much.

Thanks Lee.

Thank you. Our next question comes from the line of Jason Wangler from Wunderlich. Please go ahead.

Good morning.

Good morning Jason.

I was just curious, Pete, you talked a little bit about the guidance and kind of keeping the words at and maybe the dovetail on the last question a bit. With a lot of large projects coming out, could you maybe just comment about the guidance you’re having now? Does that kind of embed the two projects, one that’s awarded, one that’s looking like it should be and maybe, what else you’re seeing as we move through the second half or into the second half of the year?

I think I can say that, in our numbers, we do expect that we will implement the backlog that we have and that we will be able to get some of the projects that we anticipate that we’ll get. The upside to us is getting some other projects, getting some of our past challenges resolved. I think that after last year when we were totally soaked in the second quarter, that we were trying to be a little bit careful and again, our guidances for the next four quarters, I caution you that to not read into that anything, we always has an incredibly tough first quarter. I expect that this one will be the same. So, probably a longer answer than you may ask but yes, I think we believe that we have the ability to get to those numbers, contingent on obviously the markets continuing in the way that they are and the projects that people are asking us about or telling us we have being able to execute those.

That’s great color and maybe on the cost side of it, I think we’ve spoken in the past of again expecting so much work coming up in the second half of this year and even beyond that, G&A was a little bit higher and you mentioned some of the professional fees, but are you still seeing from a staffing perspective, is there kind of a holding onto folks more, I guess, then historically, as you kind of prepare for that ramp? Would that be fair just because the number look a little bit higher than that expected in the fourth quarter and I think you did mention, maybe it would come down a bit, but just maybe a comment on that?

Yes, the answer is yes. We had people that we kept on because we do know that in the Southeast, we’re going to have at least one and hopefully more significant projects. I think, ironically, where we’re seeing some manpower challenges has been on some of the heavy civil work, where actually we couldn’t find enough people which sounds funny for us to say, but that creates inefficiencies. And as we’ve gotten through the end of the year and as David mentioned, we have some new management, Randy has hired somebody to help in the Belton area and we have seen some positive responses and positive activities in January and early February. So manpower has always been a challenge and you are right, some of it is when you’re holding onto people that you should need to keep them for the next job and ironically for us this quarter was also, we didn’t have the right people in the right place, that created some inefficiencies.

Great. I’ll turn it back. Thank you.

Jason, let me add one more thing before we turn it just back very quickly. To add a little bit more color on a couple of things, when we talk about those opportunities that we still feel extremely good about, in some of my comments I mentioned the type of clients those particular projects are for, we negotiated T&Cs and are certain on quite a large amount of backlog not yet booked that are with those great levels of clients. So the likelihood of those projects proceeding I’m not very concerned. They will proceed I believe. For them, it’s a matter of going through and getting all of their - and again, I’ve met with their executive management all the way up to their CEO levels, it’s a matter for them of making sure that each of the different moving parts and pieces, they sign up and do in a sequential order. In another words, not getting ahead one way or the others. So it’s a matter of aligning up everything, which they’ve done an extremely good job and now it’s just a matter of getting to that point in time. And then we’ve also got some with some of our major customers out on the West Coast that we have been pre-awarded in verbal conversations and things, but our rules are we will not until we get a signed agreement announce anything, verbal or not. And those we feel quite comfortable about imminent awards also. I will turn it back now.

Thank you. Our next question comes from the line of Dan Mannes from Avondale Partners. Please go ahead.

Thanks. Good morning everyone.

Good morning.

Good morning Dan.

Couple of follow-ups here. First, as it relates to the cost, I don’t know if you can drill down a little bit more, I think your SG&A was up I don’t know $8 million year-over-year, maybe $3 million or so sequential. Can you maybe breakout how much of the cost differential relates to this legal costs? And especially given your commentary that the litigation is going to go on for a while, are those costs going to go away or are you going to be paying lawyers for a while here?

Paying lawyers is going to happen for a while. I think the numbers I would say were, in fact, they’re actually larger than that. Probably 40% of the increase on a year-to-year basis was from professional fees, that’s several initiatives. It is not just on those two projects. There are some other things that we had legal expenses on and some of those we do really expect to go away or become much more smaller numbers in 2016. So we’re in the midst of a thorough review to make sure that from a people standpoint and all the other SG&A items that we have what we need to do our business and not anything more. So our intent is to reduce the overall SG&A dollars based on what we know now and to get back to more of a normal percentage for us.

I guess on a similar topic, just to close the loop here, as you know, David, you’ve kind of fashioned Primoris to go after more of these larger projects and offer a broader scope of work. Have you needed to kind of improve the staffing level, whether it’s business development, project management, to be able to really pursue some of the big stuff that you guys are targeting, particularly in the industrial and petrochem side?

Yes, Dan. That’s a fair statement. You do, from a business development standpoint, number one was get out there and make sure that the customers really knew who we were and the size and breadth of our capabilities. So, yes, we have added some into that section. We obviously added some additional in the project control type functions on those larger projects. So the answer to your question there is, yes. And as I feel quite comfortable as we move into those larger projects that we’ve done all the building of the foundation to support those large projects. So, a part of those additional cost is in that area. But as Pete mentioned and I mentioned in some of opening remarks, I think we built them up, we’re ready to do. Do I think there are some areas that we can trim some of that SG&A cost back down? I do. Of course, now, obviously, as the revenue goes up, the percentage will naturally come down, but I’m talking about there is some real dollars in there I think that we can still trim out. The legal, the litigation side, I will make this comment. The recent Pete said we feel like we’ll have some of those continuing, but maybe not to the same degree and level, our BridgeTex lawsuit, that one is set for jury trial in September of this year. We’ve spent quite a bit to prepare our case, and our case indeed has done nothing but get stronger and bigger. In other words, and the more I’ve looked at it and been briefed on it the more, it upsets me and makes me angry that we had a client the treated us that way. So that one though should come to fruition and we’ve kind of capped out what the legal cost you’re adding, and as we head to that September trial date, sure, there’ll be some additional legal costs, but not at the same kind of burn rate. With ATM, the Abengoa project, obviously, we are following carefully what’s happening to Abengoa in the marketplace, but at the same point in time, our strategy there, if you remember, was to find the funds and get a bond, bonding company to - we put liens where the money was at and the facilities were at, then the bonding - Abengoa had to get bonds around it. So what we’re really doing now there, we’re spending legal cost to get there, but we’re now having to spend a little bit of legal cost to get to the bonding companies. In other words, Abengoa we don’t think may make it, that’s their business not ours, but at least our funds are protected. It’s a matter of now getting to the bonding companies and having the settlement with the bonding companies. So that’s a little bit more flavor on where some of those costs have been spent.

Understood. A transition real to pipeline, you obviously have announced a fairly sizable pipeline award for the second half of year. You have hinted and I think market expects you to pick up another one in a similar area. Can you talk it all about, number one, I think you said a late summer start for those. I guess, we were kind of assuming more like a late spring, early summer? And secondarily, walk us through maybe your capacity to add more work in pipeline either second half of this year and how you’re positioned for 2017 as well?

The project that we did announce, the Florida Southeast Connector, that project is the one that I mentioned, that we’re beginning to set up offices and things over there. Went over I did a couple of weeks ago, Frank and I did and we didn’t see nothing there. Everything seems to be going according to plan, they are down now as you know, both did and the second one I’ll talk about did get their FERC permits. Where we are at currently on that is them going through and getting their land acquisitions as far as the ride-aways are concerned. The schedule on that was always to start in that June, July timeframe and we really don’t see and they don’t see any reason why that still won’t occur. The second project, because I know you - in your announcements you have announced we have got it and it is one that we’ve obviously talked with their executive management and again on that one, they got their FERC approval process, as you know, also from that one’s perspective, it’s always been from our feelings it would start very soon right after the Florida East Connector project. So again, I don’t think it’s going to start any earlier than that. Would we like it to start early and are we prepared to jump on it, absolutely part of our SG&A costs are continuing to have some of the manpower and people for those two projects. The third project that everybody continues to talk about out there and again, it’s one that we’re following very closely. That one we knew there were some re-routing on that particular project. We were already aware of that before it became in the public press, we were already working on those re-routes and cost associated as were the other partners with us. It’s in that work. That one, again, we’re hoping something toward mid to third quarter, but again that’s just our tracking of the project. Now, I think latter part of your question was about our resources and capabilities to handle those. Those, we’ve got no difficulties at all. We’ve got plenty of spreader bars and plenty of equipment. We started making some more acquisitions on some equipment during the 2015 timeframe for both, in fact, for all three of those projects. Of course, some of the equipment because of the way to work is staged will flow from one project to another. But, yes, from a equipments perspective and from a manpower and spreader bars perspective, we’ve got those adequately covered.

Got it. And then, if you indulge me with one more question, I wanted to ask real quick about the TxDOT work. Obviously, the margin structure there hasn’t been quite what you wanted but you near the end on Belton. Can you talk a little bit about the outlook for, I guess, for 2016, in terms of what you have in backlog there, how that work is playing out, and what’s been the pace of incremental awards in Texas? We frankly haven’t seen a lot.

Yes, you haven’t seen a lot because of what we did and we’ve been working, as you know, on that I-35 and there was a tremendous amount of backlog there for us and TxDOT, we had been working with the commissioners and TxDOT and us had been some extremely good meetings. In fact, the head of TxDOT asked us to come and have what they call the partnering meeting which I attended in Temple, I guess, a couple of months ago and the main drive behind that was how do we continue to bring additional resources and equipment and how do we continue to become even a bit larger contractor for them in the state of Texas when you consider the additional highway work that they’ve got to do. It wasn’t just us. There were a lot of contractors in Texas that saw difficulty as Pete mentioned in getting some workforce. We went through military hiring workforce arrangements, we went through a lot of different resourcing of personnel. If you have ever driven and down toward the Austin area from Dallas, especially, over the last year and a half, you’ll see a lot of high rise buildings going on and a lot of work in subdivisions and of course, those kinds of projects require similar resources that you have on highway job and so we indeed were finding difficulty finding enough resources. So we put a few programs in place, not only hiring programs but some training programs and as Pete mentioned, that changed a little bit of management there, so we began to see - we did actually toward the first part of the Q4 but we really didn’t begin to see what I considered positive results, which is normal for about 45 to 60 days and indeed we began to see that. Now relative to the actual backlog part of it, we had pretty much increased our margins that we were bidding on projects really for two reasons, one was to slow down the pace of getting additional work, because I want to make sure that we had adequate resources and equipment and that the margin performance we were getting off them was what we wanted and what we expected and of course when you do that, you obviously slow down the number of awards that you win because you’ve got somebody out there that’s willing to take it for a lower cost. Now that we’ve got that trend turning, then we’ll be a little bit more aggressive on our bidding processes in there and you’ll begin to see some more awards come out. We also within the James Construction Group everybody tends to think of it as a highway company. Well, we do have a lot of capabilities in airport construction and marine terminals and things like that. And so, at the time we’re slowing down some of the highway work, we went into more, trying to get into some of the airport construction and marine terminal work. So I’m hopeful you’ll begin to see some news related to those pretty soon.

Sounds good. Thanks a lot.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of John Rogers from D.A. Davidson. Please go ahead.

Hi, good morning.

Good morning, John.

Just a couple of follow up things. First on the pipeline projects, David, that you were speaking of, how does the margin profile look or the pricing as you go into these negotiations relative to what you were thinking about a year ago? We’ve heard about a lot of delays in this industry, for other contractors as well. And I’m just wondering if people have gotten more aggressive on chasing the projects that are moving forward?

Yes. Thanks John for the question. Let me comment on that in a couple of ways to answer your question. One is we very strategically went after some specific customers or specific client’s projects. And I mentioned in some opening comments going back even a year or so ago, we were beginning to get a little bit concerned about some of the MLPs and some of their projects and so we really, from a strategic standpoint, looked at which ones of those projects we thought had the greatest probability of success, and that’s where we began to really put our efforts. And those projects that we’re talking about, the one that’s announced and the other two that one imminent hopefully and the other one maybe mid to late year. Those are the kind of organizations that we like to work with that I mentioned your investment-grade status kind of companies. So with those particular projects, those companies were looking to make sure that they had pipeline contractors that were going to be around for a long time, that the integrity of those contractors were good. So we kept our margins in pretty good stay on that. With NextEra and FL&P, part of the reason we announced that project and part of the reason they awarded it was because from their own strategic perspective, that was a key project for them and they want to make sure that the resources were there and didn’t get diverted to other projects. So there was a lot of good terms and conditions that we went through. So I feel very good about our margin levels and they are historically what we’ve seen on projects. Now, as far as the other projects out there and the pressure, yes, we saw some of that. I probably saw it more in our open shop pipeline, our Primoris pipeline and maintenance group, not in our Rockford group, but at the same point in time, in our Rockford group, on these large diameter pipelines, there is only a few contractors, there is probably - everybody can argue about how many, but I tend to think there’s only about four of us that can do projects of that size and that nature and so all four of us have got a fairly large demand for our services. So I think all four of us have said there is no reason to start trying to lower our margins on that work. And so those projects are being bid at and I feel will have some pretty good margin performance for us.

Okay, thank you. And then, maybe for Pete, just in terms of the project disputes, I know that you’ve got one going into arbitration, is that that still scheduled for March and can you tell us what - I don’t think you will give us exactly what you’re hoping to get there, sort of orders of magnitude, particularly on the cash side and sort of how that might work?

Well, as you remember, we took both of those jobs and we did not book any profits. So the amounts that we’re talking about, basically, would give us a zero margin on the jobs. So the $51 million or so million represents 0% margin. We think that we can do better on both jobs, as David said, the one will go into litigation in September and we think we will do better than the amount that we have in receivables. I don’t want to even hazard a guess, but I think we’ve got ability to do somewhat significantly better. The other one, unfortunately with the issues that the parent company in Spain is having, the arbitrators have agreed to what they say is the absolute last change in the schedule and they have now moved that back to - they extended their time frame by 120 days as to when all the documents would do. I believe we’re now looking at September for the hearings in Irvine, and honestly, at the pace that those move, we would expect that we may not see anything until early next year, first quarter 2017 a resolution on that one. So we’re somewhat encouraged that the trial date has been set for the one in September and the other one, we expect will be - we’ll get a resolution sometime in the early part of 2017. Clearly, we think that we have upsides, probably more so on the one that’s going trial this year than we do on the other one, but we’ll see where we end up and that’s certainly the one that’s going to trials in front of a jury and we’ll see what happens.

All right. Thank you.

Thank you. Our next question comes from the line of Matt Tucker from KeyBanc. Please go ahead.

Hi, good morning thanks for taking my questions.

Good morning, Matt.

I guess, just in terms of upside to the EPS guidance and it sounds like you said you didn’t raise it largely because of energy related headwinds, but you said you think you could do better based on different things that could change in the market, is that largely energy, need to see energy improve to be better than the guidance or are there other areas where you think you could see some upside?

I think that there are couple of places. Clearly, we’re a little bit apprehensive. We’ve seen a lot of people move projects and delay projects and your cost don’t go to zero when somebody delays a project. So that part of the challenge is getting comfortable that the jobs that we’ve been talking about start when they’re supposed to. We had, for example, on Carlsbad, we originally anticipated that it was going to start last year, no later than the fourth quarter and we’re talking about starting in April as it has gone through various iterations. So those are the sort of apprehensions we have. Our upside really is that if the schedule works and we can start to work when it’s scheduled, that would be a tremendously positive impact. As David implied, we are working with TxDOT to see if we can resolve some of the issues we’ve had on their scheduling and addressing some of the issues associated with the stuff that happened already last year with the weather, so that also could help us from a margin perspective. We’ve been pretty aggressive on not recording or not aggressive on recording profitability on those jobs. And so you could see hopefully at least not getting any worse than where we are with some potential upside. So if you look at those, clearly, we had one of the best fourth quarters from our Northern California gas utility, and if they keep that pace going into this year, we could see some very significant upsides there. They did about 50 out of 110 total in fourth quarter. So that was just a tremendously good fourth quarter for them and if they can do that sort of probably not in first quarter, but if they get back to those sort of numbers in the second through fourth quarters, we could see some very significant upside and we think that certainly the numbers that we did this past year, we should be able to beat based on what we’re seeing today. But, yes, there is some potential upside that could push that out to a better number that would be more what we would like to see.

Thanks, Pete. That’s helpful. And so just to summarize and clarify, you don’t think you need to see stronger oil prices, kind of recovery in energy markets this year in order for there to be some upside potential?

Well, we would love it, because it would add to the maintenance work and I don’t know what it would do to the refineries, but I think we’re not counting on a significant change in oil pricing to get to the sort of numbers that we’ve given you in the range.

Correct.

Great. Then, I guess, just given where oil prices are and kind of the backlog trends at energy, is it fair to assume that the energy will be troughing in this year in terms of awards and backlog or are you seeing some opportunities that gives you optimism you could actually grow backlog there this year?

We track through our CRM system and we track a lot with our business development people. We track a lot of opportunities out there and obviously we look at them on a go-get basis and the funding behind them and all the above. I don’t know that I would say that we’ve seen a significant - I don’t know that we are in a trough, but I’d also say I don’t know that we have seen a significant amount for the types of projects that we chase. I don’t know that we’ve seen a significant turnaround in it either, okay. In another words, we’ve seen kind of a steady flow of these opportunities. Now, there were a lot of companies out in the marketplace that we spent a great deal of time and effort over this last couple of years to let them know who Primoris was and how much depth and breadth we have to the organization. And so that’s kind of key in some of them. The gas prices continuing to stay where they are at, steel has a good look for us on gas related projects, whether they be the petrochemical kind of projects like you are seeing the Sasol work and ethylene projects, but also the LNG projects. And one of things that we made sure people understand, at least our investment community is, when we talk LNG, we have our OnQuest group that does the micro LNGs that have been quite successful for us and we see that market still continuing quite well. But, then we have our James, our industrial group with James Industrial and our construction group, I&M group, Jonas’ group that does a lot of work in the LNG and these mega projects from site clearing to all types of different work and services. So that’s why I say, we still see a number of opportunities out there for Primoris and have not seen the kind of effect from this drop in the energy price. Like Pete mentioned, would we like to see the energy price go up, sure, because I think in general market terms, that always makes everybody feel better and you see more opportunities out there. But the markets that we serve and the type of services that we perform, we really haven’t seen that much of a blip to us. The few projects that we mentioned that we did have canceled that I would say probably was related in some form or fashion was more because of companies getting acquired or merged, and so they just want to start relooking at their projects. The two that we mentioned with OnQuest for an example. But those for us in the overall scheme of things, while they’re great projects for us and we make good money, they’re not a big swing factor for us either way in our overall performance.

Thanks, David. That’s really helpful color. Just last question on M&A, it sounds like there is really nothing maybe imminent, and I certainly appreciate not doing a deal just for the sake of it. But is that because the as far as expectations are still too high and there is too wide of a gap there, or you’re just not seeing opportunities that are good fit or filling need, or could you just add some color there, please?

Sure. I suspected I’d get a question on that. So, we’re positioned very, very well for M&A right now, and with our balance sheet and cash flow and cash positions and things and any given week I could probably - I can’t because it’s strategic to us, but I could probably show you several acquisition targets that we’re looking at, just like we’ve continued to do for I guess as long as Brain has been part of this organization. But as I said earlier, we want to make sure we get the right one at the right time at the right price and we are seeing some better signs, so you’re absolutely correct in there. But we carry kind of a historical T&C transactions graph that we have, over the last several years, you can kind of look in there and there’s been some people are paid multiples of 15 to as low as 1.6. And I’ll make a point of the ones that we track, that 1.6 was Primoris by the way. And so, yes, we are going to look at acquisitions that are below that 6 and 7 multiple times, absolutely. We are seeing the seller’s expectations for what we consider quality assets, especially in the private market still remaining a little bit elevated. We think that they are coming down, we think they’ll come down more. I think we’ve seen this disruption that everybody sees in certain of these end markets and just the state of some of the financial markets, we think are beginning to present an opportunity for us. I always get asked this question when we come up and do tradeshow or investment shows. We’re looking at areas that for industrial services or markets that we’re not already currently in. We really like the natural gas plays out there. We look at that from a long-term strategic perspective, utilities and distribution is areas that continue to want to look at and grow and obviously power and trust me when I say this, Brian Pratt, every time he stops by the office, first thing he does is come in to my office door say here is an opportunity we need to look at and so we start discussing it and evaluating. So it’s probably right up there as one of the top things on our list, the top thing on our list is running this Company profitably and continue making money and so Brian and I both, it’s how do we grow this Company and we’re grown it organically and you can obviously always grow it inorganically with an acquisition and that’s top of our list also to look at. So hope that gives you a little bit of flavor, but it’s definitely on our minds.

Great color. Thanks guys.

Thank you. Our next question comes from the line of John Rogers with D.A. Davidson. Please go ahead.

Thanks. Dave, I got it answered.

Well, thanks John. Thanks for calling in.

Thank you. Ladies and gentlemen, there are no further questions in queue at this time. I would like to turn the floor back over to David King for closing comments.

Well, thank all of you for the interest in our Company and the continued interest you have. We’re all focused in making 2016 a better year and just thank you for calling in this morning. Good-bye.