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8-K/A - 8-K/A - Primoris Services Corpa12-30205_18ka.htm
EX-99.2 - EX-99.2 - Primoris Services Corpa12-30205_1ex99d2.htm
EX-23.1 - EX-23.1 - Primoris Services Corpa12-30205_1ex23d1.htm
EX-99.4 - EX-99.4 - Primoris Services Corpa12-30205_1ex99d4.htm
EX-99.3 - EX-99.3 - Primoris Services Corpa12-30205_1ex99d3.htm

Exhibit 99.5

 

PRIMORIS SERVICES CORPORATION

 

 

SEPTEMBER 30, 2012

 

AND DECEMBER 31, 2011

 

 

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

 



 

Primoris Services Corporation

Index to Unaudited Pro Forma Combined Financial Statements

 

 

 

Page

 

 

 

Unaudited Pro Forma Combined Financial Statements:

 

 

Introduction to Unaudited Pro Forma Combined Financial Statements

 

1

Pro Forma Combined Balance Sheet as of September 30, 2012 (Unaudited)

 

2

Pro Forma Combined Statement of Income for the Nine Months Ended September 30, 2012 (Unaudited)

 

3

Pro Forma Combined Statement of Income for the Year Ended December 31, 2011 (Unaudited)

 

4

Notes to Pro Forma Combined Financial Statements (Unaudited)

 

5-6

 



 

PRIMORIS SERVICES CORPORATION

 

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

 

Transaction Summary

 

On November 19, 2012, Primoris Services Corporation, a Delaware corporation (“we,” “us,” “our,” “Primoris” or the “Company”),

purchased all of the issued and outstanding shares of stock of Q3 Contracting, Inc., a privately-held Minnesota corporation (“Q3C”).

 

The material terms of the transaction were previously disclosed in our Current Report on Form 8-K filed with the Securities and Exchange Commission (the “Commission”) on November 15, 2012.  The following description of the Purchase Agreement is not intended to be complete and is qualified in its entirety by the complete text of the Purchase Agreement, which was filed as Exhibit 2.1 to our Current Report on Form 8-K as filed with the Commission on November 15, 2012, and which is incorporated herein by reference.

 

Pursuant to the Stock Purchase Agreement, dated November 8, 2012 (the “Purchase Agreement”) with Q3C, all of the shareholders of Q3C (collectively the “Shareholders”) and Jay P. Osborn, as representative of the Shareholders (the “Representative”), the issued and outstanding shares of Q3C were sold and transferred by the Shareholders to Primoris on November 19, 2012 and Primoris paid approximately $48.12 million in initial cash consideration.  Additionally, the Company committed to issue Primoris stock valued at $0.43 million based on the average closing price of our stock for the month of December 2012. We will issue 29,273 shares of common stock in February 2013 based on that formula.  Of the initial cash amount, $4 million was placed in an escrow or held back to secure certain obligations and agreements of the Shareholders under the Purchase Agreement.  In December 2012, $1 million of the holdback amount was release to shareholders.  Additional cash will be provided subject to Q3C’s attaining certain specified financial goals, with a maximum potential payout of $10 million. The incentive provisions are based on Q3C’s achieving certain financial targets using income before interest, taxes, depreciation and amortization (“EBITDA”), as that term is defined in the Purchase Agreement. As a result, and assuming that the earnout consideration is earned, the total consideration payable to the Shareholders pursuant to the Purchase Agreement may be approximately $58.12 million.

 

The Purchase Agreement contains covenants, representations and warranties of the Company, Q3C and the Shareholders that are customary for transactions of this type. Prior to the closing of the transaction, and other than with respect to the Purchase Agreement, neither we nor any of our officers, directors, affiliates or any of their associates had any material relationship with Q3C, the Shareholders or the Representative.

 

Consideration

 

Cash

 

On November 19, 2012, we paid the Shareholders approximately $48.12 million in cash. Of that amount, we placed $3.0 million of the cash consideration in an escrow account and held back $1.0 million, as discussed below.

 

Earnout Consideration

 

First Earnout Period

 

Subject to certain specified adjustments, if Q3C’s EBITDA for the period commencing November 18, 2012 and ending December 31, 2013 is equal to or greater than $17.7 million, we have agreed to pay the Shareholders $3.75 million in cash. An additional cash payment of $1.25 million will be paid if Q3C’s EBITDA equals or exceeds $19.7 million for the same period.

 

Second Earnout Period

 

Subject to certain specified adjustments, if Q3C’s EBITDA for the twelve month period commencing January 1, 2014 and ending December 31, 2014 is equal to or greater than $19.0 million, we have agreed to pay the Shareholders $3.75 million in cash. An additional cash payment of $1.25 million will be paid if Q3C’s EBITDA equals or exceeds $22.0 million for the same period.

 

Potential Adjustment to Consideration

 

The Purchase Agreement provided that the cash paid at closing will be reduced by the amount, if any, by which the stockholders equity, as indicated on Q3C’s balance sheet as of the closing date, is less than approximately $18.86 million.

 



 

Escrow Account

 

An additional $3.0 million of the cash consideration was placed in an escrow account until the earlier of 18 months after the closing date or the date that the audit of our financial statements for the fiscal year ended December 31, 2013 is completed. This amount will be used to provide a source of indemnity against specified damages to us, as described in the Purchase Agreement.

 

Management

 

In connection with the Purchase Agreement, certain of Q3C’s key employees entered into employment and noncompetition agreements with us, effective as of the closing date.  Prior to the closing of the transaction, and other than with respect to the Purchase Agreement, neither we nor any of our officers, directors, affiliates or any of their associates had any material relationship with Q3C, the Shareholders or the Representative.

 

Pro Forma for Q3C

 

The following unaudited pro forma combined consolidated financial statements are based on the historical financial statements of Primoris and Q3C after giving effect to the acquisition, and the assumptions, reclassifications and adjustments described in the accompanying notes to the unaudited pro forma combined financial statements, as prescribed by the Securities and Exchange Commission guidelines.

 

The following unaudited pro forma combined balance sheet as of September 30, 2012 is presented as if the purchase had occurred on September 30, 2012.  The unaudited pro forma combined statements of income for the nine months ended September 30, 2012, and the year ended December 31, 2011, are presented as if the purchase had occurred on January 1, 2011 with recurring acquisition-related adjustments reflected in each of these periods.

 

The historical consolidated financial information has been adjusted in the unaudited pro forma combined financial data to give effect to pro forma events that are, based upon available information and certain assumptions, (i) directly attributable to the acquisition, (ii) factually supportable and reasonable under the circumstances, and (iii) with respect to the statement of income, expected to have a continuing impact on the combined results.

 

Pro Forma for Other Acquisitions

 

During the nine months ended September 30, 2012, the Company completed three other acquisitions.  Individually or in the aggregate, these acquisitions are not considered significant under ASC Topic 805 and SEC guidelines.  The acquisitions were as follows:

 

1.                                      On March 12, 2012, the Company entered into an asset purchase agreement with Sprint Pipeline Services, L.P. (“Sprint”) for consideration valued at $28.4 million.

 

2.                                      On May 30, 2012, the Company entered into an asset purchase agreement with Silva Contracting Company, Inc., Tarmac Materials, LLC and C3 Interest, LLC (collectively “Silva”) for consideration valued at $14.1 million.

 

3.                                      On September 28, 2012, the Company executed an asset purchase agreement with The Saxon Group (“Saxon”) for consideration valued at $3.0 million.

 

The Sprint, Silva and the Saxon acquisitions (the “Other Acquisitions”) are described more fully in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.

 

Our historical results for the periods prior to the above acquisition dates do not include the effects of the Other Acquisitions.  The following unaudited pro forma combined financial statements present pro forma information of the acquisitions for the twelve months ended December 31, 2011 and for the periods prior to their acquired dates during the nine months ended September 30, 2012, as if the Other Acquisitions had occurred on January 1, 2011.

 

The Q3C and Other Acquisitions are being accounted for under the acquisition method of accounting in accordance with the Financial Accounting Standard Board (“FASB”), Accounting Standard Codification or ASC 805-10 topic for “Business Combinations”.  Management has estimated the fair value of tangible and intangible assets acquired and liabilities assumed based on preliminary estimates and assumptions.  These preliminary estimates and assumptions could change significantly during the purchase price measurement period as we finalize the valuations of the net tangible assets and intangible assets.  Any change could result in material variances between our future financial results and the amounts presented in these unaudited combined financial statements, including variances in fair values recorded, as well as expenses associated with these items.

 



 

The following unaudited pro forma combined financial statements are prepared for illustrative purposes only and are not necessarily indicative of or intended to represent the results that would have been achieved had the acquisition been consummated as of the dates indicated or that may be achieved in the future.  For example, the unaudited pro forma combined financial statements do not reflect any operating efficiencies, associated cost savings or additional costs that we may achieve with respect to the combined companies.

 

The unaudited pro forma combined financial statements should be read in conjunction with Primoris’ historical consolidated financial statements and accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 2011, Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, the historical consolidated financial statements of Q3C for the year ended December 31, 2011 (Exhibit 99.2 to this Form 8-K/A), the historical unaudited consolidated financial statements of Q3C as of and for the nine months ended September 30, 2012 (Exhibit 99.4 to this Form 8-K/A) and other information contained in this Form 8-K/A.

 



 

Primoris Services Corporation

Pro Forma Combined Balance Sheet

As of September 30, 2012

(Unaudited)

(Amounts in thousands)

 

 

 

(Note A)
Primoris
reported at
9/30/12

 

(Note B)
Q3C
at
9/30/12

 

Pro Forma
Adjustments

 

Notes

 

Proforma
Combined

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

76,654

 

256

 

(48,116

)

D

 

$

28,794

 

Short term investments

 

6,380

 

 

 

 

 

 

6,380

 

Customer retention deposits & restricted cash

 

34,814

 

 

 

 

 

 

34,814

 

Accounts receivable, net

 

263,144

 

15,347

 

 

 

 

 

278,491

 

Costs and estimated earnings in excess of billings

 

63,931

 

4,646

 

 

 

 

 

68,577

 

Inventory

 

37,334

 

186

 

 

 

 

 

37,520

 

Deferred tax assets

 

10,659

 

 

 

 

 

 

10,659

 

Prepaid expenses and other current assets

 

7,992

 

658

 

 

 

 

 

8,650

 

Total current assets

 

500,908

 

21,093

 

(48,116

)

 

 

473,885

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

159,369

 

18,322

 

2,300

 

E

 

179,991

 

Other assets

 

 

22

 

 

 

 

 

22

 

Investment in non-consolidated entities

 

12,322

 

432

 

 

 

 

 

12,754

 

Goodwill

 

104,019

 

 

14,726

 

F

 

118,745

 

Intangible assets

 

32,452

 

 

 

21,550

 

G

 

54,002

 

Total assets

 

$

809,070

 

$

39,869

 

$

(9,540

)

 

 

$

839,399

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts Payable

 

$

133,098

 

2,151

 

 

 

 

 

$

135,249

 

Billings in excess of costs and estimated earnings

 

145,582

 

 

 

 

 

 

145,582

 

Accrued expenses and other current liabilities

 

84,783

 

6,208

 

640

 

D & H

 

91,631

 

Distributions and dividends payable

 

1,542

 

 

 

 

 

 

1,542

 

Current portion of long-term debt and capital leases

 

19,763

 

517

 

 

 

 

20,280

 

Contingent consideration - earnout – current portion

 

10,050

 

 

 

 

 

10,050

 

Total current liabilities

 

394,818

 

8,876

 

640

 

 

 

404,334

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt and capital leases, net of current portion

 

61,942

 

13,575

 

 

 

 

 

75,517

 

Deferred tax liabilities

 

21,079

 

 

 

 

 

 

21,079

 

Other long-term liabilities

 

10,104

 

 

 

 

 

 

10,104

 

Contingent consideration - earnout liability

 

4,879

 

 

7,448

 

I

 

12,327

 

Total liabilities

 

492,822

 

22,451

 

7,088

 

 

 

523,361

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders equity:

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

5

 

 

 

 

 

 

5

 

Additional paid-in capital

 

155,605

 

560

 

(560

)

J

 

155,605

 

Retained earnings

 

160,038

 

16,858

 

(17,068

)

J & H

 

159,828

 

Noncontrolling interest

 

600

 

 

 

 

 

 

600

 

Total stockholder’s equity

 

316,248

 

17,418

 

(17,628

)

 

 

316,038

 

Total liabilities and stockholders’ equity

 

$

809,070

 

$

39,869

 

$

(9,540

)

 

 

$

839,399

 

 



 

PRIMORIS SERVICES CORPORATION

PRO FORMA COMBINED STATEMENT OF INCOME

For the nine months ended September 30, 2012

(Unaudited)

(Amounts in thousands, except per share amounts)

 

 

 

 

 

 

 

(Note C)

 

 

 

 

 

 

 

 

 

(Note A)
Primoris

 

(Note B)
Q3C

 

Other
Acquisitions

 

Pro Forma
Adjustment

 

Notes

 

Pro Forma
Combined

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

1,060,851

 

$

76,774

 

$

41,697

 

 

 

 

 

$

1,179,322

 

Cost of revenues

 

922,960

 

62,240

 

37,798

 

525

 

E

 

1,023,523

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

137,891

 

14,534

 

3,899

 

(525

)

 

 

155,799

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

69,684

 

5,720

 

6,570

 

2,166

 

I & G

 

84,140

 

Operating income

 

68,207

 

8,814

 

(2,671

)

(2,691

)

 

 

71,659

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from non-consolidated entities

 

895

 

 

 

 

 

 

 

895

 

Foreign exchange gain (loss)

 

(30

)

 

 

 

 

 

 

(30

)

Other income (expense), net

 

(961

)

433

 

(660

)

(653

)

I

 

(1,841

)

Interest income

 

143

 

 

 

 

 

 

 

143

 

Interest (expense)

 

(3,044

)

(153

)

(217

)

 

 

 

(3,414

)

Total other income (expense)

 

(2,997

)

280

 

(877

)

(653

)

 

 

(4,247

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

65,210

 

9,094

 

(3,548

)

(3,344

)

 

 

67,412

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

(24,875

)

(3,547

)

1,384

 

1,304

 

K

 

(25,734

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

40,335

 

$

5,547

 

$

(2,164

)

$

(2,040

)

 

 

$

41,678

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interests

 

(600

)

 

 

 

 

 

(600

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attrib to Primoris

 

$

39,735

 

$

5,547

 

$

(2,164

)

$

(2,040

)

 

 

$

41,078

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.77

 

 

 

 

 

 

 

 

 

$

0.80

 

Diluted

 

$

0.77

 

 

 

 

 

 

 

 

 

$

0.80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

51,387

 

 

 

 

 

12

 

L

 

51,399

 

Diluted

 

51,402

 

 

 

 

 

12

 

L

 

51,414

 

 



 

PRIMORIS SERVICES CORPORATION

PRO FORMA COMBINED STATEMENT OF INCOME

For the year ended December 31, 2011

(Unaudited)

Amounts in thousands, except per share amounts

 

 

 

 

 

 

 

(Note C)

 

 

 

 

 

 

 

 

 

(Note A)

 

(Note B)

 

Other

 

Pro Forma

 

 

 

Pro Forma

 

 

 

Primoris

 

Q3C

 

Acquisitions

 

Adjustment

 

Notes

 

Combined

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

1,460,150

 

$

83,824

 

$

130,432

 

 

 

 

 

$

1,674,406

 

Cost of revenues

 

1,274,947

 

67,441

 

123,045

 

1,251

 

E

 

1,466,684

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

185,203

 

16,383

 

7,387

 

(1,251

)

 

 

207,722

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

86,204

 

7,395

 

14,957

 

3,018

 

I & G

 

111,574

 

Operating income

 

98,999

 

8,988

 

(7,570

)

(4,269

)

 

 

96,148

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from non-consolidated entities

 

4,018

 

 

 

 

 

 

 

4,018

 

Foreign exchange gain (loss)

 

(96

)

 

 

 

 

 

 

(96

)

Other income (expense), net

 

(1,088

)

53

 

(37

)

(1,678

)

I

 

(2,750

)

Interest income

 

331

 

 

2

 

 

 

 

 

333

 

Interest (expense)

 

(5,431

)

(93

)

(1,263

)

 

 

 

(6,787

)

Total other income (expense)

 

(2,266

)

(40

)

(1,298

)

(1,678

)

 

 

(5,282

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

96,733

 

8,948

 

(8,868

)

(5,947

)

 

 

90,866

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

(38,174

)

(3,490

)

3,459

 

2,319

 

K

 

(35,886

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

58,559

 

$

5,458

 

$

(5,409

)

$

(3,628

)

 

 

$

54,980

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attrib to Primoris

 

$

58,559

 

$

5,458

 

$

(5,409

)

$

(3,628

)

 

 

$

54,980

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.15

 

 

 

 

 

 

 

 

 

$

1.08

 

Diluted

 

$

1.14

 

 

 

 

 

 

 

 

 

$

1.07

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

50,707

 

 

 

 

 

62

 

L

 

50,769

 

Diluted

 

51,153

 

 

 

 

 

62

 

L

 

51,215

 

 



 

Primoris Services Corporation

Notes to Pro Forma Combined Financial Statements (Unaudited)

(Amounts in Thousands)

 

The unaudited pro forma combined balance sheet as of September 30, 2012 is presented as if the acquisition of Q3C had occurred on September 30, 2012.  The unaudited pro forma combined statements of operations for the nine months ended September 30, 2012, and the year ended December 31, 2011 are presented as if the acquisition of Q3C and the Other Acquisitions had occurred on January 1, 2011 with recurring acquisition-related adjustments for all of the acquisitions in each of the periods.

 

For Q3C, the statement of assets acquired and liabilities assumed as of the date of the acquisition is based on preliminary estimates of fair value as follows, in thousands:

 

Accounts receivable, net

 

17,947

 

Cost and earnings in excess of billings

 

4,358

 

Inventory and prepaid expenses

 

305

 

Property, plant and equipment

 

20,526

 

Investment in non-consolidated entities

 

573

 

Goodwill

 

13,287

 

Intangible assets

 

21,550

 

Accounts payable

 

(4,448

)

Accrued expenses

 

(7,851

)

Short term debt

 

(10,253

)

Total fair value of the consideration transferred

 

55,994

 

 

For the Other Acquisitions, the statements of assets acquired and liabilities assumed are included in our Form 10Q for September 30, 2012.

 


(A)                               The columns for Primoris represent the financial statements as reported for the period shown.

 

(B)                               This column represents the historical financial information for Q3C.  It is based on the information provided by the historical statements included as Exhibit 99.2 of this Form 8K/A for the December 31, 2011 information and Exhibit 99.4 of this Form 8K/A for the September 30, 2012 information.

 

The December 2011 combined statement in Exhibit 99.2 includes both Q3C and Quality Real Estate Partners, LLC (“QREP”).  QREP was not included in the purchase by the Company of Q3C.  The following table is derived from the exhibit and provides the Q3C only information for inclusion in our pro forma statements:

 

 

 

Combined

 

 

 

 

 

 

 

Q3C & QREP

 

 

 

 

 

 

 

Reported

 

 

 

Q3C Only

 

 

 

December 31,

 

 

 

December 31,

 

 

 

2011

 

Less QREP

 

2011

 

 

 

 

 

 

 

 

 

Revenues

 

$

83,824

 

$

0

 

$

83,824

 

Cost of revenues

 

67,490

 

(49

)

67,441

 

 

 

 

 

 

 

 

 

Gross Profit

 

16,334

 

49

 

16,383

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

7,168

 

227

 

7,395

 

Operating income

 

9,166

 

(178

)

8,988

 

 

 

 

 

 

 

 

 

Other income

 

53

 

0

 

53

 

Interest (expense)

 

(141

)

48

 

(93

)

Total other income (expense)

 

(88

)

48

 

(40

)

 

 

 

 

 

 

 

 

Income before income taxes

 

9,078

 

(130

)

8,948

 

 



 

(C)                               The column for the Other Acquisitions represents the combined historical financial statements of the three acquired companies for the periods ended September 30, 2012 and December 31, 2011.  Sprint was acquired on March 12, 2012, Silva on May 30, 2012 and Saxon on September 28, 2012.

 

The 2012 results of operations for the Other Acquisitions from January 1, 2012 to the date of acquisition are included in the “Pro Forma Adjustments” column.   The results from the date of acquisition through September 30, 2012 are included in the consolidated Primoris Statement of Income column.

 

Note that the Primoris balance sheet on September 30, 2012 (Column A) includes the balance sheets of the Other Acquisitions.

 

(D)                               As part of the Q3C acquisition, the Company paid cash of $48.1 million and we committed to issue Primoris stock valued at $0.43 million based on the average closing price of our stock for the month of December 2012.  We will issue 29,273 shares of common stock in February 2013 based on that formula.

 

(E)                                In accordance with the Financial Accounting Standard Board (“FASB”), Accounting Standard Codification or ASC topic 805-10 for “Business Combinations”, the Q3C assets and liabilities were measured at fair value at the date of the acquisition.   On a preliminary basis, we increased the book value of Q3C’s fixed assets by $2.3 million, primarily machinery and equipment.

 

The resulting adjustment to depreciation expense is approximately $0.43 million for the pro forma nine months ended September 30, 2012 and $0.58 million for the pro forma year ended December 31, 2011.  The adjustment is charged to cost of revenues.

 

In a similar manner, we increased the book value for the fixed assets of the Other Acquisitions by $3.7 million.  Increased depreciation expense for the pro forma year ended December 31, 2011 was $0.576 million and increased depreciation expense for the pro forma nine months ended September 30, 2012 was increased by $0.093 million for the periods from January 1, 2012 to the date of the acquisition.  For the Other Acquisitions, depreciation expense from their acquisition dates to September 30, 2012 is included in the Primoris consolidated amounts.

 

(F)                                 Goodwill of $13.3 million for Q3C largely consists of expected benefits from the geographic expansion and presence of Q3C primarily in the upper Midwest region of the United States and expanded pipeline capabilities, the opportunity to extend our infrastructure operations and other synergies of the combined companies, the value of the assembled workforce, other intangible assets that did not qualify for separate recognition and other intangible assets that were not individually identified because they cannot be reliably measured.  Based on the terms of the purchase agreement, we expect that goodwill will be deductible for Federal or state tax purposes over a 15-year period.

 

Goodwill for the Other Acquisitions is included in the Primoris balance sheet at September 30, 2012.

 

(G)                               To determine the estimated fair value of intangibles acquired, Primoris engaged a third party valuation specialist to assist management.  Our valuation estimates are preliminary and subject to change.  Based on our preliminary assessment, the acquired intangible asset categories, fair value and average amortization periods, generally on a straight-line basis, are as follows:

 

 

 

Q3C

 

 

 

Amortization

 

Fair

 

 

 

Period

 

Value (thousands)

 

 

 

 

 

 

 

Tradename

 

10 years

 

$

6,650

 

Non-compete agreements

 

5 years

 

$

450

 

Customer relationships

 

15 years

 

$

14,450

 

Total

 

 

 

21,550

 

 



 

Pro forma amortization expense is approximately $1.287 million for the nine months ended September 30, 2012, included in selling, general and administrative expenses, with no expense included in cost of revenues.  For the year ended December 31, 2011, pro forma amortization expense was $1.72 million included in selling, general and administrative (“SG&A”) expenses.

 

The fair value of the tradename was determined based on the “relief from royalty” method, an approach under which fair value is estimated to be the present value of royalties saved because we own the intangible asset and therefore do not have to pay a royalty for its use.  The fair value for the non-compete agreements was valued based on a discounted “income approach” model including estimated financial results with and without the non-compete agreements in place.  The agreements were analyzed based on the potential impact competition from certain individuals could have on the financial results of the Company, assuming the agreements were not in place.  The customer relationships were valued utilizing the “excess earnings method” of income approach.  Estimated discounted cash flow associated with existing customers and projects was based on historical and market participant data.

 

For the Other Acquisitions, intangibles were identified by the Company in a manner similar to the Q3C process.  Intangible amortization expense for the pro forma year ended December 31, 2011 was increased by $0.93 million.  Intangible amortization expense for the pro forma nine months ended September 30, 2012 was increased by $0.38 million through the dates of the acquisition.  After the acquisition dates, the amortization expense is included in the Primoris consolidated amounts.

 

(H)                          Q3C incurred certain costs, including legal, accounting and tax consulting expenses relating to the sale of the business to Primoris, and amounted to $0.09 million in estimated costs.

 

Additionally, Primoris’ acquisition-related costs, consisting primarily of legal, accounting, tax consulting and due diligence expenses, were approximately $0.12 million.

 

(I)                                   The Company provided for additional cash consideration to the Q3C sellers in the form of an earnout.  The earnout is subject to Q3C attaining certain specified financial goals, with a maximum potential payout of $10 million.  The incentive provisions are based on Q3C achieving certain financial targets using income before interest, taxes, depreciation and amortization (“EBITDA”), as that term is defined in the Purchase Agreement.  The amounts are as follows:

 

First Earnout Period

 

Subject to certain specified adjustments, if Q3C’s EBITDA for the period commencing November 18, 2012 and ending December 31, 2013 is equal to or greater than $17.7 million, we have agreed to pay the Shareholders $3.75 million in cash.  An additional cash payment of $1.25 million will be paid if Q3C’s EBITDA equals or exceeds $19.7 million for the same period.

 

Second Earnout Period

 

Subject to certain specified adjustments, if Q3C’s EBITDA for the twelve month period commencing January 1, 2014 and ending December 31, 2014 is equal to or greater than $19.0 million, we have agreed to pay the Shareholders $3.75 million in cash.  An additional cash payment of $1.25 million will be paid if Q3C’s EBITDA equals or exceeds $22.0 million for the same period.

 

The estimated fair value of the total earnout consideration (adjusting to reflect the time value of money and a contingent probability factor) as of the closing date was approximately $7.45 million and is reflected as a liability on the Pro Forma Combined Balance Sheet.  The Company will record the amortization of the discount for the fair value of the contingent consideration of a potential payout of the liability as an “other expense”.

 

Upon meeting all of the contingency targets in the First Earnout Period, the sellers will receive $5.0 million and the Company will record an SG&A expense of $0.37 million.  Similarly, upon meeting all of the targets in the Second Earnout Period, the sellers would receive $5 million and the Company will record an SG&A expense of $0.93 million.

 



 

The Company provided additional contingent consideration for the Other Acquisitions, providing additional cash to the sellers, subject to achieving certain EBITDA targets.  The estimated fair value of the earnout contingencies at the time of each acquisition was approximately $5.4 million.  The Company records the amortization of the discount for the fair value of the contingent consideration of a potential payout of the liability as an “other expense”.

 

(J)            Reflects the elimination of Q3C’s equity and represents the book value of net assets acquired by Primoris.

 

(K)          The tax effect of both the income before income taxes for all of the acquisitions and the pro forma adjustments for the acquisitions are calculated using the Company’s corporate statutory rate of 39.0%.

 

(L)           The adjustment to earnings per share reflects the 62,052 shares of common stock issued to the sellers of Sprint in order to reflect the additional pro forma dilution.  Dilution for the nine months ended September 30, 2012 was increased for the period of January 1, 2012 to March 12, 2012, the date Sprint was acquired.