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PERNIX GROUP, INC. AND SUBSIDIARIES

(Unaudited)

1. Description of Business

In this report, the terms “Pernix Group,” “Pernix,” “PGI,” “the Company,” are used to refer to Pernix Group, Inc. and its consolidated subsidiaries. Unless otherwise noted, references to years are for calendar years.

Overview

Pernix Group is a global company managed from Lombard, Illinois and was originally formed in 1995 as Telesource International, Inc.  In 2001, the Company was incorporated in Delaware and became an SEC registrant. As of September 30, 2015, Pernix Group is over 96% owned by Ernil Continental (“Ernil”), S.A., BVI, Halbarad Group, Ltd., BVI (“Halbarad”), and Affiliates. The Company conducts its operations through its Corporate office in Lombard and its subsidiaries. The Company’s two primary operating business segments are general construction and power generation services. In addition to these two operating segments, the corporate operations are a separately reported segment that provides administrative support to the operating segments and manages the Corporate headquarters building operations.

Pernix has full-scale construction and management capabilities, with some our subsidiaries located in the South Pacific islands of Fiji and Vanuatu, Guam, South Korea, Africa, Azerbaijan, Kurdistan, United Arab Emirates and in the United States. We provide our services in a broad range of end markets, including federal government, commercial and industrial, and power.  Our services include construction, construction management, power and facility operations and maintenance (O&M) services.

The construction and power segments offer diversified general contracting, design/build and construction management services to public and private agencies.

2. Significant Accounting Policies

Basis of Presentation—The interim condensed consolidated financial statements and notes thereto of Pernix Group have been prepared by management without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Although certain information and footnote disclosures normally included in condensed consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations, the Company believes that the disclosures are adequate to make the information presented not misleading. The financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods presented. All such adjustments are of a normal and recurring nature. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s 2014 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results for any subsequent quarter or the entire fiscal year ending December 31, 2015.

Principles of Consolidation and Presentation—The condensed consolidated financial statements include the accounts of all majority-owned subsidiaries and joint ventures, as well as variable interest entities in which the Company is the primary beneficiary. All intercompany accounts have been eliminated in consolidation.

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Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates affecting amounts reported in the consolidated financial statements relate to revenues under long-term contracts, including estimates of costs to complete projects and provisions for contract losses, valuation of assets and liabilities with respect to business combinations, valuation of options in connection with various share-based compensation plans, insurance accruals, determination of useful lives of intangible assets and the valuation allowance against deferred tax assets. Accordingly, there can be no assurance that the estimates, assumptions and values reflected in the valuations will be realized. Actual results could vary materially.

Revenue Recognition— Pernix offers our services through two operating business segments: General Construction and Power Generation Services which are supported by the Corporate segment. Revenue recognition for each of the non-corporate segments is described by segment below.

General Construction Revenue. Revenue from construction contracts is recognized using the percentage-of-completion method of accounting based upon costs incurred and estimated total projected costs. Our current projects include design/build, design/bid/build contracts with fixed contract prices, guarantee maximum price contracts and may include provisions of termination for convenience by the party contracting with us. Such provisions also allow payment to us for the work performed through the date of termination.

The Company only uses approved contract changes in its revenue recognition calculation. The percentage-of completion method of revenue recognition requires that the Company estimate future costs to complete a project based upon the knowledge and experience of the Company’s engineers, project managers and finance professionals. Estimating future costs requires judgment of the value and timing of material, labor, scheduling, product deliveries, contractual performance standards, liability claims, impact of change orders, contract disputes as well as productivity. Amounts billed in excess of costs and estimated earnings are recognized as a liability. The Company will record a provision for losses when estimated costs exceed estimated revenues. Contracts generally extend over a period of longer than one year from the date on which the Company is ordered to proceed with substantial work. In situations where the Company is responsible for procurement of construction materials, shipping and handling expenses are included in the contract costs of revenue and in revenue to the extent the contract is complete.

Power Generation Services Revenue. The Company receives variable monthly payments as compensation for its production of power. The variable payments are recognized based upon power produced and billed to the customer as earned during each accounting period. The Company also received fixed payments in connection with the long term concession deed for Operations and Maintenance (O&M) services in Fiji.

Cost of Construction Revenue. Cost of revenue consists of direct costs on contracts, including labor and materials, amounts payable to subcontractors, direct overhead costs, equipment expense (primarily depreciation, maintenance, and repairs), and interest associated with construction projects, and insurance costs. The Company records a portion of depreciation and indirect overhead in cost of construction revenue dependent on the nature of charges and the related project agreements. If not chargeable to individual projects, overhead costs are expensed in the period incurred. Contracts frequently extend over a period of more than one year. Revisions in cost and profit estimates during construction are recognized in the accounting period in which the facts that require the revision become known. Losses on contracts are provided for in total when determined, regardless of the degree of project completion. Cost of construction revenue also includes amortization expense associated with customer contract / backlog intangible assets.

Contract Claims— Sometimes clients, vendors and subcontractors will present claims against us for recovery of costs they incurred in excess of what they expected to incur, or for which they believe they are not contractually responsible. In turn, we may also present claims to our clients, vendors and subcontractors for costs that we believe were not our responsibility or may be beyond our scope of work. The Company records contract revenue related to claims only if it is probable that the claim will result in additional contract revenue and if the amount can be reliably estimated. In such cases, the Company records revenue only to the extent that contract costs relating to the claim have been incurred. As of September 30, 2015 and December 31, 2014, the Company had no significant receivables or payables related to contract claims.

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Fair Value Measurements—Accounting Standards Codification ("ASC") 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy that requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value.

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 inputs include inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities.

Level 3 inputs are unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The carrying values of our accounts including cash and cash equivalents, restricted cash, accounts receivable, inventories, cost in excess of billings, accounts payable, accrued employee compensation, billings in excess of costs, dividends payable and current maturities of long term debt are reasonable estimates of their fair values as of September 30, 2015 and December 31, 2014 due to the short-term nature of these instruments.

Cash and Cash Equivalents—The Company’s cash equivalents include highly liquid investments which have an initial maturity of three months or less and approximates fair value.

Restricted cash— The Company’s restricted cash represents required cash balances maintained in conjunction with PFL’s financing agreements related to ongoing construction projects and certain balances associated with one of our recent acquisitions as described in Note 3.

Inventory — Inventory represents the value of spare parts which the Company is required to maintain for use in the diesel power generators. Inventories are valued at the lower of cost or market, generally using the first-in, first-out method, and are primarily homogenous in nature.  As of September 30, 2015 and December 31, 2014, the balance of inventory, consisting primarily of spare parts used for the diesel power generators, totaled $1.6 million for both periods presented.

Property and Equipment - Property and equipment are initially recorded at cost and are depreciated over their estimated useful lives using the straight-line method. Expenditures for maintenance and repairs are expensed as incurred. Typically, estimated useful lives range from three to ten years for equipment, furniture and fixtures and 39 years for buildings. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the remaining terms of the underlying lease agreement.

Long-lived assets to be held and used are reviewed for impairment whenever events or circumstances indicate that the assets may be impaired. For assets to be held and used, impairment losses are recognized based upon the excess of the asset’s carrying amount over the fair value of the asset. For long-lived assets to be disposed, impairment losses are recognized at the lower of the carrying amount or fair value less cost to sell. There was no such impairment for the periods ended September 30, 2015 and 2014.

Goodwill and Other Intangible Assets – The acquisitions discussed in Note 3 resulted in the recognition of goodwill and certain other intangible assets. Goodwill represents the excess of purchase consideration over the fair value of the net assets of businesses acquired. Goodwill is not amortized. Instead, goodwill is tested for impairment at least annually or more frequently if indicators of impairment exist, such as a significant sustained change in the business climate or a current expectation of an impending disposal. The Company conducts its annual impairment evaluation in the fourth quarter of each year.

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Other intangible assets with determinable lives consist primarily of customer contracts/backlog and tradename. The customer contracts / backlog intangible assets are being amortized on a straight-line basis over a 3 year weighted average life and are recorded in construction costs in the statements of operations. The tradename intangible asset is being amortized on a straight-line basis over 2 years and is recorded in general and administrative expenses in the statements of operations.   

Income Taxes—Pernix Group, Inc. is a U.S. corporation that files a separate U.S. corporate income tax return, which includes its respective share of earnings from its U.S. subsidiaries. PFL is a Fijian corporation and files a Fijian corporate tax return.

Deferred income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  Effective for the activity commencing on or after January 1, 2015, the state of Illinois has enacted legislation which results in a reduction of the Company’s net deferred tax assets. This impact is offset with a corresponding decrease in valuation allowance, resulting in no impact on net income.

A valuation reserve is recorded to offset the deferred tax benefit if management has determined it is more likely than not that the deferred tax assets will not be realized.  The need for a valuation allowance is assessed each quarter.

At the date of the quasi-reorganization, deferred taxes were reported in conformity with applicable income tax accounting standards, net of applicable valuation allowances. Deferred tax assets and liabilities were recognized for differences between the assigned values and the tax basis of the recognized assets and liabilities. In accordance with the quasi-reorganization requirements, tax benefits realized in periods after the quasi-reorganization that were not recognized at the date of the quasi-reorganization will be recorded directly to equity.

The assets and liabilities of the entity which are denominated in currencies other than the Company’s functional currency are re-measured into the Company’s functional currency using end of period or historical exchange rates. Gains (losses) associated with these re-measurements are included in other income (expense), net in the consolidated statement of operations. From time to time, the Company is exposed to foreign currency exchange risk on various foreign transactions and the Company attempts to reduce this risk and manage cash flow exposure of certain payables and anticipated transactions by entering into forward exchange contracts. At September 30, 2015 and December 31, 2014, the foreign currency risk is not material and there were no foreign exchange contracts outstanding. The Company historically has not applied hedge accounting treatment to its forward exchange contracts.

Stock-Based Compensation—Awards issued under the Company’s stock-based compensation plans include qualified stock options to employees, non-qualified stock options and awards, restricted stock units and other types of awards.

The Company recognizes the expense associated with stock option awards over the period during which an employee, director or consultant is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).

Stock option awards for employees and directors are classified as equity instruments and are valued at the grant date and are not subject to re-measurement. The option valuation is performed using the Black Scholes model. Option valuation models require the input of highly subjective assumptions and changes in the assumptions can materially affect fair value estimates. Judgment is required in estimating stock price volatility, forfeiture rates, expected dividends, and the expected terms of options outstanding.

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3. Acquisitions

BE&K Building Group Acquisition

On June 30, 2015, the Pernix Building Group, LLC (“PBG”), a wholly owned subsidiary of Pernix, acquired a 100% membership interest in KBR Building Group, LLC from BE&K, Inc., a subsidiary of KBR, Inc. pursuant to a definitive Membership Interest Purchase Agreement (the “Purchase Agreement”) for $22.0 million in cash subject to working capital adjustments, of which $0.9 million was paid on the acquisition date, based on a net working capital target of negative $6.0 million. The KBR Building Group, LLC, now known as “BE&K Building Group” (“BEK BG”), is a diversified construction services company serving advanced manufacturing, industrial, life sciences, and commercial/mixed-use clients providing comprehensive pre-construction and at-risk construction management services. The addition of BEK BG personnel, resources, past experience and past performance will serve to expand Pernix’s U.S. domestic base and its private sector coverage.

dck Pacific Guam LLC & dck-ecc Pacific Guam LLC Acquisition

On June 15, 2015, Pernix Guam, LLC (“PPG”), a wholly owned subsidiary of Pernix, acquired certain assets of dck Pacific Guam LLC (the “LLC”) and a 55% membership interest in dck-ecc Pacific Guam LLC joint venture (the  “JV”), (collectively the “PPG Acquisition”) pursuant to a definitive purchase agreement (“the Agreement”) among the Company and dck worldwide Holdings Inc. and dck worldwide, LLC (collectively “dck”) for a purchase price of $1.8 million, of which $0.3 million is subject to certain terms and conditions.

The JV operates on the island of Guam and holds a Design-Build Multiple Award Construction Contract (the “DB-MACC”) with the United States Naval Facilities Engineering Command (“NAVFAC”). The DB-MACC serves as a pre-qualification for future work issued through NAVFAC task orders.  There are four task orders under the DB-MACC. Pursuant to the Agreement, the members of the JV executed an amended and restated operating agreement of the JV (the “Amended JV Agreement”), under which PPG’s membership interest in the JV represents a 96% economic interest in one DB-MACC task order called P-109 for the design and construction of an aircraft maintenance hangar on the island of Guam with a contract value of $53.6 million. In accordance with the Agreement and the Amended JV Agreement, the PPG’s interest, rights and obligations with respect to the JV are limited only to the P-109 task order. dck and the other members of the JV retain all other interests, rights and obligations with respect to the JV. To that end, the JV entered into an agreement with dck for the completion of all remaining work on the non P-109 (“non P-109”) task orders.  dck will fully indemnify and hold harmless PPG and its affiliates, including the P-109 assets of the JV and PPG’s rights thereto, from and against any and all damages from any claim, to the extent that such claim arises as a result of, or relates to, any non P-109 task order. PPG and its affiliates are also indemnified through a payment and performance bond on the non P-109 task orders.

The Company has determined that the JV is a Variable Interest Entity (“VIE”) in which PPG now holds a 55% membership interest.  PPG is the primary beneficiary of the JV and as a result, consolidates the JV in its entirety.  PPG controls all activities and has a 96% economic interest in the activities of the P-109 project, which represents the most significant remaining activities of the JV.  PPG has no obligation to absorb the expected losses of, nor the right to receive the expected residual returns deriving from non P-109 activity of the JV.  It is expected that the JV activity upon which these short-term balance sheet items are based will be concluded by December 31, 2015, or sooner, and will not impact the Company’s consolidated financial statements after the completion of these non P-109 projects.  The consolidated financial statements as of September 30, 2015 include the following assets and liabilities of the JV which relate solely to the non P-109 projects and the Company has no rights or obligations with respect to these items:

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Purchase Price Allocations

Both the Company’s 2015 acquisitions were accounted for as business combinations under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 805 - Business Combinations (“ASC 805”). Accordingly, the assets and liabilities of the acquired businesses are accounted for under the purchase method of accounting and recorded at their fair values at the dates of acquisition. The results of operations of acquired businesses have been included in the Company’s consolidated statement of operations from their respective dates of acquisition. In accordance with ASC 805, all direct transaction costs relating to the acquisitions were expensed as incurred.  

The Company has estimated the fair value of the assets acquired and liabilities assumed at the date of acquisition based upon information available to the Company at the reporting date. The Company is still in the process of finalizing appraisals of tangible and intangible assets in order to complete its purchase price allocation for the acquisitions. Accordingly, management has used its best estimates in the preliminary purchase price allocation as of the date of these financial statements. As additional information is obtained about these assets and liabilities within the measurement period (not to exceed one year from the date of acquisition), the Company may revise its estimates of fair value to more accurately allocate the purchase price.

The following presents the estimated fair value of the assets acquired and liabilities assumed in the BEK BG and PPG acquisitions, and the resulting goodwill recognized in the BEK BG acquisition:

Acquired intangible assets consist primarily of contract-related intangibles and tradename. The 2015 acquisitions resulted in the recognition of $19.6 million of goodwill. Transaction costs associated with these acquisitions incurred during the nine months ended September 30, 2015 were $1.7 million and were nominal during the three months ended September 30, 2015.

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The amounts assigned to goodwill and intangible asset classifications for the 2015 acquisitions are all recorded in the General Construction segment as follows:

Pro Forma Information

The following unaudited pro forma information illustrates the effect on the Company’s revenue and net earnings for the three and nine months ended September 30, 2015 and 2014, assuming that the 2015 acquisitions had taken place on January 1, 2014.

These pro forma results of operations have been prepared for comparative purposes only. These pro forma results are based on the actual results of the acquired companies and also include certain adjustments to actual financial results for the periods presented, such as estimated additional amortization and depreciation expense as a result of intangibles and fixed assets acquired, measured at fair value. They do not purport to be indicative of the results of operations that actually would have resulted had the acquisitions occurred on the date indicated or that may result in the future.

The pro forma results include adjustments for non-recurring transaction costs of $1.7 million for the nine months ended September 30, 2015 and $0.8 million of non-recurring professional fees and transition related expenditures for the nine months ended September 30, 2015 and 2014 and for the three months ended September 30, 2015.

Actual acquisition revenue for the three and nine months ended September 30, 2015 were $76.9 million and $78.7 million, respectively. Actual acquisition loss before income taxes for the three and nine months ended September 30, 2015 were $0.3 million and $0.5 million, respectively.

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4. Goodwill and Other Intangible Assets

Goodwill and other intangible assets subject to amortization consisted of the following:

The Company recognized $16.6 million of goodwill resulting from the June 30, 2015 acquisition of BEK BG, all of which was assigned to the Company’s General Construction segment. During the three months ended September 30, 2015, the Company recognized an increase to project related liabilities of $3.0 million with a corresponding increase to goodwill.  

Amortization of intangible assets for the three and nine months ended September 30, 2015 was $0.9 million, of which $0.8 million was recorded in construction costs and $0.2 million was recorded in general and administrative expenses on the consolidated Statements of Operations.

Amortization expense relating to amortizable intangible assets will be $0.9 million for the remainder of 2015, $3.7 million in 2016, $3.4 million in 2017, and $1.5 million in 2018.

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5. Recently Issued Accounting Pronouncements

In September 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”). The main provisions of this guidance require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer is further required to record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, resulting from the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.  Entities are required to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, applied prospectively with early application permitted on unissued financial statements. Management has adopted and applied early adoption of ASU 2015-16 in these financial statements.

In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2015-14”), which deferred the effective date of ASU 2014-09 (“ASU 2014-09”) issued in May 2014. ASU 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific requirements. ASU 2014-09 establishes a five-step revenue recognition process in which an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. With the issuance of ASU 2015-14, the FASB delayed the effective date for implementation of ASU 2014-09. Deferral of the effective date requires the Company to adopt the new standard not later than January 1, 2018. Management is currently evaluating the impact the adoption of ASU 2014-09 will have on the Company’s consolidated financial position, results of operations or cash flows and the method of retrospective application, either full or modified.

In August 2015, the FASB issued ASU No. 2015-15, “Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements—Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting”. The guidance in update 2015-03 (see paragraph 835-30-45-1A) does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within Update 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The amendments in ASU No. 2015-15 update are effective for interim and annual reporting periods beginning after December 15, 2015 with early adoption permitted. Adoption of the standard is not expected to have a material impact on the condensed consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, “Inventory – Simplifying the Measurement of Inventory” (“ASU 2015-11”).  The main provision of the guidance is that an entity should measure inventory at the lower of cost and net realizable value.  Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.  This guidance does not apply to inventory that is being measured using Last-In, First-Out (LIFO) or the retail inventory method.  The guidance is effective for financial statements issued for annual and interim periods beginning after December 15, 2016 on a prospective basis.  Early adoption is permitted.  Management does not expect the adoption of ASU 2015-11 to have a material impact on the Company's financial position, results of operations or cash flows.

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In April 2015, the FASB issued ASU 2015-03, “Interest — Imputation of Interest (Subtopic 835-30)” (“ASU 2015-03”). This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The discount, premium, or debt issuance costs shall not be classified as a deferred charge or deferred credit. An entity should apply the guidance on a retrospective basis, with applicable disclosures for a change in an accounting principle. ASU 2015-03 is effective for interim and annual reporting periods beginning after December 15, 2015 with early adoption permitted. Management does not expect the adoption of ASU 2015-03 to have a material impact on the Company's financial position, results of operations or cash flows.

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810)”. The guidance contains changes to the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The amendments in this update are effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted, including adoption in an interim period. Adoption of the standard is not expected to have a material impact on the condensed consolidated financial statements.

Other pronouncements issued recently are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

6. Contract Backlog

Backlog represents the amount of revenue the Company expects to realize from work to be performed on uncompleted construction contracts in progress at September 30, 2015 and 2014. In addition, backlog also includes construction contractual agreements on which work has not yet begun and awarded not booked backlog where a contractual agreement has not yet been signed and for which there is a high degree of certainty where we expect to recognize revenue in the future. The following summarizes changes in backlog on construction contracts during nine months ended September 30, 2015 and 2014:

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7. Cost and Estimated Earnings on Uncompleted Contracts

Long-term construction contracts in progress use the percentage-of-completion method to recognize revenue. Billings, costs incurred, and estimated earnings on uncompleted contracts as of September 30, 2015 and December 31, 2014 were as follows:

8. Short-Term and Long-Term Borrowings

Fair Value of Debt

In accordance with ASC 820 – Fair Value Measurements, the fair values of the Company’s short-term borrowings are based on quoted market prices at the date of measurement. The Company’s credit facilities approximate fair value as they bear interest rates that approximate market. These inputs used to determine fair value are considered Level 2 inputs.

The fair values of the Company’s long-term borrowings, the exit price of which cannot be determined using quoted market prices, is established using market and income valuation techniques and are considered Level 2 inputs. The aggregate carrying value of the Company’s borrowings is $10.8 million and the estimated aggregate fair value using the income approach is $11.7 million.

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The Company had no debt outstanding as of September 30, 2014. The current and non-current portions of the Company’s outstanding borrowings as of September 30, 2015 are as follows:

Maturities—The Company’s debt as of September 30, 2015 matures as follows: