Kate A. Tholking - Primoris Services Corp. David L. King - Primoris Services Corp. Peter J. Moerbeek - Primoris Services Corp..

Stefan Neely - Avondale Partners LLC Matt Duncan - Stephens, Inc. Ryan Curtis Cassil - Seaport Global Securities LLC Lee Jagoda - CJS Securities, Inc. Robert Joseph Burleson - Canaccord Genuity, Inc. Jason A. Wangler - Wunderlich Securities, Inc. Brent Edward Thielman - D. A. Davidson & Co. Tahira Afzal - KeyBanc Capital Markets, Inc..

Greetings and welcome to the Primoris Services Corporation 2016 Fourth Quarter and Full Year Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

I'd now like to turn the conference over to Kate Tholking. Thank you. Please go ahead..

Thank you, Brenda. Good morning, everyone, and thank you for joining us today. Our speakers for today's call will be David King, President and Chief Executive Officer; and Pete Moerbeek, Executive Vice President and Chief Financial Officer.

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

Forward-looking statements inherently involve risks and uncertainties, including without limitation those discussed 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, 2016, which was filed this morning, and other filings with the SEC.

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 security laws. I'd now like to turn the call over to our CEO, David King..

Good morning, everyone, and thank you for joining us today to discuss our fourth quarter and 2016 full-year results. I'm extremely pleased with how the 2016 year wrapped up. We finished strong in the fourth quarter with revenues in Q4 2016 as compared to Q4 2015.

During the fourth quarter, we continued to reduce our SG&A cost by an additional $1.2 million, which contributed to a total of $10.9 million reduction in SG&A cost for the year.

We generated an additional $12 million in cash flow from operations in the fourth quarter and we were free cash flow positive for both the quarter and the full year, ending the year with a strong $136 million cash balance.

Q4, 2016 saw us continue to build our backlog both in MSA and project work, and it now stands at $2.8 billion, a 34% increase over 2015's year-end backlog and a record for our company. And as you can tell form the recent announcements we've been making, the trend continues into 2017.

We've already announced an additional $459 million in new awards so far in the first quarter. Our opportunity list is as strong as I've ever seen it and the quality of those prospects is very good. We were able to close out the year exceeding our new awards goals and are off to a great start in 2017.

We continue to selectively choose which projects we should pursue and which clients we work with for the best success and margin performance. We also experienced an 18% reduction in our 2016 OSHA recordable incidents and had zero loss time incidents for the entire year. I'm proud of the many safety awards our various businesses have been receiving.

This outstanding safety culture was recently recognized on our Florida LNG project by the ENR magazine in their Southeast Best Projects category. Before I ask Pete to go over the financials, I'd like to highlight a few items.

Our accounts receivable and CIEBI (3:40) billings continue to be a focus and I'm proud to report that our internal DSO ranges between 38 to 48 days. Our outstanding legal disputes are progressing as we expected with the real possibility of an ATM settlement this year.

We are also raising our EPS guidance and continuing our dividend as noted in our press release. Our M&A activity remained strong and we are seeing some positive movements in that area. I'll begin with an update from an operation perspective of our Civil business, which includes both our highway work and also our I&M work.

As you all know, last quarter, we announced our intention to sell the Texas Heavy Civil business. We currently have interested parties and expect to be analyzing those offers next month. But as previously indicated, we have not discontinued our operations.

And unless we realize the proper value for this group, we will continue our Texas Heavy Civil operations. I'm pleased to say that we've achieved substantial completion on two of the large Belton area jobs along I-35 corridor.

Our new Heavy Civil Senior VP, Mark Buchanan, deserves a lot of credit for getting the Texas Heavy Civil division working more effectively, and we expect to see continued improvement in 2017. We're also seeing good potential in the change orders and claims we have relative to those I-35 projects, but we still have a long way to go.

Our Louisiana Heavy Civil operations continues to perform well, including a recent $124 million award for additional work along the I-10 corridor.

The I&M group has wrapped up the majority of their initial scope on the large petrochem facility in Lake Charles, which led to the most fourth quarter revenue decline for this group, but we're now seeing success as they bid on continuing and present (5:31) work at that existing site.

We also recently announced a $30 million award for the division at a new methanol plant with a potential for scope expansion there also. With these new wins, I feel better today than I did a year ago for the I&M's 2017 prospects. Jonas Beatty and his group have a great prospect list in front of them.

The improvement in the commodity prices has also had a positive impact on our power and industrial groups, as customers are gaining confidence that there is some stability in energy markets. Natural gas prices below $4 are driving investment in industrial projects and LNG peak shaving facilities.

We've recently completed an LNG facility for transportation fuels, and we now have announced a new $100 million LNG peak shaver.

Our traditional power work in California was delayed in 2016 by regulatory issues, but we're pleased to announce that the final legal hurdle has been cleared on the 500 megawatt natural gas combined cycle, and we anticipate full notice to proceed tomorrow, March the 1.

Tim Healy and his team has worked tirelessly with our customer to accommodate for the permitting delays, and I know he is as excited as I'm to move forward on this project. We also started work in the fourth quarter on a power job on the East Coast, where we are relocating a simple cycle gas turbine to an existing facility.

During the fourth quarter, we also acquired the assets of a small EPC solar construction company, which gives us full turnkey EPC capacity in the renewable power markets under the brand of Primoris Renewable Energy. I'm optimistic that we'll be making new business announcements for them in the near future.

Our ARB Industrial team has also been involved in alternative power projects, successfully completing construction on a 20 megawatts electrical storage capacity facility in California. It is currently the largest battery storage facility in operation in North America with other battery storage projects being planned.

Our industrial work in the Gulf Coast region continues to be driven by the successful project – petrochem project in Lake Charles. We announced an additional $138 million in work for this project in October, and we expect our industrial team led by Conrad Bourg to remain on site through the third quarter of this year.

Their prospects for new awards continue to improve as the stability in energy prices give our clients increased pricing certainty. You've also heard me mention on past calls about Primoris moving further up the industrial project cycle.

There's a segment of the industrial project market, which we believe is underserved by the larger EPC companies, namely the small to midsize capital projects for refining, petrochemical and gas-processing industries.

After searching for an engineering acquisition that would allow us to target this market, and not finding the right company at the right price, we decided to create our own entity. We have experience in doing this, as you may remember that our OnQuest engineering group was formed in the same manner.

I don't want to go into too many details right now, but we'll be making a more formal announcement in the next month or so.

Our OnQuest engineering group, led by Randy Kessler, continued focusing on the execution of the PBH (8:45) heaters in Canada, hot oil heaters for LNG facilities on the Gulf Coast, and has begun work on three new diesel hydrotreater heaters for our U.S. domestic refinery.

Fourth quarter saw them also finalize the contract terms for a new LNG peak shaving facility we recently announced. Our utilities and distribution businesses remained a dependable stable business for Primoris.

Scott Summers' ARB Underground team and Jaeson Osborn's Q3C teams, both had profitable revenue growth in the fourth quarter, helped out by a mild start to the winter. Our work with California Utilities has remained strong, and it looks like a plant piece at higher (9:23) for one of our larger California customers is now being delayed into 2018.

In the Midwest, we have also been successful pursuing MSA agreements with existing and new customers, and extending our geographic reach. Our MSA backlog of $671 million is at the highest level in the company's history.

And while MSA backlog is the best estimate and our clients are not obligated to give us work under the MSA, we're getting better and better at estimating our MSA revenues. Our 2016 MSA revenues came within $5 million of our initial backlog estimate.

We're also now seeing our electrical transmission group in the Midwest, Primoris Aevenia, seeing a very encouraging uptick in securing new business and bidding opportunities. I'll end my comments with our pipeline and underground business.

The outlook for smaller-diameter pipeline market is seeing improvement and we're building name recognition for our Primoris Pipeline Group, our former Sprint acquisition.

In December, we announced $20 million of work for this group at the Lake Charles petrochem project, and we're pursuing spreads on some larger projects that we feel optimistic will be awarded.

Our Florida Rockford pipeline jobs are well underway and our project supervisors, Mickey and Dickey Langston, are doing an outstanding job keeping those projects on schedule. We expect that work to wrap up late in the second quarter.

Our joint venture, Spring Ridge Constructors, formerly awarded the spreads for Atlantic Coast Pipeline project, so we increased the value of the project in backlog by $55 million to $680 million for our portions. We have four spreads on that project and we do not expect our work to begin until the first quarter of 2018.

This means we have some capacity available in the second half of 2017. We are actively bidding on additional large-diameter work and we feel confident we will win our fair share, but we are being very strategic in what we pursue, concentrating on the quality of the prospect, the customer and the contract for our remaining capacity.

Frank Welch and Josh Ramsey continue to surprise me each day on what this group can perform. The large-diameter pipeline market looks to be strong for us through 2018 and 2019. With that in mind, we want to showcase one of our projects and give investors a deep look into the process of constructing a pipeline.

So, we'll be hosting an Analyst Day on April the 7 in Florida with a morning of meetings with our senior management, followed by a site visit to one of our pipeline projects. Because of site constraints, attendants will be limited to invitation-only, but the presentations will be made available on our website.

So, as I look ahead at 2017, the benefits of our diversified strategy become clear as we have multiple end markets driving strong backlog growth, especially for infrastructure projects in the pipeline, industrial and utilities and distribution markets.

We recently held our strategic planning meetings and came away with each business unit having very strong organic growth opportunities. We entered the 2017 year with a balance sheet that remained strong with growing tangible net worth, a solid cash balance and low-cost debt.

We've improved visibility on major projects such as our California power job and large-diameter pipeline projects. We continue to look for acquisitions in targeted markets such as the U&D market. And where we can't find the right acquisition, we're looking for ways to grow the business organically.

All of our operations indicators are pointed in the right direction. With those comments, I'll turn it over to Pete Moerbeek, our CFO, for his comments.

Pete?.

Thank you, David, and good morning, everyone. We filed our form 10-K this morning. Since it took us about 58 days to write it, I don't expect that anyone listening has had a chance to memorize it, but the information is now out there for your reading pleasure. Completing the filing also means that I can limit my remarks to just a few highlights.

Our 2016 fourth quarter revenues were $601.9 million, a 21% increase over 2015's fourth quarter revenues. The revenue increase was driven by increased revenues in the West segment as our large Florida pipeline jobs took the top two spots for customer revenue for the quarter.

We also saw revenues from two of our large utility customers, one in California and one in the Midwest, increase.

Unfortunately, revenues in both the East and Energy segments declined, driven primarily by a decrease in total revenue of almost $15 million at the Lake Charles, Louisiana petrochemical construction site, but also driven by closeouts of projects at James Industrial and OnQuest prior to this year's fourth quarter.

Our TXDOT revenues increased by $10 million to almost $52 million for the quarter. We are still in a process for our planned divestiture of our JCG Heavy Civil division and we expect that we will have enough information to make a decision within the next two months.

Gross margins in the 2016 fourth quarter were 11.4% compared to 12.8% in 2015's fourth quarter. While the West gross margin remained strong at 14.9%, it was down slightly from 2015, when we benefited from closeouts on large projects at both Rockford and ARB Industrial.

Gross margins in the East were impacted by both the reduced revenues at I&M as well as the continued challenges in the Texas Heavy Civil division, although to a significantly lesser degree than this year's third quarter.

Fourth quarter over fourth quarter, gross margins in the Energy segment declined from 13.8% to 12.6%, reflecting the impact of unfavorably closing out two jobs. Selling, general and administrative expenses declined by $1.2 million in the quarter, compared to 2015 fourth quarter and by $10.9 million for the full year.

SG&A decreased to 7.1% of total revenues compared to 2015's 7.9% of revenues. We anticipate continued improvement in 2017, especially as revenue increases. For the quarter, our provision for income taxes was $11.9 million for an effective tax rate on income attributable to Primoris of 45.1%.

That compares to 2015's fourth quarter provision of $8.8 million for an effective tax rate on income attributable to Primoris of 41.2%. At the end of the third quarter, we expected a full-year effective tax rate of 43%, but our actual rate is 44.2%, so the fourth quarter represented a catch-up.

Our fourth quarter net income attributable to Primoris was $14.5 million or $0.28 per share, a $1.9 million increase over 2015's fourth quarter net income of $12.6 million or $0.24 a share. We ended the year with $135.8 million in cash and cash equivalents on the balance sheet and tangible net worth of $337 million.

For 2016, our operating cash flow was $62.6 million, a $14 million improvement over 2015. Our goal for capital expenditures is to invest an amount equal to sum of depreciation, amortization and net proceeds from equipment sales. At a total of $58 million in 2016, we spent less than our goal.

At present, we believe we'll spend around the same in 2017 as we did in 2016. As David mentioned, during the fourth quarter, we acquired the assets of a small solar power EPC company for $6.9 million using cash on hand.

There was not earn-out contingency associated with this purchase and we have no such earn-out contingencies remaining on the balance sheet from previous acquisitions. In the fourth quarter, we also purchased and canceled 207,800 shares of stock for a total of about $5 million.

The board of directors has authorized additional $5 million share repurchase program for 2017 that will expire at the end of the year. At this time, the intent of the repurchase program is to purchase shares that will be issued to directors and managers during the year.

Our total debt at year-end was $261.8 million, which included $168.7 million in equipment notes and $92.9 million in senior secured notes, and our debt to equity is 52.6%, our weighted average cost of debt is 2.9%.

Our backlog at year end was a record $2.8 billion, $103 million increase from the end of the third quarter and a $710 million increase from the end of 2015. As we have already announced an additional $459 million in new awards in the first two months of the year, I think it's safe to say that we're excited about the opportunities going forward.

That comment leads to guidance. The easy part is for me to say that for the next four quarters, we expect earnings attributable to Primoris will be in the $1 to $1.20 per share range. The slightly more difficult part is to identify some of the key assumptions. First, we're assuming no collection from the ATM collection matter.

We believe we'll resolve the issue in 2017, but at this time, there is no way to assign the value. Secondly, we're including no assumption for the results of the divestiture of our Texas Heavy Civil business. Third, we're assuming three-quarters of Carlsbad with our traditional conservative approach at the start of the project.

Fourth, we're assuming minimal utilization of Rockford after the two Florida jobs. And finally, we're assuming an overall effective tax rate for earnings attributable to Primoris of 40%. We certainly hope that we are being overly conservative with that assumption. Finally, let me briefly talk about our financial segments.

Earlier in the call, I said that our two best jobs in the fourth quarter were in Florida in our West segment. Hopefully, this is the last time that I will be so geographically challenged. We'll present our financial results in different operating segments, starting with the first quarter of 2017.

The new segments reflect the way that David and Tom McCormick manage our business, and yes they are more aligned with our end markets. We will provide the historical information for both the new and old segments, for the last eight quarters by filing a Form 10-K in the next few weeks. By waiting, we don't ruin anyone's Fat Tuesday.

With that, I will now turn it back over to Brenda for your questions..

Thank you. Our first question comes from the line of Stefan Neely with Avondale Partners. Please go ahead with your question..

Hey. Good morning, folks. Thanks for taking my question..

Good morning..

So, I wanted to start off, I had a little bit of a question. I wanted to clarify, for Carlsbad, how you're including that in the full-year guidance. You said three-quarters. Are you excluding three-quarters of the project or is that just the three-quarters of the year over next four years – next four quarters (21:35)..

No, when we are – we're not really looking at much slope (21:42) coming out of the ground. So I think you'll see our operations start ramping up throughout the year, but the project goes into next year obviously, into 2018..

Okay. Perfect. Thanks. And I was also curious, if you could give us a little bit of an update on the kind of the pipe integrity business in California. I know you had said that there was kind of a slowdown in spending, particularly in Southern California, that you were seeing.

How is that progressing for you?.

Well, I think, as I've mentioned even on the last call, we've continued to add MSA work out there. So, our potential for more work of that type and nature in California continues to grow. We've got one customer, who slows down, but that's very typical of that business in California.

You have some customers that will exceed it forward (22:39), some that slow down. It goes back and forth. We've always made comments that it is still California on some of that spending. But for us right now, that's still a very healthy market and we're still seeing it very healthy..

Okay. Excellent. Now, the last question is just quickly, I know speaking of California, it seems they've had a lot of rain out there so far in Q1.

Is that anything you guys are seeing any impact from at all?.

We've seen some impact from it. I wouldn't say it's been a major impact on us. Obviously, on our utilities and distribution side, Scott Summers, his group's out there, we've had some days that they couldn't get in there and do the work.

And since we were beginning to come out of the ground, on our NRG power plant project, obviously, that was a hole filled with water that we had to pump out and start over. So, we have had some effect, but I would not call it a major effect on us..

Okay. Excellent. Thanks a lot. I'll get back in queue..

Thank you..

Thank you. Our next questions come from the line of Matt Duncan with Stephens. Please go ahead with your questions..

Hey, good morning, guys..

Good morning, Matt..

First question I've got is just on the West segment. So, really strong revenue quarter there, obviously. I'm trying to get a feel for how much of the improvement we saw there, sequentially. Was the pipeline projects in Florida kind of kicking into full gear? And I think you guys mentioned that there might have been a weather benefit there too.

If you could quantify what that might have been that'd be helpful..

I'm not sure that I would call it (24:11)....

Yeah, I'm sorry....

...weather benefit. What you're looking at is very strong contribution, as we noted that the two biggest jobs that we had for the quarter came out of Florida. So, that obviously is a major contributor. And we also benefited a little bit from the fact that it didn't snow quite as early in Denver and Minnesota as it traditionally does.

So, we were able to work a little bit later in December..

Got it..

But the biggest impact came out of Florida..

Yeah. The weather was the mild winter for Q3C, that's where we got the benefit. Q3C was able to work a little longer in the winter than they typically do..

Got it. Okay. And then, it's interesting that you guys are assuming that there is not much for Rockford after the Florida jobs. I certainly understand it so you know what there is, it's safe to be conservative there. But it sounds like that market is pretty strong.

Some of the projects you guys are looking at for after Florida is done, beyond just Atlantic Coast, what's the timeline look like on that stuff? Are there some smaller projects that you could fill the back half of this year? Just give us some thoughts on what the market looks like from a timing perspective?.

Definitely, Matt. By the way, it doesn't mean that our Rockford guys are not working as they come down off that Florida project. We've actually got some small projects booked in there, they just won't be at full utilization. We've talked the last two quarters, we knew that they might not be at full utilization toward the latter half of this year.

So, we actually went out – and again, we want to be very selective on which projects we go after so that we get a good customer and a good terms and conditions, but also it fits that latter half of 2017 timeframe that we're looking at. I don't want to individually talk projects, Matt, but I'll talk some customer names and things like that.

We do a lot of work with the Enterprises and the Williams, and some other people like that. And they've obviously got projects that, I believe, will award and execute in that timeframe toward the latter half of 2017, as well as several other customers.

So, we're – as I mentioned in some of my comments, I'm fairly optimistic that we will pick up one or two of those projects and be able to use that utilization. But being very cautious right now before we say we're filing that utilization up..

Sure. Makes perfect sense. And then last thing, I'll hop back in the queue, just on some of the small pipe work. Now that we've flipped the calendar to 2017, your energy customers are obviously in the new budgets, which I would think will be a little bit helpful.

So, have you begun to see actual demand improve? I know your customers are likely going to be more optimistic.

But is it resulting in a move higher in revenues for that Energy segment as you've gone here into 2017?.

Yeah, let me make this comment. Our estimating group on the smaller-diameter pipeline projects is as busy as they've ever been in the last – literally the last couple of years. A lot of bidding opportunities, a lot of pretty good projects coming up.

And in fact, Patrick McRae (27:26), who runs a lot of that Primoris – runs the Primoris Pipeline Group for us, told me the other day that he actually had 10 bids in the first two months of this year versus 20 bids for all of 2016.

So maybe that will give you a flavor for how the market's turning around from a demand standpoint as far as the request for bids are concerned. Now, some of those, not all those, will materialize. But we track those jobs very closely and I can tell you we look at the goes (28:02) on those projects and obviously the get percentages and things.

I do feel that you're going to see more announcements from us with regard to the small-diameter pipeline business in 2017..

Great. Good news. All right. Thanks, guys..

Our next questions come from the line of Ryan Cassil with Seaport Global. Please go ahead with your questions..

Good morning..

Good morning, Ryan.

I guess, just going back to your comments on the pipeline market, you talked in the last call about $6 billion award funnel, lot of small and medium sized projects.

It seems consistent today, but are you seeing projects skew a little bit larger or is it still real healthy market of the smaller work out there?.

On the large diameter, we're still seeing the skew to fairly large projects. There are some smaller ones out there, but on the large-diameter pipeline business, those skew to the heavier, larger projects. On the – interesting on the small diameter, Ryan, some of these small-diameter projects that are going in are long distances.

So, they will be fairly large projects from a spend perspective. Even though they're small diameter, but they're going quite long distances; 500 miles, 600 miles, 700 miles, 800 miles on some of them.

But at the same time, the laterals that come off of them (29:25) and some of the other interconnect lines obviously spur some of the smaller pipeline jobs also. So, I hope that answered your question, but that's kind of what we're seeing..

Okay. Great. And then you've talked about you've got Sasol project coming off and we've seen some nice industrial awards here recently as well.

I mean, are things picking up in the industrial petrochemical market? Can you talk about just kind of what you're seeing there?.

Well, we never really saw – and now when I talked the industrial, petrochem market, let me kind of separate that a little bit by really – further. When you really look at the petrochem side, we never really saw much of a drop-off on the petrochem side. That natural gas prices at the level they're at continue to spur a lot of those projects.

A lot of those projects are the size of that Lake Charles facility, so they're mega billions of dollars. And so, it takes longer for the customers to materialize those projects. In other words, the germination period, I guess, is a lot longer on them.

But we still have seen a lot and you've seen us amass them (30:39) even last year a lot of the smaller projects on the petrochem side, the methanol projects and some of the hydrogen-related projects and things of that nature. They're not the mega billions of dollars of projects. So, we never really saw the petrochem side drop off.

What we're seeing now that we probably didn't see last year is much of – is some of the other types of projects that are more the refining-based projects and as well as the petrochem projects and we're beginning to see a little bit more – and I want to separate the LNG market into two categories.

We're beginning to see a little bit more activity from customers on the large LNG projects that of course we're just a subcontractor that perform field services work on those. And then, obviously, we're still seeing the small LNG projects that we do the engineering and construction on.

So, we're absolutely seeing more uptick, interest in those kind of projects also..

Great. Thanks. I'll turn it back..

Our next questions come from the line of Lee Jagoda with CJS Securities. Please go ahead with your question..

Hi. Good morning..

Good morning, Lee..

So just starting with MSA side of the business, how much additional capacity do you think you have within your current footprint to add to the MSA work on an ongoing basis? And then what's the pipeline for acquisitions in that side of the business looks like given that that's been one of your areas of emphasis?.

What I don't really look at is as capacity limited. Obviously, there is a capacity that you have from a limit standpoint. But the way I tend to look at our capacity on this MSA work is – and I can go to our Q3C group as kind of an explanation of why I feel this way.

As those MSAs or as those customers want us to do additional work, we add on additional resources, we grow organically into the area they want us to grow. And so, we just keep expanding as we go. And as you can see, we've done that with Q3 from maybe a $90 million revenue entity to a $300 million type revenue entity.

So, I don't really categorize there as having a capacity limit. Same thing is true with our ARB Underground Group. They continue to grow each and every year in our MSA working capacity.

Now, when you start looking at acquisition base, obviously when we're not in a geographic area that either ARB touches or Q3C touches and is not a neighboring state that would make it easy from an organic growth area, then we do look at expanding into those areas.

And although I'm not ready to make any formal announcements, I can tell you we've had some very serious discussions on another acquisition that's an MSA-based utilities and distribution organization. If I can leave it just at that, I will make a comment, generally, that they're in an area that we currently don't cover.

We've been trying to find an entity like this in that particular region for probably the last year to year-and-a-half. And finally, I think we've got the right entity. So, you'll probably be hearing us talk about that sometime in the next couple of months or so..

Okay. Great. And then, one for you Pete, just on Carlsbad.

Can you just remind us of the size of that opportunity and how the math works with regard to the non-controlling interest?.

It's right at a little over $200 million and it's a 50/50 JV with Burns & Mc. We do all the – we'll recognize 100% of the revenue in the non-controlling interest line, all the way at the bottom of the income statement, is where we take out their half..

Got it. Perfect. And then one more for me and I'll hop back in.

Just as it relates to the East and the shortfall in profitability, is there a way for you to breakout the TXDOT-related issues versus the rest of the business, and then maybe highlight if there were one or two other issues that impacted that?.

Well, we – I think David said that on the area that we've had the challenges, which is the Belton corridor where we took the huge loss in third quarter. They finished two other jobs, we lost or expensed about $3.4 million on those jobs in fourth quarter.

We do believe that we have the opportunity now to go back in on those two jobs and start negotiations with TXDOT on claims and all sorts of a wonderful long-term negotiations that we actually have begun.

The operations in the rest of Texas outside of that corridor were profitable for the quarter, and Louisiana was slightly profitable for the quarter..

Yeah. Let me add a little bit more color for you, Lee, if I can, on what Pete just said (35:59). In our Texas Heavy Civil, we had that I-35 corridor, those Belton projects, those were the areas that we struggled on.

When you look at the rest of what we have in the Texas Heavy Civil, the airport work, some other municipality work, city works, things of that nature, all of that has been performing very well and looks like it will continue to perform well.

The issue on that I-35 corridor has to do more with – and it's the way we have always – I guess, Brian used to use the old comment, take your S81s (36:39) type thing, but those contracts don't allow you to settle up on your claims and extensions and things of that nature until the projects are complete.

And so, that's why I mentioned on my prepared notes that we've closed out two of those jobs, which now allows us to go forth with some of those claims and change order request. But again, we're way too early in that process for me to report any positive news therein..

Okay. Great. Thanks very much..

Our next questions come from the line of Bobby Burleson with Canaccord. Please go ahead with your question..

Yeah. Good morning.

So just curious on Texas Heavy Civil, what the bid pipeline looks like there and if you're seeing any benefits from Prop 7?.

Yes. What Prop 7 is going through right now is more – is still in the engineering stages of it, but we're beginning to see some early indications of some of the smaller spend on that and some very small highway sections.

Now, we've been – because of the issues we've had with those jobs in TXDOT, we've been very selective on what type of margins and contingencies and which projects we go after, and whether or not we figure that TXDOT has got all that prepared right-of-ways and permitting and things of that nature so that we don't fall victim, like we did before, in some of that I-35 corridor work.

But we are beginning to see some of that. But remember, some of my comments on the last couple of calls relative to Texas Heavy Civil, we really began refocusing that group almost a year ago to go after more airport work and municipality work, which has a higher-margin benefit to it than going after some of the TXDOT work..

Okay.

And then just on with some of the other new markets you're work – you're moving into with some of the petrochem opportunities that you're starting to look at, what are the prospective margins there relative to kind of your corporate average?.

Well, again, we're changing the way we segment. But if you remember, the old segments in the East, the petrochem business is pretty much, the percentages that we talk about from a gross margin percentage from the Energy segment is pretty consistent with what we'd see on that type of work..

And we tend to be in the low teens..

Yeah..

Okay. Great. Thanks..

Our next questions come from the line of Jason Wangler with Wunderlich. Please go ahead with your questions..

Good morning.

I was curious as we look at the guidance in kind of what you talk about with some of these larger projects kicking off, and obviously Carlsbad as well here pretty soon, do you see the same type of seasonality, you think, in the business as far as, as we should look at the modeling perspective with the guidance you gave? Or do you think there is maybe going to be a little bit more of a smoothing effect because of those larger projects?.

I'll let Pete address it, but I believe there's going to be more of a smoothing effect. But Pete, talk about that..

Yeah, I'm not sure if I want to call it smoothing, and I think you're going to see stronger revenue and profitability in the first two quarters because of the large jobs that Rockford has in Florida. Then obviously you're going to see the stronger MSA work in the second part.

I don't know yet – and I think we've kind of alluded that, we're not sure how strong Rockford will be in the third and fourth quarters. On the other hand, you are starting to see by then the NRG job come out of the ground.

So, it's hard to say that it's going to be perfectively smooth, but I don't think you're going to see as big the drop-off as we have in the past in the first and second quarters..

Okay. And just maybe one on Carlsbad, specifically, the $200 million or so, and you've got three quarters of work there. I think you're trying to finish it by third quarter of 2018.

Just should we look at that as basically being, you should have about half of the work done this year, half of the work next year, or just maybe the cadence of that?.

As you build up on that, when you come out of the ground, obviously, your cost are not as high as once you come out of the ground, and you're doing lot of the mechanical, and piping, and civil, and instrumentation electrical.

So, if you trying to weight it over that 18-month period, you're probably talking about 30% or 40% in the first nine months and 60% to 65% in the second nine months would be a pretty good weighting..

Great. Thank you. I'll turn it back..

Our next questions come from the line of Brent Thielman with D. A. Davidson. Please proceed with your questions..

Thanks. Good morning..

Good morning, Brent..

Yeah.

Kind of back on the LNG opportunities out there, any sense on kind of how the micro to midsize facilities kind of coming for you in 2017? Are they sort of front half, back half weighted bookings opportunities? And then, kind of for the larger plants, is that something that looks more like a 2018 event for you in terms of doing some work on those or could that come sooner?.

Let me talk about the small to midsized first. Most of what we'll be chasing at the start is going to be more feed type work, not really the procurement in the construction side of some of those small to midsize projects.

So, I think what you're going to see us in 2017 relative to that market we're beginning to chase is going to be fairly small from the standpoint of a revenue generation. I think then those kind of projects materialize into the full EPC work. So, those would be more of a 2018 effect on us.

As far as the large petrochem projects and things, a lot of those larger petrochem projects as they develop are not going to be go into finalization until the latter part of this year. However, the upfront, some of the offsite (42:56) work that typically our I&M group and Civil groups do would potentially start in the latter half of this year. So....

Yeah. And obviously we do have the benefit of the job that we announced recently, the $100 million job for OnQuest, so that is starting now..

Yeah. The LNG project that we mentioned for OnQuest is a full EPC job for us..

Okay. Okay. That's helpful.

And then, I guess, on the East segment, any comments on the pipeline of upcoming work you're seeing for the non-Texas Civil business?.

We just announced a good-size I-10 project and we think there are some other ones that, hopefully, Louisiana will be in a position to start increasing their lettings. We've always – we've traditionally been first or second in awards, but being first or second is a much smaller pond isn't quite as exciting.

I think we're starting to see more opportunities in Louisiana. We have done work in Mississippi and Arkansas. We'll just kind of have to wait and see, as the year goes on, certainly, if there are going to be any other infrastructure projects announced by the new administration that could be a real positive.

There certainly are projects needed in the Louisiana area..

Okay. Thanks, guys..

Thank you..

Thank you. Our next questions come from the line of Tahira Afzal of KeyBanc. Please go ahead with your question..

Morning, folks..

Good morning, Tahira. Good to hear your voice again..

Same here. And Pete, good to know you haven't lost your wonderful sense of humor..

That isn't what Brian used to call it..

So, I guess first question is, it seems like, as I look beyond 2017, 2018 is shaping up really nicely from the pipe side, both on the integrity side and the large pipe side. And it's seems on the industrial side, you're going to be kicking into high gear again as well.

So, is there a change that if execution goes well, you could end up again at that 6.5% operating margin sort of profile in 2018, or do we need to have some more power gen replacements coming through to really get there?.

You just put us right on the spot with that question, didn't you?.

I did (45:41)..

I'll let Pete comment on the margin performance in a moment, but the market is shaping up, I do feel that.

Obviously, we're being cautious because some of these large projects on this industrial side, these mega billion ones that I talk about that will drive some revenue and margin performance for us, have not yet been sanctioned, although I think the dynamics are there and they're certainly moving in that direction.

And I would say the percent goal on them (46:10) is very high. So, I'm a little cautious to start waving the flag too much just yet, Tahira. You're right, I do see the large-diameter pipe business and the MSA work shaping up fairly nicely, going all the way into 2018.

We certainly see enough opportunities to have that robust growth in the industrial market.

As far as the performance, Pete – I can tell you my perspective, Tahira, the jobs we're going after, we've really tightened the belt relative to terms and conditions and payment arrangements, and things of that nature, and obviously project controls around the projects and things of that nature.

So, as I said here today, you can never predict that you're not going to have something that doesn't go wrong, but I certainly think that the chances of anything going wrong on similar of our projects is very, very low.

But Pete, what do you think on her other question?.

I think, I'll avoid the litany of all the issues associated with new revenue recognition standards and all those sort of wonderful things and say that we think that our SG&A is under control. We think that we have the ability and the opportunities are there. Not sure if we're ready to commit to whether that's a 6% or a 6.5%.

I think we probably need to get a little bit more operating room at kind of where we are currently, but I don't think it's impossible for us to start approaching those sort of numbers..

Okay. Great. And I guess, the second question is, how are you all looking at labor inflation in the Gulf area, especially into next year? You have the gathering work picking up again and I assume that would soak up some of the basic labor pool out there, and God knows, you might have a big wall coming up that might soak up some labor.

So, would love to get a perspective on the pipe fitters, et cetera, which is more specialized and really the basic labor pool as well?.

It's interesting question, Tahira. We watch that – trust me, we watch that almost daily, but we haven't seen it yet. Even a few years ago, when everybody talked about, oh no, her it comes, it really never did materialize because a lot of those projects didn't hit at the same time. I'm suspecting that may be the same case that happens here.

There will be some pockets – on these major multi-billion-dollar projects, there will be some pockets that have a little bit of a higher labor rate, but some of those people will travel, some won't. And so, in some of the other areas, we probably won't see as much of a labor inflation.

We put escalators in our contract to try to cover us on those things. But I know your question is more are we actually seeing some of that right now, and we're really not just yet. Same thing with materials. We haven't seen an increase in material prices yet. No matter what the material is, we really haven't seen an increased cost with that (49:20).

If it occurs, I don't think it would occur until really late in 2017 or maybe not even until mid-2018, in my opinion..

Got it. Okay. And then I guess last question is on the buyback, seems a little on the small side, David and Pete.

Any thoughts around if that could be expanded or in terms of cash allocation what you guys are thinking?.

So just because I started off by saying at this time, the current buyback represents – Tahira, we go through quite regularly with the board and look at what are we going to do. We have cash and obviously our first priority remains finding good accretive profitable acquisitions.

We've obviously not done a great job with that over the last couple of years. We think we have some opportunities now. I think that if this year progresses as we expect it to, then that will take some of the cash. If that doesn't happen, I think you'll see us doing two things.

One, we'll probably increase the dividend that's not a material change as far as cash is concerned. And yes, the board would seriously consider and has in the past talked about doing a stock buyback that would be a larger number. We're kind of used to Brian having 20% ownership and I think we're all afraid of him owning much more..

Fair enough. Well, Pete, you can buy some too, so...

That's a good question..

Thanks..

Thanks, Tahira..

Thanks..

Thank you. Since we have no further questions at this time, I'd like to turn the floor back to David King for closing comments..

Well, thanks everyone for participating on the call today. I'm pleased with the revenues and the profitability momentum that we're experiencing, and the record backlog that the company has achieved. The momentum to build America's infrastructure for us continues to grow and we see multiyear opportunities ahead for Primoris.

Again, we appreciate your participation on the call and have a good day..

Thank you, ladies and gentlemen. This concludes today's teleconference. You may disconnect your lines at this time, and have a wonderful day..