PRIMORIS SERVICES CORPORATION

price or unit-price and is recognized over time as work is completed because of the continuous transfer of control to the customer. For time and material and cost reimbursable plus fee contracts, revenue is recognized primarily on an input basis, based on contract costs incurred as defined within the respective contracts.

Our reportable segments include the Power, Industrial, and Engineering (“Power”) segment, the Pipeline and Underground (“Pipeline”) segment, the Utilities and Distribution (“Utilities”) segment, the Transmission and Distribution (“Transmission”) segment, which is a new reportable segment created in connection with the acquisition of Willbros Group, Inc. (“Willbros”), and the Civil segment.  See Note 18 – “ Reportable Segments ” for a brief description of the reportable segments and their operations.

The classification of revenue and gross profit for segment reporting purposes can at times require judgment on the part of management. Our segments may perform services across industries or perform joint services for customers in multiple industries. To determine reportable segment gross profit, certain allocations, including allocations of shared and indirect costs, such as facility costs, equipment costs and indirect operating expenses were made.

On June 1, 2018, we acquired Willbros for approximately $111.0 million, net of cash and restricted cash acquired. Willbros is a specialty energy infrastructure contractor serving the oil and gas and power industries through its utility transmission and distribution, oil and gas, and Canadian operations, which principally executes industrial and power projects. The utility transmission and distribution operations formed the Transmission segment, the oil and gas operations are included in the Pipeline segment, and the Canadian operations are included in the Power segment. Willbros expands our services into electric utility-focused offerings and increases our geographic presence in the United States and Canada.

On May 26, 2017, we acquired the net assets of Florida Gas Contractors (“FGC”) for $37.7 million; on May 30, 2017, we acquired certain engineering assets for approximately $2.3 million; and on June 16, 2017, we acquired the net assets of Coastal Field Services (“Coastal”) for $27.5 million.  FGC operations are included in the Utilities segment, the engineering assets are included in the operations of the Power segment, and Coastal operations are included in the Pipeline segment.

In August 2017, we announced that we are investing approximately $22.0 million to build, own, and operate a portfolio of solar projects in a California School District acquired from the developers, Spear Point Energy, LLC, and PFMG Solar, LLC.  This investment amount includes the estimated cost of Engineering, Procurement, and Construction (“EPC”) work on the projects, which is projected to be completed in 2018. The solar projects are expected to generate a 25-year recurring revenue stream from the District's signed power purchase agreement. As an investment in a renewable energy project, the solar assets should provide us with investment tax credits valued at over $5.0 million. As of September 30, 2018, our investment for the solar projects was approximately $23.1 million. The $23.1 million investment is our construction in progress on the solar projects and is included in Property and equipment, net on the Consolidated Balance Sheets.

We own a 50% interest in two separate joint ventures, both formed in 2015.  The Carlsbad Power Constructors joint venture (“Carlsbad”) is engineering and constructing a gas-fired power generation facility, and the ARB Inc. & B&M Engineering Co. joint venture (“Wilmington”) is also engineering and constructing a gas-fired power generation facility.  Both projects are located in Southern California.  The joint venture operations are included as part of the Power segment.  As a result of determining that we are the primary beneficiary of the two variable interest entities (“VIEs”), the results of the Carlsbad and Wilmington joint ventures are consolidated in our financial statements.  The Wilmington project was substantially complete as of December 31, 2017, and the Carlsbad project is expected to be completed in 2018.

Material trends and uncertainties

We generate our revenue from both large and small construction and engineering projects. The award of these contracts is dependent on many factors, most of which are not within our control. We depend in part on spending by companies in the energy and oil and gas industries, the gas utility industry, as well as municipal water and wastewater customers. Over the past several years, each segment has benefited from demand for more efficient and more environmentally friendly energy and power facilities, local highway and bridge needs and from the activity level in the oil and gas industry. However, periodically, each of these industries and government agencies is adversely affected by macroeconomic conditions. Economic factors outside of our control may affect the amount and size of contracts we are awarded in any particular period.

We closely monitor our customers to assess the effect that changes in economic, market and regulatory conditions may have on them. We have experienced reduced spending by some of our customers over the last several years, which we attribute to negative economic and market conditions, and we anticipate that these negative conditions may continue to affect demand for our services in the near-term.  Fluctuations in market prices of oil, gas and other fuel sources have affected demand for our services.  While we have seen signs of a recovery in the price of oil in late 2017 and 2018, the significant volatility in the price of oil, gas and liquid natural gas that occurred in the past few years may create uncertainty with respect to demand for our oil and gas pipeline services both in the near-term and for future projects. We have started to see increased activity in our upstream operations, such as the construction of gathering lines within the oil shale formations and believe that over time, the need for pipeline infrastructure for mid-stream and gas utility companies will result in a continuing need for our services. However, a reduction in oil prices from current levels could delay midstream pipeline opportunities. We are also monitoring the impact of recently imposed domestic and foreign trade tariffs, which could raise the price of raw materials, such as steel, utilized on construction projects or delay the start of certain projects. The continuing changes in the regulatory environment also affect the demand for our services, either by increasing our work or delaying projects.  For example, environmental laws and regulation could provide challenges to major pipeline projects, resulting in delays that impact the timing of revenue recognition. In addition, the regulatory environment in California may result in delays for the construction of gas-fired power plants while regulators continue to search for significant renewable resources, but renewable resources may also create a demand for our construction services such as the need for storage of renewable generated electricity.  Finally, we believe that regulated utility customers will continue to invest in our maintenance and replacement services.

Seasonality, cyclicality and variability

Our results of operations are subject to quarterly variations. Some of the variation is the result of weather, particularly rain, ice and snow, which can impact our ability to perform construction services. While the majority of our work is in the southern half of the United States, these seasonal impacts can affect revenue and profitability in all of our businesses since utilities defer routine replacement and repair during their period of peak demand. Any quarter can be affected either negatively or positively by atypical weather patterns in any part of the country.  In addition, demand for new projects tends to be lower during the early part of the year due to clients’ internal budget cycles.  As a result, we usually experience higher revenue and earnings in the third and fourth quarters of the year as compared to the first two quarters.

We are also dependent on large construction projects which tend not to be seasonal, but can fluctuate from year to year based on general economic conditions.  Our business may be affected by declines or delays in new projects or by client project schedules.  Because of the cyclical nature of our business, the financial results for any period may fluctuate from prior periods, and our financial condition and operating results may vary from quarter to quarter.  Results from one quarter may not be indicative of financial condition or operating results for any other quarter or for an entire year.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and that affect the amounts of revenue and expenses reported for each period. These estimates and assumptions must be made because certain information that is used in the preparation of our financial statements cannot be calculated with a high degree of precision from data available, is dependent on future events, or is not capable of being readily calculated based on generally accepted methodologies. Often, these estimates are particularly difficult to determine, and we must exercise significant judgment. Actual results could differ significantly from our estimates, and our estimates could change if they were made under different assumptions or conditions.

Our critical accounting policies are described in our Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2017. Significant changes to our critical accounting policies as a result of adopting ASC Topic 606 are discussed below. There have been no material changes to our other critical accounting policies since December 31, 2017.

Revenue recognition —We generate revenue under a range of contracting types, including fixed-price, unit-price, time and material, and cost reimbursable plus fee contracts. A substantial portion of our revenue is derived from contracts that are fixed-price or unit-price and is recognized over time as work is completed because of the continuous

transfer of control to the customer (typically using an input measure such as costs incurred to date relative to total estimated costs at completion to measure progress). For time and material and cost reimbursable plus fee contracts, revenue is recognized primarily on an input basis, based on contract costs incurred as defined within the respective contracts. Costs to obtain contracts are generally not significant and are expensed in the period incurred.

We evaluate whether two or more contracts should be combined and accounted for as one single performance obligation and whether a single contract should be accounted for as more than one performance obligation. ASC Topic 606 defines a performance obligation as a contractual promise to transfer a distinct good or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Our evaluation requires significant judgment and the decision to combine a group of contracts or separate a contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. The majority of our contracts have a single performance obligation, as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contract and, therefore, is not distinct. However, occasionally we have contracts with multiple performance obligations. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using the observable standalone selling price, if available, or alternatively our best estimate of the standalone selling price of each distinct performance obligation in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach for each performance obligation. 

Accounting for long-term contracts involves the use of various techniques to estimate total transaction price and costs. For long-term contracts, transaction price, estimated cost at completion and total costs incurred to date are used to calculate revenue earned. Unforeseen events and circumstances can alter the estimate of the costs and potential profit associated with a particular contract.  Total estimated costs, and thus contract revenue and income, can be impacted by changes in productivity, scheduling, the unit cost of labor, subcontracts, materials and equipment. Additionally, external factors such as weather, client needs, client delays in providing permits and approvals, labor availability, governmental regulation and politics may affect the progress of a project’s completion, and thus the timing of revenue recognition. To the extent that original cost estimates are modified, estimated costs to complete increase, delivery schedules are delayed, or progress under a contract is otherwise impeded, cash flow, revenue recognition and profitability from a particular contract may be adversely affected.

The nature of our contracts give rise to several types of variable consideration, including contract modifications (change orders and claims), liquidated damages, volume discounts, performance bonuses, incentive fees, and other terms that can either increase or decrease the transaction price. We estimate variable consideration as the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent we believe we have an enforceable right and it is probable that a significant reversal of cumulative revenue recognized will not occur. Our estimates of variable consideration and the determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us at this time.

Contract modifications result from changes in contract specifications or requirements. We consider unapproved change orders to be contract modifications for which customers have not agreed to both scope and price. We consider claims to be contract modifications for which we seek, or will seek, to collect from customers, or others, for customer-caused changes in contract specifications or design, or other customer-related causes of unanticipated additional contract costs on which there is no agreement with customers. Claims can also be caused by non-customer-caused changes, such as rain or other weather delays. Costs associated with contract modifications are included in the estimated costs to complete the contracts and are treated as project costs when incurred. In most instances, contract modifications are for goods or services that are not distinct, and, therefore, are accounted for as part of the existing contract. The effect of a contract modification on the transaction price, and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis. In some cases, settlement of contract modifications may not occur until after completion of work under the contract.

As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the cumulative impact of the profit adjustment is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on a contract, the projected loss is recognized in full, including any previously recognized profit, in the period it is identified and recognized as an “accrued loss provision” which is included in “Contract liabilities” on the Condensed Consolidated Balance Sheets. For contract revenue recognized over time, the accrued loss provision is adjusted so that the gross profit for the contract remains zero in future periods.

At September 30, 2018, we had approximately $90.4 million of unapproved contract modifications included in the aggregate transaction prices. These contract modifications were in the process of being negotiated in the normal course of business. Approximately $82.9 million of the contract modifications had been recognized as revenue on a cumulative catch-up basis through September 30, 2018.

In all forms of contracts, we estimate the collectability of contract amounts at the same time that we estimate project costs.  If we anticipate that there may be issues associated with the collectability of the full amount calculated as the transaction price, we may reduce the amount recognized as revenue to reflect the uncertainty associated with realization of the eventual cash collection. For example, when a cost reimbursable project exceeds the client’s expected budget amount, the client frequently requests an adjustment to the final amount. Similarly, some utility clients reserve the right to audit costs for significant periods after performance of the work.

The timing of when we bill our customers is generally dependent upon agreed-upon contractual terms, milestone billings based on the completion of certain phases of the work, or when services are provided. Sometimes, billing occurs subsequent to revenue recognition, resulting in unbilled revenue, which is a contract asset. However, we sometimes receive advances or deposits from our customers before revenue is recognized, resulting in deferred revenue, which is a contract liability.

The caption “Contract assets” in the Condensed Consolidated Balance Sheets represents the following:

The caption “Contract liabilities” in the Condensed Consolidated Balance Sheets represents deferred revenue (formerly billings in excess of costs and estimated earnings) on billings in excess of contract revenue recognized to date, and the accrued loss provision.

Results of Operations

Consolidated Results

The following discussion compares the results of the three and nine months ended September 30, 2018 to the three and nine months ended September 30, 2017.

Revenue

Revenue was $908.9 million for the three months ended September 30, 2018, an increase of $300.6 million, or 49.4%, compared to the same period in 2017. The increase was primarily due to incremental revenue from acquisitions ($175.8 million combined), progress on major pipeline projects on the Atlantic coast and in West Texas, and a refinery project in Southern California. The overall increase was partially offset by the substantial completion of a petrochemical plant project in 2017.

Revenue was $2.06 billion for nine months ended September 30, 2018, an increase of $260.8 million, or 14.5%, compared to the same period in 2017.  The increase was primarily due to incremental revenue from acquisitions ($277.0 million combined), progress on major pipeline projects on the Atlantic coast and in West Texas, and a refinery project in Southern California. The overall increase was partially offset by the substantial completion of two large Florida pipeline projects and a petrochemical plant project in 2017.

Gross Profit

Gross profit was $106.5 million for the three months ended September 30, 2018, an increase of $36.1 million, or 51.2%, compared to the same period in 2017.  The increase was primarily due to revenue growth. Incremental gross profit in the three months ended September 30, 2018 from acquisitions totaled $19.5 million. Gross profit as a percentage of revenue increased slightly to 11.7% in the three months ended September 30, 2018 from 11.6% in the same period in 2017.

Gross profit was $222.5 million for the nine months ended September 30, 2018, an increase of $12.5 million, or 6.0%, compared to the same period in 2017. The increase was primarily due to incremental gross profit for the nine months ended September 30, 2018 from acquisitions ($34.8 million) and overall revenue growth, partially offset by the substantial completion of two large Florida pipeline projects and a petrochemical plant project in 2017. Gross profit as a percentage of revenue decreased to 10.8% in the nine months ended September 30, 2018 from 11.7% in the same period in 2017 due primarily to favorable performance on the two Florida pipeline projects in 2017.

Selling, general and administrative expenses

Selling, general and administrative (“SG&A”) expenses were $51.6 million during the three months ended September 30, 2018, an increase of $9.3 million, or 21.9%, compared to the third quarter of 2017 primarily due to $9.7 million of incremental expense from the businesses we acquired during the period. SG&A expense as a percentage of revenue decreased to 5.7% compared to 7.0% for the corresponding period in 2017 due to increased revenue.

SG&A expenses were $132.0 million during the nine months ended September 30, 2018, an increase of $5.2 million, or 4.1%, compared to 2017. The primary reason for the increase was $14.9 million of incremental expense from the businesses we acquired during the period. The overall increase was partially offset by a $5.8 million reduction in compensation related expenses, including incentive compensation accruals and a $2.2 million decrease in legal fees. SG&A expense as a percentage of revenue decreased to 6.4% compared to 7.0% for the corresponding period in 2017 due to increased revenue.

Merger and related costs

Merger and related costs were $3.8 million and $13.2 million for the three and nine months ended September 30, 2018, respectively, compared to $0.2 million and $1.6 million in the same periods in 2017. The increase is primarily related to higher costs associated with the acquisition of Willbros. Such costs primarily consisted of severance and retention bonus costs for certain employees of Willbros, professional fees paid to advisors, and exiting or impairing certain duplicate facilities.  

Other income and expense

Non-operating income and expense items for the three and nine months ended September 30, 2018 and 2017 were as follows (in thousands):

Investment income in the three and nine months ended September 30, 2017 is related to a $6.0 million unrealized gain from a short-term investment in marketable equity securities.

Foreign exchange gains reflect currency exchange fluctuations associated with our Canadian engineering operation, which operates principally in United States dollars.

Other expense for the nine months ended September 30, 2018 was $0.8 million primarily due to remeasurement of the contingent consideration in the second quarter of 2018 related to the FGC performance target contemplated in the purchase agreement. Under ASC 805, we are required to estimate the fair value of contingent consideration based on facts and circumstances that existed as of the acquisition date and remeasure to fair value at each reporting date until the contingency is resolved. As a result of that remeasurement in the second quarter of 2018, we increased the contingent consideration liability by $0.8 million.

Interest income is derived from interest earned on excess cash invested primarily in short term U.S. Treasury bills, backed by the federal government.

Interest expense for the three and nine months ended September 30, 2018 increased compared to the same periods in 2017 due to higher average debt balances and weighted average interest rates in 2018. In addition, we recognized an additional $2.3 million of interest in the three and nine months ended September 30, 2018 related to the early extinguishment of the notes issued under the Senior Secured Notes and Shelf Agreement.

Provision for income taxes

We are subject to tax liabilities imposed by multiple jurisdictions. We determine our best estimate of the annual effective tax rate at each interim period using expected annual pre-tax earnings, statutory tax rates, and available tax planning opportunities. Certain significant or unusual items are separately recognized in the quarter in which they occur and can cause variability in the effective tax rate from quarter to quarter. We recognize interest and penalties related to uncertain tax positions, if any, as an income tax expense.

The effective tax rate on income attributable to Primoris (excluding noncontrolling interests) was 24.5% for the nine months ended September 30, 2018.  The rate differs from the U.S. federal statutory rate of 21% primarily due to state income taxes, investment tax credits, and nondeductible components of per diem expenses.

We recorded income tax expense for the three months ended September 30, 2018 of $10.7 million compared to $10.0 million for the three months ended September 30, 2017. The $0.7 million increase in income tax expense was primarily driven by a $12.8 million increase in pre-tax income (excluding noncontrolling interests), partially offset by the impact of the Tax Cuts and Jobs Act’s reduction of the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018.

We recorded income tax expense for the nine months ended September 30, 2018 of $14.6 million compared to $28.6 million for the nine months ended September 30, 2017.  The $14.0 million decrease was primarily driven by an $18.8 million decrease in pre-tax income (excluding noncontrolling interests) and the Tax Cuts and Jobs Act’s reduction of the U.S. federal corporate income tax rates from 35% to 21% effective January 1, 2018.

Segment results

Revenue increased by $27.6 million, or 17.9%, for the three months ended September 30, 2018, compared to the same period in 2017. The growth is primarily due to a refinery project in Southern California ($23.9 million) and the acquisition of Willbros ($27.8 million), partially offset by the substantial completion of a large petrochemical plant in Louisiana in 2017 ($23.9 million).

Revenue increased by $72.2 million, or 16.3%, for the nine months ended September 30, 2018, compared to the same period in 2017. The growth is primarily due to a refinery project in Southern California ($48.2 million), a West Texas solar electric facility project that started in 2018 ($39.5 million), and a monoethylene glycol plant project in Texas that started in the third quarter of 2017 ($33.5 million). In addition, the acquisition of Willbros ($34.7 million) increased revenue for the first nine months of 2018. The overall increase was partially offset by the substantial completion of a large petrochemical plant in Louisiana in 2017 ($92.3 million).

Gross profit for the three months ended September 30, 2018, increased by $13.2 million, or 70.2% compared to the same period in 2017.  The increase is primarily due to revenue growth and higher margins. In addition, gross profit increased by $6.2 million from a partial settlement in the third quarter of 2018 of a disputed receivable related to a project completed in 2014.

Gross profit for the nine months ended September 30, 2018, increased by $24.2 million, or 46.1%, compared to the same period in 2017.  The increase is primarily due to the revenue growth and higher margins, as well as the partial settlement in 2018 of a disputed receivable related to a project completed in 2014.

Gross profit as a percentage of revenue increased to 17.6% and 14.9% during the three and nine months ended September 30, 2018, respectively, compared to 12.2% and 11.8% in the same periods in 2017 primarily due to a strong performance and favorable margins realized by our Carlsbad joint venture project and the partial settlement of the disputed receivable discussed above.

Revenue increased by $128.7 million for the three months ended September 30, 2018, compared to the same period in 2017. The increase is primarily due to major pipeline projects on the Atlantic Coast and West Texas that began in 2018 ($111.3 million combined) and incremental revenue from the Willbros acquisition ($26.5 million), partially offset by the completion of a pipeline job in West Texas in 2017 ($18.3 million).

Revenue decreased by $41.2 million, or 10.2%, for the nine months ended September 30, 2018, compared to the same period in 2017. The decrease is primarily due to the completion of two large pipeline jobs in Florida and a pipeline job in West Texas in 2017 ($254.8 million combined). The overall decrease was partially offset by major pipeline projects on the Atlantic Coast and West Texas that began in 2018 ($150.3 million combined), and incremental revenue from the Willbros and Coastal acquisitions ($56.4 million combined).

Gross profit for the three months ended September 30, 2018 increased by $12.9 million compared to the same period in 2017 primarily due to revenue growth, partially offset by lower margins.

Gross profit for the nine months ended September 30, 2018 decreased by $36.0 million, or 45.2%, compared to the same period in 2017. The decrease is primarily attributable to the higher revenue and gross profit from the two pipeline jobs in Florida in 2017, partially offset by incremental gross profit from the Willbros and Coastal acquisitions.

Gross profit as a percent of revenue decreased to 11.7% during the three months ended September 30, 2018, compared to 14.3% in the same period in 2017 primarily due to favorable performance on the West Texas job in 2017.

Gross profit as a percent of revenue decreased to 12.1% during the nine months ended September 30, 2018, compared to 19.8% in the same period in 2017. The decrease is primarily due to our strong performance on the two Florida jobs in 2017, which benefited from good weather conditions resulting in no weather delays and high productivity. The higher gross margin experienced in 2017 is not common and not expected to occur again in the future.

Revenue increased by $23.1 million, or 9.4%, for the three months ended September 30, 2018, compared to the same period in 2017 primarily due to higher revenue with a major utility customer in the Midwest ($16.3 million).

Revenue increased by $88.8 million, or 15.4%, for the nine months ended September 30, 2018, compared to the same period in 2017. The increase is primarily attributable to higher revenue from a major utility customer in the Midwest ($32.4 million), and increased activity with a major utility customer in California ($17.9 million). In addition, the impact of the acquired FGC operations in the second quarter of 2017 also benefited 2018 ($15.8 million).

Gross profit for the three months ended September 30, 2018 decreased by $0.7 million, or 2.0%, compared to the same period in 2017. The decrease is primarily due to the mix of work associated with new Master Service Agreement (“MSA”) projects in the Midwest.

Gross profit for the nine months ended September 30, 2018 increased by $2.3 million, or 2.9%, compared to the same period in 2017. The increase is primarily due to the impact of higher volume.

Gross profit as a percent of revenue decreased to 13.1% during the three months ended September 30, 2018, compared to 14.6% in the same period in 2017 primarily due to the reasons discussed above.

Gross profit as a percentage of revenue decreased to 11.9% during the nine months ended September 30, 2018 compared to 13.3% in the same period in 2017 primarily due to the impact of a client delay and unfavorable weather conditions experienced by a major utility customer in the Midwest in the nine months ended September 30, 2018.

The Transmission segment was created in connection with the acquisition of Willbros. Revenue and gross profit represent results from June 1, 2018, the acquisition date, to September 30, 2018.

Revenue for the three months ended September 30, 2018 was comparable to the same period in 2017. Significant activity included the substantial completion of a methanol plant project and a large petrochemical plant project in 2017 ($18.1 million combined) as well as lower Arkansas DOT volumes. The overall decrease was offset by higher Louisiana DOT volumes ($14.1 million), an ethylene plant project that began in 2018, and increased Florida mine work.

Revenue decreased by $22.9 million, or 6.1%, for the nine months ended September 30, 2018, compared to the same period in 2017. The decrease is primarily due to the substantial completion of a methanol plant project ($31.4 million) and a large petrochemical plant project ($31.0 million), partially offset by higher Louisiana DOT volumes ($41.2 million).

Gross profit decreased by $3.3 million for the three months ended September 30, 2018, compared to the same period in 2017 primarily due to favorable performance on the methanol plant and petrochemical plant projects in 2017.

Gross profit increased by $2.4 million for the nine months ended September 30, 2018, compared to the same period in 2017 primarily due to higher profit on Arkansas DOT and Louisiana DOT projects, partially offset by favorable performance on the methanol plant and petrochemical plant projects in 2017.

Gross profit as a percent of revenue decreased to 0.1% during the three months ended September 30, 2018 and increased to 1.0% during the nine months ended September 30, 2018, compared to 2.8% and 0.3%, respectively, in the same periods in 2017 due primarily to the reasons noted above.

Revenue at the five Belton area projects was $30.0 million and $102.4 million for the three and nine months ended September 30, 2018, respectively, representing 24.4% and 28.8% of total Civil revenue. Revenue for which no margin was recognized was $12.6 million and $52.3 million for the three and nine months ended September 30, 2018, respectively. During the three and nine months ended September 30, 2018, the four Belton area jobs in a loss position contributed ($0.9) million and $7.7 million gross profit. Two of the Belton area jobs in a loss position were completed during 2017, and the remaining two loss jobs are scheduled to be completed in 2018. At September 30, 2018, the accrued loss provision for the two open loss jobs was $1.7 million and estimated remaining revenue for the jobs was $20.3 million. The remaining Belton area job is not in a loss position and contributed $0.1 million and $0.7 million gross profit during the three and nine months ended September 30, 2018. At September 30, 2018, estimated remaining revenue for the remaining Belton area job was $39.5 million, with completion scheduled for early 2019.

At September 30, 2018, we had approximately $57.6 million of unapproved contract modifications included in the aggregate transaction prices associated with the Belton area projects. Approximately $53.4 million of the contract modifications had been recognized as revenue on a cumulative catch-up basis through September 30, 2018.

Geographic area financial information

The majority of our revenue is derived from customers in the United States with approximately 2.5% generated from sources outside of the United States, principally Canada.

Backlog

For companies in the construction industry, backlog can be an indicator of future revenue streams. We define backlog as a combination of: (1) anticipated revenue from the uncompleted portions of existing contracts for which we have known revenue amounts for fixed and unit price contracts (“Fixed Backlog”), and (2) the estimated revenue on MSA work for the next four quarters (“MSA Backlog”).  We normally do not include time and material and cost reimbursable plus fee contracts in the calculation of backlog, since their final revenue amount is difficult to estimate in advance.  However, we will include these types of contracts in backlog if the customer specifies an anticipated revenue amount.

The two components of backlog, Fixed Backlog and MSA Backlog, are detailed below.

Fixed Backlog

Fixed Backlog by reportable segment as of December 31, 2017 and September 30, 2018 and the changes in Fixed Backlog for the nine months ended September 30, 2018 are as follows (in millions):

Revenue recognized from non-Fixed Backlog projects shown above are generated by MSA projects and projects completed under time and material and cost reimbursable plus fee contracts or are generated from the sale of construction materials, such as rock or asphalt to outside third parties or sales of water services.

At September 30, 2018, our total Fixed Backlog was $1.61 billion, representing a decrease of $213.5 million, or 12.8%, compared to $1.82 billion at December 31, 2017. 

MSA Backlog includes anticipated MSA revenue for the next twelve months. We estimate MSA revenue based on historical trends, anticipated seasonal impacts and estimates of customer demand based on information from our customers.

The following table shows our estimated MSA Backlog at September 30, 2018 by reportable segment (in millions):

Total Backlog

The following table shows total backlog (Fixed Backlog plus MSA Backlog), by reportable segment as of the quarter-end dates shown below (in millions):

We expect that during the next four quarters, we will recognize as revenue approximately 88% of the total backlog at September 30, 2018, comprised of backlog of approximately: 91% of the Power segment; 78% of the Pipeline segment; 100% of the Utilities segment; 100% of the Transmission segment; and 76% of the Civil segment.

Backlog should not be considered a comprehensive indicator of future revenue, as a percentage of our revenue is derived from projects that are not part of a backlog calculation.  The backlog estimates include amounts from estimated MSA revenue, but our customers are not contractually obligated to purchase an amount of services from us under the MSAs.  Any of our contracts, MSA, fixed-price or unit-price, may be terminated by our customers on relatively short notice. In the event of a project cancellation, we may be reimbursed for certain costs, but typically we have no contractual right to the total revenue reflected in backlog.  Projects may remain in backlog for extended periods of time as a result of customer delays, regulatory requirements or project specific issues.  Future revenue from projects completed under time and material and cost reimbursable plus fee contracts may not be included in our estimated backlog amount.

Liquidity and Capital Resources

Cash Needs

Liquidity represents our ability to pay our liabilities when they become due, fund business operations and meet our contractual obligations and execute our business plan.  Our primary sources of liquidity are our cash balances at the beginning of each period and our net cash flow.  If needed, we have availability under our lines of credit to augment liquidity needs. Only July 9, 2018, we amended our Credit Agreement to include a $220.0 million term loan that was used to refinance and extinguish all of the notes under our Senior Secured Notes and Shelf Agreement, to pay down a significant portion of the borrowings under our Revolving Credit Facility that was used to finance the acquisition of Willbros, and for general corporate purposes. At September 30, 2018, commercial letters of credit outstanding were $50.7 million. Other than commercial letters of credit, there were no outstanding borrowings under the Revolving Credit Facility, and available borrowing capacity was $149.3 million at September 30, 2018. See Note 9 — “ Credit Agreements ” in Item 1, Financial Statements, of this Third Quarter 2018 Report. In order to maintain sufficient liquidity, we evaluate our working capital requirements on a regular basis.  We may elect to raise additional capital by issuing common stock, convertible notes, term debt or increasing our credit facility as necessary to fund our operations or to fund the acquisition of new businesses.

Our cash and cash equivalents totaled $60.0 million at September 30, 2018 compared to $170.4 million at December 31, 2017. We anticipate that our cash and cash equivalents on hand, existing borrowing capacity under our credit facility and our future cash flows from operations will provide sufficient funds to enable us to meet our operating needs, our planned capital expenditures, and settle our commitments and contingencies for at least the next twelve months. In evaluating our liquidity needs, we do not consider cash and cash equivalents held by our consolidated VIEs. These amounts, which totaled $15.7 million and $60.3 million as of September 30, 2018 and December 31, 2017, respectively, were not available for general corporate purposes.

The construction industry is capital intensive, and we expect to continue to make capital expenditures to meet anticipated needs for our services. Historically, we have invested an amount that approximated the sum of depreciation and amortization expenses plus proceeds from equipment sales. During the nine months ended September 30, 2018, we spent approximately $80.8 million for capital expenditures, which included $13.2 million spent for our investment in the solar projects and $31.4 million for construction equipment. In addition, the acquisition of Willbros during 2018 added $30.6 million to property, plant and equipment. The total of our depreciation, amortization and equipment sales was approximately $65.6 million.  Capital expenditures for the remaining three months of 2018 are expected to total between $10.0 million and $15.0 million.

Net cash used in operating activities for the nine months ended September 30, 2018 was $12.9 million compared to cash provided by operating activities of $161.4 million for the nine months ended September 30, 2017.  The change year-over-year was primarily due to an unfavorable impact from the changes in assets and liabilities.

The significant components of the $119.8 million change in assets and liabilities for the nine months ended September 30, 2018 are summarized as follows:

Investing activities

For the nine months ended September 30, 2018, we used $182.1 million in cash from investing activities compared to $129.8 million for the nine months ended September 30, 2017.

During the nine months ended September 30, 2018, we purchased property and equipment for $80.8 million in cash compared to $57.3 million during the same period in the prior year.  We believe the ownership of equipment is generally preferable to renting equipment on a project-by-project basis, as ownership helps to ensure the equipment is available for our projects when needed. In addition, ownership has historically resulted in lower overall equipment costs.

During the nine months ended September 30, 2018, we used $111.0 million for the acquisition of Willbros. During the nine months ended September 30, 2017, we used $66.2 million for acquisitions, primarily related to FGC and Coastal.

In connection with the acquisition of Willbros, we agreed to provide, at our discretion, up to $20.0 million in secured bridge financing to support Willbros’ working capital needs through the closing date. In March 2018 and May 2018, we provided $10.0 million and $5.0 million, respectively, in secured bridge financing to Willbros. The $15.0 million was repaid in its entirety on June 1, 2018.

We paid $13.6 million during the nine months ended September 30, 2017 for a short-term investment in marketable equity securities. We did not have any purchases or sales of investments during the nine months ended September 30, 2018.

Financing activities

Financing activities provided cash of $84.9 million for the nine months ended September 30, 2018, which was primarily due to the following:

Financing activities used cash of $24.3 million for the nine months ended September 30, 2017, which was primarily due to the following:

Credit Agreements

For a description of our credit agreements, see Note 9 — “ Credit Arrangements ” in Item 1, Financial Statements of this Third Quarter 2018 Report.

Related party transactions

For a discussion of related party transactions, please see Note 12 — “ Related Party Transactions ” in Item 1, Financial Statements of this Third Quarter 2018 Report.

Common stock

For a discussion of items affecting our common stock, please see Note 16 — “ Stockholders’ Equity ” in Item 1, Financial Statements of this Third Quarter 2018 Report.

Contractual Obligations

As of September 30, 2018, we had $371.4 million of outstanding long-term debt and capital lease obligations, and there were no short-term borrowings.

A summary of contractual obligations as of September 30, 2018 was as follows (in millions):

The table does not include potential obligations under multi-employer pension plans in which some of our employees participate.  Our multi-employer pension plan contribution rates are generally specified in our collective bargaining agreements, and contributions are made to the plans based on employee payrolls.  Our obligations for future periods cannot be determined because we cannot predict the number of employees that we will employ at any given time nor the plans in which they may participate.

We may also be required to make additional contributions to multi-employer pension plans if they become underfunded, and these contributions will be determined based on our union payroll.  The Pension Protection Act of 2006 added special funding and operational rules for multi-employer plans that are classified as “endangered,” “seriously endangered” or “critical”.  Plans in these classifications must adopt measures to improve their funded status through a funding improvement or rehabilitation plan, which may require additional contributions from employers.  The amounts of additional funds that we may be obligated to contribute cannot be reasonably estimated and is not included in the table above.

Off-balance sheet transactions

As is common in our industry, we enter into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected on our balance sheet. We have no off-balance sheet financing arrangement with VIEs.  The following represents transactions, obligations or relationships that could be considered material off-balance sheet arrangements.

Receivable Collection Actions

As do all construction contractors, we negotiate payments with our customers from time to time, and we may encounter delays in receiving payments from our customers. We have been engaged in a dispute resolution to collect money we believe we are owed for a construction project completed in 2014.  Because of uncertainties associated with the project, including uncertainty of the amounts that would be collected, we used a zero profit margin approach to recording revenue during the construction period for the project. For the project, a cost reimbursable contract, we had a receivable of $32.9 million with a reserve of approximately $17.9 million included in “Contract liabilities” at December 31, 2017. During the second quarter of 2018, we reached a partial settlement and received a payment on the receivable balance of $12.0 million. As of September 30, 2018, our receivable was $20.9 million and our reserve was $11.6 million. In addition, we reflected another partial settlement of $9.0 million during the third quarter of 2018, which resulted in gross profit of $6.2 million for the three and nine months ended September 30, 2018. The $9.0 million payment was received subsequent to September 30, 2018, which reduced our receivable balance to $11.9 million, and is fully reserved in “Contract liabilities”. At this time, we cannot predict the amount that we will collect nor the timing of any collection. The dispute resolution for the receivable initially required international arbitration; however, in the first half of 2016, the owner sought bankruptcy protection in U.S. bankruptcy court. We have initiated litigation against the remaining surety who has provided lien and stop payment release bonds for the total amount owed. A trial date has been tentatively set for November 26, 2018.

Effects of Inflation and Changing Prices

Our operations are affected by increases in prices, whether caused by inflation or other economic factors. We attempt to recover anticipated increases in the cost of labor, equipment, fuel and materials through price escalation provisions in certain major contracts or by considering the estimated effect of such increases when bidding or pricing new work or by entering into back-to-back contracts with suppliers and subcontractors. To date, our operations have not been materially impacted by the effects of increases in prices.