Primoris Services Corporation
Primoris Services CORP (Form: 10-Q, Received: 08/12/2009 06:02:05)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

 

 

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

 

For the quarterly period ended June 30, 2009

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

 

For the transition period from                  to                  .

 

Commission file number 0001-34145

 

Primoris Services Corporation

(Exact name of registrant as specified in its charter)

 

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)

 

20-4743916
(I.R.S. Employer
Identification No.)

 

 

 

26000 Commercentre Drive, Lake Forest,
California
(Address of Principal Executive Offices)

 

92630
(Zip Code)

 

Registrant’s telephone number, including area code: (949) 598-9242

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o   No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  o

 

Accelerated filer  o

 

 

 

Non-accelerated filer  o
Do not check if a smaller reporting company.

 

Smaller reporting company  x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o   No  x

 

As of August 4, 2009, 32,477,364 shares of the registrant’s common stock were outstanding.

 

 

 



Table of Contents

 

PRIMORIS SERVICES CORPORATION AND SUBSIDIARIES

INDEX

 

 

Page No

Part I. Financial Information

 

 

 

Item 1 Condensed Consolidated Financial Statements:

 

—Condensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008

3

—Condensed Consolidated Statements of Income for the three months and six months ended June 30, 2009 and June 30, 2008

4

—Condensed Consolidated Statements of Cash Flows for the three months and six months ended June 30, 2009 and June 30, 2008

5

—Notes to Condensed Consolidated Financial Statements

7

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

Item 3 Quantitative and Qualitative Disclosures About Market Risk

29

Item 4T Controls and Procedures

29

 

 

Part II. Other Information

 

 

 

Item 1 Legal Proceedings

30

Item 1A Risk Factors

30

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3 Defaults Upon Senior Securities

31

Item 4 Submission of Matters to a Vote of Security Holders

31

Item 5 Other Information

32

Item 6 Exhibits

32

Signatures

33

 

2



Table of Contents

 

PRIMORIS SERVICES CORPORATION

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

 

 

 

June 30,
2009

 

December 31,
2008

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

59,781

 

$

73,018

 

Short-term investments

 

15,091

 

15,036

 

Restricted cash

 

8,326

 

11,111

 

Accounts receivable, net

 

95,483

 

90,826

 

Costs and estimated earnings in excess of billings

 

20,870

 

21,017

 

Deferred income taxes

 

5,591

 

5,591

 

Prepaid expenses, inventory and other current assets

 

4,385

 

5,856

 

Total current assets

 

209,527

 

222,455

 

Property and equipment, net

 

28,181

 

26,224

 

Other assets

 

255

 

139

 

Investment in non-consolidated entities

 

1,333

 

500

 

Other intangible assets, net

 

34

 

52

 

Goodwill

 

2,842

 

2,842

 

Total assets

 

$

242,172

 

$

252,212

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

48,471

 

$

56,088

 

Billings in excess of costs and estimated earnings

 

67,309

 

72,664

 

Accrued expenses and other current liabilities

 

23,266

 

26,067

 

Distributions and dividends payable

 

812

 

5,696

 

Current portion of capital leases

 

1,582

 

2,198

 

Current portion of long-term debt

 

6,046

 

5,679

 

Total current liabilities

 

147,486

 

168,392

 

Long-term debt, net of current portion

 

25,324

 

26,624

 

Long-term capital leases, net of current portion

 

 

341

 

Deferred tax liabilities

 

1,429

 

1,425

 

Total liabilities

 

174,239

 

196,782

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock—$.0001 par value, 1,000,000 shares authorized, 0 outstanding

 

 

 

Common stock—$.0001 par value; authorized: 90,000,000 shares; 32,477,364 and 29,977,339 issued and outstanding at June 30, 2009 and December 31, 2008

 

3

 

3

 

Additional paid-in capital

 

34,796

 

34,796

 

Retained earnings

 

33,031

 

20,528

 

Accumulated other comprehensive income

 

103

 

103

 

Total stockholders’ equity

 

67,933

 

55,430

 

Total liabilities and stockholders’ equity

 

$

242,172

 

$

252,212

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

3



Table of Contents

 

PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(Unaudited)

 

(Unaudited)

 

Revenues

 

$

126,900

 

$

142,444

 

$

255,638

 

$

311,835

 

Cost of revenues

 

105,977

 

127,810

 

219,987

 

280,988

 

Gross profit

 

20,923

 

14,634

 

35,651

 

30,847

 

Selling, general and administrative expenses

 

8,388

 

6,622

 

16,002

 

14,623

 

Operating income

 

12,535

 

8,012

 

19,649

 

16,224

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Income from non-consolidated entities

 

1,736

 

1,204

 

3,903

 

3,027

 

Foreign exchange gain (loss)

 

(26

)

(41

)

203

 

(22

)

Interest income (expense) net

 

(334

)

(147

)

(594

)

(224

)

Income before provision for income taxes

 

13,911

 

9,028

 

23,161

 

19,005

 

Provision for income taxes

 

(5,331

)

(259

)

(8,941

)

(454

)

Net income

 

$

8,580

 

$

8,769

 

$

14,220

 

$

18,551

 

Basic earnings per share

 

$

0.26

 

$

0.37

 

$

0.45

 

$

0.79

 

Diluted earnings per share

 

$

0.26

 

$

0.37

 

$

0.44

 

$

0.79

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

32,477

 

23,587

 

31,303

 

23,587

 

Diluted

 

32,835

 

23,587

 

32,477

 

23,587

 

Pro forma net income data—2008:

 

 

 

 

 

 

 

 

 

Income before provision for income tax, as reported

 

 

 

$

9,028

 

 

 

$

19,005

 

Adjustments for provision for income tax

 

 

 

(3,593

)

 

 

(7,564

)

Pro forma adjusted net income

 

 

 

$

5,435

 

 

 

$

11,441

 

Pro forma earnings per share

 

 

 

 

 

 

 

 

 

Basic

 

 

 

$

0.23

 

 

 

$

0.49

 

Diluted

 

 

 

$

0.23

 

 

 

$

0.49

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

4



Table of Contents

 

PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(Unaudited)

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Net income

 

$

8,580

 

$

8,769

 

$

14,220

 

$

18,551

 

Adjustments to reconcile net income to net cash provided by:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

2,089

 

1,529

 

3,990

 

2,967

 

Amortization of other intangible assets

 

9

 

9

 

18

 

18

 

Gain on sale of property and equipment

 

(375

)

(344

)

(1,499

)

(484

)

Income from non-consolidated entities

 

(1,736

)

(1,204

)

(3,903

)

(3,027

)

Non-consolidated entity distributions

 

 

 

3,400

 

566

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

Restricted cash

 

(94

)

(860

)

2,785

 

781

 

Accounts receivable

 

(11,270

)

26,288

 

(4,657

)

30,032

 

Costs and estimated earnings in excess of billings

 

(157

)

1,138

 

147

 

(7,829

)

Prepaid expenses, inventory and other current assets

 

4,702

 

(150

)

1,471

 

69

 

Other assets

 

(334

)

370

 

(116

)

884

 

Accounts payable

 

301

 

(12,879

)

(7,617

)

(13,528

)

Billings in excess of costs and estimated earnings

 

(1,881

)

2,356

 

(5,355

)

12,080

 

Deferred income tax

 

4

 

 

4

 

 

Accrued expenses and other current liabilities

 

(3,969

)

2,305

 

(2,095

)

273

 

Other long-term liabilities

 

 

16

 

 

29

 

Net cash provided (used) by operating activities

 

(4,131

)

27,343

 

793

 

41,382

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

(1,888

)

(2,148

)

(3,077

)

(3,665

)

Sale (purchase) of short-term investments

 

10,075

 

 

(55

)

 

Advances to non-consolidated entities

 

(1,036

)

 

(1,036

)

 

Proceeds from sale of property and equipment

 

402

 

619

 

1,652

 

787

 

Net cash provided (used) in investing activities

 

7,553

 

(1,529

)

(2,516

)

(2,878

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Repayment of long-term debt

 

(1,461

)

(1,726

)

(3,956

)

(3,180

)

Repayment of capital leases

 

(482

)

 

(957

)

 

Repurchase of warrants

 

(11

)

 

(93

)

 

Dividends

 

(812

)

 

(1,561

)

 

Cash distributions to stockholders

 

 

(11,903

)

(4,947

)

(18,018

)

Net cash provided (used) in financing activities

 

(2,766

)

(13,629

)

(11,514

)

(21,198

)

Net change in cash and cash equivalents

 

656

 

12,185

 

(13,237

)

17,306

 

Cash and cash equivalents at beginning of the period

 

59,125

 

68,087

 

73,018

 

62,966

 

Cash and cash equivalents at end of the period

 

$

59,781

 

$

80,272

 

$

59,781

 

$

80,272

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

 

PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(IN THOUSANDS)

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(Unaudited)

 

(Unaudited)

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

 

Interest

 

$

538

 

$

521

 

$

1,057

 

$

1,207

 

Income taxes

 

$

7,704

 

$

259

 

$

11,100

 

$

454

 

 

 

 

 

 

 

 

 

 

 

Non-cash activities

 

 

 

 

 

 

 

 

 

Obligations incurred for the acquisition of property and equipment leases

 

$

 

$

7,075

 

$

3,023

 

$

7,075

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

 

PRIMORIS SERVICES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

 

Note 1—Business Activity

 

Organization and operations Primoris Services Corporation and its wholly-owned subsidiaries ARB, Inc. (“ARB”), ARB Structures, Inc., Onquest, Inc., Born Heaters Canada, ULC, Cardinal Contractors, Inc., GML Coatings, LLC, Cardinal Mechanical, L.P., Stellaris, LLC and ARB Ecuador, Ltda., collectively the “Company”, are engaged in various construction and engineering activities. The Company’s underground and directional drilling operations install, replace and repair natural gas, petroleum, telecommunications and water pipeline systems. The Company’s industrial, civil and engineering operations construct and provide maintenance services to industrial facilities including power plants, petrochemical facilities, and other processing plants, and construct multi-level parking structures. The Company is incorporated in the State of Delaware and has its corporate headquarters in Lake Forest, California.

 

Note 2—Basis of Presentation

 

Interim consolidated financial statements The interim condensed consolidated financial statements for the three-month and six-month periods ended June 30, 2009 and 2008 have been prepared in accordance with Regulation S-X Rule 10-01 of the Securities Exchange Act of 1934. As such, certain disclosures, which would substantially duplicate the disclosures contained in the Company’s latest audited consolidated financial statements, have been omitted. This Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009 (the “Second Quarter 2009 Report”) should be read in concert with the Company’s Annual Report on Form 10-K, filed on March 24, 2009, which contains the Company’s audited consolidated financial statements for the year ended December 31, 2008.

 

The interim financial information for the three-month periods and six-month periods ended June 30, 2009 and 2008 is unaudited and has been prepared on the same basis as the audited financial statements. However, the financial statements contained in this Second Quarter 2009 Report do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for audited financial statements. In the opinion of management, this unaudited information includes all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the interim financial information.

 

In May 2009, the FASB issued SFAS No. 165, “ Subsequent Events ”.  We applied the requirements of SFAS No. 165 beginning with this Second Quarter 2009 Report.  We evaluated all significant events or transactions that occurred after June 30, 2009 up to August 11, 2009, the date we issued these financial statements.  During this period, we identified one subsequent event that is described in Note 15 “Subsequent Event”.

 

Use of Estimates The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management 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 condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could materially differ from those estimates. Significant estimates used in preparing these condensed consolidated financial statements include estimated costs to complete contracts, which have a direct effect on gross profit, estimates for worker’s compensation self insurance reserves, fair value estimates for financial assets and financial liabilities, reserves for bad debt and other accruals.

 

Revenue recognition A number of factors relating to the business of the Company affect the recognition of contract revenue. The Company typically structures contracts as unit-price, time and material, fixed-price or cost plus fixed fee. Revenue is recognized on the percentage-of-completion method for all fixed-price contracts. Under the percentage-of-completion method, estimated contract income and resulting revenue is generally accrued based on costs incurred to date as a percentage of total estimated costs. Total estimated costs, and thus contract revenue and income, are impacted by changes in productivity, scheduling, the unit cost of labor, subcontracts, materials and equipment and other unforeseen events. 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. If a current estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full.

 

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The caption “ Costs and estimated earnings in excess of billings ” represents the excess of contract revenues from fixed-priced contracts recognized under the percentage-of-completion method over billings to date. For those fixed-priced contracts in which billings exceed contract revenues recognized to date, such excesses are included in the caption “ Billings in excess of costs and estimated earnings ”.

 

Revenues on cost-plus and time and materials contracts are recognized as the related work is completed.

 

In accordance with the terms of the contracts, certain retainage provisions are withheld by customers until completion and acceptance of the contracts. Final payments of the majority of such amounts are expected to be receivable in the following periods.

 

Note 3—Recent Accounting Pronouncements

 

In April 2009, the Financial Accounting Standards Board (“FASB”) issued three accounting pronouncements:

 

·                   FASB Staff Position FAS 157-4, “ Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly ” (“FSP FAS 157-4”) provides guidelines for making fair value measurements more consistent with the principles presented in Statement of Financial Accounting Standards (“SFAS”) No. 157. FSP FAS 157-4 provides additional authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed.  It is applicable to all assets and liabilities (i.e. financial and non-financial) and will require enhanced disclosures.

 

·               FASB Staff Position FAS 115-2 and FAS 124-2, “ Recognition and Presentation of Other-Than-Temporary Impairments ” provides additional guidance to provide greater clarity about the credit and noncredit component of an other-than-temporary impairment event and to improve presentation and disclosure of other-than-temporary impairments in the financial statements.

 

·                   FASB Staff Position FAS 107-1 and APB 28-1, “ Interim Disclosures about Fair Value of Financial Instruments ” amends FASB Statement No. 107, “ Disclosures about Fair Value of Financial Instruments ”, to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. This FSP also amends Accounting Principles Board (“APB”) Opinion No. 28, “ Interim Financial Reporting ”, to require those disclosures in all interim financial statements.

 

We adopted the three FASB Staff Positions above during the second quarter ended June 30, 2009, and adoption did not result in a material impact on our financial statements.

 

In April, 2009, the FASB issued Staff Position FAS 141(R)-1, “ Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arises from Contingencies ” which amends and clarifies FASB Statement No. 141 (revised 2007), “ Business Combinations ”, and provides guidelines for the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This pronouncement will be effective for any acquisition made after January 1, 2009.

 

In May 2009, the FASB issued SFAS No. 165, “ Subsequent Events ”.  SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. SFAS No. 165 is effective for interim or annual periods ending after June 15, 2009. The adoption of SFAS No. 165 during the three months ended June 30, 2009, did not have a material effect on the Company’s consolidated financial statements.

 

SFAS No. 167, “ Amendments to FASB Interpretation No. 46R ” amends FASB Interpretation (“FIN”) No. 46 (Revised December 2003), “ Consolidation of Variable Interest Entities ,” sets rules for determining whether to consolidate an entity that is insufficiently capitalized or is not controlled through voting (or similar rights). These rules are based on an entity’s purpose and design and the company’s ability to direct the entity’s activities that most significantly impact the entity’s economic performance.  SFAS 167 requires additional disclosures about the reporting company’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the company’s financial statements.  SFAS 167 will be effective January 1, 2010.  The Company is currently evaluating the impact on the Company’s financial statements.

 

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Table of Contents

 

SFAS No. 168, “ The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a Replacement of FASB Statement No. 162 ”.  SFAS No. 168 replaces SFAS No. 162, “ The Hierarchy of Generally Accepted Accounting Principles ” and establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB for non-governmental entities in the preparation of financial statements in conformity with GAAP.  SFAS No. 168 will be effective for the Company’s financial statements for periods ending after September 15, 2009. SFAS No. 168 is not expected to have a significant impact on the Company’s consolidated financial statements.

 

Note 4—Fair Value Measurements

 

On January 1, 2008, the Company adopted SFAS No. 157, “ Fair Value Measures ” (“SFAS No. 157”). This Statement defines fair value, establishes a framework for measuring fair value in GAAP, expands disclosures about fair value measurements and applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 does not require any new fair value measurements. The 2008 adoption related to our financial assets and financial liabilities that are re-measured and reported at fair value at each reporting period.

 

In accordance with FASB Staff Position No. FAS-157-2, on January 1, 2009, the Company adopted SFAS No. 157 for non-financial assets and liabilities, which included goodwill and other intangible assets for purposes of impairment assessments. This adoption in 2009 did not have a material impact on the financial statements of the Company.

 

In general, fair values determined by Level 1 use quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs use data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are “unobservable data points” for the asset or liability and include situations where there is little, if any, market activity for the asset or liability.

 

The following table presents, for each of the fair value hierarchy levels required under SFAS No. 157, the Company’s financial assets that are measured at fair value on a recurring basis at June 30, 2009 and December 31, 2008:

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

 

 

Amount
Recorded
on Balance
Sheet

 

Quoted Prices
in Active Markets
for Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets as of June 30, 2009:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

59,781

 

$

59,781

 

 

 

Short-term investments

 

$

15,091

 

$

15,091

 

 

 

Assets as of December 31, 2008:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

73,018

 

$

73,018

 

 

 

Short-term investments

 

$

15,036

 

$

15,036

 

 

 

 

In addition to the assets listed in the table, other financial instruments of the Company consist of accounts receivable, accounts payable and certain accrued liabilities. The carrying value of the Company’s long-term debt approximates fair value based on comparison with current prevailing market rates for loans of similar risks and maturities. The Company’s other financial instruments generally approximate fair market value based on the short-term nature of these instruments.

 

Note 5—Accounts Receivable

 

The following is a summary of accounts receivable:

 

 

 

June 30,
2009

 

December 31,
2008

 

 

 

(Unaudited)

 

 

 

Contracts receivable, net of allowance for doubtful accounts of $200

 

$

78,514

 

$

73,430

 

Retention

 

17,414

 

15,804

 

 

 

95,928

 

89,234

 

Due from affiliates

 

 

17

 

Other accounts receivable

 

445

 

1,575

 

 

 

$

95,483

 

$

90,826

 

 

Amounts “due from affiliates” primarily relate to amounts due from related parties (see Note 7, “ Equity Method Investments ” and Note 10, “ Related Party Transactions ”) for the performance of construction contracts. Contract revenues earned from related parties were $5,611 and $3,689 for the three months, and $11,319 and $9,341 for the six months ended June 30, 2009 and 2008, respectively.

 

At June 30, 2009 and December 31, 2008 amounts due from Otay Mesa Power Partners totaling $696 and $1,340, respectively, are included in contracts receivable (see Note 7, “ Equity Method Investments ”).

 

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Note 6—Costs and Estimated Earnings on Uncompleted Contracts

 

Costs and estimated earnings on uncompleted contracts consist of the following:

 

 

 

June 30,
2009

 

December 31,
2008

 

 

 

(Unaudited)

 

 

 

Costs incurred on uncompleted contracts

 

$

1,003,956

 

$

1,267,650

 

Provision for estimated (gain) loss on uncompleted contracts

 

(353

)

700

 

Gross profit recognized

 

80,034

 

95,608

 

 

 

1,083,637

 

1,363,958

 

Less: billings to date

 

(1,130,076

)

(1,415,605

)

 

 

$

(46,439

)

$

(51,647

)

 

This net amount is included in the accompanying condensed consolidated balance sheet under the following captions:

 

 

 

June 30,
2009

 

December 31,
2008

 

 

 

(Unaudited)

 

 

 

Costs and estimated earnings in excess of billings

 

$

20,870

 

$

21,017

 

Billings in excess of cost and estimated earnings

 

(67,309

)

(72,664

)

 

 

$

(46,439

)

$

(51,647

)

 

Note 7—Equity Method Investments

 

During 2007, the Company established a joint venture, Otay Mesa Power Partners (“OMPP”), for the sole purpose of constructing a power plant near San Diego, California. The Company has a 40% interest in the project and accounts for its investment in OMPP using the equity method. ARB, one of the subsidiaries of the Company, acts as one of OMPP’s primary subcontractors and has contracts with OMPP totaling $45,319 as of June 30, 2009. ARB recognized $10,181 in related revenues in the six months ended June 30, 2009 and $9,341 in the six months ended June 30, 2008. These revenues are included in the contract revenues earned from related parties as stated in Note 5, “ Accounts Receivable ”.

 

 

 

June 30,
2009

 

December 31,
2008

 

 

 

(Unaudited)

 

 

 

Otay Mesa Power Partners—Joint Venture

 

 

 

 

 

Balance sheet data

 

 

 

 

 

Assets

 

$

23,661

 

$

48,775

 

Liabilities

 

18,663

 

50,540

 

Net assets

 

$

5,298

 

$

(1,765

)

Company’s equity investment in venture

 

$

979

 

$

(706

)

 

 

 

Three months ended June 30

 

Six months ended June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(Unaudited)

 

(Unaudited)

 

Earnings data:

 

 

 

 

 

 

 

 

 

Revenue

 

$

34,494

 

$

26,140

 

$

78,386

 

$

48,176

 

Gross profit

 

$

4,473

 

$

2,944

 

$

15,558

 

$

7,324

 

Earnings before taxes

 

$

4,475

 

$

3,010

 

$

15,563

 

$

7,568

 

Company’s equity in earnings

 

$

2,700

 

$

1,204

 

$

5,085

 

$

3,027

 

 

OMPP distributed $8,500 to its equity holders during the six months ended June 30, 2009, of which the Company’s share was $3,400. The OMPP agreement states that distributions made prior to the completion of the contract are considered advances on account of the related partner’s share as determined at the completion of the underlying contract. The deficit shown in the table above due to the excess distributions received as of December 31, 2008 was included in accrued expenses on the Company’s condensed consolidated balance sheet.

 

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Table of Contents

 

The Company has a 49% interest in ARB Arendal, SRL de CV (“ARB Arendal”), and accounts for this investment under the equity method. ARB Arendal engages in construction activities in Mexico. Because of the uncertainty on the outcome of the negotiations of ARB Arendal with a major customer in Mexico, the Company determined there was an other than temporary impairment of its investment in and advances to ARB Arendal.  The Company wrote down the investment to $0 as of December 31, 2007, and has reserved advances of $1,036 made during the three months ended June 30, 2009 and has not recognized any earnings for the three and six months ended June 30, 2009 and 2008.

 

The Company purchased a 49% interest in All Day Electric (“All Day”) in December 2008 for $500 and accounts for this investment under the equity method. All Day engages in electrical construction activities mainly in Northern California.  The Company’s equity in earnings was $72 for the three months ended June 30, 2009 and a loss of $146 for the six months ended June 30, 2009.  This resulted in a net investment in All Day of $354 as of June 30, 2009.

 

Note 8—Accounts Payable and Accrued Liabilities

 

At June 30, 2009 and December 31, 2008, accounts payable includes retentions of approximately $8,546 and $7,741, respectively, due to subcontractors, which have been retained pending contract completion and customer acceptance of jobs.

 

The following is a summary of accrued expenses and other current liabilities:

 

 

 

June 30,
2009

 

December 31,
2008

 

 

 

(Unaudited)

 

 

 

Payroll and related employee benefits

 

$

8,571

 

$

6,981

 

Insurance, including self-insurance reserves

 

10,308

 

9,994

 

Corporate income taxes and other taxes

 

1,234

 

2,807

 

Earn-out liability

 

 

615

 

Provision for estimated losses on uncompleted contracts

 

625

 

700

 

Accrued leases and rents

 

418

 

917

 

Accrued overhead cost

 

437

 

1,521

 

OMPP liability

 

 

706

 

Other

 

1,673

 

1,826

 

 

 

$

23,266

 

$

26,067

 

 

Note 9—Credit Arrangements

 

On July 31, 2008, we completed a merger (“Merger”) of Rhapsody Acquisition Corp. and Primoris Corporation, a privately held Nevada corporation (“Former Primoris”). Prior to the Merger, on March 2007, Former Primoris entered into a new revolving line of credit agreement payable to a bank group with an interest rate of prime or at LIBOR plus an applicable margin. The revolving line is secured by substantially all the assets of the Company. The Company can borrow up to $30,000 based on a defined rate of interest, and all amounts borrowed under the line of credit are due March 31, 2010. There were no amounts outstanding under the line of credit at June 30, 2009 or December 31, 2008, other than letters of credit issued in the amounts of $677 and $677, respectively, which reduces the amount available on the revolving line.

 

Also prior to the Merger, in January 2008, Former Primoris entered into a credit facility (as amended) for purposes of issuing commercial letters of credit in Canada, for an amount up to 10 million Canadian dollars. The credit facility with a Canadian bank is for a term of 5 years, and provides for an annual fee of 1% for any issued and outstanding commercial letters of credit. Letters of credit can be denominated in either Canadian or U.S. dollars. As of June 30, 2009 and December 31, 2008, total commercial letters of credit outstanding under this credit facility totaled $4,822 and $4,981 (in U.S. dollars), respectively.

 

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Note 10—Related Party Transactions

 

The Company has entered into various transactions with Stockdale Investment Group, Inc. (“SIGI”). The largest stockholder, Chief Executive Officer, President and Chairman of the Board of Directors of the Company, Brian Pratt, also holds a majority interest in SIGI. In addition, the following two officers and/or directors of the Company also serve as officers and/or directors of SIGI (with their respective positions with SIGI reflected in parentheses): Brian Pratt (chairman and director) and John M. Perisich (secretary).

 

Two officers and/or directors of the Company also served as officers and directors of SIGI in the past, including John P. Schauerman (president and director) and Scott Summers (vice president and director).

 

The Company leases properties from SIGI located in Bakersfield, Pittsburg and San Dimas, California, as well as a property in Pasadena, Texas. During the six months ended June 30, 2009 and 2008, the Company paid $394 and $373, respectively, in lease payments to SIGI for the use of these properties. Prior to the Merger, the Company also leased certain construction and transportation equipment from SIGI. This equipment was purchased from SIGI on the closing date of the Merger and the leases were terminated.

 

The Company leased an airplane from SIGI for business use. During the six months ended June 30, 2009 and 2008, the Company paid $70 and $119, respectively, in lease payments to SIGI for use of the airplane. This lease commenced on May 1, 2004 and was terminated on March 31, 2009 when SIGI sold the airplane.

 

The Company leases certain property from Roger Newnham, a manager at the subsidiary Born Heaters Canada. The property is located in Calgary, Canada. This lease was entered into on similar terms as negotiated with an independent third party. During the six-month period ended June 30, 2009 and 2008, the Company paid $171 and $149, respectively, in lease payments to Mr. Newnham for the use of this property. The three-year lease for the Calgary property commenced in October 2005 and was renewed and extended until September 2009.

 

Note 11—Income Taxes and Pro Forma Net Income

 

Income Taxes

 

The effective tax rate for the three and six months ended June 30, 2009 was 38.3% and 38.6%, respectively. The rate for both the three months and six months ended June 30, 2009 differs from the U.S. federal statutory rate of 35% due primarily to state income tax and the impact of the “Domestic Production Activity Deduction”.

 

To determine its quarterly provision for income taxes, the Company uses an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions to which the Company is subject. Significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rate from quarter to quarter.

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the financial reporting basis and tax basis of the Company’s assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

The Company adopted the provisions of FIN 48, “ Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 ”, on January 1, 2007. As of June 30, 2009 and December 31, 2008, there were no recorded liabilities related to unrecognized tax benefits. Management does not anticipate that there will be a material change in the balance of unrecognized tax benefits within the next 12 months.

 

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.

 

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Table of Contents

 

The effective tax rate for the three and six months ended June 30, 2008 was 2.9% and 2.4%, respectively, representing primarily Canadian and California income taxes. Through July 31, 2008, the date of the Merger, Former Primoris elected to be taxed in accordance with Subchapter S of the United States Internal Revenue Code (“Code”) and similar codes for certain states. While this election was in effect, the income was taxed for federal income tax purposes to the stockholders of Former Primoris. Accordingly, no provision for federal income tax was required by Former Primoris.

 

Pro Forma Net Income

 

Pro forma net income is shown on the condensed consolidated statements of income, and reflects an adjustment for income tax at the applicable statutory rates as if the Company had been taxed in accordance with Subchapter C of the Code since the beginning of 2008 using an effective tax rate of 39.8%.

 

Note 12—Dividends and Earnings Per Share

 

On March 16, 2009, the Company declared a cash dividend of $0.025 per common share, payable to stockholders of record as of March 31, 2009. The dividend, totaling $812, was paid on April 15, 2009.  Additionally, on May 19, 2009, the Company declared a cash dividend of $0.025 per common share, payable to stockholders of record as of June 30, 2009.  The dividend, totaling $812, was paid on July 15, 2009.

 

The table below presents the computation of basic and diluted earnings per share for the three and six months ended June 30, 2009 and 2008:

 

 

 

Three months
ended June 30,

 

Six months
ended June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

8,580

 

$

8,769

 

$

14,220

 

$

18,551

 

Net income (pro forma – 2008) – (1)

 

$

8,580

 

$

5,435

 

$

14,220

 

$

11,441

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average shares for computation of basic earnings per share

 

32,477

 

23,587

 

31,303

 

23,587

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of warrants and units (2)

 

358

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of contingently issuable shares (3)

 

 

 

1,174

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares for computation of diluted earnings per share

 

32,835

 

23,587

 

32,477

 

23,587

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.26

 

$

0.37

 

$

0.45

 

$

0.79

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.26

 

$

0.37

 

$

0.44

 

$

0.79

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share (pro forma – 2008) – (1)

 

$

0.26

 

$

0.23

 

$

0.45

 

$

0.49

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share (pro forma – 2008) – (1)

 

$

0.26

 

$

0.23

 

$

0.44

 

$

0.49

 

 


(1)                As discussed in Note 11—“ Income Taxes and Pro Forma Net Income ”, pro forma 2008 net income and earnings per share are shown on the condensed consolidated statements of income and reflect an adjustment for income tax at the applicable statutory rates as if the Company had been taxed in accordance with Subchapter C of the Code since the beginning of 2008 using an effective tax rate of 39.8 percent.

 

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(2)                Represents the dilutive effect of 4,705,956 common stock warrants with a strike price of $5.00 per share and the effect of the Units available under the Unit Purchase Option (“UPO”) at a purchase price of $8.80 per Unit.  The UPO provides for the purchase of 450,000 Units.  Each Unit consists of one share of common stock plus one warrant to purchase a share of common stock at a strike price of $5.00 per share.

 

(3)                Represents the dilutive effect of 2,500,025 shares of Company stock that were issued to the Former Primoris stockholders on March 17, 2009. These shares were to be issued contingent upon attaining certain defined performance targets in 2008. It was determined that the targets would be met in September 2008 and were included as part of the diluted shares outstanding. Subsequent to the shares being issued on March 17, 2009, the shares were included as part of the basic weighted average shares outstanding.  No dilutive impact is included for an additional 2,500,000 shares of stock, which may be issued in 2010, contingent upon meeting a defined performance target for 2009.

 

Note 13—Commitments and Contingencies

 

Leases The Company leases certain property and equipment under non-cancelable operating leases, which expire at various dates through 2019. The leases require the Company to pay all taxes, insurance, maintenance and utilities with respect to such property and equipment.

 

Certain of these leases are with related entities, which share similar ownership by stockholders, officers, and directors with the Company. The leases are classified as operating leases in accordance with SFAS No. 13, “ Accounting for Leases ”.

 

Total lease expense during the three and six months ended June 30, 2009 amounted to approximately $1,851 and $3,859, respectively, including amounts paid to related parties of $289 and $565, respectively. Total lease expense during the three and six months ended June 30, 2008 amounted to approximately $1,700 and $3,800, including amounts paid to related parties of $261 and $521, respectively.

 

Letters of credit At June 30, 2009 and December 31, 2008, the Company had letters of credit outstanding of approximately $5,498 and $5,658, respectively.

 

Litigation— The Company is subject to claims and legal proceedings arising out of its business. Management believes that the Company has meritorious defenses to such claims. Although management is unable to ascertain the ultimate outcome of such matters, after review and consultation with counsel and taking into consideration relevant insurance coverage and related deductibles, management believes that the outcome of these matters will not have a materially adverse effect on the consolidated financial position of the Company.

 

Bonding— As of June 30, 2009 and December 31, 2008, the Company had bid and payment/performance bonds issued and outstanding totaling $255,321 and $353,008, respectively.

 

Note 14—Reportable Operating Segments

 

The Company operates in two reportable segments: Construction Services and Engineering. In the following tables, all intersegment revenues and gross profit have been eliminated, which were immaterial.

 

The following table sets forth the Company’s revenue by segment for the three months ended June 30, 2009 and 2008:

 

 

 

For the three months ended June 30,

 

 

 

2009

 

2008

 

Segment

 

Revenue

 

% of
Segment
Revenue

 

Revenue

 

% of
Segment
Revenue

 

 

 

(Unaudited)

 

Construction Services

 

$

113,538

 

89.5

%

$

120,329

 

84.5

%

Engineering

 

13,362

 

10.5

%

22,115

 

15.5

%

Total

 

$

126,900

 

100.0

%

$

142,444

 

100.0

%

 

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Table of Contents

 

The following table sets forth the Company’s revenue by segment for the six months ended June 30, 2009 and 2008:

 

 

 

For the six months ended June 30,

 

 

 

2009

 

2008

 

Segment

 

Revenue

 

% of
Segment
Revenue

 

Revenue

 

% of
Segment
Revenue

 

 

 

(Unaudited)

 

Construction Services

 

$

223,509

 

87.4

%

$

266,697

 

85.5

%

Engineering

 

32,129

 

12.6

%

45,138

 

14.5

%

Total

 

$

255,638

 

100.0

%

$

311,835

 

100.0

%

 

The following table sets forth the Company’s gross profit by segment for the three months ended June 30, 2009 and 2008:

 

 

 

For the three months ended June 30,

 

 

 

2009

 

2008

 

Segment

 

Gross
Profit

 

% of
Segment
Revenue

 

Gross
Profit

 

% of
Segment
Revenue

 

 

 

(Unaudited)

 

Construction Services

 

$

19,656

 

17.3

%

$

13,203

 

11.0

%

Engineering

 

1,267

 

9.5

%

1,431

 

6.5

%

Total

 

$

20,923

 

16.5

%

$

14,634

 

10.3

%

 

The following table sets forth the Company’s gross profit by segment for the six months ended June 30, 2009 and 2008:

 

 

 

For the six months ended June 30,

 

 

 

2009

 

2008

 

Segment

 

Gross
Profit

 

% of
Segment
Revenue

 

Gross
Profit

 

% of
Segment
Revenue

 

 

 

(Unaudited)

 

Construction Services

 

$

32,675

 

14.6

%

$

27,999

 

10.5

%

Engineering

 

2,976

 

9.3

%

2,848

 

6.3

%

Total

 

$

35,651

 

14.0

%

$

30,847

 

9.9

%

 

Revenues as presented below are based on the geographic region in which the contracting subsidiary is located and not the location of the client or job site:

 

 

 

For the six months ended June 30,

 

 

 

 

 

 

 

2009

 

2008

 

Total Assets

 

Country:

 

Revenue

 

% of
Revenue

 

Revenue

 

% of
Revenue

 

June 30,
2009

 

December 31,
2008

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

United States

 

$

230,826

 

90.3

%

$

302,522

 

97.0

%

$

219,999

 

$

231,642

 

Canada

 

12,334

 

4.8

%

9,112

 

2.9

%

14,658

 

12,514

 

Ecuador

 

12,478

 

4.9

%

201

 

0.1

%

7,515

 

8,056

 

 

 

$

255,638

 

100.0

%

$

311,835

 

100.0

%

$

242,172

 

$

252,212

 

 

15



Table of Contents

 

Note 15—Subsequent Event

 

On July 22, 2009, the Company announced that it has begun demobilization at Chevron Corp’s Richmond Refinery located in Contra Costa, California.  Primoris’ wholly-owned subsidiary, ARB, Inc., had been constructing a hydrogen plant at the Richmond facility under contract from Praxair, Inc. since September 2008, with completion expected in the first calendar quarter of 2010. As announced by the Company on July 9, 2009, a California state judge’s ruling halted construction at Richmond following opposition from environmental groups and what the judge identified as inadequacies in Chevron’s environmental impact report. On July 20, 2009, Chevron filed an appeal to overturn the judge’s order. The future of the project remains in question until the appeals court can decide the issues.

 

Approximately 160 Primoris personnel were assigned to the Richmond project. Approximately one-half of these workers will remain on site, as permitted by the judge’s order, to assist with demobilization and site preservation, with a smaller contingent potentially remaining on site for preservation post- demobilization. The remaining one-half of the Richmond workforce were reassigned to other Company projects or laid-off. Praxair has continued to meet all of its contractual obligations to Primoris. At June 30, 2009, the Company estimates that the backlog associated with the Richmond contract was approximately $52.0 million, which, based on the scheduled project completion date, would have been realized over the next three quarters.

 

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Table of Contents

 

PRIMORIS SERVICES CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), which are subject to the “safe harbor” created by those sections. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of regulation and the economy, generally. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends, “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions.

 

Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss many of these risks in detail in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2008 and our other filings with the Securities and Exchange Commission (“SEC”). Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2008, and our other filings with the SEC, completely, and with the understanding that our actual future results may be materially different from what we expect.

 

Given these uncertainties, you should not place undue reliance on these forward-looking statements. We assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available.

 

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

 

Introduction

 

Primoris Services Corporation is a holding company with various subsidiaries that cumulatively form a diversified engineering and construction company providing a wide range of construction, fabrication, maintenance, replacement and engineering services to major public utilities, petrochemical companies, energy companies, municipalities and other customers.

 

We install, replace, repair and rehabilitate natural gas, refined product, telecommunications, water and wastewater pipeline systems, and also construct mechanical facilities and other structures, including power plants, petrochemical facilities, refineries and parking structures. In addition, we provide maintenance services, including inspection, overhaul and emergency repair services, to cogeneration plants, refineries and similar mechanical facilities. Through our subsidiary Onquest, Inc., we provide engineering and design services for fired heaters and furnaces primarily used in refinery applications. Through our subsidiary Cardinal Contractors, Inc., we construct water and wastewater facilities in Florida. A substantial portion of our activities are performed in the Western United States, and more specifically in California. In addition, we have strategic presences in Florida, Texas, Latin America and Canada.

 

On July 31, 2008, we completed a merger (“Merger”) of Rhapsody Acquisition Corp. (“Rhapsody”) and Primoris Corporation, a privately held Nevada corporation (“Former Primoris”). Unless specifically noted otherwise, as used throughout this Quarterly Report on Form 10-Q, “Primoris”, the “Company” or “we,” “our,” or “us” refers to the business, operations and financial results of Former Primoris prior to, and Primoris Services Corporation subsequent to, the closing of the Merger on July 31, 2008, between Rhapsody and Former Primoris as the context requires. “Rhapsody” refers to the operations or financial results of Rhapsody Acquisition Corp. prior to the closing of the Merger.

 

The Merger was accounted for as a reverse acquisition. Under this method of accounting, we were treated as the “acquired” company for financial reporting purposes. This determination was primarily based on the operations and management of Former Primoris comprising the ongoing operations and management of the Company after the Merger. In accordance with guidance applicable to these circumstances, the Merger was considered to be a capital transaction in substance. Accordingly, for accounting purposes, the Merger was treated as the equivalent of Former Primoris issuing stock for our net assets, accompanied by a recapitalization. Our pre-Merger net assets are stated at historical cost, with no goodwill or other intangible assets recorded.

 

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We make available free of charge through our Internet Website our press releases, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all other required filings with the SEC and amendments thereto as soon as reasonably practical after they are electronically filed with, or furnished to, the SEC. Our principal executive offices are located at 26000 Commercentre Drive, Lake Forest, California 92630, and our telephone number is (949) 598-9242. Our Website address is www.primoriscorp.com . The information on our Website is neither part of nor incorporated by reference into this Quarterly Report on Form 10-Q.

 

We provide services in the following two segments:

 

Construction Services Segment:

 

The Construction Services segment specializes in a range of services that include designing, building/installing, replacing, repairing/rehabilitating and providing management services for construction related projects. Our services include:

 

·                   Providing installation of underground pipeline, cable and conduits for entities primarily in the petroleum, petrochemical and water industries;

 

·                   Providing installation and maintenance of industrial facilities for entities in the petroleum, petrochemical and water industries; and

 

·                   Providing installation of complex commercial and industrial cast-in-place structures.

 

Engineering Segment:

 

The Engineering segment specializes in designing, supplying and installing high-performance furnaces, heaters, burner management systems and related combustion and process technologies for clients in the oil refining, petrochemical and power generation industries. It also furnishes turnkey project management with the technical expertise and the ability to deliver custom engineering solutions worldwide.

 

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 a number of factors, many of which are not within our control. Business in the construction industry is cyclical. We depend in part on spending by companies in the energy, and oil and gas industries, as well as on municipal water and wastewater customers. Over the past several years, both our Construction Services and Engineering segments have benefited from demand for more efficient and more environmentally friendly energy and power facilities and from the past strength of the oil and gas industry. Economic factors outside of our control may affect the amount and size of contracts in any particular period.

 

Visibility into the current economic issues and how these will impact the Company, especially in the United States, remains murky. While we currently have adequate backlog and projects to bid, we are uncertain as to the impact of the current global financial turmoil will affect our clients.  In addition, our competitive environment is seeing some migration into our market segment from other industries experiencing higher levels of stress.

 

Seasonality and cyclicality

 

Our operating results can be subject to seasonal and cyclical variations. Weather, particularly rain, can impact our ability to perform construction work. Our clients’ budget cycles have an impact on the timing of project awards. Accordingly, our financial condition and operating results may vary from quarter-to-quarter. Absent the awarding and construction of a large project, revenues tend to be lowest in our first fiscal quarter.

 

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Results of operations

 

Revenues, gross profit, operating income and net income for the three and six months ended June 30, 2009 and 2008 were as follows:

 

 

 

Three Months Ended June 30,

 

 

 

2009

 

2008

 

 

 

(Thousands,
except per share
amounts)

 

% of
Revenue

 

(Thousands,
except per share
amounts)

 

% of
Revenue

 

Revenues

 

$

126,900

 

100.0

%

$

142,444

 

100.0

%

Gross profit

 

20,923

 

16.5

%

14,634

 

10.3

%

Selling, general and administrative expense

 

8,388

 

6.6

%

6,622

 

4.6

%

Operating income

 

12,535

 

9.9

%

8,012

 

5.6

%

Other income (expense)

 

1,376

 

1.1

%

1,016

 

0.7

%

Income before income taxes

 

13,911

 

11.0

%

9,028

 

6.3

%

Income tax provision (1)

 

(5,331

)

(4.2

)%

(259

)

(0.2

)%

Net income

 

$

8,580

 

6.8

%

$

8,769

 

6.2

%

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.26

 

 

 

$

0.37

 

 

 

Diluted

 

$

0.26

 

 

 

$

0.37

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

32,477

 

 

 

23,587

 

 

 

Diluted

 

32,835

 

 

 

23,587

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

 

 

(Thousands,
except per share
amounts)

 

% of
Revenue

 

(Thousands,
except per share
amounts)

 

% of
Revenue

 

Revenues

 

$

255,638

 

100.0

%

$

311,835

 

100.0

%

Gross profit

 

35,651

 

14.0

%

30,847

 

9.9

%

Selling, general and administrative expense

 

16,002

 

6.3

%

14,623

 

4.7

%

Operating income

 

19,649

 

7.7

%

16,224

 

5.2

%

Other income (expense)

 

3,512

 

1.4

%

2,781

 

0.9

%

Income before income taxes

 

23,161

 

9.1

%

19,005

 

6.1

%

Income tax provision (1)

 

(8,941

)

(3.5

)%

(454

)

(0.1

)%

Net income

 

$

14,220

 

5.6

%

$

18,551

 

5.9

%

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.45

 

 

 

$

0.79

 

 

 

Diluted

 

$

0.44

 

 

 

$

0.79

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

31,303

 

 

 

23,587

 

 

 

Diluted

 

32,477

 

 

 

23,587

 

 

 

 


(1)               As discussed in “Provision for income taxes” and “Pro forma net income data” below, the Company made a change in our tax status from that of Subchapter S of the Internal Revenue Code (“S-Corporation”) to that of Subchapter C of the Internal Revenue Code as part of the Merger in July 2008.  After the Merger, the combined entity became subject to federal and state income tax in the jurisdictions in which we do business.  Prior to the Merger, as an S-Corporation, we had no provision for federal income tax and only minimal provision for state income tax.

 

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Revenue for the three and six months ended June 30, 2009 were $126.9 and $255.6 million, respectively, a decrease of $15.5 and $56.2 million, or 10.9% and 18.0%, respectively, compared to the same periods in 2008. During the year 2008, we attained record levels of revenue and operating income, and have seen a decrease in both the Construction Services and Engineering segments during the three and six months ended June 30, 2009, which is in part a result of  the current economic issues in the marketplace, especially in the United States.  The decrease in revenues compared to the same period a year ago were due primarily to decreased revenues in refining sector projects and water and wastewater sector projects and the performance of an unusually large engineering project during 2008, partially offset by increased revenue in underground projects, and from our Ecuador subsidiary.

 

Gross profit increased by $6.3 and $4.8 million, or 43.0% and 15.6%, for the three and six months ended June 30, 2009 compared to the same periods in 2008 due primarily as a result of increased profitability in underground and power projects. This gain is partially offset by reduced revenues and margins in refining sector projects and third party equipment rentals.  Gross profit as a percent of revenues increased to 16.5% and 14.0% during the three and six months ended June 30, 2009 from 10.3% and 9.9 % in the same periods of 2008. The three and six months ended June 30, 2009 benefited from higher margin industrial work in the petroleum and power sectors as compared to lower margin work on industrial projects in the refining sector in the prior year periods.

 

Geographic areas financial information

 

Revenue by geographic area for the six months ended June 30, 2009 and 2008 was as follows:

 

 

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

Country:

 

 

 

 

 

 

 

 

 

United States

 

$

230,826

 

90.3

%

$

302,521

 

97.0

%

Canada

 

12,334

 

4.8

%

9,112

 

2.9

%

Ecuador

 

12,478

 

4.9

%

201

 

0.1

%

Total Revenue

 

$

255,638

 

100.0

%

$

311,835

 

100.0

%

 

Note that revenue is attributed to the countries based on our reporting entity that records the transaction and not the location of the client or job site.

 

Segment Results

 

The following discussion describes the significant factors contributing to the results of our two operating segments.

 

Construction Services Segment

 

Revenue and gross profit for the Construction Services segment for the three and six months ended June 30, 2009 and 2008 were as follows:

 

 

 

Three Months Ended June 30,

 

 

 

2009

 

2008

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

Construction Services

 

 

 

 

 

 

 

 

 

Revenue

 

$

113,538

 

 

 

$

120,329

 

 

 

Gross Profit

 

$

19,656

 

17.3

%

$

13,203

 

11.0

%

 

 

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

Construction Services

 

 

 

 

 

 

 

 

 

Revenue

 

$

223,509

 

 

 

$

266,696

 

 

 

Gross Profit

 

$

32,675

 

14.6

%

$

27,999

 

10.5

%

 

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Revenue for the Construction Services segment decreased by $6.8 and $43.2 million, or 5.6% and 16.2%, respectively, for the three and six months ended June 30, 2009, compared to the same periods in 2008. These revenue decreases were due primarily to reduced revenues for projects in the refining and water and wastewater sectors compared to the same period in 2008. The revenue decrease for the six months ended June 30, 2009 were offset by increased revenue of $29.8 million in underground projects, including pipeline, cable and conduit projects, reflecting significant work begun at the end of 2008 and early 2009. Revenue generated by our subsidiary in Ecuador for the six months ended June 30, 2009 increased by $12.3 million due to two ongoing projects.

 

Despite lower revenues, the Construction Services segment gross profit increased by $6.5 and $4.7 million, or 48.9% and 16.7%, respectively, for the three and six months ended June 30, 2009, compared to the same period of 2008. The increase resulted primarily from improved margins as a percent of revenue on completed or near completed projects. The margins improved from 11.0% and 10.5% for the three and six months ended June 30, 2008 to 17.3% and 14.6% for the three and six months ended June 30, 2009. Of the $6.5 million gross profit increase in the three months ended June 30, 2009 (“Second Quarter 2009”) as compared to the same period in 2008, approximately $2.8 million was due to increased profitability in underground projects, and approximately $3.8 million was due to increased profitability in industrial projects, which were partially offset by $0.9 million in reduced third party equipment rentals. The gross profit margins increased primarily due to a shift in business mix from lower margin industrial projects in the refining sector, to higher margin industrial projects in the petroleum and power sectors, during the three and six months ended June 30, 2009.

 

Engineering Segment

 

Revenue and gross profit for the Engineering segment for the three months and six months ended June 30, 2009 and 2008 were as follows:

 

 

 

Three Months Ended June 30,

 

 

 

2009

 

2008

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

Engineering

 

 

 

 

 

 

 

 

 

Revenue

 

$

13,362

 

 

 

$

22,115

 

 

 

Gross Profit

 

$

1,267

 

9.5

%

$

1,431

 

6.5

%

 

 

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

Engineering

 

 

 

 

 

 

 

 

 

Revenue

 

$

32,129

 

 

 

$

45,138

 

 

 

Gross Profit

 

$

2,976

 

9.3

%

$

2,848

 

6.3

%

 

Revenue decreased by $8.8 and $13.0 million, or 39.6% and 28.8%, respectively, for the three and six months ended June 30, 2009, compared to the same periods in 2008. These decreases were due primarily to the impact of an unusually large project in the prior year, whereas very little activity and revenue was recorded in the first six months ended June 30, 2009, during which we provided startup assistance to the client.  We anticipate final project acceptance in 2009.

 

Engineering segment gross profit decreased by $0.2 million, or 11.5%, for the Second Quarter 2009, compared to the same period in 2008, and increased by $0.1 million or 4.5% for the six months ended June 30, 2009, compared to the same period in 2008. The decrease for the Second Quarter 2009, compared to the same period in 2008, is due to lower margins and profit write-backs on certain alliance projects partially offset by a profit improvement on a larger project, nearing completion later in 2009. The increase for the six months ended June 30, 2009, compared to the same period in 2008  is due to higher gross profit margins in the Canadian operation, despite a decrease in revenues.

 

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Table of Contents

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses (“SG&A”) increased by $1.8 million, or 26.7%, for the Second Quarter 2009 compared to the same period in 2008. The change was mainly due to a net increase in reporting and compliance costs associated with being a public company of $0.8 million, an increase in long-term incentive compensation costs of $0.6 million and an increase of $0.2 million in depreciation expense.

 

The SG&A increase of $1.4 million for the six months ended June 30, 2009 was net of a gain on the sale of operating equipment of $1.5 million recorded in SG&A as part of our fleet upgrade program.  Under this program, we routinely turn over our equipment during the first part of the fiscal year.  A gain on sale of $0.5 million was recorded during the same period in the prior year.  Excluding the increased gain on sale, the increase in SG&A was $2.4 million for the six months ended June 30, 2009.  The increase was due primarily to increased long-term incentive compensation of $1.2 million, an increase of $0.5 in public company reporting and compliance costs, and an increase of $0.3 million in depreciation expense.

 

SG&A as a percentage of revenue increased to 6.6% for the Second Quarter 2009, from 4.6% for the same period in 2008 and 6.3% for the six months ended June 30, 2009 compared to 4.7% for the same period in the prior year. The increased percentage for both the Second Quarter 2009 and the six months ended June 30, 2009, was due to the increased costs discussed above as well as due to the relatively fixed nature of administrative and management expenses, which did not decrease proportionally with the decreased revenues.

 

Other income and expense

 

Non-operating income and expense items for the three and six months ended June 30, 2009 and 2008 were as follows:

 

 

 

Three Months
Ended June 30,

 

 

 

2009

 

2008

 

 

 

(Thousands)

 

Other income (expense)

 

 

 

 

 

Income from non-consolidated investments

 

$

1,736

 

$

1,204

 

Foreign exchange gain (loss)

 

(26

)

(41

)

Interest income (expense), net

 

(334

)

(147

)

Total other income

 

$

1,376

 

$

1,016

 

 

 

 

Six Months
Ended June 30,

 

 

 

2009

 

2008

 

 

 

(Thousands)

 

Other income (expense)

 

 

 

 

 

Income from non-consolidated investments

 

$

3,903

 

$

3,027

 

Foreign exchange gain (loss)

 

203

 

(22

)

Interest income (expense), net

 

(594

)

(224

)

Total other income

 

$

3,512

 

$

2,781

 

 

For the Second Quarter 2009, we recognized income of $2.7 million from the Otay Mesa Power Partners (“OMPP”) joint venture, a power plant construction project near San Diego, California, which we expect to complete later in 2009.  We also recognized income of $0.1 million from the All Day Electric joint venture (“All Day”), an electrical construction project in Northern California.  The income recognized for OMPP and All Day was offset by an impairment charge of $1.0 million on certain advances made to ARB Arendal, SRL de CF (“ARB Arendal”).  The Company has a 49% interest in ARB Arendal and accounts for this investment under the equity method.  Because of uncertainty on the outcome of the continuing negotiations of ARB Arendal with a major customer in Mexico, the Company determined there was an other than temporary impairment of its investment in and advances to ARB Arendal, recording an impairment charge in prior periods.  Under a separate agreement with ARB Arendal, the Company was required to make an advance of working capital funds to the venture during the three months ended June 30, 2009.  The Company believes the investment in the venture remains impaired, pending the outcome of the customer negotiations, and recorded an impairment charge of $1.0 million during the Second Quarter.

 

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Comparing the same three month period in 2008, income from non-consolidated joint ventures consisted of income of $1.2 million from the OMPP joint venture. The total income for the first six months of 2009 from OMPP was $5.1 million as compared with $3.0 million for the same period in 2008. The total loss from All Day for the first six months of 2009 was $0.2 million.

 

Foreign exchange results for the three and six months ended June 30, 2009 and for the same period in 2008 reflect currency exchange fluctuations of the United States dollar compared to the Canadian dollar. Our contracts in Calgary, Canada are sold based on United States dollars, but a portion of the work is paid for with Canadian dollars, which can create a currency exchange difference.

 

Interest income decreased by $0.2 million and $0.5 million for the three and six months ended June 30, 2009 compared to the same period in 2008. This was due to declining interest rates, as well as our decision to invest excess cash balances in Treasury bills and certificates of deposit (“CDs”) rather than commercial paper. Interest expense for both the three and six months ended June 30, 2009 was approximately the same, compared to the same period in 2008.

 

Provision for income taxes

 

Our provision for income tax increased $5.1 million for the three months ended June 30, 2009 to $5.3 million, and $8.5 million for the six months ended June 30, 2009 to $8.9 million, compared to the same period in 2008, as a result of a change in our tax status from that of Subchapter S of the Internal Revenue Code (“S-Corporation”) to that of Subchapter C of the Internal Revenue Code (“C-Corporation”) as part of the Merger. Thereafter, the combined entity became subject to federal and state income tax in the jurisdictions in which we do business, including California. With the change in tax status, our effective tax rate for the Second Quarter 2009 was 38.3%. Prior to the Merger, as an S-Corporation, we had no provision for federal income tax and only minimal provision for state income tax.

 

Pro forma net income data

 

Pro forma information concerning the income tax provision as if we were taxed as a C-Corporation for the three and six months ended June 30, 2008 compared to the actual three and six months ended June 30, 2009 is shown as follows:

 

 

 

Three Months Ended
June 30,

 

 

 

As reported
2009

 

Pro forma
2008

 

 

 

(Thousands, except
per share amounts)

 

Income before provision for income tax, as reported

 

$

13,911

 

$

9,028

 

Provision for income tax

 

(5,331

)

(3,593

)

Net income

 

$

8,580

 

$

5,435

 

Earnings per share:

 

 

 

 

 

Basic

 

$

0.26

 

$

0.23

 

Diluted

 

$

0.26

 

$

0.23

 

 

 

 

Six Months Ended
June 30,

 

 

 

As reported
2009

 

Pro forma
2008

 

 

 

(Thousands, except
per share amounts)

 

Income before provision for income tax, as reported

 

$

23,161

 

$

19,005

 

Provision for income tax

 

(8,941

)

(7,564

)

Net income

 

$

14,220

 

$

11,441

 

Earnings per share:

 

 

 

 

 

Basic

 

$

0.45

 

$

0.49

 

Diluted

 

$

0.44

 

$

0.49

 

 

The estimated pro forma tax provision amount was calculated at an effective statutory tax rate of approximately 39.8% for the three and six months ended June 30, 2008, respectively.

 

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Table of Contents

 

Liquidity and Capital Resources

 

Recent global market and economic conditions have been, and continue to be, disruptive and volatile, having an adverse impact on financial markets in general. The volatility has reached unprecedented levels. As a result of concern about the stability of the markets and the strength of counterparties, many lenders and institutional investors have reduced and, in some cases, ceased to provide funding to borrowers resulting in severely diminished liquidity and credit availability. At this time, the extent to which these conditions will persist is unclear. To date, the Company’s cost and availability of funding has not been adversely affected by illiquid credit markets, and we do not expect it to be materially impacted in the near future.

 

At June 30, 2009, our balance sheet included a net cash balance of $59.8 million, and an additional $15.1 million in short-term investments. We continue to have borrowing capacity for our foreseeable needs based on our current cash flow forecast. We currently have a $30 million credit facility, which expires on March 31, 2010, and a $10 million (Canadian dollars) facility for commercial letters of credit in Canada with an expiration date of December 31, 2012. At June 30, 2009, $5.5 million was outstanding on these two facilities representing issued letters of credit.

 

Cash Flows

 

Cash flows during the six months ended June 30, 2009 and 2008 are summarized as follows:

 

 

 

Six Months Ended
June 30,

 

 

 

2009

 

2008

 

 

 

(Thousands)

 

Change in cash:

 

 

 

 

 

Net cash provided (used) by operating activities

 

$

793

 

$