Primoris Services Corporation
Primoris Services CORP (Form: 10-K, Received: 03/11/2010 17:18:55)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-K

 

(Mark One)

 

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

 

For the fiscal year ended December 31, 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

 

20-4743916

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

26000 Commercentre Drive
Lake Forest, California

 

92630

(Address of principal executive offices)

 

(Zip Code)

 

(949) 598-9242

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of exchange on which registered

Common Stock, $0.0001 par value

 

The NASDAQ Stock Market LLC

Units

 

The NASDAQ Stock Market LLC

Common Stock Purchase Warrants

 

The NASDAQ Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-know seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o   No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o   No  x

 

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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III in this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer  o

 

Accelerated filer  x

Non-accelerated filer  o

 

Smaller Reporting Company  o

 

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

 

The aggregate market value of the voting common equity held by non-affiliates of the registrant was approximately $87.2 million based upon the average bid and asked price of such common equity as of June 30, 2009 (the last business day of the Registrant’s most recently completed second fiscal quarter). On March 9, 2010, there were 33,121,567 shares of common stock, par value $0.0001, outstanding. For purposes of this Annual Report on Form 10-K, in addition to those stockholders which fall within the definition of “affiliates” under Rule 405 of the Securities Act of 1933, holders of ten percent or more of the Registrant’s common stock are deemed to be affiliates.

 

Documents Incorporated by Reference

 

Portions of the Proxy Statement to be delivered to stockholders in connection with the Registrant’s 2010 Annual Meeting of Stockholders and to be filed on or before 120 days after the end of the Registrant’s fiscal year end are incorporated by reference into Part III of this Annual Report on Form 10-K. With the exception of those portions that are specifically incorporated in this Annual Report on Form 10-K, such Proxy Statement shall not be deemed filed as part of this Annual Report on Form 10-K or incorporated by reference herein.

 

 

 



 

Table of Contents

 

TABLE OF CONTENTS

 

 

 

 

 

Page

Part I

 

 

 

 

Item 1.

 

Business

 

3

Item 1A.

 

Risk Factors

 

9

Item 1B.

 

Unresolved Staff Comments

 

18

Item 2.

 

Properties

 

19

Item 3.

 

Legal Proceedings

 

20

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

20

 

 

 

 

 

Part II

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

20

Item 6.

 

Selected Financial Data

 

23

Item 7.

 

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

 

24

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

41

Item 8.

 

Financial Statements and Supplementary Data

 

42

Item 9.

 

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

 

42

Item 9A.

 

Controls and Procedures

 

42

Item 9B.

 

Other Information

 

43

 

 

 

 

 

Part III

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

43

Item 11.

 

Executive Compensation

 

44

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

44

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

44

Item 14.

 

Principal Accounting Fees and Services

 

44

 

 

 

 

 

Part IV

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

44

 

 

 

 

 

Signatures

 

49

 

 

 

 

 

Index to Consolidated Financial Statements

 

F-1

 

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FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “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 “Item 1A. Risk Factors”. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Annual Report on Form 10-K. You should read this Annual Report on Form 10-K 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.

 

PART I

 

ITEM 1.  BUSINESS

 

Business Overview

 

Primoris Services Corporation, a Delaware corporation formed in October 2006 (“Primoris”, the “Company”, “we”, “us” or “our”), is a holding company of various subsidiaries, which 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. Since 1946, our primary subsidiary in California is ARB, Inc. (“ARB”). ARB is engaged primarily in the infrastructure, underground pipeline, directional drilling and other structure construction and maintenance services.

 

On December 18, 2009, the Company acquired James Construction Group, LLC, a Florida limited liability company (“JCG”).  JCG is one of the largest general contractors based in the Gulf Coast states, and is engaged in highway, industrial and environmental construction, primarily in Louisiana, Texas and Florida.  JCG is the successor company to T. L. James and Company, Inc., a well-known Louisiana company that has been in business for over 80 years.  Headquartered in Baton Rouge, Louisiana, JCG serves government and private clients in a broad geographical region that includes the entire Gulf Coast region of the United States.

 

Primoris companies install, replace, repair and rehabilitate natural gas, refined product, water and wastewater pipeline systems, and constructs 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, for cogeneration plants, refineries and similar mechanical facilities.

 

JCG’s heavy civil division provides services in heavy civil construction projects, including highway and bridge construction, concrete paving, levee construction, airport runway and taxiway construction and marine facility construction. JCG’s infrastructure and maintenance division provides large earthwork and site development, landfill construction, site remediation and mining support services. JCG’s industrial division, with a client base comprised primarily of private industrial companies, provides all phases of civil and structural construction, mechanical equipment erection, process pipe installation and boiler, furnace and heater installation and repair.

 

Prior to the JCG acquisition, substantial portions of our activities were performed in the western United States, primarily in California. Through our Canadian subsidiary Onquest, Inc. and its subsidiary, Born Heaters, ULC, we provide engineering 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 the southeast United States. In addition, we have strategic presences in Florida and Texas through our subsidiaries Cardinal Mechanical and Cravens Services, Inc.

 

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Company History and the July 2008 Merger

 

Rhapsody Acquisition Corp. (“Rhapsody”) was a blank check company formed on April 24, 2006 as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business.  On October 10, 2006, Rhapsody closed its initial public offering and raised cash to affect a transaction. Rhapsody’s common stock, warrants to purchase common stock (“Warrants”) and Units (each unit consisting of one share of common stock and one Warrant) traded on the OTC Bulletin Board under the symbols “RPSD”, “RPSDW” and “RPSDU”, respectively. On February 19, 2008, Rhapsody entered into an Agreement and Plan of Merger (“Merger Agreement”) with Primoris Corporation, a privately held Nevada corporation (“Former Primoris”), and certain stockholders of Former Primoris. On July 31, 2008, with the consent of both the Rhapsody stockholders and the stockholders of Former Primoris, the merger was completed. In connection with the merger, Rhapsody changed its name to “Primoris Services Corporation”, whose common stock, Warrants and Units have traded since August 4, 2008 on the NASDAQ Global Market under the symbols “PRIM”, “PRIMW” and “PRIMU”, respectively. While Rhapsody was the surviving legal entity in the merger, Former Primoris was treated as the acquiring entity for accounting purposes. Unless specifically noted otherwise, as used throughout this Annual Report on Form 10-K, “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 us and Former Primoris, as the context requires. “Rhapsody” refers to our operations or financial results prior to the closing of the merger.

 

The merger with Rhapsody was accounted for as a reverse acquisition in accordance with accounting principles generally accepted in the United States (“GAAP”). Under this method of accounting, Rhapsody was 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 Rhapsody’s net assets, accompanied by a recapitalization. Our pre-merger net assets are stated at historical cost, with no goodwill or other intangible assets recorded as part of the merger transaction. Operations prior to the merger are those of Former Primoris.

 

As part of the July 2008 merger, holders of all of the issued and outstanding shares of common stock of Former Primoris and two foreign managers of Former Primoris (collectively, the “Former Primoris Holders”) received an aggregate of (i) 24,094,800 shares of our common stock at the closing of the merger plus (ii) the right to receive 2,500,025 additional shares of our common stock for the fiscal year ending December 31, 2008 and 2,499,975 shares for the fiscal year ending December 31, 2009 for a total of 5,000,000 additional shares, provided that we achieved specified financial milestones. Of the 24,094,800 shares of common stock issued at the closing of the merger, 1,807,110 were placed into escrow to provide funds to satisfy Rhapsody’s rights to indemnification under the Merger Agreement.  The Company achieved the specified financial milestone for 2008 and consequently, 2,500,025 shares were issued to the Former Primoris stockholders in March 2009.  Additionally, for the year ended December 31, 2009, the specified financial milestone for 2009 was met, and we expect to issue 2,499,975 shares in March 2010 to the Former Primoris Holders.

 

At the time of the July 2008 merger, Brian Pratt, our Chief Executive Officer and President of the Company, beneficially held more than 50% of the voting power of the Company, through his ownership of shares of our common stock and by the delivery of revocable proxies to Mr. Pratt from certain of our stockholders. The Company was considered a “controlled company” for purposes of the NASDAQ listing requirements (a corporation which more than 50% of the voting power is held by an individual, a group or another company). Therefore, the Company was not subject to the NASDAQ listing requirements that would otherwise require that the board of directors have a majority of independent directors that executive compensation and director nominations be subject to independent director oversight.  On December 18, 2009, the Company completed the acquisition of JCG and appointed two new directors, the former executive chairman and the chief executive officer of JCG to the Primoris Board of Directors.  As of December 17, 2009 the Board of Directors determined that six of the ten directors were independent under the applicable NASDAQ listing requirements.

 

On December 18, 2009, we completed the acquisition of the equity interests of JCG, following which JCG became our wholly-owned subsidiary.  Under the terms of the purchase agreement, the purchase amounted to $125.0 million in initial consideration at closing, consisting of a combination of $7.0 million in cash, shares of Primoris Series A Non-Voting Contingent Convertible Preferred Stock valued at $64.5 million and a $53.5 million promissory note.  In addition, if JCG attains certain specified financial goals for the fiscal year ending December 31, 2010, we have agreed to pay the sellers an additional $10.0 million earnout consideration, payable in shares of our common stock.

 

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Services

 

Currently, the Company provides services in two business segments, Construction Services and Engineering.  Construction Services represented approximate 87.6% of revenues for 2009 and 84.4% in 2008.  Engineering represented approximately 12.4% of revenues in 2009 and 15.6% in 2008.

 

The segment operations are as follows:

 

Construction Services

 

Our 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 in the petroleum, petrochemical and water industries;

 

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

 

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

 

·                   Providing large earthwork and site development, site remediation and mining support services; and

 

·                   Since the acquisition of JCG, services also include heavy civil construction projects, including highway and bridge construction, concrete paving, levee construction, airport runway and taxiway construction and marine facility construction.

 

Engineering

 

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.

 

Segment reporting for 2010

 

As a result of the acquisition of JCG, management will change the Primoris reportable segments effective on January 1, 2010.  The three new segments will be Construction Services — East, Construction Services — West and Engineering.

 

The Construction Services — East segment will incorporate the JCG construction services business, located primarily in the southern United States, specializing in highway, industrial and environmental projects and will include the current Construction Services businesses located in the Gulf Coast region of the United States, which includes Cardinal Contractors, Inc., Cardinal Mechanical and Cravens Services, Inc. The newly formed Construction Services-West segment will include the Construction Services performed in the western United States, primarily in the state of California. The current Engineering segment will remain unchanged.

 

Strategy

 

Our strategy emphasizes the following key elements:

 

·                   Diversification through Controlled Expansion.  We continue to emphasize both the expansion of services beyond our traditional focus and the addition of new customers. In December 2009, we completed the acquisition of JCG as part of this strategy.  We will continue to evaluate acquisitions that offer growth opportunities and the ability to leverage our resources as a leading service provider to the oil and gas, power, refining and water industries. The current strategy also includes potential selective expansion to new geographic regions.

 

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·                   Emphasis on Retention of Existing Customers and Recurring Revenue.  In order to fully leverage our relationships with our existing customer base, we believe it is important to maintain strong customer relationships and to expand our base of recurring revenue sources and recurring customers.

 

·                   Ownership of Equipment.  Many of our services are equipment intensive. The cost of construction equipment provides a significant barrier to entry into several of our businesses. We believe that our ownership of a large and varied construction fleet and our maintenance facilities enhances our access to reliable equipment at a favorable cost.

 

·                   Stable Work Force.  We maintain a stable work force of skilled, experienced laborers, many of whom are cross-trained in projects such as pipeline and facility construction, refinery maintenance, and piping systems.

 

·                   Selective Bidding.  We selectively bid on projects that we believe offer an opportunity to meet our profitability objectives, or that offer the opportunity to enter promising new markets. In addition, we review our bidding opportunities to attempt to minimize concentration of work with any one customer, in any one industry, or in stressed labor markets.

 

Backlog

 

Backlog is discussed in Item 7. “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” of this Annual Report on Form 10-K.

 

Customers

 

We have longstanding relationships with major utility, refining, petrochemical, power and engineering companies. We have completed major underground and industrial projects for a number of large natural gas transmission and petrochemical companies in the western United States, as well as significant projects through our engineering subsidiary.  With the December 2009 completion of the JCG acquisition, we have expanded our customer base to include a significant presence in the Gulf Coast region of the United States. We enter into a large number of contracts each year and the projects can vary in length — from three months, to as long as 12 to 36 months for completion on larger projects. Although we have not been dependent upon any one customer in any year, a small number of customers may constitute a substantial portion of our total revenues.

 

Our customers have included many of the leading energy and utility companies in the United States, including, among others, Duke Energy, Conoco Phillips, British Petroleum, Pacific Gas & Electric, Sempra Energy, Williams, Valero, Chevron, Calpine, Kinder Morgan and Praxair.

 

The following customers accounted for more than 5% of our revenues in the periods indicated:

 

Description of customer’s business

 

2009

 

2008

 

2007

 

Public gas and electric utility

 

14.4

%

7.6

%

6.0

%

Public gas and electric utility

 

11.9

%

*

 

*

 

Public gas utility

 

9.1

%

*

 

5.7

%

Engineering contractor

 

*

 

9.9

%

 

Engineering contractor

 

*

 

11.3

%

10.3

%

Totals

 

35.4

%

28.8

%

22.0

%

 


(*)                                  Indicates a customer with less than 5% of revenues during such period.

 

For the year ended December 31, 2009, approximately 58.8% of total revenues were generated from the Company’s top ten customers. Additionally, approximately 8.4% of the Company’s accounts receivable were due from one customer. For the year ended December 31, 2009, the Company earned approximately 11.9% of its total revenue from this customer.

 

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Ongoing Projects

 

The following is a summary of our selected ongoing construction projects at December 31, 2009:

 

Segment

 

Project

 

Location

 

Contract
Amount

 

Estimated
Completion
Date

 

Remaining
Backlog at
December 31,
2009

 

 

 

 

 

 

 

(Millions)

 

 

 

(Millions)

 

Construction Services

 

138 kV Transmission Line

 

Las Vegas, NV

 

$

15.0

 

03/2010

 

$

15.0

 

Construction Services

 

Parking Structure

 

Long Beach, CA

 

$

38.0

 

12/2011

 

38.0

 

Construction Services

 

Delevan Compressor Power Retrofit

 

Willows, CA

 

$

54.0

 

04/2011

 

40.0

 

Construction Services

 

Bell County US 190

 

Bell County, LA

 

$

45.0

 

06/2011

 

27.0

 

Construction Services

 

I12 Design Build

 

Baton Rouge, LA

 

$

100.0

 

11/2011

 

83.0

 

Construction Services

 

Causeway Blvd Exchange

 

Metarie, LA

 

$

51.0

 

03/2012

 

50.0

 

Construction Services

 

LA1 Bridge

 

Lafourche Parish, LA

 

$

138.0

 

11/2011

 

91.0

 

Engineering

 

Waste Heat Recovery

 

Australia

 

$

28.0

 

09/2011

 

28.0

 

Engineering

 

Waste Heat Recover

 

Thailand

 

$

28.0

 

03/2010

 

1.0

 

 

Competition

 

We face substantial competition on large construction projects from regional and national contractors. Competitors on small construction projects range from a few large construction companies to a variety of smaller contractors. We compete with many local and regional firms for construction services and with a number of large firms on select projects. Each business segment faces varied competition depending on the type of project and services offered.

 

We believe that the primary factors influencing competition in our industry are price, reputation for quality, delivery and safety, relevant experience, availability of skilled labor, machinery and equipment, financial strength, knowledge of local markets and conditions, and estimating abilities. We believe that we compete favorably in all of the foregoing factors.

 

Geographic Areas — Financial Information

 

The following table sets forth our revenues from external customers attributable to our operations in the countries identified below for the years ended December 31, 2009, 2008 and 2007, and the total assets located in those countries for the years ended December 31, 2009 and 2008. Our revenue from operations in the United States are related to projects primarily in the geographic United States. Our revenue from operations in Canada are primarily derived from our office in Calgary, Canada, but may relate to specific projects in other countries.  In December 2009, we determined to discontinue all operations in Ecuador and in February 2010, entered into an agreement for the sale of the Ecuador business. As a result, the table below does not include the information attributable to our discontinued Ecuador subsidiary.

 

 

 

Year Ended December 31,

 

Total Assets at
December 31,

 

 

 

2009

 

2008

 

2007

 

 

 

 

 

Country

 

Revenue

 

%

 

Revenue

 

%

 

Revenue

 

%

 

2009 (1)

 

2008 (1)

 

 

 

(Thousands)

 

 

 

(Thousands)

 

 

 

(Thousands)

 

 

 

(Thousands)

 

(Thousands)

 

United States

 

$

445,979

 

95.5

 

$

577,090

 

96.5

 

$

521,663

 

96.1

 

$

465,025

 

$

231,432

 

Non-United States

 

21,031

 

4.5

 

20,732

 

3.5

 

20,961

 

3.9

 

5,760

 

12,514

 

TOTAL

 

$

467,010

 

100.0

 

$

597,822

 

100.0

 

$

542,624

 

100.0

 

$

470,723

 

$

243,946

 

 


(1)           Total assets within the United States include current assets of discontinued operations of Ecuador of $5.3 million and $6.9 million as of December 31, 2009 and 2008, respectively.

 

Risks Attendant to Foreign Operations

 

International operations are subject to foreign economic and political uncertainties. Unexpected and adverse changes in the foreign countries in which we operate could result in project disruptions, increased costs and potential losses. Our business is subject to fluctuations in demand and to changing domestic and international economic and political conditions which are beyond our control. In 2009, as set forth in the table above, approximately 4.5% of our revenue was attributable to external customers in foreign countries. The current expectation is that a similar portion of revenue will continue to come from international projects for the foreseeable future.

 

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The lack of a well-developed legal system in some foreign countries may also make it difficult to enforce contractual rights. There are significant risks due to civil strife, acts of war, terrorism and insurrection. The level of exposure to these risks will vary with respect to each project, depending on the particular stage of each such project. For example, the risk exposure with respect to a project in an early development stage will generally be less than the risk exposure with respect to a project in the middle of construction. To the extent that our international business is affected by unexpected and adverse foreign economic and political conditions, we may experience project disruptions and losses, which can significantly reduce our overall revenue and profits. We are able to mitigate significant portions of these risks by focusing on U.S. and European based clients (although the projects may be located elsewhere) and U.S. dollar based or hedged contracts.

 

During the years 2005 through 2009, the Company had operations in Ecuador.  In December 2009, management determined that the Ecuador operations would be discontinued and the business sold.  Refer to Note 11 “Discontinued Operations” to the consolidated financial statements included in Part II, Item 8, “ Financial Statements and Supplementary Data ” for further discussion.

 

Contract Provisions and Subcontracting

 

A substantial portion of our revenue is derived from contracts that are “fixed price” or “fixed unit price” contracts. Under a fixed price contract, we undertake to provide labor, equipment and services required by a project for a competitively bid or negotiated fixed price. The materials required under a fixed price contract, such as pipe, turbines, boilers and vessels are often supplied by the party retaining us. Under a fixed unit price contract, we are committed to providing materials or services required by a project at fixed unit prices. While the fixed unit price contract shifts the risk of estimating the quantity of units required for a particular project to the party retaining us, any increase in our unit cost over the unit price bid, whether due to inflation, inefficiency, faulty estimates or other factors, is borne by us.

 

Construction contracts are primarily obtained through competitive bidding or through negotiations with long-standing customers. We are typically invited to bid on projects undertaken by recurring customers who maintain pre-qualified contractor lists. Contractors are selected for the pre-approved contractor lists by virtue of their prior performance for such customers, as well as their experience, reputation for quality, safety record, financial strength and bonding capacity.

 

In evaluating bid opportunities, we consider such factors as the customer, the geographic location of the work, the availability of labor, our competitive advantage or disadvantage relative to other likely contractors, our current and projected workload, the likelihood of additional work, and the project’s cost and profitability estimates. We use computer-based estimating systems and our estimating staff has significant experience in the construction industry. The project estimates form the basis of a project budget against which performance is tracked through a project cost system, thereby enabling management to monitor a project. Project costs are accumulated and monitored weekly against billings and payments to assure proper control of cash flow on the project.

 

All government contracts and many other contracts provide for termination of the contract for the convenience of the party. In addition, many contracts are subject to certain completion schedule requirements with liquidated damages in the event schedules are not met. We have not been materially adversely affected by these provisions in the past.

 

We act as prime contractor on a majority of the construction projects we undertake. In the construction industry, the prime contractor is normally responsible for the performance of the entire contract, including subcontract work. Thus, we are subject to increased costs associated with the failure of one or more subcontractors to perform as anticipated. In our capacity as prime contractor and, when acting as a subcontractor, we perform most of the work on our projects with our own resources, but we do subcontract specialized activities such as blasting, hazardous waste removal and electrical work.

 

Our gas distribution services are typically provided pursuant to renewable contracts, on a “unit-cost” basis. Fees on unit-cost contracts are negotiated and are earned based on units completed. Historically, substantially all of the gas distribution customers have renewed their maintenance contracts. Facilities maintenance services, such as regularly scheduled and emergency repair work, are provided on an ongoing basis at predetermined rates.

 

Insurance and Bonding

 

We maintain general liability and excess liability insurance, covering our construction equipment, and workers’ compensation insurance, in amounts consistent with industry practices. In the State of California, we self-insure our workers’ compensation claims in an amount of up to $250,000 per occurrence, and we maintain insurance covering larger claims. Management believes our insurance programs are adequate.

 

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We maintain a diligent safety and risk management program that has resulted in a favorable loss experience factor. Through our safety director and the employment of a large staff of regional and site specific safety managers, we have been able to effectively assess and control potential losses and liabilities in both the pre-construction and performance phases of our projects. Though we strongly focus on safety in the workplace, we cannot give assurances that we can prevent or reduce all injuries or claims in our workplace.

 

In connection with our business, we generally are required to provide various types of surety bonds guaranteeing our performance under certain public and private sector contracts. Our ability to obtain surety bonds depends upon our capitalization, working capital, backlog, past performance, management expertise and other factors and the surety company’s current underwriting standards.

 

Regulation

 

Our operations are subject to various federal, state, local and international laws and regulations including:

 

·                   Licensing, permitting and inspection requirements;

·                   Building codes;

·                   Permitting and inspection requirements applicable to construction projects; and

·                   Special bidding, procurement and other requirements on government projects.

 

We believe that we have all the licenses required to conduct our operations and that we are in substantial compliance with applicable regulatory requirements.

 

Employees

 

We believe our employees are our most valuable resource. Our ability to maintain sufficient continuous work for approximately 2,000 hourly employees instills in such employees loyalty to and understanding of our policies and contributes to our strong production, safety and quality record.

 

As of December 31, 2009, we employed approximately 638 salaried employees and approximately 2,010 hourly employees, which includes approximately 318 salaried employees and 1,287 hourly employees from the December 18, 2009 acquisition of JCG. The total number of hourly personnel employed is subject to the volume of construction in progress. During 2009, and including the employees from the JCG acquisition, the number of hourly employees ranged from approximately 1,700 to 2,600.

 

The following is a summary of employees by function and geography at December 31, 2008:

 

 

 

CA

 

FL

 

TX

 

LA

 

Other US

 

Canada

 

Total

 

Salaried

 

234

 

24

 

78

 

265

 

8

 

29

 

638

 

Hourly

 

543

 

112

 

264

 

1,019

 

72

 

0

 

2,010

 

Total

 

777

 

136

 

342

 

1,284

 

80

 

29

 

2,648

 

 

Several of our subsidiaries have operations that are unionized through the negotiation and execution of collective bargaining agreements. These collective bargaining agreements have varying terms and are subject to renegotiation upon expiration. We have experienced no recent work stoppages and believe our employee and union relations are good.

 

ITEM 1A.  RISK FACTORS

 

Our business is subject to a variety of risks and uncertainties, including, but not limited to, the risks and uncertainties described below. The following list is not all-inclusive. There can be no assurance that we have correctly identified and appropriately assessed all factors affecting our business or that the publicly available and other information with respect to these matters is complete and correct. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely affect us. These developments could have material adverse effects on our business, financial condition and results of operations.

 

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Risks Related to Our Business and Operations

 

Our financial and operating results may vary significantly from quarter-to-quarter and year-to-year, which may adversely affect the price and value of our common stock.

 

Our annual and quarterly results may be adversely affected by:

 

·                   Changes in our mix of customers, projects, contracts and business;

·                   Regional and/or general economic conditions;

·                   Variations and changes in the margins of projects performed during any particular quarter;

·                   Increases in the costs to perform services caused by changing weather conditions;

·                   The termination of existing agreements or contracts;

·                   The budgetary spending patterns of customers;

·                   Increases in construction costs that we may be unable to pass through to our customers;

·                   Cost or schedule overruns on fixed-price contracts;

·                   Availability of qualified labor to execute specific projects;

·                   Changes in bonding requirements and bonding availability applicable to existing and new agreements;

·                   Costs we incur to support growth internally or through acquisitions or otherwise;

·                   The timing and volume of work under contract; and

·                   Losses experienced in our operations not otherwise covered by insurance.

 

Accordingly, our operating results in any particular quarter may not be indicative of the results that you may expect for any other quarter or for the entire year. Such quarterly and annual fluctuations in our financial and operating results may affect the value of our common stock.

 

Our business is labor intensive. We depend on key personnel and we may not be able to operate and grow our business effectively if we lose the services of any of our key personnel or are unable to attract qualified and skilled personnel in the future. This could lead to a decrease in our overall competitiveness, resulting in an adverse effect on our business, operating results, financial condition and value of our common stock.

 

We are dependent upon the efforts of our key personnel and our ability to retain them and hire other qualified employees. In particular, we are dependent upon the management and leadership of Brian Pratt, who is our Chief Executive Officer, as well as other members of executive and senior management. The loss of any of the executive officers or other key personnel could affect our ability to run our business effectively. Competition for senior management personnel is intense and we may not be able to retain our personnel even though we have entered into employment agreements with certain of them. The loss of any key person requires the remaining key personnel to divert immediate and substantial attention to seeking a replacement. An inability to find a suitable replacement for any departing executive or senior officer on a timely basis could adversely affect our ability to operate and grow our business.

 

Our ability to maintain our productivity and profitability may be limited by our ability to employ, train and retain skilled personnel necessary to meet our requirements. We may not be able to maintain an adequate skilled labor force necessary to operate efficiently and to support our growth strategy. We have from time-to time experienced shortages of certain types of qualified personnel. For example, there is a shortage of engineers, project managers, field supervisors, and other skilled workers capable of working on and supervising the construction of underground and industrial facilities, as well as providing engineering services. The supply of experienced engineers, project managers, field supervisors and other skilled workers may not be sufficient to meet current or expected demand. The commencement of new, large-scale infrastructure projects or increased demand for workers available to us, could affect our business, even if we are not awarded such projects. Labor shortages or increased labor costs could impair our ability to maintain our business or grow our revenues. If we are unable to hire employees with the requisite skills, we may also be forced to incur significant training expenses. The occurrence of any of the foregoing could have an adverse effect on our business, operating results, financial condition and value of our common stock.

 

We may be unsuccessful at generating internal growth, which may affect our ability to expand our operations or grow our business, which may cause an adverse effect on our financial condition, results of operations and cash flows.

 

Our ability to generate internal growth may be affected by, among other factors, our ability to:

 

·                   Attract new customers;

·                   Increase the number of projects performed for existing customers;

·                   Hire and retain qualified personnel;

·                   Successfully bid for new projects; and

·                   Adapt the range of services we offer to address our customers’ evolving construction needs.

 

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In addition, our customers may reduce the number or size of projects available to us due to their inability to obtain capital. Many of the factors affecting our ability to generate internal growth may be beyond our control, and we cannot be certain that our strategies will be successful or that we will be able to generate cash flow sufficient to fund our operations and to support internal growth. If we are unsuccessful, we may not be able to achieve internal growth, expand our operations or grow our business and the failure to do so could have an adverse effect on our financial condition, results of operations and cash flow.

 

Demand for our services may decrease during an economic recession, and such lack of demand may adversely affect our business.

 

The engineering and construction industries historically have experienced cyclical fluctuations in financial results due to economic recessions, downturns in business cycles of our customers, material shortages, price increases by subcontractors, interest rate fluctuations and other economic factors beyond our control. If the general level of economic activity deteriorates, our customers may delay or cancel upgrades, expansions, and/or maintenance and repairs to their systems. Many factors, including the financial condition of the industry, could adversely affect our customers and their willingness to fund capital expenditures in the future.

 

We expect that the continuing challenges in credit conditions and the current downturn in the United States will cause some of our customers to delay or postpone construction projects. Forecasts are predicting continuing declines in construction activity in the United States during 2010.

 

We are also dependent on the amount of work our customers outsource. In a slower economy, our customers may decide to outsource less infrastructure services reducing demand for our services. In addition, consolidation, competition or capital constraints in the industries we serve may result in reduced spending by our customers.

 

We derive a significant portion of our revenues from a few customers, and the loss of one or more of these customers could have significant effects on our revenues, resulting in adverse effects on our financial condition, results of operations and cash flows.

 

Our customer base is highly concentrated, with our top ten customers accounting for 58.8% of our revenue in 2009, 54.7% of our revenue in 2008 and 46.5% in 2007. Our revenue could significantly decline if we lose one or more of our significant customers. In addition, revenues under our contracts with significant customers may vary from period-to-period depending on the timing and volume of work which such customers order in a given period and as a result of competition from the in-house service organizations of several of our customers. Reduced demand for our services or a loss of a significant customer could have an adverse effect on our financial condition, results of operations and cash flows.

 

Our actual cost may be greater than expected in performing our fixed-price and unit-price contracts, causing us to realize significantly lower profits on our projects, which would have an adverse effect on our financial condition, results of operations and cash flows.

 

We currently generate, and expect to continue to generate, a portion of our revenue and profits under fixed-price and unit-price contracts. The portion of revenue generated from fixed-price and unit-price contracts for 2009, 2008 and 2007 was 68%, 67% and 65%, respectively. The portion of gross profit generated from fixed-price and unit-price contracts for 2009, 2008 and 2007 was 55%, 64% and 51%, respectively. We must estimate the costs of completing a particular project to bid these types of contracts. The actual cost of labor and materials, however, may vary from the costs we originally estimated and we may not be successful in recouping additional costs from our customers. These variations, along with other risks inherent in performing fixed-price and unit-price contracts, may cause gross profits for a project to differ from those we originally estimated and could result in reduced profitability or losses on projects due to changes in a variety of factors such as:

 

·                   Failure to properly estimate costs of engineering, materials, equipment or labor;

·                   Unanticipated technical problems with the structures, materials or services being supplied by us, which may require that we spend our own money to remedy the problem;

·                   Project modifications creating unanticipated costs;

·                   Changes in the costs of equipment, materials, labor or subcontractors;

·                   Our suppliers or subcontractors failure to perform;

·                   Changes in local laws and regulations;

·                   Delays caused by local weather conditions; and

·                   Exacerbation of any one or more of these factors as projects grow in size and complexity.

 

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Depending upon the size of a particular project, variations from the estimated contracts costs could have an adverse effect on our financial condition, results of operations and cash flows.

 

We may lose business to competitors through the competitive bidding processes, which could have an adverse effect on our financial condition, results of operations and cash flows.

 

We are engaged in highly competitive businesses in which customer contracts are often awarded through bidding processes based on price and the acceptance of certain risks. We compete with other general and specialty contractors, both foreign and domestic, including large international contractors and small local contractors. The strong competition in our markets requires maintaining skilled personnel, investing in technology and also puts pressure on profit margins. Because of this, we could be prevented from obtaining contracts for which we have bid.

 

We may pay our suppliers and subcontractors before receiving payment from our customers for the related services, we could experience an adverse affect on our financial condition, results of operations and cash flows.

 

We use subcontractors and material suppliers for portions of certain work, and our customers pay us for those related services. If we pay our suppliers and subcontractors for materials purchased and work performed for customers who fail to pay, or such customers delay in paying us for the related work or materials, we could experience a material adverse effect on our financial condition, results of operations and cash flows.

 

Our unionized workforce may commence work stoppages, which could adversely affect our operations.

 

As of December 31, 2009, approximately 21% of our hourly employees, primarily consisting of field laborers, were covered by collective bargaining agreements. Although the majority of these agreements prohibit strikes and work stoppages, we cannot be certain that strikes or work stoppages will not occur in the future. Strikes or work stoppages would adversely impact our relationships with our customers and could have an adverse effect on our financial condition, results of operations and cash flow.

 

Our business growth could outpace the capability of our internal infrastructure and may prohibit us from expanding our operations or execute our business plan, which failures may adversely affect the value of our common stock.

 

Our internal infrastructure may not be adequate to support our operations as they expand. To the extent that we are unable to buy or build equipment necessary for a project, either due to a lack of available funding or equipment shortages in the marketplace, we may be forced to rent equipment on a short-term basis or to find alternative ways to perform the work without the benefit of equipment ideally suited for the job, which could increase the costs of completing the project. We often bid for work knowing that we will have to rent equipment on a short-term basis and we include our assumptions of market equipment rental rates into our bid. If market rates for rental equipment increase between the time of bid submission and project execution, our margins for the project may be reduced. In addition, our equipment requires continuous maintenance, which we generally provide through our own repair facilities. If we are unable to continue to maintain the equipment in our fleet, we may be forced to obtain additional third-party repair services at a higher cost or be unable to bid on contracts.

 

A significant portion of our business depends on our ability to provide surety bonds and we may be unable to compete for or work on certain projects if we are not able to obtain the necessary surety bonds, which could result in an adverse affect on our financial condition, results of operations and cash flows.

 

Our contracts frequently require that we provide payment and performance bonds to our customers. Furthermore, under standard terms in the surety market, sureties issue or continue bonds on a project-by-project basis and can decline to issue bonds at any time or require the posting of additional collateral as a condition to issuing or renewing any bonds.

 

Current or future market conditions, as well as changes in our sureties assessments of our operating and financial risk, could cause our surety providers to decline to issue or renew, or substantially reduce the amount of bonds for our work and could increase our bonding costs. These actions could be taken on short notice. If our surety providers were to limit or eliminate our access to bonding, our alternatives would include seeking bonding capacity from other sureties, finding more business that does not require bonds and posting other forms of collateral for project performance, such as letters of credit or cash. We may be unable to secure these alternatives in a timely manner, on acceptable terms, or at all. Accordingly, if we were to experience an interruption or reduction in the availability of bonding capacity, we may be unable to compete for or work on certain projects and such interruption or reduction could have an adverse effect on our financial condition, results of operations and cash flows.

 

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Our bonding requirements may limit our ability to incur indebtedness, which would limit our ability to refinance our existing credit facilities or to execute our business plan, and potentially result in an adverse effect on our business.

 

Our ability to obtain surety bonds depends upon various factors including our capitalization, working capital and amount of our indebtedness. In order to help ensure that we can obtain required bonds, we may be limited in our ability to incur additional indebtedness that may be needed to refinance our existing credit facilities upon maturity and to execute our business plan. Our inability to incur additional indebtedness could have an adverse effect on our business, operating results and financial condition.

 

Our business may be affected by difficult work sites and environments, which may adversely affect our ability to procure materials and labor, which may adversely affect our overall business.

 

We perform our work under a variety of conditions, including, but not limited to, difficult and hard to reach terrain, difficult site conditions and busy urban centers where delivery of materials and availability of labor may be impacted. Performing work under these conditions can slow our progress, potentially causing us to incur contractual liability to our customers. These difficult conditions may also cause us to incur additional, unanticipated costs that we might not be able to pass on to our customers.

 

Our results of operations could be adversely affected as a result of goodwill impairments.

 

When we acquire a business, we record an asset called “goodwill” equal to the excess amount we pay for the business, including liabilities assumed, over the fair value of the tangible and intangible assets of the business we acquire. For example, in connection with the acquisition of JCG, we recorded approximately $56.1 million in goodwill and $31.7 million of intangible assets based on the application of the acquisition method of accounting. Goodwill and other intangible assets that have indefinite useful lives cannot be amortized, but instead must be tested at least annually for impairment, while intangible assets that have finite useful lives are amortized over their useful lives. The accounting literature provides specific guidance for testing goodwill and other non-amortized intangible assets for impairment. Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Polices” for a detailed discussion. Management is required to make certain estimates and assumptions when allocating goodwill to reporting units and determining the fair value of a reporting unit’s net assets and liabilities, including, among other things, an assessment of market conditions, projected cash flows, investment rates, cost of capital and growth rates, which could significantly impact the reported value of goodwill and other intangible assets. Fair value is determined using a combination of the discounted cash flow, market multiple and market capitalization valuation approaches. Absent any impairment indicators, we perform our impairment tests annually during the fourth quarter. If there is a decrease in market capitalization below book value in the future, this may be considered an impairment indicator. Any future impairments, including impairments of the goodwill or intangible assets recorded in connection with the acquisition of JCG, and other past or future acquisitions, would negatively impact our results of operations for the period in which the impairment is recognized.

 

During the ordinary course of our business, we may become subject to lawsuits or indemnity claims, which could materially and adversely affect our business and results of operations.

 

We have in the past been, and may in the future be, named as a defendant in lawsuits, claims and other legal proceedings during the ordinary course of our business. These actions may seek, among other things, compensation for alleged personal injury, workers’ compensation, employment discrimination, breach of contract, property damage, punitive damages, civil penalties or other losses or injunctive or declaratory relief. In addition, we generally indemnify our customers for claims related to the services we provide and actions we take under our contracts with them, and, in some instances, we may be allocated risk through our contract terms for actions by our customers or other third parties. Because our services in certain instances may be integral to the operation and performance of our customers’ infrastructure, we may become subject to lawsuits or claims for any failure of the systems that we work on, even if our services are not the cause of such failures, and we could be subject to civil and criminal liabilities to the extent that our services contributed to any property damage, personal injury or system failure. The outcome of any of these lawsuits, claims or legal proceedings could result in significant costs and diversion of management’s attention to the business. Payments of significant amounts, even if reserved, could adversely affect our reputation, liquidity and results of operations.

 

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We may incur liabilities or suffer negative financial or reputational impacts relating to occupational health and safety matters.

 

Our operations are subject to extensive laws and regulations relating to the maintenance of safe conditions in the workplace. While we have invested, and will continue to invest, substantial resources in our occupational health and safety programs, our industry involves a high degree of operational risk and there can be no assurance that we will avoid significant liability exposure. Although we have taken what we believe are appropriate precautions, we have suffered fatalities in the past and may suffer additional fatalities in the future. Serious accidents, including fatalities, may subject us to substantial penalties, civil litigation or criminal prosecution. Claims for damages to persons, including claims for bodily injury or loss of life, could result in substantial costs and liabilities, which could materially and adversely affect our financial condition, results of operations or cash flows. In addition, if our safety record were to substantially deteriorate over time or we were to suffer substantial penalties or criminal prosecution for violation of health and safety regulations, our customers could cancel our contracts and not award us future business.

 

Opportunities within the government arena could subject us to increased governmental regulation and costs.

 

Most government contracts are awarded through a regulated competitive bidding process. As we pursue increased opportunities in the government arena, management’s focus associated with the start up and bidding process may be diverted away from other opportunities. Involvement with government contracts could require a significant amount of costs to be incurred before any revenues are realized from these contracts. In addition, as a government contractor, we are subject to a number of procurement rules and other public sector liabilities, any deemed violation of which could lead to fines or penalties or a loss of business. Government agencies routinely audit and investigate government contractors. Government agencies may review a contractor’s performance under its contracts, cost structure, and compliance with applicable laws, regulations and standards. If government agencies determine through these audits or reviews that costs were improperly allocated to specific contracts, they will not reimburse the contractor for those costs or may require the contractor to refund previously reimbursed costs. If government agencies determine that we engaged in improper activity, we may be subject to civil and criminal penalties. In addition, if the government were to even allege improper activity, we also could experience serious harm to our reputation. Many government contracts must be appropriated each year. If appropriations are not made in subsequent years we would not realize all of the potential revenues from any awarded contracts.

 

Inability to perform our obligations under Engineer, Procure and Construct (“EPC”) contracts may lead to higher costs, which would adversely affect our business.

 

EPC contracts require us to perform a range of services for our customers, some of which we routinely subcontract to other parties. The portion of revenue generated from EPC contracts for 2009, 2008 and 2007 was 4%, 8% and 9%, respectively. The portion of gross profit generated from EPC contracts for 2009, 2008 and 2007 was 9%, 3% and 0%, respectively. In most instances, these contracts require completion of a project by a specific date, achievement of certain performance standards or performance of our services at certain standards of quality. If we subsequently fail to meet such dates or standards, we may be held responsible for costs resulting from such failure. Our inability to obtain the necessary material and equipment to meet a project schedule or the installation of defective material or equipment could have an adverse effect on our financial condition, results of operations and cash flows.

 

We require subcontractors to assist us in providing certain services and we may be unable to retain the necessary subcontractors to complete certain projects resulting in an adverse affect in our business.

 

We use subcontractors to perform portions of our contracts and to manage workflow, particularly for design, engineering, procurement and some foundation work. We are not dependent on any single subcontractor. However, general market conditions may limit the availability of subcontractors on which we rely to perform portions of our contracts causing delays and increases in our costs, which results could have an adverse effect on our financial condition, results of operations and cash flows.

 

Backlog may not be realized or may not result in revenues or profits, which failure in realizing revenues or profits could result in an adverse effect on our financial condition, results of operations and cash flows.

 

Backlog is difficult to determine accurately and different companies within our industry define backlog differently. We refer to “backlog” as our estimated revenue on uncompleted contracts, including the amount of revenue on contracts on which work has not begun, minus the revenue we have recognized under such contracts. We calculate backlog differently for different types of contracts. For our fixed price contracts, we include the full remaining portion of the contract in our calculation of backlog. For our unit-price, time-and-equipment, time-and-materials and cost-plus contracts, we do not include any revenue in the calculation of backlog, regardless of the duration of the contract. In addition, we work with some of our customers under master service agreements (“MSAs”). We do not include any projected revenue from MSAs in our calculation of backlog.

 

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Most contracts may be terminated by our customers on short notice, typically 30 to 90 days, but sometimes less. Reductions in backlog due to cancellation by a customer, or for other reasons, could significantly reduce the revenue and profit we actually receive from contracts in backlog. In the event of a project cancellation, we may be reimbursed for certain costs but we typically have no contractual right to the total revenues reflected in our backlog. Projects may remain in backlog for extended periods of time. Given these factors and our method of calculating backlog, our backlog at any point in time may not accurately represent the revenue that we expect to realize during any period and our backlog as of the end of a fiscal year may not be indicative of the revenue we expect to earn in the following fiscal year. Consequently, there can be no assurances as to the accuracy of our customers’ requirements or our estimates. Inability to realize revenue from our backlog could have an adverse effect on our financial condition, results of operations and cash flows.

 

Our use of percentage-of-completion accounting could result in a reduction or elimination of previously reported profits, which may result in an adverse affect on our financial condition and results of operations.

 

We recognize revenue using the percentage-of-completion method of accounting, using the cost-to-cost method, where revenues are estimated based on the percentage of costs incurred to date to total estimated costs. This method is used because management considers expended costs to be the best available measure of progress on these contracts. This accounting method is standard for fixed-price contracts. The percentage-of-completion accounting practice we use results in our recognizing contract revenues and earnings ratably over the contract term in proportion to our incurrence of contract costs. The earnings or losses recognized on individual contracts are based on estimates of contract revenues, costs and profitability. Contract losses are recognized in full when determined, and contract profit estimates are adjusted based upon ongoing reviews of contract profitability. Penalties are recorded when known or finalized, which generally is during the latter stages of the contract. In addition, we record adjustments to estimated costs of contracts when we believe the change in the estimate is probable and the amounts can be reasonably estimated. These adjustments could result in both increases and decreases in profit margins. Actual results could differ from estimated amounts and could result in a reduction or elimination of previously recognized earnings. In certain circumstances, it is possible that such adjustments could be significant and could have an adverse effect on our financial condition, results of operations and cash flows.

 

Our financial results are based upon estimates and assumptions that may differ from actual results and such differences between the estimates and actual results may have an adverse affect on our financial condition, results of operations and cash flows.

 

In preparing our consolidated annual and quarterly financial statements in conformity with generally accepted accounting principles, many estimates and assumptions are used by management in determining the reported revenues and expenses recognized during the periods presented, and disclosures of contingent assets and liabilities known to exist as of the date of the financial statements. 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 times, these estimates are particularly difficult to determine and we must exercise significant judgment. Estimates may be used in our assessments of the allowance for doubtful accounts, useful lives of property and equipment, fair value assumptions in analyzing goodwill and long-lived asset impairments, self-insured claims liabilities, revenue recognition under percentage-of-completion accounting and provisions for income taxes. Actual results for all estimates could differ materially from the estimates and assumptions that we use, which could have an adverse effect on our financial condition, results of operations and cash flows.

 

The timing of new contracts may result in unpredictable fluctuations in our cash flow and profitability, which could adversely affect our business.

 

Substantial portions of our revenues are derived from project-based work that is awarded through a competitive bid process. The portion of revenue generated from the competitive bid process for 2009, 2008 and 2007 was 54%, 45% and 44%, respectively. It is generally very difficult to predict the timing and geographic distribution of the projects that we will be awarded. The selection of, timing of or failure to obtain projects, delays in award of projects, the re-bidding or termination of projects due to budget overruns, cancellations of projects or delays in completion of contracts could result in the under-utilization of our assets and reduce our cash flows. Even if we are awarded contracts, we face additional risks that could affect whether, or when, work will begin. For example, some of our contracts are subject to financing, permitting and other contingencies that may delay or result in termination of projects. This can present difficulty in matching workforce size

 

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and equipment location with contract needs. In some cases, we may be required to bear the cost of a ready workforce and equipment that is larger than necessary, resulting in unpredictability in our cash flow, expenses and profitability. If any expected contract award or the related work release is delayed or not received, we could incur substantial costs without receipt of any corresponding revenues. Moreover, construction projects for which our services are contracted may require significant expenditures by us prior to receipt of relevant payments by a customer and may expose us to potential credit risk if such customer should encounter financial difficulties. Finally, the winding down or completion of work on significant projects that were active in previous periods will reduce our revenue and earning if such significant projects have not been replaced in the current period.

 

If we fail to integrate acquisitions successfully, we may experience operational challenges and risk which may have an adverse effect on our business and results of operations.

 

As part of our growth strategy, we may acquire companies that expand, complement or diversify our business. In December 2009, we completed the acquisition of JCG, a large construction company in the southern United States.  The JCG acquisition and future acquisitions may expose us to operational challenges and risks, including, among others:

 

·                   The diversion of management’s attention from the day-to-day operations of the combined company;

·                   The management of a significantly larger company than before completion of an acquisition;

·                   The assimilation of new employees and the integration of business cultures;

·                   Retaining key personnel;

·                   The integration of information, accounting, finance, sales, billing, payroll and regulatory compliance systems;

·                   Challenges in keeping existing customers and obtaining new customers;

·                   Challenges in combining service offerings and sales and marketing activities;

·                   The assumption of unknown liabilities of the acquired business for which there are inadequate reserves; and

·                   The potential impairment of acquired goodwill and intangible assets.

 

If our management is not able to effectively manage the integration process or if any significant business activities are interrupted as a result of the integration process of any acquisitions, our business could suffer and our results of operations and financial condition may be negatively affected.

 

We may not be successful in continuing to meet the requirements of the Sarbanes-Oxley Act of 2002.

 

The Sarbanes-Oxley Act of 2002 has many requirements applicable to us regarding corporate governance and financial reporting, including the requirements for management to report on our internal controls over financial reporting and for our independent registered public accounting firm to express an opinion over the operating effectiveness of our internal control over financial reporting. During 2009, we continued actions to ensure our ability to comply with these requirements. As of December 31, 2009, our internal control over financial reporting was effective; however, there can be no assurance that our internal control over financial reporting will be effective in future years. Failure to maintain effective internal controls or the identification of significant internal control deficiencies in acquisitions already made or made in the future could result in a decrease in the market value of our common stock and our other publicly traded securities, the reduced ability to obtain financing, the loss of customers, penalties and additional expenditures to meet the requirements.

 

Our business may be materially adversely impacted by regional, national and/or global requirements to significantly limit or reduce greenhouse gas emissions in the future.

 

Greenhouse gases that result from human activities, including burning of fossil fuels, have been the focus of increased scientific and political scrutiny and are being subjected to various legal requirements. International agreements, national laws, state laws and various regulatory schemes limit or otherwise regulate emissions of greenhouse gases, and additional restrictions are under consideration by different governmental entities. We derive a significant amount of revenues and contract profits from engineering and construction services to clients that own and/or operate a wide range of process plants and own and/or operate electric power generating plants that generate electricity from burning natural gas or various types of solid fuels. These plants emit greenhouse gases as part of the process to generate electricity or other products. Compliance with the existing greenhouse gas regulation may prove costly or difficult. It is possible that owners and operators of existing or future process plants and electric generating plants could be subject to new or changed environmental regulations that result in significantly limiting or reducing the amounts of greenhouse gas emissions, increasing the cost of emitting such gases or requiring emissions allowances. The costs of controlling such emissions or obtaining required emissions allowances could be significant. It also is possible that necessary controls or allowances may not be available. Such regulations could negatively impact client investments in capital projects in our markets, which could negatively impact the market for our products and/or services. This could materially adversely affect our business, financial condition, results of operations and cash flows.

 

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Our international operations expose us to legal, political and economic risks in different countries as well as currency exchange rate fluctuations that could harm our business and financial results.

 

During 2009 and 2008, revenue attributable to our services outside of the United States was approximately 4.5% and 3.5% of our total revenue, respectively. This revenue is derived from our operations in Canada. There are risks inherent in doing business internationally, including:

 

·                   Imposition of governmental controls and changes in laws, regulations, policies, practices, tariffs and taxes;

·                   Political and economic instability;

·                   Changes in United States and other national government trade policies affecting the market for our services;

·                   Potential non-compliance with a wide variety of laws and regulations, including the United States Foreign Corrupt Practices Act and similar non-United States laws and regulations;

·                   Currency exchange rate fluctuations, devaluations and other conversion restrictions;

·                   Restrictions on repatriating foreign profits back to the United States; and

·                   Difficulties in staffing and managing international operations.

 

Any of these factors could have a material adverse effect on our business, financial condition, results of operations and cash flows. We review foreign operations annually to determine the viability and outlook for those operations.

 

During the years 2005 through 2009, the Company had operations in Ecuador, and in December 2009, management determined that the Ecuador operations would be discontinued and the business sold.  Refer to Note 11 “Discontinued Operations” to the consolidated financial statements included in Part II, Item 8, “ Financial Statements and Supplementary Data ” for further discussion.

 

Risks Related to our Common Stock

 

Our common stock is subject to potential dilution to our stockholders.

 

As of December 31, 2009, there were outstanding Warrants to purchase an aggregate of 4,617,499 shares of common stock at a price of $5.00 per share and an option to purchase 450,000 Units at a price of $8.80 per Unit (each unit consisting of one share of common stock and one Warrant). The Warrants are exercisable until October 2, 2010. The Warrants will likely be exercised only when the market price of our common stock is greater than the $5.00 per share exercise price of the Warrants. The Units are exercisable until October 2, 2011. To the extent such Warrants or option are exercised, additional shares of our common stock will be issued, which will result in dilution to our stockholders and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares, as well as the sale of shares in the public market issued pursuant to our 2008 Long-term Incentive Equity Plan could adversely affect the market price of our common stock.

 

In addition, on December 18, 2009, the Company completed the acquisition of JCG and paid initial consideration that included a combination of cash, notes payable and 81,852.78 shares of our Series A Non-Voting Contingent Convertible Preferred Stock (“Preferred Stock”). Subject to the approval of our stockholders, the Preferred Stock will convert into an aggregate of 8,185,278 shares of common stock, thus diluting our stockholders.  Further, if JCG achieves certain financial milestones for the year ending December 31, 2010, we will issue to the sellers a number of shares of common stock equal to $10 million, divided by the average closing price of our common stock, as reported on NASDAQ, for the 20 business days prior to December 31, 2010.  The issuance of these shares would further dilute our stockholders.

 

The NASDAQ Global Market may delist our securities from quotation on its exchange which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.

 

The Company is listed on the NASDAQ Global Market exchange, which has certain listing requirements that we must comply with. We may be unable to maintain the listing of our securities in the future.

 

17



Table of Contents

 

If NASDAQ delists our securities from trading on its exchange, we could face significant material adverse consequences, including:

 

·                   A limited availability of market quotations for our securities;

·                   A limited amount of news and analyst coverage for our company; and

·                   A decreased ability to issue additional securities or obtain additional financing in the future.

 

Our securities on the NASDAQ Global Market are deemed to be shares of a “controlled company” within the meaning of the NASDAQ Global Market listing requirements and, as a result, we will be exempt from certain corporate governance requirements, which may result in reduced corporate governance protections to our stockholders.

 

Currently, Brian Pratt, the Chief Executive Officer and President of the Company, beneficially holds more than 50% of the voting power of the Company, through his ownership of shares of our common stock and by the delivery of revocable proxies to Mr. Pratt from certain of our stockholders. As a result, the Company is considered a “controlled company” for purposes of the NASDAQ listing requirements (a corporation which more than 50% of the voting power is held by an individual, a group or another company). Therefore, the Company is not subject to the NASDAQ listing requirements that would otherwise require that the board of directors have a majority of independent directors and that executive compensation and director nominations be subject to independent director oversight. Accordingly, the Company’s stockholders do not have the same protections afforded to stockholders of other companies and our independent directors do not have the same ability to influence the business policies and affairs as independent directors of companies that are subject to all of such NASDAQ corporate governance requirements.

 

As part of the December 18, 2009 acquisition of JCG, the Company issued 81,852.78 shares of Preferred Stock. Subject to the approval of our stockholders, the Preferred Stock will convert into an aggregate of 8,185,278 shares of common stock.  If the conversion is approved, Mr. Pratt will no longer beneficially hold greater than 50% of our voting power for the election of directors and we will no longer be considered a controlled company.  As a result, we will no longer be exempt from the NASDAQ listing requirements described above and we will be required to comply with these requirements.

 

Three of our director-officers are significant stockholders, which will make it possible for them to have significant influence over the outcome of all matters submitted to our stockholders for approval and which influence may be alleged to conflict with our interests and the interests of our other stockholders.

 

As of December 31, 2009, three of our director-officers and principal stockholders owned an aggregate in excess of 50% of the outstanding shares of our common stock. On his own, with the revocable proxies that have been granted to him, Brian Pratt beneficially owned and had the power to vote approximately 58.2% of the outstanding shares of our common stock at December 31, 2009. These stockholders will have significant influence over the outcome of all matters submitted to our stockholders for approval, including the election of our directors and other corporate actions. In addition, such influence by one or more of these affiliates could have the effect of discouraging others from attempting to purchase us, take us over, and/or reducing the market price offered for our common stock in such an event.

 

ITEM 1B.                     UNRESOLVED STAFF COMMENTS

 

None.

 

18



Table of Contents

 

ITEM 2.                              PROPERTIES

 

Facilities

 

Our executive offices are located at 26000 Commercentre Drive, Lake Forest, California 92630. The telephone number at our executive office is (949) 598-9242. The Construction Services segment of our business has regional offices located in Pittsburg, San Francisco, Bakersfield and San Diego, California. The Construction Services segment also has regional offices located in Baton Rouge, Louisiana, Conroe and Pasadena, Texas and Sarasota and Fort Lauderdale, Florida.  The Engineering segment of our business has offices located in San Dimas, California and in Calgary, Canada.

 

We lease all of the facilities used in our operations. The leases are generally for 10 to 12-year terms, expiring through 2019. The aggregate lease payments made for our facilities in 2009 were $2.9 million. We believe that our facilities are adequate to meet our current and foreseeable requirements for the next several years.

 

We lease some of our facilities, employees and certain construction and transportation equipment from Stockdale Investment Group, Inc. (“SIGI”). All of these leases were entered into on similar terms as negotiated with an independent third party. Our majority stockholder, Chief Executive Officer, President and Chairman of the Board, Brian Pratt, also is a majority interest holder in SIGI. In addition, two of our officers and/or directors also serve as officers and/or directors of SIGI, as follows (with their respective positions with SIGI reflected in parentheses): Brian Pratt (chairman and director) and John M. Perisich (secretary). Additionally, one of our officers and directors, John P. Schauerman, also served as an officer and director of SIGI prior to the July 2008 merger (president and director).

 

Property, Plant and Equipment

 

We own and maintain both construction and transportation equipment. In 2009, 2008 and 2007, we spent approximately $9.3 million, $10.1 million and $2.2 million, respectively, in cash for capital equipment. Additionally, we incurred debt for the acquisition of property and equipment in the amounts of approximately $4.7 million in 2009, $7.1 million in 2008 and $6.6 million in 2007. An estimated breakdown of capital equipment as of December 31, 2009 is as follows:

 

·                   Heavy construction and specialized equipment—1,053 units, including 583 units of equipment related to the acquisition of JCG; and

·                   Transportation equipment—896 units, also including 426 units of equipment related to the acquisition of JCG.

 

We believe the ownership of equipment is preferable to leasing to ensure the equipment is available as needed. In addition, ownership has historically resulted in lower equipment costs. We attempt to obtain projects that will keep our equipment fully utilized in order to increase profit. All equipment is subject to scheduled maintenance to insure reliability. Maintenance facilities exist at each of our regional offices as well as on-site on major jobs to properly service and repair equipment. Major equipment not currently utilized is rented to third parties whenever possible to supplement equipment income.

 

The following summarizes total property, plant and equipment, net of accumulated depreciation, as of December 31, 2009 and 2008:

 

 

 

2009

 

2008

 

Useful Life

 

 

 

(In Thousands)

 

(In Thousands)

 

 

 

Land and buildings

 

$

5,433

 

$

805

 

30 years

 

Leasehold improvements

 

3,460

 

988

 

Lease life

 

Office equipment

 

632

 

671

 

3 - 5 years

 

Construction equipment

 

104,337

 

46,993

 

3 - 7 years

 

Transportation equipment

 

10,538

 

10,119

 

3 - 18 years

 

 

 

124,400

 

59,576

 

 

 

Less: accumulated depreciation and amortization

 

(31,832

)

(33,352

)

 

 

Net property, plant and equipment

 

$

92,568

 

$

26,224

 

 

 

 

The amounts shown in 2009 include the property, plant and equipment of $61.3 million as a result of the December 18, 2009 acquisition of JCG, primarily in construction equipment.

 

19



Table of Contents

 

ITEM 3.                              LEGAL PROCEEDINGS

 

Legal Proceedings

 

We are from time to time subject to claims and legal proceedings arising out of our business. Our management believes that we have meritorious defenses to the claims. Although we are 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 our financial condition or results of operations.

 

Government Regulations

 

Our operations are subject to compliance with regulatory requirements of federal, state, and municipal agencies and authorities, including regulations concerning labor relations, affirmative action and the protection of the environment. While compliance with applicable regulatory requirements has not adversely affected operations in the past, there can be no assurance that these requirements will not change and that compliance with such requirements will not adversely affect operations.

 

ITEM 4.                              SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

Reserved.

 

PART II

 

ITEM 5 .                              MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

On July 31, 2008, we merged with Former Primoris, and thereafter our common stock, Warrants and Units (each unit consisting of one share of common stock and one Warrant) began trading on the NASDAQ Global Market under the symbols “PRIM”, “PRIMW” and “PRIMU”, respectively. Previously, our common stock traded on the OTC Bulletin Board under the ticker symbol “RPSD”.

 

As of March 9, 2010, we had outstanding 33,121,567 shares of common stock, which were held of record by          stockholders. These holders of record include depositories that hold shares of stock for brokerage firms, which in turn, hold shares of stock for numerous beneficial owners.

 

The following table shows the range of market prices of our common stock during 2009 and  2008.

 

 

 

Market price per
Share

 

 

 

High

 

Low

 

Year ended December 31, 2009

 

 

 

 

 

First quarter

 

$

5.44

 

$

3.25

 

Second quarter

 

$

7.63

 

$

3.93

 

Third quarter

 

$

8.00

 

$

6.87

 

Fourth quarter

 

$

8.40

 

$

7.00

 

 

 

 

 

 

 

Year ended December 31, 2008

 

 

 

 

 

First quarter

 

$

7.99

 

$

7.51

 

Second quarter

 

$

8.49

 

$

7.80

 

Third quarter

 

$

8.64

 

$

3.44

 

Fourth quarter

 

$

7.70

 

$

3.28

 

 

20



Table of Contents

 

Dividend Policy

 

The following table shows cash dividends to our common stockholders declared by the Company during the two years ended December 31, 2009:

 

Declaration Date

 

Payable Date

 

Record Date

 

Type

 

August 8, 2008

 

October 10, 2008

 

September 23, 2008

 

$0.025 per share

 

November 10, 2008

 

January 15, 2009

 

December 23, 2008

 

$0.025 per share

 

March 16, 2009

 

April 15, 2009

 

March 31, 2009

 

$0.025 per share

 

May 19, 2009

 

July 15, 2009

 

June 30, 2009

 

$0.025 per share

 

August 7, 2009

 

October 15, 2009

 

September 30, 2009

 

$0.025 per share

 

November 11, 2009

 

January 15, 2010

 

December 31, 2009

 

$0.025 per share

 

 

The payment of future dividends is contingent upon our revenues and earnings, capital requirements and general financial condition of the company, as well as contractual restrictions and other considerations deemed relevant by the board of directors. No dividends or distributions will be payable to holders of shares of common stock unless the full dividends or distributions are paid to the holders of the Series A Preferred Stock at the same time.  Dividends on the Series A Preferred Stock are non-cumulative.

 

On March 4, 2010, a cash dividend of $0.025 per share was declared and payable to stockholders of record as of March 31, 2010, with an anticipated distribution date on or about April 15, 2010.

 

Equity Compensation Plan Information

 

The following table gives information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of December 31, 2009.

 

Plan category

 

Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)

 

Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)

 

Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
(c)

 

Equity compensation plans approved by security holders

 

0

 

0

 

1,520,000

 

Equity compensation plans not approved by security holders

 

0

 

0

 

0

 

Total

 

0

 

0

 

1,520,000

 

 

These securities represent shares of common stock available for issuance under our 2008 Long-term Incentive Equity Plan (“2008 Equity Plan”). The material features of our 2008 Equity Plan are described in Notes 2, 25 and 26 to our consolidated financial statements for the year ended December 31, 2009 included in Part II, Item 8 “ Financial Statements and Supplementary Data ”.

 

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Table of Contents

 

Repurchases of Securities

 

On March 27, 2009, we announced that we entered into a Rule 10b5-1 trading plan with CJS Securities, Inc. to facilitate the repurchase of up to $1 million of our common stock purchase Warrants.  Each Warrant entitles the holder to purchase one share of our common stock at a price of $5.00 per share and is exercisable at any time on or prior to October 2, 2010, unless earlier redeemed.

 

From March 27, 2009 through May 15, 2009, CJS Securities completed the purchase of 188,500 Warrants. The Warrants purchased represented approximately 3.9% of the 4,894,456 redeemable Warrants outstanding as of March 26, 2009.  No purchases were made during the third and fourth quarters of 2009.

 

Unregistered Sales of Securities During the Fourth Quarter of 2009

 

During the fourth quarter 2009, we completed the acquisition of two companies in which some of the consideration consisted of unregistered securities of the Company. The aggregate consideration paid in these transactions was $9.1 million in cash, $53.5 million in promissory notes, 139,082 shares of common stock and 81,852.78 shares of Preferred Stock.

 

In addition, the Company provided for contingent consideration to the sellers if they achieve certain financial performance targets. The contingent consideration, totaling $12.5 million, included $0.5 million payable in cash and $12.0 million payable in shares of Company common stock. The number of shares of common stock payable under the contingent consideration will be based on future share prices of the Company’s common stock, under the terms of the Purchase Agreements.

 

All securities listed on the following table are issued shares of convertible preferred stock and shares of our common stock. Contingent consideration is not included in the table. We relied on Section 4(2) of the Securities Act, as the basis for exemption from registration. For all issuances, the purchasers were “accredited investors” as defined in Rule 501 of the Securities Act.  All issuances were as a result of privately negotiated transactions, and not pursuant to public solicitations.

 

Period

 

Number of
Shares

 

Purchaser

 

Consideration

October 1 through December 31, 2009

 

139,082 common shares

 

Stockholders of acquired company

 

Sale of acquired company

October 1 through December 31, 2009

 

81,852.78 convertible preferred shares

 

Stockholders of acquired company

 

Sale of acquired company

 

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Table of Contents

 

ITEM 6.           SELECTED FINANCIAL DATA

 

The following selected financial data should be read in conjunction with Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” and our audited financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K.

 

 

 

Year Ended December 31,

 

 

 

2009

 

2008

 

2007

 

2006

 

2005

 

 

 

(In thousands except per share data)

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

467,010

 

$

597,822

 

$

542,624

 

$

430,006

 

$

356,643

 

Cost of revenues

 

391,435

 

527,380

 

482,556

 

391,276

 

331,744

(1)

Gross profit

 

75,575

 

70,442

 

60,068

 

38,730

 

24,899

 

Selling, general and administrative expense

 

34,781

 

30,544

 

28,580

 

25,660

 

20,497

 

Merger related stock expense

 

390

 

4,050

 

 

 

 

Operating income

 

40,404

 

35,848

 

31,488

 

13,070

 

4,402

 

Other income (expense)

 

7,707

 

6,380

 

(1,856

)

1,316

 

927

 

Income from continuing operations, before income taxes

 

48,111

 

42,228

 

29,632

 

14,386

 

5,329

 

Income tax provision

 

(18,350

)

(4,926

)

(895

)

(1,175

)

(10

)

Income from continuing operations

 

$

29,761

 

$

37,302

 

$

28,737

 

$

13,211

 

$

5,319

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net of tax—(2)

 

(3,849

)

(869

)

(1,603

)

(11

)

252

 

Net income (loss)

 

$

25,912

 

$

36,433

 

$

27,134

 

$

13,200

 

$

5,571

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.93

 

$

1.42

 

$

1.23

 

$

0.56

 

$

0.22

 

Income (loss) from discontinued operations —(2)

 

$

(0.12

)

$

(0.03

)

$

(0.07

)

$

0.00

 

$

0.01

 

Net income

 

$

0.81

 

$

1.39

 

$

1.16

 

$

0.56

 

$

0.23

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.86

 

$

1.32

 

$

1.23

 

$

0.56

 

$

0.22

 

Income (loss) from discontinued operations —(2)

 

$

(0.11

)

$

(0.03

)

$

(0.07

)

$

0.00

 

$

0.01

 

Net income

 

$

0.75

 

$

1.29

 

$

1.16

 

$

0.56

 

$

0.23

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

31,937

 

26,258

 

23,458

 

23,402

 

23,897

 

Diluted

 

34,418

 

28,156

 

23,458

 

23,402

 

23,897

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro Form Data - 2005 to 2008 (unaudited)—(3)

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations, before income taxes, as reported

 

 

 

$

42,228

 

$

29,632

 

$

14,386

 

$

5,329

 

Pro forma provision for income taxes

 

 

 

(16,797

)

(11,794

)

(5,726

)

(2,121

)

Pro forma income from continuing operations

 

 

 

$

25,431

 

$

17,838

 

$

8,690

 

$

3,208

 

Pro forma income (loss) from discontinued operations — (2)

 

 

 

(592

)

(993

)

(7

)

152

 

Pro forma net income

 

 

 

$

24,839

 

$

16,845

 

$

8,653

 

$

3,360

 

Pro Forma Earnings (loss) per share (unaudited):

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

 

$

0.97

 

$

0.76

 

$

0.37

 

$

0.13

 

Income (loss) from discontinued operations — (2)

 

 

 

$

(0.02

)

$

(0.04

)

$

0.00

 

$

0.01

 

Net income

 

 

 

$

0.95

 

$

0.72

 

$

0.37

 

$

0.14

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

 

$

0.90

 

$

0.76

 

$

0.37

 

$

0.13

 

Income (loss) from discontinued operations — (2)

 

 

 

$

(0.02

)

$

(0.04

)

$

0.00

 

$

0.01

 

Net income

 

 

 

$

0.88

 

$

0.72

 

$

0.37

 

$

0.14

 

 

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Table of Contents

 

 

 

As of December 31,

 

 

 

2009

 

2008

 

2007

 

2006

 

2005

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

90,004

 

$

72,848

 

$

62,628

 

$

12,865

 

$

16,035

 

Short term investments

 

$

30,058

 

$

15,036

 

$

 

$

 

$

 

Accounts receivable, net

 

$

108,492

 

$

90,622

 

$

112,468

 

$

104,844

 

$

57,636

 

Total assets

 

$

476,027

 

$

252,212

 

$

220,973

 

$

162,309

 

$

125,982

 

Total current liabilities

 

$

242,192

 

$

168,392

 

$

150,123

 

$

97,828

 

$

73,670

 

Long-term debt, net of current portion

 

$

77,955

 

$

26,965

 

$

22,641

 

$

21,328

 

$

18,597

 

Stockholders’ equity

 

$

143,959

 

$

55,430

 

$

46,923

 

$

42,207

 

$

32,165

 

 


(1)            For the year 2005, cost of revenues includes $3.6 million for a provision for estimated losses on uncompleted contracts.

 

(2)            During December 2009, the Company determined to discontinue all operations in Ecuador and a plan was put in place to sell the stock ownership in the Company.  As a result, the results of operations and cash flows for these operations are reflected as discontinued operations for all periods presented.

 

During 2004, Former Primoris decided to cease all operations in Chile. During 2005, ARB Chile prevailed in a legal action against a customer in Chile, resulting in a substantial payment included in the gain on discontinued operations for 2005 of $1.5 million.

 

(3)            Prior to the merger with Rhapsody in July 2008, Former Primoris was taxed as an S-Corporation for purposes of federal and state income taxes. As a result of the merger, the S-Corporation status terminated and the combined entity is now taxed as a C-Corporation under federal and state tax laws. The pro forma data reflects the impact of the combined federal and state income taxes on a pro forma basis as if both Former Primoris and we had been taxed as a C-Corporation during those periods 2005 through 2008, using an effective tax rate of 39.8%.

 

ITEM 7.          MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. See “Forward Looking Statements” elsewhere in this Annual Report on Form 10-K. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including certain risks inherent with our business as discussed in “Item 1A Risk Factors”.

 

Primoris 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, water and wastewater pipeline systems, and also constructs 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 have been performed in the western United States, and more specifically in California. In addition, we have strategic presences in Florida, Texas and Canada.

 

On December 18, 2009, the Company completed the acquisition of JCG.  JCG is one of the largest general contractors based in the Gulf Coast states, and is engaged in highway, industrial and environmental construction, primarily in Louisiana, Texas and Florida.  JCG is the successor company to T. L. James and Company, Inc., a well-known Louisiana company that has been in business for over 80 years.  Headquartered in Baton Rouge, Louisiana, JCG serves government and private clients in a broad geographical region that includes the entire Gulf Coast region of the United States.

 

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JCG’s heavy civil division provides services in heavy civil construction projects, including highway and bridge construction, concrete paving, levee construction, airport runway and taxiway construction and marine facility construction. JCG’s infrastructure and maintenance division provides large earthwork and site development, landfill construction, site remediation and mining support services. JCG’s industrial division, with a client base comprised primarily of private industrial companies, provides all phases of civil and structural construction, mechanical equipment erection, process pipe installation and boiler, furnace and heater installation and repair.

 

As discussed elsewhere in this Annual Report on Form 10-K, on July 31, 2008, we completed a merger of Rhapsody Acquisition Corp. and Former Primoris. Unless specifically noted otherwise, as used throughout this Management’s Discussion and Analysis section, “Primoris”, the “Company” or “we,” “our,” or “us” refers to the business, operations and financial results of Former Primoris prior to, and Primoris 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 July 2008 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.

 

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 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.

·       Providing large earthwork and site development, site remediation and mining support services; and

·       Since the acquisition of JCG, services also include heavy civil construction projects, including highway and bridge construction, concrete paving, levee construction, airport runway and taxiway construction and marine facility construction.

 

Engineering Segment:

 

The Engineering group 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.

 

Outlook

 

In 2009, we experienced a significant reduction in revenues, especially in our California industrial and Florida water markets, as we were affected by the economic downturn and volatile capital markets. Many of our customers reduced spending and the awarding of new contracts in 2009, and we expect that economic conditions will remain challenging for the next few quarters.  As a result, while we expect the first half of 2010 to be less robust than seen in prior years, we remain positive about the long-term opportunities in the industries we serve.

 

Constructions Services — West

 

Our legacy business is focused primarily on infrastructure projects in California.  We anticipate that our utility customers will continue their efforts to improve their underground pipeline and cable and conduit projects; however, if economic conditions worsen, spending on these projects could be reduced.  Activity in industrial (above-ground) projects will remain at reduced levels for the next several quarters as the economic slowdown has reduced the need for additional power plants and the fluctuating oil prices have put pressure on refinery margins and refinery capital projects.  While currently at reduced levels, we expect a recovery and longer term growth in this sector.  In addition, demand in this sector could increase significantly depending on the impact of renewable energy initiatives.  California renewable portfolio standards require that one third of energy usage in the state be from renewable sources by 2020.  Since current estimates are that 12 to 15% of the state’s energy meets the renewable portfolio standards, significant potential opportunities exist.  In addition, certain portions of the American Recovery and Reinvestment Act (“ARRA”) of 2009 may increase demand for our services.  The ARRA includes incentives for renewable energy in the form of grants, tax cuts, tax credits and loans.  At this time, we cannot predict the timing of these projects that would implement the renewable standards or incentive programs.

 

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Construction Services — East

 

The economic downturn significantly reduced the revenues of our water and wastewater facility construction company in 2009, which is our largest contributor of revenues in the state of Florida.  While there may be a positive impact of the ARRA on this market segment in 2010, we anticipate that significant improvements may not occur until there is an improvement in the residential housing market in the southeastern United States.

 

With the acquisition of JCG in December 2009, we anticipate an increase in Primoris revenues in 2010.  In calendar 2009, revenues for JCG were approximately $360 million, and based on JCG’s backlog and the status of its projects, we anticipate no reduction in that revenue level in 2010.  The general economic climate will impact the future level of highway construction in JCG’s markets, and there can be no assurance that contract awards in 2010 will allow JCG to maintain that level in future years.  We believe that the infrastructure needs in the Gulf Coast region will provide us with a long-term growth opportunity.

 

Engineering

 

Our product engineering segment experienced a significant decline in 2009 as our customers reacted to the reduced price of oil compared to 2008 and a general slowdown in energy usage.  We anticipate continuing market uncertainty during 2010, however, we expect reasonable market growth in non-U.S. areas, primarily in Asia.  We believe that the operational improvements provided by high-performance heaters can provide future opportunities in this segment.

 

Conclusion

 

In 2009, many of our customers reduced capital spending as a result of the recession and capital markets volatility.  It is uncertain when these current unfavorable economic and market conditions will improve, or if they will deteriorate further in the near term.  While some of these issues are expected to persist in the first half of 2010, we are optimistic that with our greater size and available resources, as a result of the JCG acquisition, we are positioned to capitalize on what we believe will be  a stronger operating environment in the second half of 2010 and into 2011.

 

While we increased our gross margin as a percentage of revenues in 2009 compared to 2008, we believe that in the near-term, margins may decline as competitors bid projects more aggressively in order to maintain their revenue level and cash flow.  In addition, quarterly gross margins may be negatively impacted by adverse weather conditions and project delays.  We expect that over the long-term we can maintain and improve our margins based on the expected growth opportunities in our markets and our ability to benefit from our increased scale of operations.

 

In 2010, we will continue to focus on those aspects of our business that we can control.  Those aspects include the margins we accept on projects that we bid, our management of cash including collection of receivables, our emphasis on safety programs and quality and our continuing management of all levels of cost.  We expect to maintain a strong competitive position with existing customers and in our current markets.  We will continue to evaluate potential strategic acquisitions and investments in order to grow our geographic area of operations and services.

 

While we cannot predict the timing or the overall impact of the growth opportunities, especially in light of the current economic downturn and volatile financial markets, we believe that we have the capability and expertise to continue our growth and capitalize on opportunities in the markets that we serve.

 

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 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.

 

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We and our customers are operating in a challenging business environment in light of the economic downturn and weak capital markets. We are closely monitoring our customers and the effect that changes in economic and market conditions may have on them. We have experienced reduced spending by our customers in late 2008 and throughout 2009, which we attribute to negative economic and market conditions, and we anticipate that these negative conditions will continue to affect demand for our services in the near-term until conditions improve. However, we believe that most of our customers, some of whom are regulated utilities, remain financially stable in general and will be able to continue with their business plans in the long-term without substantial constraints.

 

Seasonality and cyclicality

 

Our revenues and results of operations can be subject to seasonal and other variations. These variations are influenced by weather, customer spending patterns, bidding seasons, project schedules and timing and holidays. Typically, our revenues are lowest in the first quarter of the year because cold, snowy or wet conditions cause delays. The second quarter is typically better than the first, as some projects begin, but continued cold and wet weather can often impact second quarter productivity. The third quarter is typically the best of the year, as a greater number of projects are underway and weather is more accommodating to work on projects. Generally, revenues during the fourth quarter of the year are lower than the third quarter but higher than the second quarter. Many projects are completed in the fourth quarter and revenues often are impacted positively by customers seeking to spend their capital budget before the end of the year; however, the holiday season and inclement weather sometimes can cause delays and thereby reduce revenues and increase costs.

 

Additionally, our industry can be highly cyclical. As a result, our volume of business may be adversely affected by declines or delays in new projects in various geographic regions in the United States. Project schedules, in particular in connection with larger, longer-term projects, can also create fluctuations in the services provided, which may adversely affect us in a given period. The financial condition of our customers and their access to capital, variations in the margins of projects performed during any particular period, regional, national and global economic and market conditions, timing of acquisitions, the timing and magnitude of acquisition assimilation costs, interest rate fluctuations and other factors may also materially affect our periodic results. Accordingly, our operating results for any particular period may not be indicative of the results that can be expected for any other period.

 

Results of operations

 

Revenue, gross profit, operating income and net income for the years ended December 31, 2009, 2008 and 2007 were as follows:

 

 

 

2009

 

2008

 

2007

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

467,010

 

100.0

%

$

597,822

 

100.0

%

$

542,624

 

100.0

%

Gross profit

 

75,575

 

16.2

%

70,442

 

11.8

%

60,068

 

11.1

%

Selling, general and administrative expense

 

34,781

 

7.4

%

30,544

 

5.1

%

28,580

 

5.3

%

Merger related stock expense

 

390

 

0.1

%

4,050

 

0.7

%

 

 

Operating income

 

40,404

 

8.7

%

35,848

 

6.0

%

31,488

 

5.8

%

Other income (expense)

 

7,707

 

1.7

%

6,380

 

1.1

%

(1,856

)

(0.3

)%

Income before income taxes

 

48,111

 

10.3

%

42,228

 

7.1

%

29,632

 

5.5

%

Provision for income taxes

 

(18,350

)

(3.9

)%

(4,926

)

(0.9

)%

(895

)

(0.2

)%

Income from continuing operations

 

29,761

 

6.4

%

37,302

 

6.2

%

28,737

 

5.3

%

Loss on discontinued operations

 

(3,849

)

(0.9

)%

(869

)

(0.1

)%

(1,603

)

(0.3

)%

Net income

 

25,912

 

5.5

%

$

36,433

 

6.1

%

$

27,134

 

5.0

%

 

Revenue decreased $130.8 million, or 21.8%, for 2009 as compared to 2008 as a result reduced revenues for projects in the refining and water and wastewater sectors. Revenues in our Engineering segment declined, reflecting completion of an unusually large project at the end of 2008. In 2009, our Construction Services segment provided 87.6% of total revenues compared to 84.4% of total revenues in 2008.

 

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Gross profit increased by $5.1 million, or 7.3%, for 2009 as compared to 2008 reflecting higher margin work in the cable and conduit and pipeline sectors.  For 2009, gross profit provided by our Construction Services segment represented 91.9% of the total gross profit compared to 92.2% of total gross profit in 2008.

 

Revenue increased $55.2 million, or 10.2%, for 2008 as compared to 2007 as a result of growth in both of our segments, led primarily by strong growth in facility work in our Construction Services segment. Both our Engineering segment and foreign operations revenues increased reflecting the strength of the petroleum industry. In 2008, our Construction Services segment provided 84.4% of total revenues compared to 85.8% of total revenues in 2007.

 

Gross profit increased by $10.4 million, or 17.3%, for 2008 as compared to 2007 reflecting higher margin work in the refining and energy sectors of the economy. For 2008, gross profit provided by our Construction Services segment represented 92.2% of the total gross profit compared to 87.1% of total gross profit in 2007.

 

Geographic areas — financial information

 

Revenue by geographic area for the years ended December 31, 2009, 2008 and 2007 was as follows:

 

 

 

2009

 

2008

 

2007

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

Country:

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

445,979

 

95.5

%

$

577,090

 

96.5

%

$

521,663

 

96.1

%

Non-United States

 

21,031

 

4.5

%

20,732

 

3.5

%

20,961

 

3.9

%

Total revenue

 

$

467,010

 

100.0

%

$

597,822

 

100.0

%

$

542,624

 

100.0

%

 

Note that revenue is attributed to the countries based on our reporting entity that records the transaction.

 

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 years ending December 31, 2009, 2008 and 2007 were as follows:

 

 

 

2009

 

2008

 

2007

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

Construction Services

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

409,237

 

 

 

$

504,880

 

 

 

$

465,324

 

 

 

Gross profit

 

$

69,471

 

17.0

%

$

64,964

 

12.9

%

$

52,309

 

11.2

%

 

Construction Services segment revenues decreased by $95.6 million, or 18.9% for 2009 compared to 2008 as a result of decreases in our California industrial business of $114.4 million and our Florida water and wastewater construction company of $27.8 million.  These decreases were due primarily to the substantial completion of refinery and water and wastewater construction projects in 2008 which were not replaced with new projects in 2009 as the general economy caused potential customers to delay construction projects.  In addition, the impact of the work slowdown and demobilizations at the Richmond Refinery project, as discussed in the Backlog section below, also had an impact on expected revenues for the California industrial business.  The revenue reduction was partially offset by revenue increases of $25.2 million in California underground projects, including pipeline and cable and conduit projects as well as an increase of $16.8 million of revenues from the JCG and Cravens acquisitions.

 

Construction Services segment gross profit increased by $4.5 million, or 7.0%, for 2009 compared to 2008. The increase resulted from improved margins as a percentage of revenue to 17.0% in 2009 from 12.9% in 2008, as well as the addition of new subsidiaries at the end of 2009, partially offset by reduced profits in the refining sector because of lower revenues, and lower revenues and profits obtained from third party equipment rentals.

 

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Revenue for the Construction Services segment increased by $39.6 million, or 8.5%, for 2008 compared to 2007. This revenue increase was led primarily by a $98.2 million increase in Construction Services for industrial facilities primarily in the refining industry as customers increased their capacity and upgraded their infrastructure in an environment of increasing worldwide petroleum pricing. The revenue increase was offset by reductions of revenue of $61.6 million primarily in pipeline, water and wastewater and cable and conduit underground projects and cast-in-place structure projects reflecting significant work completed at the end of 2007 and early 2008, thus affecting revenue comparisons.

 

Construction Services segment gross profit increased by $12.7 million, or 24.2%, for 2008 compared to 2007. The increase resulted from both increased revenue and improved margins as a percent of revenue to 12.9% in 2008 from 11.2% in 2007. Of the $12.7 million gross profit increase, approximately $4.2 million was due to increased revenues and $8.5 million was due to the improved gross profit percentage. The primary reasons for the gross profit margin increase were changes from lower margin water and wastewater and underground and structure projects to higher margin industrial projects in the petroleum and power industry.

 

Engineering Segment

 

Revenue and gross profit for the Engineering segment for the years ended December 31, 2009, 2008 and 2007 were as follows:

 

 

 

2009

 

2008

 

2007

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

Engineering Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

57,773

 

 

 

$

92,942

 

 

 

$

77,300

 

 

 

Gross profit

 

$

6,104

 

10.6

%

$

5,478

 

5.9

%

$

7,759

 

10.0

%

 

Engineering segment revenue decreased by $35.2 million, or 37.8%, for 2009 compared to 2008. The revenue decrease was primarily the result of major alliance work and a major process plant being completed in 2009. Alliance projects generated $19.5 revenue in 2009 compared to $36.4 million in 2008.

 

Engineering segment gross profit increased by $0.6 million, or 11.4%, for 2009 compared to 2008. The increase resulted from increased margin on a major project in Thailand and successful completion of a major process plant, partially offset by reduced gross profit margins in alliance work.

 

Revenue increased by $15.6 million, or 20.2%, for 2008 compared to 2007. The primary reason for the increase was the affect of an alliance agreement we made with a major client in November 2007. Alliance projects generated $36.4 million in revenue in 2008 compared to $16.7 million in 2007.

 

Engineering segment gross profit declined by $2.3 million, or 29.4%, for 2008 compared to 2007. The decrease was the result of a significant decrease in the gross profit percentage, which declined to 5.9% of revenue in 2008 from 10.0% in 2007. At the 2007 gross profit margin, the gross profit impact from the increase in revenues for 2008 was $1.6 million while the gross profit margin decrease reduced profitability by $3.9 million. In 2008, we reversed gross profit on certain alliance projects by $2.1 million and we recognized a lower gross profit percentage on a $48.1 million project which was completed in 2009. In addition, at the unusually high 2008 revenue levels for the segment, we allocated a greater percentage of general and administrative expenses to cost of sales, reducing the gross profit margin. We expect that the gross profitability in this segment will trend toward higher historical levels in 2009.

 

Segment reporting for 2010

 

As a result of the acquisition of JCG, management will change Primoris’ reportable segments effective on January 1, 2010.  The three new segments will be Construction Services — East, Construction Services — West and Engineering.

 

The Construction Services — East segment will incorporate the JCG construction services business, located primarily in the southern United States, specializing in highway, industrial and environmental projects and will include the current Construction Services businesses located in the Gulf Coast region of the United States, which includes Cardinal Contractors, Inc., Cardinal Mechanical and Cravens Services, Inc. The newly formed Construction Services-West segment will include the Construction Services performed in the western United States, primarily in the state of California. The current Engineering segment will remain unchanged.

 

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Selling, general and administrative expenses

 

Selling, general and administrative expenses (“SG&A”) increased $4.2 million, or 13.9%, for 2009 compared to 2008. The increase was due primarily to various factors, including $1.2 million for acquisition expenses related to the JCG and Cravens acquisition due diligence efforts, a lower allocation of $1.8 million of general and administrative expenses to costs of sales primarily in our engineering segments due to lower revenue levels in 2009. In addition, 2009 expenses increased by $1.6 million reflecting additional public company expenses, including increases in directors fees, audit fees, Sarbanes Oxley compliance costs, consultant fees, legal fees and payroll.  In 2009, we were a public company for twelve months, compared to only five months in 2008. Additional increases in SG&A expenses for 2009 compared to 2008 included $0.6 million for depreciation and amortization expense, $0.3 million for insurance expenses, $0.3 million for incentive compensation expense and $0.5 million in SG&A expenses as a result of JCG operations beginning on December 18, 2009, the acquisition date. SG&A expenses were offset by gains on the sales of equipment of $3.2 million in 2009 compared with a $0.6 million in 2008.

 

SG&A expenses as a percentage of revenue increased to 7.4% for 2009 from 5.1% for 2008.  The increase as a percentage of revenues was primarily due to the impact of the decrease in revenues as well as the increase in acquisition expenses and lower overhead recovery.

 

SG&A increased $2.0 million, or 6.9%, for 2008 compared to 2007. The increase was due principally to an increase in personnel expenses of $4.1 million to meet future growth, partially offset by higher absorption of overhead expenses of $2.3 million, as a result of increased activity in the Engineering segment, a decrease in legal fees of $0.6 million, and an increase in gain on sales of fixed assets of $0.5 million.

 

SG&A as a percentage of revenue decreased to 5.1% for 2008, from 5.3% for 2007. The decrease in SG&A as a percentage of revenue was primarily related to the relatively fixed accounting, administrative and management expenses, which did not increase proportionally with the increased revenue. These benefits were partially offset by increased SG&A from public company reporting obligations, primarily increased accounting and legal expenses.

 

Merger related stock expense

 

On February 19, 2008, we entered into an Agreement and Plan of Merger with Former Primoris and certain stockholders of Former Primoris (“Merger Agreement”). In connection with the Merger Agreement, we entered into agreements with two foreign managers that called for the issuance of 507,600 shares of our common stock. In accordance with ASC Topic 718 “ Compensation — Stock Compensation ”, we recognized $3.7 million of non-cash expenses and recorded an increase to additional paid-in capital. The issuance of the shares was a non-recurring event directly related to the consummation of the merger and therefore, the entire value of the shares at July 31, 2008 was taken as a charge to earnings.

 

The Merger Agreement provided for the issuance of additional earn-out shares to the Former Primoris stockholders for both 2008 and 2009 financial results. In 2008, we achieved the financial performance target, and in March 2009, we issued 2,500,025 shares to the Former Primoris stockholders.  We also recorded an expense of $0.4 million for the 52,668 shares issued to the two foreign members.

 

Similarly, in 2009, we achieved the financial performance target, and we will issue 2,499,975 shares to the Former Primoris stockholders in March 2010.  In 2009, we recorded a non-cash expense of $0.4 million and an increase in additional paid-in capital for the 52,668 shares that will be issued to the foreign managers in March 2010.

 

Other income and expense

 

Non-operating income and expense items for the years ended December 31, 2009, 2008 and 2007 were as follows:

 

 

 

2009

 

2008

 

2007

 

 

 

(Thousands)

 

(Thousands)

 

(Thousands)

 

Other income (expense)

 

 

 

 

 

 

 

Income from non-consolidated investments

 

$

8,753

 

$

6,065

 

$

(1,359

)

Foreign exchange gain (loss)

 

293

 

855

 

(471

)

Interest income

 

640

 

1,710

 

1,747

 

Interest expense

 

(1,979

)

(2,250

)

(1,773

)

Total other income

 

$

7,707

 

$

6,380

 

$

(1,856

)

 

Equity income (loss) from non-consolidated investments for 2009 consisted of $8.8 million income from the Otay Mesa Power Partners (“OMPP”) joint venture, a power plant construction project near San Diego, California which was in the final stages of completion at the end of 2009, and minor income of our other investments in joint ventures.

 

For 2008, we recognized income of $6.1 million from OMPP.

 

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Income from non-consolidated joint ventures for 2007 consisted of income of $2.2 million from the OMPP joint venture.  In December 2007, we made the decision to record a $3.6 million “other than temporary impairment” of our investment in ARB Arendal because of a client dispute with an uncertain outcome, resulting in a net loss of $1.4 million for the year.

 

In the second quarter of 2009, we made advances to ARB Arendal of $1.0 million and we reserved the full amount of these advances.  In the fourth quarter of 2009, we sold our investment in ARB Arendal to our partner for a minimal sum, and we received repayment of our $1.0 million advance.

 

Foreign exchange gain for 2009 and 2008 and foreign exchange loss for 2007 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 has created a currency exchange difference.

 

Interest income decreased for 2009 and 2008 compared to 2007 as a result of declining interest rates and our decision to invest our excess cash balances in Treasury bills and certificate of deposits (“CD’s”) purchased through the CDARS (Certificate of Deposit Account Registry Service) rather than commercial paper.  The decrease was partially offset by higher average cash balances in the 2009 and 2008 period.

 

Interest expense decreased by $0.3 million for 2009 and increased $0.5 million for 2008 compared to 2007 reflecting our financing of acquisitions of property and equipment of $14.0 million and $17.2 million for 2009 and 2008, respectively, with long-term bank debt.  The weighted average interest rate on total debt outstanding at December 31, 2009, 2008 and 2007 was 5.3%, 6.1% and 6.3%, respectively.

 

Provision for income taxes

 

Our provision for income tax increased $13.4 million for 2009 to $18.4 million from 2008 as a result of the change of tax status from that of a Subchapter S of the Internal Revenue Code (“S-Corporation”) to that of a Subchapter C of the Internal Revenue Code (“C-Corporation”) as part of the Merger Agreement on July 31, 2008. Thereafter, we 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 year ended December 31, 2009 and December 31, 2008 was 38.1% and 11.7%, respectively.  The effective tax rate for the year ended December 31, 2008 included the impact of a $3.0 million tax benefit for establishing our beginning deferred tax assets. In the years prior to 2008, as an S-Corporation we had no provision for federal income tax and only minimal provision for state income tax.

 

The 2007 provision for income taxes was principally the result of Canadian taxable income.  During the year ended December 31, 2007, as an S-Corporation, Primoris had no United States federal income tax obligations, since these obligations were the personal liability of its stockholders.

 

Pro forma net income data—unaudited

 

During the year ended December 31, 2009, the Company has been taxed as a C-Corporation.  To compare the 2009 results with the prior year, the following pro forma information is presented to provide for income tax provisions as if the company were taxed as a C-Corporation for the years ended December 31, 2008 and 2007.

 

 

 

2008

 

2007

 

 

 

(Thousands)

 

(Thousands)

 

Pro Form Data — 2008 and 2007 (unaudited)

 

 

 

 

 

Income from continuing operations, before income taxes, as reported

 

$

42,228

 

$

29,632

 

Pro forma provision for income taxes

 

$

(16,797

)

$

(11,794

)

Pro forma income from continuing operations

 

$

25,431

 

$

17,838

 

Pro forma income (loss) from discontinued operations — (1)

 

$

(592

)

$

(993

)

Pro forma net income

 

$

24,839

 

$

16,845

 

 


(1)            During December 2009, the Company determined to discontinue all operations in Ecuador and a plan was put in place to sell the stock ownership in the Company.  As a result, the results of operations and cash flows for Ecuadorian operations are reflected as discontinued operations for all periods presented.

 

During September 2004, the Company decided to cease all operations in Chile. The fixed assets, consisting mainly of construction equipment, were sold locally or repatriated in 2006. Related assets, liabilities, revenues and expenses were insignificant at and for the years ended December 31, 2008 and 2007.

 

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The estimated pro forma tax provision amounts for both 2008 and 2007 were calculated using an effective statutory tax rate of approximately 39.8%.

 

Discontinued Operations

 

During December 2009, the Company determined to discontinue all operations in Ecuador and a plan was put in place to sell the stock ownership in the business unit. As a result, the results of operations and cash flows for these operations are reflected as discontinued operations for all periods presented.

 

The following table summarizes the results of the discontinued operations of Ecuador during the prior three years:

 

 

 

2009

 

2008

 

2007

 

 

 

(Thousands)

 

(Thousands)

 

(Thousands)

 

Ecuador Business Unit

 

 

 

 

 

 

 

Revenues

 

$

18,247

 

$

11,250

 

$

5,042

 

Cost of revenue

 

23,457

 

11,249

 

5,758

 

Gross (loss) profit

 

(5,210

)

1

 

(716

)

Selling, general and administrative expenses

 

895

 

978

 

937

 

Operating loss

 

(6,105

)

(977

)

(1,653

)

Interest income

 

7

 

9

 

3

 

Loss before provision for taxes

 

(6,098

)

$

(968

)

$

(1,650

)

Income tax benefit

 

2,249

 

99

 

47

 

Income (loss) from discontinued operations

 

$

(3,849

)

$

(869

)

$

(1,603

)

 

At December 31, 2009, current assets of $5.3 million and current liabilities of $6.5 million, resulting in a net liability of $1.2 million, remain on the balance sheet for the Ecuador operations.

 

In February 2010, the Company entered into an agreement for the sale of the Ecuador business.  The Company agreed to pay $1.0 million of remaining liabilities of the business, and the buyer is to pay to the Company a combination of $0.4 million in Primoris stock owned by the buyer, a $0.3 million note payable, plus an indemnification to the Company of certain potential liabilities. The sale was completed in March 2010. The sale had no material impact to the Company.

 

During September 2004, the Company decided to cease all operations in Chile. The fixed assets, consisting mainly of construction equipment, were sold locally or repatriated in 2006. Related assets, liabilities, revenues and expenses were insignificant at and for the years ended December 31, 2009, 2008 and 2007.

 

Critical Accounting Policies and Estimates

 

General —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 also affect the amounts of revenues 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. Estimates may be used in our assessments of revenue recognition under percentage-of-completion accounting, the allowance for doubtful accounts, useful lives of property and equipment, fair value assumptions in analyzing goodwill and long-lived asset impairments, self-insured claims liabilities and deferred income taxes. Actual results could differ from those that result from using the estimates under different assumptions or conditions.

 

An accounting policy is deemed to be critical if it requires an accounting estimate to be based on assumptions about matters that are highly uncertain at the time the estimate is made, and different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated financial statements.

 

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The following accounting policies are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. Management’s estimates are based on the relevant information available at the end of each period.

 

Fixed-price contracts —Fixed-price contracts carry certain inherent risks, including underestimation of costs, problems with new technologies and economic and other changes that may occur over the contract period. We recognize revenues using the percentage-of-completion method for fixed-price contracts, which may result in uneven and irregular results. Unforeseen events and circumstances can alter the estimate of the costs and potential profit associated with a particular contract. 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 overstated or understated.

 

Revenue recognition —We typically structure contracts as unit-price, time and material, fixed-price or cost plus fixed fee. We believe that our operating results should be evaluated over a time horizon during which major contracts in progress are completed and change orders, extra work, variations in the scope of work and cost recoveries and other claims are negotiated and realized.

 

We recognize revenue on the percentage-of-completion method for all of the types of contracts described in the paragraph above. 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 income, are impacted by changes in productivity, scheduling, and 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. If a current estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full when determined.

 

We consider unapproved change orders to be contract variations on which we have customer approval for scope change, but not for price change associated with such scope change. Costs associated with unapproved change orders are included in the estimated cost to complete the contracts and are expensed as incurred. We recognize revenue equal to costs incurred on unapproved change orders when realization of price approval is probable and the estimated amount is equal to or greater than costs related to the unapproved change order. Revenue recognized on unapproved change orders is included in “costs and estimated earnings in excess of billings” on the consolidated balance sheets.

 

Unapproved change orders involve the use of estimates, and it is reasonably possible that revisions to the estimated costs and recoverable amounts may be required in future reporting periods to reflect changes in estimates or final agreements with customers.

 

We consider claims to be amounts 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 on both scope and price changes. Revenue from claims is recognized when agreement is reached with customers as to the value of the claims, which in some instances may not occur until after completion of work under the contract. Costs associated with claims are included in the estimated costs to complete the contracts and are expensed when incurred.

 

Income taxes We account for income taxes under the asset and liability method as set forth in ASC Topic 740 (formerly referred to as SFAS 109, “ Accounting for Income Taxes ”), which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the temporary differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The affect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

 

Deferred income tax assets are reduced by a valuation allowance if, in the judgment of our management, it is more likely than not that all or a portion of a deferred tax asset will not be realized. In making such determination, we consider all available positive and negative evidence, including recent financial operations, projected future taxable income, scheduled reversals of deferred tax liabilities, tax planning strategies, and the length of tax asset carryforward periods. The realization of deferred tax assets is primarily dependent upon our ability to generate sufficient future taxable earnings in certain jurisdictions. If we subsequently determine that the carrying value of these assets, which had been written down, would be realized in the future, the value of the deferred tax assets would be increased, thereby increasing net income in the period when that determination was made.

 

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Effective January 1, 2008, the Company also adopted “ Accounting for Uncertainty in Income Taxes ” as set forth in the accounting guidance ASC Topic 740.

 

Until July 31, 2008, Former Primoris was taxed as an S-Corporation under Subchapter S of the Internal Revenue Code and similar codes in states in which Former Primoris was subject to taxation, which meant that income was taxed for federal income tax purposes to the stockholders.  After the merger, the combined entity became taxable as a C-Corporation, which changed the level of taxation of Former Primoris from that of its stockholders to that of the company. For the twelve months ended December 31, 2008, we computed our provision for income taxes using a 39.8% tax rate, which reflects the rate necessary to bring the 2008 year-to-date provision for income taxes in line with the estimated annual effective tax rate of 11.7%. Our deferred income tax provision in 2008 included approximately $4.2 million in net deferred tax benefits resulting from the recognition of beginning deferred tax assets, with realization expected primarily in 2009.

 

Goodwill —Goodwill is assessed for impairment annually and more frequently if triggering events occur. In performing these assessments, management relies on various factors, including operating results, business plans, economic projections, anticipated future cash flows, comparable transactions and other market data. There are inherent uncertainties related to these factors and judgment in applying them to the analysis of goodwill for impairment. Since judgment is involved in performing fair value measurements used in goodwill impairment analyses, there is risk that the carrying values of our goodwill may be overstated.

 

We elected to make the first day of the fourth quarter the annual impairment assessment date for goodwill. When testing for goodwill impairment, we follow the guidance prescribed in ASC Topic 350 “Intangibles — Goodwill and Other” (formerly referred to as SFAS No. 142, “ Goodwill and Other Intangible Assets ”). First, we compare the fair value of a reporting unit with its carrying amount. Fair value for the goodwill impairment test is determined utilizing a discounted cash flow analysis based on our budgets discounted using our weighted average cost of capital and market indicators of terminal year cash flows. Other valuation methods may be used to corroborate the discounted cash flow method. If the carrying amount of a reporting unit is in excess of its fair value, goodwill is considered potentially impaired and further tests are performed to measure the amount of impairment loss. In the second step of the goodwill impairment test, we compare the implied fair value of reporting unit goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the carrying amount of goodwill over its implied fair value. The implied fair value of goodwill is determined in the same manner that the amount of goodwill recognized in a business combination is determined. We allocate the fair value of a reporting unit to all of the assets and liabilities of that unit, including intangible assets, as if the reporting unit had been acquired in a business combination. Any excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities represents the implied fair value of goodwill.

 

Disruptions to our business, such as end market conditions, protracted economic weakness, unexpected significant declines in operating results of reporting units and the divestiture of a significant component of a reporting unit may result in our having to perform a goodwill impairment first step valuation analysis for some or all of our reporting units prior to the required annual assessment. These types of events and the resulting analysis could result in goodwill impairment charges in the future.

 

As further discussed in Note 4 — “ Business Combinations ” of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K, primarily as a result of the acquisition of JCG in December 2009, the balance of goodwill increased to $59.7 million as of December 31, 2009 compared to $2.8 million as of December 31, 2008.

 

Long-Lived Assets —Assets held and used by the Company, primarily property, plant and equipment, are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of the asset may not be fully recoverable. We perform undiscounted operation cash flow analyses to determine if impairment exists. For purposes of recognition and measurement of an impairment for assets held for use, we group assets and liabilities at the lowest level for which cash flows are separately identified. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. The calculation of the fair value of long-lived assets is based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk. Since judgment is involved in determining the fair value and useful lives of long-lived assets, there is a risk that the carrying value of our long-lived assets may be overstated or understated.

 

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Reserve for uninsured risks —Estimates are inherent in the assessment of our exposure to material uninsured risks. Significant judgments by us and reliance on third-party experts are utilized in determining probable and/or reasonably estimable amounts to be recorded or disclosed in the financial statements. The results of any changes in accounting estimates are reflected in the financial statements of the period in which the changes are determined.

 

We self-insure worker’s compensation claims to a certain level. We maintained a self-insurance reserve totaling approximately $9.5 million at December 31, 2009 and approximately $5.5 million at December 31, 2008. Our accruals are based on judgment, the probability of losses, and where applicable, the consideration of opinions of internal and/or external legal counsel. The amount is included in “ accrued expenses and other current liabilities ” on our balance sheets. Actual payments that may be made in the future could materially differ from such reserves.

 

Liquidity and Capital Resources

 

During the past two years, global market and economic conditions have been volatile and have had an adverse impact on financial markets in general. 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. At this time, the Company’s cost and availability of funding has not been adversely affected by the credit markets, and we do not expect it to be materially impacted in the near future.

 

To date, we have experienced no loss or lack of access to our cash or cash equivalents or funds under our credit facility; however, we can provide no assurances that access to our cash, cash equivalents and funds under our credit facility will not be impacted by adverse conditions in the financial markets.

 

We continue to have borrowing capacity for our foreseeable needs based on our current cash flow forecast. We currently have a $20.0 million credit facility which expires October 28, 2012, under which we can issue letters of credit for up to $15.0 million.  We also have a credit facility of $15.0 million, which expires October 27, 2010.

 

Additionally, the Company has a $10 million (Canadian dollars) facility for commercial letters of credit in Canada with an expiration date of December 31, 2012. As of December 31, 2009 and 2008, total commercial letters of credit outstanding under this credit facility totaled $5.3 million and $5.0 million, respectively.

 

At March 1, 2010, our net cash and short term investment balance was $114.5 million. We believe that our cash position, amounts available under our credit facilities and cash provided by operating activities will be adequate to cover our operational and business needs at least through the remainder of 2010. In addition, we believe that we maintain the ability to consider strategic acquisitions that may require cash.

 

Cash Flows

 

Cash flows during the years ended December 31, 2009, 2008 and 2007 are summarized as follows:

 

 

 

2009

 

2008

 

2007

 

 

 

(Thousands)

 

(Thousands)

 

(Thousands)

 

Change in cash

 

 

 

 

 

 

 

Net cash provided (used) by operating activities

 

$

28,082

 

$

66,979

 

$

71,826

 

Net cash provided (used) in investing activities

 

5,412

 

(24,360

)

(2,289

)

Net cash used in financing activities

 

(14,499

)

(32,129

)

(18,424

)

Net cash used in discontinued operations

 

(1,839

)

(270

)

(1,350

)

Net change in cash

 

$

17,156

 

$

10,220

 

$

49,763

 

 

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Operating Activities

 

The source of our cash flow from operating activities and the use of a portion of that cash in our operations for the years ended December 31, 2009, 2008 and 2007 were as follows:

 

 

 

2009

 

2008

 

2007

 

 

 

(Thousands)

 

(Thousands)

 

(Thousands)

 

Operating Activities

 

 

 

 

 

 

 

Operating income

 

$

40,404

 

$

35,848

 

$

31,488

 

Depreciation and amortization

 

8,663

 

6,338

 

4,733

 

Gain on sale of property and equipment

 

(3,217

)

(576

)

(258

)

Merger related stock expense

 

390

 

4,050

 

 

Distributions received from joint venture

 

3,400

 

6,120

 

2,880

 

Net deferred taxes

 

1,179

 

(4,166

)

 

Changes in assets and liabilities

 

(3,341

)

23,976

 

34,375

 

Foreign exchange gain (loss)

 

293

 

855

 

(471

)

Interest income

 

640

 

1,710

 

1,747

 

Interest expense