Primoris Services Corporation
Primoris Services CORP (Form: 10-Q, Received: 05/10/2010 17:05:23)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2010

 

OR

 

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

 

For the transition period from                          to                         .

 

Commission file number 0001-34145

 

Primoris Services Corporation

(Exact name of registrant as specified in its charter)

 

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)

 

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

 

 

 

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

 

92630
(Zip Code)

 

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

 

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

 

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

 

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

 

Large accelerated filer  o

 

Accelerated filer  x

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  o

Do not check if a smaller reporting company.

 

 

 

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

 

As of May 7, 2010, 44,227,691 shares of the registrant’s common stock were outstanding.

 

 

 



Table of Contents

 

PRIMORIS SERVICES CORPORATION

INDEX

 

 

Page No.

 

 

Part I. Financial Information

 

 

 

Item 1. Financial Statements:

 

 

 

—Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009

3

 

 

—Condensed Consolidated Statements of Income for the three months ended March 31, 2010 and March 31, 2009

4

 

 

—Condensed Consolidated Statements of Stockholders’ Equity

5

 

 

—Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and March 31, 2009

6

 

 

—Notes to Condensed Consolidated Financial Statements

8

 

 

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

20

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

31

 

 

Item 4. Controls and Procedures

31

 

 

Part II. Other Information

 

 

 

Item 1. Legal Proceedings

31

 

 

Item 1A. Risk Factors

32

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

32

 

 

Item 3. Defaults Upon Senior Securities

32

 

 

Item 4. (Removed and Reserved)

32

 

 

Item 5. Other Information

32

 

 

Item 6. Exhibits

32

 

 

Signatures

33

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

PRIMORIS SERVICES CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)

 

 

 

March 31,
2010

 

December 31,
2009

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

83,289

 

$

90,004

 

Short term investments

 

29,000

 

30,058

 

Restricted cash

 

6,931

 

6,845

 

Accounts receivable, net

 

117,610

 

108,492

 

Costs and estimated earnings in excess of billings

 

16,187

 

11,378

 

Inventory

 

24,683

 

22,275

 

Deferred tax assets

 

5,630

 

5,630

 

Prepaid expenses and other current assets

 

10,029

 

5,501

 

Current assets from discontinued operations

 

 

5,304

 

Total current assets

 

293,359

 

285,487

 

Property and equipment, net

 

90,653

 

92,568

 

Investment in non-consolidated entities

 

2,174

 

5,599

 

Intangible assets, net

 

31,314

 

32,695

 

Goodwill

 

59,678

 

59,678

 

Total assets

 

$

477,178

 

$

476,027

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

65,888

 

$

62,568

 

Billings in excess of costs and estimated earnings

 

113,397

 

114,035

 

Accrued expenses and other current liabilities

 

35,716

 

34,992

 

Distributions and dividends payable

 

1,102

 

2,987

 

Current portion of capital leases

 

3,859

 

4,220

 

Current portion of long-term debt

 

6,568

 

6,482

 

Current portion of subordinated debt

 

9,165

 

10,397

 

Current liabilities of discontinued operations

 

333

 

6,511

 

Total current liabilities

 

236,028

 

242,192

 

Long-term debt, net of current portion

 

24,694

 

26,368

 

Long-term capital leases, net of current portion

 

7,130

 

7,734

 

Long-term subordinated debt, net of current portion

 

41,863

 

43,853

 

Deferred tax liabilities

 

2,643

 

2,643

 

Other long-term liabilities

 

11,350

 

9,278

 

Total liabilities

 

323,708

 

332,068

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock—$.0001 par value, 1,000,000 shares authorized, 81,852.78 issued and outstanding at March 31, 2010 and December 31, 2009

 

 

 

Common stock—$.0001 par value, 90,000,000 shares authorized, 35,900,483 and 32,704,903 issued and outstanding at March 31, 2010 and December 31, 2009

 

3

 

3

 

Additional paid-in capital

 

104,738

 

100,644

 

Retained earnings

 

48,577

 

42,982

 

Accumulated other comprehensive income

 

152

 

330

 

Total stockholders’ equity

 

153,470

 

143,959

 

Total liabilities and stockholders’ equity

 

$

477,178

 

$

476,027

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

3



Table of Contents

 

PRIMORIS SERVICES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)

 

 

 

Three months ended
March 31,

 

 

 

2010

 

2009

 

 

 

(Unaudited)

 

Revenues

 

$

174,982

 

$

123,550

 

Cost of revenues

 

150,509

 

109,044

 

Gross profit

 

24,473

 

14,506

 

Selling, general and administrative expenses

 

13,755

 

7,416

 

Operating income

 

10,718

 

7,090

 

Other income (expense):

 

 

 

 

 

Income from non-consolidated entities

 

968

 

2,167

 

Foreign exchange gain

 

92

 

229

 

Interest income

 

180

 

259

 

Interest expense

 

(1,307

)

(526

)

 

 

 

 

 

 

Income from continuing operations, before provision for income taxes

 

10,651

 

9,219

 

Provision for income taxes

 

(3,953

)

(3,599

)

Income from continuing operations

 

6,698

 

5,620

 

Income on discontinued operations, net of income taxes

 

 

20

 

Net income

 

$

6,698

 

$

5,640

 

Earnings per share:

 

 

 

 

 

Basic :

 

 

 

 

 

Income from continuing operations

 

$

0.20

 

$

0.19

 

Income on discontinued operations

 

$

 

$

 

Net income

 

$

0.20

 

$

0.19

 

Diluted :

 

 

 

 

 

Income from continuing operations

 

$

0.15

 

$

0.17

 

Income on discontinued operations

 

$

 

$

 

Net income

 

$

0.15

 

$

0.17

 

Weighted average common shares outstanding:

 

 

 

 

 

Basic

 

33,202

 

30,116

 

Diluted

 

45,544

 

32,477

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

 

PRIMORIS SERVICES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In Thousands, Except Share Amounts)

 

 

 

Common Stock

 

Preferred Stock

 

Additional
Paid-in

 

Retained

 

Accum. Other
Comprehensive

 

Total
Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income

 

Equity

 

Balance, December 31, 2008

 

29,977,339

 

$

3

 

 

$

 

$

34,796

 

$

20,528

 

$

103

 

$

55,430

 

Net income

 

 

 

 

 

 

25,912

 

 

25,912

 

Issuance of common shares to Former Primoris owners

 

2,500,025

 

 

 

 

 

 

 

 

Stock issued for the purchase of Cravens Services, Inc.

 

139,082

 

 

 

 

1,000

 

 

 

1,000

 

Repurchase of warrants

 

 

 

 

 

 

 

 

(94

)

 

 

 

 

(94

)

Dividends — common

 

 

 

 

 

 

(3,254

)

 

(3,254

)

Dividends — preferred

 

 

 

 

 

 

(204

)

 

(204

)

Foreign currency hedge effect

 

 

 

 

 

 

 

227

 

227

 

Preferred stock issued for purchase of James Construction Group

 

 

 

81,852.78

 

 

64,500

 

 

 

64,500

 

Warrant exercises

 

88,457

 

 

 

 

442

 

 

 

442

 

Balance, December 31, 2009

 

32,704,903

 

$

3

 

81,852.78

 

$

 

$

100,644

 

$

42,982

 

$

330

 

$

143,959

 

Net income

 

 

 

 

 

 

6,698

 

 

6,698

 

Issuance of common shares to Former Primoris owners

 

2,499,975

 

 

 

 

390

 

 

 

390

 

Additional contingent stock issued for the purchase of Cravens Services, Inc.

 

74,906

 

 

 

 

600

 

 

 

600

 

Dividends — common

 

 

 

 

 

 

(898

)

 

(898

)

Dividends — preferred

 

 

 

 

 

 

(205

)

 

(205

)

Foreign currency hedge effect

 

 

 

 

 

 

 

(178

)

(178

)

Warrant exercises

 

620,699

 

 

 

 

3,104

 

 

 

3,104

 

Balance, March 31, 2010 (Unaudited)

 

35,900,483

 

$

3

 

81,852.78

 

$

 

$

104,738

 

$

48,577

 

$

152

 

$

153,470

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

5



Table of Contents

 

PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

 

 

 

Three months ended
March 31,

 

 

 

2010

 

2009

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

6,698

 

$

5,640

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

4,172

 

1,835

 

Amortization of intangible assets

 

1,381

 

9

 

Gain on sale of property and equipment

 

(1,139

)

(1,124

)

Income from non-consolidated entities

 

(968

)

(2,167

)

Non-consolidated entity distributions

 

4,393

 

3,400

 

Changes in assets and liabilities:

 

 

 

 

 

Restricted cash

 

(86

)

324

 

Accounts receivable

 

(9,118

)

8,701

 

Costs and estimated earnings in excess of billings

 

(4,809

)

2,172

 

Inventory, prepaid expenses and other current assets

 

(6,936

)

44

 

Other assets

 

(178

)

(1,009

)

Accounts payable

 

3,320

 

(9,105

)

Billings in excess of costs and estimated earnings

 

(638

)

(5,189

)

Accrued expenses and other current liabilities

 

724

 

3,242

 

Other long-term liabilities

 

2,072

 

 

Net cash provided by operating activities

 

(1,112

)

6,773

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of property and equipment

 

(2,556

)

(1,171

)

Purchase of short term investments

 

1,058

 

(10,130

)

Proceeds from sale of property and equipment

 

1,438

 

1,250

 

Net cash used in investing activities

 

(60

)

(10,051

)

Cash flows from financing activities:

 

 

 

 

 

Repayment of long-term debt

 

(1,588

)

(2,495

)

Repayment of capital leases

 

(965

)

(475

)

Repayment of subordinated debt

 

(3,222

)

 

Stock issued for business acquired

 

600

 

 

Stock issued to foreign managers

 

390

 

 

Proceeds from exercise of warrants for the issuance of common stock

 

3,104

 

 

Repurchase of warrants

 

 

(82

)

Dividends

 

(1,022

)

(749

)

Cash distributions to selling stockholders

 

(1,966

)

(4,947

)

Net cash used in financing activities

 

(4,669

)

(8,748

)

Cash flows from discontinued operations:

 

 

 

 

 

Operating activities

 

(874

)

(2,710

)

Net cash used in discontinued operations

 

(874

)

(2,710

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(6,715

)

(14,736

)

Cash and cash equivalents at beginning of period

 

90,004

 

72,848

 

Cash and cash equivalents at end of the period

 

$

83,289

 

$

58,112

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

 

PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In Thousands)

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

Three months ended
March 31,

 

 

 

2010

 

2009

 

 

 

(Unaudited)

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

1,617

 

$

257

 

Income taxes

 

$

516

 

$

3,397

 

 

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

 

 

 

Three months ended
March 31,

 

 

 

2010

 

2009

 

 

 

(Unaudited)

 

Non-Cash Activities

 

 

 

 

 

Obligations incurred for the acquisition of property and equipment leases

 

$

 

$

3,023

 

Accrued dividends

 

$

1,102

 

$

812

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

 

PRIMORIS SERVICES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

Note 1—Business Activity

 

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

 

On December 18, 2009, the Company acquired 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 both government and private clients.

 

In October 2009, the Company also acquired the assets of Cravens Partners, Ltd., a Texas-based provider of civil and utility infrastructure construction services.  Following the acquisition, the Company created a wholly-owned subsidiary named Cravens Services, Inc. (“Cravens”)

 

Note 2—Basis of Presentation

 

Interim Consolidated Financial Statements The interim condensed consolidated financial statements for the three-month periods ended March 31, 2010 and 2009 have been prepared in accordance with Rule 10-01 of Regulation S-X of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As such, certain disclosures, which would substantially duplicate the disclosures contained in the Company’s latest audited consolidated financial statements, have been omitted. This Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010 (the “First Quarter 2010 Report”) should be read in concert with the Company’s Annual Report on Form 10-K, filed on March 11, 2010, which contains the Company’s audited consolidated financial statements for the year ended December 31, 2009.

 

The interim financial information for the three month-periods ended March 31, 2010 and 2009 is unaudited and has been prepared on the same basis as the audited financial statements. However, the financial statements contained in this First Quarter 2010 Report do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for audited financial statements. In the opinion of management, the unaudited information includes all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the interim financial information.

 

Revenue recognition A number of factors relating to the business of the Company affect the recognition of contract revenue. The Company typically structures contracts as unit-price, time and material, fixed-price or cost plus fixed fee. Revenue is recognized on the percentage-of-completion method for all fixed-price contracts. Under the percentage-of-completion method, estimated contract income and resulting revenue is generally accrued based on costs incurred to date as a percentage of total estimated costs. Total estimated costs, and thus contract revenue and income, are impacted by changes in productivity, scheduling, the unit cost of labor, subcontracts, materials and equipment and other unforeseen events. Additionally, external factors such as weather, client needs, client delays in providing permits and approvals, labor availability, governmental regulation and politics may affect the progress of a project’s completion and thus the timing of revenue recognition. If a current estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full when determined.

 

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

 

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Table of Contents

 

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

 

In accordance with the terms of the contracts, certain retainage provisions are withheld by customers until completion and acceptance of the contracts. Final payments of the majority of such amounts are expected to be received in the following operating cycle, which is typically within a year.

 

Note 3—Recent Accounting Pronouncements

 

Fair Value Disclosures

 

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, “ Improving Disclosures about Fair Value Measurements ” (an update to ASC Topic 820 “Fair Value Measurements and Disclosures” ).   ASU 2010-06 requires additional disclosures about fair value measurements including transfers in and out of Levels 1 and 2 and a higher level of disaggregation for the different types of financial instruments. For the reconciliation of Level 3 fair value measurements, information about purchases, sales, issuances and settlements should be presented separately. This ASU is effective for annual and interim reporting periods beginning after December 15, 2009 for most of the new disclosures and for periods beginning after December 15, 2010 for the new Level 3 disclosures. Comparative disclosures are not required in the first year the disclosures are required.  The Company adopted this accounting standard update as of January 1, 2010, which did not result in a material impact on our financial statements.

 

Consolidation of Variable Interest Entities

 

In June 2009, the FASB issued an amendment to an accounting standard for ASC Topic 810 “Consolidation”, (formerly referred to as “Statement of Financial Accounting Standards No. 167, “ Amendments to FASB Interpretation No. 46R “ (“SFAS 167”)) which sets rules for determining whether to consolidate an entity that is insufficiently capitalized or is not controlled through voting (or similar rights). These rules are based on an entity’s purpose and design and the company’s ability to direct the activities that most significantly impact the entity’s economic performance.  SFAS 167 requires additional disclosures about the reporting company’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the company’s financial statements.  The accounting standard became effective January 1, 2010.  The Company adopted the amendment as of January 1, 2010, which did not result in a material impact on our financial statements.

 

Note 4—Fair Value Measurements

 

ASC Topic 820, “ Fair Value Measurements and Disclosures ”, defines fair value, establishes a framework for measuring fair value in GAAP and requires certain disclosures about fair value measurements.  ASC Topic 820 addresses fair value GAAP for financial assets and financial liabilities that are re-measured and reported at fair value at each reporting period and for non-financial assets and liabilities that are re-measured and reported at fair value on a recurring basis, which included goodwill and intangible assets for purposes of impairment assessments.

 

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

 

The following table presents, using the fair value hierarchy levels identified under ASC Topic 820, the Company’s financial assets that are required to be measured at fair value at March 31, 2010 and December 31, 2009:

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

 

 

Amount
Recorded
on Balance
Sheet

 

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

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets as of March 31, 2010:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

83,289

 

$

83,289

 

 

 

Short-term investments

 

$

29,000

 

$

29,000

 

 

 

Other assets — hedge contracts

 

$

203

 

 

$

203

 

 

Assets as of December 31, 2009:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

90,004

 

$

90,004

 

 

 

Short-term investments

 

$

30,058

 

$

30,058

 

 

 

Other assets — hedge contracts

 

$

266

 

 

$

266

 

 

 

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

 

Note 5—Accounts Receivable

 

The following is a summary of the Company’s accounts receivable as of the dates shown:

 

 

 

March 31,
2010

 

December 31,
2009

 

 

 

(Unaudited)

 

 

 

Contracts receivable, net of allowance for doubtful accounts of $200 for March 31, 2010 and for December 31, 2009

 

$

95,774

 

$

82,254

 

Retention

 

20,825

 

25,907

 

 

 

116,599

 

108,161

 

Due from affiliates

 

4

 

 

Other accounts receivable

 

1,007

 

331

 

 

 

$

117,610

 

$

108,492

 

 

Amounts “due from affiliates” primarily relate to receivables from related parties (see Note 7, “ Equity Method Investments ” and Note 14, “ Related Party Transactions ”) for the performance of construction contracts. Contract revenues earned from related parties were approximately $927 and $5,708 for the three months ended March 31, 2010 and 2009, respectively.

 

Note 6—Costs and Estimated Earnings on Uncompleted Contracts

 

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

 

 

 

March 31,
2010

 

December 31,
2009

 

 

 

(Unaudited)

 

 

 

Costs incurred on uncompleted contracts

 

$

1,560,669

 

$

2,036,251

 

Provision for estimated loss on uncompleted contracts

 

557

 

332

 

Gross profit recognized

 

136,853

 

201,254

 

 

 

1,698,079

 

2,237,837

 

Less: billings to date

 

(1,795,289

)

(2,340,494

)

 

 

$

(97,210

)

$

(102,657

)

 

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

 

 

 

March 31,
2010

 

December 31,
2009

 

 

 

(Unaudited)

 

 

 

Costs and estimated earnings in excess of billings

 

$

16,187

 

$

11,378

 

Billings in excess of costs and estimated earnings

 

(113,397

)

(114,035

)

 

 

$

(97,210

)

$

(102,657

)

 

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Table of Contents

 

Note 7—Equity Method Investments

 

OMPP

 

During 2007, the Company established a joint venture, OMPP, for the sole purpose of constructing a power plant near San Diego, California. The Company has a 40% interest in the venture and accounts for its investment in OMPP using the equity method. ARB acts as one of OMPP’s primary subcontractors. As of March 31, 2010, ARB has contracts with OMPP totaling $49,019, which are nearing completion.  ARB recognized $12 in revenues in the three months ended March 31, 2010 and $5,384 in the three months ended March 31, 2009. These revenues are included in the contract revenues earned from related parties as stated in Note 5, “ Accounts Receivable ”.

 

 

 

March 31,
2010

 

December 31,
2009

 

 

 

(Unaudited)

 

 

 

OMPP—Joint Venture

 

 

 

 

 

Balance sheet data

 

 

 

 

 

Assets

 

$

993

 

$

9,176

 

Liabilities

 

310

 

1,493

 

Net assets

 

$

683

 

$

7,683

 

Company’s equity investment in venture

 

$

410

 

$

4,610

 

 

 

 

Three months ended
March 31,

 

 

 

2010

 

2009

 

 

 

(Unaudited)

 

Earnings data:

 

 

 

 

 

Revenue

 

$

 

$

43,892

 

Gross profit

 

$

 

$

11,085

 

Earnings before taxes

 

$

 

$

11,088

 

Company’s equity in earnings

 

$

 

$

2,385

 

 

OMPP distributed $7,000 to its equity holders during the three months ended March 31, 2010, of which the Company’s share was $4,200.  For the three months ended March 31, 2009, OMPP distributed $8,500, of which, the Company’s shares was $3,400. The OMPP agreement states that distributions made prior to the completion of the contract are considered advances on account of each partner’s share as determined at the completion of the underlying contract.

 

All Day Electric

 

The Company purchased a 49% interest in All Day Electric (“All Day”) in December 2008 for $500 and accounts for this investment under the equity method. All Day engages in electrical construction activities mainly in Northern California.  ARB recognized $914 in revenues in the three months ended March 31, 2010; there were no revenues for the same period in the prior year.  The following is a summary of the financial position and results as of and for the periods ended:

 

 

 

March 31,
2010

 

December 31,
2009

 

 

 

(Unaudited)

 

 

 

All Day Electric

 

 

 

 

 

Balance sheet data

 

 

 

 

 

Assets

 

$

2,305

 

$

5,661

 

Liabilities

 

1,670

 

4,615

 

Net assets

 

$

635

 

$

1,046

 

Company’s equity investment in venture

 

$

311

 

$

513

 

 

 

 

Three months ended
March 31,

 

 

 

2010

 

2009

 

 

 

(Unaudited)

 

Earnings data:

 

 

 

 

 

Revenue

 

$

2,903

 

$

971

 

Gross profit

 

$

(104

)

$

128

 

Net income

 

$

(411

)

$

(118

)

Company’s equity in earnings

 

$

(202

)

$

(218

)

 

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Table of Contents

 

St.— Bernard Levee Partners

 

JCG owns a 30% interest in St.—Bernard Levee Partners (“Bernard”) for $300 and accounts for this investment under the equity method. Bernard engages in construction activities in Louisiana. Bernard distributed $964 to its equity holders during the three months ended March 31, 2010, of which the Company’s share was $194.  The following is a summary of the financial position and results as of and for the periods ended:

 

 

 

March 31,
2010

 

December 31,
2009

 

 

 

(Unaudited)

 

 

 

St. —Bernard Levee Partners

 

 

 

 

 

Balance sheet data

 

 

 

 

 

Assets

 

$

34,974

 

$

3,149

 

Liabilities

 

29,893

 

1,966

 

Net assets

 

$

5,081

 

$

1,183

 

Company’s equity investment in venture

 

$

1,353

 

$

378

 

 

 

 

Three months ended
March 31,

 

 

 

2010

 

2009

 

 

 

(Unaudited)

 

Earnings data:

 

 

 

 

 

Revenue

 

$

42,130

 

$

 

Gross profit

 

$

4,855

 

$

 

Earnings before taxes

 

$

4,855

 

$

 

Company’s equity in earnings

 

$

1,169

 

$

 

 

Note 8 — Business Combinations

 

The December 18, 2009 acquisition of JCG was accounted using the acquisition method of accounting. The preliminary allocation of the purchase price based on the fair value of the acquired assets, less liabilities assumed, as of December 18, 2009, amounted to $133.19 million.

 

As part of the acquisition, the Company will issue $10 million in common stock to the sellers, contingent upon JCG meeting a specific operating performance target for the year 2010.  As discussed in Note 13 — “Other Liabilities” , the estimated fair value of this contingency was $8.19 and $8.5 million as of December 31, 2009 and March 31, 2010, respectively.

 

Other than the adjustment in the fair value of the contingent consideration discussed above, there have been no changes in the preliminary estimates of the fair value of the acquired assets and liabilities that have been identified during the three months ended March 31, 2010.  The Company expects to complete the final determination of the fair value of the tangible and intangible assets acquired prior to the end of 2010.

 

Supplemental Unaudited Pro Forma Information for the three months ended March 31, 2009

 

The following pro forma information for the three months ended March 31, 2009 presents the results of operations as if the JCG acquisition had occurred at the beginning of 2009. The supplemental pro forma information has been adjusted to include:

 

·       the pro forma impact of amortization of intangible assets and depreciation of property, plant and equipment, based on the purchase price allocation;

 

·       the pro forma impact of interest expense on the $53.5 million subordinated promissory note;

 

·       the pro forma tax effect of both the income before income taxes for JCG and the JCG pro forma adjustments, calculated using the statutory corporate tax rate of 39.8% for the three months ended March 31, 2009.

 

The pro forma results are presented for illustrative purposes only and are not necessarily indicative of or intended to represent the results that would have been achieved had the transaction been completed on January 1, 2009 or that may be achieved in the future.  The pro forma results do not reflect any operating efficiencies and associated cost savings that the Company may, or may not, achieve with respect to the combined companies.

 

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Table of Contents

 

 

 

Three months ended
March 31, 2009

 

 

 

 

 

Revenues

 

$

217,293

 

Income from continuing operations, before provision for income taxes

 

$

13,573

 

Income from continuing operations

 

$

8,241

 

Net income

 

$

8,261

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

Basic — (1)

 

37,112

 

Diluted — (1)

 

40,662

 

 

 

 

 

Earnings per share:

 

 

 

Basic — income from continuing operations

 

$

0.22

 

Basic — net income

 

$

0.20

 

Diluted — income from continuing operations

 

$

0.22

 

Diluted — net income

 

$

0.20

 

 


(1)          The adjustment to weighted average shares outstanding reflects the conversion of the Preferred Stock issued as part of the acquisition consideration (see Note 17 — “Stockholders’ Equity” ), as if such shares were converted into common stock, at a conversion rate of 100 common shares per share.  On April 12, 2010, the Preferred Stock was converted into common stock.

 

The adjustment to weighted average shares outstanding excludes the potential impact of the Earnout Shares that may be issued contingent upon meeting a certain financial target at the end of 2010.  Pro forma basic shares outstanding included 81,852.78 shares of Preferred Stock less 11,897.18 Escrow Shares, totaling 69,955.60 shares of Preferred Stock.  Shares included in pro forma diluted shares outstanding represent the 81,852.78 shares of Preferred Stock.

 

Note 9—Intangible Assets

 

At March 31, 2010 and December 31, 2009, intangible assets totaled $31,314 and $32,695, respectively, net of amortization.  The following table summarizes the intangible asset categories, average amortization periods, which are generally on a straight-line basis and the fair value, as follows:

 

 

 

Amortization

 

 

 

March 31,

 

December 31,

 

 

 

Period

 

 

 

2010

 

2009

 

Tradename

 

5 to 10 years

 

 

 

$

15,365

 

$

15,785

 

Non-compete agreements

 

5 years

 

 

 

$

5,130

 

$

5,403

 

Customer relationships

 

5 to 10 years

 

 

 

$

6,624

 

$

6,793

 

Backlog

 

0.75 to 2.25 years

 

 

 

$

4,195

 

$

4,714

 

 

 

 

 

Total

 

$

31,314

 

$

32,695

 

 

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Table of Contents

 

Amortization expense on intangible assets was $1,381 and $9 for the three months ended March 31, 2010 and 2009, respectively.  Estimated amortization expense for intangible assets as of March 31, 2010 is as follows:

 

For the Years Ending
December 31,

 

Estimated
Intangible
Amortization
Expense

 

2010 (remaining nine months)

 

$

4,297

 

2011

 

5,544

 

2012

 

3,873

 

2013

 

3,455

 

2014

 

3,360

 

Thereafter

 

10,785

 

 

 

$

31,314

 

 

Note 10—Discontinued Operations

 

During December 2009, the Company discontinued all operations in Ecuador, and a plan was put in place to sell the stock ownership of the Ecuador company.  Consequently, the results of operations and cash flows for these operations are reflected as discontinued operations for all periods presented.  Previously, the Ecuador operations were included in the Company’s Construction Services segment.

 

A liability of $333 remains on the balance sheet as of March 31, 2010 for the discontinued 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 delivered to the Company a combination of $400 in Primoris stock owned by the buyer and a $300 note payable.  The buyer also agreed to provide an indemnification to the Company for any remaining liabilities. The sale was completed in March 2010 and had no material impact to the Company.

 

Note 11—Accounts Payable and Accrued Liabilities

 

At March 31, 2010 and December 31, 2009, accounts payable includes retentions of approximately $12,952 and $12,616, respectively, due to subcontractors, which have been retained pending contract completion and customer acceptance of jobs.

 

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

 

 

 

March 31,
2010

 

December 31,
2009

 

 

 

(Unaudited)

 

 

 

Payroll and related employee benefits

 

$

18,271

 

$

18,321

 

Insurance, including self-insurance reserves

 

11,145

 

11,245

 

Provision for estimated losses on uncompleted contracts

 

557

 

332

 

Corporate income taxes and other taxes

 

1,756

 

640

 

Accrued leases and rents

 

251

 

262

 

Other

 

3,736

 

4,192

 

 

 

$

35,716

 

$

34,992

 

 

Note 12—Credit Arrangements

 

Credit Agreements .   On October 28, 2009, we entered into a Loan and Security Agreement (the “Agreement”) with The PrivateBank and Trust Company (the “Lender”) for a revolving line of credit in the total aggregate amount of $35.0 million. Under the Agreement, the Lender provides two revolving loans to us:

 

·                   a revolving loan in the amount of $20.0 million (the “Revolving Loan A”), with a maturity date of October 28, 2012; and

·                   a revolving loan in the amount of $15.0 million (the “Revolving Loan B”), with a maturity date of October 27, 2010.

 

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Table of Contents

 

The Lender agreed to issue for our account letters of credit up to $15.0 million, under Revolving Loan A.  As of March 31, 2010 and December 31, 2009, total commercial letters of credit outstanding under this credit facility totaled $3,634 and $849, respectively. The principal amount of each of Revolving Loan A and Revolving Loan B will bear interest at either: (i) LIBOR plus an applicable margin as specified in the Agreement, or (ii) the prime rate announced by the Lender plus an applicable margin as specified in the Agreement. The principal amount of any loan bearing interest at LIBOR plus an applicable margin may not be prepaid at any time without being subject to certain penalties. There is no prepayment penalty for any loan bearing interest at the prime rate announced by the Lender plus an applicable margin.

 

In January 2008, the Company entered into a credit facility (as amended) for purposes of issuing commercial letters of credit in Canada, for an amount up to 10 million in Canadian dollars. The credit facility with a Canadian bank is for a term of 5 years, and provides for an annual fee of 1% for any issued and outstanding commercial letters of credit. Letters of credit can be denominated in either Canadian or U.S. dollars. As of March 31, 2010 and December 31, 2009, total commercial letters of credit outstanding under this credit facility totaled $4,631 and $5,284, respectively.

 

All loans made by the Lender under the Agreement are secured by our assets, including, among others, our cash, inventory, goods, equipment (excluding equipment subject to certain permitted liens) and accounts receivable. Certain of our subsidiaries have executed joint and several guaranties in favor of the Lender for all amounts under the Agreement. The Agreement and the line of credit facilities contain various restrictive covenants, including, among others, restrictions on investments, capital expenditures, minimum tangible net worth and debt service coverage requirements.  The Company was in compliance with its restrictive covenants as of March 31, 2010.

 

At the time of the JCG acquisition on December 18, 2009, the Company assumed outstanding letters of credit of $5,565 under an amended credit agreement that expired on February 28, 2010. Upon termination of the credit agreement, the Company made a cash deposit as replacement for the letters of credit.

 

Subordinated Promissory Note .   In connection with the acquisition of JCG, the Company executed an unsecured Promissory Note on December 18, 2009 in favor of the sellers of JCG with an initial principal amount of $53.5 million. The Promissory Note is due and payable on December 15, 2014 and bears interest at differing rates until maturity.  For the first 9 months of the term of the note, the Promissory Note bears interest at an annual rate equal to 5%.  For months 10 through 18, the note will bear interest at an annual rate of 7%.  For the months 19 until the maturity date, the Promissory Note will bear interest at an annual rate of 8%.  Payments of principal and interest will be payable in cash on an amortizing basis over 60 monthly payments.  The Promissory Note is subordinated to amounts owed to our commercial banks for lines of credit and to our bonding agencies.

 

The Promissory Note may be prepaid in whole or in part at any time, and partial prepayment is required in the event the Company completes certain equity financing, receives warrant exercise proceeds or obtains proceeds under certain new indebtedness. As long as more than $10 million is outstanding under the Promissory Note, we have agreed to not take certain actions without the prior written consent of the Promissory Note holders, including, among others, purchase, acquire, redeem or retire any shares of our common stock. As of March 31, 2010, a total of $51.0 million was outstanding on the Promissory Note.  In April 2010, the Company made a partial prepayment of the Promissory Note in the amount of $2.3 million after receiving warrant exercise proceeds for the issuance of common stock during the prior three months.

 

Note 13 — Other Liabilities

 

Included in other liabilities were the following amounts resulting from our acquisitions of JCG and Cravens in the fourth quarter of 2009.

 

As part of the December 2009 JCG acquisition agreement, the Company will issue $10 million in common stock to the sellers, contingent upon JCG meeting a specific operating performance target for the year 2010.  At December 31, 2009, the estimated fair value of the contingent consideration was established at $8.19 million.  The estimated fair value as of March 31, 2010 was valued at $8.5 million.  The $0.3 million change in the fair value was a non-cash charge to selling, general and administrative expenses.

 

The October 2009 Cravens acquisition also included potential consideration for an additional $2.0 million in common stock and $0.5 million in cash to the sellers, contingent upon meeting specific operating performance targets for the years 2009, 2010 and 2011.  At December 31, 2009, the estimated fair value of the contingent consideration was established at $1.8 million, of which, $750 was current as of December 31, 2009.  Upon meeting the 2009 performance target, the Company paid $150 and issued 74,906 shares of common stock in March 2010.  There was no change to the estimated fair value at March 31, 2010 for the remaining earnout consideration.

 

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Table of Contents

 

Note 14— Related Party Transactions

 

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

 

Primoris leases properties from SIGI located in Bakersfield, Pittsburg and San Dimas, California, as well as a property in Pasadena, Texas. During the three months ended March 31, 2010 and 2009, the Company paid $221 and $190, respectively, in lease payments to SIGI for the use of these properties.

 

The Company leased an airplane from SIGI for business use. During the three months ended March 31, 2009, the Company paid $60 in lease payments to SIGI for the use of the airplane. This lease was terminated on March 31, 2009 when SIGI sold the airplane.

 

Primoris leases a property from Roger Newnham, a stockholder of the Company’s common stock and a manager at the subsidiary Born Heaters Canada. The property is located in Calgary, Canada. During the three months ended March 31, 2010 and 2009, Primoris paid $62 and $86, respectively, in lease payments to Mr. Newnham for the use of this property. The three-year lease for the Calgary property commenced in October 2005 and was renewed and extended until September 2010.

 

Note 15—Income Taxes

 

The effective tax rate for the three months ended March 31, 2010 (“First Quarter 2010”) was 37.1%. The rate for the First Quarter 2010 differs from the U.S. federal statutory rate of 35% due primarily to state income taxes and the Domestic Production Activity Deduction.

 

To determine its quarterly provision for income taxes, the Company uses an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions to which the Company is subject. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rate from quarter to quarter.  The Company recognizes interest and penalties related to uncertain tax positions, if any, in income tax expense.

 

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

 

The tax years 2006 through 2009 remain open to examination by the United States Internal Revenue Service.  The tax years 2005 through 2009 remain open to examination by the other major taxing jurisdictions to which the Company is subject.

 

Note 16—Dividends and Earnings Per Share

 

On March 4, 2010, the Company declared a cash dividend of $0.025 per common share, payable to stockholders of record as of March 31, 2010 and to holders of shares of the Company’s Series A Non-Voting Contingent Convertible Preferred stock (“Preferred Stock”) issued in connection with the December 18, 2009 acquisition of JCG.  The dividend, totaling $1,102 was paid on April 15, 2010.

 

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Table of Contents

 

The table below presents the computation of basic and diluted earnings per share for the three months ended March 31, 2010 and 2009:

 

 

 

Three months ended
March 31,

 

 

 

2010

 

2009

 

 

 

(Unaudited)

 

Numerator:

 

 

 

 

 

Net income

 

$

6,698

 

$

5,640

 

Denominator:

 

 

 

 

 

Weighted average shares for computation of basic earnings per share

 

33,202

 

30,116

 

Dilutive effect of warrants and units

 

1,751

 

 

Dilutive effect of contingently issuable shares (1) (2)

 

2,406

 

2,361

 

Dilutive effect of conversion of Preferred Stock (3)

 

8,185

 

 

Weighted average shares for computation of diluted earnings per share

 

45,544

 

32,477

 

Basic earnings per share

 

$

0.20

 

$

0.19

 

Diluted earnings per share

 

$

0.15

 

$

0.17

 

 


(1)         On July 31, 2008, the Company completed the merger (“Merger”) of Rhapsody Acquisition Corp. (the Company’s former name) and Primoris Corporation, a privately held Nevada corporation (“Former Primoris”).  The July 2008 merger agreement provided that the Former Primoris stockholders would receive up to an additional 5,000,000 shares of the Company’s common stock, contingent upon the combined company attaining certain financial targets in 2008 and 2009. The Company achieved the specified financial milestones for both 2009 and 2008.  As a result, 2,500,025 shares of common stock were issued to Former Primoris stockholders in March 2009 and 2,499,975 shares of common stock were issued to Former Primoris stockholders in March 2010.

 

(2)         Represents the effect of 74,906 shares of common stock that were issued as part of the acquisition of Cravens.  The shares were contingent on meeting a defined performance target in 2009.  The target was met in the fourth quarter 2009.  The shares were issued on March 30, 2010.

 

(3)         Represents the effect of 8,185,278 shares of common stock that were approved for issuance at a special meeting of the stockholders held on April 12, 2010.  The stockholders approved the issuance of shares of common stock to the holders of 81,852.78 shares of Preferred Stock and approved the conversion of the Preferred Stock to 8,185,278 shares of common stock.

 

Note 17—Stockholders’ Equity

 

Preferred stoc k The Company is authorized to issue 1,000,000 shares of $0.0001 par value preferred stock.  As part of the consideration for the acquisition of JCG, the Company issued 81,852.78 shares of Preferred Stock to JCG’s former members.  On April 12, 2010, at a special meeting of the stockholders, the stockholders approved the conversion of the 81,852.78 shares of Preferred Stock into an aggregate of 8,185,278 shares of common stock.

 

Warrants exercised As of March 31, 2010, there were 3,996,800 warrants outstanding to purchase the Company’s common stock.  Each warrant entitles the holder to purchase one share of 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 by the Company. During the first quarter 2010, a total of 620,699 warrants were exercised.

 

Note 18—Commitments and Contingencies

 

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

 

Certain of these leases are with entities related through common ownership by stockholders, officers, and directors of the Company. The leases are classified as operating leases in accordance with ASC Topic 840-“Leases”.

 

Total lease expense during the three months ended March 31, 2010 and 2009 amounted to approximately $2,539 and $2,008, respectively, including amounts paid to related parties of $283 and $276, respectively.

 

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Table of Contents

 

Letters of credit At March 31, 2010 and December 31, 2009, the Company had letters of credit outstanding of approximately $8,265 and $11,989, respectively.

 

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

 

Bonding— As of March 31, 2010 and December 31, 2009, the Company had bid and completion bonds issued and outstanding totaling approximately $767,324 and $773,762, respectively.

 

Note 19—Reportable Operating Segments

 

In prior periods, the Company reported two operating segments:  the Construction Services segment and the Engineering segment. As a result of the acquisition of JCG and to changes in the management structure, the Company changed the reportable operating segments effective on January 1, 2010, by splitting the former Construction Services segment into two separate segments. The prior year information for the Construction Services segment has been reclassified into the new segments. The three new segments are East Construction Services, West Construction Services and Engineering.

 

The East Construction Services segment incorporates the JCG construction business, located primarily in the southeastern United States.  The segment also includes the businesses located in the Gulf Coast region of the United States that were formerly included in the Construction Services segment, including Cardinal Contractors, Inc., Cardinal Mechanical and Cravens.

 

The West Construction Services segment includes the construction services performed in the western United States, primarily in the state of California.  Entities included in West Construction Services are ARB, ARB Structures, Inc., and Stellaris, LLC.

 

The Engineering segment remains unchanged and includes the results of Onquest, Inc. and Born Heaters Canada, ULC.

 

In the following tables, all intersegment revenues and gross profit have been eliminated, which were immaterial.

 

Revenue by segment for the three months ended March 31, 2010 and 2009 were as follows:

 

 

 

For the three months ended March 31,

 

 

 

2010

 

2009

 

Segment

 

Revenue

 

% of
Segment
Revenue

 

Revenue

 

% of
Segment
Revenue

 

 

 

(Unaudited)

 

East Construction Services

 

$

104,236

 

59.6

%

$

14,739

 

11.9

%

West Construction Services

 

59,887

 

34.2

%

90,044

 

72.9

%

Engineering

 

10,859

 

6.2

%

18,767

 

15.2

%

Total

 

$

174,982

 

100.0

%

$

123,550

 

100.0

%

 

Gross profit by segment for the three months ended March 31, 2010 and 2009 were as follows:

 

 

 

For the three months ended March 31,

 

 

 

2010

 

2009

 

Segment

 

Gross
Profit

 

% of
Segment
Revenue

 

Gross
Profit

 

% of
Segment
Revenue

 

 

 

(Unaudited)

 

East Construction Services

 

$

9,621

 

9.2

%

$

1,710

 

11.6

%

West Construction Services

 

12,211

 

20.4

%

11,087

 

12.3

%

Engineering

 

2,641

 

24.3

%

1,709

 

9.1

%

Total

 

$

24,473

 

14.0

%

$

14,506

 

11.7

%

 

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Table of Contents

 

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

 

 

 

Revenues

 

 

 

 

 

 

 

For the three months ended March 31,

 

 

 

 

 

 

 

2010

 

2009

 

Total Assets

 

Country:

 

Revenue

 

% of
Revenue

 

Revenue

 

% of
Revenue

 

March 31,
2010

 

December 31,
2009

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

United States

 

$

172,044

 

98.3

%

$

116,010

 

93.9

%

$

471,064

 

$

465,025

 

Non-United States

 

2,938

 

1.7

 

7,540

 

6.1

 

6,114

 

11,002

 

Total

 

$

174,982

 

100.0

%

$

123,550

 

100.0

%

$

477,178

 

$

476,027

 

 

Note 20—Subsequent Event

 

A special meeting of the stockholders was held on April 12, 2010.  The stockholders approved the issuance of shares of common stock to the holders of 81,852.78 shares of Preferred Stock and approved the conversion of the Preferred Stock into 8,185,278 shares of common stock.   Additionally, the stockholders approved the issuance of up to 6,508,276 shares of common stock, which shares may be issued as earnout consideration in connection with the December 18, 2009 acquisition of JCG.

 

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Table of Contents

 

PRIMORIS SERVICES CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

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

 

Forward Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (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 Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2009 and our other filings with the Securities and Exchange Commission (“SEC”). Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2009 and our other filings with the SEC completely and with the understanding that our actual future results may be materially different from what we expect.

 

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

 

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

 

Introduction

 

Primoris Services Corporation is a holding company with various subsidiaries that cumulatively form a diversified construction company providing a wide range of construction and engineering services.  These services include fabrication, maintenance, replacement and other services to major public utilities, petrochemical companies, energy companies, municipalities and other customers.  Our activities are performed primarily in the Southeast and Southwest United States, more specifically in Louisiana and California, with strategic presences in Florida, Texas and Canada.

 

We install, replace, repair and rehabilitate natural gas, refined product, water and wastewater pipeline systems, and also construct mechanical facilities and other structures, including power plants, petrochemical facilities, refineries and parking structures. In addition, we provide maintenance services, including inspection, overhaul and emergency repair services, to cogeneration plants, refineries and similar mechanical facilities.

 

Through our recent acquisition of James Construction Group, LLC (“JCG”) in December 2009, we provide 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.

 

Through our subsidiary Onquest, Inc. (“Onquest”), 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 primarily in Florida.

 

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Table of Contents

 

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

 

We provide services in three segments, which consist of the East Construction Services segment, the West Construction Services segment and the Engineering segment.

 

In prior periods, the Company reported two operating segments:  the Construction Services segment and the Engineering segment. As a result of the acquisition of JCG and to changes in the management structure, the Company changed the reportable operating segments effective on January 1, 2010, by splitting the former Construction Services segment into two separate segments. The prior year information for the Construction Services segment has been reclassified into the two new segments. The three new segments are East Construction Services, West Construction Services and Engineering and are outlined as follows:

 

The East Construction Services segment incorporates the JCG construction services business, located primarily in the southern United States, specializing in highway, industrial and environmental projects.  The East Construction Services segment also consists of the businesses located in the Gulf Coast region of the United States that were formerly a part of the Construction Services segment, including Cardinal Contractors, Inc., Cardinal Mechanical and Cravens Services, Inc.  The East Construction Services segment provides a range of services that include:

 

·                   Heavy civil construction projects including highway and bridge construction, paving, levee construction, airport runway and taxiway construction and marine facility construction;

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

·                   General construction and construction management of facilities and plants dedicated to water treatment, water reclamation and wastewater treatment and related systems; and

·                   Providing installation and maintenance of other infrastructure projects.

 

The West Construction Services segment includes construction services performed in the western United States, primarily in the states of California and Nevada.  The entities that are included in West Construction Services include ARB, ARB Structures, Inc., and Stellaris, LLC. The West Construction Services segment provides a range of services that include:

 

·                   Providing installation of underground pipeline, cable and conduits for entities primarily in the petroleum, petrochemical and gas industries and projects with water/wastewater distribution requirements;

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

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

·                   Providing other earthwork, site development and remediation work.

 

The Engineering segment includes the results of Onquest and Born Heaters Canada, ULC (“Born Heaters”).  The Engineering segment provides services that include:

 

·                   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; and

·                   Furnishing turn-key project management with technical expertise and the ability to deliver custom engineering solutions worldwide.

 

The following table provides the historical revenues for the previously reported quarters for 2009 into the three new operating segments.

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

June 30,

 

September
30,

 

December
31,

 

Total

 

Segment:

 

2009

 

2009

 

2009

 

2009

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

East Construction Services

 

$

14,739

 

$

13,459

 

$

13,830

 

$

26,987

 

$

69,015

 

West Construction Services

 

90,044

 

92,788

 

80,933

 

76,456

 

340,221

 

Engineering

 

18,767

 

13,363

 

11,848

 

13,796

 

57,774

 

 

 

$

123,550

 

$

119,610

 

$

106,611

 

$

117,239

 

$

467,010

 

 

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 few years, we 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 number and size of contracts awarded to us in any particular period.

 

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Table of Contents

 

The current macroeconomic issues, including those in the financial markets, will likely impact our future results. While we currently have adequate backlog and projects to bid, we are uncertain as to how the current global financial issues will impact our clients.

 

Seasonality and cyclicality

 

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

 

Results of operations

 

Revenues, gross profit, operating income and net income for the three months ended March 31, 2010 and 2009 were as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

 

 

(Thousands,
except per
share
amounts)

 

% of
Revenue

 

(Thousands,
except per
share
amounts)

 

% of
Revenue

 

Revenues

 

$

174,982

 

100.0

%

$

123,550

 

100.0

%

Gross profit

 

24,473

 

14.0

%

14,506

 

11.7

%

Selling, general and administrative expense

 

13,755

 

7.9

%

7,416

 

6.0

%

Operating income

 

10,718

 

6.1

%

7,090

 

5.7

%

Other income (expense)

 

(67

)

%

2,129

 

1.7

%

Income before income taxes

 

10,651

 

6.1

%

9,219

 

7.4

%

Income tax provision

 

(3,953

)

(2.3

)%

(3,599

)

(2.9

)%

Net income from continuing operations

 

$

6,698

 

3.8

%

$

5,620

 

4.5

%

Profit from discontinued operations

 

 

 

 

20

 

 

%

Net income

 

$

6,698

 

3.8

%

$

5,640

 

4.5

%

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.20

 

 

 

$

0.19

 

 

 

Income on discontinued operations

 

$

 

 

 

$

 

 

 

Net Income

 

$

0.20

 

 

 

$

0.19

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.15

 

 

 

$

0.17

 

 

 

Income on discontinued operations

 

$

 

 

 

$

 

 

 

Net Income

 

$

0.15

 

 

 

$

0.17

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

33,202

 

 

 

30,116

 

 

 

Diluted

 

45,544

 

 

 

32,477

 

 

 

 

Revenue for the three months ended March 31, 2010 (“First Quarter 2010”) was $175.0 million, an increase of $51.4 million, or 41.6%, compared to the same period in 2009.   The increase in revenues was due primarily to the addition of new businesses in late 2009, which contributed $96.0 million in revenues for the First Quarter 2010.  Excluding the impact of the new businesses, revenues for the First Quarter 2010 declined by $44.6 million compared to the same period a year ago.  The decreased revenues were across all business lines, but especially in pipeline and industrial projects, reflecting the slowdown in project awards in 2009.

 

Gross profit increased by $10.0 million, or 68.7%, for the First Quarter 2010 compared to the same period in 2009 due primarily to an $8.7 million profit contribution of our recent acquisitions in the East Construction Services segment and the successful close out of some pipeline and industrial projects compared to the first quarter of 2009. Gross profit as a percent of revenues increased to 14.0% during the First Quarter 2010 from 11.7% in the prior year quarter.

 

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Table of Contents

 

Geographic areas financial information

 

Revenue by geographic area for the three months ended March 31, 2010 and 2009 was as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

 

 

 

 

 

 

 

 

 

 

Country:

 

 

 

 

 

 

 

 

 

United States

 

$

172,044

 

98.3

%

$

116,010

 

93.9

%

Non- United States

 

2,938

 

1.7

%

7,540

 

6.1

%

Total revenues

 

$

174,982

 

100.0

%

$

123,550

 

100.0

%

 

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

 

Segment results

 

In prior periods, the Company reported two operating segments:  the Construction Services segment and the Engineering segment. As a result of the acquisition of JCG and to changes in the management structure, the Company changed the reportable operating segments effective on January 1, 2010, by splitting the former Construction Services segment into two separate segments. The prior year information for the Construction Services segment has been reclassified into the two new segments. The three new segments are East Construction Services, West Construction Services and Engineering.

 

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

 

East Construction Services Segment

 

Revenue and gross profit for the East Construction Services segment for the three months ending March 31, 2010 and 2009 were as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

East Construction Services

 

 

 

 

 

 

 

 

 

Revenue

 

$

104,236

 

59.6

%

$

14,739

 

11.9

%

Gross profit

 

9,621

 

9.2

%

1,710

 

11.6

%

 

Revenue for the East Construction Services segment increased by $89.5 million, or 607.2%, for the First Quarter 2010 compared to the same period in 2009. This increase was due to the addition of $96.0 million in revenues from JCG and, to a lesser extent, Cravens, and was partially reduced by a $6.5 million decrease in revenue primarily from water and wastewater projects.

 

Gross profit for the East Construction Services increased by $7.9 million for the First Quarter 2010 primarily as a result of the $8.6 million gross margin contribution from the JCG acquisition compared to the same period in 2009.  Included in the gross profit amount is intangible amortization expense related to the JCG acquisition of $0.5 million.

 

Gross profit as a percent of revenues decreased to 9.2% during the First Quarter 2010 from 11.6% in the prior year quarter, reflecting the typically lower margin percentages on JCG’s heavy civil projects during wetter, winter months.

 

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Table of Contents

 

West Construction Services Segment

 

Revenue and gross profit for the West Construction Services segment for the three months ending March 31, 2010 and 2009 were as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

West Construction Services

 

 

 

 

 

 

 

 

 

Revenue

 

$

59,887

 

34.2

%

$

90,044

 

72.9

%

Gross profit

 

12,211

 

20.4

%

11,087

 

12.3

%

 

Revenue for the West Construction Services segment decreased by $30.2 million, or 33.5%, for the First Quarter 2010 compared to the same period in 2009.  The revenue decrease was across all parts of the segment: our underground business (a 35% reduction), our industrial business (an 18% reduction) and our structures business (a 64% reduction).  In addition, we recognized virtually no third party equipment rental revenue during the First Quarter 2010.  These decreases reflect the reduction in project rewards in 2009.  As shown in the “Backlog” section below, project awards improved during the First Quarter 2010.

 

West Construction Services segment gross profit increased by $1.1 million, or 10.1%, for the First Quarter 2010 compared to the same period of 2009.   The increased gross profit as a percent of revenues was the result of the impact that smaller, higher margin jobs have on our overall margin percentages in a declining revenue environment. In addition, as discussed in the “Backlog” section below, we recognized a positive impact from converting the Richmond Refinery Project from a fixed-priced contract to a reimbursable cost plus margin project.  Without the positive impact of this project, our West Construction Services segment gross profit percentage of revenue would have been at historical levels.

 

Engineering Segment

 

Revenue and gross profit for the Engineering segment for the three months ended March 31, 2010 and 2009 were as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

Engineering

 

 

 

 

 

 

 

 

 

Revenue

 

$

10,859

 

6.2

%

$

18,767

 

15.2

%

Gross profit