Primoris Services Corporation
Primoris Services Corp (Form: 10-K, Received: 03/16/2011 16:41:27)

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, 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

 

20-4743916

(State or other jurisdiction of
incorporation or organization)

 

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

 

 

 

2100 McKinney Avenue, Suite 1500
Dallas, Texas

 

75201

(Address of principal executive offices)

 

(Zip Code)

 

(214) 740-5600

(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

 

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 $138.8 million based upon the closing price of such common equity as of June 30, 2010 (the last business day of the Registrant’s most recently completed second fiscal quarter). On March 11, 2011, there were 49,359,600 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 2011 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

4

Item 1A.

Risk Factors

12

Item 1B.

Unresolved Staff Comments

22

Item 2.

Properties

22

Item 3.

Legal Proceedings

24

Item 4.

Submission of Matters to a Vote of Security Holders

24

 

 

 

Part II

 

 

Item 5.

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

25

Item 6.

Selected Financial Data

27

Item 7.

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

29

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

47

Item 8.

Financial Statements and Supplementary Data

47

Item 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

47

Item 9A.

Controls and Procedures

47

Item 9B.

Other Information

48

 

 

 

Part III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

49

Item 11.

Executive Compensation

50

Item 12.

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

50

Item 13.

Certain Relationships and Related Transactions, and Director Independence

50

Item 14.

Principal Accounting Fees and Services

50

 

 

 

Part IV

 

 

Item 15.

Exhibits and Financial Statement Schedules

51

 

 

Signatures

57

 

 

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.

 

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PART I

 

ITEM 1.  BUSINESS

 

Business Overview

 

Primoris Services Corporation (“Primoris”, the “Company”, “we”, “us” or “our”) is a holding company of various subsidiaries, which form one of the larger specialty contractors and infrastructure companies in the United States.  Serving diverse end-markets, we provide a wide range of construction, fabrication, maintenance, replacement, water and wastewater and product engineering services to major public utilities, petrochemical companies, energy companies, municipalities, state departments of transportation and other customers. Primoris or its predecessor companies have been in business since 1946, and the Company has been incorporated in Delaware since 2006.  Since our inception, we have actively pursued a diversification and expansion strategy.   For most of our history, substantial portions of our activities were performed in the western United States, primarily in California.

 

Starting in the early 2000s, we expanded our services through a start-up business and a series of acquisitions.  We began to provide engineering design services for fired heaters and furnaces primarily used in refinery applications through a newly formed subsidiary, Onquest, Inc. which acquired a Canadian subsidiary, Born Heaters, ULC. Through our subsidiary Cardinal Contractors, Inc., we construct water and wastewater facilities in the southeast United States, and we have strategic presences in Texas through our subsidiaries Cardinal Mechanical and Cravens Services, Inc.

 

As discussed below, we became a publicly traded company in 2008, and since that time we have completed two significant acquisitions which have more than doubled the size of the company while significantly increasing our service capabilities and geographic footprint.  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.

 

On November 8, 2010, the Company entered into an agreement (the “Rockford Agreement”) to acquire privately held Rockford Corporation (“Rockford”).  Upon completion of the transaction on November 12, 2010, Rockford became our wholly owned subsidiary.  Based in Hillsboro (Portland), Oregon, Rockford specializes in large diameter natural gas and liquid pipeline projects and related facilities construction.

 

The July 2008 Merger

 

Rhapsody Acquisition Corp. (“Rhapsody”) was founded as a blank check company on April 24, 2006 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. 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”, and the common stock has traded since August 4, 2008 on the NASDAQ Global Market under the symbol “PRIM”. While Rhapsody was the surviving legal entity in the merger, Former Primoris was treated as the acquiring entity for accounting purposes.

 

As part of the 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

 

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achieved the specified financial milestone for 2008 and 2009 and consequently, 2,500,025 shares were issued to the Former Primoris stockholders in 2009 and 2,499,975 shares were issued in 2010.

 

Services

 

Prior to January 1, 2010, the Company reported two operating segments:  the Construction Services segment and the Engineering segment.  As a result of the acquisition of JCG and changes in our management structure, the Company changed the reportable operating segments on January 1, 2010 by separating 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.

 

East Construction Services represented 51.0% of revenues for 2010 and 14.8% of revenues for 2009.   West Construction Services represented 42.7% of revenues for 2010 and 72.9% in 2009.  Engineering represented approximately 6.3% of revenues in 2010 and 12.3% in 2009.

 

With respect to industry trends, we continue to operate in a challenging business environment with increasing regulatory requirements and only gradual recovery in the economy and capital markets from the recessionary levels of the past two years.  Economic and regulatory issues have adversely affected demand for our services, and demand may continue to be impacted as conditions slowly improve. Therefore, we cannot predict the timing or magnitude that industry trends may have on our business, particularly in the near-term.

 

Range of Services — East and West Construction Services

 

Both of our construction services segments provide a range of services that include designing, building/installing, replacing, repairing/rehabilitating and providing management services for construction related projects. These 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; and

 

·                    Providing construction of highways and industrial and environmental construction.

 

East Construction Services

 

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, L.P. and Cravens.

 

West Construction Services

 

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, Inc., ARB Structures, Inc. and Stellaris, LLC.  Additionally, the results of Rockford for the period November 1, 2010 through December 31, 2010 are included in the West Construction Services segment.

 

Engineering

 

The Engineering segment remained unchanged and includes the results of Onquest, Inc. and Born Heaters Canada, ULC.  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 furnishes turnkey project management with technical expertise and the ability to deliver custom engineering solutions worldwide.

 

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Trends

 

We continue to operate in a challenging business environment with increasing regulatory requirements and only gradual recovery in the economy and capital markets from the recessionary levels of the past two years.  Economic and regulatory issues have adversely affected our customers and have affected demand for our services, and demand may continue to be impacted as conditions slowly improve. Therefore, we cannot predict the timing or magnitude that industry trends may have on our business, particularly in the near-term.

 

A significant contributor to the revenue and profitability of the West Construction Services segment is construction of electrical power generation facilities.  Demand for electric power is expected to grow, especially in large population centers, such as California.  That demand may be met by renewable energy sources, such as solar power, or by converting current facilities to more efficient sources of power.  We expect that this continuing demand growth will provide significant opportunities for our construction services.

 

For our underground services, we expect that the opportunities for natural gas pipelines will increase over the long-term.   Development of gas shale formations throughout North America has resulted in a significant increase in the natural gas supply, leading to a reduction in natural gas prices from the levels in the 2003 to 2008 period.   As one of the cleanest-burning fossil fuels, low-cost natural gas supports the U.S. goals of energy independence from foreign energy sources and a cleaner environment.  The U.S. Energy Information Administration has stated that the number of natural gas-fired power plants built will increase significantly over the next two decades. In addition, as renewable energy generation continues to increase and become a larger percentage of the overall power generation mix, natural gas may well be the fuel used to provide backup power generation.  The existing pipeline infrastructure may be insufficient to meet the growing natural gas demand that could lead to opportunities for new pipeline construction.  We also believe that the regulations enacted by the U.S. Department of Transportation through the Pipeline and Hazardous Materials Safety Administration relating to pipeline integrity requirements and similar state regulations will increase the demand for our underground services.

 

Our highway construction services will find a challenging market in the near-term.  Declining tax revenues, budget deficits, financing constraints and competing priorities have resulted in cutbacks in new infrastructure projects in the public sector.  Some funding sources that have been specifically earmarked for infrastructure spending, such as diesel and gasoline taxes, are not as directly affected by a stagnant or declining economy, unless actual consumption is reduced. However, even these can be temporarily at risk as state and local governments struggle to balance their budgets. Additionally, high fuel prices can have a dampening effect on consumption, resulting in overall lower tax revenue.  Offsetting these challenges is the need for continuing highway infrastructure and the perception of federal and state funding of transportation projects as an investment in infrastructure.

 

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 and in November 2010 we completed the acquisition of Rockford 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. Our strategy also considers potential selective expansion to new geographic regions.

 

·                   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.

 

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·                   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.  We believe that by carefully positioning ourselves in market segments that have meaningful barriers of entry, we can position ourselves so that we compete with other strong, experienced bidders.

 

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

 

Historically, 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 for our engineering customers.  With the December 2009 acquisition of JCG, we have expanded our customer base to include a significant presence in the Gulf Coast region of the United States and with the November 2010 acquisition of Rockford, expanded to include the Pacific Northwest area of the United States. The JCG acquisition also changed the composition of our customer base with a significant increase in public state agency projects. We enter into a large number of contracts each year and the projects can vary in length — from three months, to as long as 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 tend to 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 El Paso Corporation.

 

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

 

Description of customer’s business

 

2010

 

2009

 

2008

 

Gas and electric utility

 

7.3

%

14.4

%

7.6

%

Gas and electric utility

 

*

 

11.9

%

*

 

Gas utility

 

*

 

9.1

%

*

 

Gas utility (Ruby Pipeline Project)

 

8.4

%

*

 

*

 

Louisiana DOT

 

20.5

%

*

 

*

 

Public state agency

 

5.0

%

*

 

*

 

Engineering contractor

 

*

 

*

 

9.9

%

Engineering contractor

 

*

 

*

 

11.3

%

Totals

 

41.2

%

35.4

%

28.8

%

 


(*)                                  Indicates customers with 5% or less of revenues during such period.

 

For the year ended December 31, 2010, approximately 55.0% of total revenues were generated from the Company’s top ten customers. Additionally, approximately 25.0% of the Company’s accounts receivable were due from one customer. For the year ended December 31, 2010, the Company earned approximately 8.4% of its total revenue from this customer.

 

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Management at each of our operating units is responsible for developing and maintaining successful long-term relationships with customers. Our operating unit management teams build existing customer relationships to secure additional projects and increase revenue from our current customer base. Many of these customer relationships are long-term.   Operating unit managers are also responsible for pursuing growth opportunities with prospective new customers.

 

We believe that our strategic relationships with customers will result in future opportunities. Some of our strategic relationships are in the form of strategic alliance or long-term maintenance agreements.

 

Ongoing Projects

 

The following is a summary of significant ongoing construction projects demonstrating our capabilities in different markets at December 31, 2010:

 

Segment

 

Project

 

Location

 

Contract
Amount

 

Estimated
Completion
Date

 

Remaining
Backlog at
December 31,
2010

 

 

 

 

 

 

 

(Millions)

 

 

 

(Millions)

 

Construction Services

 

Ruby pipeline — 126 miles/42”

 

NV/OR

 

$

162.0

 

06/2010

 

$

0.0

 

Construction Services

 

Parking Structure

 

Long Beach, CA

 

$

38.0

 

12/2011

 

21.0

 

Construction Services

 

296 MW Comb. Cycle Plant

 

Lodi, CA

 

$

100.0

 

07/2012

 

87.0

 

Construction Services

 

144 MW Comb. Cycle Plant

 

El Centro, CA

 

$

89.0

 

05/2012

 

74.0

 

Construction Services

 

I12 Design Build

 

Baton Rouge, LA

 

$

110.0

 

11/2011

 

67.0

 

Construction Services

 

Causeway Blvd Exchange

 

Metarie, LA

 

$

52.0

 

03/2012

 

34.0

 

Construction Services

 

LA1 Bridge

 

Lafourche Parish, LA

 

$

138.0

 

11/2011

 

57.0

 

Engineering

 

Waste Heat Recovery

 

Australia

 

$

32.0

 

09/2011

 

22.0

 

 

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, 2010, 2009 and 2008, and the total assets located in those countries for the years ended December 31, 2010 and 2009. Our revenue from operations in the United States is related to projects primarily in the geographic United States. Our revenue from operations in Canada is primarily derived from our office in Calgary, Canada, but relates to specific projects in other countries, especially in the Far East and Australia.  In December 2009, we discontinued 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

 

 

 

2010

 

2009

 

2008

 

December 31,

 

Country

 

Revenue

 

%

 

Revenue

 

%

 

Revenue

 

%

 

2010

 

2009

 

 

 

(Thousands)

 

 

 

(Thousands)

 

 

 

(Thousands)

 

 

 

(Thousands)

 

(Thousands)

 

United States

 

$

920,051

 

97.7

 

$

445,979

 

95.5

 

$

577,090

 

96.5

 

$

692,759

 

$

465,025

 

Non-United States

 

21,714

 

2.3

 

21,031

 

4.5

 

20,732

 

3.5

 

11,457

 

11,002

 

TOTAL

 

$

941,765

 

100.0

 

$

467,010

 

100.0

 

$

597,822

 

100.0

 

$

704,216

 

$

476,027

 

 

All non-United States revenue has been generated in the Engineering Segment.  The table above reflects non-United States revenues generated through our Canadian subsidiary, Born Heaters Canada, ULC.

 

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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 2010, as set forth in the table above, approximately 2.3% 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.

 

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 10 “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

 

The Company typically structures contracts as unit-price, time and material, fixed-price or cost plus fixed fee.  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. To date, these provisions have not materially adversely affected us.

 

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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. While we subcontract specialized activities such as blasting, hazardous waste removal and electrical work, we perform most of the work on our projects with our own resources, including labor and equipment.

 

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.

 

Risk Management, 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 States of California and Louisiana, we self-insure our workers’ compensation claims in an amount of up to $250,000 and $150,000, respectively, per occurrence, and we maintain insurance covering larger claims. Management believes our insurance programs are adequate.

 

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.

 

Environmental Matters and Climate Change Impacts

 

We are subject to numerous federal, state, local and international environmental laws and regulations governing our operations, including the handling, transportation and disposal of non-hazardous and hazardous substances and wastes, as well as emissions and discharges into the environment, including discharges to air, surface water, groundwater and soil. We also are subject to laws and regulations that impose liability and cleanup responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, such liabilities can be imposed for cleanup of previously owned or operated properties, or properties to which hazardous substances or wastes were sent by current or former operations at our facilities, regardless of whether we directly caused the contamination or violated any law at the time of discharge or disposal. The presence of contamination from such substances or wastes could interfere with ongoing operations or adversely affect our ability to sell, lease or use our properties as collateral for financing.

 

In addition, we could be held liable for significant penalties and damages under certain environmental laws and regulations and also could be subject to a revocation of our licenses or permits, which could materially and adversely affect our business and results of operations. Our contracts with our customers may also impose liabilities on us

 

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regarding environmental issues that arise through the performance of our services.  From time to time, we may incur costs and obligations for correcting environmental noncompliance matters and for remediation at or relating to certain of our properties. We believe that we are in substantial compliance with our environmental obligations to date and that any such obligations will not have a material adverse effect on our business or financial performance.

 

The potential physical impacts of climate change on our operations are highly uncertain. Climate change may result in, among other things, changes in rainfall patterns, storm patterns and intensities and temperature levels. As discussed elsewhere in this Annual Report on Form 10-K, including in Item 1A. Risk Factors” , our operating results are significantly influenced by weather. Therefore, significant changes in historical weather patterns could significantly impact our future operating results. For example, if climate change results in significantly more adverse weather conditions in a given period, we could experience reduced productivity, which could negatively impact our revenues and gross margins.

 

Climate change could also affect our customers and the types of projects that they award.  Demand for power projects, underground pipelines or highway projects could be affected by significant changes in weather.  Reductions in project awards could adversely affect our operations and financial performance.

 

Employees

 

We believe that our employees are our most valuable resource in successfully completing construction work. Our ability to maintain sufficient continuous work for over 3,000 hourly employees instills in our employees loyalty to and understanding of our policies and contributes to our strong production, safety and quality record.

 

As of December 31, 2010, we employed approximately 778 salaried employees and approximately 3,256 hourly employees.  These numbers include 56 salaried employees and 980 hourly employees from the November 2010 acquisition of Rockford Corporation. The total number of hourly personnel employed is subject to the volume of construction in progress. During the calendar year 2010, the number of hourly employees ranged from approximately 2,000 employees to 3,800 employees.

 

The following is a summary of employees by function and geography at December 31, 2010:

 

 

 

CA

 

OR

 

NV

 

FL

 

TX

 

LA

 

Other
US

 

Canada

 

Total

 

Salaried

 

250

 

34

 

9

 

34

 

129

 

259

 

34

 

29

 

778

 

Hourly

 

695

 

451

 

480

 

92

 

414

 

926

 

198

 

0

 

3,256

 

Total

 

945

 

485

 

489

 

126

 

543

 

1,185

 

232

 

29

 

4,034

 

 

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 not experienced recent work stoppages and believe our employee and union relations are good.

 

Website Access and Other Information

 

Our website address is www.prim.com. You may obtain free electronic copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to these reports through our website under the “Investor Relations” tab or through the website of the Securities and Exchange Commission (the “SEC”) at www.sec.gov. These reports are available on our website as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. In addition, our Corporate Governance Guidelines, Code of Ethics and Business Conduct and the charters of each of our Audit Committee, Compensation Committee and Governance and Nominating Committee are posted on our website under the “Investor Relations/Corporate Governance” tab.  We intend to disclose on our website any amendments or waivers to our Code of Ethics and Business Conduct that are required to be disclosed pursuant to Item 5.05 of Form 8-K. You may obtain copies of these items from our website.

 

We will make available to any stockholder, without charge, copies of our Annual Report on Form 10-K as filed with the SEC. For copies of this or any other information, stockholders should submit a request in writing to Primoris Services, Inc., Attn: Corporate Secretary, 26000 Commercentre Drive, Lake Forest, CA 92630.

 

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This Annual Report on Form 10-K and our website may contain information provided by other sources that we believe are reliable. However, we cannot assure you that the information obtained from other sources is accurate or complete. No information on our website is incorporated by reference herein and should not be considered part of this Annual Report.

 

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.

 

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 your 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 your 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, and may in the future experience, shortages of certain types of qualified personnel. For example, periodically there are

 

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shortages of engineers, project managers, field supervisors, and other skilled workers capable of working on and supervising the construction of underground, heavy civil 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.

 

In addition, our customers may reduce the number or size of projects available to us due to their inability to obtain capital.  Our customers may also reduce projects in response to economic conditions.  For example, in 2009 very few power plant construction contracts were bid or awarded in California.  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 operation and cash flow.

 

Demand for our services may decrease during economic recessions or volatile economic cycles, 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.

 

In early 2011, the economy is still recovering from the recent recession and economic growth remains slow. The financial markets also have not fully recovered. It is uncertain when these conditions will significantly improve. The declining economic conditions have adversely impacted the demand for our services and resulted in the delay, reduction or cancellation of certain projects and may continue to adversely affect us in the future. Additionally, many of our customers finance their projects through the incurrence of debt or the issuance of equity. The availability of credit remains constrained, and many of our customers have not fully recovered from the negative impact of the recession. A continued reduction in our customers spending for our services could have a material adverse affect on our operations and our ability to grow at historical levels.

 

Much of the work that we perform in the highway markets involves funding by federal, state and local governments.  In the current recessionary and political environment, funding for these projects could be reduced significantly, which could have a material adverse affect on our operations and financial results.

 

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.

 

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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 55.0% of our revenue in 2010, 58.8% of our revenue in 2009 and 54.7% in 2008. 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 2010, 2009 and 2008 was 72%, 68% and 67%, respectively. The portion of gross profit generated from fixed-price and unit-price contracts for 2010, 2009 and 2008 was 71%, 55% and 64%, respectively. We must estimate the costs of completing a particular project to bid these types of contracts. The actual cost of labor and materials may vary from the costs we originally estimated, and we may not be successful in recouping additional costs from our customers. These variations, may cause gross profits for a project to differ from those we originally estimated.    Reduced profitability or losses on projects could occur 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.

 

Depending upon the size of a particular project, variations from the estimated contract 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 and investing in technology, and it 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.

 

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

 

As of December 31, 2010, approximately 51% of our hourly employees, primarily consisting of field laborers, were covered by collective bargaining agreements. Of the 30 collective bargaining agreements the Company is a party to, fourteen expire during 2011 and require renegotiation. 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.

 

Additionally, our collective bargaining agreements generally require us to participate with other companies in multiemployer pension plans. To the extent those plans are underfunded, the Employee Retirement Income Security Act of 1974, as amended by the Multi-Employer Pension Plan Amendments Act of 1980, may subject us to substantial liabilities under those plans if we withdraw from them or they are terminated. In addition, the Pension Protection Act of 2006 added new funding rules generally applicable to plan years beginning after 2007 for multi-employer plans that are classified as endangered, seriously endangered or critical status.  For a plan in critical status, additional required contributions and benefit reductions may apply if a plan is determined to be underfunded, which could adversely affect our financial condition or results of operations.  If any plans are in critical status, we may be required to make additional contributions, generally in the form of surcharges on contributions otherwise required. Should we provide in the future a significant amount of services in areas that require us to utilize unionized employees covered by these affected plans, causing us to make substantial contributions, or should a determination be made that plans to which any of our operating units contribute are in a critical status requiring additional contributions, it could adversely affect our results of operations, financial condition or cash flows if we are not able to adequately mitigate these costs.

 

Our ability to complete future acquisitions could be adversely affected because of our union status for a variety of reasons. For instance, our union agreements may be incompatible with the union agreements of a business we want to acquire and some businesses may not want to become affiliated with a union-based company. Additionally, we may increase our exposure to withdrawal liabilities for underfunded multi-employer pension plans to which an acquired company contributes.

 

The current presidential administration has expressed strong support for proposed legislation that would create more flexibility and opportunity for labor unions to organize non-union workers. If passed, this legislation could result in a greater percentage of our workforce being subject to collective bargaining agreements .

 

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 surety provider’s 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

 

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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.

 

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.

 

We are self-insured against potential liabilities.

 

Although we maintain insurance policies with respect to employer’s liability, general liability, auto and workers compensation claims, those policies are subject to deductibles ranging from $0.15 million to $0.25 million per occurrence depending on the insurance policy. We are primarily self-insured for all claims that do not exceed the amount of the applicable deductible. We also have employee health care benefit plans for most employees not subject to collective bargaining agreements, of which one of the primary plans is subject to a deductible of $150,000 per claimant per year. Our insurance policies include various coverage requirements, including the requirement to give appropriate notice. If we fail to comply with these requirements, our coverage could be denied. Losses under all of these insurance programs are accrued based upon our estimates of the ultimate liability for claims reported and an estimate of claims incurred but not reported, These insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the extent of damage, the determination of our liability in proportion to other parties and the number of incidents not reported. The accruals are based upon known facts and historical trends, and management believes such accruals are adequate. If we were to experience insurance claims or costs significantly above our estimates, our results of operations could be materially and adversely affected in a given period.

 

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. We recorded approximately $32.1 million in goodwill and $15.5 million of intangible assets in connection with the 2010 Rockford acquisition and we recorded approximately $58.1 million in goodwill and $31.7 million of intangible assets based on the application of the acquisition method of accounting in connection with the 2009 acquisition of JCG.  Under current accounting rules, 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. As discussed in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies”, the accounting literature provides specific guidance for testing goodwill and other non-amortized intangible assets for impairment.  At the time of an acquisition, 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 impairment, including impairments of the goodwill or intangible assets recorded in connection with the acquisitions of Rockford or JCG or any future acquisitions, would negatively impact our results of operations for the period in which the impairment is recognized.

 

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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, and 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.

 

We may incur liabilities or suffer negative financial or reputational impacts relating to 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.

 

We may incur additional healthcare costs arising from federal healthcare reform legislation.

 

In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law in the U.S. This legislation expands health care coverage to many uninsured individuals and expands coverage to those already insured. The changes required by this legislation could cause us to incur additional healthcare and other costs.  Although we do not expect any material short-term impact on our financial results as a result of the legislation, we cannot determine the extent of any long-term impact from the legislation or any potential changes to the legislation.

 

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.

 

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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 2010, 2009 and 2008 was 5%, 4% and 8%, respectively. The portion of gross profit generated from EPC contracts for 2010, 2009 and 2008 was 4%, 9% and 3%, 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 time-and-equipment, time-and-materials and cost-plus contracts, we do not include future 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.

 

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 currently 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

 

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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 2010, 2009 and 2008 was 76%, 54% and 45%, 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 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 risks 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 November 2010, we completed the acquisition of Rockford and we completed the JCG acquisition in December 2009.  The two acquisitions 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

 

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·                   The potential impairment of acquired goodwill and intangible assets.

 

If we cannot effectively manage the integration process or if any significant business activities are interrupted as a result of the integration process of any acquisition, 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 2010, we continued actions to ensure our ability to comply with these requirements. As of December 31, 2010, 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, 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, are the focus of increased scientific and political scrutiny and may be 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.

 

Changes to renewable portfolio standards and decreased demand for renewable energy projects could negatively impact our future results of operations, cash flows and liquidity.

 

A significant portion of our future business could be focused on providing construction and/or installation services to owners and operators of solar power and other renewable energy facilities. Currently, the development of solar and other renewable energy facilities is highly dependent on tax credits, the existence of renewable portfolio standards and other state incentives. Renewable portfolio standards are state specific statutory provisions requiring that electric utilities generate a certain amount of electricity from renewable energy sources.  These standards have initiated significant growth in the renewable energy industry and a potential demand for renewable energy infrastructure construction services. Since renewable energy is generally more expensive to produce, elimination of, or changes to, existing renewable portfolio standards or similar environmental policies may negatively affect future demand for our services.

 

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.  We could be adversely affected by our failure to comply with laws applicable to our foreign activities, such as the U.S. Foreign Corrupt Practices Act.

 

During 2010 and 2009, revenue attributable to our services outside of the United States was approximately 2.3% and 4.5% of our total revenue, respectively. While much of this revenue is derived from the operations of our

 

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Canadian subsidiary, Born Heaters, ULC, actual construction operations have occurred in the several far eastern countries and in Australia. 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 (FCPA) 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.

 

The FCPA and similar anti-bribery laws in other jurisdictions prohibit U.S.-based companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. We pursue opportunities in certain parts of the world that experience government corruption, and in certain circumstances, compliance with anti-bribery laws may conflict with local customs and practices. Our policies mandate compliance with all applicable anti-bribery laws. Further, we require our partners, subcontractors, agents and others who work for us or on our behalf to comply with the FCPA and other anti-bribery laws. Although we have policies and procedures designed to ensure that we, our employees, our agents and others who work with us in foreign countries comply with the FCPA and other anti-bribery laws, there is no assurance that such policies or procedures will protect us against liability under the FCPA or other laws for actions taken by our agents, employees and intermediaries. If we are found to be liable for FCPA violations (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others), we could suffer from severe criminal or civil penalties or other sanctions, which could have a material adverse effect on our reputation, business, results of operations or cash flows. In addition, detecting, investigating and resolving actual or alleged FCPA violations is expensive and could consume significant time and attention of our senior management.

 

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 10 – “ Discontinued Operations ” to the consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data”.

 

Risks Related to our Common Stock

 

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

 

As of December 31, 2010, the Company has 450,000 Unit Purchase Options (“UPO”) outstanding.  Each UPO currently includes the right to purchase one share of common stock for $8.80 per share.  The UPOs expire on October 2, 2011.  The UPOs will likely be exercised only when the market price of our common stock is greater than $8.80 per share.  To the extent such UPOs 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 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.

 

Additionally, as part of the Rockford acquisition, 494,095 shares of common stock will be issued to the Rockford former shareholders as a result of Rockford meeting a defined performance target in 2010.  The purchase agreement provides for additional performance targets for 2011 and 2012 and may result in additional shares being issued.  As part of the JCG acquisition agreement, JCG achieved certain financial milestones for the year ending December 31, 2010 and we will issue to the sellers 1,095,602 shares of common stock in the first quarter 2011.  The issuance of these shares will 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 with which we must comply.  If we do not do so, we may be unable to maintain the listing of our securities in the future.

 

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

 

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·                   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.

 

Three of our director-officers are significant stockholders, which may make it possible for them to have significant influence over the outcome of matters submitted to our stockholders for approval and their interests may differ from the interests of our other stockholders.

 

As of December 31, 2010, three of our director-officers and principal stockholders owned an aggregate in excess of 40% of the outstanding shares of our common stock. On his own, Brian Pratt beneficially owned and had the power to vote approximately 34.5% of the outstanding shares of our common stock at December 31, 2010. 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. Such influence could have the effect of discouraging others from attempting to purchase us or take us over, could reduce the market price offered for our common stock in such an event.

 

ITEM 1B.                     UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.                              PROPERTIES

 

Facilities

 

In January 2011, our executive offices relocated from Lake Forest in California to Dallas, Texas at 2100 McKinney Avenue, Suite 1500, Dallas, Texas 75201. The telephone number at our executive office is (214) 740-5600. The East Construction Services segment of our business has regional offices located in Baton Rouge, Louisiana, in Conroe and Pasadena, Texas and in Sarasota and Fort Lauderdale, Florida. The West Construction Services segment has regional offices located in Lake Forest, Pittsburg, San Francisco, Bakersfield and San Diego, California and offices located in Hillsboro, Oregon and in Toledo, Washington.   The Engineering segment of our business has offices located in San Dimas, California and in Calgary, Canada.  Most accounting and financial operations remain at our Lake Forest location.

 

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 2010 were $3.5 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. Brian Pratt, one of our largest stockholders and our Chief Executive Officer, President and Chairman of the Board of Directors, also holds a majority interest in SIGI and is the chairman and director of SIGI.  John M. Perisich, our Senior Vice President and General Counsel, is secretary of SIGI.

 

Property, Plant and Equipment

 

We own and maintain both construction and transportation equipment. In 2010, 2009 and 2008, we spent approximately $23.6 million, $9.3 million and $10.1 million, respectively, in cash for property and equipment. Additionally, we incurred debt for the acquisition of property and equipment in the amounts of approximately $4.7 million in 2009 and $7.1 million in 2008.  We did not incur any debt for property and equipment in 2010. An estimated breakdown of capital equipment as of December 31, 2010 is as follows:

 

·                   Heavy construction and specialized equipment—1,467 units, including 423 units of equipment related to the acquisition of Rockford; and

·                   Transportation equipment—1,090 units, including 293 units of equipment related to the acquisition of Rockford.

 

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

 

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our equipment fully utilized in order to increase profit. All equipment is subject to scheduled maintenance to insure reliability. Maintenance facilities exist at most 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, 2010 and 2009:

 

 

 

2010

 

2009

 

Useful Life

 

 

 

(In Thousands)

 

(In Thousands)

 

 

 

Land and buildings

 

$

14,415

 

$

5,433

 

30 years

 

Leasehold improvements

 

3,539

 

3,460

 

Lease life

 

Office equipment

 

1,006

 

632

 

3 - 5 years

 

Construction equipment

 

148,125

 

104,337

 

3 - 7 years

 

Transportation equipment

 

16,844

 

10,538

 

3 - 18 years

 

 

 

183,929

 

124,400

 

 

 

Less: accumulated depreciation and amortization

 

(60,762

)

(31,832

)

 

 

Net property, plant and equipment

 

$

123,167

 

$

92,568

 

 

 

 

The amounts shown in 2010 include the addition of property, plant and equipment of $24.1 million as a result of the November 2010 acquisition of Rockford.  The amounts shown in 2009 included the addition of $61.3 million in property, plant and equipment as a result of the December 2009 acquisition of JCG.  For both acquisitions, property plant and equipment additions consisted primarily of construction equipment.

 

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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.

 

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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 began trading on the NASDAQ Global Market under the symbol “PRIM”. Previously, our common stock traded on the OTC Bulletin Board under the ticker symbol “RPSD”.

 

We had outstanding 49,359,600 shares of common stock and 82 stockholders of record as of March 11, 2011. 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 2010 and 2009.

 

 

 

Market price per
Share

 

 

 

High

 

Low

 

Year ended December 31, 2010

 

 

 

 

 

First quarter

 

$

8.72

 

$

7.40

 

Second quarter

 

$

8.37

 

$

5.95

 

Third quarter

 

$

7.40

 

$

5.65

 

Fourth quarter

 

$

9.54

 

$

6.77

 

 

 

 

 

 

 

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

 

 

Prior to their expiration on October 2, 2010, the Company had Warrants and Units that were trading under the NASDAQ Global Market under the symbols “PRIMW” and “PRIMU”, respectively.

 

Dividend Policy

 

The following table shows cash dividends to our common stockholders declared by the Company during the two years ended December 31, 2010:

 

Declaration Date

 

Payable Date

 

Record Date

 

Type

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

March 04, 2010

 

April 15, 2010

 

March 31, 2010

 

$0.025 per share

May 11, 2010

 

July 15, 2010

 

June 30, 2010

 

$0.025 per share

August 6, 2010

 

October 15, 2010

 

September 30, 2010

 

$0.025 per share

November 5, 2010

 

January 15, 2011

 

December 31, 2010

 

$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.

 

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, 2010.

 

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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 and 23 to our consolidated financial statements for the year ended December 31, 2010 included in Part II, Item 8 “ Financial Statements and Supplementary Data ”.

 

Repurchases of Securities

 

On September 7, 2010, the Company adopted a Rule 10b5-1 trading plan with a broker to facilitate the repurchase of the Company’s redeemable warrants.  From September 7, 2010 through the plan termination date of September 28, 2010, the broker completed the repurchase of 245,846 warrants in accordance with the plan, for $0.28 million.

 

On October 2, 2010, all outstanding warrants expired.  A total of 33,744 unexercised warrants expired on that date.

 

Unregistered Sales of Securities during the Fourth Quarter of 2010

 

During the fourth quarter of 2010, we completed the acquisition of Rockford for which a portion of the consideration consisted of unregistered securities of the Company. The aggregate consideration paid in this transaction was $35.0 million in cash, $16.7 million in promissory notes, and 1,605,709 shares of common stock.  The shares were valued in the purchase agreement at $7.77 per share, for an aggregate consideration of $64.2 million.

 

In addition, the Company provided contingent consideration to the sellers if Rockford achieves certain financial performance targets.  The consideration includes the potential issuance of Company common stock.  A total of 494,095 shares of common stock will be issued to the sellers in the first quarter 2011 as a result of meeting the 2010 target. The purchase agreement provides an additional performance target for 2011, which may result in issuing additional shares of common stock.  The number of shares of common stock payable under the contingent consideration for achievement of the 2011 target will be based on share prices of the Company’s common stock in December 2011, under the terms of the purchase agreement.

 

A total of 1,095,602 shares of the Company’s common stock will be issued to JCG’s former members in the first quarter of 2011 as a result of JCG meeting a defined performance target for 2010.  The number of shares was calculated in accordance with the purchase agreement.  There are no further contingent considerations for the JCG acquisition.

 

All securities listed on the following table are issued shares of our common stock. Contingent consideration not yet issued 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, 2010

 

1,605,709 common shares

 

Stockholders of acquired company

 

Sale of acquired company

 

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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,

 

 

 

2010

 

2009

 

2008

 

2007

 

2006

 

 

 

(In thousands except per share data)

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

941,765

 

$

467,010

 

$

597,822

 

$

542,624

 

$

430,006

 

Cost of revenues

 

818,976

 

391,435

 

527,380

 

482,556

 

391,276

 

Gross profit

 

122,789

 

75,575

 

70,442

 

60,068

 

38,730

 

Selling, general and administrative expense

 

64,985

 

34,781

 

30,544

 

28,580

 

25,660

 

Merger related stock expense

 

 

390

 

4,050

 

 

 

Operating income

 

57,804

 

40,404

 

35,848

 

31,488

 

13,070

 

Other income (expense)

 

(2,129

)

7,707

 

6,380

 

(1,856

)

1,316

 

Income from continuing operations, before income taxes

 

55,675

 

48,111

 

42,228

 

29,632

 

14,386

 

Income tax provision

 

(22,059

)

(18,350

)

(4,926

)

(895

)

(1,175

)

Income from continuing operations

 

$

33,616

 

$

29,761

 

$

37,302

 

$

28,737

 

$

13,211

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net of tax—(1)

 

 

(3,849

)

(869

)

(1,603

)

(11

)

Net income (loss)

 

$

33,616

 

$

25,912

 

$

36,433

 

$

27,134

 

$

13,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per common share

 

$

0.10

 

$

0.10

 

$

0.05

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.79

 

$

0.93

 

$

1.42

 

$

1.23

 

$

0.56

 

Income (loss) from discontinued operations —(1)

 

$

 

$

(0.12

)

$

(0.03

)

$

(0.07

)

$

0.00

 

Net income

 

$

0.79

 

$

0.81

 

$

1.39

 

$

1.16

 

$

0.56

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.72

 

$

0.86

 

$

1.32

 

$

1.23

 

$

0.56

 

Income (loss) from discontinued operations —(1)

 

$

 

$

(0.11

)

$

(0.03

)

$

(0.07

)

$

0.00

 

Net income

 

$

0.72

 

$

0.75

 

$

1.29

 

$

1.16

 

$

0.56

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

42,694

 

31,937

 

26,258

 

23,458

 

23,402

 

Diluted

 

46,878

 

34,418

 

28,156

 

23,458

 

23,402

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro Form Data - 2006 to 2008 (unaudited)—(2)

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations, before income taxes, as reported

 

 

 

 

 

$

42,228

 

$

29,632

 

$

14,386

 

Pro forma provision for income taxes

 

 

 

 

 

(16,797

)

(11,794

)

(5,726

)

Pro forma income from continuing operations

 

 

 

 

 

$

25,431

 

$

17,838

 

$

8,690

 

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

 

 

 

 

 

(592

)

(993

)

(7

)

Pro forma net income

 

 

 

 

 

$

24,839

 

$

16,845

 

$

8,653

 

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

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

 

 

 

$

0.97

 

$

0.76

 

$

0.37

 

Income (loss) from discontinued operations — (1)

 

 

 

 

 

$

(0.02

)

$

(0.04

)

$

0.00

 

Net income

 

 

 

 

 

$

0.95

 

$

0.72

 

$

0.37

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

 

 

 

$

0.90

 

$

0.76

 

$

0.37

 

Income (loss) from discontinued operations — (1)

 

 

 

 

 

$

(0.02

)

$

(0.04

)

$

0.00

 

Net income

 

 

 

 

 

$

0.88

 

$

0.72

 

$

0.37

 

 

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Table of Contents

 

 

 

As of December 31,

 

 

 

2010

 

2009

 

2008

 

2007

 

2006

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

115,437

 

$

90,004

 

$

72,848

 

$

62,628

 

$

12,865

 

Short term investments

 

$

26,000

 

$

30,058

 

$

15,036

 

$

 

$

 

Accounts receivable, net

 

$

208,145

 

$

108,492

 

$

90,622

 

$

112,468

 

$

104,844

 

Total assets

 

$

704,216

 

$

476,027

 

$

252,212

 

$

220,973

 

$

162,309

 

Total current liabilities

 

$

381,587

 

$

242,192

 

$

168,392

 

$

150,123

 

$

97,828

 

Long-term debt, net of current portion

 

$

73,160

 

$

77,955

 

$

26,965

 

$

22,641

 

$

21,328

 

Stockholders’ equity

 

$

208,231

 

$

143,959

 

$

55,430

 

$

46,923

 

$

42,207

 

 


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

 

(2)                               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 has been 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 2006 through 2008, using an effective tax rate of 39.8%.

 

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Table of Contents

 

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” at the beginning of 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 of various subsidiaries, which form one of the largest specialty contractors and infrastructure companies in the United States.  Serving diverse end-markets, Primoris provides a wide range of construction, fabrication, maintenance, replacement, water and wastewater, and engineering services to major public utilities, petrochemical companies, energy companies, municipalities, and other customers. With our acquisitions of JCG in December 2009 and Rockford in November 2010, Primoris has doubled its size and the Company’s national footprint now extends from Florida, along the Gulf Coast, through California, into the Pacific Northwest and Canada.

 

We install, replace, repair and rehabilitate natural gas, refined product, water and wastewater pipeline systems, large diameter gas and liquid pipeline facilities, heavy civil projects, earthwork and site development and also construct mechanical facilities and other structures, including power plants, petrochemical facilities, refineries and parking structures. In addition, we provide maintenance services, including inspection, overhaul and emergency repair services, to cogeneration plants, refineries and similar mechanical facilities. Through our subsidiary Onquest, Inc., we provide engineering and design services for fired heaters and furnaces primarily used in refinery applications. Through our subsidiary Cardinal Contractors, Inc., we construct water and wastewater facilities in Florida.

 

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 and 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.

 

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.

 

On November 8, 2010, the Company entered into the Rockford Agreement to acquire privately held Rockford.  Upon completion of the acquisition on November 12, 2010, Rockford became a wholly owned subsidiary.  Based in Hillsboro (Portland), Oregon, Rockford specializes in large diameter natural gas and liquid pipeline projects and related facilities construction.  The Rockford Agreement provided that the transaction was effective retroactive to October 1, 2010.

 

Rockford’s business adds to the Company’s major underground project bidding and performance capabilities. Rockford also adds to our California underground capacity and provides a northwest United States location to expand the Company’s geographic presence.

 

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.  The July 2008 merger was accounted for as a reverse acquisition. 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 our net assets, accompanied by a recapitalization. Our pre-merger net assets are stated at historical cost, with no goodwill or other intangible assets recorded.

 

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Prior to January 1, 2010, the Company reported two operating segments:  the Construction Services segment and the Engineering segment. As a result of the acquisition of JCG and changes in our management structure, the Company changed the reportable operating segments on January 1, 2010, by separating 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.

 

Range of Services — East and West Construction Services

 

Both the East Construction Services and the West Construction Services segments specialize 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; and

 

·                    Providing construction of highways and industrial and environmental construction.

 

East Construction Services

 

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, L.P. and Cravens.

 

West Construction Services

 

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 Inc., ARB Structures, Inc. and Stellaris, LLC.  Additionally, the results of the November 12, 2010 acquisition of Rockford, effective on November 1, 2010, are included in the West Construction Services segment.

 

Engineering

 

The Engineering segment remained unchanged and includes the results of Onquest, Inc. and Born Heaters Canada, ULC.  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 furnishes turnkey project management with technical expertise and the ability to deliver custom engineering solutions worldwide.

 

Material trends and uncertainties

 

We generate our revenue from both large and small construction and engineering projects. The award of these contracts is dependent on a number of factors, many of which are not within our control. Business in the construction industry is cyclical. We depend in part on spending by companies in the energy, and oil and gas industries, as well as on municipal water and wastewater customers. Over the past several years, each segment has benefited from demand for more efficient and more environmentally friendly energy and power facilities, local highway and bridge needs and from the 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.

 

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 throughout 2009 and 2010,

 

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Table of Contents

 

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 results of operations can be subject to quarterly variations. Some of the variation is the result of weather, particularly rain, which can impact Primoris’ ability to perform construction services. Since the majority of the Company’s work is in the southern half of the United States, these seasonal impacts are not as dramatic for the Company as may be experienced by companies in some other states.  In addition, demand for new projects can be lower during the early part of the year due to clients’ internal budget cycles.  As a result, the Company usually experiences higher revenues and earnings in the third and fourth quarters of the year as compared to the first two quarters.  The Company is also dependent on large construction projects which tend not to be seasonal, but can fluctuate from year to year based on general economic conditions.  Because of the cyclical nature of its business, the financial results for any period may fluctuate from prior periods, and the Company’s financial condition and operating results may vary from quarter-to-quarter.  Results from one quarter may not be indicative of its financial condition or operating results for any other quarter or for an entire year.

 

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, 2010, 2009 and 2008 were as follows:

 

 

 

2010

 

2009

 

2008

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

941,765

 

100.0

%

$

467,010

 

100.0

%

$

597,822

 

100.0

%

Gross profit

 

122,789

 

13.0

%

75,575

 

16.2

%

70,442

 

11.8

%

Selling, general and administrative expense

 

64,985

 

6.9

%

34,781

 

7.4

%

30,544

 

5.1

%

Merger related stock expense

 

 

 

390

 

0.1

%

4,050

 

0.7

%

Operating income

 

57,804

 

6.1

%

40,404

 

8.7

%

35,848

 

6.0

%

Other income (expense)

 

(2,129

)

(0.2

)%

7,707

 

1.7

%

6,380

 

1.1

%

Income before income taxes

 

55,675

 

5.9

%

48,111

 

10.3

%

42,228

 

7.1

%

Provision for income taxes

 

(22,059

)

(2.3

)%

(18,350

)

(3.9

)%

(4,926

)

(0.9

)%

Income from continuing operations

 

33,616

 

3.6

%

29,761

 

6.4

%

37,302

 

6.2

%

Loss on discontinued operations

 

 

 

(3,849

)

(0.9

)%

(869

)

(0.1

)%

Net income

 

$

33,616

 

3.6

%

$

25,912

 

5.5

%

$

36,433

 

6.1

%

 

Revenue increased $474.8 million, or 101.7%, for 2010 as compared to 2009 primarily as a result of the contributions from the acquisitions of JCG in December 2009 and Rockford in November 2010.  Revenues from the Engineering segment increased by 2.1%.  In 2010, our East Construction Services segment, which includes a full year contribution from the JCG acquisition, provided 51.0% of total revenues compared to 14.8% of total revenues in 2009.  The JCG acquisition contributed $429.4 million and the Rockford acquisition contributed $85.3 million during 2010.  Excluding the impact of the acquired businesses, revenue declined by $39.9 million in 2010 compared to 2009.  Revenues decreased primarily in oil and gas pipeline projects and parking structure projects reflecting the impact of decreased project awards during the recession.

 

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Table of Contents

 

Gross profit increased by $47.2 million, or 62.5%, for 2010 as compared to 2009 primarily due to the acquisitions of JCG and Rockford.  JCG contributed $45.5 million in gross profit and Rockford provided $9.8 million in gross profit.  For 2010, gross profit provided by our East Construction Services segment represented 39.7% of the total gross profit compared to 8.7% of total gross profit in 2009.

 

Gross profit as a percent of revenues decreased to 13.0% compared to 16.2% in 2009.  The decrease was primarily due to the typically lower margin percentages on JCG’s civil projects and the lower utilization of equipment and manpower in the West Construction Services segment reflected by the decrease in revenues.

 

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.  Gross profit increased by $5.1 million, or 7.3%, for 2009 as compared to 2008 reflecting higher margin work primarily in the cable and conduit and pipeline sectors in the West Construction Services segment.

 

Geographic areas — financial information

 

Revenue by geographic area for the years ended December 31, 2010, 2009 and 2008 was as follows:

 

 

 

2010

 

2009

 

2008

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

Country:

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

920,051

 

97.7

%

$

445,979

 

95.5

%

$

577,090

 

96.5

%

Non-United States

 

21,714

 

2.3

%

21,031

 

4.5

%

20,732

 

3.5

%

Total revenue

 

$

941,765

 

100.0

%

$

467,010

 

100.0

%

$

597,822

 

100.0

%

 

All non-United States revenue has been generated in the Engineering Segment.  The table above reflects non-United States revenues generated through our Canadian subsidiary, Born Heaters Canada, ULC.  Much of that work was done in the Far East and Australia.

 

Segment Results

 

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 years ending December 31, 2010, 2009 and 2008 were as follows:

 

 

 

2010

 

2009

 

2008

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

East Construction Services

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

480,533

 

 

 

$

69,015

 

 

 

$

75,525

 

 

 

Gross profit

 

$

48,770

 

10.1

%

$

6,544

 

9.5

%

$

5,186

 

6.9

%

 

East Construction Services segment revenue increased by $411.5 million, or 596.3%, as a result of the acquisition of JCG in December 2009, which contributed revenues of $429.4 million. Excluding the impact of the JCG acquisition, revenue for the segment was lower than the prior year by $17.9 million caused primarily by a reduction in revenues on Florida water and wastewater projects.

 

Gross profit increased by $42.2 million in 2010 compared to 2009. The increase resulted from increased gross profit contributed by JCG of $45.5 million in 2010 compared to 2009.  This increase was partially offset by decreases in

 

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Table of Contents

 

gross profit of $2.2 million, primarily in water and wastewater projects.  The JCG gross profit amount included intangible amortization expense of $2.1 million.

 

East Construction Services segment revenues decreased by $6.5 million, or 8.6% for 2009 compared to 2008 as a result of decreases in our Florida water and wastewater construction company.  These decreases were due primarily to the substantial completion of 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 through 2009 and into 2010.

 

West Construction Services Segment

 

Revenue and gross profit for the West Construction Services segment for the years ending December 31, 2010, 2009 and 2008 were as follows:

 

 

 

2010

 

2009

 

2008

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

West Construction Services

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

402,273

 

 

 

$

340,222

 

 

 

$

429,239

 

 

 

Gross profit

 

$

61,897

 

15.4

%

$

62,927

 

18.5

%

$

59,592

 

13.9

%

 

West Construction Services segment revenues increased by $62.1 million, or 18.2% for 2010 compared to 2009 as a result of revenue of $85.3 million contributed by the Rockford acquisition in the fourth quarter of 2010 and a revenue increase of $21.3 million from California water and sewer pipeline projects, partially offset by a decline in revenues from oil and gas pipeline projects of $25.6 million and parking structure projects of $15.2 million.

 

Gross profit for the West Construction Services decreased by $1.0 million, or 1.6%, for 2010 compared to 2009.   Rockford contributed gross profit of $9.8 million.  This amount was offset by an  $11.7 million decrease in other construction work, including decreases of $5.5 million on oil and gas pipeline projects, $1.7 million in underground cable and conduit projects, $2.7 million on water and sewer projects in California and $1.2 million in horizontal directional drilling projects.  These reductions were as a result of the general slowdown in business  primarily in California.

 

Gross profit as a percent of revenues decreased to 15.4% in 2010 compared to 18.5% in 2009 primarily as a result of lower utilization of equipment and manpower, especially in the first half of 2010.

 

West Construction Services segment revenues decreased by $89.0 million, or 20.7% for 2009 compared to 2008 as a result of decreases in our California industrial business of $114.4 million. These decreases were due primarily to the substantial completion of refinery 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, revenues were reduced due to the impact of the work slowdown and demobilizations of a large refinery project located in Richmond, California.  The revenue reduction was partially offset by revenue increases of $25.4 million in California underground projects, including pipeline and cable and conduit projects.

 

West Construction Services segment gross profit increased by $3.3 million, or 5.6%, for 2009 compared to 2008. The increase resulted from improved margins as a percentage of revenue of 18.5% in 2009 compared to 13.9% in 2008, partially offset by reduced profits in the refining sector because of lower revenues, and lower revenues and profits obtained from third party equipment rentals.

 

Engineering Segment

 

Revenue and gross profit for the Engineering segment for the years ended December 31, 2010, 2009 and 2008 were as follows:

 

 

 

2010

 

2009

 

2008

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

Engineering Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

58,959

 

 

 

$

57,773

 

 

 

$

92,942

 

 

 

Gross profit

 

$

12,122

 

20.6

%

$

6,104

 

10.6

%

$

5,478

 

5.9

%

 

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Revenue for the Engineering segment increased by $1.2 million, or 2.1%, for 2010, compared to 2009, due to several new projects that began in the first half of 2010, replacing completed projects in 2009.

 

Gross profit for the Engineering segment for 2010 increased to $12.1 million from $6.1 million for the same period in 2009, an increase of $6.0 million.  Gross margin as a percent of revenues for 2010 was 20.6% compared to 10.6% for the same period in 2009.  A significant portion of the increase was due to improvements in the final costs of several complex projects completed in 2010 compared to the estimated costs for these projects identified in the prior year.  These improvements resulted in a favorable impact to gross profit of $4.8 million for 2010.  Excluding the impact of these projects, gross profit for 2010 was $7.3 million, a net increase of $1.2 million compared to the same period in the prior year, with gross profit as a percent of revenues of 12.4% in 2010 compared to 10.6% for 2009.

 

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 million 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.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses (“SG&A”) increased $30.2 million, or 86.8%, for 2010 compared to 2009. Of the increased amount, approximately $21.5 million was added by the acquisitions of JCG and Rockford, including $3.4 million for amortization of intangible assets. The balance of the increase of $5.3 million was due in part to several one-time expenses in 2010, including a $1.7 million impairment charge for intangible assets and goodwill of a small acquisition made in 2009, offset by a reduction in a liability relating to the termination of that investment’s earnout agreement.  Additional one-time items include a charge of $1.6 million for a reserve associated with collection of receivables and return of equipment associated with the All Day Electric joint venture, the impact of recognizing $2.0 million less in gain on sale of equipment in 2010 compared to 2009, an increase of $0.8 million for audit and tax fees as a result of the JCG and Rockford acquisitions and a one-time, non-cash charge of $0.7 million relating to the additional consideration to be paid to the sellers of JCG upon achievement of the 2010 earn-out financial target.

 

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 decreased to 6.9% for 2010 from 7.5% for 2009.  This decrease as a percentage of revenues was primarily due to the increase in revenues which allowed better absorption of the relatively fixed expenses.

 

Merger related stock expense

 

As part of the merger of Rhapsody and Former Primoris in July 2008, we issued 507,600 shares of common stock to two foreign managers. We recognized $3.7 million of non-cash expenses and recorded an increase to additional paid-in capital.  We also recorded an expense of $0.4 million in 2008 and $0.4 million in 2009 for 52,668 shares issued each year to the foreign managers in accordance with Primoris attaining its financial performance targets.

 

Other income and expense

 

Non-operating income and expense items for the years ended December 31, 2010, 2009 and 2008 were as follows:

 

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2010

 

2009

 

2008

 

 

 

(Thousands)

 

(Thousands)

 

(Thousands)

 

Other income (expense)

 

 

 

 

 

 

 

Income from non-consolidated investments

 

$

4,630

 

$

8,753

 

$

6,065

 

Foreign exchange gain (loss)

 

250

 

293

 

855

 

Other income (expense)

 

(1,429

)

 

 

Interest income

 

616

 

640

 

1,710

 

Interest expense

 

(6,196

)

(1,979

)

(2,250

)

Total other income

 

$

(2,129

)

$

7,707

 

$

6,380

 

 

Income from non-consolidated joint ventures for 2010 included $5.4 million from the St.-Bernard Levee Partners joint venture, offset by the write-off of $0.5 million for the All Day Electric joint venture and a $0.2 million expense for the Wespac Energy joint venture, a developer of pipeline and terminal projects in which the Company acquired a 50% interest in July 2010.  The Company acquired a 50% membership interest in the Wespac Energy joint venture in July 2010 for cash of $18.1 million.  This long-term strategic investment is expected to provide a new stream of project opportunities over the course of the next several years.

 

Equity income (loss) from non-consolidated investments for 2009 consisted of $8.7 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.

 

Foreign exchange gain for 2010, 2009 and 2008 reflect currency exchange fluctuations of the United States dollar compared to the Canadian dollar. Our contracts in Calgary, Canada are sold based on United States dollars, but a portion of the work is paid for with Canadian dollars creating a currency exchange difference.

 

Other expense of $1.4 million in 2010 reflects the non-cash accretion expense associated with the present value calculations of the contingent liability for the earn-out agreements for JCG and Rockford.   Both JCG and Rockford met the 2010 earn-out targets. Additional expense for achieving those targets is included in SG&A.

 

Interest income decreased for 2010 and 2009 compared to 2008 as a result of declining interest rates and our decision to invest our excess cash balances primarily in Treasury bills and certificate of deposits (“CD’s”) purchased through the CDARS (Certificate of Deposit Account Registry Service) and in money market accounts, rather than commercial paper.  The decrease was partially offset by higher average cash balances in the 2010 and 2009 period.

 

Interest expense increased by $4.2 million for 2010 and decreased $0.3 million for 2009 compared to 2008.  The $4.2 million increase in 2010 was due to an increase of $2.5 million for interest paid on the subordinated debt from the JCG and Rockford acquisitions, an increase of $0.7 million as a result of increased financing of equipment that were part of the JCG and Rockford acquisitions, and $1.0 million in interest on federal income taxes.

 

The weighted average interest rate on total debt outstanding at December 31, 2010, 2009 and 2008 was 5.2%, 5.3% and 6.1%, respectively.

 

Provision for income taxes

 

Our provision for income tax increased $3.7 million to $22.1 million for 2010 compared to 2009.  The tax rate applied for 2010 was 39.6% compared to 38.1% for 2009.  The increase in the expected tax rate reflects our estimated full year results and assumptions of our mix of revenues and profits in the various tax jurisdictions throughout the USA and Canada. We recorded a tax charge of $0.4 million in 2010 in order to adjust the prior year accrual to the actual  tax returns filed and recorded a one-time tax charge of $0.5 million for unrecognized tax benefits.

 

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.

 

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Pro forma net income data—unaudited

 

During the years ended December 31, 2010 and 2009, respectively, the Company has been taxed as a C-Corporation.  To compare the 2010 and 2009 results with 2008, 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.

 

 

 

2008

 

 

 

(Thousands)

 

Pro Form Data — 2008 (unaudited)

 

 

 

Income from continuing operations, before income taxes, as reported

 

$

42,228

 

Pro forma provision for income taxes

 

$

(16,797

)

Pro forma income from continuing operations

 

$

25,431

 

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

 

$

(592

)

Pro forma net income

 

$

24,839

 

 


(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.

 

The estimated pro forma tax provision amount for 2008 was 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 years ended December 31, 2009 and 2008:

 

 

 

2009

 

2008

 

 

 

(Thousands)

 

(Thousands)

 

Ecuador Business Unit

 

 

 

 

 

Revenues

 

$

18,247

 

$

11,250

 

Cost of revenue

 

23,457

 

11,249

 

Gross (loss) profit

 

(5,210

)

1

 

Selling, general and administrative expenses

 

895

 

978

 

Operating loss

 

(6,105

)

(977

)

Interest income

 

7

 

9

 

Loss before provision for taxes

 

$

(6,098

)

$

(968

)

Income tax benefit

 

2,249

 

99

 

Income (loss) from discontinued operations

 

$

(3,849

)

$

(869

)

 

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, were 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.  As of December 31, 2010, a net liability for this transaction was on the balance sheet and amounted to $0.73 million.

 

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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.

 

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.

 

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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.

 

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 reflected 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 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.

 

Goodwill is tested on October 1 each year. 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.

 

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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, our goodwill balances have increased significantly since 2008 due to the acquisitions of JCG in December 2009 and Rockford in November 2010.

 

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.

 

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 $12.7 million at December 31, 2010 and approximately $9.5 million at December 31, 2009. Claims administration expenses were charged to current operations as incurred. 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

 

Liquidity represents our ability to pay our liabilities when they become due, fund business operations and meet our contractual obligations.  Our primary sources of liquidity are our cash balances at the beginning of each period and our net cash flow.  In addition to cash flow from operations, we have availability under our lines of credit to augment liquidity needs.  In order to maintain sufficient liquidity, we evaluate our working capital requirements on a regular basis.  We may elect to raise additional capital by issuing common stock, convertible notes, term debt or increasing our credit facility as necessary to fund our operations or to fund the acquisition of new businesses.

 

At December 31, 2010, our balance sheet included net cash and investments of $141.4 million, consisting of net cash of $115.4 million, and $26.0 million in short-term investments.  We currently have the following credit facilities:

 

·               a $20 million credit facility which expires on October 26, 2013, under which we can issue letters of credit for up to $15 million.  At December 31, 2010, we have issued letters of credit of $4.3 million on this facility, resulting in $15.7 million in available borrowing capacity;

·               a credit facility of $15 million, with the full borrowing amount available at December 31, 2010, which expires on October 26, 2011; and

·               a $10 million (Canadian dollars) facility for commercial letters of credit in Canada with an expiration date of December 31, 2012. At December 31, 2010, $5.0 million of letters of credit (Canadian dollars) were outstanding, with $5.0 million available under this credit facility for additional letters of credit.

 

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During the past three 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. The extent to which these conditions will persist is unclear. At this time, the credit markets have not adversely affected the Company’s cost and availability of funding, and we do not expect it to be materially impacted in the near future.

 

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.

 

Cash Flows

 

Cash flows during the years ended December 31, 2010, 2009 and 2008 are summarized as follows:

 

 

 

2010

 

2009

 

2008

 

 

 

(Thousands)

 

(Thousands)

 

(Thousands)

 

Change in cash

 

 

 

 

 

 

 

Net cash provided (used) by operating activities

 

$

81,848

 

$

28,082

 

$

66,979

 

Net cash provided (used) in investing activities

 

(54,177

)

5,412

 

(24,360

)

Net cash used in financing activities

 

(1,364

)

(14,499

)

(32,129

)

Net cash used in discontinued operations

 

(874

)

(1,839

)

(270

)

Net change in cash

 

$

25,433

 

$

17,156

 

$

10,220

 

 

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, 2010, 2009 and 2008 were as follows:

 

 

 

2010

 

2009

 

2008

 

 

 

(Thousands)

 

(Thousands)

 

(Thousands)

 

Operating Activities

 

 

 

 

 

 

 

Operating income

 

$

57,804

 

$

40,404

 

$

35,848

 

Depreciation and amortization

 

24,484

 

8,663

 

6,338

 

Gain on sale of property and equipment

 

(1,359

)

(3,217

)

(576

)

Merger related stock expense

 

 

390

 

4,050

 

Distributions received from joint venture

 

9,491

 

3,400

 

6,120

 

Goodwill/intangible impairment

 

1,732

 

 

 

Net deferred taxes

 

(1,091

)

1,179

 

(4,166

)

Changes in assets and liabilities

 

19,605

 

(3,341

)

23,976

 

Foreign exchange gain (loss)

 

250

 

293

 

855

 

Interest income

 

616

 

640

 

1,710

 

Interest expense

 

(6,196

)

(1,979

)

(2,250

)

Other expenses

 

(1,429

)

 

 

Provision for income taxes

 

(22,059

)

(18,350

)

(4,926

)

Net cash provided by operating activities

 

$

81,848

 

$

28,082

 

$

66,979

 

 

Cash flow provided by operating activities for 2010 of $81.8 million increased by $53.8 million compared to 2009.  This was due primarily to an increase in operating income of $17.4 million and an increase in depreciation and amortization of $15.8 million as a result of the additional equipment acquired in the JCG and Rockford acquisitions and the amortization of the intangible assets associated with the two acquisitions. Additional changes in operating cash flow included an increase of $6.1 million in joint ventures distributions offset by an increase in interest expense of $4.2 million, other expenses of $1.4 million, and an increase in taxes of $3.7 million. The increase in taxes is due to a higher tax rate and an increase in income before tax in 2010, compared to 2009.

 

The significant changes in the components of the $19.6 million change in assets and liabilities for 2010 are summarized as follows:

 

·                   a $42.1 million increase in accounts receivable. At December 31, 2010, accounts receivable of $208.1 million represented 29.6% of total assets compared to 22.8% in the prior year.  Included in the

 

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December 31, 2010 total was $52.3 million from a Rockford customer.  We continue to have an excellent collection history for our receivables and have certain lien rights that can provide additional security for collection;

·                   a $12.4 million increase in accounts payable.  Accounts payable at December 31, 2010 were $89.5 million, which represented 18.0% of total liabilities compared to 18.8% in 2009.  Included in the December 31, 2010 total were $7.4 million related to Rockford operations;

·                   costs and estimated earnings in excess of billings increased by $3.8 million;

·                   billings in excess of costs and estimated earnings of $205.3 million which included  $78.7 million from Rockford, increased by $55.8 million;

·                   inventory, prepaid expenses and other current assets increased by $6.8 million;

·                   customer retention deposits increased by $5.7 million

·                   other long-term liabilities increased by $4.4 million; and

·                   accrued expenses and other current liabilities increased by $5.4 million.

 

For 2009, the changes in assets and liabilities, excluding the impact of the assets acquired and liabilities assumed at the date of the acquisitions, decreased operating cash flow by $3.3 million. The components of this change are included in the consolidated statements of cash flow for 2009. The significant changes include a $15.8 million decrease in accounts receivable, a $7.0 million decrease in accounts payable and a decrease in accrued liabilities of $4.7 million. In addition, billings in excess of costs and estimated earnings decreased by $15.1 million while costs and estimated earnings in excess of billings decreased by $9.4 million, inventory and prepaid expenses increased by $3.8 million and restricted cash decreased by $1.7 million.

 

The decrease in customer retention deposits in 2009 was related to project completions causing the release of retentions. The decrease in billings in excess of costs and estimated earnings were principally due to the progress and completion status of projects. The decrease in costs and estimated earnings in excess of billings derived from timing of costs incurred versus our contractual ability to bill our customers.

 

As of December 31, 2009, accounts receivable represented 22.8% of total assets versus 36.0% in 2008. Accounts payable represented 18.8% of the total liability as opposed to 26.0% in 2008. This reflects the impact from the acquisition of two subsidiaries in late 2009.

 

Investing activities

 

 

 

2010

 

2009

 

2008

 

 

 

(Thousands)

 

(Thousands)

 

(Thousands)

 

Capital expenditures — cash

 

$

23,640

 

$

9,314

 

$

10,132

 

Capital expenditures — financed

 

 

4,723

 

7,076

 

Total capital expenditures

 

$

23,640

 

$

14,037

 

$

17,208

 

 

We purchased property and equipment for $23.6 million, $14.0 million and $17.2 million in the years ended December 31, 2010, 2009 and 2008, respectively, principally for our construction activities. We believe the ownership of equipment is generally preferable to renting equipment on a project-by-project basis, as ownership helps to ensure the equipment is available for our workloads when needed. In addition, ownership has historically resulted in lower overall equipment costs.

 

For 2010 purchases, we paid $23.6 million in cash.  Included in the 2010 purchases is approximately $2.0 million for a new facility for our affiliate in Sarasota, Florida and a $7.5 million equipment yard in Carson, California. The remaining $14.1 million purchases in 2010 include equipment purchased at JCG.

 

We periodically sell and acquire equipment, typically to update our fleet. We received proceeds from the sale of used equipment of $3.0 million and $4.3 million for 2010 and 2009, respectively. For the past few years, we have been able to rent major equipment not used for our own projects to third parties, but with the current recession, equipment rentals have decreased to a small amount.

 

As part of our cash management program, we invested $44.0 million and $45.0 million in 2010 and 2009, respectively, in short term investments, and sold $48.0 million and $30.0 million in 2010 and 2009, respectively.  Short term investments consist primarily of CDs purchased through the CDARS (Certificate of Deposit Account Registry Service) process to provide FDIC backing of the CDs, U.S. Treasury bonds and money market accounts with various financial institutions.

 

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We used $35.0 million in cash for the Rockford acquisition on November 12, 2010.  The acquisition added $19.6 million to our cash balance.  We used $4.1 million for a smaller acquisition in December 2010.

 

Financing activities

 

Financing activities required the net use of $1.4 million cash in 2010. Significant transactions impacting cash flows from financing activities included:

 

·                   $27.5 million proceeds from the issuance of long-term debt;

 

·                   $12.7 million in repayment of long-term debt during 2010, based on scheduled maturities of such debt;

 

·                   $4.6 million in repayment of long-term capital leases during 2010;

 

·                     $27.0 million repayment of subordinated debt;

 

·                   $21.7 million proceeds from the issuance of common stock;

 

·                   $4.4 million for payment of dividends; and

 

·                   a final cash distribution of $2.0 million paid to the Former JCG stockholders during 2010.

 

Capital Requirements

 

During the year 2010, our operations provided cash of $80.9 million, which included an increase of $55.8 million of billings in excess of costs and estimated earnings. Billings in excess of costs and estimated earnings increase as we receive cash prior to performing the required work.  If there were a reduction in the amount of work we perform, we may experience decreases in cash from operations as we use the cash previously paid to complete the work to be performed.

 

Other Cash Use

 

We distributed approximately $48.9 million to the Former Primoris stockholders immediately prior to the closing of the merger on July 31, 2008. In addition, on July 31, 2008, the Rhapsody trust fund was liquidated and the proceeds of $41.3 million, including earned interest, were transferred to us.

 

Common Stock

 

Prior to July 2008, Former Primoris was a non-publicly traded entity with 4,368 shares outstanding. At the time of the merger, each Former Primoris share was converted into 5,400 shares of the Company, for 23,587,200 shares. Additionally, as part of the Merger Agreement, two foreign managers of Former Primoris were issued 507,600 shares of common stock.

 

As part of the consideration for the acquisition of JCG in December 2009, 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 8,185,278 shares of common stock.  In October 2009, we issued 139,082 shares of our common stock in the acquisition of Cravens.  Additionally, in November 2010 we issued 1,605,709 shares of unregistered common stock to the sellers of Rockford.

 

Contingent shares of common stock

 

Former Primoris Contingent Shares

 

The Merger Agreement provided that the Former Primoris Holders would receive up to an additional 5,000,000 shares of the Company’s common stock, contingent upon the Company attaining certain financial targets in 2008 and 2009. The Company achieved the specified financial milestones for both 2008 and 2009.  On March 27, 2009, we issued 2,500,025 shares of Company stock and on March 25, 2010, we issued 2,499,975 shares.

 

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JCG Contingent Shares

 

A total of 1,095,602 shares will be issued to the JCG’s former members in the first quarter of 2011 as a result of JCG meeting a defined performance target in 2010.  The number of shares is equal to  $10.2 million divided by the average closing price of our common stock for the 20 business days prior to December 31, 2010 (which was $9.31 per share).

 

Cravens Contingent Shares

 

A total of 74,906 shares of common stock were issued in March 2010 after Cravens met a 2009 defined pe