Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark One)**                                                                                                                                                                 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                     |
| **x**                                                                                                                                                                          | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.** |
| ** **                                                                                                                                                                     | ** ** | ** ** |
| **For the  quarterly period ended September 30, 2009**                                                                                                                    |
| ** **                                                                                                                                                                     |
| **OR**                                                                                                                                                                         |
| ** **                                                                                                                                                                     | ** ** | ** ** |
| **o**                                                                                                                                                                          | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.** |
| ** **                                                                                                                                                                     |
| **For the  transition period from              to            .** |

 

**Commission file number 0001-34145**

 

**PrimorisServices Corporation**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                     | ** ** | **20-4743916**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) | ** ** | (I.R.S. Employer  Identification No.) |
| ** **                                                       | ** ** | ** **                            |
| **26000  Commercentre Drive, Lake Forest,  California**          | ** ** | **92630**                             |
| (Address of Principal  Executive Offices)                        | ** ** | (Zip Code)                            |

 

Registrant’s telephonenumber, including area code: **(949) 598-9242**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No o

 

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

 

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

 
| Large accelerated  filer o               |   | Accelerated filer  o   |
|-----------------------------------------------|--------|-----------------------------|
|                                          |   |                        |
| Non-accelerated  filer o                 |   | Smaller reporting company x |
| Do  not check if a smaller reporting company. |   |                        |

 

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

 

As of November 09,2009, 32,642,546 shares of the registrant’s common stock were outstanding.

 

 

 

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**PRIMORIS SERVICES CORPORATION**

**INDEX**

 
| ** **                                                                                                                                              | **Page No** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------------|
| **Part I. Financial Information**                                                                                                                  |             |
| Item 1  Condensed Consolidated Financial Statements:                                                                                               |             |
| —Condensed Consolidated Balance Sheets as of September 30,  2009 and December 31, 2008                                                   | 3                |
| —Condensed  Consolidated Statements of Income for the three months and nine months ended  September 30, 2009 and September 30, 2008 | 4                |
| —Condensed  Consolidated Statements of Cash Flows for the three months and nine months  ended September 30, 2009 and September 30, 2008  | 5                |
| —Notes to Condensed Consolidated Financial Statements                                                                                              | 7                |
| Item 2 Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                 | 17               |
| Item 3 Quantitative and Qualitative Disclosures  About Market Risk                                                                                 | 29               |
| Item 4T Controls and Procedures                                                                                                                    | 29               |
| **Part II.  Other Information**                                                                                                                    |             |
| Item 1  Legal Proceedings                                                                                                                          | 30               |
| Item 1A  Risk Factors                                                                                                                              | 30               |
| Item 2 Unregistered Sales of Equity Securities  and Use of Proceeds                                                                                | 30               |
| Item 3 Defaults Upon Senior Securities                                                                                                             | 30               |
| Item 4 Submission of Matters to a Vote of  Security Holders                                                                                        | 30               |
| Item 5  Other Information                                                                                                                          | 30               |
| Item 6  Exhibits                                                                                                                                   | 31               |
| Signatures                                                                                                                                              | 32               |

 

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**PRIMORIS SERVICES CORPORATION**

 

**PART I.FINANCIAL INFORMATION**

 

**ITEM1.  CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(INTHOUSANDS, EXCEPT SHARE AMOUNTS)**

 
| ** **                                                                                                                                                                   | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                   | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                   |       |                         |       |                        |       |
| Current  assets:                                                                                                                                                             |       |                         |       |                        |       |
| Cash  and cash equivalents                                                                                                                                                   |       | $                            | 80,346     |                        | $          | 73,018 |   |
| Short-term  investments                                                                                                                                                      |       | 5,016                        |       | 15,036                      |       |
| Restricted  cash                                                                                                                                                             |       | 6,536                        |       | 11,111                      |       |
| Accounts  receivable, net                                                                                                                                                    |       | 81,810                       |       | 90,826                      |       |
| Costs  and estimated earnings in excess of billings                                                                                                                          |       | 22,369                       |       | 21,017                      |       |
| Deferred  income taxes                                                                                                                                                       |       | 6,182                        |       | 5,591                       |       |
| Prepaid  expenses, inventory and other current assets                                                                                                                        |       | 4,256                        |       | 5,856                       |       |
| Total  current assets                                                                                                                                                        |       | 206,515                      |       | 222,455                     |       |
| Property  and equipment, net                                                                                                                                                 |       | 31,830                       |       | 26,224                      |       |
| Other  assets                                                                                                                                                                |       | 24                           |       | 191                         |       |
| Investment  in non-consolidated entities                                                                                                                                     |       | 2,773                        |       | 500                         |       |
| Goodwill                                                                                                                                                                     |       | 2,842                        |       | 2,842                       |       |
| Total  assets                                                                                                                                                                |       | $                            | 243,984    |                        | $          | 252,212 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                               |       |                         |       |                        |       |
| Current  liabilities:                                                                                                                                                        |       |                         |       |                        |       |
| Accounts  payable                                                                                                                                                            |       | $                            | 39,609     |                        | $          | 56,088 |   |
| Billings  in excess of costs and estimated earnings                                                                                                                          |       | 73,037                       |       | 72,664                      |       |
| Accrued  expenses and other current liabilities                                                                                                                              |       | 25,128                       |       | 26,067                      |       |
| Distributions  and dividends payable                                                                                                                                         |       | 812                          |       | 5,696                       |       |
| Current  portion of capital leases                                                                                                                                           |       | 1,093                        |       | 2,198                       |       |
| Current  portion of long-term debt                                                                                                                                           |       | 5,217                        |       | 5,679                       |       |
| Total  current liabilities                                                                                                                                                   |       | 144,896                      |       | 168,392                     |       |
| Long-term  debt, net of current portion                                                                                                                                      |       | 22,478                       |       | 26,624                      |       |
| Long-term  capital leases, net of current portion                                                                                                                            |       | —                       |       | 341                         |       |
| Deferred  tax liabilities                                                                                                                                                    |       | 1,434                        |       | 1,425                       |       |
| Total  liabilities                                                                                                                                                           |       | 168,808                      |       | 196,782                     |       |
| Commitments  and contingencies                                                                                                                                               |       |                         |       |                        |       |
| Stockholders’  equity                                                                                                                                                   |       |                         |       |                        |       |
| Preferred  stock—$.0001 par value, 1,000,000 shares authorized, 0 outstanding                                                                                           |       | —                       |       | —                      |       |
| Common  stock—$.0001 par value; authorized: 90,000,000 shares; 32,477,364 and  29,977,339 issued and outstanding at September 30, 2009 and  December 31, 2008 |       | 3                            |       | 3                           |       |
| Additional  paid-in capital                                                                                                                                                  |       | 34,796                       |       | 34,796                      |       |
| Retained  earnings                                                                                                                                                           |       | 40,165                       |       | 20,528                      |       |
| Accumulated  other comprehensive income                                                                                                                                      |       | 212                          |       | 103                         |       |
| Total  stockholders’ equity                                                                                                                                             |       | 75,176                       |       | 55,430                      |       |
| Total  liabilities and stockholders’ equity                                                                                                                             |       | $                            | 243,984    |                        | $          | 252,212 |   |

 

See Accompanying Notes toCondensed Consolidated Financial Statements

 

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**PRIMORIS SERVICES CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

**(INTHOUSANDS, EXCEPT PER SHARE AMOUNTS)**

** **
| ** **                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                           | ** ** | **2009**                         | ** ** | **2008**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                           | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)**                 | ** ** |
| Revenues                                             |       | $                                | 111,491    |                            | $          | 146,737 |   | $ | 367,129 |   | $ | 458,572 |   |
| Cost of revenues                                     |       | 92,415                           |       | 125,634                         |       | 312,402 |   | 406,622 |   |
| Gross profit                                         |       | 19,076                           |       | 21,103                          |       | 54,727 |   | 51,950 |   |
| Selling, general and administrative expenses         |       | 7,423                            |       | 7,039                           |       | 23,425 |   | 21,662 |   |
| Merger related stock expense                         |       | —                           |       | 3,675                           |       | — |   | 3,675 |   |
| Operating income                                     |       | 11,653                           |       | 10,389                          |       | 31,302 |   | 26,613 |   |
| Other income (expense):                              |       |                             |       |                            |       |   |   |   |   |
| Income from non-consolidated entities                |       | 1,439                            |       | 1,474                           |       | 5,342 |   | 4,501 |   |
| Foreign exchange gain (loss)                         |       | (170                             | )          | 89                              |       | 33 |   | 67 |   |
| Interest income (expense) net                        |       | (308                             | )          | (132                            | )          | (902 | ) | (356 | ) |
| Income before provision for income taxes             |       | 12,614                           |       | 11,820                          |       | 35,775 |   | 30,825 |   |
| Provision for income taxes                           |       | (4,667                           | )          | (1,734                          | )          | (13,608 | ) | (2,188 | ) |
| Net income                                           |       | $                                | 7,947      |                            | $          | 10,086 |   | $ | 22,167 |   | $ | 28,637 |   |
| Basic earnings per share                             |       | $                                | 0.24       |                            | $          | 0.36 |   | $ | 0.70 |   | $ | 1.15 |   |
| Diluted earnings per share                           |       | $                                | 0.23       |                            | $          | 0.32 |   | $ | 0.67 |   | $ | 1.10 |   |
| Weighted average common shares outstanding           |       |                             |       |                            |       |   |   |   |   |
| Basic                                                |       | 32,477                           |       | 27,824                          |       | 31,699 |   | 25,010 |   |
| Diluted                                              |       | 34,048                           |       | 31,063                          |       | 33,128 |   | 26,093 |   |
| **Pro forma net income data—2008:**             |       |                             |       |                            |       |   |   |   |   |
| Income before provision for income tax, as  reported |       |                             |       | $                               | 11,820     |   |   |   | $ | 30,825 |   |
| Adjustments for provision for income tax             |       |                             |       | (4,706                          | )          |   |   | (12,271 | ) |
| Pro forma adjusted net income                        |       |                             |       | $                               | 7,144      |   |   |   | $ | 18,554 |   |
| Pro forma earnings per share                         |       |                             |       |                            |       |   |   |   |   |
| Basic                                                |       |                             |       | $                               | 0.26       |   |   |   | $ | 0.74 |   |
| Diluted                                              |       |                             |       | $                               | 0.23       |   |   |   | $ | 0.71 |   |

 

SeeAccompanying Notes to Condensed Consolidated Financial Statements

 

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**PRIMORISSERVICES CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(INTHOUSANDS)**

** **
| ** **                                                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                          | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                          | ** ** | **2009**                         | ** ** | **2008**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                          | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)**                 | ** ** |
| Cash flows from operating activities:                                               |       |                             |       |                            |       |   |   |   |   |
| Net income                                                                          |       | $                                | 7,947      |                            | $          | 10,086 |   | $ | 22,167 |   | $ | 28,637 |   |
| Adjustments to reconcile net income to net cash  provided by: operating activities: |       |                             |       |                            |       |   |   |   |   |
| Depreciation and amortization                                                       |       | 2,120                            |       | 1,796                           |       | 6,110 |   | 4,763 |   |
| Amortization of other intangible assets                                             |       | 10                               |       | 9                               |       | 28 |   | 27 |   |
| Merger related stock expense                                                        |       | —                           |       | 3,675                           |       | — |   | 3,675 |   |
| Gain on sale of property and equipment                                              |       | (1,684                           | )          | (344                            | )          | (3,183 | ) | (724 | ) |
| Income from non-consolidated entities                                               |       | (1,440                           | )          | (1,474                          | )          | (5,343 | ) | (4,502 | ) |
| Non-consolidated entity distributions                                               |       | —                           |       | 2,754                           |       | 3,400 |   | 3,320 |   |
| Changes in assets and liabilities:                                                  |       |                             |       |                            |       |   |   |   |   |
| Restricted cash                                                                     |       | 1,790                            |       | (3,819                          | )          | 4,575 |   | (3,038 | ) |
| Accounts receivable                                                                 |       | 13,673                           |       | (210                            | )          | 9,016 |   | 29,822 |   |
| Costs and estimated earnings in excess of billings                                  |       | (1,499                           | )          | (3,923                          | )          | (1,352 | ) | (11,752 | ) |
| Prepaid expenses, inventory and other current  assets                               |       | 129                              |       | 597                             |       | 1,600 |   | 667 |   |
| Other assets                                                                        |       | 363                              |       | (320                            | )          | 247 |   | 564 |   |
| Accounts payable                                                                    |       | (8,862                           | )          | (2,880                          | )          | (16,479 | ) | (16,408 | ) |
| Billings in excess of costs and estimated earnings                                  |       | 5,728                            |       | 6,520                           |       | 373 |   | 18,600 |   |
| Accrued expenses and other current liabilities                                      |       | 1,862                            |       | 6,713                           |       | (233 | ) | 6,986 |   |
| Deferred income tax                                                                 |       | (586                             | )          | (2,769                          | )          | (582 | ) | (2,769 | ) |
| Other long-term liabilities                                                         |       | —                           |       | (1,315                          | )          | — |   | (1,286 | ) |
| Net cash provided (used) by operating activities                                    |       | 19,551                           |       | 15,096                          |       | 20,344 |   | 56,582 |   |
| Cash flows from investing activities:                                               |       |                             |       |                            |       |   |   |   |   |
| Purchase of property and equipment                                                  |       | (4,965                           | )          | (5,576                          | )          | (8,042 | ) | (9,241 | ) |
| Proceeds from sale of property and equipment                                        |       | 2,580                            |       | 437                             |       | 4,232 |   | 1,120 |   |
| Sale (purchase) of short-term investments                                           |       | 10,075                           |       | —                          |       | 10,020 |   | — |   |
| Advances to non-consolidated entities                                               |       | —                           |       | —                          |       | (1,036 | ) | — |   |
| Net cash provided (used) in investing activities                                    |       | 7,690                            |       | (5,139                          | )          | 5,174 |   | (8,121 | ) |
| Cash flows from financing activities:                                               |       |                             |       |                            |       |   |   |   |   |
| Proceeds from long-term debt                                                        |       | 10,871                           |       | —                          |       | 10,871 |   | — |   |
| Repayment of long-term debt                                                         |       | (16,246                          | )          | (1,607                          | )          | (20,202 | ) | (4,787 | ) |
| Repayment of capital leases                                                         |       | (489                             | )          | —                          |       | (1,446 | ) | — |   |
| Repayment of common stock                                                           |       | —                           |       | (3,331                          | )          | — |   | (3,331 | ) |
| Proceeds from issuance of common stock                                              |       | —                           |       | 34,472                          |       | — |   | 34,472 |   |
| Repurchase of warrants                                                              |       | —                           |       | —                          |       | (93 | ) | — |   |
| Dividends                                                                           |       | (812                             | )          | —                          |       | (2,373 | ) | — |   |
| Cash distributions to stockholders                                                  |       | —                           |       | (43,068                         | )          | (4,947 | ) | (61,086 | ) |
| Net cash provided (used) in financing activities                                    |       | (6,676                           | )          | (13,534                         | )          | (18,190 | ) | (34,732 | ) |
| Net change in cash and cash equivalents                                             |       | 20,565                           |       | (3,577                          | )          | 7,328 |   | 13,729 |   |
| Cash and cash equivalents at beginning of the  period                               |       | 59,781                           |       | 80,272                          |       | 73,018 |   | 62,966 |   |
| Cash and cash equivalents at end of the period                                      |       | $                                | 80,346     |                            | $          | 76,695 |   | $ | 80,346 |   | $ | 76,695 |   |

 

See Accompanying Notes toCondensed Consolidated Financial Statements

 

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**PRIMORISSERVICES CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)**

**(INTHOUSANDS)**

 

**SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION**

 
| ** **                                                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                 | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                 | ** ** | **2009**                         | ** ** | **2008**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                 | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)**                 | ** ** |
| **Cash paid during the period for:**                                       |       |                             |       |                            |       |   |   |   |   |
| Interest                                                                   |       | $                                | 398        |                            | $          | 498 |   | $ | 1,456 |   | $ | 1,705 |   |
| Income taxes                                                               |       | $                                | 5,093      |                            | $          | 2,552 |   | $ | 16,193 |   | $ | 3,006 |   |
| ** **                                                                 |       |                             |       |                            |       |   |   |   |   |
| **Non-cash activities**                                                    |       |                             |       |                            |       |   |   |   |   |
| Obligations incurred for the acquisition of  property and equipment leases |       | $                                | 1,700      |                            | $          | — |   | $ | 4,723 |   | $ | 7,075 |   |

 

See Accompanying Notes toCondensed Consolidated Financial Statements

 

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**PRIMORISSERVICES CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(In thousands, except per share amounts)**

**(Unaudited)**

 

**Note 1—Business Activity**

 

***Organization and operations*****—**Primoris Services Corporation and its wholly-owned subsidiaries ARB, Inc.(“ARB”), ARB Structures, Inc., Onquest, Inc., Born HeatersCanada, ULC, Cardinal Contractors, Inc., GML Coatings, LLC,Cardinal Mechanical, L.P., Stellaris, LLC, Juniper Rock Corporation, andARB Ecuador, Ltda., collectively the “Company”, are engaged in variousconstruction and engineering activities. The Company’s underground anddirectional drilling operations install, replace and repair natural gas, petroleum,telecommunications and water pipeline systems. The Company’s industrial, civiland engineering operations construct and provide maintenance services toindustrial facilities including power plants, petrochemical facilities, andother processing plants, and construct multi-level parking structures. TheCompany is incorporated in the State of Delaware and has its corporateheadquarters in Lake Forest, California.

 

**Note 2—Basis of Presentation**

 

***Interim consolidated financial statements*****—**The interim condensed consolidated financial statements for thethree-month and nine-month periods ended September 30, 2009 and 2008 havebeen prepared in accordance with Regulation S-X Rule 10-01 of theSecurities Exchange Act of 1934. As such, certain disclosures, which wouldsubstantially duplicate the disclosures contained in the Company’s latestaudited consolidated financial statements, have been omitted. This QuarterlyReport on Form 10-Q for the quarterly period ended September 30, 2009(the “Third Quarter 2009 Report”) should be read in concert with the Company’sAnnual Report on Form 10-K, filed on March 24, 2009, which containsthe Company’s audited consolidated financial statements for the year ended December 31,2008.

 

Theinterim financial information for the three-month periods and nine-monthperiods ended September 30, 2009 and 2008 is unaudited and has beenprepared on the same basis as the audited financial statements. However, thefinancial statements contained in this Third Quarter 2009 Report do not includeall of the information and disclosures required by accounting principlesgenerally accepted in the United States of America (“GAAP”) for auditedfinancial statements. In the opinion of management, this unaudited informationincludes all adjustments (consisting of normal recurring adjustments) necessaryfor the fair presentation of the interim financial information.

 

Wefollow GAAP set by the Financial Accounting Standards Board (“FASB”).  References to GAAP issued by the FASB in thefootnotes in this Quarterly Report on Form 10-Q are to the FASB AccountingStandards CodificationTM, sometimesreferred to as the Codification or ASC. The FASB finalized the Codification effective for periods ending on orafter September 15, 2009.  TheCodification does not change how the Company accounts for its transactions orthe nature of related disclosures made. However, when referring to guidance issued by the FASB, the Companyrefers to topics in the ASC rather than referring to the variousstandard-setting sources of the past.  Wehave updated references to GAAP in this Quarterly Report on Form 10-Q toreflect the guidance in the Codification.

 

Asrequired in the Topic ASC 855 “Subsequent Events”, for this Third Quarter 2009Report, we evaluated all significant events or transactions that occurred afterSeptember 30, 2009 up to November 12, 2009, the date we issued thesefinancial statements.  During thisperiod, we identified three subsequent events that are described in Note 15 “SubsequentEvents”.

 

***Use of Estimates*****—**The preparation of the Company’s condensed consolidated financialstatements in conformity with GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities as of the date of the condensedconsolidated financial statements, and the reported amounts of revenues andexpenses during the reporting periods. Actual results could materially differfrom those estimates. Significant estimates used in preparing these condensedconsolidated financial statements include estimated costs to completecontracts, which have a direct effect on gross profit, estimates for worker’scompensation self insurance reserves, fair value estimates for financial assetsand financial liabilities, reserves for bad debt and other accruals.

 

***Revenue recognition*****—**A number of factors relating to the business of the Company affect therecognition of contract revenue. The Company typically structures contracts asunit-price, time and material, fixed-price or cost plus fixed fee. Revenue isrecognized on the percentage-of-completion method for all fixed-pricecontracts. Under the percentage-of-completion method, estimated contract incomeand resulting revenue is generally accrued based on costs incurred to date as a

 

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percentage of totalestimated costs. Total estimated costs, and thus contract revenue and income,are impacted by changes in productivity, scheduling, the unit cost of labor,subcontracts, materials and equipment and other unforeseen events.Additionally, external factors such as weather, client needs, client delays inproviding permits and approvals, labor availability, governmental regulationand politics may affect the progress of a project’s completion and thus thetiming of revenue recognition. If a current estimate of total contract costindicates a loss on a contract, the projected loss is recognized in full.

 

Thecaption “*Costs and estimated earnings inexcess of billings*” represents the excess of contract revenues fromfixed-priced contracts recognized under the percentage-of-completion methodover billings to date. For those fixed-priced contracts in which billingsexceed contract revenues recognized to date, such excesses are included in thecaption “*Billings in excess of costs andestimated earnings*”.

 

Revenueson cost-plus and time and materials contracts are recognized as the relatedwork is completed.

 

Inaccordance with the terms of the contracts, certain retainage provisions arewithheld by customers until completion and acceptance of the contracts. Finalpayments of the majority of such amounts are expected to be receivable in thefuture periods.

 

**Note 3—Recent Accounting Pronouncements**

 

InJuly 2009, the FASB issued Financial Accounting Standards No. 168 “TheHierarchy of Generally Accepted Accounting Principles”, (“SFAS 168”) whichestablished the FASB Accounting Standards Codification (“Codification” or “ASC”)as the sole source of authoritative generally accepted accountingprinciples.  Pursuant to the provisionsof SFAS 168, now codified in ASC 105 “*Generally AcceptedAccounting Principles*”, the Company has updated references to GAAPin its financial statements issued for the period ended September 30,2009.  The adoption of ASC 105 did notimpact the Company’s financial position or results of operations.

 

InJune 2009, the FASB issued Statement of Financial Accounting Standards No. 167,“*Amendments to FASB Interpretation No. 46R*”(“SFAS 167”).  SFAS 167 amends theprevious FASB Interpretation No. 46 (Revised December 2003), “*Consolidation of Variable Interest Entities*,” (“FIN 46R”)and sets rules for determining whether to consolidate an entity that isinsufficiently capitalized or is not controlled through voting (or similarrights). These rules are based on an entity’s purpose and design and thecompany’s ability to direct the entity’s activities that most significantlyimpact the entity’s economic performance. SFAS 167 requires additional disclosures about the reporting company’sinvolvement with variable-interest entities and any significant changes in riskexposure due to that involvement as well as its affect on the company’s financial statements.  SFAS 167 will be effective January 1,2010.  The Company is currentlyevaluating the impact on the Company’s financial statements.

 

InAugust 2009, the FASB issued Accounting Standards Update No. 2009-05,“*Fair Value Measurements and Disclosures (Topic820), Measuring Liabilities at Fair Value*”.  This update provides clarification that incircumstances in which a quoted price in an active market for the identicalliability is not available, a reporting entity is required to measure fairvalue using one or more of the following techniques:  1) a valuation technique using quoted pricesand;  2) a valuation technique consistentwith ASC 820 “*Measuring Liabilities at Fair Value*”,such as a present value technique or a technique based on the amount thereporting entity would (a) pay to transfer the identical liability orwould (b) receive to enter into the identical liability.  This update applies to all entities thatmeasure liabilities at fair value within the scope of ASC 820 and is effectivefor financial statements issued for the period ended September 30,2009.  We adopted this update during thethird quarter ended September 30, 2009, and adoption did not result in amaterial impact on our financial statements.

 

**Note 4—Fair Value Measurements**

 

OnJanuary 1, 2008, the Company adopted ASC 820, “*Fair Value Measurements and Disclosures*”.  This ASC Topic defines fair value,establishes a framework for measuring fair value in GAAP, and requires certaindisclosures about fair value measurements. ASC 820 addresses fair value GAAP for financial assets and financialliabilities that are re-measured and reported at fair value at each reportingperiod and for non-financial assets and liabilities that are re-measured andreported at fair value on a recurring basis, which included goodwill and otherintangible assets for purposes of impairment assessments.

 

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

 

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Thefollowing table presents, for each of the fair value hierarchy levelsidentified under ASC 820, the Company’s financial assets that are required tobe measured at fair value at September 30, 2009 and December 31,2008:

 
| ** **                                            | ** ** | ** **                              | ** ** | **Fair Value Measurements at Reporting Date**                              | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **Amount  Recorded  on Balance  Sheet** | ** ** | **Quoted Prices  in Active Markets  for Identical Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
| **Assets as of September 30, 2009 - Unaudited:** |       |                                    |       |                                                                       |       |   |   |   |   |
| Cash and cash equivalents                             |       | $                                       | 80,346     |                                                                       | $          | 80,346 |   | — |   | — |   |
| Short-term investments                                |       | $                                       | 5,016      |                                                                       | $          | 5,016 |   | — |   | — |   |
| **Assets as of December 31, 2008:**              |       |                                    |       |                                                                       |       |   |   |   |   |
| Cash and cash equivalents                             |       | $                                       | 73,018     |                                                                       | $          | 73,018 |   | — |   | — |   |
| Short-term investments                                |       | $                                       | 15,036     |                                                                       | $          | 15,036 |   | — |   | — |   |

 

Inaddition to the assets listed in the table, other financial instruments of theCompany consist of accounts receivable, accounts payable and certain accruedliabilities.  Under ASC 820, the carryingvalue of the Company’s long-term debt approximates fair value based oncomparison with current prevailing market rates for loans of similar risks andmaturities. The Company’s other financial instruments generally approximatefair market value based on the short-term nature of these instruments.

 

**Note 5—Accounts Receivable**

 

Thefollowing is a summary of accounts receivable:

 
| ** **                                                                 | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                 | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| Contracts receivable, net of allowance for doubtful accounts of  $200 |       | $                            | 61,873     |                        | $          | 73,430 |   |
| Retention                                                                  |       | 19,766                       |       | 15,804                      |       |
|                                                                       |       | 81,639                       |       | 89,234                      |       |
| Due from affiliates                                                        |       | 1                            |       | 17                          |       |
| Other accounts receivable                                                  |       | 170                          |       | 1,575                       |       |
|                                                                       |       | $                            | 81,810     |                        | $          | 90,826 |   |

 

Amounts“due from affiliates” primarily relate to amounts due from related parties (seeNote 7, “*Equity Method Investments*”and Note 10, “*Related PartyTransactions*”) for the performance of construction contracts.Contract revenues earned from related parties were $9,472 and $5,803 for thethree months, and $15,083 and $15,144 for the nine months ended September 30,2009 and 2008, respectively.

 

AtSeptember 30, 2009 and December 31, 2008 amounts due from Otay MesaPower Partners totaling $726 and $1,340, respectively, are included incontracts receivable (see Note 7, “*EquityMethod Investments*”).

 

**Note 6—Costs and Estimated Earnings onUncompleted Contracts**

 

Costsand estimated earnings on uncompleted contracts consist of the following:

 
| ** **                                            | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| Costs incurred on uncompleted contracts               |       | $                            | 1,100,834  |                        | $          | 1,267,650 |   |
| Provision for estimated loss on uncompleted contracts |       | 567                          |       | 700                         |       |
| Gross profit recognized                               |       | 95,714                       |       | 95,608                      |       |
|                                                  |       | 1,197,115                    |       | 1,363,958                   |       |
| Less: billings to date                                |       | (1,247,783                   | )          | (1,415,605                  | )          |
|                                                  |       | $                            | (50,668    | )                           | $          | (51,647 | ) |

 

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Thisnet amount is included in the accompanying condensed consolidated balance sheetunder the following captions:

 
| ** **                                         | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                         | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| Costs and estimated earnings in excess of billings |       | $                            | 22,369     |                        | $          | 21,017 |   |
| Billings in excess of cost and estimated earnings  |       | (73,037                      | )          | (72,664                     | )          |
|                                               |       | $                            | (50,668    | )                           | $          | (51,647 | ) |

 

**Note 7—Equity Method Investments**

 

During2007, the Company established a joint venture, Otay Mesa Power Partners (“OMPP”),for the sole purpose of constructing a power plant near San Diego, California.The Company has a 40% interest in the project and accounts for its investmentin OMPP using the equity method. ARB, one of the subsidiaries of the Company,acts as one of OMPP’s primary subcontractors and has contracts with OMPPtotaling $48,681 as of September 30, 2009. ARB recognized $13,158 inrelated revenues in the nine months ended September 30, 2009 and $14,842in the nine months ended September 30, 2008. These revenues are includedin the contract revenues earned from related parties as stated in Note 5, “*Accounts Receivable*”.

 
| ** **                                      | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **Otay Mesa Power Partners—Joint Venture** |       |                         |       |                        |       |
| Balance sheet data                              |       |                         |       |                        |       |
| Assets                                          |       | $                            | 13,550     |                        | $          | 48,775 |   |
| Liabilities                                     |       | 5,813                        |       | 50,540                      |       |
| Net assets                                      |       | $                            | 7,737      |                        | $          | (1,765 | ) |
| Company’s equity investment in venture     |       | $                            | 2,479      |                        | $          | (706 | ) |

 
| ** **                        | ** ** | **Three  months ended September 30** | ** ** | **Nine  months ended September 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | **2009**                                  | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                        | ** ** | **(Unaudited)**                           | ** ** | **(Unaudited)**                           | ** ** |
| Earnings data:                    |       |                                      |       |                                      |       |   |   |   |   |
| Revenue                           |       | $                                         | 19,229     |                                      | $          | 29,261 |   | $ | 97,615 |   | $ | 77,437 |   |
| Gross profit                      |       | $                                         | 2,439      |                                      | $          | 3,622 |   | $ | 17,997 |   | $ | 10,946 |   |
| Earnings before taxes             |       | $                                         | 2,439      |                                      | $          | 3,686 |   | $ | 18,002 |   | $ | 11,254 |   |
| Company’s equity in earnings |       | $                                         | 1,500      |                                      | $          | 1,474 |   | $ | 6,585 |   | $ | 4,501 |   |

 

OMPPdistributed $8,500 to its equity holders during the nine months ended September 30,2009, of which the Company’s share was $3,400. The OMPP agreement states thatdistributions made prior to the completion of the contract are consideredadvances on account of the related partner’s share of calculated profits asdetermined at the completion of the underlying contract. The deficit shown inthe table above due to the excess distributions received as of December 31,2008 was included in accrued expenses on the Company’s condensed consolidatedbalance sheet.

 

TheCompany has a 49% interest in ARB Arendal, SRL de CV (“ARB Arendal”), andaccounts for this investment under the equity method. ARB Arendal engages inconstruction activities in Mexico. Because of the uncertainty on the outcome ofthe negotiations of ARB Arendal with a major customer in Mexico, the Companydetermined there was an other than temporary impairment of its investment inand advances to ARB Arendal.  The Companywrote down the investment to $0 as of December 31, 2007, and has reservedadvances of $1,036 made during the nine months ended September 30, 2009and has not recognized any earnings for the three and nine months ended September 30,2009 and 2008.

 

TheCompany purchased a 49% interest in All Day Electric (“All Day”) in December 2008for $500 and accounts for this investment under the equity method. All Dayengages in electrical construction activities mainly in NorthernCalifornia.  The Company’s equity inearnings was a loss of $ 60 for the three months ended September 30, 2009and a loss of $206 for the nine months ended September 30, 2009.  This resulted in a net investment in All Dayof $294 as of September 30, 2009.

 

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**Note 8—Accounts Payable and Accrued Liabilities**

 

AtSeptember 30, 2009 and December 31, 2008, accounts payable includesretentions of approximately $8,499 and $7,741, respectively, due to subcontractors,which have been retained pending contract completion and customer acceptance ofjobs.

 

Thefollowing is a summary of accrued expenses and other current liabilities:

 
| ** **                                              | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                              | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| Payroll and related employee benefits                   |       | $                            | 11,437     |                        | $          | 6,981 |   |
| Insurance, including self-insurance reserves            |       | 8,920                        |       | 9,994                       |       |
| Corporate income taxes and other taxes                  |       | 938                          |       | 2,807                       |       |
| Earn-out liability                                      |       | —                       |       | 615                         |       |
| Provision for estimated losses on uncompleted contracts |       | 567                          |       | 700                         |       |
| Accrued leases and rents                                |       | 363                          |       | 917                         |       |
| Accrued overhead cost                                   |       | 843                          |       | 1,521                       |       |
| OMPP liability                                          |       | —                       |       | 706                         |       |
| Other                                                   |       | 2,060                        |       | 1,826                       |       |
|                                                    |       | $                            | 25,128     |                        | $          | 26,067 |   |

 

**Note 9—Credit Arrangements**

 

InMarch 2007, the Company entered into a new revolving line of creditagreement payable to a bank group with an interest rate of prime or at LIBORplus an applicable margin. The revolving line is secured by substantially allthe assets of the Company. The Company can borrow up to $30,000 based on adefined rate of interest, and all amounts borrowed under the line of credit aredue March 31, 2010. There were no amounts outstanding under the line ofcredit at September 30, 2009 or December 31, 2008, other than lettersof credit issued in the amounts of $677 and $677, respectively, which reducesthe amount available on the revolving line. This revolving line of credit agreement was terminated in October 2009.  See Note 15 “Subsequent Events”.

 

InJanuary 2008, the Company entered into a credit facility (as amended) forpurposes of issuing commercial letters of credit in Canada, for an amount up to10 million Canadian dollars. The credit facility with a Canadian bank isfor a term of five years, and provides for an annual fee of 1% for anyissued and outstanding commercial letters of credit. Letters of credit can bedenominated in either Canadian or U.S. dollars. As of September 30, 2009and December 31, 2008, total commercial letters of credit outstandingunder this credit facility totaled $4,821 and $4,981 (in U.S. dollars),respectively.

 

During the third quarter2009, the Company sold certain equipment and paid down a total of $17.6 millionof the underlying construction equipment notes payable.  Additionally, the Company refinanced certainequipment with notes payable totaling $10.9 million.  The notes are payable over a five year periodand include interest at 5.5% to 5.9% per annum. Monthly principal and interest payments are due in the amount of $209,with the final payment due in September 2014.  The notes are secured by the related constructionequipment.

 

**Note 10—Related Party Transactions**

 

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

 

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

 

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TheCompany leases properties from SIGI located in Bakersfield, Pittsburg and SanDimas, California, as well as a property in Pasadena, Texas. During the ninemonths ended September 30, 2009 and 2008, the Company paid $613 and $561,respectively, in lease payments to SIGI for the use of these properties. Priorto the Merger, the Company also leased certain construction and transportationequipment from SIGI. This equipment was purchased from SIGI on the closing dateof the Merger and the equipment leases were terminated.

 

TheCompany leased an airplane from SIGI for business use. During the nine monthsended September 30, 2009 and 2008, the Company paid $70 and $179,respectively, in lease payments to SIGI for use of the airplane. This leasecommenced on May 1, 2004 and was terminated on March 31, 2009 whenSIGI sold the airplane.

 

TheCompany leases certain property from Roger Newnham, a manager at the subsidiaryBorn Heaters Canada. The property is located in Calgary, Canada. This lease wasentered into on similar terms as negotiated with an independent third party.During the nine-month period ended September 30, 2009 and 2008, theCompany paid $256 and $224, respectively, in lease payments to Mr. Newnhamfor the use of this property. The three-year lease for the Calgary propertycommenced in October 2005 and was renewed and extended until September 2010.

 

**Note 11—Income Taxes and Pro Forma Net Income**

 

*IncomeTaxes*

 

Theeffective tax rate for the three and nine months ended September 30, 2009was 37.0% and 38.0%, respectively. The rate for both the three months and ninemonths ended September 30, 2009 differs from the U.S. federal statutoryrate of 35% due primarily to state income tax and offset by a 2% impact of the “DomesticProduction Activity Deduction”.

 

Todetermine its quarterly provision for income taxes, the Company uses anestimated annual effective tax rate, which is based on expected annual income,statutory tax rates and tax planning opportunities available in the variousjurisdictions to which the Company is subject. Significant or unusual items areseparately recognized in the quarter in which they occur and can be a source ofvariability in the effective tax rate from quarter to quarter.

 

Incometaxes are accounted for under the asset and liability method. Deferred taxassets and liabilities are recognized for the future tax consequences oftemporary differences between the financial reporting basis and tax basis ofthe Company’s assets and liabilities. Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled. The effect on deferred tax assets and liabilities of a change in taxrates is recognized in income in the period that includes the enactment date.

 

Asof September 30, 2009 and December 31, 2008, there were no recordedliabilities related to unrecognized tax benefits. Management does notanticipate that there will be a material change in the balance of unrecognizedtax benefits within the next 12 months.

 

TheCompany recognizes interest and penalties related to uncertain tax positions inincome tax expense.

 

OnJuly 31, 2008, we completed a merger (“Merger”) of Rhapsody AcquisitionCorp. and Primoris Corporation, a privately held Nevada corporation (“FormerPrimoris”).  Prior to the Merger, FormerPrimoris elected to be taxed in accordance with Subchapter S of the UnitedStates Internal Revenue Code (“Code”) and similar codes for certainstates.  While this election was ineffect, income was taxed for federal income tax purposes to the stockholders ofFormer Primoris. Accordingly, no provision for federal income tax was requiredby Former Primoris.  As a result, theeffective tax rate for the nine months ended September 30, 2008 was7.1%.  The effective tax rate for thethree months ended September 30, 2008, now taxed at corporate rates fortwo of the three months, was 14.7%.  Thelow rate for this three-month period included the impact of a $3.0 million taxbenefit for establishing our beginning deferred tax assets.

 

*Pro FormaNet Income*

 

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

 

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**Note 12—Dividends and Earnings Per Share**

 

TheCompany declared cash dividends during the year on March 16, 2009, May 19,2009 and August 7, 2009.  Eachdeclaration represented a cash dividend of $0.025 per common share, payable tostockholders of record as of the end of each quarterly period.  The first quarterly dividend was paid on April 15,2009, the second quarterly dividend was paid on July 15, 2009 and the thirdquarterly dividend is payable to stockholders of record as of September 30,2009.  The third quarterly dividend,totaling $812 was paid on October 15, 2009.

 

Thetable below presents the computation of basic and diluted earnings per sharefor the three and nine months ended September 30, 2009 and 2008:

 
| ** **                                                            | ** ** | **Three months  ended September 30,** | ** ** | **Nine months  ended September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                            | ** ** | **2009**                                             | ** ** | **2008**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                            | ** ** | **(Unaudited)**                                      | ** ** | **(Unaudited)**                                     | ** ** |
| ** **                                                            | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Numerator:**                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Net income                                                            |       | $                                                    | 7,947      |                                                | $          | 10,086 |   | $ | 22,167 |   | $ | 28,637 |   |
| Net income (pro forma – 2008) – (1)                         |       | $                                                    | 7,947      |                                                | $          | 7,114 |   | $ | 22,167 |   | $ | 18,554 |   |
| **Denominator:**                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average shares for computation of basic earnings per share   |       | 32,477                                               |       | 27,824                                              |       | 31,699 |   | 25,010 |   |
|                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Dilutive effect of warrants and units (2)                             |       | 1,571                                                |       | 1,581                                               |       | 650 |   | 531 |   |
|                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Dilutive effect of contingently issuable shares (3)                   |       | —                                               |       | 1,658                                               |       | 779 |   | 552 |   |
|                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average shares for computation of diluted earnings per share |       | 34,048                                               |       | 31,063                                              |       | 33,128 |   | 26,093 |   |
|                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Basic earnings per share                                              |       | $                                                    | 0.24       |                                                | $          | 0.36 |   | $ | 0.70 |   | $ | 1.15 |   |
|                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Diluted earnings per share                                            |       | $                                                    | 0.23       |                                                | $          | 0.32 |   | $ | 0.67 |   | $ | 1.10 |   |
|                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Basic earnings per share (pro forma – 2008) – (1)           |       | $                                                    | 0.24       |                                                | $          | 0.26 |   | $ | 0.70 |   | $ | 0.74 |   |
|                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Diluted earnings per share (pro forma – 2008) – (1)         |       | $                                                    | 0.23       |                                                | $          | 0.23 |   | $ | 0.67 |   | $ | 0.71 |   |

 

----

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

 

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

 

(3)                Represents the dilutive effect of 2,500,025shares of Company stock that were issued to the Former Primoris stockholders onMarch 17, 2009. These shares were to be issued contingent upon attainingcertain defined performance targets in 2008. The 2008 targets were met in September 2008 and were included aspart of the diluted shares outstanding. Subsequent to the shares being issuedon March 17, 2009, the shares were included as part of the basic weightedaverage shares outstanding. No dilutive impact is included for an additional2,499,975 shares of stock, which may be issued in 2010, contingent upon meetinga defined financial performance target for 2009.  The Company has achieved approximately 90% ofthe 2009 performance target as of September 30, 2009.

 

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**Note 13—Commitments and Contingencies**

 

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

 

Certainof these leases are with related entities, which share similar ownership bystockholders, officers, and directors with the Company. The leases areclassified as operating leases in accordance with ASC 840 “*Leases*”.

 

Totallease expense during the three and nine months ended September 30, 2009amounted to approximately $1,481 and $4,775, respectively, including amountspaid to related parties of $303 and $868 respectively. Total lease expenseduring the three and nine months ended September 30, 2008 amounted toapproximately $2,165 and $5,965, including amounts paid to related parties of$843 and $1,364 respectively.

 

***Letters of credit****—*At September 30,2009 and December 31, 2008, the Company had letters of credit outstandingof approximately $5,498 and $5,658, respectively.

 

***Litigation—***The Company issubject to claims and legal proceedings arising out of its business. Managementbelieves that the Company has meritorious defenses to such claims. Althoughmanagement is unable to ascertain the ultimate outcome of such matters, afterreview and consultation with counsel and taking into consideration relevantinsurance coverage and related deductibles, management believes that theoutcome of these matters will not have a materially adverse effect on theconsolidated financial position of the Company.

 

***Bonding—***As of September 30,2009 and December 31, 2008, the Company had bid and payment/performancebonds issued and outstanding totaling $207,381 and $353,008, respectively.

 

**Note 14—Reportable Operating Segments**

 

TheCompany operates in two reportable segments: Construction Services andEngineering. In the following tables, all intersegment revenues and grossprofit have been eliminated, which were immaterial.

 

Thefollowing table sets forth the Company’s revenue by segment for the threemonths ended September 30, 2009 and 2008:

 
| ** **            | ** ** | **For the three months ended September 30,** | ** ** |
|-----------------------|------------|---------------------------------------------------|------------|
| ** **            | ** ** | **2009**                                          | ** ** | **2008** | ** ** |
| **Segment**           | ** ** | **Revenue**                                       | ** ** | **% of  Segment  Revenue** | ** ** | **Revenue** | ** ** | **% of  Segment  Revenue** | ** ** |
| ** **            | ** ** | **(Unaudited)**                                   | ** ** |
| Construction Services |       | $                                                 | 99,643     |   | 89.4 | % | $ | 116,807 |   | 79.6 | % |
| Engineering           |       | 11,848                                            |       | 10.6 | % | 29,930 |   | 20.4 | % |
| Total                 |       | $                                                 | 111,491    |   | 100.0 | % | $ | 146,737 |   | 100.0 | % |

 

Thefollowing table sets forth the Company’s revenue by segment for the nine monthsended September 30, 2009 and 2008:

 
| ** **            | ** ** | **For the nine months ended September 30,** | ** ** |
|-----------------------|------------|--------------------------------------------------|------------|
| ** **            | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| **Segment**           | ** ** | **Revenue**                                      | ** ** | **% of  Segment  Revenue** | ** ** | **Revenue** | ** ** | **% of  Segment  Revenue** | ** ** |
| ** **            | ** ** | **(Unaudited)**                                  | ** ** |
| Construction Services |       | $                                                | 323,152    |   | 88.0 | % | $ | 383,504 |   | 83.6 | % |
| Engineering           |       | 43,977                                           |       | 12.0 | % | 75,068 |   | 16.4 | % |
| Total                 |       | $                                                | 367,129    |   | 100.0 | % | $ | 458,572 |   | 100.0 | % |

 

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Thefollowing table sets forth the Company’s gross profit by segment for the threemonths ended September 30, 2009 and 2008:

 
| ** **            | ** ** | **For the three months ended September 30,** | ** ** |
|-----------------------|------------|---------------------------------------------------|------------|
| ** **            | ** ** | **2009**                                          | ** ** | **2008** | ** ** |
| **Segment**           | ** ** | **Gross  Profit**                                 | ** ** | **% of  Segment  Revenue** | ** ** | **Gross  Profit** | ** ** | **% of  Segment  Revenue** | ** ** |
| ** **            | ** ** | **(Unaudited)**                                   | ** ** |
| Construction Services |       | $                                                 | 17,754     |   | 17.8 | % | $ | 19,333 |   | 16.6 | % |
| Engineering           |       | 1,322                                             |       | 11.2 | % | 1,770 |   | 5.9 | % |
| Total                 |       | $                                                 | 19,076     |   | 17.1 | % | $ | 21,103 |   | 14.4 | % |

 

Thefollowing table sets forth the Company’s gross profit by segment for the ninemonths ended September 30, 2009 and 2008:

 
| ** **            | ** ** | **For the nine months ended September 30,** | ** ** |
|-----------------------|------------|--------------------------------------------------|------------|
| ** **            | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| **Segment**           | ** ** | **Gross  Profit**                                | ** ** | **% of  Segment  Revenue** | ** ** | **Gross  Profit** | ** ** | **% of  Segment  Revenue** | ** ** |
| ** **            | ** ** | **(Unaudited)**                                  | ** ** |
| Construction Services |       | $                                                | 50,429     |   | 15.6 | % | $ | 47,332 |   | 12.3 | % |
| Engineering           |       | 4,298                                            |       | 9.8 | % | 4,618 |   | 6.2 | % |
| Total                 |       | $                                                | 54,727     |   | 14.9 | % | $ | 51,950 |   | 11.3 | % |

 

Revenuesas presented below are based on the geographic region in which the contractingsubsidiary is located and not the location of the client or job site:

 
|          |       |                                             |       |              |       |             |       |              |       |                         |       |                        |       |   |   |    |   |
|---------------|------------|--------------------------------------------------|------------|-------------------|------------|------------------|------------|-------------------|------------|------------------------------|------------|-----------------------------|------------|--------|--------|---------|--------|
| ** **    | ** ** | **For the nine months ended September 30,** | ** ** | ** **        | ** ** | ** **       | ** ** |
| ** **    | ** ** | **2009**                                         | ** ** | **2008**          | ** ** | **Total Assets** | ** ** |
| **Country:**  | ** ** | **Revenue**                                      | ** ** | **% of  Revenue** | ** ** | **Revenue**      | ** ** | **% of  Revenue** | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|          |       | **(Unaudited)**                                  |       | **(Unaudited)**   |       |             |       |
| United States |       | $                                                | 332,952    |              | 90.7       | %                | $          | 441,417           |       | 96.3                         | %          | $                           | 225,311    |   | $      | 231,642 |   |
| Canada        |       | 16,819                                           |       | 4.6               | %          | 14,207           |       | 3.1               | %          | 12,309                       |       | 12,514                      |       |
| Ecuador       |       | 17,358                                           |       | 4.7               | %          | 2,948            |       | 0.6               | %          | 6,364                        |       | 8,056                       |       |
|          |       | $                                                | 367,129    |              | 100.0      | %                | $          | 458,572           |       | 100.0                        | %          | $                           | 243,984    |   | $      | 252,212 |   |

 

**Note 15—SubsequentEvents**

 

1.                                       On October 14, 2009, the Companyannounced that it had acquired the assets of Cravens Partners, Ltd, aTexas-based provider of civil and utility infrastructure constructionservices.  The acquisition was completedfor a combination of cash and Company common stock.  Additionally, the Company entered into anincentive program that could provide future earn-out payments based onattaining specified financial goals for the 3-year period 2009 to 2011.  In 2008, Cravens Partners generated revenuesof approximately $15 million and operated profitably.  Primoris expects the acquisition to beimmediately accretive to earnings.

 

Followingthe completion of the acquisition, the Company created a wholly-ownedsubsidiary named Cravens Services, Inc. Services of the new acquisition include excavation, undergroundutilities, drainage channels, facility upgrades, detention ponds andtelecommunications infrastructure projects.

 

2.                                       On October 28, 2009, we paid allamounts due and owing under an existing line of credit and terminated the lineof credit agreement.  In March, 2007, wehad entered into the revolving line of credit agreement payable to Bank ofAmerica, N.A. (successor by merger to LaSalle Bank National Association) withan interest rate of prime or at LIBOR plus an applicable margin. The revolvingline was secured by substantially all of our assets. Under the line of creditagreement, we 

 

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were able to borrow up to $30.0 million, and all amounts borrowed underthe line of credit were to be due March 31, 2010. The line of creditagreement contained restrictive covenants, including, among others,restrictions on investments, minimum working capital and tangible net worthrequirements. We were in compliance, or obtained a waiver, with all restrictivecovenants during and as of the nine months ended September 30, 2009.  None of these covenants were consideredrestrictive to our business.

 

3.                                       On October 28, 2009, we entered intoa Loan and Security Agreement (the “Agreement”) with The PrivateBank and TrustCompany (the “Lender”) for a revolving line of credit in the total aggregateamount of $35.0 million. Under the Agreement, the Lender has agreed to make tworevolving loans to us:

 

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

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

 

The Lender has agreed to issue for our account lettersof credit of up to $15.0 million, under Revolving Loan A.  The principal amount of each of RevolvingLoan A and Revolving Loan B will bear interest at either: (i) LIBOR plusan applicable margin as specified in the Agreement, or (ii) the prime rateannounced by the Lender plus an applicable margin as specified in theAgreement. The principal amount of any loan bearing interest at LIBOR plus anapplicable margin may not be prepaid in whole or in part at any time. However,if any such loan is prepaid, we will be subject to certain prepaymentpenalties. There is no prepayment penalty for any loan bearing interest at theprime rate announced by the Lender plus an applicable margin.

 

All loans made by the Lenderunder the Agreement are secured by certain of our assets, including, amongothers, our cash, inventory, goods, equipment (excluding equipment subject tocertain permitted liens) and accounts receivable. The Agreement also containsvarious restrictive covenants, including, among others, restrictions oninvestments, capital expenditures, minimum tangible net worth and debt servicecoverage requirements.  Certain of oursubsidiaries have executed joint and several guaranties in favor of the Lenderfor all amounts under the Agreement.

 

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**PRIMORIS SERVICES CORPORATION**

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS**

 

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

 

***Forward Looking Statements***

 

*ThisQuarterly Report on Form 10-Q contains forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended (“Exchange Act”), which aresubject to the “safe harbor” created by those sections. Forward-lookingstatements include information concerning our possible or assumed futureresults of operations, business strategies, financing plans, competitiveposition, industry environment, potential growth opportunities, the effects ofregulation and the economy, generally. Forward-looking statements include allstatements 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 similarexpressions.*

 

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

 

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

 

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

 

**Introduction**

 

Primoris ServicesCorporation is a holding company with various subsidiaries that cumulativelyform a diversified engineering and construction company providing a widerange of construction, fabrication, maintenance, replacement and engineeringservices to major public utilities, petrochemical companies, energy companies,municipalities and other customers.

 

We install, replace, repairand rehabilitate natural gas, refined product, telecommunications, water andwastewater pipeline systems, and also construct mechanical facilities and otherstructures, including power plants, petrochemical facilities, refineries andparking structures. In addition, we provide maintenance services, includinginspection, 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 furnacesprimarily used in refinery applications. Through our subsidiary CardinalContractors, Inc., we construct water and wastewater facilities primarilyin Florida. A substantial portion of our activities are performed in theWestern United States, and more specifically in California. In addition, wehave strategic presences in Florida, Texas, Latin America and Canada.

 

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

 

The Merger was accounted foras a reverse acquisition. Under this method of accounting, Rhapsody was treatedas the “acquired” company for financial reporting purposes. This determinationwas primarily based on the operations and management of Former Primoriscomprising the ongoing operations and management of the Company after theMerger. In 

 

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accordance with guidance applicable to thesecircumstances, the Merger was considered to be a capital transaction insubstance. Accordingly, for accounting purposes, the Merger was treated as theequivalent of Former Primoris issuing stock for Rhapsody’s net assets,accompanied by a recapitalization. Our pre-Merger net assets are stated athistorical cost, with no goodwill or other intangible assets recorded.

 

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

 

We provide services in thefollowing two segments:

 

***Construction Services Segment:***

 

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

 

·                  Providinginstallation of underground pipeline, cable and conduits for entities primarilyin the petroleum, petrochemical and water industries;

 

·                  Providinginstallation and maintenance of industrial facilities for entities in thepetroleum, petrochemical and water industries; and

 

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

 

***Engineering Segment:***

 

The Engineering segmentspecializes in designing, supplying and installing high-performance furnaces,heaters, burner management systems and related combustion and processtechnologies for clients in the oil refining, petrochemical and powergeneration industries. It also furnishes turnkey project management with thetechnical expertise and the ability to deliver custom engineering solutionsworldwide.

 

**Material trends and uncertainties**

 

We generate our revenue fromboth large and small construction and engineering projects. The award of thesecontracts is dependent on a number of factors, many of which are not within ourcontrol. Business in the construction industry is cyclical. We depend in parton spending by companies in the energy, and oil and gas industries, as well ason municipal water and wastewater customers. Over the past several years, bothour Construction Services and Engineering segments have benefited from demandfor more efficient and more environmentally friendly energy and powerfacilities and from the past strength of the oil and gas industry. Economicfactors outside of our control may affect the amount and size of contracts inany particular period.

 

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

 

**Seasonality and cyclicality**

 

Our operating results can besubject to seasonal and cyclical variations. Weather, particularly rain, canimpact our ability to perform construction work. Our clients’ budget cycleshave an impact on the timing of project awards. Accordingly, our financialcondition and operating results may vary from quarter-to-quarter. Absent theawarding and construction of a large project, revenues tend to be lowest in ourfirst fiscal quarter.

 

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**Results of operations**

 

Revenues,gross profit, operating income and net income for the three and nine monthsended September 30, 2009 and 2008 were as follows:

 
| ** **                                   | ** ** | **Three Months Ended September 30,**   | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                   | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| ** **                                   | ** ** | **(Thousands,  except per share  amounts)** | ** ** | **% of  Revenue** | ** ** | **(Thousands,  except per share  amounts)** | ** ** | **% of  Revenue** | ** ** |
| Revenues                                     |       | $                                           | 111,491    |   | 100.0 | % | $ | 146,737 |   | 100.0 | % |
| Gross profit                                 |       | 19,076                                      |       | 17.1 | % | 21,103 |   | 14.4 | % |
| Selling, general and administrative expenses |       | 7,423                                       |       | 6.6 | % | 7,039 |   | 4.8 | % |
| Merger related stock expense                 |       | —                                      |       | 0.0 | % | 3,675 |   | 2.5 | % |
| Operating income                             |       | 11,653                                      |       | 10.5 | % | 10,389 |   | 7.1 | % |
| Other income (expense)                       |       | 961                                         |       | 0.8 | % | 1,431 |   | 1.0 | % |
| Income before income taxes                   |       | 12,614                                      |       | 11.3 | % | 11,820 |   | 8.1 | % |
| Income tax provision (1)                     |       | (4,667                                      | )          | (4.2 | )% | (1,734 | ) | (2.2 | )% |
| Net income                                   |       | $                                           | 7,947      |   | 7.1 | % | $ | 10,086 |   | 6.9 | % |
| Net income per share:                        |       |                                        |       |   |   |   |   |   |   |
| Basic                                        |       | $                                           | 0.24       |   |   |   | $ | 0.36 |   |   |   |
| Diluted                                      |       | $                                           | 0.23       |   |   |   | $ | 0.32 |   |   |   |
| Weighted average common shares outstanding   |       |                                        |       |   |   |   |   |   |   |
| Basic                                        |       | 32,477                                      |       |   |   | 27,824 |   |   |   |
| Diluted                                      |       | 34,048                                      |       |   |   | 31,063 |   |   |   |

 
| ** **                                   | ** ** | **Nine Months Ended September 30,**    | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                   | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| ** **                                   | ** ** | **(Thousands,  except per share  amounts)** | ** ** | **% of  Revenue** | ** ** | **(Thousands,  except per share  amounts)** | ** ** | **% of  Revenue** | ** ** |
| Revenues                                     |       | $                                           | 367,129    |   | 100.0 | % | $ | 458,572 |   | 100.0 | % |
| Gross profit                                 |       | 54,727                                      |       | 14.9 | % | 51,950 |   | 11.3 | % |
| Selling, general and administrative expenses |       | 23,425                                      |       | 6.4 | % | 21,662 |   | 4.7 | % |
| Merger related stock expense                 |       | —                                      |       | 0.0 | % | 3,675 |   | 0.8 | % |
| Operating income                             |       | 31,302                                      |       | 8.5 | % | 26,613 |   | 5.8 | % |
| Other income (expense)                       |       | 4,473                                       |       | 1.2 | % | 4,212 |   | 0.9 | % |
| Income before income taxes                   |       | 35,775                                      |       | 9.7 | % | 30,825 |   | 6.7 | % |
| Income tax provision (1)                     |       | (13,608                                     | )          | (3.7 | )% | (2,188 | ) | (0.8 | )% |
| Net income                                   |       | $                                           | 22,167     |   | 6.0 | % | $ | 28,637 |   | 6.2 | % |
| Net income per share:                        |       |                                        |       |   |   |   |   |   |   |
| Basic                                        |       | $                                           | 0.70       |   |   |   | $ | 1.15 |   |   |   |
| Diluted                                      |       | $                                           | 0.67       |   |   |   | $ | 1.10 |   |   |   |
| Weighted average common shares outstanding   |       |                                        |       |   |   |   |   |   |   |
| Basic                                        |       | 31,699                                      |       |   |   | 25,010 |   |   |   |
| Diluted                                      |       | 33,128                                      |       |   |   | 26,093 |   |   |   |

 

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(1)             As discussed in “Provisionfor income taxes” and “Pro forma net income data” below, we made a change inour tax status from that of Subchapter S of the Internal Revenue Code (“S-Corporation”)to that of Subchapter C of the Internal Revenue Code as part of the Merger in July 2008.  After the Merger, the combined entity becamesubject to federal and state income tax in the jurisdictions in which we dobusiness.  Prior to the Merger, as anS-Corporation, we had no provision for federal income tax and only minimalprovision for state income tax.

 

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Revenue for the three andnine months ended September 30, 2009 were $111.5 and $367.1  million, respectively, a decrease of $35.2and $91.4 million, or 24.0% and 19.9%, respectively, compared to the sameperiods in 2008. During fiscal year 2008, we attained record levels of revenueand operating income, and have seen a decrease in both the ConstructionServices and Engineering segments during the three and nine months ended September 30,2009, which is in part a result of  thecurrent economic issues in the marketplace, especially in the UnitedStates.  The decrease in revenuescompared to the same period a year ago were due primarily to decreased revenuesin refining sector projects and water and wastewater sector projects and theperformance of an unusually large engineering project during 2008, partiallyoffset by increased revenue in cable and conduit projects, and from our Ecuadorsubsidiary.  We continue to expect thatrevenues for the remainder of 2009 will decline from the record levels achievedin the prior year.

 

Gross profit decreased by$2.0 million or 9.6%, and increased by $2.8 million, or 5.4%, for thethree and nine months ended September 30, 2009 compared to the same periodsin 2008. The decrease in profit for the three months ended September 30,2009, compared with the same period in 2008 was primarily due to decreasedrevenue and the related profits in refining, international and engineeringprojects.  The increase in profit for thenine months ended September 30, 2009 compared to the same period in 2008,was due to increased profit margins in underground, cable and conduit andindustrial projects, partially offset by decreased profitability in theengineering and refining sector projects and third party equipment rentals.

 

Gross profit as a percent ofrevenues increased to 17.1% and 14.9% during the three and nine months ended September 30,2009 compared to 14.4% and 11.3% in the same periods of 2008.  Overall, the gross profit margins wereimpacted primarily from the Construction Services segment, reflecting a shiftin business mix from lower margin industrial projects in the refining sector,to higher margin industrial projects in the petroleum and underground power sectors,during the three and nine months ended September 30, 2009.

 

**Geographic areas financial information**

 

Revenue by geographic areafor the nine months ended September 30, 2009 and 2008 was as follows:

 
| ** **     | ** ** | **Nine Months  Ended September 30,** | ** ** |
|----------------|------------|-------------------------------------------|------------|
| ** **     | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| ** **     | ** ** | **(Thousands)**                           | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
| ***Country:*** |       |                                      |       |   |   |   |   |   |   |
| United States  |       | $                                         | 332,952    |   | 90.7 | % | $ | 441,417 |   | 96.3 | % |
| Canada         |       | 16,819                                    |       | 4.6 | % | 14,207 |   | 3.1 | % |
| Ecuador        |       | 17,358                                    |       | 4.7 | % | 2,948 |   | 0.6 | % |
| Total revenue  |       | $                                         | 367,129    |   | 100.0 | % | $ | 458,572 |   | 100.0 | % |

 

Note that revenue isattributed to the countries based on our reporting subsidiary entity thatrecords the transaction and not the location of the client or job site.

 

**Segment Results**

 

The following discussiondescribes the significant factors contributing to the results of our twooperating segments.

 

*Construction Services Segment*

 

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

 
| ** **                  | ** ** | **Three  Months Ended September 30,** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|
| ** **                  | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| ** **                  | ** ** | **(Thousands)**                            | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
| ***Construction Services*** |       |                                       |       |   |   |   |   |   |   |
| Revenue                     |       | $                                          | 99,643     |   |   |   | $ | 116,807 |   |   |   |
| Gross profit                |       | $                                          | 17,754     |   | 17.8 | % | $ | 19,333 |   | 16.6 | % |

 
| ** **                  | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| ** **                  | ** ** | **(Thousands)**                           | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
| ***Construction Services*** |       |                                      |       |   |   |   |   |   |   |
| Revenue                     |       | $                                         | 323,152    |   |   |   | $ | 383,504 |   |   |   |
| Gross profit                |       | $                                         | 50,429     |   | 15.6 | % | $ | 47,332 |   | 12.3 | % |

 

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Revenue for the ConstructionServices segment decreased by $17.2 million and $60.4 million, or 14.7% and15.7%, respectively, for the three and nine months ended September 30,2009, compared to the same periods in 2008. These revenue decreases were dueprimarily to reduced revenues for projects in the refining and water andwastewater sectors compared to the same period in 2008. The decline in refiningand water and wastewater revenues in the nine months ended September 30,2009 were partially offset by increased revenue of $32.4 million inunderground projects, including pipeline, cable and conduit projects,reflecting significant work begun at the end of 2008 and early 2009. Revenuegenerated by our subsidiary in Ecuador for the nine months ended September 30,2009, increased by $14.4 million due to two ongoing underground projectsfor the Ecuadorian national oil company, expected to be complete in the firstquarter of 2010.

 

The Construction Servicessegment gross profit decreased by $1.6 million, or 8.2% for the threemonths ended September 30, 2009, compared to the same period of 2008.  This decrease was due to lower revenue volumein refining projects, equipment rental revenue and a loss incurred on an undergroundproject in Ecuador, partially offset by higher margins and volume in the cableand conduit area and oil and gas pipeline projects.  The gross profit increased $3.1 million or6.5% for the nine months ended September 30, 2009, compared for the sameperiod in 2008. The increase resulted primarily from improved margins as apercent of revenue on completed or near completed projects.  The gross profit margins increased primarilydue to a shift in business mix from lower margin industrial projects in therefining sector, to higher margin industrial projects in the petroleum andpower sectors, during the nine months ended September 30, 2009.

 

*Engineering Segment*

 

Revenue and gross profit forthe Engineering segment for the three months and nine months ended September 30,2009 and 2008 were as follows:

 
| ** **        | ** ** | **Three  Months Ended September 30,** | ** ** |
|-------------------|------------|--------------------------------------------|------------|
| ** **        | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| ** **        | ** ** | **(Thousands)**                            | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
| ***Engineering*** |       |                                       |       |   |   |   |   |   |   |
| Revenue           |       | $                                          | 11,848     |   |   |   | $ | 29,930 |   |   |   |
| Gross profit      |       | $                                          | 1,322      |   | 11.2 | % | $ | 1,770 |   | 5.9 | % |

 
| ** **        | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-------------------|------------|-------------------------------------------|------------|
| ** **        | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| ** **        | ** ** | **(Thousands)**                           | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
| ***Engineering*** |       |                                      |       |   |   |   |   |   |   |
| Revenue           |       | $                                         | 43,977     |   |   |   | $ | 75,068 |   |   |   |
| Gross profit      |       | $                                         | 4,298      |   | 9.8 | % | $ | 4,618 |   | 6.2 | % |

 

Revenue decreased by $18.1million and $31.1 million, or 60.0% and 41.4%, respectively, for the three andnine months ended September 30, 2009, compared to the same periods in2008. These decreases were due primarily to the impact of an unusually largeproject in the prior year, whereas reduced activity and revenue was recorded inthe first nine months ended September 30, 2009, during which we providedcompletion startup assistance to the client. We anticipate final project acceptance in the Fourth Quarter 2009.

 

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Engineering segment grossprofit amounts decreased by $0.5 million and $0.3 million, or 25.3% and 6.9%,for the three and nine months ended September 2009, compared to the sameperiod in 2008.  The decrease was due tothe lower revenues and profit write-downs on certain alliance projects, offsetby higher gross profit margins.

 

Engineering gross profit asa percentage of revenues increased to 11.2% and 9.8% during the three and ninemonths ended September 30, 2009 compared to 5.9% and 6.2% in the sameperiods of 2008.  This improvement ingross profit margins was primarily due to work on a large project during theyear for a major customer located in Thailand.

 

**Selling, general and administrative expenses**

 

Selling, general andadministrative expenses (“SG&A”) increased by $0.4 million, or 5.5%,for the three months ended September 30, 2009 (“Third Quarter 2009”)compared to the same period in 2008. The change was mainly due to a netincrease in legal expenses of $0.2 million, an increase in long-term incentive compensation costs of$0.6  million and a decrease of $0.9  million in overhead expense allocation to project cost, due to lower activity inthe engineering segment. This increase was partially offset by a $1.5 millionincrease in gain on sale of equipment.

 

SG&A increased by $1.8million, or 8.1% for the nine months ended September 30, 2009 compared tothe same period in 2008.  This increasewas net of a gain on the sale of operating equipment of $3.2 million recordedin SG&A as part of our fleet upgrade program.  Under this program, we routinely turn overour equipment during the first part of the fiscal year.  A gain on sale of $0.7 million was recordedduring the same period in the prior year. Excluding the gain on sale, the increase in SG&A was $4.2 millionfor the nine months ended September 30, 2009.  The increase was due primarily to increasedlong-term incentive compensation of $1.9 million, an increase of $0.2 in publiccompany reporting and compliance costs, an increase of $0.4 million indepreciation expense, an increase in consulting and various expenses of $1.0million related to expenses in the renewable energy market, and a reduction inoverhead allocation to projects of $0.7 million.

 

SG&A as a percentage ofrevenue increased to 6.6% for the Third Quarter 2009, from 4.8% for the sameperiod in 2008 and 6.4% for the nine months ended September 30, 2009compared to 4.7% for the same period in the prior year. The increasedpercentage for both the Third Quarter 2009 and the nine months ended September 30,2009, was due to the increased costs discussed above as well as the relativelyfixed nature of administrative and management expenses, which did not decreaseproportionally with the decreased revenues.

 

**Other income and expense**

 

Non-operating income andexpense items for the three and nine months ended September 30, 2009 and2008 were as follows:

 
| ** **                                | ** ** | **Three  Months  Ended September 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| ** **                                | ** ** | **(Thousands)**                             | ** ** |
| ***Other income (expense)***              |       |                                        |       |   |   |
| Income from  non-consolidated investments |       | $                                           | 1,439      |   | $ | 1,474 |   |
| Foreign exchange gain  (loss)             |       | (170                                        | )          | 89 |   |
| Interest income                           |       | 90                                          |       | 366 |   |
| Interest (expense)                        |       | (398                                        | )          | (498 | ) |
| Total other income                        |       | $                                           | 961        |   | $ | 1,431 |   |

 
| ** **                                | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| ** **                                | ** ** | **(Thousands)**                           | ** ** |
| ***Other income (expense)***              |       |                                      |       |   |   |
| Income from  non-consolidated investments |       | $                                         | 5,342      |   | $ | 4,501 |   |
| Foreign exchange gain                     |       | 33                                        |       | 67 |   |
| Interest income                           |       | 554                                       |       | 1,349 |   |
| Interest (expense)                        |       | (1,456                                    | )          | (1,705 | ) |
| Total other income                        |       | $                                         | 4,473      |   | $ | 4,212 |   |

 

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For the Third Quarter 2009,we recognized income of $1.5 million from the Otay Mesa Power Partners (“OMPP”)joint venture, a power plant construction project near San Diego, California,which we expect to be substantially complete by year-end 2009.  We also recognized a loss of$0.1 million from the All Day Electric joint venture (“All Day”) inNorthern California.

 

The total income for thefirst nine months of 2009 from OMPP was $6.6 million as compared with $4.5million for the same period in 2008. The income recognized for OMPP  was offset by a loss booked for All Day of$0.2 million and by an impairment charge of $1.0 million on certain advancesmade to ARB Arendal, SRL de CF (“ARB Arendal”). We have a 49% interest in ARB Arendal and we account for this investmentunder the equity method.  Because ofuncertainty on the outcome of the continuing negotiations of ARB Arendal with amajor customer in Mexico, we determined there was an other than temporaryimpairment of its investment in and advances to ARB Arendal, recording animpairment charge in prior periods. Under a separate agreement with ARB Arendal, we were required to make anadvance of working capital funds to the venture in June 2009. We believethe investment in the venture remains impaired, pending the outcome of thecustomer negotiations, and recorded an impairment charge of $1.0 million in June 2009.

 

Foreign exchange results forthe three and nine months ended September 30, 2009 and for the same periodin 2008 reflect currency exchange fluctuations of the United States dollarcompared to the Canadian dollar. Our contracts in Calgary, Canada are soldbased on United States dollars, but a portion of the work is paid for withCanadian dollars, which can create a currency exchange difference.

 

Interest income decreased by$0.3 million and $0.8 million for the three and nine months ended September 30,2009 compared to the same period in 2008. This was due to declining interestrates, as well as our decision to invest excess cash balances in Treasury billsand certificates of deposit (“CDs”) rather than commercial paper. Interestexpense decreased by $0.1 million and $0.2 million for the three and ninemonths ended September 30, 2009 compared to the same periods in 2008 dueprimarily to reduced levels of long-term debt.

 

**Provision for income taxes**

 

Our provision for income taxincreased $2.9 million for the three months ended September 30, 2009to $4.6 million, and $11.4 million for the nine months ended September 30,2009 to $13.6 million, compared to the same periods in 2008, as a result of achange in our tax status from that of Subchapter S of the Internal RevenueCode (“S-Corporation”) to that of Subchapter C of the Internal RevenueCode (“C-Corporation”) as part of the Merger. Thereafter, the combined entitybecame subject to federal and state income tax in the jurisdictions in which wedo business, including California. With the change in tax status, our effectivetax rate for the Third Quarter 2009 was 37%. Prior to the Merger, as anS-Corporation, we had no provision for federal income tax and only minimalprovision for state and foreign income tax.

 

**Pro forma net income data**

 

Pro forma informationconcerning the income tax provision as if we were taxed as a C-Corporation forthe three and nine months ended September 30, 2008 compared to the actualthree and nine months ended September 30, 2009 is shown as follows:

 
| ** **                                           | ** ** | **Three  Months Ended  September 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                           | ** ** | **As reported  2009**                       | ** ** | **Pro forma  2008** | ** ** |
| ** **                                           | ** ** | **(Thousands,  except  per share amounts)** | ** ** |
| Income before provision  for income tax, as reported |       | $                                           | 12,614     |   | $ | 11,820 |   |
| Provision for income tax                             |       | (4,667                                      | )          | (4,706 | ) |
| Net income                                           |       | $                                           | 7,947      |   | $ | 7,114 |   |
| Earnings per share:                                  |       |                                        |       |   |   |
| Basic                                                |       | $                                           | 0.24       |   | $ | 0.26 |   |
| Diluted                                              |       | $                                           | 0.23       |   | $ | 0.23 |   |

 

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| ** **                                           | ** ** | **Nine Months  Ended  September 30,**  | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                           | ** ** | **As reported  2009**                       | ** ** | **Pro forma  2008** | ** ** |
| ** **                                           | ** ** | **(Thousands,  except  per share amounts)** | ** ** |
| Income before provision  for income tax, as reported |       | $                                           | 35,775     |   | $ | 30,825 |   |
| Provision for income tax                             |       | (13,608                                     | )          | (12,271 | ) |
| Net income                                           |       | $                                           | 22,167     |   | $ | 18,554 |   |
| Earnings per share:                                  |       |                                        |       |   |   |
| Basic                                                |       | $                                           | 0.70       |   | $ | 0.74 |   |
| Diluted                                              |       | $                                           | 0.67       |   | $ | 0.71 |   |

 

The estimated pro forma taxprovision amount was calculated at an effective statutory tax rate ofapproximately 39.8% for the three and nine months ended September 30,2008, respectively.

 

**Liquidity and Capital Resources**

 

Recent global market andeconomic conditions have been, and continue to be, disruptive and volatile,having an adverse impact on financial markets in general. The volatility has reachedunprecedented levels. As a result of concern about the stability of the marketsand the strength of counterparties, many lenders and institutional investorshave reduced and, in some cases, ceased to provide funding to borrowersresulting in severely diminished liquidity and credit availability. At thistime, the extent to which these conditions will persist is unclear. To date,the Company’s cost and availability of funding has not been adversely affectedby illiquid credit markets, and we do not expect it to be materially impactedin the near future.

 

At September 30, 2009,our balance sheet included a net cash balance of $80.3 million, and anadditional $5.0 million in short-term investments. We continue to haveborrowing capacity for our foreseeable needs based on our current cash flowforecast. As of September 30, 2009, we had a $30 million creditfacility, which was terminated October 28, 2009 and replaced by a $35million revolving line of credit, with $15 million expiring on October 27,2010 and $20 million expiring on October 28, 2012.  Additionally, we have a $10 million(Canadian dollars) facility for commercial letters of credit in Canada with anexpiration date of December 31, 2012. At September 30, 2009,$5.5 million was outstanding on these two facilities representing issuedletters of credit.

 

**Cash Flows**

 

Cash flows during the nine months ended September 30, 2009 and2008 are summarized as follows:

 
| ** **                                        | ** ** | **Nine Months  Ended  September 30,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                        | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| ** **                                        | ** ** | **(Thousands)**                            | ** ** |
| ***Change in cash:***                             |       |                                       |       |   |   |
| Net cash provided (used)  by operating activities |       | $                                          | 20,344     |   | $ | 56,582 |   |
| Net cash provided (used)  in investing activities |       | 5,174                                      |       | (8,121 | ) |
| Net cash provided (used)  in financing activities |       | (18,190                                    | )          | (34,732 | ) |
| Net change in cash                                |       | $                                          | 7,328      |   | $ | 13,729 |   |

 

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***Operating Activities***

 

Netcash provided by operating activities decreased by $36.2 million, primarily asa result of the changes in current assets and current liabilities and in theuse of cash for the change in the provision for income taxes.  Shown in the table below are the sources anduses of our cash flow from operating activities and the use of a portion ofthat cash in our operations for the nine months ended September 30, 2009and 2008.

 
| ** **                                        | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                        | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| ** **                                        | ** ** | **(Thousands)**                           | ** ** |
| ***Operating Activities:***                       |       |                                      |       |   |   |
| Operating income                                  |       | $                                         | 31,302     |   | $ | 26,613 |   |
| Depreciation and amortization                     |       | 6,110                                     |       | 4,763 |   |
| Amortization of other intangible assets           |       | 28                                        |       | 27 |   |
| Merger related stock expense                      |       | —                                    |       | 3,675 |   |
| Gain on sale of property and equipment            |       | (3,183                                    | )          | (724 | ) |
| Changes in current assets and current liabilities |       | (2,836                                    | )          | 21,387 |   |
| Non-consolidated entity distributions             |       | 3,400                                     |       | 3,320 |   |
| Foreign exchange gain                             |       | 33                                        |       | 67 |   |
| Interest expense, net                             |       | (902                                      | )          | (356 | ) |
| Provision for income taxes                        |       | (13,608                                   | )          | (2,188 | ) |
| Net cash provided by operating activities         |       | $                                         | 20,344     |   | $ | 56,582 |   |
|                                              |       |                                      |       |   |   |
| Capital expenditures — cash                  |       | $                                         | (8,042     | ) | $ | (9,241 | ) |
| Capital expenditures - financed                   |       | $                                         | (4,723     | ) | $ | (7,075 | ) |

 

The changes in currentassets and current liabilities decreased operating cash flow by$2.8 million during the nine months ended September 30, 2009. Thecomponents of this change are included in the consolidated statements of cashflow. The significant changes include:

 

·                  a$9.0 million decrease in accounts receivable;

 

·                  a$16.5 million decrease in accounts payable;

 

·                  a$0.2 million net decrease in accrued expenses and other accruedliabilities;

 

·                  costs andestimated earnings in excess of billings increased by $1.4 million;

 

·                  prepaidexpenses, inventory, other current assets decreased by $1.6 million; and

 

·                  restricted cashdecreased by $4.6 million.

 

As of September 30,2009, accounts receivable represented 33.5% of total assets. We have anexcellent collection history stemming from many factors, including performingwork for recurring customers and substantial pre-acceptance review of thefinancial worthiness and credit history of new customers. We bill customers onan ongoing basis as projects are being constructed. As a contractor, we havecertain lien rights that can provide additional security on the accountsreceivable that are generated, which may give priority to us over lenders orcertain other creditors of the project. The decreases in accounts receivableand the reductions in accounts payable as of September 30, 2009, are dueprimarily to a slow down in revenues, mainly due to the current economicclimate.

 

The decrease in billings inexcess of costs and estimated earnings was principally due to the timing of thebillings on certain projects and the nature and type of projects.

 

The net decrease of $0.2million in accrued expenses and other current liabilities included an increaseof $4.4 million in payroll and related employee benefits, offset by reductionsin accruals for income taxes, leases, rents and other.  The $4.4 million increase was due primarilyto the timing of payments of $2.0 million for union related benefits, thetiming of payments for payroll and related benefits, and an increase of $1.0million for incentive compensation.

 

***Investing activities***

 

We purchased property andequipment for $12.8 million during the nine months ended September 30,2009, as compared to $16.3 million during the same period in 2008. Thesepurchases were principally for our construction activities, with $8.1 millionpaid in cash for the purchases and incurred $4.7 million in additionalloan obligations, secured by the underlying equipment. We believe the ownershipof equipment is generally preferable to renting equipment on a project byproject basis, as ownership helps to ensure the availability of equipment whenneeded. In addition, ownership has historically resulted in lower overallequipment costs.

 

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As part of our cashmanagement program, we sold $10 million of short-term investments duringthe Third Quarter 2009, which primarily consisted of CDs purchased through theCDARS (Certificate of Deposit Account Registry Service) process to provide FDICbacking of the CDs.

 

***Financing activities***

 

Financing activitiesrequired the use of $18.2 million during the nine months ended September 30,2009. Significant transactions using cash flows from financing activitiesincluded:

 

·                  Cashdistributions of $4.9 million were paid to the Former Primorisstockholders during the nine months ended September 30, 2009. We provided distributionsto the Former Primoris stockholders during the period that the Company was anS-Corporation, principally to allow them to pay their personal income taxliability stemming from the profits of the Company. This final distribution toFormer Primoris stockholders was made in accordance with the terms of themerger agreement as part of the Merger.

 

·                  $20.2 millionduring the nine months ended September 30, 2009 in repayment of long-termdebt as compared to $4.8 for the same period of 2008, based on scheduledmaturities of such debt.

 

·                  $10.9 millionof proceeds from long-term debt from refinancing of existing equipment.

 

·                  $0.8 millionwas paid as dividends to our stockholders during the Third Quarter 2009(representing a dividend of $0.025 per share) with a total of $2.4 million paidduring the nine months ended June 30, 2009.

 

·                  $0.1 millionfor the re-purchase of our warrants during the nine months ended September 30,2009.

 

**Capital Requirements**

 

We believe that we will beable to support our ongoing working capital needs through cash on hand,short-term investments, operating cash flows and our existing creditfacilities, which will be adequate to cover our operational and business needsfor the next twelve months.

 

During the nine months endedSeptember 30, 2009, our operations provided net cash of $7.3 million,compared to $13.7 million of cash provided in the same period of 2008. For thenine months ended September 30, 2008, we experienced a substantial cashinflow of $18.6 million relating to billings in excess of costs andestimated earnings, meaning that we received cash prior to performing therequired construction or engineering work. For the nine months ended September 30,2009, we experienced a decrease in cash as we used $0.4 million to pay inadvance to complete the work to be performed. This change in cash typicallywill vary based on the timing of work and the related contractual billings onour projects.

 

**Common Stock**

 

Prior to the Merger, FormerPrimoris was a non-publicly traded entity with 4,368 shares outstanding. At thetime of the Merger, each Former Primoris share was converted into 5,400 sharesof our common stock, totaling 23,587,200 shares. Additionally, as part of themerger agreement, two foreign managers of Former Primoris were issued 507,600shares of common stock. All of these shares were subject to a sale restrictionthat expired on July 31, 2009.

 

In addition, the mergeragreement provided for a potential issuance of 5,000,000 shares of common stockto the Former Primoris stockholders for the years ended December 31, 2008and 2009, if the Company achieves specific annual financial targets. Weachieved the 2008 financial target in the third quarter of 2008 and 2,500,025shares of common stock were issued to the Former Primoris stockholders during March 2009.  As of September 30, 2009, the Companyachieved approximately 90% of the performance target for the additional2,499,975 shares of stock.

 

The Company has outstanding4,705,956 redeemable warrants, each of which entitles the holder to purchaseone share of common stock at a price of $5.00 per share and is exercisable at anytime on or prior to October 2, 2010, unless earlier redeemed by theCompany (“Warrant”).  Additionally, theCompany’s underwriter has a Unit Purchase Option that includes the right topurchase 450,000 Units at $8.80 per share. For the period up to October 2, 2010, each Unit is comprised of oneshare of common stock and one Warrant. For the period from October 3, 2010 to October 2, 2011, theexpiration date of the Unit Purchase Option, each Unit is comprised of oneshare of common stock.

 

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**Credit agreements**

 

In March 2007, we entered into a revolving line of creditagreement payable to Bank of America, N.A. (successor by merger to LaSalle BankNational Association) with an interest rate of prime or at LIBOR plus anapplicable margin. The revolving line was secured by substantially all of ourassets. Under the line of credit agreement, we were able to borrow up to $30.0million, and all amounts borrowed under the line of credit were to be due March 31,2010. The line of credit agreement contained restrictive covenants, including,among others, restrictions on investments, minimum working capital and tangiblenet worth requirements. We were in compliance, or obtained a waiver, with allrestrictive covenants during and as of the nine months ended September 30,2009.  None of these covenants wereconsidered restrictive to our business. On October 28, 2009, we paid all amountsdue and owing under the line of credit and terminated the line of creditagreement.

 

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

 

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

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

 

The Lender has agreed to issue for our account letters of credit of upto $15.0 million, under Revolving Loan A. The principal amount of each of Revolving Loan A and Revolving Loan Bwill bear interest at either: (i) LIBOR plus an applicable margin asspecified in the Agreement, or (ii) the prime rate announced by the Lenderplus an applicable margin as specified in the Agreement. The principal amountof any loan bearing interest at LIBOR plus an applicable margin may not beprepaid in whole or in part at any time. However, if any such loan is prepaid,we will be subject to certain prepayment penalties. There is no prepaymentpenalty for any loan bearing interest at the prime rate announced by the Lenderplus an applicable margin.

 

All loans made by the Lender under theAgreement are secured by certain of our assets, including, among others, ourcash, inventory, goods, equipment (excluding equipment subject to certainpermitted liens) and accounts receivable. The Agreement also contains variousrestrictive covenants, including, among others, restrictions on investments,capital expenditures, minimum tangible net worth and debt service coveragerequirements.  Certain of oursubsidiaries have executed joint and several guaranties in favor of the Lenderfor all amounts under the Agreement.

 

**Related Party Transactions**

 

We have entered into varioustransactions with Stockdale Investment Group, Inc. (“SIGI”). Our largeststockholder, Chief Executive Officer, President and Chairman of the Board ofDirectors, Brian Pratt, also holds a majority interest in SIGI. In addition,two of our officers and/or directors also serve as officers and/or directors ofSIGI (with their respective positions with SIGI reflected in parentheses):Brian Pratt (chairman and director) and John M. Perisich (secretary).

 

Two of our officers and/ordirectors also served as officers and directors of SIGI in the past, includingJohn P. Schauerman (president and director) and Scott Summers (vice presidentand director).

 

We lease properties fromSIGI located in Bakersfield, Pittsburg and San Dimas, California, as well as aproperty in Pasadena, Texas. During the nine months ended September 30,2009 and 2008, we paid $613 and $561, respectively, in lease payments to SIGIfor the use of these properties. Prior to the Merger, we also leased certainconstruction and transportation equipment from SIGI. This equipment waspurchased from SIGI on the closing date of the Merger and the leases wereterminated.

 

The Company leased anairplane from SIGI for business use, from May 1, 2004 until the airplanewas sold on March 31, 2009.  Duringthe nine months ended September 30, 2009 and 2008, we paid $70 and $179,respectively, in lease payments to SIGI for the use of the airplane.

 

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We lease a property fromRoger Newnham, a manager at our subsidiary, Born Heaters Canada. The propertyis located in Calgary, Canada. This lease was entered into on similar terms asnegotiated with an independent third party. During the nine months ended September 30,2009 and 2008, we paid $256 and $224, respectively, in lease payments to Mr. Newnhamfor the use of this property. The three-year lease for the Calgary propertycommenced in October 2005 and was renewed and extended until September 2010.

 

**Contractual Obligations**

 

As of September 30,2009, we had $28.8 million of outstanding long-term debt and capital leaseobligations.

 

A summary of contractualobligations as of September 30, 2009 is as follows:

 
| **Payments  due by period**                      | ** ** | **Total**       | ** ** | **1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After  5 Years** | ** ** |
|--------------------------------------------------|------------|-----------------|------------|------------|------------|---------------|------------|---------------|------------|--------------------|------------|
| ** **                                       | ** ** | **(Thousands)** | ** ** |
| Long-term debt and capital  lease obligations    |       | $               | 28,788     |       | $          | 6,310         |       | $             | 11,101     |               | $          | 11,377 |   | $ | — |   |
| Interest on long-term debt                       |       | 3,899           |       | 1,423      |       | 1,913         |       | 563           |       | —             |       |
| Equipment operating leases                       |       | 5,773           |       | 2,815      |       | 2,931         |       | 27            |       | —             |       |
| Equipment operating  leases—related parties |       | —          |       | —     |       | —        |       | —        |       | —             |       |
| Real property leases                             |       | 4,319           |       | 1,429      |       | 2,081         |       | 809           |       | —             |       |
| Real property  leases—related parties       |       | 7,112           |       | 1,109      |       | 1,751         |       | 1,826         |       | 2,426              |       |
|                                             |       | $               | 49,891     |       | $          | 13,086        |       | $             | 19,777     |               | $          | 14,602 |   | $ | 2,426 |   |
| Stand-by letters of credit                       |       | $               | 5,498      |       | $          | 1,364         |       | $             | 4,134      |               | $          | — |   | $ | — |   |

 

The interest amount aboverepresents interest payments for our fixed rate debt assuming that principalpayments are made as originally scheduled.

 

**Off Balance Sheet Transactions**

 

The following representtransactions, obligations or relationships that could be considered material,off-balance sheet arrangements.

 

·                  Letters ofcredit issued under our lines of credit. At September 30, 2009, we hadletters of credit outstanding of $5.5 million.

 

·                  Equipmentoperating leases with a balance of $5.8 million at September 30,2009.

 

·                   In the ordinary course ofour business, we may be required by our customers to post surety bid or completionbonds in connection with services that we provide. At September 30, 2009,we had $207.4 million in outstanding bonds.

 

·                   Four derivative financialinstruments for the purpose of hedging future currency exchange in Canadiandollars. The contracts enable us to purchase Canadian dollars before certaindates in 2010 at certain exchange rates. These contracts expire in January throughJune 2010. The related Canadian dollars purchased under contract were for$5.5 million CAD.

 

**Backlog**

 

In the industries in whichwe operate, backlog can be considered an indicator of potential futureperformance because it represents a portion of the future revenue stream.Different companies in our industry define backlog differently. We considerbacklog as the anticipated revenue from the uncompleted portions of existingcontracts. We calculate backlog differently for different types of contracts.For our fixed price and fixed unit price contracts, we include the fullremaining portion of the contract in our calculation. Since their ultimaterevenue amount is difficult to determine, we do not include unit-price,time-and-equipment, time-and-materials and cost-plus contracts in thecalculation of backlog.

 

Most fixed price contractsmay be terminated by our customers on relatively short notice. In the event ofa project cancellation, we may be reimbursed for certain costs, but typicallywe have no contractual right to the total revenues reflected in backlog.Projects may remain in backlog for extended periods of time.

 

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At September 30, 2009,our total backlog of $220.8 million compared to $271.0 million as of June 30,2009.  The backlog includes approximately$39.9 million related to the recently announced demobilization at Chevron Corp’sRichmond Refinery project located in Contra Costa, California. The project was haltedin July 2009 by a judge’s ruling following opposition from environmentalgroups and what the judge identified as inadequacies in an environmental impactreport. Chevron filed an appeal to overturn the judge’s order. The future ofthe project remains in question until the appeals court can decide theissues.  The project work, under contractfrom Praxair, Inc, started in September 2008. Excluding the $39.9 millionimpact on backlog for the Chevron project, net backlog would be $180.9million.  We expect that approximately $80 million,or 44.2%, of the net backlog at September 30, 2009, will be recognized asrevenue during the remainder of 2009.

 

Backlogby operating segment at September 30, 2009 and 2008 was as follows:

 
| ** **            | ** ** | **As of September 30,** | ** ** |
|-----------------------|------------|------------------------------|------------|
| ** **            | ** ** | **2009**                     | ** ** | **2008** | ** ** |
| ** **            | ** ** | **Amount**                   | ** ** | **Percentage** | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **            | ** ** | **(Thousands)**              | ** ** |
| ***Segment:***        |       |                         |       |   |   |   |   |   |   |
| Construction Services |       | $                            | 181.5      |   | 82.2 | % | $ | 340.9 |   | 82.8 | % |
| Engineering           |       | 39.3                         |       | 17.8 | % | 70.6 |   | 17.2 | % |
|                  |       | 220.8                        |       | 100.0 | % | $ | 411.5 |   | 100.0 | % |
|                       |            |                              |            |  |  |  |  |  |  |  |  |

 

Our backlog at any point intime may not accurately represent the revenue that we expect to realize duringany period. Additionally, our backlog at the end of the period may not beindicative of the revenue we expect to earn over the course of the followingtwelve months.

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

In the ordinary course ofbusiness, we are exposed to risks related to market conditions. These risksprimarily include fluctuations in foreign currency exchange rates, interestrates and commodity prices. We may seek to manage these risks through the useof financial derivative instruments. These instruments may include foreigncurrency exchange contracts and interest rate swaps.

 

We do not executetransactions or use financial derivative instruments for trading or speculativepurposes. We enter into transactions with counter parties that are generallyfinancial institutions to limit significant exposure with any one party.

 

The carrying amounts forcash and cash equivalents, accounts receivable, long-term debt and accountspayable and accrued liabilities shown in the condensed consolidated balancesheets approximate fair value at September 30, 2009 and December 31,2008 due to the generally short maturities of these items. At September 30,2009, we invested primarily in short-term dollar denominated bank deposits. Weexpect to hold our investments to maturity.

 

At September 30, 2009,all of our long-term debt was under fixed interest rates.

 

As of September 30,2009, we had four derivative financial instruments for the purpose of hedgingfuture currency exchange in Canadian dollars. The contracts enable us topurchase Canadian dollars before certain dates in 2010 at certain exchangerates. These contracts expire in January through June 2010. Therelated Canadian dollars purchased under contract were for $5.5 millionCAD. The related gains or losses on these contracts are not significant at September 30,2009. We intend to continue to hedge foreign currency risks in those situationswhere we believe such transactions are prudent.

 

**Item 4T. Controls and Procedures**

 

***(a)******                                ******Evaluation of Disclosure Controls and Procedures***

 

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in our reports under the Exchange Act, is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to management,including our Chief Executive Officer (“CEO”) and Executive Vice President,Chief Financial Officer (“CFO”), as appropriate, to allow for timely decisionsregarding required disclosure. In designing and evaluating our disclosurecontrols and procedures, our 

 

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management recognized that any system ofcontrols and procedures, no matter how well designed and operated, can provideonly reasonable assurance of achieving the desired control objectives, as oursare designed to do, and our management necessarily was required to apply itsjudgment in evaluating the cost-benefit relationship of possible controls andprocedures.

 

In connection with thepreparation of this Quarterly Report on Form 10-Q, as of September 30,2009, an evaluation was performed under the supervision and with theparticipation of our management, including our CEO and CFO, of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rule 13a-15(e) and 15d -15(e) underthe Exchange Act). Based on that evaluation, our CEO and CFO concluded that ourdisclosure controls and procedures were effective as of the end of the periodcovered by this Quarterly Report on Form 10-Q to ensure that theinformation required to be disclosed by us in our reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms, and toensure that the information required to be disclosed by us in reports that wefile or submit under the Exchange Act is accumulated and communicated to ourmanagement, including our CEO and CFO, as appropriate, to allow timelydecisions regarding required disclosures.

 

***(b)******                                ******Changes in Internal Control Over Financial Reporting***

 

During our last fiscalquarter, there were no changes in our internal control over financial reportingthat would materially affect, or are reasonably likely to materially affect ourinternal control over financial reporting.

 

**Part II. Other Information**

 

**Item 1.  LegalProceedings**

 

We are from time to timesubject to claims and legal proceedings arising out of our business. Ourmanagement believes that we have meritorious defenses to such claims. Althoughwe are unable to ascertain the ultimate outcome of such matters, after reviewand consultation with counsel and taking into consideration relevant insurancecoverage and related deductibles, management believes that the outcome of thesematters will not have a materially adverse effect on our financial condition orresults of operations.

 

**Item 1A. Risk Factors**

 

A description of the riskfactors associated with our business is contained in Part I, Item 1A,“*Risk Factors*,” of our AnnualReport on Form 10-K for the year ended December 31, 2008. Thesecautionary statements are to be used as a reference in connection with anyforward-looking statements. The factors, risks and uncertainties identified inthese cautionary statements are in addition to those contained in any othercautionary statements, written or oral, which may be made or otherwiseaddressed in connection with a forward-looking statement or contained in any ofour subsequent filings with the Securities and Exchange Commission (“SEC”). Youshould carefully consider the risk factors discussed in our Annual Report on Form 10-K,as well as the other information in this Quarterly Report on Form 10-Q,before deciding whether to invest in shares of our common stock. The occurrenceof any of the risk factors discussed in our filings with the SEC could harm ourbusiness, financial condition, results of operations or growth prospects.

 

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

 

None

 

**Item 3. Defaults Upon Senior Securities**

 

None

 

**Item 4. Submission of Matters to a Vote of Security Holders**

 

**None**

 

**Item 5. Other Information**

 

None

 

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**Item 6. Exhibits**

 

The following exhibits arefiled as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.

 
| **Exhibit  Number** | ** ** | **Description**                                                                                       |
|---------------------|------------|-------------------------------------------------------------------------------------------------------|
| 31.1                |       | Rule 13a-14(a)/15d-14(a) Certification by the Registrant’s  Chief Executive Officer(*) |
| 31.2                |       | Rule 13a-14(a)/15d-14(a) Certification by the Registrant’s  Chief Financial Officer(*) |
| 32.1                |       | Section 1350 Certification by the Registrant’s Chief Executive  Officer(*)                  |
| 32.2                |       | Section 1350 Certification by the Registrant’s Chief Financial  Officer(*)                  |

 

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(*)                                 Filed herewith

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                         | PRIMORIS SERVICES CORPORATION                                          |
|------------------------------|------------------------------------------------------------------------|
|                         |                                                                   |
| Date: November 12, 2009 | /s/ PETER J. MOERBEEK                                                  |
|                         | Peter J. Moerbeek *Executive Vice President, Chief Financial  Officer* |

 

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**EXHIBITS ATTACHED TO THIS QUARTERLY REPORT ON FORM 10-Q**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                    |
|---------------------|------------|----------------------------------------------------------------------------------------------------|
| 31.1                |       | Rule 13a-14(a)/15d-14(a) Certification by the Registrant’s  Chief Executive Officer |
| 31.2                |       | Rule 13a-14(a)/15d-14(a) Certification by the Registrant’s  Chief Financial Officer |
| 32.1                |       | Section 1350 Certification by the Registrant’s Chief Executive  Officer                  |
| 32.2                |       | Section 1350 Certification by the Registrant’s Chief Financial  Officer                  |

 

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