Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

**FORM 10-Q**

 

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

 

**Commissionfile number 0001-34145**

 

**PrimorisServices Corporation**

(Exact name of registrant asspecified in its charter)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

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**PRIMORIS SERVICES CORPORATION AND SUBSIDIARIES**

**INDEX**

 
| ** **                                                                                                                                  | **Page No** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------------|
| **Part I. Financial Information**                                                                                                      |             |
| ** **                                                                                                                                  |             |
| Item 1  Condensed Consolidated Financial Statements:                                                                                   |             |
| —Condensed  Consolidated Balance Sheets as of June 30, 2009 and December 31,  2008                                           | 3                |
| —Condensed  Consolidated Statements of Income for the three months and six months ended  June 30, 2009 andJune 30, 2008 | 4                |
| —Condensed  Consolidated Statements of Cash Flows for the three months and six months  ended June 30, 2009 and June 30, 2008 | 5                |
| —Notes to Condensed Consolidated Financial Statements                                                                                  | 7                |
| Item 2 Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                     | 17               |
| Item 3 Quantitative and Qualitative Disclosures  About Market Risk                                                                     | 29               |
| Item 4T Controls and Procedures                                                                                                        | 29               |
|                                                                                                                                        |             |
| **Part II.  Other Information**                                                                                                        |             |
| ** **                                                                                                                                  |             |
| Item 1  Legal Proceedings                                                                                                              | 30               |
| Item 1A  Risk Factors                                                                                                                  | 30               |
| Item 2 Unregistered Sales of Equity Securities  and Use of Proceeds                                                                    | 30               |
| Item 3 Defaults Upon Senior Securities                                                                                                 | 31               |
| Item 4 Submission of Matters to a Vote of  Security Holders                                                                            | 31               |
| Item 5  Other Information                                                                                                              | 32               |
| Item 6  Exhibits                                                                                                                       | 32               |
| Signatures                                                                                                                                  | 33               |

 

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**PRIMORIS SERVICES CORPORATION**

 

**PART I.FINANCIAL INFORMATION**

 

**ITEM1.  CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(INTHOUSANDS, EXCEPT SHARE AMOUNTS)**

 
| ** **                                                                                                                                                             | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                             | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                             |       |                    |       |                        |       |
| Current assets:                                                                                                                                                        |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                                              |       | $                       | 59,781     |                        | $          | 73,018 |   |
| Short-term investments                                                                                                                                                 |       | 15,091                  |       | 15,036                      |       |
| Restricted cash                                                                                                                                                        |       | 8,326                   |       | 11,111                      |       |
| Accounts receivable, net                                                                                                                                               |       | 95,483                  |       | 90,826                      |       |
| Costs and estimated earnings in excess of billings                                                                                                                     |       | 20,870                  |       | 21,017                      |       |
| Deferred income taxes                                                                                                                                                  |       | 5,591                   |       | 5,591                       |       |
| Prepaid expenses, inventory and other current assets                                                                                                                   |       | 4,385                   |       | 5,856                       |       |
| Total current assets                                                                                                                                                   |       | 209,527                 |       | 222,455                     |       |
| Property and equipment, net                                                                                                                                            |       | 28,181                  |       | 26,224                      |       |
| Other assets                                                                                                                                                           |       | 255                     |       | 139                         |       |
| Investment in non-consolidated entities                                                                                                                                |       | 1,333                   |       | 500                         |       |
| Other intangible assets, net                                                                                                                                           |       | 34                      |       | 52                          |       |
| Goodwill                                                                                                                                                               |       | 2,842                   |       | 2,842                       |       |
| Total assets                                                                                                                                                           |       | $                       | 242,172    |                        | $          | 252,212 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                         |       |                    |       |                        |       |
| Current liabilities:                                                                                                                                                   |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                       |       | $                       | 48,471     |                        | $          | 56,088 |   |
| Billings in excess of costs and estimated earnings                                                                                                                     |       | 67,309                  |       | 72,664                      |       |
| Accrued expenses and other current liabilities                                                                                                                         |       | 23,266                  |       | 26,067                      |       |
| Distributions and dividends payable                                                                                                                                    |       | 812                     |       | 5,696                       |       |
| Current portion of capital leases                                                                                                                                      |       | 1,582                   |       | 2,198                       |       |
| Current portion of long-term debt                                                                                                                                      |       | 6,046                   |       | 5,679                       |       |
| Total current liabilities                                                                                                                                              |       | 147,486                 |       | 168,392                     |       |
| Long-term debt, net of current portion                                                                                                                                 |       | 25,324                  |       | 26,624                      |       |
| Long-term capital leases, net of current portion                                                                                                                       |       | —                  |       | 341                         |       |
| Deferred tax liabilities                                                                                                                                               |       | 1,429                   |       | 1,425                       |       |
| Total liabilities                                                                                                                                                      |       | 174,239                 |       | 196,782                     |       |
| Commitments and contingencies                                                                                                                                          |       |                    |       |                        |       |
| Stockholders’ equity                                                                                                                                              |       |                    |       |                        |       |
| Preferred stock—$.0001 par value, 1,000,000 shares authorized, 0  outstanding                                                                                     |       | —                  |       | —                      |       |
| Common stock—$.0001 par value; authorized: 90,000,000 shares;  32,477,364 and 29,977,339 issued and outstanding at June 30, 2009 and  December 31, 2008 |       | 3                       |       | 3                           |       |
| Additional paid-in capital                                                                                                                                             |       | 34,796                  |       | 34,796                      |       |
| Retained earnings                                                                                                                                                      |       | 33,031                  |       | 20,528                      |       |
| Accumulated other comprehensive income                                                                                                                                 |       | 103                     |       | 103                         |       |
| Total stockholders’ equity                                                                                                                                        |       | 67,933                  |       | 55,430                      |       |
| Total liabilities and stockholders’ equity                                                                                                                        |       | $                       | 242,172    |                        | $          | 252,212 |   |

 

See Accompanying Notes toCondensed Consolidated Financial Statements

 

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**PRIMORIS SERVICES CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

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

** **
| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                          | ** ** | **2009**                         | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                          | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)**                | ** ** |
| Revenues                                            |       | $                                | 126,900    |                           | $          | 142,444 |   | $ | 255,638 |   | $ | 311,835 |   |
| Cost of revenues                                    |       | 105,977                          |       | 127,810                        |       | 219,987 |   | 280,988 |   |
| Gross profit                                        |       | 20,923                           |       | 14,634                         |       | 35,651 |   | 30,847 |   |
| Selling, general and administrative expenses        |       | 8,388                            |       | 6,622                          |       | 16,002 |   | 14,623 |   |
| Operating income                                    |       | 12,535                           |       | 8,012                          |       | 19,649 |   | 16,224 |   |
| Other income (expense):                             |       |                             |       |                           |       |   |   |   |   |
| Income from non-consolidated entities               |       | 1,736                            |       | 1,204                          |       | 3,903 |   | 3,027 |   |
| Foreign exchange gain (loss)                        |       | (26                              | )          | (41                            | )          | 203 |   | (22 | ) |
| Interest income (expense) net                       |       | (334                             | )          | (147                           | )          | (594 | ) | (224 | ) |
| Income before provision for income taxes            |       | 13,911                           |       | 9,028                          |       | 23,161 |   | 19,005 |   |
| Provision for income taxes                          |       | (5,331                           | )          | (259                           | )          | (8,941 | ) | (454 | ) |
| Net income                                          |       | $                                | 8,580      |                           | $          | 8,769 |   | $ | 14,220 |   | $ | 18,551 |   |
| Basic earnings per share                            |       | $                                | 0.26       |                           | $          | 0.37 |   | $ | 0.45 |   | $ | 0.79 |   |
| Diluted earnings per share                          |       | $                                | 0.26       |                           | $          | 0.37 |   | $ | 0.44 |   | $ | 0.79 |   |
| Weighted average common shares outstanding          |       |                             |       |                           |       |   |   |   |   |
| Basic                                               |       | 32,477                           |       | 23,587                         |       | 31,303 |   | 23,587 |   |
| Diluted                                             |       | 32,835                           |       | 23,587                         |       | 32,477 |   | 23,587 |   |
| **Pro forma net income data—2008:**            |       |                             |       |                           |       |   |   |   |   |
| Income before provision for income tax, as reported |       |                             |       | $                              | 9,028      |   |   |   | $ | 19,005 |   |
| Adjustments for provision for income tax            |       |                             |       | (3,593                         | )          |   |   | (7,564 | ) |
| Pro forma adjusted net income                       |       |                             |       | $                              | 5,435      |   |   |   | $ | 11,441 |   |
| Pro forma earnings per share                        |       |                             |       |                           |       |   |   |   |   |
| Basic                                               |       |                             |       | $                              | 0.23       |   |   |   | $ | 0.49 |   |
| Diluted                                             |       |                             |       | $                              | 0.23       |   |   |   | $ | 0.49 |   |

 

See Accompanying Notes toCondensed Consolidated Financial Statements

 

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**PRIMORISSERVICES CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(INTHOUSANDS)**

** **
| ** **                                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                   | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                   | ** ** | **2009**                         | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                   | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)**                | ** ** |
| Cash flows from operating activities:                        |       |                             |       |                           |       |   |   |   |   |
| Net income                                                   |       | $                                | 8,580      |                           | $          | 8,769 |   | $ | 14,220 |   | $ | 18,551 |   |
| Adjustments to reconcile net income to net cash provided by: |       |                             |       |                           |       |   |   |   |   |
| Depreciation and amortization                                |       | 2,089                            |       | 1,529                          |       | 3,990 |   | 2,967 |   |
| Amortization of other intangible assets                      |       | 9                                |       | 9                              |       | 18 |   | 18 |   |
| Gain on sale of property and equipment                       |       | (375                             | )          | (344                           | )          | (1,499 | ) | (484 | ) |
| Income from non-consolidated entities                        |       | (1,736                           | )          | (1,204                         | )          | (3,903 | ) | (3,027 | ) |
| Non-consolidated entity distributions                        |       | —                           |       | —                         |       | 3,400 |   | 566 |   |
| Changes in assets and liabilities:                           |       |                             |       |                           |       |   |   |   |   |
| Restricted cash                                              |       | (94                              | )          | (860                           | )          | 2,785 |   | 781 |   |
| Accounts receivable                                          |       | (11,270                          | )          | 26,288                         |       | (4,657 | ) | 30,032 |   |
| Costs and estimated earnings in excess of billings           |       | (157                             | )          | 1,138                          |       | 147 |   | (7,829 | ) |
| Prepaid expenses, inventory and other current assets         |       | 4,702                            |       | (150                           | )          | 1,471 |   | 69 |   |
| Other assets                                                 |       | (334                             | )          | 370                            |       | (116 | ) | 884 |   |
| Accounts payable                                             |       | 301                              |       | (12,879                        | )          | (7,617 | ) | (13,528 | ) |
| Billings in excess of costs and estimated earnings           |       | (1,881                           | )          | 2,356                          |       | (5,355 | ) | 12,080 |   |
| Deferred income tax                                          |       | 4                                |       | —                         |       | 4 |   | — |   |
| Accrued expenses and other current liabilities               |       | (3,969                           | )          | 2,305                          |       | (2,095 | ) | 273 |   |
| Other long-term liabilities                                  |       | —                           |       | 16                             |       | — |   | 29 |   |
| Net cash provided (used) by operating activities             |       | (4,131                           | )          | 27,343                         |       | 793 |   | 41,382 |   |
| Cash flows from investing activities:                        |       |                             |       |                           |       |   |   |   |   |
| Purchase of property and equipment                           |       | (1,888                           | )          | (2,148                         | )          | (3,077 | ) | (3,665 | ) |
| Sale (purchase) of short-term investments                    |       | 10,075                           |       | —                         |       | (55 | ) | — |   |
| Advances to non-consolidated entities                        |       | (1,036                           | )          | —                         |       | (1,036 | ) | — |   |
| Proceeds from sale of property and equipment                 |       | 402                              |       | 619                            |       | 1,652 |   | 787 |   |
| Net cash provided (used) in investing activities             |       | 7,553                            |       | (1,529                         | )          | (2,516 | ) | (2,878 | ) |
| Cash flows from financing activities:                        |       |                             |       |                           |       |   |   |   |   |
| Repayment of long-term debt                                  |       | (1,461                           | )          | (1,726                         | )          | (3,956 | ) | (3,180 | ) |
| Repayment of capital leases                                  |       | (482                             | )          | —                         |       | (957 | ) | — |   |
| Repurchase of warrants                                       |       | (11                              | )          | —                         |       | (93 | ) | — |   |
| Dividends                                                    |       | (812                             | )          | —                         |       | (1,561 | ) | — |   |
| Cash distributions to stockholders                           |       | —                           |       | (11,903                        | )          | (4,947 | ) | (18,018 | ) |
| Net cash provided (used) in financing activities             |       | (2,766                           | )          | (13,629                        | )          | (11,514 | ) | (21,198 | ) |
| Net change in cash and cash equivalents                      |       | 656                              |       | 12,185                         |       | (13,237 | ) | 17,306 |   |
| Cash and cash equivalents at beginning of the period         |       | 59,125                           |       | 68,087                         |       | 73,018 |   | 62,966 |   |
| Cash and cash equivalents at end of the period               |       | $                                | 59,781     |                           | $          | 80,272 |   | $ | 59,781 |   | $ | 80,272 |   |

 

See Accompanying Notes toCondensed Consolidated Financial Statements

 

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**PRIMORISSERVICES CORPORATION**

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

**(INTHOUSANDS)**

 

**SUPPLEMENTALDISCLOSURES OF CASH FLOW INFORMATION**

 
| ** **                                                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                 | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                 | ** ** | **2009**                         | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                 | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)**                | ** ** |
| **Cash paid during the period for:**                                       |       |                             |       |                           |       |   |   |   |   |
| Interest                                                                   |       | $                                | 538        |                           | $          | 521 |   | $ | 1,057 |   | $ | 1,207 |   |
| Income taxes                                                               |       | $                                | 7,704      |                           | $          | 259 |   | $ | 11,100 |   | $ | 454 |   |
| ** **                                                                 |       |                             |       |                           |       |   |   |   |   |
| **Non-cash activities**                                                    |       |                             |       |                           |       |   |   |   |   |
| Obligations incurred for the acquisition of property and equipment  leases |       | $                                | —     |                           | $          | 7,075 |   | $ | 3,023 |   | $ | 7,075 |   |

 

See Accompanying Notes toCondensed Consolidated Financial Statements

 

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**PRIMORIS SERVICES CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Inthousands, except per share amounts)**

**(Unaudited)**

 

**Note 1—BusinessActivity**

 

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

 

**Note 2—Basisof Presentation**

 

***Interim consolidated financial statements*****—**The interim condensed consolidated financial statements for thethree-month and six-month periods ended June 30, 2009 and 2008 have beenprepared 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 June 30, 2009 (the“Second 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.

 

The interim financial information for thethree-month periods and six-month periods ended June 30, 2009 and 2008 isunaudited and has been prepared on the same basis as the audited financialstatements. However, the financial statements contained in this Second Quarter2009 Report do not include all of the information and disclosures required byaccounting principles generally accepted in the United States of America (“GAAP”)for audited financial statements. In the opinion of management, this unauditedinformation includes all adjustments (consisting of normal recurringadjustments) necessary for the fair presentation of the interim financialinformation.

 

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

 

***Use of Estimates*****—**The preparationof the Company’s condensed consolidated financial statements in conformity withGAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and the disclosure of contingentassets and liabilities as of the date of the condensed consolidated financialstatements, and the reported amounts of revenues and expenses during thereporting periods. Actual results could materially differ from those estimates.Significant estimates used in preparing these condensed consolidated financialstatements include estimated costs to complete contracts, which have a directeffect on gross profit, estimates for worker’s compensation self insurancereserves, fair value estimates for financial assets and financial liabilities,reserves for bad debt and other accruals.

 

***Revenue recognition*****—**A number offactors relating to the business of the Company affect the recognition ofcontract revenue. The Company typically structures contracts as unit-price,time and material, fixed-price or cost plus fixed fee. Revenue is recognized onthe percentage-of-completion method for all fixed-price contracts. Under thepercentage-of-completion method, estimated contract income and resultingrevenue is generally accrued based on costs incurred to date as a percentage oftotal estimated costs. Total estimated costs, and thus contract revenue andincome, are impacted by changes in productivity, scheduling, the unit cost oflabor, 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.

 

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The caption “*Costsand estimated earnings in excess of billings*” represents the excessof contract revenues from fixed-priced contracts recognized under thepercentage-of-completion method over billings to date. For those fixed-pricedcontracts in which billings exceed contract revenues recognized to date, suchexcesses are included in the caption “*Billingsin excess of costs and estimated earnings*”.

 

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

 

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

 

**Note 3—RecentAccounting Pronouncements**

 

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

 

·                  FASB Staff PositionFAS 157-4, “*Determining Fair Value Whenthe Volume and Level of Activity for the Asset or Liability Have SignificantlyDecreased and Identifying Transactions That Are Not Orderly*” (“FSPFAS 157-4”) provides guidelines for making fair value measurements moreconsistent with the principles presented in Statement of Financial AccountingStandards (“SFAS”) No. 157. FSP FAS 157-4 provides additionalauthoritative guidance in determining whether a market is active or inactive,and whether a transaction is distressed. It is applicable to all assets and liabilities (i.e. financial andnon-financial) and will require enhanced disclosures.

 

·              FASB Staff PositionFAS 115-2 and FAS 124-2, “*Recognitionand Presentation of Other-Than-Temporary Impairments*” providesadditional guidance to provide greater clarity about the credit and noncreditcomponent of an other-than-temporary impairment event and to improvepresentation and disclosure of other-than-temporary impairments in thefinancial statements.

 

·                  FASB Staff PositionFAS 107-1 and APB 28-1, “*InterimDisclosures about Fair Value of Financial Instruments*” amends FASBStatement No. 107, “*Disclosures aboutFair Value of Financial Instruments*”, to require disclosures aboutfair value of financial instruments in interim as well as in annual financialstatements. This FSP also amends Accounting Principles Board (“APB”) Opinion No. 28,“*Interim Financial Reporting*”, torequire those disclosures in all interim financial statements.

 

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

 

In April, 2009, the FASBissued Staff Position FAS 141(R)-1, “*Accountingfor Assets Acquired and Liabilities Assumed in a Business Combination ThatArises from Contingencies*” which amends and clarifies FASB StatementNo. 141 (revised 2007), “*Business Combinations*”,and provides guidelines for the initial recognition and measurement, subsequentmeasurement and accounting, and disclosure of assets and liabilities arisingfrom contingencies in a business combination. This pronouncement will beeffective for any acquisition made after January 1, 2009.

 

In May 2009, the FASBissued SFAS No. 165, “*Subsequent Events*”.  SFAS No. 165 establishes generalstandards of accounting for and disclosure of events that occur after thebalance sheet date but before financial statements are issued. SFAS No. 165 is effective forinterim or annual periods ending after June 15, 2009. The adoption of SFASNo. 165 during the three months ended June 30, 2009, did not have amaterial effect on the Company’s consolidated financial statements.

 

SFAS No. 167, “*Amendments to FASB Interpretation No. 46R*” amends FASBInterpretation (“FIN”) No. 46 (Revised December 2003), “*Consolidation of Variable Interest Entities*,” sets rules fordetermining whether to consolidate an entity that is insufficiently capitalizedor is not controlled through voting (or similar rights). These rules arebased on an entity’s purpose and design and the company’s ability to direct theentity’s activities that most significantly impact the entity’s economicperformance.  SFAS 167 requiresadditional disclosures about the reporting company’s involvement withvariable-interest entities and any significant changes in risk exposure due tothat 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.

 

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

 

**Note 4—FairValue Measurements**

 

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

 

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

 

In general, fair values determined byLevel 1 use quoted prices (unadjusted) in active markets for identicalassets or liabilities. Fair values determined by Level 2 inputs use datapoints that are observable such as quoted prices, interest rates and yieldcurves. Fair values determined by Level 3 inputs are “unobservable datapoints” for the asset or liability and include situations where there islittle, if any, market activity for the asset or liability.

 

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

 
| ** **                                | ** ** | ** **                              | ** ** | **Fair Value Measurements at Reporting Date**                              | ** ** |
|-------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **Amount  Recorded  on Balance  Sheet** | ** ** | **Quoted Prices  in Active Markets  for Identical Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
| **Assets as of June 30,  2009:**     |       |                                    |       |                                                                       |       |   |   |   |   |
| Cash and cash equivalents                 |       | $                                       | 59,781     |                                                                       | $          | 59,781 |   | — |   | — |   |
| Short-term investments                    |       | $                                       | 15,091     |                                                                       | $          | 15,091 |   | — |   | — |   |
| **Assets as of  December 31, 2008:** |       |                                    |       |                                                                       |       |   |   |   |   |
| Cash and cash equivalents                 |       | $                                       | 73,018     |                                                                       | $          | 73,018 |   | — |   | — |   |
| Short-term investments                    |       | $                                       | 15,036     |                                                                       | $          | 15,036 |   | — |   | — |   |

 

In addition to the assets listed in thetable, other financial instruments of the Company consist of accountsreceivable, accounts payable and certain accrued liabilities. 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—AccountsReceivable**

 

The following is a summary of accountsreceivable:

 
| ** **                                                                 | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                 | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| Contracts receivable, net of allowance for  doubtful accounts of $200 |       | $                       | 78,514     |                        | $          | 73,430 |   |
| Retention                                                                  |       | 17,414                  |       | 15,804                      |       |
|                                                                       |       | 95,928                  |       | 89,234                      |       |
| Due from affiliates                                                        |       | —                  |       | 17                          |       |
| Other accounts receivable                                                  |       | 445                     |       | 1,575                       |       |
|                                                                       |       | $                       | 95,483     |                        | $          | 90,826 |   |

 

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

 

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

 

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**Note 6—Costsand Estimated Earnings on Uncompleted Contracts**

 

Costs and estimated earnings on uncompletedcontracts consist of the following:

 
| ** **                                                    | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| Costs incurred on uncompleted contracts                       |       | $                       | 1,003,956  |                        | $          | 1,267,650 |   |
| Provision for estimated (gain) loss on  uncompleted contracts |       | (353                    | )          | 700                         |       |
| Gross profit recognized                                       |       | 80,034                  |       | 95,608                      |       |
|                                                          |       | 1,083,637               |       | 1,363,958                   |       |
| Less: billings to date                                        |       | (1,130,076              | )          | (1,415,605                  | )          |
|                                                          |       | $                       | (46,439    | )                           | $          | (51,647 | ) |

 

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

 
| ** **                                          | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                          | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| Costs and estimated earnings in excess of  billings |       | $                       | 20,870     |                        | $          | 21,017 |   |
| Billings in excess of cost and estimated  earnings  |       | (67,309                 | )          | (72,664                     | )          |
|                                                |       | $                       | (46,439    | )                           | $          | (51,647 | ) |

 

**Note 7—Equity Method Investments**

 

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

 
| ** **                                       | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| **Otay Mesa Power  Partners—Joint Venture** |       |                    |       |                        |       |
| Balance sheet data                               |       |                    |       |                        |       |
| Assets                                           |       | $                       | 23,661     |                        | $          | 48,775 |   |
| Liabilities                                      |       | 18,663                  |       | 50,540                      |       |
| Net assets                                       |       | $                       | 5,298      |                        | $          | (1,765 | ) |
| Company’s equity investment in venture      |       | $                       | 979        |                        | $          | (706 | ) |

 
| ** **                        | ** ** | **Three  months ended June 30** | ** ** | **Six  months ended June 30,** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                        | ** ** | **2009**                             | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                        | ** ** | **(Unaudited)**                      | ** ** | **(Unaudited)**                     | ** ** |
| Earnings data:                    |       |                                 |       |                                |       |   |   |   |   |
| Revenue                           |       | $                                    | 34,494     |                                | $          | 26,140 |   | $ | 78,386 |   | $ | 48,176 |   |
| Gross profit                      |       | $                                    | 4,473      |                                | $          | 2,944 |   | $ | 15,558 |   | $ | 7,324 |   |
| Earnings before taxes             |       | $                                    | 4,475      |                                | $          | 3,010 |   | $ | 15,563 |   | $ | 7,568 |   |
| Company’s equity in earnings |       | $                                    | 2,700      |                                | $          | 1,204 |   | $ | 5,085 |   | $ | 3,027 |   |

 

OMPP distributed $8,500 to its equity holdersduring the six months ended June 30, 2009, of which the Company’s sharewas $3,400. The OMPP agreement states that distributions made prior to thecompletion of the contract are considered advances on account of the relatedpartner’s share as determined at the completion of the underlying contract. Thedeficit shown in the table above due to the excess distributions received as ofDecember 31, 2008 was included in accrued expenses on the Company’s condensedconsolidated balance sheet.

 

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

 

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

 

**Note 8—AccountsPayable and Accrued Liabilities**

 

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

 

The following is a summary of accruedexpenses and other current liabilities:

 
| ** **                                               | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                               | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| Payroll and related employee benefits                    |       | $                       | 8,571      |                        | $          | 6,981 |   |
| Insurance, including self-insurance  reserves            |       | 10,308                  |       | 9,994                       |       |
| Corporate income taxes and other taxes                   |       | 1,234                   |       | 2,807                       |       |
| Earn-out liability                                       |       | —                  |       | 615                         |       |
| Provision for estimated losses on  uncompleted contracts |       | 625                     |       | 700                         |       |
| Accrued leases and rents                                 |       | 418                     |       | 917                         |       |
| Accrued overhead cost                                    |       | 437                     |       | 1,521                       |       |
| OMPP liability                                           |       | —                  |       | 706                         |       |
| Other                                                    |       | 1,673                   |       | 1,826                       |       |
|                                                     |       | $                       | 23,266     |                        | $          | 26,067 |   |

 

**Note 9—Credit Arrangements**

 

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

 

Also prior to the Merger, in January 2008,Former Primoris entered into a credit facility (as amended) for purposes ofissuing 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 5 years, and provides for an annual fee of 1% for any issuedand outstanding commercial letters of credit. Letters of credit can bedenominated in either Canadian or U.S. dollars. As of June 30, 2009 and December 31,2008, total commercial letters of credit outstanding under this credit facilitytotaled $4,822 and $4,981 (in U.S. dollars), respectively.

 

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**Note 10—RelatedParty Transactions**

 

The Company has entered into varioustransactions with Stockdale Investment Group, Inc. (“SIGI”). The largeststockholder, Chief Executive Officer, President and Chairman of the Board ofDirectors of the Company, Brian Pratt, also holds a majority interest in SIGI.In addition, the following two officers and/or directors of the Company alsoserve as officers and/or directors of SIGI (with their respective positionswith SIGI reflected in parentheses): Brian Pratt (chairman and director) andJohn M. Perisich (secretary).

 

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

 

The Company leases properties from SIGIlocated in Bakersfield, Pittsburg and San Dimas, California, as well as aproperty in Pasadena, Texas. During the six months ended June 30, 2009 and2008, the Company paid $394 and $373, respectively, in lease payments to SIGIfor the use of these properties. Prior to the Merger, the Company also leasedcertain construction and transportation equipment from SIGI. This equipment waspurchased from SIGI on the closing date of the Merger and the leases wereterminated.

 

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

 

The Company leases certain property fromRoger Newnham, a manager at the subsidiary Born Heaters Canada. The property islocated in Calgary, Canada. This lease was entered into on similar terms asnegotiated with an independent third party. During the six-month period ended June 30,2009 and 2008, the Company paid $171 and $149, respectively, in lease paymentsto Mr. Newnham for the use of this property. The three-year lease for theCalgary property commenced in October 2005 and was renewed and extendeduntil September 2009.

** **

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

* *

*Income Taxes*

 

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

 

To determine its quarterly provision forincome taxes, the Company uses an estimated annual effective tax rate, which isbased on expected annual income, statutory tax rates and tax planningopportunities available in the various jurisdictions to which the Company issubject. Significant or unusual items are separately recognized in the quarterin which they occur and can be a source of variability in the effective taxrate from quarter to quarter.

 

Income taxes are accounted for under theasset and liability method. Deferred tax assets and liabilities are recognizedfor the future tax consequences of temporary differences between the financialreporting basis and tax basis of the Company’s assets and liabilities. Deferredtax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date.

 

The Company adopted the provisions of FIN 48,“*Accounting for Uncertainty in IncomeTaxes—an interpretation of FASB Statement No. 109*”, on January 1,2007. As of June 30, 2009 and December 31, 2008, there were norecorded liabilities 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.

 

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

 

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Theeffective tax rate for the three and six months ended June 30, 2008 was2.9% and 2.4%, respectively, representing primarily Canadian and Californiaincome taxes. Through July 31, 2008, the date of the Merger, FormerPrimoris elected to be taxed in accordance with Subchapter S of the UnitedStates Internal Revenue Code (“Code”) and similar codes for certain states.While this election was in effect, the income was taxed for federal income taxpurposes to the stockholders of Former Primoris. Accordingly, no provision forfederal income tax was required by Former Primoris.

 

*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%.

 

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

 

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

 

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

 
| ** **                                                            | ** ** | **Three months  ended June 30,** | ** ** | **Six months  ended June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                            | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                            | ** ** | **(Unaudited)**                                 | ** ** | **(Unaudited)**                               | ** ** |
| ** **                                                            | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Numerator:**                                                        |       |                                            |       |                                          |       |   |   |   |   |
| Net income                                                            |       | $                                               | 8,580      |                                          | $          | 8,769 |   | $ | 14,220 |   | $ | 18,551 |   |
| Net income (pro forma – 2008) – (1)                         |       | $                                               | 8,580      |                                          | $          | 5,435 |   | $ | 14,220 |   | $ | 11,441 |   |
| **Denominator:**                                                      |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average shares for computation of basic earnings per share   |       | 32,477                                          |       | 23,587                                        |       | 31,303 |   | 23,587 |   |
|                                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Dilutive effect of warrants and units (2)                             |       | 358                                             |       | —                                        |       | — |   | — |   |
|                                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Dilutive effect of contingently issuable shares (3)                   |       | —                                          |       | —                                        |       | 1,174 |   | — |   |
|                                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average shares for computation of diluted earnings per share |       | 32,835                                          |       | 23,587                                        |       | 32,477 |   | 23,587 |   |
|                                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Basic earnings per share                                              |       | $                                               | 0.26       |                                          | $          | 0.37 |   | $ | 0.45 |   | $ | 0.79 |   |
|                                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Diluted earnings per share                                            |       | $                                               | 0.26       |                                          | $          | 0.37 |   | $ | 0.44 |   | $ | 0.79 |   |
|                                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Basic earnings per share (pro forma – 2008) – (1)           |       | $                                               | 0.26       |                                          | $          | 0.23 |   | $ | 0.45 |   | $ | 0.49 |   |
|                                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Diluted earnings per share (pro forma – 2008) – (1)         |       | $                                               | 0.26       |                                          | $          | 0.23 |   | $ | 0.44 |   | $ | 0.49 |   |

 

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(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.

 

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(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. It was determined that the targetswould be met in September 2008 and were included as part of the dilutedshares outstanding. Subsequent to the shares being issued on March 17,2009, the shares were included as part of the basic weighted average sharesoutstanding.  No dilutive impact isincluded for an additional 2,500,000 shares of stock, which may be issued in2010, contingent upon meeting a defined performance target for 2009.

 

**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 SFAS No. 13, “*Accounting for Leases*”.

 

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

 

***Letters of credit****—*At June 30,2009 and December 31, 2008, the Company had letters of credit 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 June 30,2009 and December 31, 2008, the Company had bid and payment/performancebonds issued and outstanding totaling $255,321 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 June 30, 2009 and 2008:

 
| ** **            | ** ** | **For the three months ended June 30,** | ** ** |
|-----------------------|------------|----------------------------------------------|------------|
| ** **            | ** ** | **2009**                                     | ** ** | **2008** | ** ** |
| **Segment**           | ** ** | **Revenue**                                  | ** ** | **% of  Segment  Revenue** | ** ** | **Revenue** | ** ** | **% of  Segment  Revenue** | ** ** |
| ** **            | ** ** | **(Unaudited)**                              | ** ** |
| Construction Services |       | $                                            | 113,538    |   | 89.5 | % | $ | 120,329 |   | 84.5 | % |
| Engineering           |       | 13,362                                       |       | 10.5 | % | 22,115 |   | 15.5 | % |
| Total                 |       | $                                            | 126,900    |   | 100.0 | % | $ | 142,444 |   | 100.0 | % |

 

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

 
| ** **            | ** ** | **For the six months ended June 30,** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|
| ** **            | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| **Segment**           | ** ** | **Revenue**                                | ** ** | **% of  Segment  Revenue** | ** ** | **Revenue** | ** ** | **% of  Segment  Revenue** | ** ** |
| ** **            | ** ** | **(Unaudited)**                            | ** ** |
| Construction Services |       | $                                          | 223,509    |   | 87.4 | % | $ | 266,697 |   | 85.5 | % |
| Engineering           |       | 32,129                                     |       | 12.6 | % | 45,138 |   | 14.5 | % |
| Total                 |       | $                                          | 255,638    |   | 100.0 | % | $ | 311,835 |   | 100.0 | % |

 

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

 
| ** **            | ** ** | **For the three months ended June 30,** | ** ** |
|-----------------------|------------|----------------------------------------------|------------|
| ** **            | ** ** | **2009**                                     | ** ** | **2008** | ** ** |
| **Segment**           | ** ** | **Gross  Profit**                            | ** ** | **% of  Segment  Revenue** | ** ** | **Gross  Profit** | ** ** | **% of  Segment  Revenue** | ** ** |
| ** **            | ** ** | **(Unaudited)**                              | ** ** |
| Construction Services |       | $                                            | 19,656     |   | 17.3 | % | $ | 13,203 |   | 11.0 | % |
| Engineering           |       | 1,267                                        |       | 9.5 | % | 1,431 |   | 6.5 | % |
| Total                 |       | $                                            | 20,923     |   | 16.5 | % | $ | 14,634 |   | 10.3 | % |

 

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

 
| ** **            | ** ** | **For the six months ended June 30,** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|
| ** **            | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| **Segment**           | ** ** | **Gross  Profit**                          | ** ** | **% of  Segment  Revenue** | ** ** | **Gross  Profit** | ** ** | **% of  Segment  Revenue** | ** ** |
| ** **            | ** ** | **(Unaudited)**                            | ** ** |
| Construction Services |       | $                                          | 32,675     |   | 14.6 | % | $ | 27,999 |   | 10.5 | % |
| Engineering           |       | 2,976                                      |       | 9.3 | % | 2,848 |   | 6.3 | % |
| Total                 |       | $                                          | 35,651     |   | 14.0 | % | $ | 30,847 |   | 9.9 | % |

 

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 six months ended June 30,** | ** ** | ** **        | ** ** | ** **       | ** ** |
|---------------|------------|--------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **    | ** ** | **2009**                                   | ** ** | **2008**          | ** ** | **Total Assets** | ** ** |
| **Country:**  | ** ** | **Revenue**                                | ** ** | **% of  Revenue** | ** ** | **Revenue**      | ** ** | **% of  Revenue** | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
| ** **    | ** ** | **(Unaudited)**                            | ** ** | **(Unaudited)**   | ** ** | ** **       | ** ** |
| United States |       | $                                          | 230,826    |              | 90.3       | %                | $          | 302,522 |   | 97.0 | % | $ | 219,999 |   | $ | 231,642 |   |
| Canada        |       | 12,334                                     |       | 4.8               | %          | 9,112            |       | 2.9 | % | 14,658 |   | 12,514 |   |
| Ecuador       |       | 12,478                                     |       | 4.9               | %          | 201              |       | 0.1 | % | 7,515 |   | 8,056 |   |
|          |       | $                                          | 255,638    |              | 100.0      | %                | $          | 311,835 |   | 100.0 | % | $ | 242,172 |   | $ | 252,212 |   |

 

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**Note 15—SubsequentEvent**

 

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

 

Approximately160 Primoris personnel were assigned to the Richmond project. Approximately one-halfof these workers will remain on site, as permitted by the judge’s order, toassist with demobilization and site preservation, with a smaller contingentpotentially remaining on site for preservation post- demobilization. Theremaining one-half of the Richmond workforce were reassigned to other Companyprojects or laid-off. Praxair has continued to meet all of its contractualobligations to Primoris. At June 30, 2009, the Company estimates that thebacklog associated with the Richmond contract was approximately $52.0 million,which, based on the scheduled project completion date, would have been realizedover the next three quarters.

 

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**PRIMORIS SERVICES CORPORATION**

**MANAGEMENT’SDISCUSSION AND ANALYSIS**

 

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

 

***Forward Looking Statements***

 

*This Quarterly Report on Form 10-Q containsforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended (“Exchange Act”), which are subject to the “safeharbor” created by those sections. Forward-looking statements includeinformation concerning our possible or assumed future results of operations,business strategies, financing plans, competitive position, industryenvironment, potential growth opportunities, the effects of regulation and theeconomy, generally. Forward-looking statements include all statements that arenot historical facts and can be identified by terms such as “anticipates,” “believes,”“could,” “estimates,” “expects,” “intends, “may,” “plans,” “potential,” “predicts,”“projects,” “should,” “will,” “would” or similar expressions.*

 

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

 

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

 

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

 

**Introduction**

 

PrimorisServices Corporation is a holding company with various subsidiaries thatcumulatively form a diversified engineering and construction companyproviding a wide range of construction, fabrication, maintenance, replacementand engineering services to major public utilities, petrochemical companies,energy companies, municipalities and other customers.

 

Weinstall, replace, repair and rehabilitate natural gas, refined product,telecommunications, water and wastewater pipeline systems, and also constructmechanical facilities and other structures, including power plants,petrochemical facilities, refineries and parking structures. In addition, weprovide maintenance services, including inspection, overhaul and emergencyrepair services, to cogeneration plants, refineries and similar mechanicalfacilities. Through our subsidiary Onquest, Inc., we provide engineeringand design services for fired heaters and furnaces primarily used in refineryapplications. Through our subsidiary Cardinal Contractors, Inc., weconstruct water and wastewater facilities in Florida. A substantial portion ofour activities are performed in the Western United States, and morespecifically in California. In addition, we have strategic presences inFlorida, Texas, Latin America and Canada.

 

OnJuly 31, 2008, we completed a merger (“Merger”) of Rhapsody AcquisitionCorp. (“Rhapsody”) and Primoris Corporation, a privately held Nevadacorporation (“Former Primoris”). Unless specifically noted otherwise, as usedthroughout this Quarterly Report on Form 10-Q, “Primoris”, the “Company”or “we,” “our,” or “us” refers to the business, operations and financialresults of Former Primoris prior to, and Primoris Services Corporationsubsequent to, the closing of the Merger on July 31, 2008, betweenRhapsody and Former Primoris as the context requires. “Rhapsody” refers to theoperations or financial results of Rhapsody Acquisition Corp. prior to theclosing of the Merger.

 

TheMerger was accounted for as a reverse acquisition. Under this method ofaccounting, we were treated as the “acquired” company for financial reportingpurposes. This determination was primarily based on the operations andmanagement of Former Primoris comprising the ongoing operations and managementof the Company after the Merger. In accordance with guidance applicable tothese circumstances, the Merger was considered to be a capital transaction in substance.Accordingly, for accounting purposes, the Merger was treated as the equivalentof Former Primoris issuing stock for our net assets, accompanied by arecapitalization. Our pre-Merger net assets are stated at historical cost, withno goodwill or other intangible assets recorded.

 

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

 

Weprovide services in the following two segments:

 

***Construction Services Segment:***

 

TheConstruction Services segment specializes in a range of services that includedesigning, building/installing, replacing, repairing/rehabilitating andproviding management services for construction related projects. Our servicesinclude:

 

·                  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 the petroleum,petrochemical and water industries; and

 

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

 

***Engineering Segment:***

 

TheEngineering segment specializes in designing, supplying and installinghigh-performance furnaces, heaters, burner management systems and relatedcombustion and process technologies for clients in the oil refining,petrochemical and power generation industries. It also furnishes turnkeyproject management with the technical expertise and the ability to delivercustom engineering solutions worldwide.

 

**Material trends and uncertainties**

 

Wegenerate our revenue from both large and small construction and engineeringprojects. The award of these contracts is dependent on a number of factors,many of which are not within our control. Business in the construction industryis cyclical. We depend in part on spending by companies in the energy, and oiland gas industries, as well as on municipal water and wastewater customers.Over the past several years, both our Construction Services and Engineeringsegments have benefited from demand for more efficient and more environmentallyfriendly energy and power facilities and from the past strength of the oil andgas industry. Economic factors outside of our control may affect the amount andsize of contracts in any particular period.

 

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

 

**Seasonality and cyclicality**

 

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

 

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**Results of operations**

 

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

 
| ** **                                  | ** ** | **Three Months Ended June 30,**        | ** ** |
|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                  | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| ** **                                  | ** ** | **(Thousands,  except per share  amounts)** | ** ** | **% of  Revenue** | ** ** | **(Thousands,  except per share  amounts)** | ** ** | **% of  Revenue** | ** ** |
| Revenues                                    |       | $                                           | 126,900    |   | 100.0 | % | $ | 142,444 |   | 100.0 | % |
| Gross profit                                |       | 20,923                                      |       | 16.5 | % | 14,634 |   | 10.3 | % |
| Selling, general and administrative expense |       | 8,388                                       |       | 6.6 | % | 6,622 |   | 4.6 | % |
| Operating income                            |       | 12,535                                      |       | 9.9 | % | 8,012 |   | 5.6 | % |
| Other income (expense)                      |       | 1,376                                       |       | 1.1 | % | 1,016 |   | 0.7 | % |
| Income before income taxes                  |       | 13,911                                      |       | 11.0 | % | 9,028 |   | 6.3 | % |
| Income tax provision (1)                    |       | (5,331                                      | )          | (4.2 | )% | (259 | ) | (0.2 | )% |
| Net income                                  |       | $                                           | 8,580      |   | 6.8 | % | $ | 8,769 |   | 6.2 | % |
| Net income per share:                       |       |                                        |       |   |   |   |   |   |   |
| Basic                                       |       | $                                           | 0.26       |   |   |   | $ | 0.37 |   |   |   |
| Diluted                                     |       | $                                           | 0.26       |   |   |   | $ | 0.37 |   |   |   |
| Weighted average common shares outstanding  |       |                                        |       |   |   |   |   |   |   |
| Basic                                       |       | 32,477                                      |       |   |   | 23,587 |   |   |   |
| Diluted                                     |       | 32,835                                      |       |   |   | 23,587 |   |   |   |
|                                        |       |                                        |       |   |   |   |   |   |   |
| ** **                                  | ** ** | **Six Months Ended June 30,**          | ** ** |
| ** **                                  | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| ** **                                  | ** ** | **(Thousands,  except per share  amounts)** | ** ** | **% of  Revenue** | ** ** | **(Thousands,  except per share  amounts)** | ** ** | **% of  Revenue** | ** ** |
| Revenues                                    |       | $                                           | 255,638    |   | 100.0 | % | $ | 311,835 |   | 100.0 | % |
| Gross profit                                |       | 35,651                                      |       | 14.0 | % | 30,847 |   | 9.9 | % |
| Selling, general and administrative expense |       | 16,002                                      |       | 6.3 | % | 14,623 |   | 4.7 | % |
| Operating income                            |       | 19,649                                      |       | 7.7 | % | 16,224 |   | 5.2 | % |
| Other income (expense)                      |       | 3,512                                       |       | 1.4 | % | 2,781 |   | 0.9 | % |
| Income before income taxes                  |       | 23,161                                      |       | 9.1 | % | 19,005 |   | 6.1 | % |
| Income tax provision (1)                    |       | (8,941                                      | )          | (3.5 | )% | (454 | ) | (0.1 | )% |
| Net income                                  |       | $                                           | 14,220     |   | 5.6 | % | $ | 18,551 |   | 5.9 | % |
| Net income per share:                       |       |                                        |       |   |   |   |   |   |   |
| Basic                                       |       | $                                           | 0.45       |   |   |   | $ | 0.79 |   |   |   |
| Diluted                                     |       | $                                           | 0.44       |   |   |   | $ | 0.79 |   |   |   |
| Weighted average common shares outstanding  |       |                                        |       |   |   |   |   |   |   |
| Basic                                       |       | 31,303                                      |       |   |   | 23,587 |   |   |   |
| Diluted                                     |       | 32,477                                      |       |   |   | 23,587 |   |   |   |

 

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(1)              As discussed in “Provision for income taxes” and “Proforma net income data” below, the Company made a change in our tax status fromthat of Subchapter S of the Internal Revenue Code (“S-Corporation”) to that ofSubchapter 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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Revenuefor the three and six months ended June 30, 2009 were $126.9 and$255.6 million, respectively, a decrease of $15.5 and $56.2 million, or 10.9%and 18.0%, respectively, compared to the same periods in 2008. During the year2008, we attained record levels of revenue and operating income, and have seena decrease in both the Construction Services and Engineering segments duringthe three and six months ended June 30, 2009, which is in part a resultof  the current economic issues in themarketplace, especially in the United States. The decrease in revenues compared to the same period a year ago were dueprimarily to decreased revenues in refining sector projects and water andwastewater sector projects and the performance of an unusually largeengineering project during 2008, partially offset by increased revenue inunderground projects, and from our Ecuador subsidiary.

 

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

 

**Geographic areas financial information**

 

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

 
| ** **     | ** ** | **Six Months  Ended June 30,** | ** ** |
|----------------|------------|-------------------------------------|------------|
| ** **     | ** ** | **2009**                            | ** ** | **2008** | ** ** |
| ** **     | ** ** | **(Thousands)**                     | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
| ***Country:*** |       |                                |       |   |   |   |   |   |   |
| United States  |       | $                                   | 230,826    |   | 90.3 | % | $ | 302,521 |   | 97.0 | % |
| Canada         |       | 12,334                              |       | 4.8 | % | 9,112 |   | 2.9 | % |
| Ecuador        |       | 12,478                              |       | 4.9 | % | 201 |   | 0.1 | % |
| Total Revenue  |       | $                                   | 255,638    |   | 100.0 | % | $ | 311,835 |   | 100.0 | % |

 

Note that revenue isattributed to the countries based on our reporting entity that records thetransaction 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 six months ended June 30,2009 and 2008 were as follows:

 
| ** **                  | ** ** | **Three  Months Ended June 30,** | ** ** |
|-----------------------------|------------|---------------------------------------|------------|
| ** **                  | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| ** **                  | ** ** | **(Thousands)**                       | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
| ***Construction Services*** |       |                                  |       |   |   |   |   |   |   |
| Revenue                     |       | $                                     | 113,538    |   |   |   | $ | 120,329 |   |   |   |
| Gross Profit                |       | $                                     | 19,656     |   | 17.3 | % | $ | 13,203 |   | 11.0 | % |

 
| ** **                  | ** ** | **Six Months  Ended June 30,** | ** ** |
|-----------------------------|------------|-------------------------------------|------------|
| ** **                  | ** ** | **2009**                            | ** ** | **2008** | ** ** |
| ** **                  | ** ** | **(Thousands)**                     | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
| ***Construction Services*** |       |                                |       |   |   |   |   |   |   |
| Revenue                     |       | $                                   | 223,509    |   |   |   | $ | 266,696 |   |   |   |
| Gross Profit                |       | $                                   | 32,675     |   | 14.6 | % | $ | 27,999 |   | 10.5 | % |

 

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Revenue for the ConstructionServices segment decreased by $6.8 and $43.2 million, or 5.6% and 16.2%,respectively, for the three and six months ended June 30, 2009, comparedto the same periods in 2008. These revenue decreases were due primarily toreduced revenues for projects in the refining and water and wastewater sectorscompared to the same period in 2008. The revenue decrease for the six monthsended June 30, 2009 were offset by increased revenue of $29.8 millionin underground 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 six months ended June 30,2009 increased by $12.3 million due to two ongoing projects.

 

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

 

*Engineering Segment*

 

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

 
| ** **        | ** ** | **Three  Months Ended June 30,** | ** ** |
|-------------------|------------|---------------------------------------|------------|
| ** **        | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| ** **        | ** ** | **(Thousands)**                       | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
| ***Engineering*** |       |                                  |       |   |   |   |   |   |   |
| Revenue           |       | $                                     | 13,362     |   |   |   | $ | 22,115 |   |   |   |
| Gross Profit      |       | $                                     | 1,267      |   | 9.5 | % | $ | 1,431 |   | 6.5 | % |

 
| ** **        | ** ** | **Six Months  Ended June 30,** | ** ** |
|-------------------|------------|-------------------------------------|------------|
| ** **        | ** ** | **2009**                            | ** ** | **2008** | ** ** |
| ** **        | ** ** | **(Thousands)**                     | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
| ***Engineering*** |       |                                |       |   |   |   |   |   |   |
| Revenue           |       | $                                   | 32,129     |   |   |   | $ | 45,138 |   |   |   |
| Gross Profit      |       | $                                   | 2,976      |   | 9.3 | % | $ | 2,848 |   | 6.3 | % |

 

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

 

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

 

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**Selling, general and administrative expenses**

 

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

 

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

 

SG&A as a percentage ofrevenue increased to 6.6% for the Second Quarter 2009, from 4.6% for the sameperiod in 2008 and 6.3% for the six months ended June 30, 2009 compared to4.7% for the same period in the prior year. The increased percentage for boththe Second Quarter 2009 and the six months ended June 30, 2009, was due tothe increased costs discussed above as well as due to the relatively fixednature 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 six months ended June 30, 2009 and 2008were as follows:

 
| ** **                                | ** ** | **Three  Months  Ended June 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|
| ** **                                | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| ** **                                | ** ** | **(Thousands)**                        | ** ** |
| ***Other income (expense)***              |       |                                   |       |   |   |
| Income from  non-consolidated investments |       | $                                      | 1,736      |   | $ | 1,204 |   |
| Foreign exchange gain  (loss)             |       | (26                                    | )          | (41 | ) |
| Interest income (expense),  net           |       | (334                                   | )          | (147 | ) |
| Total other income                        |       | $                                      | 1,376      |   | $ | 1,016 |   |

 
| ** **                                | ** ** | **Six Months  Ended June 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------|------------|
| ** **                                | ** ** | **2009**                            | ** ** | **2008** | ** ** |
| ** **                                | ** ** | **(Thousands)**                     | ** ** |
| ***Other income (expense)***              |       |                                |       |   |   |
| Income from  non-consolidated investments |       | $                                   | 3,903      |   | $ | 3,027 |   |
| Foreign exchange gain  (loss)             |       | 203                                 |       | (22 | ) |
| Interest income (expense),  net           |       | (594                                | )          | (224 | ) |
| Total other income                        |       | $                                   | 3,512      |   | $ | 2,781 |   |

 

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

 

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

 

Foreign exchange results forthe three and six months ended June 30, 2009 and for the same period in2008 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$0.2 million and $0.5 million for the three and six months ended June 30,2009 compared to the same period in 2008. This was due to declining interestrates, as well as our decision to invest excess cash balances in Treasury billsand certificates of deposit (“CDs”) rather than commercial paper. Interest expensefor both the three and six months ended June 30, 2009 was approximatelythe same, compared to the same period in 2008.

 

**Provision for income taxes**

 

Our provision for income taxincreased $5.1 million for the three months ended June 30, 2009 to$5.3 million, and $8.5 million for the six months ended June 30, 2009to $8.9 million, compared to the same period in 2008, as a result of a changein our tax status from that of Subchapter S of the Internal Revenue Code (“S-Corporation”)to that of Subchapter C of the Internal Revenue Code (“C-Corporation”) aspart of the Merger. Thereafter, the combined entity became subject to federaland state income tax in the jurisdictions in which we do business, includingCalifornia. With the change in tax status, our effective tax rate for theSecond Quarter 2009 was 38.3%. Prior to the Merger, as an S-Corporation, we hadno provision for federal income tax and only minimal provision for state incometax.

 

**Pro forma net income data**

 

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

 
| ** **                                           | ** ** | **Three  Months Ended  June 30,**      | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                           | ** ** | **As reported  2009**                       | ** ** | **Pro forma  2008** | ** ** |
| ** **                                           | ** ** | **(Thousands,  except  per share amounts)** | ** ** |
| Income before provision  for income tax, as reported |       | $                                           | 13,911     |   | $ | 9,028 |   |
| Provision for income tax                             |       | (5,331                                      | )          | (3,593 | ) |
| Net income                                           |       | $                                           | 8,580      |   | $ | 5,435 |   |
| Earnings per share:                                  |       |                                        |       |   |   |
| Basic                                                |       | $                                           | 0.26       |   | $ | 0.23 |   |
| Diluted                                              |       | $                                           | 0.26       |   | $ | 0.23 |   |

 
| ** **                                           | ** ** | **Six Months  Ended  June 30,**        | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                           | ** ** | **As reported  2009**                       | ** ** | **Pro forma  2008** | ** ** |
| ** **                                           | ** ** | **(Thousands,  except  per share amounts)** | ** ** |
| Income before provision  for income tax, as reported |       | $                                           | 23,161     |   | $ | 19,005 |   |
| Provision for income tax                             |       | (8,941                                      | )          | (7,564 | ) |
| Net income                                           |       | $                                           | 14,220     |   | $ | 11,441 |   |
| Earnings per share:                                  |       |                                        |       |   |   |
| Basic                                                |       | $                                           | 0.45       |   | $ | 0.49 |   |
| Diluted                                              |       | $                                           | 0.44       |   | $ | 0.49 |   |

 

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

 

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**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 hasreached unprecedented levels. As a result of concern about the stability of themarkets and the strength of counterparties, many lenders and institutionalinvestors have reduced and, in some cases, ceased to provide funding toborrowers resulting in severely diminished liquidity and credit availability.At this time, the extent to which these conditions will persist is unclear. To date,the Company’s cost and availability of funding has not been adversely affectedby illiquid credit markets, and we do not expect it to be materially impactedin the near future.

 

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

 

**Cash Flows**

 

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

 
| ** **                                        | ** ** | **Six Months  Ended  June 30,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                        | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **                                        | ** ** | **(Thousands)**                      | ** ** |
| ***Change in cash:***                             |       |                                 |       |   |   |
| Net cash provided (used)  by operating activities |       | $                                    | 793        |   | $ | 41,382 |   |
| Net cash provided (used)  in investing activities |       | (2,516                               | )          | (2,878 | ) |
| Net cash provided (used)  in financing activities |       | (11,514                              | )          | (21,198 | ) |
| Net change in cash                                |       | $                                    | (13,237    | ) | $ | 17,306 |   |

 

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**Operating Activities**

 

Thesource and use of our cash flow from operating activities and the use of aportion of that cash in our operations for the six months ended June 30,2009 and 2008 were as follows:

 
| ** **                                       | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                       | ** ** | **2009**                            | ** ** | **2008** | ** ** |
| ** **                                       | ** ** | **(Thousands)**                     | ** ** |
| ***Operating Activities:***                      |       |                                |       |   |   |
| Operating income                                 |       | $                                   | 19,649     |   | $ | 16,224 |   |
| Depreciation and amortization                    |       | 3,990                               |       | 2,967 |   |
| Amortization of other intangible assets          |       | 18                                  |       | 18 |   |
| Gain on sale of property and equipment           |       | (1,499                              | )          | (484 | ) |
| Changes in assets and liabilities                |       | (15,433                             | )          | 22,791 |   |
| Non-consolidated entity distributions            |       | 3,400                               |       | 566 |   |
| Foreign exchange gain (loss)                     |       | 203                                 |       | (22 | ) |
| Interest income (expense), net                   |       | (594                                | )          | (224 | ) |
| Provision for income taxes                       |       | (8,941                              | )          | (454 | ) |
| Net cash provided (used) by operating activities |       | $                                   | 793        |   | $ | 41,382 |   |
|                                             |       |                                |       |   |   |
| Capital expenditures – Cash                 |       | $                                   | (3,077     | ) | $ | (3,665 | ) |
| Capital expenditures - Financed                  |       | $                                   | (3,023     | ) | $ | (7,075 | ) |

 

The changes in assets andliabilities decreased operating cash flow by $15.4 million during the sixmonths ended June 30, 2009. The components of this change are included inthe consolidated statements of cash flow. The significant changes include:

 

·                  a$4.7 million increase in accounts receivable;

 

·                  a$7.6 million decrease in accounts payable;

 

·                  billings inexcess of costs and estimated earnings decreased by $5.4 million;

 

·                  accruedexpenses and other current liabilities decreased by $2.1 million;

 

·                  inventory,prepaids and other current assets decreased by $1.5 million; and

 

·                  restricted cashdecreased by $2.8 million.

 

As of June 30, 2009,accounts receivable represented 39.4% of total assets. We have an excellentcollection history stemming from many factors, including performing work forrecurring customers and substantial pre-acceptance review of the financialworthiness and credit history of new customers. We bill customers on an ongoingbasis as projects are being constructed. As a contractor, we have certain lienrights that can provide additional security on the accounts receivable that aregenerated, which may give priority to us over lenders or certain othercreditors of the project. The increases in accounts receivable and thereductions in accounts payable as of June 30, 2009 are due primarily tothe timing of our billings to clients and payments to our vendors related tovarious construction projects.

 

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.

 

***Investing activities***

 

We purchased property andequipment for $6.1 million during the six months ended June 30, 2009, ascompared to $10.7 million during the same period in 2008. These purchaseswere principally for our construction activities. We paid $3.1 million in cashfor the purchases and incurred $3.0 million in additional loanobligations, secured by the underlying equipment. We believe the ownership ofequipment is generally preferable to renting equipment on a project by projectbasis, as ownership helps to ensure the availability of equipment when needed.In addition, ownership has historically resulted in lower overall equipmentcosts.

 

As part of our cash managementprogram, we sold $10.1 million of short-term investments during the SecondQuarter 2009, which primarily consisted of CDs purchased through the CDARS(Certificate of Deposit Account Registry Service) process to provide FDICbacking of the CDs.

 

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***Financing activities***

 

Financing activitiesrequired the use of $11.5 million during the six months ended June 30, 2009.Significant transactions using cash flows from financing activities included:

 

·                  Cashdistributions of $4.9 million were paid to the Former Primorisstockholders during the six months ended June 30, 2009. We provideddistributions to the Former Primoris stockholders during the period that theCompany was an S-Corporation, principally to allow them to pay their personalincome tax liability stemming from the profits of the Company. This finaldistribution to Former Primoris stockholders was made in accordance with theterms of the merger agreement as part of the Merger.

 

·                  $4.0 millionduring the six months ended June 30, 2009 in repayment of long-term debtas compared to $3.2 for the same period of 2008, based on scheduled maturitiesof such debt.

 

·                  $0.8 millionwas paid as dividends to our stockholders during the Second Quarter 2009(representing a dividend of $0.025 per share) with a total of $1.6 million paidduring the six months ended June 30, 2009.

 

·                  $0.1 millionfor the re-purchase of our warrants during the six months ended June 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 six months ended June 30,2009, our operations used net cash of $0.2 million, compared to $41.4million of cash provided in the same period of 2008. For the six months ended June 30,2008, we experienced a substantial cash inflow of $12.1 million relatingto billings in excess of costs and estimated earnings, meaning that we receivedcash prior to performing the required construction or engineering work. For thesix months ended June 30, 2009, we experienced a decrease in cash as weused $5.4 million to pay in advance to complete the work to be performed.This change in cash typically will vary based on the timing of work and therelated contractual billings on our 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.

 

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 atany time 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.

 

**Credit agreements**

 

In October 2008, weborrowed $3.0 million from a bank at an interest rate of 5.5%. The termsof the signed note call for 60 consecutive monthly payments of principal andinterest in the amount of $58,000 which commenced on November 3, 2008,with a maturity date of October 3, 2013. The note is secured by certainconstruction equipment. The note is guaranteed by our largest subsidiary, ARB, Inc.

 

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In October 2008, weterminated a lease on an older airplane, and on October 17, 2008, weentered into a note agreement through our subsidiary, Stellaris, LLC, for$3.8 million with a bank to finance the purchase of a replacement airplanefor business use. The note is secured by the airplane and all related parts andequipment. The terms of the note calls for 59 monthly payments ofprincipal and interest of $43,000 which began November 10, 2008, followedby one installment payment of $2.1 million in addition to any accrued andoutstanding interest due. The note accrues interest at a rate of 5.6% annually.The note allows for prepayment with certain prepayment penalties if exercisedin less than 36 months, and after that, the loan can be paid in fullwithout penalty.

 

In March 2007, weentered into a revolving line of credit agreement payable to Bank of America,N.A. (successor by merger to LaSalle Bank National Association) with aninterest rate of prime or at LIBOR plus an applicable margin. The revolvingline is secured by substantially all of our assets. Under the line of creditagreement, we can borrow up to $30.0 million, and all amounts borrowedunder the line of credit are due March 31, 2010.

 

In January 2008, weentered into a credit facility (as amended) for purposes of issuing commercialletters of credit in Canada for an amount up to 10 million in Canadiandollars. The credit facility, with a Canadian bank, is for a term of5 years and provides for an annual fee of 1% for any issued andoutstanding commercial letters of credit. Letters of credit can be denominatedin either Canadian or U.S. dollars.

 

Our subsidiaries and weenter into agreements with banks for the banks to issue letters of credit toclients or potential clients for the following purposes:

 

·                  Born HeatersCanada, one of our subsidiaries, has entered into contracts for the delivery ofengineered equipment, which require letters of credit. These letters of creditmay be drawn upon by the client in instances where Born Heaters Canada fails toprovide the contracted services or equipment. Most of these letters of creditare for Canadian exports, 90% of that amount is guaranteed by the EconomicDevelopment Bank of Canada against “unfair” calling.

 

·                  Insurancecompanies may from time to time require letters of credit to cover the risk ofinsurance deductible programs. These letters of credit can be drawn upon by theinsurance company if we fail to pay the deductible of certain insurancepolicies in case of a claim.

 

The Bank of America line ofcredit agreement and the Canadian credit facility dated January 2008contain restrictive covenants, including, among others, restrictions oninvestments, minimum working capital and tangible net worth requirements. Wewere in compliance with all restrictive covenants during and as of the sixmonths ended June 30, 2009. None of these covenants are consideredrestrictive to our business.

 

**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 six months ended June 30, 2009 and2008, we paid $394 and $373, respectively, in lease payments to SIGI for theuse 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. During the six months ended June 30, 2009and 2008, we paid $70 and $119, respectively, in lease payments to SIGI for theuse 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 six months ended June 30,2009 and 2008, we paid $171 and $149, 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 2009.

 

**Contractual Obligations**

 

As of June 30, 2009, wehad $33.0 million of outstanding long-term debt and capital leaseobligations.

 

A summary of contractualobligations as of June 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    |       | $               | 32,952     |       | $          | 7,628         |       | $             | 13,226     |               | $          | 12,098 |   | $ | — |   |
| Interest on long-term debt                       |       | 4,632           |       | 1,739      |       | 2,276         |       | 617           |       | —             |       |
| Equipment operating leases                       |       | 6,901           |       | 3,067      |       | 3,751         |       | 83            |       | —             |       |
| Equipment operating leases—related  parties |       | —          |       | —     |       | —        |       | —        |       | —             |       |
| Real property leases                             |       | 4,657           |       | 1,470      |       | 2,138         |       | 1,049         |       | —             |       |
| Real property  leases—related parties       |       | 7,147           |       | 931        |       | 1,743         |       | 1,816         |       | 2,657              |       |
|                                             |       | $               | 56,289     |       | $          | 14,835        |       | $             | 23,134     |               | $          | 15,663 |   | $ | 2,657 |   |
| Stand-by letters of credit                       |       | $               | 5,498      |       | $          | 1,337         |       | $             | 4,161      |               | $          | — |   | $ | — |   |

 

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 June 30, 2009, we had lettersof credit outstanding of $5.5 million.

 

·                  Equipmentoperating leases with a balance of $6.9 million at June 30, 2009.

 

·                  In the ordinarycourse of our business, we may be required by our customers to post surety bidor completion bonds in connection with services that we provide. At June 30,2009, we had $255 million in outstanding bonds.

 

**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.

 

At June 30, 2009, ourtotal backlog of $271.0 million decreased $71.6 million, or 20.9%,from $342.7 million as of June 30, 2008. The backlog includesapproximately $ 52.0 million related to the recently announced demobilizationat Chevron Corp’s Richmond Refinery project located in Contra Costa,California. The project had been halted by a judge’s ruling followingopposition from environmental groups and what the judge identified asinadequacies in Chevron’s environmental impact report. Chevron filed an appealto overturn the judge’s order. The future of the project remains in questionuntil the appeals court can decide the issues. The project, under contract fromPraxair, Inc, was in process since September 2008. Excluding the $52.0million impact on backlog for the Chevron project, net backlog would be $219.0 million.  We expect that approximately$149.0 million, or 68.0%, of the net backlog at June 30, 2009, willbe recognized as revenue during the remainder of 2009.

 

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Backlog by operating segmentat June 30, 2009 and 2008 was as follows:

 
| ** **            | ** ** | **As of  June 30,** | ** ** |
|-----------------------|------------|--------------------------|------------|
| ** **            | ** ** | **2009**                 | ** ** | **2008** | ** ** |
| ** **            | ** ** | **Amount**               | ** ** | **Percentage** | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| *** ***          |       | **(Thousands)**          |       |
| ***Segment:***        |       |                     |       |   |   |   |   |   |   |
| Construction Services |       | $                        | 233,165    |   | 86.0 | % | $ | 252,234 |   | 73.6 | % |
| Engineering           |       | 37,872                   |       | 14.0 | % | 90,449 |   | 26.4 | % |
|                  |       | $                        | 271,037    |   | 100.0 | % | $ | 342,683 |   | 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 use offinancial 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 June 30, 2009 and December 31, 2008due to the generally short maturities of these items. At June 30, 2009, weinvested primarily in short-term dollar denominated bank deposits. We expect tohold our investments to maturity.

 

At June 30, 2009, allof our long-term debt was under fixed interest rates.

 

As of June 30, 2009, wehad one derivative financial instrument for the purpose of hedging futurecurrency exchange in Canadian dollars. The contract enables us to purchaseCanadian dollars before certain dates in 2010 at certain exchange rates. Thesecontracts expire in January 2010. The related Canadian dollars purchasedunder contract were for $2.0 million CAD. The related gain or loss on thiscontract is not significant at June 30, 2009. We intend to continue tohedge foreign currency risks in those situations where we believe suchtransactions are prudent.

 

**Item 4T.  Controlsand 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 management recognized that any system of controlsand procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, as ours aredesigned 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 June 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 and procedures(as defined in Rule 13a-15(e) and 15d -15(e) under theExchange Act). Based on that evaluation, our CEO and CFO concluded that ourdisclosure controls and 

 

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procedures were effective as of the end ofthe period covered by this Quarterly Report on Form 10-Q to ensure thatthe information 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.  RiskFactors**

 

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**

 

On March 27, 2009, weannounced that we entered into a Rule 10b5-1 trading plan with CJSSecurities, Inc. to facilitate the repurchase of up to $1 million ofour common stock purchase warrants (“Warrants”). Each Warrant entitles theholder to purchase one share of our common stock at a price of $5.00 per shareand is exercisable at any time on or prior to October 2, 2010, unlessearlier redeemed.

 

From and including March 27,2009 through May 15, 2009, CJS Securities completed the purchase of theWarrants subject to the limitations set forth in the plan.

 

The following lists thepurchases made during the period March 27, 2009 through June 30,2009:

 
| ** **                                          | ** ** | **(a)**                                  | ** ** | **(b)**                              | ** ** | **(c)**                                                                                      | ** ** | **(d)**                                                                                                                 | ** ** |
|-----------------------------------------------------|------------|------------------------------------------|------------|--------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|
| **Period**                                          | ** ** | **Total Number  of Warrants  Purchased** | ** ** | **Average  Price  Paid per Warrant** | ** ** | **Total  Number of  Warrants  Purchased as Part  of Publicly  Announced Plans  or Programs** | ** ** | **Maximum  Number  (or Approximate  Dollar Value) of  Shares that May  Yet Be Purchased  Under the Plans  or Programs** | ** ** |
| March 27, 2009  through March 31, 2009(1) |       | 169,400                                  |       | $                                    | 0.48       |                                                                                         | 169,400    |                                                                                                                    | $          | 918,181 |   |
| April 1, 2009 through  April 30, 2009(1)  |       | 19,100                                   |       | $                                    | 0.63       |                                                                                         | 19,100     |                                                                                                                    | $          | — |   |
| May 1, 2009 through  May 15, 2009(1)      |       | —                                   |       | $                                    | —     |                                                                                         | —     |                                                                                                                    | $          | — |   |

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(1)           The purchase offer wasannounced and commenced on March 27, 2009 and concluded at the close ofbusiness on May 15, 2009, pursuant to the terms of the plan. The Warrantspurchased represented approximately 3.9% of the 4,894,456 redeemable Warrantsoutstanding as of March 26, 2009.

 

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**Item 3.  DefaultsUpon Senior Securities**

 

None

 

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

 

TheCompany’s Annual Meeting of Stockholders was held on May 19, 2009. Thetotal number of shares of the Company’s common stock issued, outstanding andentitled to vote at the meeting was 32,477,364 shares of which 27,415,806 werepresent at the meeting either in person or by proxy. The results of the votesfor the following proposals were as follows:

 

***Proposal 1***. To electthree Class A Directors to hold office for a three-year term expiring atthe Annual Meeting of the Stockholders to be held in 2012 or until theirrespective successors are elected and qualified:

 

·                  Brian Pratt — votes “For” —26,015,942; votes “Withheld” — 1,399,864

 

·                  Thomas E. Tucker — votes “For”— 27,399,704; votes “Withheld” — 16,102

 

·                  Peter C. Brown — votes “For”— 27,399,704; votes “Withheld” — 16,102

 

Inaddition to the directors elected above, the following directors’ term ofoffice continued after the meeting until subsequent annual meetings ofstockholders:

 

Class B — Directors with terms expiring at the 2010 annual meetingof stockholders: :

 

·                  John P. Schauerman

 

·                  Stephen C. Cook

 

·                  Peter J. Moerbeek

 

Class C — Directors with terms expiring at the 2011 annual meetingof stockholders: :

 

·                  Eric S. Rosenfeld

 

·                  David D. Sgro

 

***Proposal 2.***  Approvalof the Amendment and Restatement of our Third Amended and Restated Certificateof Incorporation to increase Authorized Shares:

 

·                     Votes “For” —27,385,539

 

·                     Votes “Against”— 18,965

 

·                     Votes “Abstained”— 11,302

 

·                     Broker “Non-Votes”— 0

 

***Proposal 3.***  Ratifychange of corporate name to “Primoris Services Corporation” and ratifycorresponding change to our Certificate of Incorporation:

 

·                     Votes “For” —27,404,604

 

·                     Votes “Against”— 0

 

·                     Votes“Abstained” — 11,202

 

·                     Broker“Non-Votes” — 0

 

***Proposal 4. *** Ratificationof the appointment of Moss Adams LLP as our Independent Registered PublicAccount Firm for 2009:

 

·                     Votes “For” —27,404,604

 

·                     Votes “Against”—0

 

·                     Votes“Abstained” — 11,202

 

·                     Broker“Non-Votes” — 0

 

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**Item 5.  OtherInformation**

 

None

 

**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**                                                                                                                                                                     |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                 |       | Agreement and Plan of Merger dated as of February 19, 2008 by  and among Rhapsody Acquisition Corp., Primoris Corporation and certain  stockholders of Primoris Corporation(1) |
| 3.1                 |       | Fourth Amended and Restated Certificate of Incorporation of Primoris  Services Corporation(*)                                                                                       |
| 3.2                 |       | Amended and Restated Bylaws of Primoris Services Corporation(2)                                                                                                                     |
| 4.1                 |       | Specimen Unit Certificate(3)                                                                                                                                                        |
| 4.2                 |       | Specimen Common Stock Certificate(3)                                                                                                                                                |
| 4.3                 |       | Specimen Warrant Certificate(4)                                                                                                                                                     |
| 4.4                 |       | Form of Unit Purchase Option granted to Representative(5)                                                                                                                      |
| 4.5                 |       | Form of Warrant Agreement between Continental Stock  Transfer & Trust Company and the Registrant(4)                                                                   |
| 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

 

(1)                                 Attached as anannex to the Registrant’s Registration Statement on Form S-4/A (File No. 333-150343)filed with the Securities and Exchange Commission on July 9, 2008 andincorporated herein by reference.

 

(2)                                 Filed as anexhibit to the Initial Filing of the Current Report on Form 8-K for July 31,2008 (File No. 001-34145) filed with the Securities and ExchangeCommission on August 6, 2008 and incorporated herein by reference.

 

(3)                                 Filed as anexhibit to the Registrant’s Registration Statement on Form S-1 (File No. 333-134694)filed with the Securities and Exchange Commission on June 2, 2006 andincorporated herein by reference.

 

(4)                                 Filed as anexhibit to the Registrant’s Registration Statement on Form S-1/A (File No. 333-134694)filed with the Securities and Exchange Commission on August 28, 2006 andincorporated herein by reference.

 

(5)                                 Filed as anexhibit to Registrant’s Registration Statement on Form S-1/A (File No. 333-134694)filed with the Securities and Exchange Commission on July 14, 2006 andincorporated herein by reference.

 

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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: August 11, 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**                                                                                    |
|---------------------|------------|----------------------------------------------------------------------------------------------------|
| 3.1                 |       | Fourth Amended and Restated Certificate of Incorporation of Primoris  Services Corporation         |
| 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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