Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

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

 

**For the quarterly period ended June 30, 2010**

 

**OR**

 

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

 

**For the transition period from                    to                    ..**

 

**Commission file number 0001-34145**

 

**PrimorisServices Corporation**

(Exact name of registrant as specified in its charter)

 

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

 

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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T(Section 232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  Yes o No o

 

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

 

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

 

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

 

Asof August 5, 2010, 44,909,619 shares of the registrant’s common stock wereoutstanding.

 

 

 

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Table ofContents

 

**PRIMORIS SERVICES CORPORATION**

**INDEX**

 
| ** **                                                                                                                                   | ** ** | **Page No.** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|
| ** **                                                                                                                                   | ** ** | ** **        |
| **Part I. Financial Information**                                                                                                       |       |              |
|                                                                                                                                         |       |              |
| Item 1.  Financial Statements:                                                                                                          |       |              |
|                                                                                                                                         |       |              |
| —Condensed Consolidated Balance Sheets as of  June 30, 2010 and December 31, 2009                                             |       | 3                 |
|                                                                                                                                         |       |              |
| —Condensed Consolidated Statements of Income for the  three months and six months ended June 30, 2010 and  June 30, 2009 |       | 4                 |
|                                                                                                                                         |       |              |
| —Condensed Consolidated Statements of Stockholders’  Equity                                                                        |       | 5                 |
|                                                                                                                                         |       |              |
| —Condensed Consolidated Statements of Cash Flows for  the three months and six months ended June 30, 2010 and June 30,  2009  |       | 6                 |
|                                                                                                                                         |       |              |
| —Notes to Condensed Consolidated Financial Statements                                                                                   |       | 8                 |
|                                                                                                                                         |       |              |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                     |       | 21                |
|                                                                                                                                         |       |              |
| Item 3. Quantitative and Qualitative Disclosures  About Market Risk                                                                     |       | 34                |
|                                                                                                                                         |       |              |
| Item 4. Controls and Procedures                                                                                                         |       | 34                |
|                                                                                                                                         |       |              |
| **Part II.  Other Information**                                                                                                         |       |              |
|                                                                                                                                         |       |              |
| Item 1.  Legal Proceedings                                                                                                              |       | 34                |
|                                                                                                                                         |       |              |
| Item 1A.  Risk Factors                                                                                                                  |       | 35                |
|                                                                                                                                         |       |              |
| Item 2. Unregistered Sales of Equity Securities  and Use of Proceeds                                                                    |       | 35                |
|                                                                                                                                         |       |              |
| Item 3. Defaults Upon Senior Securities                                                                                                 |       | 35                |
|                                                                                                                                         |       |              |
| Item 4. (Removed and Reserved)                                                                                                          |       | 35                |
|                                                                                                                                         |       |              |
| Item 5.  Other Information                                                                                                              |       | 35                |
|                                                                                                                                         |       |              |
| Item 6.  Exhibits                                                                                                                       |       | 35                |
|                                                                                                                                         |       |              |
| Signatures                                                                                                                                   |       | 36                |

 

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Table ofContents

 

**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**PRIMORIS SERVICES CORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(In Thousands, Except Share Amounts)**

**(Unaudited)**

 
| ** **                                                                                                                                                            | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                            |       |                    |       |                        |       |
| Current assets:                                                                                                                                                       |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                                             |       | $                       | 87,283     |                        | $          | 90,004 |   |
| Short term investments                                                                                                                                                |       | 33,000                  |       | 30,058                      |       |
| Restricted cash                                                                                                                                                       |       | 9,310                   |       | 6,845                       |       |
| Accounts receivable, net                                                                                                                                              |       | 121,928                 |       | 108,492                     |       |
| Costs and estimated earnings in excess of billings                                                                                                                    |       | 22,091                  |       | 11,378                      |       |
| Inventory                                                                                                                                                             |       | 19,922                  |       | 22,275                      |       |
| Deferred tax assets                                                                                                                                                   |       | 5,630                   |       | 5,630                       |       |
| Prepaid expenses and other current assets                                                                                                                             |       | 12,375                  |       | 5,501                       |       |
| Current assets from discontinued operations                                                                                                                           |       | —                  |       | 5,304                       |       |
| Total current assets                                                                                                                                                  |       | 311,539                 |       | 285,487                     |       |
| Property and equipment, net                                                                                                                                           |       | 97,269                  |       | 92,568                      |       |
| Investment in non-consolidated entities                                                                                                                               |       | 3,133                   |       | 5,599                       |       |
| Intangible assets, net                                                                                                                                                |       | 29,818                  |       | 32,695                      |       |
| Goodwill                                                                                                                                                              |       | 59,678                  |       | 59,678                      |       |
| Total assets                                                                                                                                                          |       | $                       | 501,437    |                        | $          | 476,027 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                        |       |                    |       |                        |       |
| Current liabilities:                                                                                                                                                  |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                      |       | $                       | 64,392     |                        | $          | 62,568 |   |
| Billings in excess of costs and estimated earnings                                                                                                                    |       | 117,572                 |       | 114,035                     |       |
| Accrued expenses and other current liabilities                                                                                                                        |       | 37,819                  |       | 34,992                      |       |
| Distributions and dividends payable                                                                                                                                   |       | 1,107                   |       | 2,987                       |       |
| Current portion of long-term debt                                                                                                                                     |       | 9,694                   |       | 6,482                       |       |
| Current portion of capital leases                                                                                                                                     |       | 3,537                   |       | 4,220                       |       |
| Current portion of subordinated debt                                                                                                                                  |       | 10,575                  |       | 10,397                      |       |
| Current liabilities of discontinued operations                                                                                                                        |       | 733                     |       | 6,511                       |       |
| Total current liabilities                                                                                                                                             |       | 245,429                 |       | 242,192                     |       |
| Long-term debt, net of current portion                                                                                                                                |       | 39,922                  |       | 26,368                      |       |
| Long-term capital leases, net of current portion                                                                                                                      |       | 6,512                   |       | 7,734                       |       |
| Long-term subordinated debt, net of current  portion                                                                                                                  |       | 35,758                  |       | 43,853                      |       |
| Deferred tax liabilities                                                                                                                                              |       | 2,643                   |       | 2,643                       |       |
| Contingent earnout liabilities                                                                                                                                        |       | 9,910                   |       | 9,278                       |       |
| Other long-term liabilities                                                                                                                                           |       | 1,354                   |       | —                      |       |
| Total liabilities                                                                                                                                                     |       | 341,528                 |       | 332,068                     |       |
| Commitments and contingencies                                                                                                                                         |       |                    |       |                        |       |
| Stockholders’ equity                                                                                                                                             |       |                    |       |                        |       |
| Preferred stock—$.0001 par value, 1,000,000 shares  authorized, 0 issued and outstanding at June 30, 2010 and 81,852.78 at  December 31, 2009          |       | —                  |       | —                      |       |
| Common stock—$.0001 par value, 90,000,000 shares  authorized, 44,238,611 and 32,704,903 issued and outstanding at June 30,  2010 and December 31, 2009 |       | 4                       |       | 3                           |       |
| Additional paid-in capital                                                                                                                                            |       | 105,348                 |       | 100,644                     |       |
| Retained earnings                                                                                                                                                     |       | 54,557                  |       | 42,982                      |       |
| Accumulated other comprehensive income                                                                                                                                |       | —                  |       | 330                         |       |
| Total stockholders’ equity                                                                                                                                       |       | 159,909                 |       | 143,959                     |       |
| Total liabilities and stockholders’ equity                                                                                                                       |       | $                       | 501,437    |                        | $          | 476,027 |   |

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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**PRIMORIS SERVICES CORPORATION**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

**(In Thousands, Except Per Share Amounts)**

**(Unaudited)**

 
| ** **                                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                            | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues                                                              |       | $                                | 203,187    |                           | $          | 119,610 |   | $ | 378,169 |   | $ | 243,160 |   |
| Cost  of revenues                                                     |       | 176,551                          |       | 98,867                         |       | 327,060 |   | 207,911 |   |
| Gross  profit                                                         |       | 26,636                           |       | 20,743                         |       | 51,109 |   | 35,249 |   |
| Selling,  general and administrative expenses                         |       | 15,823                           |       | 8,143                          |       | 29,269 |   | 15,559 |   |
| Operating  income                                                     |       | 10,813                           |       | 12,600                         |       | 21,840 |   | 19,690 |   |
| Other  income (expense):                                              |       |                             |       |                           |       |   |   |   |   |
| Income  from non-consolidated entities                                |       | 1,756                            |       | 1,736                          |       | 2,724 |   | 3,903 |   |
| Foreign  exchange gain (loss)                                         |       | 94                               |       | (26                            | )          | 186 |   | 203 |   |
| Other  expense                                                        |       | (322                             | )          | —                         |       | (631 | ) | — |   |
| Interest  income                                                      |       | 153                              |       | 205                            |       | 333 |   | 464 |   |
| Interest  expense                                                     |       | (1,220                           | )          | (539                           | )          | (2,527 | ) | (1,065 | ) |
|                                                                  |       |                             |       |                           |       |   |   |   |   |
| Income  from continuing operations, before provision for income taxes |       | 11,274                           |       | 13,976                         |       | 21,925 |   | 23,195 |   |
| Provision  for taxes                                                  |       | (4,187                           | )          | (5,355                         | )          | (8,140 | ) | (8,954 | ) |
| Income  from continuing operations                                    |       | 7,087                            |       | 8,621                          |       | 13,785 |   | 14,241 |   |
| Loss  on discontinued operations, net of income taxes                 |       | —                           |       | (41                            | )          | — |   | (21 | ) |
| Net  income                                                           |       | $                                | 7,087      |                           | $          | 8,580 |   | $ | 13,785 |   | $ | 14,220 |   |
| ** **                                                            |       |                             |       |                           |       |   |   |   |   |
| **Earnings  per share:**                                              |       |                             |       |                           |       |   |   |   |   |
| Basic:                                                                |       |                             |       |                           |       |   |   |   |   |
| Income  from continuing operations                                    |       | $                                | 0.16       |                           | $          | 0.26 |   | $ | 0.36 |   | $ | 0.45 |   |
| Income  on discontinued operations                                    |       | $                                | —     |                           | $          | — |   | $ | — |   | $ | — |   |
| Net  income                                                           |       | $                                | 0.16       |                           | $          | 0.26 |   | $ | 0.36 |   | $ | 0.45 |   |
| Diluted:                                                              |       |                             |       |                           |       |   |   |   |   |
| Income  from continuing operations                                    |       | $                                | 0.16       |                           | $          | 0.26 |   | $ | 0.30 |   | $ | 0.44 |   |
| Income  on discontinued operations                                    |       | $                                | —     |                           | $          | — |   | $ | — |   | $ | — |   |
| Net  income                                                           |       | $                                | 0.16       |                           | $          | 0.26 |   | $ | 0.30 |   | $ | 0.44 |   |
| **Weighted average common shares outstanding:**                       |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                 |       | 43,163                           |       | 32,477                         |       | 38,210 |   | 31,303 |   |
| Diluted                                                               |       | 45,407                           |       | 32,835                         |       | 45,451 |   | 32,477 |   |

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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**PRIMORIS SERVICES CORPORATION**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**(In Thousands, Except Share Amounts)**

**(Unaudited)**

 
| ** **                                                                               | ** ** | **Common Stock** | ** ** | **Preferred Stock** | ** ** | **Additional  Paid-in** | ** ** | **Retained** | ** ** | **Accum. Other  Comprehensive** | ** ** | **Total  Stockholders’** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|-------------------------|------------|--------------|------------|--------------------------------------|------------|-------------------------------|------------|
| ** **                                                                               | ** ** | **Shares**            | ** ** | **Amount**               | ** ** | **Shares**              | ** ** | **Amount**   | ** ** | **Capital**                          | ** ** | **Earnings**                  | ** ** | **Income** | ** ** | **Equity** | ** ** |
| **Balance, December 31, 2008**                                                      |       | 29,977,339            |       | $                        | 3          |                    | —     |         | $          | —                               |       | $                             | 34,796     |   | $ | 20,528 |   | $ | 103 |   | $ | 55,430 |   |
| Net  income                                                                              |       | —                |       | —                   |       | —                  |       | —       |       | —                               |       | 25,912                        |       | — |   | 25,912 |   |
| Issuance  of common shares to Former Primoris owners                                     |       | 2,500,025             |       | —                   |       | —                  |       | —       |       | —                               |       | —                        |       | — |   | — |   |
| Stock  issued for the purchase of Cravens Services, Inc.                                 |       | 139,082               |       | —                   |       | —                  |       | —       |       | 1,000                                |       | —                        |       | — |   | 1,000 |   |
| Repurchase  of warrants                                                                  |       | —                |       |                     |       |                    |       |         |       | (94                                  | )          |                          |       |   |   | (94 | ) |
| Dividends  — common                                                                 |       | —                |       | —                   |       | —                  |       | —       |       | —                               |       | (3,254                        | )          | — |   | (3,254 | ) |
| Dividends  — preferred                                                              |       | —                |       | —                   |       | —                  |       | —       |       | —                               |       | (204                          | )          | — |   | (204 | ) |
| Foreign  currency hedge effect                                                           |       | —                |       | —                   |       | —                  |       | —       |       | —                               |       | —                        |       | 227 |   | 227 |   |
| Preferred  stock issued for purchase of James Construction Group          |       | —                |       | —                   |       | 81,852.78               |       | —       |       | 64,500                               |       | —                        |       | — |   | 64,500 |   |
| Warrant  exercises                                                                       |       | 88,457                |       | —                   |       | —                  |       | —       |       | 442                                  |       | —                        |       | — |   | 442 |   |
| **Balance, December 31, 2009**                                                      |       | 32,704,903            |       | $                        | 3          |                    | 81,852.78  |         | $          | —                               |       | $                             | 100,644    |   | $ | 42,982 |   | $ | 330 |   | $ | 143,959 |   |
| Net  income                                                                              |       | —                |       | —                   |       | —                  |       | —       |       | —                               |       | 6,698                         |       | — |   | 6,698 |   |
| Issuance  of common shares to Former Primoris owners                                     |       | 2,499,975             |       | —                   |       | —                  |       | —       |       | 390                                  |       | —                        |       | — |   | 390 |   |
| Additional  contingent stock issued for the purchase of Cravens Services, Inc. |       | 74,906                |       | —                   |       | —                  |       | —       |       | 600                                  |       | —                        |       | — |   | 600 |   |
| Dividends  — common                                                                 |       | —                |       | —                   |       | —                  |       | —       |       | —                               |       | (898                          | )          | — |   | (898 | ) |
| Dividends  — preferred                                                              |       | —                |       | —                   |       | —                  |       | —       |       | —                               |       | (205                          | )          | — |   | (205 | ) |
| Foreign  currency hedge effect                                                           |       | —                |       | —                   |       | —                  |       | —       |       | —                               |       | —                        |       | (178 | ) | (178 | ) |
| Warrant  exercises                                                                       |       | 620,699               |       | —                   |       | —                  |       | —       |       | 3,104                                |       | —                        |       | — |   | 3,104 |   |
| **Balance, March 31, 2010**                                                         |       | 35,900,483            |       | $                        | 3          |                    | 81,852.78  |         | $          | —                               |       | $                             | 104,738    |   | $ | 48,577 |   | $ | 152 |   | $ | 153,470 |   |
| Net  income                                                                              |       | —                |       | —                   |       | —                  |       | —       |       | —                               |       | 7,087                         |       | — |   | 7,087 |   |
| Cancelled  shares — foreign manager — sale of discontinued operations          |       | (49,080               | )          | —                   |       | —                  |       | —       |       | (400                                 | )          | —                        |       | — |   | (400 | ) |
| Conversion  of JCG preferred stock to common stock                                       |       | 8,185,278             |       | 1                        |       | (81,852.78              | )          | —       |       | —                               |       | —                        |       | — |   | 1 |   |
| Dividends  — common                                                                 |       | —                |       | —                   |       | —                  |       | —       |       | —                               |       | (1,107                        | )          | — |   | (1,107 | ) |
| Foreign  currency hedge effect                                                           |       | —                |       | —                   |       | —                  |       | —       |       | —                               |       | —                        |       | (152 | ) | (152 | ) |
| Warrant  exercises                                                                       |       | 201,930               |       | —                   |       | —                  |       | —       |       | 1,010                                |       | —                        |       | — |   | 1,010 |   |
| **Balance, June 30, 2010**                                                          |       | 44,238,611            |       | $                        | 4          |                    | —     |         | $          | —                               |       | $                             | 105,348    |   | $ | 54,557 |   | $ | — |   | $ | 159,909 |   |

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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**PRIMORIS SERVICES CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In Thousands)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **June 30,**              | ** ** |
| ** **                                                                         | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| Cash  flows from operating activities:                                             |       |                           |       |   |   |
| Net  income                                                                        |       | $                              | 13,785     |   | $ | 14,220 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                           |       |   |   |
| Depreciation                                                                       |       | 8,303                          |       | 3,862 |   |
| Amortization  of intangible assets                                                 |       | 2,877                          |       | 18 |   |
| Gain  on sale of property and equipment                                            |       | (1,228                         | )          | (1,499 | ) |
| Income  from non-consolidated entities                                             |       | (2,724                         | )          | (3,903 | ) |
| Non-consolidated  entity distributions                                             |       | 5,190                          |       | 3,400 |   |
| Loss  on discontinued operations                                                   |       | —                         |       | (21 | ) |
| Changes  in assets and liabilities:                                                |       |                           |       |   |   |
| Restricted  cash                                                                   |       | (2,465                         | )          | 230 |   |
| Accounts  receivable                                                               |       | (13,436                        | )          | (4,859 | ) |
| Costs  and estimated earnings in excess of billings                                |       | (10,713                        | )          | 5,118 |   |
| Inventory,  prepaid expenses and other current assets                              |       | (4,851                         | )          | 31 |   |
| Accounts  payable                                                                  |       | 1,824                          |       | (5,817 | ) |
| Billings  in excess of costs and estimated earnings                                |       | 3,537                          |       | (5,139 | ) |
| Accrued  expenses and other current liabilities                                    |       | 3,068                          |       | (1,976 | ) |
| Contingent  earnout liabilities                                                    |       | 631                            |       | — |   |
| Other  long-term liabilities                                                       |       | 1,354                          |       | — |   |
| Net  cash provided by operating activities                                         |       | 5,152                          |       | 3,665 |   |
| Cash  flows from investing activities:                                             |       |                           |       |   |   |
| Purchase  of property and equipment                                                |       | (13,789                        | )          | (3,058 | ) |
| Proceeds  from sale of property and equipment                                      |       | 2,013                          |       | 1,652 |   |
| Purchase  of short-term investments                                                |       | (2,942                         | )          | (55 | ) |
| Advances  to non-consolidated entities                                             |       | —                         |       | (1,036 | ) |
| Net  cash used in investing activities                                             |       | (14,718                        | )          | (2,497 | ) |
| Cash  flows from financing activities:                                             |       |                           |       |   |   |
| Proceeds  from issuance of long-term debt                                          |       | 20,000                         |       | — |   |
| Repayment  of long-term debt                                                       |       | (3,234                         | )          | (3,956 | ) |
| Repayment  of capital leases                                                       |       | (1,905                         | )          | (957 | ) |
| Repayment  of subordinated debt                                                    |       | (7,166                         | )          | — |   |
| Proceeds  from exercise of warrants for the issuance of common stock               |       | 4,114                          |       | — |   |
| Repurchase  of warrants                                                            |       | —                         |       | (93 | ) |
| Dividends  paid                                                                    |       | (2,124                         | )          | (1,561 | ) |
| Cash  distributions to selling stockholders                                        |       | (1,966                         | )          | (4,947 | ) |
| Net  cash provided (used) in financing activities                                  |       | 7,719                          |       | (11,514 | ) |
| Cash  flows from discontinued operations:                                          |       |                           |       |   |   |
| Operating  activities                                                              |       | (874                           | )          | (3,281 | ) |
| Net  cash provided (used) in discontinued operations                               |       | (874                           | )          | (3,281 | ) |
| Net  change in cash and cash equivalents                                           |       | (2,721                         | )          | (13,627 | ) |
| Cash  and cash equivalents at beginning of the period                              |       | 90,004                         |       | 72,848 |   |
| Cash  and cash equivalents at end of the period                                    |       | $                              | 87,283     |   | $ | 59,221 |   |

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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**SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION**

 
| ** **                           | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **June 30,**              | ** ** |
| ** **                           | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| ** **                           | ** ** | **(Unaudited)**                | ** ** |
| **Cash paid during the period for:** |       |                           |       |   |   |
| Interest                             |       | $                              | 2,527      |   | $ | 1,065 |   |
| Income  taxes                        |       | $                              | 7,688      |   | $ | 11,100 |   |

 

**SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ANDFINANCING ACTIVITIES**

 
| ** **               | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|--------------------------------|------------|
| ** **               | ** ** | **June 30,**              | ** ** |
| ** **               | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| ** **               | ** ** | **(Unaudited)**                | ** ** |
| **Non-cash activities:** |       |                           |       |   |   |
| Accrued  dividends       |       | $                              | 1,107      |   | $ | 812 |   |
|                          |            |                                |            |  |  |  |  |

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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**PRIMORIS SERVICES CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(In Thousands, Except Per Share Amounts)**

**(Unaudited)**

 

**Note 1—Business Activity**

 

***Organization and operations*****—** Primoris Services Corporation, a Delaware corporation (“Primoris”, the“Company”, “we”, “us” or “our”), and its wholly-owned subsidiariesARB, Inc. (“ARB”), ARB Structures, Inc., Onquest, Inc., JamesConstruction Group, LLC (“JCG”), Cravens Services, Inc. (“Cravens”), BornHeaters Canada, ULC, Cardinal Contractors, Inc., GML Coatings, LLC,Cardinal Mechanical, L.P. and Stellaris, LLC, collectively, areengaged in various construction and product engineering activities.

 

TheCompany’s underground and directional drilling operations install, replace andrepair natural gas, petroleum, telecommunications and water pipeline systems.The Company’s industrial, civil and engineering operations construct andprovide maintenance services to industrial facilities including power plants,petrochemical facilities and other processing plants and construct multi-levelparking structures.

 

OnDecember 18, 2009, the Company acquired JCG.  JCG is one of the largest general contractorsbased in the Gulf Coast states and is engaged in highway, industrial andenvironmental construction, primarily in Louisiana, Texas and Florida.  JCG is the successor company to T. L. Jamesand Company, Inc., a well-known Louisiana company that has been inbusiness for over 80 years. Headquartered in Baton Rouge, Louisiana, JCG serves both government andprivate clients.

 

Corporateheadquarters for the Company are located in Lake Forest, California.

 

**Note 2—Basis of Presentation**

 

***Interim Consolidated FinancialStatements*****—**The interim condensedconsolidated financial statements for the three-month and six-month periodsended June 30, 2010 and 2009 have been prepared in accordance withRule 10-01 of Regulation S-X of the Securities Exchange Act of 1934,as amended (the “Exchange Act”). 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, 2010 (the“Second Quarter 2010 Report”) should be read in concert with the Company’sAnnual Report on Form 10-K, filed on March 11, 2010, which containsthe Company’s audited consolidated financial statements for the year endedDecember 31, 2009.

 

Theinterim financial information for the three-month and six-month periods ended June 30,2010 and 2009 is unaudited and has been prepared on the same basis as theaudited financial statements. However, the financial statements contained inthis Second Quarter 2010 Report do not include all of the information anddisclosures required by accounting principles generally accepted in the UnitedStates of America (“GAAP”) for audited financial statements. In the opinion ofmanagement, the unaudited information includes all adjustments (consisting ofnormal recurring adjustments) necessary for the fair presentation of theinterim financial information.

 

Certainamounts in prior periods have been reclassified in order to conform to thepresent period financial statement presentation.  Specifically, the prior period financialinformation was revised to conform to our current presentation of continuingand discontinued operations (see Note 10, *“Discontinued Operations”*).

 

***Revenue recognition*****—**A number of factors relating to the business of the Company affect therecognition of contract revenue. The Company typically structures contracts asunit-price, time and material, fixed-price or cost plus fixed fee. Revenue isrecognized on the percentage-of-completion method for all fixed-pricecontracts. Under the percentage-of-completion method, estimated contractrevenue and resulting income is generally accrued based on costs incurred todate as a percentage of total estimated costs. Total estimated costs areimpacted by changes in productivity, scheduling, the cost of labor,subcontracts, materials and equipment and other unforeseen events.Additionally, external factors such as weather, client needs, client delays inproviding permits and approvals, labor availability, governmental regulationand politics may affect the progress of a project’s completion and thus thetiming of revenue recognition. If a current estimate of total contract costdetermines a loss on a contract, the projected loss is recognized in full.

 

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

 

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

 

Inaccordance with the terms of our contracts, certain retainage provisions arewithheld by customers until completion and acceptance of the contracts. Finalpayments of the majority of such amounts are expected to be received in thefollowing operating cycle, which is typically within a year.

 

**Note 3—Recent Accounting Pronouncements**

 

*Fair Value Disclosures*

 

InJanuary 2010, the FASB issued Accounting Standards UpdateNo. 2010-06, “*Improving Disclosuresabout Fair Value Measurements*” (an update to ASC Topic 820 *“Fair Value Measurements and Disclosures”*).   ASU 2010-06 requires additional disclosuresabout fair value measurements including transfers in and out of Levels 1 and 2and a higher level of disaggregation for the different types of financialinstruments. For the reconciliation of Level 3 fair value measurements,information about purchases, sales, issuances and settlements should bepresented separately. This ASU is effective for annual and interimreporting periods beginning after December 15, 2009 for most of the newdisclosures and for periods beginning after December 15, 2010 for the newLevel 3 disclosures. Comparative disclosures are not required in the first yearthe disclosures are required.  As of January 1,2010, the Company adopted this accounting standard update, which did not resultin a material impact on our financial statements.

 

*Consolidation of Variable Interest Entities*

 

InJune 2009, the FASB issued an amendment to an accounting standard for ASCTopic 810 “Consolidation”, (formerly referred to as “Statement of FinancialAccounting Standards No. 167, “*Amendmentsto FASB Interpretation No. 46R*” (“SFAS 167”)) which sets rules for determining whether toconsolidate an entity that is insufficiently capitalized or is not controlledthrough voting (or similar rights). These rules are based on an entity’spurpose and design and the company’s ability to direct the activities that mostsignificantly impact the entity’s economic performance.  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 financialstatements.  The accounting standard became effective January 1,2010.  The adoption of this amendment didnot result in a material impact on our financial statements.

 

**Note 4—Fair Value Measurements**

 

ASCTopic 820, “*Fair Value Measurements andDisclosures*”, defines fair value, establishes a framework formeasuring fair value in GAAP and requires certain disclosures about fair valuemeasurements.  ASC Topic 820 addresses fair value GAAP for financial assetsand financial liabilities that are re-measured and reported at fair value ateach reporting period and for non-financial assets and liabilities that arere-measured and reported at fair value on a recurring basis, which includedgoodwill and intangible assets for purposes of impairment assessments.

 

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

 

Thefollowing table presents, using the fair value hierarchy levels identifiedunder ASC Topic 820, the Company’s financial assets that are required to bemeasured at fair value at June 30, 2010 and December 31, 2009:

 
| ** **                                | ** ** | ** **                                   | ** ** | **Fair Value Measurements at Reporting Date**                              | ** ** |
|-------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **Amount  Recorded  on Balance  Sheet** | ** ** | **Quoted Prices  in Active Markets  for Identical Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
| **Assets  as of June 30, 2010:**     | ** ** | ** **                                   | ** ** | ** **                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash equivalents                 |       | $                                            | 87,283     |                                                                                                | $          | 87,283 |   | — |   | — |   |
| Short-term investments                    |       | $                                            | 33,000     |                                                                                                | $          | 33,000 |   | — |   | — |   |
| **Assets as of December 31,  2009:** |       |                                         |       |                                                                                                |       |   |   |   |   |
| Cash and cash equivalents                 |       | $                                            | 90,004     |                                                                                                | $          | 90,004 |   | — |   | — |   |
| Short-term investments                    |       | $                                            | 30,058     |                                                                                                | $          | 30,058 |   | — |   | — |   |
| Other assets — hedge contracts       |       | $                                            | 266        |                                                                                                | —     |   | $ | 266 |   | — |   |
|                                           |            |                                              |            |                                                                                                     |            |  |  |  |  |  |  |  |

 

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Inaddition to the assets listed in the table, other short-term financial assetsand liabilities of the Company consist of accounts receivable, accounts payableand certain accrued liabilities.  Thesefinancial assets and liabilities generally approximate fair market value basedon their short-term nature.  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.

 

**Note 5—Accounts Receivable**

 

Thefollowing is a summary of the Company’s accounts receivable as of the datesshown:

 
| ** **                                                                                                                   | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                   | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Contracts receivable, net of allowance for  doubtful accounts of $200 for June 30, 2010 and for December 31,  2009 |       | $                       | 105,021    |                        | $          | 82,254 |   |
| Retention                                                                                                                    |       | 15,560                  |       | 25,907                      |       |
|                                                                                                                         |       | 120,581                 |       | 108,161                     |       |
| Due from affiliates                                                                                                          |       | 1                       |       | —                      |       |
| Other accounts receivable                                                                                                    |       | 1,346                   |       | 331                         |       |
|                                                                                                                         |       | $                       | 121,928    |                        | $          | 108,492 |   |

 

Amounts“due from affiliates” primarily relate to receivables from related parties (seeNote 7, “*Equity Method Investments*”and Note 14, “*Related PartyTransactions*”) for the performance of construction contracts.Contract revenues earned from related parties were approximately $362 and$5,611 for the three months, and $1,288 and $11,319 for the six months ended June 30,2010 and 2009, respectively.

 

**Note 6—Costs and Estimated Earnings on UncompletedContracts**

 

Costsand estimated earnings on uncompleted contracts consist of the following at:

 
| ** **                                             | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Costs incurred on uncompleted contracts                |       | $                       | 1,741,409  |                        | $          | 2,036,251 |   |
| Provision for estimated loss on uncompleted  contracts |       | 539                     |       | 332                         |       |
| Gross profit recognized                                |       | 164,044                 |       | 201,254                     |       |
|                                                   |       | 1,905,992               |       | 2,237,837                   |       |
| Less: billings to date                                 |       | (2,001,473              | )          | (2,340,494                  | )          |
|                                                   |       | $                       | (95,481    | )                           | $          | (102,657 | ) |

 

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

 
| ** **                                         | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                         | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Costs and estimated earnings in excess of billings |       | $                       | 22,091     |                        | $          | 11,378 |   |
| Billings in excess of costs and estimated earnings |       | (117,572                | )          | (114,035                    | )          |
|                                               |       | $                       | (95,481    | )                           | $          | (102,657 | ) |

 

**Note 7—Equity Method Investments**

 

OtayMesa Power Partners

 

During2007, the Company established a joint venture, Otay Mesa Power Partners (“OMPP”),for the sole purpose of constructing a power plant near San Diego, California.The Company has a 40% interest in the venture and accounts for its investmentin OMPP using the equity method. ARB acts as one of OMPP’s primarysubcontractors. As of June 30, 2010, ARB had total project contracts withOMPP amounting to $49,019, which are essentially complete.  ARB recognized $83 in related party revenuesin the six months ended June 30, 2010 and

 

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$10,384 in the six months ended June 30,2009. These revenues are included in the contract revenues earned from relatedparties as stated in Note 5, “*AccountsReceivable*”. The following is a summary of the financial positionand results as of and for the periods ended:

 
| ** **                                  | ** ** | **June 30,  2010**                            | ** ** | **December 31,  2009** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------|------------|-----------------------------|---------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                  |       |                                               |       |                        |                                              |       |       |       |       |       |
| **OMPP—Joint Venture**                 |       |                                               |       |                        |                                              |       |       |       |       |       |
| Balance sheet data                          |       |                                               |       |                        |                                              |       |       |       |       |       |
| Assets                                      |       | $                                                  | 350        |                        | $                                                 | 9,176      |       |       |       |       |   |   |
| Liabilities                                 |       | 238                                                |       | 1,493                       |                                              |       |       |       |       |       |
| Net assets                                  |       | $                                                  | 112        |                        | $                                                 | 7,683      |       |       |       |       |   |   |
| Company’s equity investment in venture |       | $                                                  | 67         |                        | $                                                 | 4,610      |       |       |       |       |   |   |
|                                        |       |                                               |       |                        |                                              |       |       |       |       |       |
| ** **                                  | ** ** | **Three months ended June 30** | ** ** | ** **                  | **Six months ended June 30,** | ** ** |
| ** **                                  | ** ** | **2010**                                           | ** ** | **2009**                    | ** **                                        | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|                                        |       |                                               |       |                        |                                              |       |       |       |       |       |
| Earnings  data:                             |       |                                               |       |                        |                                              |       |       |       |       |       |
| Revenue                                     |       | $                                                  | —     |                        | $                                                 | 34,494     |       |       | $          | —     |   | $ | 78,386 |   |
| Gross  profit                               |       | $                                                  | —     |                        | $                                                 | 4,473      |       |       | $          | —     |   | $ | 15,558 |   |
| Earnings  before taxes                      |       | $                                                  | —     |                        | $                                                 | 4,475      |       |       | $          | —     |   | $ | 15,563 |   |
| Company’s  equity in earnings          |       | $                                                  | —     |                        | $                                                 | 2,700      |       |       | $          | —     |   | $ | 5,085 |   |

 

OMPPdistributed $7,571 to its equity holders during the six months ended June 30,2010, of which the Company’s share, as calculated under the joint venture agreement,was $4,543.  For the six months ended June 30,2009, OMPP distributed $8,500, of which the Company’s share was $3,400. TheOMPP agreement states that distributions made prior to the completion of thecontract are considered advances on account of each partner’s share asdetermined at the completion of the underlying contract.

 

AllDay Electric

 

TheCompany purchased a 49% interest in All Day Electric (“All Day”) inDecember 2008 for $500 and accounts for this investment under the equitymethod. All Day engages in electrical construction activities mainly inNorthern California.  ARB recognized$1,205 in related party revenues in the six months ended June 30, 2010 and$234 in the six months ended June 30, 2009. The following is a summary of the financial position and results as ofand for the periods ended:

 
| ** **                                  | ** ** | **June 30,  2010**                            | ** ** | **December 31,  2009** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------|------------|-----------------------------|---------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                  |       |                                               |       |                        |                                              |       |       |       |       |       |
| ***All Day  Electric***                     |       |                                               |       |                        |                                              |       |       |       |       |       |
| Balance sheet data                          |       |                                               |       |                        |                                              |       |       |       |       |       |
| Assets                                      |       | $                                                  | 3,983      |                        | $                                                 | 5,661      |       |       |       |       |   |   |
| Liabilities                                 |       | 3,371                                              |       | 4,615                       |                                              |       |       |       |       |       |
| Net assets                                  |       | $                                                  | 612        |                        | $                                                 | 1,046      |       |       |       |       |   |   |
| Company’s equity investment in venture |       | $                                                  | 300        |                        | $                                                 | 513        |       |       |       |       |   |   |
|                                        |       |                                               |       |                        |                                              |       |       |       |       |       |
| ** **                                  | ** ** | **Three months ended June 30** | ** ** | ** **                  | **Six months ended June 30,** | ** ** |
| ** **                                  | ** ** | **2010**                                           | ** ** | **2009**                    | ** **                                        | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|                                        |       |                                               |       |                        |                                              |       |       |       |       |       |
| Earnings  data:                             |       |                                               |       |                        |                                              |       |       |       |       |       |
| Revenue                                     |       | $                                                  | 4,003      |                        | $                                                 | 2,299      |       |       | $          | 6,906      |   | $ | 3,270 |   |
| Gross  profit                               |       | $                                                  | 243        |                        | $                                                 | 456        |       |       | $          | 139        |   | $ | 584 |   |
| Net  income                                 |       | $                                                  | (24        | )                           | $                                                 | 147        |       |       | $          | (434       | ) | $ | (298 | ) |
| Company’s  equity in earnings          |       | $                                                  | (11        | )                           | $                                                 | 72         |       |       | $          | (213       | ) | $ | (146 | ) |

 

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St.—BernardLevee Partners

 

TheCompany purchased a 30% interest in St.—Bernard Levee Partners (“Bernard”) for$300 and accounts for this investment under the equity method. Bernard engagesin construction activities in Louisiana. Bernard distributed $3,177 to itsequity holders during the six months ended June 30, 2010, of which theCompany’s share, as calculated under the joint venture agreement, was$648.  The following is a summary of thefinancial position and results as of and for the periods ended:

 
| ** **                                  | ** ** | **June 30,  2010**                            | ** ** | **December 31,  2009** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------|------------|-----------------------------|---------------------------------------------------|------------|------------|------------|------------|------------|
|                                        |       |                                               |       |                        |                                              |       |       |       |       |       |
| ***St. — Bernard  Levee Partners***    |       |                                               |       |                        |                                              |       |       |       |       |       |
| Balance sheet data                          |       |                                               |       |                        |                                              |       |       |       |       |       |
| Assets                                      |       | $                                                  | 47,326     |                        | $                                                 | 3,149      |       |       |       |       |   |   |
| Liabilities                                 |       | 36,896                                             |       | 1,966                       |                                              |       |       |       |       |       |
| Net assets                                  |       | $                                                  | 10,430     |                        | $                                                 | 1,183      |       |       |       |       |   |   |
| Company’s equity investment in venture |       | $                                                  | 2,735      |                        | $                                                 | 378        |       |       |       |       |   |   |
|                                        |       |                                               |       |                        |                                              |       |       |       |       |       |
| ** **                                  | ** ** | **Three months ended June 30** | ** ** | ** **                  | **Six months ended June 30,** | ** ** |
| ** **                                  | ** ** | **2010**                                           | ** ** | **2009**                    | ** **                                        | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|                                        |       |                                               |       |                        |                                              |       |       |       |       |       |
| Earnings  data:                             |       |                                               |       |                        |                                              |       |       |       |       |       |
| Revenue                                     |       | $                                                  | 65,892     |                        | $                                                 | —     |       |       | $          | 108,022    |   | $ | — |   |
| Gross  profit                               |       | $                                                  | 7,562      |                        | $                                                 | —     |       |       | $          | 12,417     |   | $ | — |   |
| Earnings  before taxes                      |       | $                                                  | 7,562      |                        | $                                                 | —     |       |       | $          | 12,417     |   | $ | — |   |
| Company’s  equity in earnings          |       | $                                                  | 1,836      |                        | $                                                 | —     |       |       | $          | 3,005      |   | $ | — |   |

 

**Note 8 — Business Combinations**

 

TheDecember 18, 2009 acquisition of JCG was accounted using the acquisitionmethod of accounting. The preliminary allocation of the purchase price based onthe fair value of the acquired assets, less liabilities assumed, as ofDecember 18, 2009, amounted to $133,190.

 

Aspart of the acquisition, the Company will issue $10,000 in common stock to thesellers, contingent upon JCG meeting a specific operating performance targetfor the year 2010.  As discussed in Note13 — *“Other Liabilities”*, theestimated fair value of this contingency was $8,190 and $8,821 as of December 31,2009 and June 30, 2010, respectively.

 

Therehave been no changes in the preliminary estimates of the fair value of theacquired assets and liabilities during the six months ended June 30,2010.  The Company has engaged outsideexperts to assist in the evaluation of the estimated fair value of certainacquired casualty and health insurance liabilities acquired.  The Company expects to receive the consultantstudy and to complete our final determination of the estimated fair value ofthese liabilities prior to the end of 2010.

 

*Supplemental Unaudited Pro Forma Information for the threeand six months ended June 30, 2009*

 

Thefollowing pro forma information for the three and six months ended June 30,2009 presents the results of operations as if the JCG acquisition had occurredat the beginning of 2009. The supplemental pro forma information has beenadjusted to include:

 

·                  the pro formaimpact of amortization of intangible assets and depreciation of property, plantand equipment, based on the purchase price allocation;

 

·                  the pro formaimpact of interest expense on the $53,500 subordinated promissory note;

 

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

 

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

 
| ** **                                                            | ** ** | **Three months ended  June 30, 2009** | ** ** | **Six months ended  June 30, 2009** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
|                                                                  |       |                                                      |       |                                                    |       |
| Revenues                                                              |       | $                                                         | 210,217    |                                                    | $          | 427,510 |   |
| Income from continuing operations, before  provision for income taxes |       | $                                                         | 16,405     |                                                    | $          | 29,978 |   |
| Income from continuing operations                                     |       | $                                                         | 10,083     |                                                    | $          | 18,324 |   |
| Net income                                                            |       | $                                                         | 10,042     |                                                    | $          | 18,303 |   |
|                                                                  |       |                                                      |       |                                                    |       |
| Weighted average common shares outstanding:                           |       |                                                      |       |                                                    |       |
| Basic — (1)                                                      |       | 39,473                                                    |       | 38,299                                                  |       |
| Diluted — (1)                                                    |       | 41,020                                                    |       | 40,662                                                  |       |
|                                                                  |       |                                                      |       |                                                    |       |
| Earnings per share:                                                   |       |                                                      |       |                                                    |       |
| Basic — income from continuing operations                        |       | $                                                         | 0.26       |                                                    | $          | 0.48 |   |
| Basic — net income                                               |       | $                                                         | 0.25       |                                                    | $          | 0.48 |   |
| Diluted — income from continuing operations                      |       | $                                                         | 0.25       |                                                    | $          | 0.45 |   |
| Diluted — net income                                             |       | $                                                         | 0.24       |                                                    | $          | 0.45 |   |

 

----

(1)                                 The adjustmentto weighted average shares outstanding reflects the conversion of the PreferredStock issued as part of the acquisition consideration (see Note 17 — *“Stockholders’ Equity”*), as if such shareswere converted into 8,185 shares of common stock, at a conversion rate of 100common shares per share.  On April 12, 2010, the Preferred Stock wasconverted into common stock.

 

Theadjustment to weighted average shares outstanding excludes the potential impactof the Earnout Shares that may be issued contingent upon meeting a certainfinancial target at the end of 2010.  Pro forma basic shares outstandingincluded a total of 8,185 shares, less 1,190 Escrow Shares, totaling 6,995shares of common stock.  Shares includedin pro forma diluted shares outstanding represent the 8,185 shares of commonstock.

 

**Note 9—Intangible Assets**

 

AtJune 30, 2010 and December 31, 2009, intangible assets totaled$29,818 and $32,695, respectively, net of amortization.  The following table summarizes the intangibleasset categories, average amortization periods, which are generally on astraight-line basis, and the fair value, as follows:

 
| ** **             | ** ** | **Amortization**   | ** ** | ** ** | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------|------------|--------------------|------------|------------|------------|-------------------|------------|-----------------------|------------|
| ** **             | ** ** | **Period**         | ** ** | ** ** | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Tradename              |       | 5 to 10 years      |       |       |       | $                 | 14,948     |                  | $          | 15,785 |   |
| Non-compete agreements |       | 5 years            |       |       |       | $                 | 4,858      |                  | $          | 5,403 |   |
| Customer relationships |       | 5 to 10 years      |       |       |       | $                 | 6,428      |                  | $          | 6,793 |   |
| Backlog                |       | 0.75 to 2.25 years |       |       |       | $                 | 3,584      |                  | $          | 4,714 |   |
|                   |       |               |       | Total      |       | $                 | 29,818     |                  | $          | 32,695 |   |

 

Amortizationexpense on intangible assets was $1,496 and $9 for the three months ended June 30,2010 and 2009, respectively, and amortization expense for the six months ended June 30,2010 and 2009 was $2,877 and $18, respectively. Estimated amortization expensefor intangible assets as of June 30, 2010 is as follows:

 
| **For the Years Ending  December 31,** | ** ** | **Estimated  Intangible  Amortization  Expense** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|
| 2010 (remaining six months)                 |       | $                                                | 2,801      |   |
| 2011                                        |       | 5,544                                            |       |
| 2012                                        |       | 3,873                                            |       |
| 2013                                        |       | 3,455                                            |       |
| 2014                                        |       | 3,360                                            |       |
| Thereafter                                  |       | 10,785                                           |       |
|                                        |       | $                                                | 29,818     |   |

 

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**Note 10—Discontinued Operations**

 

DuringDecember 2009, the Company discontinued all operations in Ecuador, and aplan was put in place to sell the stock ownership of the Ecuador company.  Consequently, the results of operations andcash flows for these operations are reflected as discontinued operations forall periods presented.  Previously, theEcuador operations were included in the Company’s Construction Servicessegment.

 

InFebruary 2010, the Company entered into an agreement for the sale of theEcuador business.  The Company agreed topay $1,000 of remaining liabilities of the business, and the buyer agreed toacquire the business for $700, which was comprised of $400 in Primoris commonstock owned by the buyer and an interest free $300 note payable, due on February 19,2011.  The buyer also agreed to providean indemnification to the Company for any remaining liabilities. The sale wascompleted in March 2010.  The $400in Primoris common stock was cancelled when received by the Company during thesecond quarter 2010.  The sale of theEcuador business had no material impact to the Company.

 

AtJune 30, 2010, the balance sheet reflects a net liability of $733 forpotential remaining liabilities under this agreement.

 

**Note 11—Accounts Payable and Accrued Liabilities**

 

AtJune 30, 2010 and December 31, 2009, accounts payable includesretentions of approximately $12,333 and $12,616, respectively, due tosubcontractors, which have been retained pending contract completion andcustomer acceptance of jobs.

 

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

 
| ** **                                               | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                               | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Payroll and related employee benefits                    |       | $                       | 22,346     |                        | $          | 18,321 |   |
| Insurance, including self-insurance reserves             |       | 9,957                   |       | 11,245                      |       |
| Provision for estimated losses on uncompleted  contracts |       | 539                     |       | 332                         |       |
| Sales and other taxes                                    |       | 115                     |       | 640                         |       |
| Accrued leases and rents                                 |       | 241                     |       | 262                         |       |
| Other                                                    |       | 4,621                   |       | 4,192                       |       |
|                                                     |       | $                       | 37,819     |                        | $          | 34,992 |   |

 

**Note 12—Credit Arrangements**

 

***Credit Agreements****.*  On October 28, 2009, we entered into aLoan and Security Agreement (the “Agreement”) with The PrivateBank and TrustCompany (the “Lender”) for a revolving line of credit in the total aggregateamount of $35,000. Under the Agreement, the Lender provides two revolving loansto us:

 

·                  a revolvingloan in the amount of $20,000 (the “Revolving Loan A”), with a maturity date ofOctober 28, 2012; and

·                  a revolvingloan in the amount of $15,000 (the “Revolving Loan B”), with a maturity date ofOctober 27, 2010.

 

TheLender agreed to issue letters of credit up to $15,000, under Revolving LoanA.  At June 30, 2010 and December 31, 2009, total commercialletters of credit outstanding under this credit facility totaled $4,338 and$850, respectively.  There were no otherborrowings under these two lines during the six months ended June 30,2010, leaving available borrowing capacity under Revolving Loan A at $15,662and $15,000 for Revolving Loan B.

 

Theprincipal amount of each of Revolving Loan A and Revolving Loan B will bearinterest at either: (i) LIBOR plus an applicable margin as specified inthe Agreement, or (ii) the prime rate announced by the Lender plus anapplicable margin as specified in the Agreement. The principal amount of anyloan bearing interest at LIBOR plus an applicable margin may not be prepaid atany time without being subject to certain penalties. There is no prepaymentpenalty for any loan bearing interest at the prime rate announced by the Lenderplus an applicable margin.

 

Allloans made by the Lender under the Agreement are secured by our assets,including, among others, our cash, inventory, goods, equipment (excludingequipment subject to certain permitted liens) and accounts receivable. Certainof our subsidiaries have executed joint and several guaranties in favor of theLender for all amounts under the Agreement. The Agreement and the line of credit facilities contain variousrestrictive covenants, including, among others, restrictions on investments,capital expenditures, minimum tangible net worth and debt service coveragerequirements.  The Company was in compliance with its restrictivecovenants as of June 30, 2010.

 

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InJanuary 2008, the Company entered into a credit facility (as amended) forpurposes of issuing commercial letters of credit in Canada, for an amount up to$10,000 in Canadian dollars. The credit facility with a Canadian bank is for aterm of 5 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. At June 30, 2010, total commercialletters of credit outstanding under this credit facility totaled $5,463 inCanadian dollars, and $5,543 in Canadian dollars at December 31,2009.  As of June 30, 2010, therewas $4,537 in Canadian dollars available for additional letters of credit underthis credit facility.

 

Atthe time of the JCG acquisition on December 18, 2009, the Company assumedoutstanding letters of credit of $5,600 under an amended credit agreement thatexpired on February 28, 2010. Upon termination of the credit agreement,the Company made a cash deposit as replacement for the letters of credit.

 

***EquipmentLoans. ***On June 25,2010, we entered into a loan for the financing of existing equipment for thetotal aggregate amount of $10,000 and paid a loan commitment fee of 0.5%.  This loan is secured by certain constructionand automotive equipment and is payable in equal monthly installments over afive year period. The principal amount of the loan bears interest at 4.12% perannum and may be prepaid after one year, subject to certain prepaymentpenalties, and after three years without penalty.

 

Under a master loanagreement dated August 2009, we executed an equipment note on June 25,2010 for an aggregate amount of $10,000. This note is secured by certain existing construction and automotiveequipment and is payable in equal monthly installments over a seven yearperiod. The principal amount of this note bears interest at 4.71% per annum.

 

***Subordinated Promissory Note****.*  In connection with the acquisition of JCG,the Company executed an unsecured Promissory Note on December 18, 2009 infavor of the sellers of JCG with an initial principal amount of $53,500. ThePromissory Note is due and payable on December 15, 2014 and bears interestat differing rates until maturity.  Forthe first 9 months of the term of the note, the Promissory Note bears interestat an annual rate equal to 5%.  Formonths 10 through 18, the Promissory Note will bear interest at an annual rateof 7%.  For the months 19 until thematurity date, the Promissory Note will bear interest at an annual rate of8%.  Payments of principal and interestwill be payable in cash on an amortizing basis over 60 monthly payments.  The Promissory Note is subordinated toamounts owed to our commercial banks for lines of credit and to our bondingagencies.

 

ThePromissory Note may be prepaid in whole or in part at any time, and partialprepayment is required in the event the Company completes certain equityfinancing, receives warrant exercise proceeds or obtains proceeds under certainnew indebtedness. As long as more than $10,000 is outstanding under thePromissory Note, we have agreed to not take certain actions without the priorwritten consent of the Promissory Note holders, including, among others,purchase, acquire, redeem or retire any shares of our common stock. As of June 30,2010, a total of $46,333 was outstanding on the Promissory Note.  The Company made prepayments of thePromissory Note in the amounts of $2,328 in April 2010 and $757 in July 2010,after receiving warrant exercise proceeds for the issuance of common stockduring each prior quarter.

 

**Note 13— Contingent Earnout Liabilities**

 

Contingentearnout liabilities consist of following amounts resulting from ouracquisitions of JCG and Cravens in the fourth quarter of 2009.

 

Aspart of the December 2009 JCG acquisition agreement, the Company willissue $10,000 in common stock to the sellers, contingent upon JCG meeting aspecific operating performance target for the year 2010.  The number of shares are calculated bydividing $10,000 by the average closing price of our common stock, as reportedon NASDAQ, for the 20 business days prior to December 31, 2010.  Upon meeting the contingency target, theshares of common stock are to be issued at the time the Company’s auditedfinancials are available, but in no event later than April 15, 2011.  At December 31, 2009, the estimated fairvalue of the contingent consideration was established at $8,190.  The estimated fair value as of June 30,2010 was valued at $8,821. The $631 change in the fair value was a non-cashcharge to other expense.

 

InOctober 2009, the Company acquired the assets of Cravens Partners, Ltd.,a Texas-based provider of civil and utility infrastructure constructionservices.  The Cravens acquisitionincluded potential consideration for an additional $2,000 in common stock and$500 in cash to the sellers, contingent upon meeting specific operatingperformance targets for the years 2009, 2010 and 2011.  At December 31, 2009, the estimated fairvalue of the contingent consideration was established at $1,839 of which, $750was current as of December 31, 2009. Upon meeting the 2009 performance target, the Company paid $150 andissued 74.9 shares of common stock in March 2010 with a value of$600.  There was no change to theestimated fair value of $1,089 at June 30, 2010 for the remaining earnoutconsideration.

 

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**Note 14—Related Party Transactions**

 

Primorishas entered into various transactions with Stockdale InvestmentGroup, Inc. (“SIGI”).  Brian Pratt, oneof our largest stockholders and our Chief Executive Officer, President and Chairmanof the Board of Directors, also holds a majority interest in SIGI and is the chairmanand a director of SIGI.  John M.Perisich, our Senior Vice President and General Counsel, is secretary of SIGI.

 

Primorisleases properties from SIGI located in Bakersfield, Pittsburg and San Dimas,California and in Pasadena, Texas. During the six months ended June 30,2010 and 2009, the Company paid $444 and $394, respectively, in lease paymentsto SIGI for the use of these properties.

 

Primorisleases a property from Roger Newnham, one of our stockholders and a manager at oursubsidiary Born Heaters Canada. The property is located in Calgary, Canada.During the six months ended June 30, 2010 and 2009, Primoris paid $130 and$171, respectively, in lease payments to Mr. Newnham for the use of thisproperty. The three-year lease for the Calgary property commenced in October 2005and was renewed and extended until December 31, 2014.

 

TheCompany owns several non-consolidated investments and has recognized revenueson work performed for those joint ventures. ARB, a subsidiary of the Company, recognized $83 and $10,384 in relatedparty revenues during the six months ended June 30, 2010 and 2009,respectively, on the OMPP joint venture. ARB also recognized $1,205 and $234 in related party revenues during thesix months ended June 30, 2010 and 2009, respectively, from the All Dayjoint venture.  See Note 7—*EquityMethod Investments*.

 

**Note 15—Income Taxes**

 

Theeffective tax rate for both the three and six months ended June 30, 2010was 37.1%. The rate differs from the U.S. federal statutory rate of 35% dueprimarily to state income taxes and the “Domestic Production Activity Deduction”.

 

Todetermine its quarterly provision for income taxes, the Company uses anestimated annual effective tax rate, which is based on expected annual income,statutory tax rates and tax planning opportunities available in the variousjurisdictions to which the Company is subject. Certain significant or unusualitems are separately recognized in the quarter in which they occur and can be asource of variability in the effective tax rate from quarter to quarter.  The Company recognizes interest and penaltiesrelated to uncertain tax positions, if any, as an income tax expense.

 

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

 

Thetax years 2006 through 2009 remain open to examination by the United StatesInternal Revenue Service.  The tax years2005 through 2009 remain open to examination by the other major taxingjurisdictions to which the Company is subject.

 

**Note 16—Dividends and Earnings Per Share**

 

TheCompany has declared cash dividends on two occasions during 2010.  On March 4, 2010, the Company declared acash dividend of $0.025 per common share, payable to stockholders of record asof March 31, 2010 and to holders of shares of the Company’s Series ANon-Voting Contingent Convertible Preferred stock (“Preferred Stock”) issued inconnection with the December 18, 2009 acquisition of JCG.  On May 11, 2010, the Company declared acash dividend of $0.025 per common share, payable to stockholders of record asof June 30, 2010.  On April 12,2010, the Preferred Stock was converted to common stock and was thereforeincluded as common stock outstanding as of June 30, 2010.  The March 31, 2010 dividend, totaling$1,102, was paid on April 15, 2010 and the June 30, 2010 dividend,totaling $1,107, was paid on July 15, 2010.

 

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Thetable below presents the computation of basic and diluted earnings per sharefor the three and six months ended June 30, 2010 and 2009:

 
| ** **                                                             | ** ** | **Three months  ended June 30,** | ** ** | **Six months  ended June 30,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                             | ** ** | **2010**                                        | ** ** | **2009**                                      | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| **Numerator:**                                                         |       |                                            |       |                                          |       |   |   |   |   |
| Net  income                                                            |       | $                                               | 7,087      |                                          | $          | 8,580 |   | $ | 13,785 |   | $ | 14,220 |   |
| **Denominator:**                                                       |       |                                            |       |                                          |       |   |   |   |   |
| Weighted  average shares for computation of basic earnings per share   |       | 43,163                                          |       | 32,477                                        |       | 38,210 |   | 31,303 |   |
|                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Dilutive  effect of warrants and units                                 |       | 1,165                                           |       | 358                                           |       | 1,431 |   | — |   |
|                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Dilutive  effect of contingently issuable shares (1) (2)          |       | —                                          |       | —                                        |       | 1,197 |   | 1,174 |   |
|                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Dilutive  effect of conversion of Preferred Stock (3)                  |       | 1,079                                           |       | —                                        |       | 4,613 |   | — |   |
|                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Weighted  average shares for computation of diluted earnings per share |       | 45,407                                          |       | 32,835                                        |       | 45,451 |   | 32,477 |   |
|                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Basic  earnings per share                                              |       | $                                               | 0.16       |                                          | $          | 0.26 |   | $ | 0.36 |   | $ | 0.45 |   |
|                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Diluted  earnings per share                                            |       | $                                               | 0.16       |                                          | $          | 0.26 |   | $ | 0.30 |   | $ | 0.44 |   |

 

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(1)         Represents the effect of5,000 shares of the Company’s common stock issued when certain financialtargets were met in 2008 and 2009 under the merger agreement between RhapsodyAcquisition Corp. (the Company’s former name) and Primoris Corporation, aprivately held Nevada corporation (“Former Primoris”).

 

(2)         Includes the effect of 74.9shares of common stock that were issued as part of the acquisition ofCravens.  The shares were issued in March 2010upon meeting a defined performance target in 2009.

 

(3)         Represents the effect of8,185 shares of common stock that were approved for issuance at a specialmeeting of the stockholders held on April 12, 2010.  The stockholders approved the issuance ofshares of common stock to the holders of 81.8 shares of Preferred Stock andapproved the conversion of the Preferred Stock to 8,185 shares of common stock.

 

**Note 17—Stockholders’ Equity**

 

***Preferred stoc******k*****—** The Company isauthorized to issue 1,000 shares of $0.0001 par value preferred stock.  As part of the consideration for theacquisition of JCG, the Company issued 81.8 shares of Preferred Stock to JCG’sformer members.  On April 12, 2010,at a special meeting of the stockholders, the stockholders approved theconversion of the 81.8 shares of Preferred Stock into 8,185 shares of commonstock.  There are no shares of PreferredStock outstanding at June 30, 2010.

 

***Warrants*****—** As of June 30, 2010,there were 3,795 warrants outstanding to purchase the Company’s commonstock.  Each warrant entitles the holderto purchase one share of common stock at a price of $5.00 per share and isexercisable at any time on or prior to October 2, 2010 (“Warrant”), unlessearlier redeemed by the Company. During the six months ended June 30,2010, a total of 822.6 Warrants were exercised.

 

***Unit Purchase Options*****—** As of June 30,2010, the Company has 450 Unit Purchase Options (“UPO”) outstanding.  Each UPO includes the right to purchase aUnit at $8.80 per share, and such Unit is comprised of one share of commonstock and one Warrant.  The UPO expireson October 2, 2011.  The Warrantsexpire on October 2, 2010, including the Warrants that are included aspart of the UPO.

 

**Note 18—Commitments and Contingencies**

 

***Leases****—*The Companyleases certain property and equipment under non-cancellable operating leaseswhich expire at various dates through 2019. The leases require the Company topay all taxes, insurance, maintenance and utilities.

 

Certainof these leases are with entities related through common ownership bystockholders, officers, and directors of the Company. The leases are classifiedas operating leases in accordance with ASC Topic 840-”Leases”.

 

Totallease expense during the three and six months ended June 30, 2010 amountedto $2,397 and $4,936, respectively, including amounts paid to related partiesof $291 and $574, respectively.  Totallease expense during the three and six months ended June 30, 2009 amountedto $1,551 and $3,266, including amounts paid to related parties of $289 and$565, respectively.

 

***Letters of credit****—*At June 30,2010, the Company had letters of credit outstanding of $9,614 and atDecember 31, 2009, the Company had letters of credit outstanding of$11,989.  The outstanding amountsincluded the U.S. dollar equivalent for letters of credit issued in Canadiandollars.

 

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***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 the consolidatedfinancial position of the Company.

 

***Bonding—***As of June 30,2010 and December 31, 2009, the Company had bid and completion bondsissued and outstanding totaling approximately $812,474 and $773,762,respectively.

 

**Note 19—Reportable Operating Segments**

 

Priorto January 1, 2010, the Company reported two operating segments:  the Construction Services segment and theEngineering segment. As a result of the acquisition of JCG and changes in ourmanagement structure, the Company changed the reportable operating segments onJanuary 1, 2010, by splitting the former Construction Services segmentinto two separate segments. The prior year information for the ConstructionServices segment has been reclassified into the new segments. The three newsegments are East Construction Services, West Construction Services andEngineering.

 

TheEast Construction Services segment incorporates the JCG construction business,located primarily in the southeastern United States.  The segment also includes the businesseslocated in the Gulf Coast region of the United States that were formerlyincluded in the Construction Services segment, including CardinalContractors, Inc., Cardinal Mechanical and Cravens.

 

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

 

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

 

Inthe following tables, all intersegment revenues and gross profit have beeneliminated, which were immaterial.

 

***Segment Revenues***

 

Revenueby segment for the three months ended June 30, 2010 and 2009 were as follows:

 
| ** **                 | ** ** | **For the three months ended June 30,** | ** ** |
|----------------------------|------------|----------------------------------------------|------------|
| ** **                 | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| **Segment**                | ** ** | **Revenue**                                  | ** ** | **% of  Segment  Revenue** | ** ** | **Revenue** | ** ** | **% of  Segment  Revenue** | ** ** |
|                       |       |                                         |       |   |   |   |   |   |   |
| East Construction Services |       | $                                            | 120,471    |   | 59.3 | % | $ | 13,459 |   | 11.3 | % |
| West Construction Services |       | 69,821                                       |       | 34.4 | % | 92,788 |   | 77.6 | % |
| Engineering                |       | 12,895                                       |       | 6.3 | % | 13,363 |   | 11.1 | % |
| Total                      |       | $                                            | 203,187    |   | 100.0 | % | $ | 119,610 |   | 100.0 | % |

 

Revenueby segment for the six months ended June 30, 2010 and 2009 were asfollows:

 
| ** **                 | ** ** | **For the six months ended June 30,** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|
| ** **                 | ** ** | **2010**                                   | ** ** | **2009** | ** ** |
| **Segment**                | ** ** | **Revenue**                                | ** ** | **% of  Segment  Revenue** | ** ** | **Revenue** | ** ** | **% of  Segment  Revenue** | ** ** |
|                       |       |                                       |       |   |   |   |   |   |   |
| East Construction Services |       | $                                          | 224,707    |   | 59.4 | % | $ | 28,198 |   | 11.6 | % |
| West Construction Services |       | 129,708                                    |       | 34.3 | % | 182,832 |   | 75.2 | % |
| Engineering                |       | 23,754                                     |       | 6.3 | % | 32,130 |   | 13.2 | % |
| Total                      |       | $                                          | 378,169    |   | 100.0 | % | $ | 243,160 |   | 100.0 | % |

 

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***Segment Gross Profit***

 

Grossprofit by segment for the three months ended June 30, 2010 and 2009 wereas follows:

 
| ** **                 | ** ** | **For the three months ended June 30,** | ** ** |
|----------------------------|------------|----------------------------------------------|------------|
| ** **                 | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| **Segment**                | ** ** | **Gross  Profit**                            | ** ** | **% of  Segment  Revenue** | ** ** | **Gross  Profit** | ** ** | **% of  Segment  Revenue** | ** ** |
|                       |       |                                         |       |   |   |   |   |   |   |
| East Construction Services |       | $                                            | 13,593     |   | 11.3 | % | $ | 1,348 |   | 10.0 | % |
| West Construction Services |       | 10,181                                       |       | 14.6 | % | 18,128 |   | 19.5 | % |
| Engineering                |       | 2,862                                        |       | 22.2 | % | 1,267 |   | 9.5 | % |
| Total                      |       | $                                            | 26,636     |   | 13.1 | % | $ | 20,743 |   | 17.3 | % |

 

Grossprofit by segment for the six months ended June 30, 2010 and 2009 were asfollows:

 
| ** **                 | ** ** | **For the six months ended June 30,** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|
| ** **                 | ** ** | **2010**                                   | ** ** | **2009** | ** ** |
| **Segment**                | ** ** | **Gross  Profit**                          | ** ** | **% of  Segment  Revenue** | ** ** | **Gross  Profit** | ** ** | **% of  Segment  Revenue** | ** ** |
|                       |       |                                       |       |   |   |   |   |   |   |
| East Construction Services |       | $                                          | 23,214     |   | 10.3 | % | $ | 3,058 |   | 10.8 | % |
| West Construction Services |       | 22,392                                     |       | 17.3 | % | 29,215 |   | 16.0 | % |
| Engineering                |       | 5,503                                      |       | 23.2 | % | 2,976 |   | 9.3 | % |
| Total                      |       | $                                          | 51,109     |   | 13.5 | % | $ | 35,249 |   | 14.5 | % |

 

***Segment Goodwill***

 

Thefollowing presents the amount of goodwill recorded by segment at June 30,2010 and at December 31, 2009.

 
| **Segment**                | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | ** **              | ** ** | ** **                  | ** ** |
| East Construction Services |       | $                       | 57,237     |                        | $          | 57,237 |   |
| West Construction Services |       | —                  |       | —                      |       |
| Engineering                |       | 2,441                   |       | 2,441                       |       |
| Total                      |       | $                       | 59,678     |                        | $          | 59,678 |   |

 

***Geographic Region — Revenues and Total Assets***

 

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:

 
| ** **        | ** ** | **Revenues**                               | ** ** | ** **        | ** ** | ** **       | ** ** |
|-------------------|------------|--------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **        | ** ** | **For the six months ended June 30,** | ** ** | ** **        | ** ** | ** **       | ** ** |
| ** **        | ** ** | **2010**                                   | ** ** | **2009**          | ** ** | **Total Assets** | ** ** |
| **Country:**      | ** ** | **Revenue**                                | ** ** | **% of  Revenue** | ** ** | **Revenue**      | ** ** | **% of  Revenue** | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|              |       |                                       |       |              |       |             |       |   |   |   |   |   |   |
| United States     |       | $                                          | 365,692    |              | 96.7       | %                | $          | 230,826 |   | 94.9 | % | $ | 491,423 |   | $ | 465,025 |   |
| Non-United States |       | 12,477                                     |       | 3.3               |       | 12,334           |       | 5.1 |   | 10,014 |   | 11,002 |   |
| Total             |       | $                                          | 378,169    |              | 100.0      | %                | $          | 243,160 |   | 100.0 | % | $ | 501,437 |   | $ | 476,027 |   |

 

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**Note 20—Subsequent Event**

 

On July 1, 2010, theCompany completed the acquisition of a 50% membership interest in WesPac EnergyLLC, a Nevada limited liability company (“WesPac”). Pursuant to the terms ofthe Membership Interest Purchase Agreement, dated July 1, 2010, by andamong us, WesPac and Kealine Holdings, LLC (“Kealine”), a Nevada limitedliability company and the sole limited liability company member of WesPac priorto the closing, we acquired 50% of the issued and outstanding limited liabilitycompany membership interests of WesPac for total cash consideration of $18,065.Kealine will hold the remaining 50% membership interest in WesPac.  Immediately following the closing, WesPac distributed$4,900 to Kealine. We have no future obligation to make any additionalinvestments into WesPac. All key investment, management and operating decisionsof WesPac will require unanimous approval from a management committee equallyrepresented by us and Kealine.

 

Founded in 1998 and based inIrvine, California, WesPac develops pipeline and terminal projects in theUnited States, Canada and Mexico, providing long-term economic solutions forits customers and partners by building, expanding or enhancing infrastructurein the areas of pipeline transportation and storage inefficiencies. To date,WesPac has successfully developed, financed and brought to completion severalsuch projects.  The Company believes theinterest in WesPac will broaden our exposure to a variety of pipeline, terminaland energy-related infrastructure opportunities across North America.

 

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**PRIMORIS SERVICES CORPORATION**

**MANAGEMENT’S DISCUSSION AND ANALYSIS**

 

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

 

***Forward Looking Statements***

 

*This Quarterly Report on Form 10-Q for the quarterlyperiod ended June 30, 2010 (“Second Quarter 2010 Report”) containsforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended (the “Securities Act”), and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”), whichare subject to the “safe harbor” created by those sections. Forward-lookingstatements include information concerning our possible or assumed futureresults of operations, business strategies, financing plans, competitiveposition, industry environment, potential growth opportunities, the effects ofregulation and the economy, generally. Forward-looking statements include allstatements that are not historical facts and can be identified by terms such as“anticipates,” “believes,” “could,” “estimates,” “expects,” “intends, “may,” “plans,”“potential,” “predicts,” “projects,” “should,” “will,” “would” or similarexpressions.*

 

*Forward-looking statements involve known and unknown risks,uncertainties and other factors which may cause our actual results, performanceor achievements to be materially different from any future results, performanceor achievements expressed or implied by the forward-looking statements. Wediscuss many of these risks in detail in Part I, Item 1A “RiskFactors” of our Annual Report on Form 10-K for the year endedDecember 31, 2009 and our other filings with the Securities and ExchangeCommission (“SEC”). Also, forward-looking statements represent our management’sbeliefs and assumptions only as of the date of this Second Quarter 2010 Report.You should read this Second Quarter 2010 Report, our Annual Report onForm 10-K for the year ended December 31, 2009 and our other filingswith the SEC completely and with the understanding that our actual futureresults 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 read inconjunction with the unaudited financial statements and notes thereto includedin Part 1, Item 1 of this Second Quarter 2010 Report.*

 

**Introduction**

 

PrimorisServices Corporation is a holding company with various subsidiaries thatcumulatively form a diversified construction company providing a widerange of construction and product engineering services.  These services include fabrication,maintenance, replacement and other services to major public utilities,petrochemical companies, energy companies, municipalities and othercustomers.  Our activities are performedprimarily in the Southeast and Southwest United States, primarily in Louisianaand California, with strategic presences in Florida, Texas and Canada.

 

Weinstall, replace, repair and rehabilitate natural gas, refined product, waterand wastewater pipeline systems, and also construct mechanical facilities andother structures, including power plants, petrochemical facilities, refineriesand parking structures. In addition, we provide maintenance services, includinginspection, overhaul and emergency repair services, to cogeneration plants,refineries and similar mechanical facilities.

 

Throughour acquisition of James Construction Group, LLC (“JCG”) in December 2009,we provide services in heavy civil construction projects, including highway andbridge construction, concrete paving, levee construction, airport runway andtaxiway construction and marine facility construction. JCG’s infrastructure andmaintenance division provides large earthwork and site development, landfillconstruction, site remediation and mining support services. JCG’s industrialdivision, with a client base comprised primarily of private industrialcompanies, provides all phases of civil and structural construction, mechanicalequipment erection, process pipe installation and boiler, furnace and heaterinstallation and repair.

 

Throughour subsidiary Onquest, Inc. (“Onquest”), we provide product engineeringand design services for fired heaters and furnaces primarily used in refineryapplications. Through our subsidiary Cardinal Contractors, Inc., weconstruct water and wastewater facilities primarily in Florida.

 

Wemake our press releases, our Annual Reports on Form 10-K, our QuarterlyReports on Form 10-Q, our Current Reports on Form 8-K and all otherrequired filings with the SEC available, free of charge through our InternetWeb site, as reasonably practical after they are electronically filed with, orfurnished to, the SEC. Our principal executive offices are located at 26000Commercentre Drive, Lake Forest, California 92630, and our telephone number is(949) 598-9242. Our Web site address is *www.prim.com*.The information on our Internet Web site is neither part of nor incorporated byreference into this Second Quarter 2010 Report.

 

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Weprovide services in three segments: the East Construction Services segment, theWest Construction Services segment and the Engineering segment.

 

Inprior periods, the Company reported two operating segments:  the Construction Services segment and theEngineering segment. As a result of the acquisition of JCG and changes in themanagement structure, the Company changed the reportable operating segments onJanuary 1, 2010, by splitting the former Construction Services segmentinto two separate segments. The prior year information for the ConstructionServices segment has been reclassified into the two new segments. The threesegments are outlined as follows:

 

TheEast Construction Services segment incorporates the JCG construction servicesbusiness, located primarily in the southern United States, specializing inhighway, industrial and environmental projects. The East Construction Services segment also consists of the businesseslocated in the Gulf Coast region of the United States that were formerly a partof the Construction Services segment, including CardinalContractors, Inc., Cardinal Mechanical and CravensServices, Inc.  The EastConstruction Services segment provides a range of services that include:

 

·                 Heavy civil construction projects includinghighway and bridge construction, paving, levee construction, airport runway andtaxiway construction and marine facility construction;

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

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

·                 Providing installation and maintenance ofinfrastructure projects.

 

TheWest Construction Services segment includes construction services performed inthe western United States, primarily in the states of California andNevada.  The entities that are includedin West Construction Services include ARB, ARB Structures, Inc., andStellaris, LLC. The West Construction Services segment provides a range ofservices that include:

 

·                 Providing installation of undergroundpipeline, cable and conduits for entities primarily in the petroleum,petrochemical and gas industries and projects with water/wastewaterdistribution requirements;

·                 Providing installation and maintenance ofindustrial facilities for entities in the power, petroleum and petrochemicalindustries;

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

·                 Providing other earthwork, site developmentand remediation work.

 

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

 

·                 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; and

·                 Furnishing turn-key project management withtechnical expertise and the ability to deliver custom product engineeringsolutions worldwide.

 

Thefollowing table provides the historical revenues for the previously reportedquarters for 2009 into the three new operating segments.

 
| ** **                 | ** ** | **Three Months Ended** | ** ** | ** **        | ** ** |
|----------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                 | ** ** | **March 31,**     | ** ** | **June 30,** | ** ** | **September  30,** | ** ** | **December  31,** | ** ** | **Total** | ** ** |
| **Segment:**               | ** ** | **2009**               | ** ** | **2009**          | ** ** | **2009** | ** ** | **2009** | ** ** | **2009** | ** ** |
| ** **                 | ** ** | **(Thousands)**        | ** ** |
| East Construction Services |       | $                      | 14,739     |              | $          | 13,459 |   | $ | 13,830 |   | $ | 26,987 |   | $ | 69,015 |   |
| West Construction Services |       | 90,044                 |       | 92,788            |       | 80,933 |   | 76,456 |   | 340,221 |   |
| Engineering                |       | 18,767                 |       | 13,363            |       | 11,848 |   | 13,796 |   | 57,774 |   |
|                       |       | $                      | 123,550    |              | $          | 119,610 |   | $ | 106,611 |   | $ | 117,239 |   | $ | 467,010 |   |

 

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**Material trends and uncertainties**

 

Wegenerate our revenue from both large and small construction and productengineering projects. The award of these contracts is dependent on a number offactors, many of which are not within our control. Business in the constructionindustry is cyclical. We depend in part on spending by companies in the energy,and oil and gas industries, as well as on municipal water and wastewatercustomers. Over the past few years, we have benefited from demand for moreefficient and more environmentally friendly energy and power facilities andfrom the strength of the oil and gas industry.

 

Thecurrent macroeconomic issues, including those in the financial markets, willlikely impact our future results. While we currently have adequate backlog andprojects to bid, we are uncertain as to how the current global financial issueswill impact our clients.  Economicfactors outside of our control may affect the number and size of contractsawarded to us in any particular period.

 

**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 from quarter-to-quarter.  Absent the awarding of a large project, thecombination of weather and budget cycles suggest that revenues tend to belowest in the first quarter of the year.

 

**Results of operations**

 

Revenues,gross profit, operating income and net income for the three months ended June 30,2010 and 2009 were as follows:

 
| ** **                                      | ** ** | **Three Months Ended June 30,**         | ** ** |
|-------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                      | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| ** **                                      | ** ** | **(Thousands,  except per  share  amounts)** | ** ** | **% of  Revenue** | ** ** | **(Thousands,  except per  share  amounts)** | ** ** | **% of  Revenue** | ** ** |
| Revenues                                        |       | $                                            | 203,187    |   | 100.0 | % | $ | 119,610 |   | 100.0 | % |
| Gross profit                                    |       | 26,636                                       |       | 13.1 | % | 20,743 |   | 17.3 | % |
| Selling, general and administrative expense     |       | 15,823                                       |       | 7.8 | % | 8,143 |   | 6.8 | % |
| Operating income                                |       | 10,813                                       |       | 5.3 | % | 12,600 |   | 10.5 | % |
| Other income (expense)                          |       | 461                                          |       | 0.2 | % | 1,376 |   | 1.2 | % |
| Income before income taxes                      |       | 11,274                                       |       | 5.5 | % | 13,976 |   | 11.7 | % |
| Income tax provision                            |       | (4,187                                       | )          | (2.0 | )% | (5,355 | ) | (4.5 | )% |
| Net income from continuing operations           |       | $                                            | 7,087      |   | 3.5 | % | $ | 8,621 |   | 7.2 | % |
| Profit from discontinued operations             |       | —                                       |       | — |   | (41 | ) | — | % |
| Net income                                      |       | $                                            | 7,087      |   | 3.5 | % | $ | 8,580 |   | 7.2 | % |
| **Earnings per share:**                         |       |                                         |       |   |   |   |   |   |   |
| Basic:                                          |       |                                         |       |   |   |   |   |   |   |
| Income from continuing operations               |       | $                                            | 0.16       |   |   |   | $ | 0.27 |   |   |   |
| Income on discontinued operations               |       | $                                            | —     |   |   |   | $ | (0.01 | ) |   |   |
| Net Income                                      |       | $                                            | 0.16       |   |   |   | $ | 0.26 |   |   |   |
|                                            |       |                                         |       |   |   |   |   |   |   |
| Diluted:                                        |       |                                         |       |   |   |   |   |   |   |
| Income from continuing operations               |       | $                                            | 0.16       |   |   |   | $ | 0.26 |   |   |   |
| Income on discontinued operations               |       | $                                            | —     |   |   |   | $ | — |   |   |   |
| Net Income                                      |       | $                                            | 0.16       |   |   |   | $ | 0.26 |   |   |   |
|                                            |       |                                         |       |   |   |   |   |   |   |
| **Weighted average common shares  outstanding** |       |                                         |       |   |   |   |   |   |   |
| Basic                                           |       | 43,163                                       |       |   |   | 32,477 |   |   |   |
| Diluted                                         |       | 45,407                                       |       |   |   | 32,835 |   |   |   |

 

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Revenues,gross profit, operating income and net income for the six months ended June 30,2010 and 2009 were as follows:

 
| ** **                                      | ** ** | **Six Months Ended June 30,**           | ** ** |
|-------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                      | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| ** **                                      | ** ** | **(Thousands,  except per  share  amounts)** | ** ** | **% of  Revenue** | ** ** | **(Thousands,  except per  share  amounts)** | ** ** | **% of  Revenue** | ** ** |
| Revenues                                        |       | $                                            | 378,169    |   | 100.0 | % | $ | 243,160 |   | 100.0 | % |
| Gross profit                                    |       | 51,109                                       |       | 13.5 | % | 35,249 |   | 14.5 | % |
| Selling, general and administrative expense     |       | 29,269                                       |       | 7.7 | % | 15,559 |   | 6.4 | % |
| Operating income                                |       | 21,840                                       |       | 5.8 | % | 19,690 |   | 8.1 | % |
| Other income (expense)                          |       | 85                                           |       | — | % | 3,505 |   | 1.4 | % |
| Income before income taxes                      |       | 21,925                                       |       | 5.8 | % | 23,195 |   | 9.5 | % |
| Income tax provision                            |       | (8,140                                       | )          | (2.2 | )% | (8,954 | ) | (3.7 | )% |
| Net income from continuing operations           |       | $                                            | 13,785     |   | 3.6 | % | $ | 14,241 |   | 5.9 | % |
| Profit from discontinued operations             |       | —                                       |       |   |   | (21 | ) | (0.1 | )% |
| Net income                                      |       | $                                            | 13,785     |   | 3.6 | % | $ | 14,220 |   | 5.8 | % |
| **Earnings per share:**                         |       |                                         |       |   |   |   |   |   |   |
| Basic:                                          |       |                                         |       |   |   |   |   |   |   |
| Income from continuing operations               |       | $                                            | 0.36       |   |   |   | $ | 0.45 |   |   |   |
| Income on discontinued operations               |       | $                                            | —     |   |   |   | $ | — |   |   |   |
| Net Income                                      |       | $                                            | 0.36       |   |   |   | $ | 0.45 |   |   |   |
|                                            |       |                                         |       |   |   |   |   |   |   |
| Diluted:                                        |       |                                         |       |   |   |   |   |   |   |
| Income from continuing operations               |       | $                                            | 0.30       |   |   |   | $ | 0.44 |   |   |   |
| Income on discontinued operations               |       | $                                            | —     |   |   |   | $ | — |   |   |   |
| Net Income                                      |       | $                                            | 0.30       |   |   |   | $ | 0.44 |   |   |   |
|                                            |       |                                         |       |   |   |   |   |   |   |
| **Weighted average common shares  outstanding** |       |                                         |       |   |   |   |   |   |   |
| Basic                                           |       | 38,210                                       |       |   |   | 31,303 |   |   |   |
| Diluted                                         |       | 45,451                                       |       |   |   | 32,477 |   |   |   |

 

Revenuefor the three months ended June 30, 2010 (“Second Quarter 2010”) and the sixmonths ended June 30, 2010 was $203.2 million and $378.2 million,respectively, an increase of $83.6 million and $135.0 million, or 69.9%and 55.6%, respectively, compared to the same periods in 2009.   The increase in revenues was due primarilyto the addition of new businesses in late 2009, which contributed $112.9million in revenues for the Second Quarter 2010 and $208.9 million for the sixmonths ended June 30, 2010 . Excluding the impact of the new businesses, revenues for the SecondQuarter 2010 and the six months ended June 30, 2010 declined by $29.3million and $73.9 million, respectively, compared to the same period a yearago.  The decreased revenues were acrossall business lines, but especially in pipeline and industrial projects in theWest Construction segment, reflecting the slowdown in project awards in 2009.

 

Grossprofit increased by $5.9 million, or 28.5%, and increased by $15.9million, or 45.2%, for the three and six months ended June 30, 2010compared to the same periods in 2009. This was due primarily to a $12.8 million and $21.5 million profitcontribution of our recent acquisitions in the East Construction Servicessegment for the three and six months ended June 30, 2010, respectively,and the successful close out of pipeline and industrial projects in the WestConstruction segment compared to the first quarter of 2009.

 

Grossprofit as a percent of revenues decreased to 13.1% and 13.5% during the threeand six months ended June 30, 2010, respectively, compared to 17.3% and14.5% in the same periods of 2009, respectively. The margins were primarilyimpacted by lower utilization of equipment and manpower in the WestConstruction segment and lower margins in the legacy companies for the EastConstruction segment.

 

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**Geographic areas financial information**

 

Revenue by geographic area for the six months ended June 30, 2010and 2009 was as follows:

 
| ** **             | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------|------------|---------------------------------------------------|------------|
| ** **             | ** ** | **2010**                                          | ** ** | **2009** | ** ** |
| ** **             | ** ** | **(Thousands)**                                   | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
| ** **             | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ***Country:***         |       |                                              |       |   |   |   |   |   |   |
| United States          |       | $                                                 | 365,692    |   | 96.7 | % | $ | 230,826 |   | 94.9 | % |
| Non—United States |       | 12,477                                            |       | 3.3 | % | 12,334 |   | 5.1 | % |
| Total revenues         |       | $                                                 | 378,169    |   | 100.0 | % | $ | 243,160 |   | 100.0 | % |

 

Note that revenue is attributed to the countries based on our reportingentity that records the transaction, rather than the geographic location of theclient or job site.

 

**Segment results**

 

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

 

*East Construction Services Segment*

 

Revenue and gross profit for the East Construction Services segment forthe three and six months ended June 30, 2010 and 2009 were as follows:

 
| ** **                        | ** ** | **Three Months Ended June 30,** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|
| ** **                        | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                        | ** ** | **(Thousands)**                      | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
| ***East  Construction Services*** |       |                                 |       |   |   |   |   |   |   |
| Revenue                           |       | $                                    | 120,471    |   |   |   | $ | 13,459 |   |   |   |
| Gross profit                      |       | 13,593                               |       | 11.3 | % | 1,348 |   | 10.0 | % |
|                                   |            |                                      |            |  |  |  |  |  |  |  |  |

 
| ** **                        | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------|------------|------------------------------------|------------|
| ** **                        | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| ** **                        | ** ** | **(Thousands)**                    | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
| ***East  Construction Services*** |       |                               |       |   |   |   |   |   |   |
| Revenue                           |       | $                                  | 224,707    |   |   |   | $ | 28,198 |   |   |   |
| Gross profit                      |       | 23,214                             |       | 10.3 | % | 3,058 |   | 10.8 | % |
|                                   |            |                                    |            |  |  |  |  |  |  |  |  |

 

Revenue for the East Construction Services segment increased by $107.0million and $196.5 million, respectively, for the three and six months ended June 30,2010 compared to the same periods in 2009. This increase was due to the addition of $112.9 million and $208.9million in revenues attributable to the 2009 additions of JCG and Cravens in thefourth quarter 2009, which was partially offset by $5.9 million and $12.4million decrease in revenue for the three and six month periods ended June 30,2010, primarily as a result of reduced revenues on water and wastewaterprojects.

 

Gross profit for the East Construction Services segment increased by$12.2 million and $20.2 million for the three and six months ended June 30,2010, respectively, primarily as a result of the $12.2 million and $20.8million gross margin contribution from the JCG acquisition compared to those ofthe water and wastewater projects in the same periods in 2009, respectively.  Included in the gross profit amount isintangible amortization expense related to the JCG acquisition of $1.1 million.

 

Gross profit as a percent of revenues increased to 11.3% during thethree months ended June 30, 2010 from 10.0% in the prior year quarter,reflecting the increased margin percentages realized on JCG projects.  For the six months ended June 30, 2010,gross profit as a percent of revenues decreased to 10.3% compared to 10.8% inthe same period in the prior year due to the typically lower margin percentageson JGC’s heavy civil projects in the wet winter months during primarily thefirst quarter of 2010.

 

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*West Construction Services Segment*

 

Revenue and gross profit for the West Construction Services segment forthe three and six months ended June 30, 2010 and 2009 were as follows:

 
| ** **                        | ** ** | **Three Months Ended June 30,** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|
| ** **                        | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                        | ** ** | **(Thousands)**                      | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
| ***West  Construction Services*** |       |                                 |       |   |   |   |   |   |   |
| Revenue                           |       | $                                    | 69,821     |   |   |   | $ | 92,788 |   |   |   |
| Gross profit                      |       | 10,181                               |       | 14.6 | % | 18,128 |   | 19.5 | % |
|                                   |            |                                      |            |  |  |  |  |  |  |  |  |

 
| ** **                        | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------|------------|------------------------------------|------------|
| ** **                        | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| ** **                        | ** ** | **(Thousands)**                    | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
| ***West  Construction Services*** |       |                               |       |   |   |   |   |   |   |
| Revenue                           |       | $                                  | 129,708    |   |   |   | $ | 182,832 |   |   |   |
| Gross profit                      |       | 22,392                             |       | 17.3 | % | 29,215 |   | 16.0 | % |
|                                   |            |                                    |            |  |  |  |  |  |  |  |  |

 

Revenue for the West Construction Services segment decreased by $23.0million, or 24.8%, and 53.1 million, or 29.1%, respectively, for the three andsix months ended June 30, 2010 compared to the same periods in 2009. Thisdecrease was primarily due to a decline in project revenues from power plant,oil and gas pipelines and parking structure projects.

 

Gross profit for the West Construction Services decreased by $7.9million, or 43.8%, for the three months ended June 30, 2010 primarily as aresult of lower business volume resulting in a decline in gross profit of $3.9million and profit declines related to power plant and pipeline projectsbecause of high profit margins in the same period of 2009.  Gross profit for the six months ended June 30,2010 decreased by $6.8 million, or 23.4%, compared to the same period in2009.  This decrease was due to lowerequipment and manpower utilization, primarily in the first quarter of 2010.

 

Gross profit as a percent of revenues decreased to 14.6% during thethree months ended June 30, 2010 from 19.5% in the prior year quarter,reflecting high margins in the second quarter of 2009 because of projectclose-outs.  For the six months ended June 30,2010, gross profit as a percent of revenues increased to 17.3% compared to16.0% in the same period in the prior year due to higher margins in pipeline,industrial and parking garage projects.

 

*Engineering Segment*

 

Revenue and gross profit for the Engineering segment for the three andsix months ended June 30, 2010 and 2009 were as follows:

 
| ** **        | ** ** | **Three Months Ended June 30,** | ** ** |
|-------------------|------------|--------------------------------------|------------|
| ** **        | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **        | ** ** | **(Thousands)**                      | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
| ***Engineering*** |       |                                 |       |   |   |   |   |   |   |
| Revenue           |       | $                                    | 12,895     |   |   |   | $ | 13,363 |   |   |   |
| Gross profit      |       | 2,862                                |       | 22.2 | % | 1,267 |   | 9.5 | % |
|                   |            |                                      |            |  |  |  |  |  |  |  |  |

 
| ** **        | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------|------------|------------------------------------|------------|
| ** **        | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| ** **        | ** ** | **(Thousands)**                    | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
| ***Engineering*** |       |                               |       |   |   |   |   |   |   |
| Revenue           |       | $                                  | 23,754     |   |   |   | $ | 32,130 |   |   |   |
| Gross profit      |       | 5,503                              |       | 23.2 | % | 2,976 |   | 9.3 | % |
|                   |            |                                    |            |  |  |  |  |  |  |  |  |

 

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Revenuefor the Engineering segment decreased by $0.5 million, or 3.5%, and $8.4million, or 26.1%, for the three and six months ended June 30, 2010,respectively, compared to the same periods in 2009.  This decrease was due to slower activity inthe first and second quarters of 2010, compared to the same periods in2009.  The higher revenue in the prioryear included the finalization of a large international project and severallarge domestic projects.

 

Grossprofit for the Engineering segment increased by $1.6 million and $2.5 millionfor the three and six months ended June 30, 2010, respectively, comparedto the same periods in 2009.  Thisincrease was due primarily to customer acceptance of a project during the sixmonths ended June 30, 2010 and due to lower profit margins during the sameperiod in 2009 because of a reserve for completed work.  As a result, the gross profit as a percent ofrevenues increased to 23.2% for the six months ended June 30, 2010compared to 9.3% of revenues for the same period in 2009.

 

**Selling, general and administrative expenses**

 

Selling, general and administrative expenses (“SG&A”) increased$7.7 million, or 94.3%, for the Second Quarter 2010 compared to the sameperiod in 2009. Of the increased amount, $6.0 million was added by theacquisitions of JCG and Cravens . The balance of the increase of $1.7 millionwas mainly due to $0.2 million of increased professional fees, $0.3 million ofdecreased profit on sale of equipment and $0.8 million of lower recovery allocationto cost of revenues due to reduced West Construction Segment activities.

 

SG&A increased by $13.7 million, or 88.1%, for the six months endedJune 30, 2010 compared to the same period in 2009.  A total of $10.7 million of the increase wasdue to the acquisitions of JGC and Cravens during the fourth quarter of2009.  The $3.0 remaining increase wasprimarily due to a lower recovery allocation of $1.9 million to cost ofrevenues as a result of reduced West Construction Segment activities, decreasedprofit on the sale of equipment of $0.3 million and an increase in professionalfees of $0.6 million as a result, in part, of the recently acquired companies.

 

SG&A as a percentage of revenue increased to 7.8% for the SecondQuarter 2010, from 6.8% for the same period in 2009 and 7.7% for the six monthsended June 30, 2010 compared to 6.4% for the same period in the prioryear.  The increased percentage for theSecond Quarter 2010 was due primarily to the increased costs discussed above.

 

**Other income and expense**

 

Non-operating income and expense items for the three and six monthsended June 30, 2010 and 2009 were as follows:

 
| ** **                               | ** ** | **Three Months  Ended June 30,** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|
| ** **                               | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| ** **                               | ** ** | **(Thousands)**                       | ** ** |
| ***Other income  (expense)***            |       |                                  |       |   |   |
| Income from non-consolidated investments |       | $                                     | 1,756      |   | $ | 1,736 |   |
| Foreign exchange gain (loss)             |       | 94                                    |       | (26 | ) |
| Other income (expense)                   |       | (322                                  | )          | — |   |
| Interest income                          |       | 153                                   |       | 205 |   |
| Interest (expense)                       |       | (1,220                                | )          | (539 | ) |
| Total other income                       |       | $                                     | 461        |   | $ | 1,376 |   |

 
| ** **                               | ** ** | **Six Months  Ended June 30,** | ** ** |
|------------------------------------------|------------|-------------------------------------|------------|
| ** **                               | ** ** | **2010**                            | ** ** | **2009** | ** ** |
| ** **                               | ** ** | **(Thousands)**                     | ** ** |
| ***Other income  (expense)***            |       |                                |       |   |   |
| Income from non-consolidated investments |       | $                                   | 2,724      |   | $ | 3,903 |   |
| Foreign exchange gain (loss)             |       | 186                                 |       | 203 |   |
| Other income (expense)                   |       | (631                                | )          | — |   |
| Interest income                          |       | 333                                 |       | 464 |   |
| Interest (expense)                       |       | (2,527                              | )          | (1,065 | ) |
| Total other income                       |       | $                                   | 85         |   | $ | 3,505 |   |

 

For the Second Quarter 2010, income from non-consolidated jointventures amounted to $1.8 million which was primarily due to income from theSt.-Bernard Levee Partners joint venture, a construction project near NewOrleans, Louisiana.  Income fromnon-consolidated joint ventures for the same period in 2009 amounted to $1.7million, which consisted of income of $2.7 million from the Otay MesaPower Partners (“OMPP”) joint venture, a power plant construction project nearSan Diego, California and income of 

 

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$0.07million from All Day Electric, an electrical construction company in NorthernCalifornia, reduced by a $1.0 million reserve recorded for the ARB Arendal, SRLde CV (“ARB Arendal”) joint venture.  ARBArendal engaged in construction activities in Mexico.

 

Income from non-consolidated joint ventures for the six months ended June 30,2010 of $2.4 million included $3.0 million from the St.-Bernard Levee Partnersjoint venture and was offset by a loss of $0.2 million for All DayElectric.  Income for the same period in2009 was $3.9 million, which included $5.1 million from the OMPP joint venture,reduced by a loss of $0.1 million from All Day Electric and the $1.0 millionreserve recorded for ARB Arendal.

 

Foreign exchange gains for both the six months ended June 30, 2010and for the same period in 2009 reflect currency exchange fluctuations of theUnited States dollar compared to the Canadian dollar. Our contracts in Calgary,Canada are sold based on United States dollars, but a portion of the work ispaid for with Canadian dollars, which can create a currency exchangedifference.

 

Other expense represents the change in the fair value of the contingentearnout liabilities resulting from the acquisitions of JCG and Cravens in thefourth quarter 2009, which amounted to an expense of $0.6 million during thesix months ended June 30, 2010.

 

For the three and six months ended June 30, 2010, interest expensewas $1.2 million and $2.5 million, respectively, compared to $0.5 million and$1.1 million for the same periods in 2009. The increase over both the prior periods was due primarily to interestpayments due on the subordinated debt related to the JCG acquisition.

 

**Provision for income taxes**

 

Our provision for income tax decreased $1.2 million for the threemonths ended June 30, 2010 to $4.2 million, and decreased $0.8 million forthe six months ended June 30, 2010 to $8.1 million, compared to the sameperiods in 2009.  The tax rate applied inthe Second Quarter 2010 was 37.1% as compared to 38.3% for the same period in2009, and 37.1% for the six months ended June 30, 2010 compared to 38.6%for the same period in 2009.  This changein tax rate depends on our estimated full year results, coupled withassumptions on our mix in revenues and profits in the various tax jurisdictionsthroughout the USA and Canada.

 

**Liquidity and Capital Resources**

 

Liquidity represents our ability to pay our liabilities when theybecome due, fund business operations and meet our contractual obligations.  Our primary sources of liquidity are our cashbalances at the beginning of each period and our net cash flow.  In addition to cash flow from operations, wehave availability under our lines of credit to augment liquidity needs.  In order to maintain sufficient liquidity, weevaluate our working capital requirements on a regular basis.  We may elect to raise additional capital byissuing common stock, convertible notes, term debt or increasing our creditfacility as necessary to fund our operations or to fund the acquisition of newbusinesses.

 

At June 30, 2010, our balance sheet included net cash andinvestments of $120.3 million, consisting of net cash of $87.3 million,and $33.0 million in short-term investments. We also have borrowingcapacity to help meet our foreseeable needs based on our current cash flowforecast. We currently have the following credit facilities:

 

·                  a $20 million creditfacility which expires on October 28, 2012, under which we can issueletters of credit for up to $15 million. At June 30, 2010, we have issued letters of credit of $4.3 millionon this facility, resulting in $15.7 million in available borrowing capacity;

·                  a credit facility of $15million, with the full borrowing amount available at June 30, 2010, whichexpires on October 27, 2010; and

·                  a $10 million (Canadiandollars) facility for commercial letters of credit in Canada with an expirationdate of December 31, 2012. At June 30, 2010, $5.5 million of lettersof credit (Canadian dollars) were outstanding, with $4.5 million availableunder this credit facility for additional letters of credit.

 

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**Cash Flows**

 

Cash flows during the six months ended June 30, 2010 and 2009 aresummarized as follows:

 
| ** **                                           | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                           | ** ** | **2010**                            | ** ** | **2009** | ** ** |
| ** **                                           | ** ** | **(Thousands)**                     | ** ** |
| ***Change in cash:***                                |       |                                |       |   |   |
| Net cash provided by operating activities            |       | $                                   | 5,152      |   | $ | 3,665 |   |
| Net cash used in investing activities                |       | (14,718                             | )          | (2,497 | ) |
| Net cash provided by (used in) financing  activities |       | 7,719                               |       | (11,514 | ) |
| Net cash used by discontinued operations             |       | (874                                | )          | (3,281 | ) |
| Net change in cash                                   |       | $                                   | (2,721     | ) | $ | (13,627 | ) |

 

**Operating activities**

 

The source of our cash flow from operating activities and the use of aportion of that cash in our operations for the six months ended June 30,2010 and 2009 were as follows:

 
| ** **                                | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------|------------|
| ** **                                | ** ** | **2010**                            | ** ** | **2009** | ** ** |
| ** **                                | ** ** | **(Thousands)**                     | ** ** |
| ***Operating  Activities:***              |       |                                |       |   |   |
| Operating Income                          |       | $                                   | 21,840     |   | $ | 19,690 |   |
| Depreciation                              |       | 8,303                               |       | 3,862 |   |
| Amortization of intangible assets         |       | 2,877                               |       | 18 |   |
| Gain on sale of property and equipment    |       | (1,228                              | )          | (1,499 | ) |
| Profit on discontinued operations         |       | —                              |       | (21 | ) |
| Changes in assets and liabilities         |       | (21,051                             | )          | (12,433 | ) |
| Non-consolidated entity distributions     |       | 5,190                               |       | 3,400 |   |
| Foreign exchange gain                     |       | 186                                 |       | 203 |   |
| Other income (expense)                    |       | (631                                | )          | — |   |
| Interest income                           |       | 333                                 |       | 464 |   |
| Interest expense                          |       | (2,527                              | )          | (1,065 | ) |
| Provision for income taxes                |       | (8,140                              | )          | (8,954 | ) |
| Net cash provided by operating activities |       | $                                   | 5,152      |   | $ | 3,665 |   |
|                                      |       |                                |       |   |   |
| Capital expenditures                      |       | $                                   | (13,789    | ) | $ | (3,058 | ) |

 

Cash flow provided by operating activities for the six months ended June 30,2010 increased by $1.8 million compared to the same period in 2009 dueprimarily to increased operating income of $2.2 million and $7.3 million indepreciation and amortization of intangible assets and as a result of thecontribution of the JCG acquisition. This was mainly offset by the increased use of cash of $8.6 million forchanges in assets and liabilities, and interest expense of $1.5 million.

 

The changes in assets and liabilities decreased operating cash flow by$21.1 million in the six months ended June 30,  2010. The components of this change areincluded in the consolidated statements of cash flow. The significant changesinclude:

 

·                    a $2.5 million increase inrestricted cash;

 

·                  a $13.4 millionincrease in accounts receivable;

 

·                  a $1.8 million increasein accounts payable;

 

·                  billings in excess of costsand estimated earnings increased by $3.5 million;

 

·                  costs and estimated earningsin excess of billings increased by $10.7 million;

 

·                  accrued expenses and othercurrent liabilities increased by $3.1 million;

 

·                  contingent earnoutliabilities increased by $0.6 million;

 

·                  other long-term liabilitiesincreased by $1.4 million; and

 

·                  inventory, prepaid expensesand other current assets increased by $4.9 million.

 

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As of June 30, 2010, accounts receivable represented 23.5% oftotal assets. We have an excellent collection history stemming from manyfactors, including performing work for recurring customers and substantialpre-acceptance review of the financial worthiness and credit history of new customers.We bill customers on an ongoing basis as projects are being constructed. As acontractor, we have certain lien rights that can provide additional security onthe accounts receivable that are generated, which may give priority to us overlenders or certain other creditors of the project. The increase in bothaccounts receivable and accounts payable as of June 30, 2010, are dueprimarily to the timing of our billings to clients and payments to our vendorsrelated to various construction projects, offset by reduced revenues of ourlegacy business during the six months ended June 30, 2010 compared to thesame period in 2009.

 

***Investing activities***

 

During the six month ended June 30, 2010, we purchased propertyand equipment for $13.8 million in cash and $3.1 million during thesame period in 2009. These purchases were principally for constructionequipment, including the purchase of an equipment yard for $7.3 million in theLos Angeles area.  We believe the ownershipof equipment is generally preferable to renting equipment on a project byproject basis, as ownership helps to ensure the equipment is available for ourworkloads when needed. In addition, ownership has historically resulted inlower overall equipment costs.

 

As part of our cash management program, we purchased $2.9 millionin short term investments during the six months ended June 30, 2010. Ourshort term investments consist primarily of CDs purchased through the CDARS(Certificate of Deposit Account Registry Service) program to provide FDICbacking of the CDs.

 

***Financing activities***

 

Financing activities provided $7.7 million of cash during the sixmonths ended June 30, 2010. Significant transactions using cash flows fromfinancing activities included:

 

·                    Proceeds long term debt fromequipment financing of $20.0 million.  Weused existing equipment to secure these borrowings.

 

·                  Cash distributions of$2.0 million were paid to the former members of JCG in January 2010.We provided this distribution to the former members of JCG, principally to allowthem to pay their personal income tax liability stemming from the JCG profitsprior to the December 2009 acquisition. This final distribution to theformer members of JCG was made in accordance with the terms of the acquisitionagreement.

 

·                  $3.2 million inrepayment of long-term debt during the six months ended June 30, 2010which included a partial prepayment of $2.3 million on subordinated debt andthe scheduled payments for long-term debt.

 

·                  $7.2 million in payment ofthe subordinated note related to the JCG acquisition.

 

·                  $2.1 million was paidas dividends to our stockholders during the six months ended June 20,2010, representing a dividend of $0.05 per share of common stock.

 

·                  $4.1 million wascollected for the conversion of warrants to common stock during the six monthsended June 30, 2010.

 

**Capital requirements**

 

We believe that we will be able to support our ongoing working capitalneeds through cash on hand, short term investments, operating cash flows andthe availability under our existing credit facilities, which we believe will beadequate to cover our operational and business needs for the next twelvemonths.

 

**Common stock**

 

On July 31, 2008, the Company completed the merger (“Merger”) ofRhapsody Acquisition Corp. (the Company’s former name) and PrimorisCorporation, a privately held Nevada corporation (“Former Primoris”).  The July 2008 merger agreement providedthat the Former Primoris stockholders would receive up to an additional5,000,000 shares of the Company’s common stock, contingent upon the combinedcompany attaining certain financial targets in 2008 and 2009. The Companyachieved the specified financial milestones for both 2009 and 2008.  As a result, 2,500,025 shares of common stockwere issued to Former Primoris stockholders in March 2009 and 2,499,975shares of common stock were issued to Former Primoris stockholders inMarch 2010.

 

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As part of the consideration for the acquisition of JCG, the Companyissued 81,852.78 shares of Preferred Stock to JCG’s former members.  On April 12, 2010, at a special meetingof the stockholders, the stockholders approved the conversion of the 81,852.78shares of Preferred Stock into an aggregate of 8,185,278 shares of commonstock.

 

As of June 30, 2010, there were 3,794,870 warrants outstanding topurchase the Company’s common stock. Each warrant entitles the holder to purchase one share of common stockat a price of $5.00 per share and is exercisable at any time on or prior toOctober 2, 2010, unless earlier redeemed by the Company. During the sixmonths ended June 30, 2010, a total of 822,629 warrants were exercised.

 

**Credit agreements**

 

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

 

·                  a revolvingloan in the amount of $20.0 million (the “Revolving Loan A”), with a maturitydate of October 28, 2012; and

 

·                  a revolvingloan in the amount of $15.0 million (the “Revolving Loan B”), with a maturitydate of October 27, 2010.

 

TheLender has agreed to issue for our account letters of credit of up to $15.0million, under Revolving Loan A. As of June 30, 2010 andDecember 31, 2009, total commercial letters of credit outstanding underthis credit facility totaled $4.3 million and $0.85 million, respectively.  This resulted in $15.7 million in availableborrowing capacity for Revolving Loan A at June 30, 2010.

 

AtJune 30, 2010, Revolving Loan B had $15.0 million in available borrowingcapacity.

 

Theprincipal amount of each of Revolving Loan A and Revolving Loan B will bearinterest at either: (i) LIBOR plus an applicable margin as specified inthe Agreement, or (ii) the prime rate announced by the Lender plus anapplicable margin as specified in the Agreement. The principal amount of anyloan bearing interest at LIBOR plus an applicable margin may not be prepaid inwhole or in part at any time. However, if any such loan is prepaid, we will besubject to certain prepayment penalties. There is no prepayment penalty for anyloan bearing interest at the prime rate announced by the Lender plus anapplicable margin.

 

In January 2008, we entered into a credit facility (as amended)for purposes of issuing commercial letters of credit in Canada, for an amountup to $10 million in Canadian dollars. The credit facility with a Canadianbank is for a term of 5 years, and provides for an annual fee of 1% forany issued and outstanding commercial letters of credit. Letters of credit canbe denominated in either Canadian or U.S. dollars.  At June 30, 2010 total letters of creditoutstanding for this credit facility amounted to $5.5 million (Canadiandollars), with $4.5 million available for additional letters of credit.

 

Allloans made by the Lender under the Agreement are secured by certain of ourassets, including, among others, our cash, inventory, goods, equipment(excluding equipment subject to certain permitted liens) and accountsreceivable. Certain of our subsidiaries have executed joint and severalguaranties in favor of the Lender for all amounts under the Agreement. TheAgreement and the line of credit facilities contain various restrictivecovenants, including, among others, restrictions on investments, capitalexpenditures, minimum tangible net worth and debt service coveragerequirements. The Company was in compliance with its restrictive covenantsas of June 30, 2010.

 

At the time of the JCG acquisition on December 18, 2009, theCompany assumed outstanding letters of credit of $5.6 million under an amendedcredit agreement that expired on February 28, 2010.  To facilitate the expiration of the creditagreement with outstanding letters of credit, the Company made a cash depositas replacement for the existing letters of credit, and is recorded as a prepaidasset on the Company’s balance sheet.

 

We enter into agreements with banks for the banks to issue letters ofcredit to clients or potential clients for two separate purposes as follows:

 

·                  Born Heaters Canada, one ofour subsidiaries, has entered into contracts for the delivery of engineeredequipment, which require letters of credit. These letters of credit may bedrawn upon by the client in instances where Born Heaters Canada fails to providethe contracted services or equipment. Most of these letters of credit are forCanadian exports, of which 90% is guaranteed by the Economic Development Bankof Canada against “unfair” calling.

 

·                  Insurance companies may fromtime to time require letters of credit to cover the risk of insurancedeductible programs. These letters of credit can be drawn upon by the insurancecompany if we fail to pay the deductible of certain insurance policies in caseof a claim.

 

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**Related party transactions**

 

We have entered into various transactions with Stockdale InvestmentGroup, Inc. (“SIGI”). Brian Pratt, one of our largest stockholders and ourChief Executive Officer, President and Chairman of the Board of Directors,holds a majority interest in SIGI and is the chairman and a director of SIGI. Inaddition, John M. Perisich, our Senior Vice President and General Counsel, issecretary of SIGI.

 

We lease properties from SIGI located in Bakersfield, Pittsburg and SanDimas, California, and in Pasadena, Texas. During the six months ended June 30,2010 and 2009, we paid $0.44 million and $0.39 million, respectively, in leasepayments to SIGI for the use of these properties. These leases with SIGI wereentered into on similar terms as negotiated with an independent thirdparty.  Also, SIGI occupies certain spacein our corporate offices and pays a pro rata portion of facility costs based onsquare footage occupied.

 

We lease a property from Roger Newnham, a manager at our subsidiary,Born Heaters Canada. The property is located in Calgary, Canada.  During the six months ended June 30,2010 and 2009, we paid $0.13 million and $0.17 million, respectively, in leasepayments to Mr. Newnham for the use of this property. The three-year leasefor the Calgary property commenced in October 2005 and was renewed andextended until December 31, 2014.

 

We own several non-consolidated investments and we recognized revenueson work performed for those joint ventures. ARB recognized $0.08 million and $10.4 million in project revenuesduring the six months ended June 30, 2010 and 2009, respectively, on theOMPP joint venture.  ARB also recognized$1.2 million and $0.23 million in project revenues during the six months ended June 30,2010 and 2009, respectively on the All Day joint venture.

 

**Contractual obligations**

 

As of June 30, 2010, we had $59.7 million of outstanding debtand capital lease obligations, and $46.3 million of subordinated debt.

 

A summary of contractual obligations as of June 30, 2010 were asfollows:

 
| **Payments due by period**                     | ** ** | **Total**       | ** ** | **1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After  5 Years** | ** ** |
|------------------------------------------------|------------|-----------------|------------|------------|------------|---------------|------------|---------------|------------|--------------------|------------|
| ** **                                     | ** ** | **(Thousands)** | ** ** |
| Debt and capital lease obligations             |       | $               | 59,665     |       | $          | 13,231        |       | $             | 25,603     |               | $          | 17,631 |   | $ | 3,200 |   |
| Interest on debt and capital lease obligations |       | 7,358           |       | 2,733      |       | 3,520         |       | 946           |       | 159                |       |
| Subordinated debt                              |       | 46,333          |       | 10,575     |       | 21.519        |       | 14,239        |       | —             |       |
| Interest on subordinated debt                  |       | 7,496           |       | 2,656      |       | 4,117         |       | 723           |       | —             |       |
| Equipment operating leases                     |       | 7,456           |       | 5,037      |       | 2,419         |       | —        |       | —             |       |
| Real property leases                           |       | 11,497          |       | 1,950      |       | 2,591         |       | 1,912         |       | 5,044              |       |
| Real property leases—related parties      |       | 6,281           |       | 928        |       | 1,778         |       | 1,649         |       | 1,926              |       |
|                                           |       | $               | 146,086    |       | $          | 37,110        |       | $             | 61,547     |               | $          | 37,100 |   | $ | 10,329 |   |
|                                           |       |            |       |       |       |          |       |          |       |               |       |
| Stand-by letters of credit                     |       | $               | 9,614      |       | $          | 2,198         |       | $             | 3,654      |               | $          | 3,762 |   | $ | — |   |

 

The interest amount above represents interest payments for our fixedrate debt assuming that principal payments are made as originally scheduled.

 

**Off balance sheet transactions**

 

The following represent transactions, obligations or relationships thatcould be considered material off-balance sheet arrangements.

 

·                  Letters of credit issuedunder our lines of credit. At June 30, 2010, we had letters of creditoutstanding of $9.6 million.

 

·                  Equipment operating leaseswith a balance of $7.5 million at June 30, 2010.

 

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·                  In the ordinary course ofour business, we may be required by our customers to post surety bid orcompletion bonds in connection with services that we provide. At June 30, 2010we had $812.5 million in outstanding bonds.

 

**Backlog**

 

In the industries in which we operate, backlog can be considered anindicator of potential future performance because it represents a portion ofthe future revenue stream. Different companies in our industry define backlogdifferently. We consider backlog as the anticipated revenue from theuncompleted portions of existing contracts. We calculate backlog differentlyfor different types of contracts. For our fixed price and fixed unit pricecontracts, we include the full remaining portion of the contract in ourcalculation. We do not include unit-price, time-and-equipment,time-and-materials and cost-plus contracts in the calculation of backlog, astheir ultimate revenue amount is difficult to determine.

 

Any contract, including fixed price contracts, may be terminated by ourcustomers on relatively short notice. In the event of a project cancellation,we may be reimbursed for certain costs, but typically, we have no contractualright to the total revenues reflected in backlog. Projects may remain inbacklog for extended periods of time, especially with the longer-term nature ofthe JCG heavy civil highway projects.

 

At June 30, 2010, our total backlog was $872.8 million representingan increase of $77.4 million, or 9.7%, from our total backlog of $795.4 millionas of December 31, 2009. We expect that approximately $338.7 million,or 38.8%, of the total backlog at June 30, 2010, will be recognized as revenueduring the remainder of 2010, with $210.5 million expected for the EastConstruction segment, $88.0 million for the West Construction segment and $40.2million for the Engineering segment.

 

Backlog by operating segment at June 30, 2010 and December 31,2009 was as follows:

 
| ** **                 | ** ** | **June 30, 2010**                 | ** ** | **As Adjusted (1)  December 31, 2009** | ** ** | **As Reported  December 31, 2009** | ** ** |
|----------------------------|------------|-----------------------------------|------------|---------------------------------------------|------------|-----------------------------------------|------------|
| ** **                 | ** ** | **Amount**                        | ** ** | **Percentage**                              | ** ** | **Amount**                              | ** ** | **Percentage** | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **                 | ** ** | **(Thousands, except % amounts)** | ** ** |
| ***Segment:***             |       |                              |       |                                        |       |                                    |       |   |   |   |   |   |   |
| East Construction Services |       | $                                 | 618,427    |                                        | 70.9       | %                                       | $          | 572,545 |   | 74.8 | % | $ | 572,545 |   | 72.0 | % |
| West Construction Services |       | 193,380                           |       | 22.2                                        | %          | 136,722                                 |       | 17.9 | % | 166,822 |   | 21.0 | % |
| Engineering                |       | 60,972                            |       | 6.9                                         | %          | 56,012                                  |       | 7.3 | % | 56,012 |   | 7.0 | % |
|                       |       | $                                 | 872,779    |                                        | 100.0      | %                                       | $          | 765,279 |   | 100.0 | % | $ | 795,379 |   | 100.0 | % |

 

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(1)                      InJuly 2009, we announced demobilization of a construction project atChevron Corp’s Richmond Refinery located on Contra Costa, California.  The project was performed under a contractfrom Praxair, Inc. At December 31, 2009, approximately $40 millionwas included in the backlog amount shown for West Construction Servicessegment.

 

In April 2010, the California Court of Appealsruled that there were deficiencies in the Environment Impact Report for theproject, and at the same time, Praxair, Inc. provided us with a notice oftermination for the project.  Inaccordance with the terms of our contract, the project converted from a fixedprice contract to a reimbursed cost plus margin contract.  Due to the termination, we adjusted our costestimates for the contract and reduced the contingent amounts normallyassociated with fixed price contracts, which resulted in a reduction ofapproximately $30 million in our backlog amount as of December 31, 2009,as set forth in the table above.  In thesix months ended June 30, 2010, we recognized revenues of $10.2 million relatedto this project and at June 30, 2010 have a remaining backlog amount of $0.01million for this project.

 

In accordance with the terms of the contract,Praxair, Inc. has engaged a firm to perform an audit of some of the costs relatedto the project.  We do not anticipatethat the results of the audit will have a material impact on our financialcondition, results of operations and cash flows.

 

Our backlog at any point in time may not accurately represent therevenue that we expect to realize during any period. Additionally, our backlogat the end of the period may not be indicative of the revenue we expect to earnover the course of the following twelve months.

 

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**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

In the ordinary course of business, we are exposed to risks related tomarket conditions. These risks primarily include fluctuations in foreigncurrency exchange rates, interest rates and commodity prices. We may seek tomanage these risks through the use of financial derivative instruments. Theseinstruments may include foreign currency exchange contracts and interest rateswaps.

 

We do not execute transactions or use financial derivative instrumentsfor trading or speculative purposes. We enter into transactions with counterparties that are generally financial institutions in a matter to limitsignificant exposure with any one party.

 

The carrying amounts for cash and cash equivalents, accountsreceivable, long-term debt and accounts payable and accrued liabilities shownin the condensed consolidated balance sheets approximate fair value at June 30,2010 and December 31, 2009 due to the generally short maturities of theseitems. At June 30, 2010, we invested primarily in short-term dollar denominatedbank deposits. We expect to hold our investments to maturity.

 

At June 30, 2010, all of our long-term debt was under fixed interestrates.

 

At June 30, 2010, we had one derivative financial instrument for thepurpose of hedging future currency exchange in Canadian dollars (“CAD”). Therelated Canadian dollars purchased is one contract for $0.8 million CAD at anexchange rate of 1.066 CAD per US dollar which expire on September 15, 2010.The related gain or loss on these contracts is not significant at June 30,2010. We intend to continue to hedge foreign currency risks in those situationswhere we believe such transactions are prudent.

 

**Item 4.  Controls and Procedures**

 

***Disclosure Controls and Procedures***

 

As of June 30, 2010, we carried out an evaluation, under thesupervision and with the participation of our management, including our chiefexecutive officer (“CEO”) and chief financial officer (“CFO”), of theeffectiveness of the design and operation of our “disclosure controls andprocedures”, as such term is defined under Exchange ActRules 13a-15(e) and 15d-15(e).

 

Based on this evaluation, our CEO and CFO concluded that, as of June30, 2010, the disclosure controls and procedures were effective at thereasonable assurance level to ensure that information required to be disclosedby us in the reports we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in therules and forms of the SEC, and accumulated and communicated to ourmanagement, including our CEO and CFO, as appropriate to allow timely decisionsregarding required disclosure.

 

As discussed in Note 8 — “Business Combinations” of the Notes toCondensed Consolidated Financial Statements included in Item 1 of thisQuarterly Report on Form 10Q, we acquired James Construction Group, LLC (“JCG”)on December 18, 2009 and Cravens Partners, Ltd. (“Cravens”), on October 3,2009.  We have excluded from ourevaluation of the effectiveness of our internal control over financialreporting as of June 30, 2010, the JCG and Cravens internal control overfinancial reporting, whose financial statements constitute approximately 54percent of total assets and approximately 55 percent of total revenues of theconsolidated financial statement amounts as of and for the six months endedJune 30, 2010. We are documenting and testing our disclosure controls for theseacquisitions and expect completion of this effort during the 2010 fourthquarter.

 

In designing and evaluating the disclosure controls and procedures, ourmanagement recognized that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives and in reaching a reasonable level of assurance ourmanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.  The Company’s disclosure controls andprocedures are designed to provide reasonable assurance of achieving theirstated objectives.

 

***Changes in Internal Control Over Financial Reporting***

 

During the last fiscal quarter ended June 30, 2010, there were nochanges in our internal control over financial reporting that materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

**Part II.Other Information**

 

**Item 1.  Legal Proceedings**

 

From time to time, we are subject to claims and legal proceedingsarising out of our business. Our management believes that we have meritoriousdefenses to such claims. Although we are unable to ascertain the ultimateoutcome of such matters, after review and consultation with counsel and takinginto consideration relevant insurance coverage and related deductibles, ourmanagement believes that the outcome of these matters will not have amaterially adverse effect on our financial condition or results of operations.

 

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**Item 1A.  Risk Factors.**

 

In addition to the other information set forth in this Report, youshould carefully consider the factors discussed in the section entitled “*Risk Factors*” in our Annual Report on Form 10-K for theyear ended December 31, 2009, which to our knowledge have not materiallychanged. Those risks, which could materially affect our business, financialcondition or future results, are not the only risks we face. Additional risksand uncertainties not currently known to us or that we currently deem to beimmaterial also may materially adversely affect our business, financialcondition and/or operating results.

 

**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds.**

 

On October 14, 2009, we announced that we had acquired certainassets and assumed certain liabilities of Cravens Partners, Ltd. (“CravensPartners”), a Texas-based provider of civil and utility infrastructureconstruction services. Under the terms of the purchase agreement, and inaddition to the consideration paid at closing, we agreed to pay the sellercertain additional earn-out payments based on Cravens Partners’ attaining specifiedfinancial goals for the 3-year period 2009 to 2011.  OnMarch 30, 2010, upon the achievement of a 2009 performance target, weissued to the seller 74,906 shares of Common Stock in earn-outconsideration.  These securities wereissued pursuant to Section 4(2) of the Securities Act of 1933, asamended.

 

**Item 3.  Defaults Upon Senior Securities.**

 

None.

 

**Item 4.  (Removed and Reserved).**

 

**Item 5.  Other Information.**

 

None.

 

**Item 6.  Exhibits.**

 

The following exhibits are filed as part of this Quarterly Report onForm 10-Q.

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

 

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(*)                                 Filed herewith

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                            | PRIMORIS  SERVICES CORPORATION                                         |
|---------------------------------|------------------------------------------------------------------------|
|                            |                                                                   |
| Date:  August 9, 2010 | /s/  PETER J. MOERBEEK                                                 |
|                            | Peter  J. Moerbeek*Executive Vice President, Chief Financial  Officer* |

 

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** **

**EXHIBITSATTACHED TO THIS QUARTERLY REPORT ON FORM 10-Q**

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

 

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