Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

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

 

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

 

**OR**

 

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

 

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

 

**Commission file number 0001-34145**

 

**Primoris Services Corporation**

(Exactname 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’stelephone number, including area code: **(949) 598-9242**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes  x No  o

 

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

 

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

 

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

 

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

 

At November 5, 2010,47,753,891 shares of the registrant’s common stock were outstanding.

 

 

 

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Table of Contents

 

**PRIMORIS SERVICES CORPORATION**

**INDEX**

 
| ** **                                                                                                                                    | **Page No.** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|-------------------|
|                                                                                                                                          |              |
| **Part I. Financial Information**                                                                                                        |              |
|                                                                                                                                          |              |
| Item 1.  Financial Statements:                                                                                                           |              |
|                                                                                                                                          |              |
| —Consolidated  Balance Sheets at September 30, 2010 and December 31, 2009                                                      | 3                 |
|                                                                                                                                          |              |
| —Consolidated  Statements of Income for the three months and nine months ended  September 30, 2010 and September 30, 2009 | 4                 |
|                                                                                                                                          |              |
| —Consolidated  Statements of Stockholders’ Equity                                                                                   | 5                 |
|                                                                                                                                          |              |
| — Consolidated Statements of Cash Flows for the three  months and nine months ended September 30, 2010 and September 30,  2009 | 6                 |
|                                                                                                                                          |              |
| —Notes to Consolidated Financial Statements                                                                                              | 8                 |
|                                                                                                                                          |              |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                      | 20                |
|                                                                                                                                          |              |
| Item 3. Quantitative and Qualitative Disclosures  About Market Risk                                                                      | 31                |
|                                                                                                                                          |              |
| Item 4. Controls and Procedures                                                                                                          | 32                |
|                                                                                                                                          |              |
| **Part II. Other Information**                                                                                                           |              |
|                                                                                                                                          |              |
| Item 1.  Legal Proceedings                                                                                                               | 32                |
|                                                                                                                                          |              |
| Item 1A.  Risk Factors                                                                                                                   | 32                |
|                                                                                                                                          |              |
| Item 2. Unregistered Sales of Equity Securities  and Use of Proceeds                                                                     | 32                |
|                                                                                                                                          |              |
| Item 3. Defaults Upon Senior Securities                                                                                                  | 33                |
|                                                                                                                                          |              |
| Item 4.  (Removed and Reserved)                                                                                                          | 33                |
|                                                                                                                                          |              |
| Item 5.  Other Information                                                                                                               | 33                |
|                                                                                                                                          |              |
| Item 6.  Exhibits                                                                                                                        | 33                |
|                                                                                                                                          |              |
| Signatures                                                                                                                                    | 34                |

 

2

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Tableof Contents

 

**PART I. FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

**PRIMORIS SERVICES CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

 
| ** **                                                                                                                                                                  | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                  |       |                         |       |                        |       |
| Current  assets:                                                                                                                                                            |       |                         |       |                        |       |
| Cash  and cash equivalents                                                                                                                                                  |       | $                            | 81,594     |                        | $          | 90,004 |   |
| Short  term investments                                                                                                                                                     |       | 26,000                       |       | 30,058                      |       |
| Customer  retention deposits                                                                                                                                                |       | 9,178                        |       | 6,845                       |       |
| Accounts  receivable, net                                                                                                                                                   |       | 148,981                      |       | 108,492                     |       |
| Costs  and estimated earnings in excess of billings                                                                                                                         |       | 23,299                       |       | 11,378                      |       |
| Inventory                                                                                                                                                                   |       | 22,618                       |       | 22,275                      |       |
| Deferred  tax assets                                                                                                                                                        |       | 6,068                        |       | 5,630                       |       |
| Prepaid  expenses and other current assets                                                                                                                                  |       | 9,521                        |       | 5,501                       |       |
| Current  assets from discontinued operations                                                                                                                                |       | —                       |       | 5,304                       |       |
| Total  current assets                                                                                                                                                       |       | 327,259                      |       | 285,487                     |       |
| Property  and equipment, net                                                                                                                                                |       | 96,818                       |       | 92,568                      |       |
| Investment  in non-consolidated entities                                                                                                                                    |       | 19,274                       |       | 5,599                       |       |
| Intangible  assets, net                                                                                                                                                     |       | 28,404                       |       | 32,695                      |       |
| Goodwill                                                                                                                                                                    |       | 61,713                       |       | 59,678                      |       |
| Total  assets                                                                                                                                                               |       | $                            | 533,468    |                        | $          | 476,027 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                              |       |                         |       |                        |       |
| Current  liabilities:                                                                                                                                                       |       |                         |       |                        |       |
| Accounts  payable                                                                                                                                                           |       | $                            | 76,814     |                        | $          | 62,568 |   |
| Billings  in excess of costs and estimated earnings                                                                                                                         |       | 122,311                      |       | 114,035                     |       |
| Accrued  expenses and other current liabilities                                                                                                                             |       | 39,205                       |       | 34,992                      |       |
| Distributions  and dividends payable                                                                                                                                        |       | 1,173                        |       | 2,987                       |       |
| Current  portion of long-term debt                                                                                                                                          |       | 8,894                        |       | 6,482                       |       |
| Current  portion of capital leases                                                                                                                                          |       | 3,153                        |       | 4,220                       |       |
| Current  portion of subordinated debt                                                                                                                                       |       | 23,952                       |       | 10,397                      |       |
| Current  liabilities of discontinued operations                                                                                                                             |       | 733                          |       | 6,511                       |       |
| Total  current liabilities                                                                                                                                                  |       | 276,235                      |       | 242,192                     |       |
| Long-term  debt, net of current portion                                                                                                                                     |       | 36,665                       |       | 26,368                      |       |
| Long-term  capital leases, net of current portion                                                                                                                           |       | 5,948                        |       | 7,734                       |       |
| Long-term  subordinated debt, net of current portion                                                                                                                        |       | 19,164                       |       | 43,853                      |       |
| Deferred  tax liabilities                                                                                                                                                   |       | 1,483                        |       | 2,643                       |       |
| Contingent  earnout liabilities                                                                                                                                             |       | 10,243                       |       | 9,278                       |       |
| Other  long-term liabilities                                                                                                                                                |       | 3,985                        |       | —                      |       |
| Total  liabilities                                                                                                                                                          |       | 353,723                      |       | 332,068                     |       |
| Commitments  and contingencies                                                                                                                                              |       |                         |       |                        |       |
| Stockholders’  equity                                                                                                                                                  |       |                         |       |                        |       |
| Preferred  stock—$.0001 par value, 1,000,000 shares authorized, none issued and  outstanding at September 30, 2010 and 81,852.78 at December 31,  2009       |       | —                       |       | —                      |       |
| Common  stock—$.0001 par value, 90,000,000 shares authorized, 46,980,765 and  32,704,903 issued and outstanding at September 30, 2010 and  December 31, 2009 |       | 5                            |       | 3                           |       |
| Additional  paid-in capital                                                                                                                                                 |       | 118,779                      |       | 100,644                     |       |
| Retained  earnings                                                                                                                                                          |       | 60,961                       |       | 42,982                      |       |
| Accumulated  other comprehensive income                                                                                                                                     |       | —                       |       | 330                         |       |
| Total  stockholders’ equity                                                                                                                                            |       | 179,745                      |       | 143,959                     |       |
| Total  liabilities and stockholders’ equity                                                                                                                            |       | $                            | 533,468    |                        | $          | 476,027 |   |

 

 SeeAccompanying Notes to Consolidated Financial Statements

 

3

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** **

**PRIMORIS SERVICES CORPORATION**

 

**CONSOLIDATED STATEMENTS OF INCOME**

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

**(Unaudited)**

 
| ** **                                                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                            | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                            | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues                                                              |       | $                                | 230,357    |                            | $          | 106,611 |   | $ | 608,526 |   | $ | 349,771 |   |
| Cost  of revenues                                                     |       | 202,477                          |       | 86,457                          |       | 529,537 |   | 294,368 |   |
| Gross  profit                                                         |       | 27,880                           |       | 20,154                          |       | 78,989 |   | 55,403 |   |
| Selling,  general and administrative expenses                         |       | 14,580                           |       | 7,266                           |       | 43,849 |   | 22,825 |   |
| Operating  income                                                     |       | 13,300                           |       | 12,888                          |       | 35,140 |   | 32,578 |   |
| Other  income (expense):                                              |       |                             |       |                            |       |   |   |   |   |
| Income  from non-consolidated entities                                |       | 1,366                            |       | 1,439                           |       | 4,090 |   | 5,342 |   |
| Foreign  exchange gain (loss)                                         |       | 80                               |       | (170                            | )          | 266 |   | 33 |   |
| Other  expense                                                        |       | (333                             | )          | —                          |       | (964 | ) | — |   |
| Interest  income                                                      |       | 151                              |       | 90                              |       | 484 |   | 554 |   |
| Interest  expense                                                     |       | (1,345                           | )          | (398                            | )          | (3,872 | ) | (1,463 | ) |
|                                                                  |       |                             |       |                            |       |   |   |   |   |
| Income  from continuing operations, before provision for income taxes |       | 13,219                           |       | 13,849                          |       | 35,144 |   | 37,044 |   |
| Provision  for taxes                                                  |       | (5,642                           | )          | (5,123                          | )          | (13,782 | ) | (14,077 | ) |
| Income  from continuing operations                                    |       | 7,577                            |       | 8,726                           |       | 21,362 |   | 22,967 |   |
| Loss  on discontinued operations, net of income taxes                 |       | —                           |       | (779                            | )          | — |   | (800 | ) |
| Net  income                                                           |       | $                                | 7,577      |                            | $          | 7,947 |   | $ | 21,362 |   | $ | 22,167 |   |
|                                                                  |       |                             |       |                            |       |   |   |   |   |
| **Earnings per share:**                                               |       |                             |       |                            |       |   |   |   |   |
| Basic:                                                                |       |                             |       |                            |       |   |   |   |   |
| Income  from continuing operations                                    |       | $                                | 0.17       |                            | $          | 0.27 |   | $ | 0.53 |   | $ | 0.72 |   |
| Loss  on discontinued operations                                      |       | $                                | —     |                            | $          | (0.03 | ) | $ | — |   | $ | (0.02 | ) |
| Net  income                                                           |       | $                                | 0.17       |                            | $          | 0.24 |   | $ | 0.53 |   | $ | 0.70 |   |
| Diluted:                                                              |       |                             |       |                            |       |   |   |   |   |
| Income  from continuing operations                                    |       | $                                | 0.17       |                            | $          | 0.26 |   | $ | 0.47 |   | $ | 0.69 |   |
| Loss  on discontinued operations                                      |       | $                                | —     |                            | $          | (0.03 | ) | $ | — |   | $ | (0.02 | ) |
| Net  income                                                           |       | $                                | 0.17       |                            | $          | 0.23 |   | $ | 0.47 |   | $ | 0.67 |   |
| **Weighted average common shares outstanding:**                       |       |                             |       |                            |       |   |   |   |   |
| Basic                                                                 |       | 44,887                           |       | 32,477                          |       | 40,499 |   | 31,699 |   |
| Diluted                                                               |       | 45,528                           |       | 34,048                          |       | 45,486 |   | 33,128 |   |

 

SeeAccompanying Notes to Consolidated Financial Statements

 

4

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Tableof Contents

 

**PRIMORIS SERVICES CORPORATION**

 

**CONSOLIDATED 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 |   |
| Net income                                                                               |       | —                |       | —                   |       | —                  |       | —       |       | —                               |       | 7,577                         |       | — |   | 7,577 |   |
| Dividends — common                                                                  |       | —                |       | —                   |       | —                  |       | —       |       | —                               |       | (1,173                        | )          | — |   | (1,173 | ) |
| Repurchase of warrants                                                                   |       | —                |       |                     |       |                    |       |         |       | (277                                 | )          |                          |       |   |   | (277 | ) |
| Warrant exercises                                                                        |       | 2,742,154             |       | 1                        |       | —                  |       | —       |       | 13,708                               |       | —                        |       | — |   | 13,709 |   |
| **Balance,  September 30, 2010**                                                    |       | 46,980,765            |       | $                        | 5          |                    | —     |         | $          | —                               |       | $                             | 118,779    |   | $ | 60,961 |   | $ | — |   | $ | 179,745 |   |

 

SeeAccompanying Notes to Consolidated Financial Statements

 

5

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Tableof Contents

 

**PRIMORIS SERVICES CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In Thousands)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **September 30,**          | ** ** |
| ** **                                                                         | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| Cash  flows from operating activities:                                             |       |                            |       |   |   |
| Net  income                                                                        |       | $                               | 21,362     |   | $ | 22,167 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                            |       |   |   |
| Depreciation                                                                       |       | 12,575                          |       | 5,918 |   |
| Amortization  of intangible assets                                                 |       | 4,291                           |       | 28 |   |
| Gain  on sale of property and equipment                                            |       | (1,352                          | )          | (3,183 | ) |
| Income  from non-consolidated entities                                             |       | (4,090                          | )          | (5,343 | ) |
| Non-consolidated  entity distributions                                             |       | 8,480                           |       | 3,400 |   |
| Net  deferred taxes                                                                |       | (1,598                          | )          | (591 | ) |
| Contingent  earnout liabilities                                                    |       | 964                             |       | — |   |
| Loss  on discontinued operations                                                   |       | —                          |       | 800 |   |
| Changes  in assets and liabilities:                                                |       |                            |       |   |   |
| Customer  retention deposits                                                       |       | (2,333                          | )          | 2,020 |   |
| Accounts  receivable                                                               |       | (40,489                         | )          | 9,641 |   |
| Costs  and estimated earnings in excess of billings                                |       | (11,921                         | )          | 1,324 |   |
| Inventory,  prepaid expenses and other current assets                              |       | (4,693                          | )          | 39 |   |
| Accounts  payable                                                                  |       | 14,246                          |       | (15,447 | ) |
| Billings  in excess of costs and estimated earnings                                |       | 8,276                           |       | 1,844 |   |
| Accrued  expenses and other current liabilities                                    |       | 2,418                           |       | (291 | ) |
| Other  long-term liabilities                                                       |       | 3,985                           |       | — |   |
| Net  cash provided by operating activities                                         |       | 10,121                          |       | 22,326 |   |
| Cash  flows from investing activities:                                             |       |                            |       |   |   |
| Purchase  of property and equipment                                                |       | (17,779                         | )          | (8,023 | ) |
| Investment  in WesPac joint venture                                                |       | (18,065                         | )          |   |   |
| Proceeds  from sale of property and equipment                                      |       | 2,306                           |       | 4,232 |   |
| Sale  of short-term investments                                                    |       | 4,058                           |       | 10,020 |   |
| Advances  to non-consolidated entities                                             |       | —                          |       | (1,036 | ) |
| Net  cash (used in) provided by investing activities                               |       | (29,480                         | )          | 5,193 |   |
| Cash  flows from financing activities:                                             |       |                            |       |   |   |
| Proceeds  from issuance of long-term debt                                          |       | 20,000                          |       | 10,871 |   |
| Repayment  of long-term debt                                                       |       | (7,290                          | )          | (20,202 | ) |
| Repayment  of capital leases                                                       |       | (2,853                          | )          | (1,446 | ) |
| Repayment  of subordinated debt                                                    |       | (10,384                         | )          | — |   |
| Proceeds  from exercise of warrants for the issuance of common stock               |       | 17,822                          |       | — |   |
| Repurchase  of warrants                                                            |       | (277                            | )          | (93 | ) |
| Dividends  paid                                                                    |       | (3,229                          | )          | (2,373 | ) |
| Cash  distributions to selling stockholders                                        |       | (1,966                          | )          | (4,947 | ) |
| Net  cash provided by (used in) financing activities                               |       | 11,823                          |       | (18,190 | ) |
| Cash  flows from discontinued operations:                                          |       |                            |       |   |   |
| Operating  activities                                                              |       | (874                            | )          | (2,920 | ) |
| Net  cash used in discontinued operations                                          |       | (874                            | )          | (2,920 | ) |
| Net  change in cash and cash equivalents                                           |       | (8,410                          | )          | 6,409 |   |
| Cash  and cash equivalents at beginning of the period                              |       | 90,004                          |       | 72,848 |   |
| Cash  and cash equivalents at end of the period                                    |       | $                               | 81,594     |   | $ | 79,257 |   |

 

SeeAccompanying Notes to Consolidated Financial Statements

 

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**SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION**

 
| ** **                           | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **September 30,**          | ** ** |
| ** **                           | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| ** **                           | ** ** | **(Unaudited)**                 | ** ** |
| **Cash paid during the period for:** |       |                            |       |   |   |
| Interest                             |       | $                               | 3,872      |   | $ | 1,456 |   |
| Income  taxes                        |       | $                               | 15,323     |   | $ | 16,193 |   |

 

**SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCINGACTIVITIES**

 
| ** **                                                                 | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                 | ** ** | **September 30,**          | ** ** |
| ** **                                                                 | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| ** **                                                                 | ** ** | **(Unaudited)**                 | ** ** |
| **Non-cash activities:**                                                   |       |                            |       |   |   |
| Accrued  dividends                                                         |       | $                               | 1,173      |   | $ | 812 |   |
| Obligations  incurred for the acquisition of property and equipment leases |       | $                               | —     |   | $ | 4,723 |   |

 

SeeAccompanying Notes to Consolidated Financial Statements

 

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**PRIMORIS SERVICES CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

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

**(Unaudited)**

 

**Note 1—BusinessActivity**

 

***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., GMLCoatings, LLC, Cardinal Mechanical, L.P. and Stellaris, LLC,collectively, are engaged in various construction and product engineeringactivities.

 

The Company’s undergroundand directional drilling operations install, replace and repair natural gas,petroleum, telecommunications and water pipeline systems. The Company’sindustrial, civil and engineering operations construct and provide maintenanceservices to industrial facilities including power plants, petrochemicalfacilities and other processing plants and construct multi-level parkingstructures.

 

On December 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. James and Company, Inc., awell-known Louisiana company that has been in business for over 80 years. Headquartered in Baton Rouge, Louisiana, JCG serves both government and privateclients.

 

Corporate headquarters forthe Company are located in Lake Forest, California.

 

**Note 2—Basisof Presentation**

 

***Interim Consolidated Financial Statements*****—** The interim consolidated financialstatements for the three-month and nine-month periods ended September 30,2010 and 2009 have been prepared in accordance with Rule 10-01 of Regulation S-Xof the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Assuch, certain disclosures, which would substantially duplicate the disclosurescontained in the Company’s latest audited consolidated financial statements,have been omitted. This Quarterly Report on Form 10-Q for the quarterlyperiod ended September 30, 2010 (the “Third Quarter 2010 Report”) shouldbe read in concert with the Company’s Annual Report on Form 10-K, filed onMarch 11, 2010, which contains the Company’s audited consolidatedfinancial statements for the year ended December 31, 2009.

 

The interim financialinformation for the three-month and nine-month periods ended September 30,2010 and 2009 is unaudited and has been prepared on the same basis as theaudited consolidated financial statements. However, the financial statementscontained in this Third Quarter 2010 Report do not include all of theinformation and disclosures required by accounting principles generallyaccepted in the United States of America (“GAAP”) for audited financialstatements. In the opinion of management, the unaudited information includesall adjustments (consisting of normal recurring adjustments) necessary for thefair presentation of the interim financial information.

 

Certain amounts in priorperiods have been reclassified in order to conform to the present periodfinancial statement presentation.  Specifically, the prior periodfinancial information was revised to conform to our current presentation ofcontinuing and discontinued operations (see Note 10, *“Discontinued Operations”*).

 

***Revenue recognition*****—** A number of factors relating to the business of the Companyaffect the recognition of contract revenue. The Company typically structurescontracts as unit-price, time and material, fixed-price or cost plus fixed fee.Revenue is recognized on the percentage-of-completion method for allfixed-price contracts. Under the percentage-of-completion method, estimatedcontract revenue and resulting income is generally accrued based on costs incurredto date 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 the periodthe loss is identified and for the full amount of the loss.

 

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

 

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

 

In accordance with the termsof our contracts, certain retainage provisions are withheld by customers until completionand acceptance of the contracts. Final payments of the majority of such amountsare expected to be received within a year.

 

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**Note 3—RecentAccounting Pronouncements**

 

*Fair ValueDisclosures*

 

In January 2010, theFASB issued Accounting Standards Update No. 2010-06, “*Improving Disclosures about Fair Value Measurements*”(an update to ASC Topic 820 *“Fair Value Measurementsand Disclosures”*).   ASU 2010-06 requires additionaldisclosures about fair value measurements including transfers in and out ofLevels 1 and 2 and a higher level of disaggregation for the different types offinancial instruments. For the reconciliation of Level 3 fair valuemeasurements, information about purchases, sales, issuances and settlementsshould be presented separately. This ASU is effective for annual andinterim reporting periods beginning after December 15, 2009 for most ofthe new disclosures and for periods beginning after December 15, 2010 forthe new Level 3 disclosures. Comparative disclosures are not required in thefirst year the disclosures are required.  As of January 1, 2010, theCompany adopted this accounting standard update, which did not result in amaterial impact on our financial statements.

 

*Consolidationof Variable Interest Entities*

 

In June 2009, the FASBissued an amendment to an accounting standard for ASC Topic 810 “Consolidation”,(formerly referred to as “Statement of Financial Accounting StandardsNo. 167, “*Amendments to FASBInterpretation No. 46R* ” (“SFAS 167”)) which setsrules for determining whether to consolidate an entity that isinsufficiently capitalized or is not controlled through voting (or similarrights). These rules are based on an entity’s purpose and design and thecompany’s ability to direct the activities that most significantly impact theentity’s economic performance.  ASC Topic 810 requires additionaldisclosures about the reporting company’s involvement with variable-interestentities and any significant changes in risk exposure due to that involvementas well as its affect on the company’s financial statements.  Theaccounting standard became effective January 1, 2010.  The adoptionof this amendment did not result in a material impact on our financialstatements.

 

**Note 4—FairValue Measurements**

 

ASC Topic 820, “*Fair Value Measurements and Disclosures*”,defines fair value, establishes a framework for measuring fair value in GAAPand requires certain disclosures about fair value measurements.  ASC Topic820 addresses fair value GAAP for financial assets and financial liabilitiesthat are re-measured and reported at fair value at each reporting period andfor non-financial assets and liabilities that are re-measured and reported atfair value on a recurring basis, which included goodwill and intangible assetsfor purposes of impairment assessments.

 

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

 

The following tablepresents, using the fair value hierarchy levels identified under ASC Topic 820,the Company’s financial assets that are required to be measured at fair valueat September 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 at September 30, 2010:** | ** ** |                                         | ** ** |                                                                                                | ** ** |   | ** ** |   | ** ** |
| Cash  and cash equivalents             |       | $                                            | 81,594     |                                                                                                | $          | 81,594 |   | — |   | — |   |
| Short-term  investments                |       | $                                            | 26,000     |                                                                                                | $          | 26,000 |   | — |   | — |   |
| **Assets at December 31, 2009:**  |       |                                         |       |                                                                                                |       |   |   |   |   |
| Cash  and cash equivalents             |       | $                                            | 90,004     |                                                                                                | $          | 90,004 |   | — |   | — |   |
| Short-term  investments                |       | $                                            | 30,058     |                                                                                                | $          | 30,058 |   | — |   | — |   |

 

Short-term investmentsconsist primarily of Certificates of Deposit (“CDs”) purchased through theCDARS (Certificate of Deposit Account Registry Service) program to provideFederal Deposit Insurance Corporation backing of the CDs.

 

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

 

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**Note 5—AccountsReceivable**

 

The following is a summaryof the Company’s accounts receivable at the dates shown:

 
| ** **                                                                                                                        | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                                                                                                              |       |                         |       |                        |       |
| Contracts  receivable, net of allowance for doubtful accounts of $200 for  September 30, 2010 and for December 31, 2009 |       | $                            | 126,006    |                        | $          | 82,254 |   |
| Retention                                                                                                                         |       | 19,216                       |       | 25,907                      |       |
|                                                                                                                              |       | 145,222                      |       | 108,161                     |       |
| Due  from affiliates                                                                                                              |       | —                       |       | —                      |       |
| Other  accounts receivable                                                                                                        |       | 3,759                        |       | 331                         |       |
|                                                                                                                              |       | $                            | 148,981    |                        | $          | 108,492 |   |
|                                                                                                                                   |            |                              |            |                             |            |  |  |  |

 

Amounts “due from affiliates”primarily relate to receivables from related parties (see Note 7, “*Equity Method Investments*” andNote 14, “*Related Party Transactions*”)for the performance of construction contracts. Contract revenues earned from related parties were approximately $79 and$3,764 for the three months, and $1,367 and $15,083 for the nine months endedSeptember 30, 2010 and 2009, respectively.

 

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

 

Costs and estimated earningson uncompleted contracts consist of the following at:

 
| ** **                                             | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                                   |       |                         |       |                        |       |
| Costs  incurred on uncompleted contracts               |       | $                            | 1,950,166  |                        | $          | 2,036,251 |   |
| Provision  for estimated loss on uncompleted contracts |       | 445                          |       | 332                         |       |
| Gross  profit recognized                               |       | 191,027                      |       | 201,254                     |       |
|                                                   |       | 2,141,638                    |       | 2,237,837                   |       |
| Less:  billings to date                                |       | (2,240,650                   | )          | (2,340,494                  | )          |
|                                                   |       | $                            | (99,012    | )                           | $          | (102,657 | ) |
|                                                        |            |                              |            |                             |            |  |  |  |

 

This net amount is includedin the accompanying consolidated balance sheet under the following captions:

 
| ** **                                          | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                                |       |                         |       |                        |       |
| Costs  and estimated earnings in excess of billings |       | $                            | 23,299     |                        | $          | 11,378 |   |
| Billings  in excess of costs and estimated earnings |       | (122,311                     | )          | (114,035                    | )          |
|                                                |       | $                            | (99,012    | )                           | $          | (102,657 | ) |

 

**Note 7—EquityMethod Investments**

 

WesPac Energy LLC

 

On July 1, 2010, theCompany acquired a 50% membership interest in WesPac Energy LLC, a Nevadalimited liability company (“WesPac”). Pursuant to the terms of the MembershipInterest Purchase Agreement, dated July 1, 2010, by and among the Company,WesPac and Kealine Holdings, LLC (“Kealine”), a Nevada limited liability companyand the sole limited liability company member of WesPac prior to the closing,we acquired 50% of the issued and outstanding limited liability companymembership interests of WesPac for total cash consideration of $18,065. Kealinewill hold the remaining 50% membership interest in WesPac.  We have nofuture obligation to make any additional investments into WesPac. All keyinvestment, management and operating decisions of WesPac will require unanimousapproval from a management committee equally represented by Kealine and us.

 

Founded in 1998 and based inIrvine, California, WesPac develops pipeline and terminal projects in theUnited States, Canada and Mexico, by building, expanding or enhancinginfrastructure in the areas of pipeline transportation and storage efficiencyenhancement. To date, WesPac has successfully developed, financed and broughtto completion several such projects.  The Company believes the ownershipinterest in WesPac will broaden our exposure to a variety of pipeline, terminaland energy-related infrastructure opportunities across North America.

 

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The following is a summaryof the financial position and results as of and for the periods ended:

 
| ** **                                   | ** ** | **September 30,  2010** | ** ** |
|----------------------------------------------|------------|------------------------------|------------|
|                                         |       |                         |       |
| ***Wespac Energy, LLC***                     |       |                         |       |
| Balance  sheet data                          |       |                         |       |
| Assets                                       |       | $                            | 37,176     |   |
| Liabilities                                  |       | 1,220                        |       |
| Net  assets                                  |       | $                            | 35,956     |   |
| Company’s  equity investment in venture |       | $                            | 17,979     |   |

 
| ** **                         | ** ** | **Three months  ended********September 30,  2010** | ** ** | **Nine months  ended  September 30,  2010** | ** ** |
|------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------|------------|
|                               |       |                                                         |       |                                                  |       |
| Earnings  data:                    |       |                                                         |       |                                                  |       |
| Revenue                            |       | $                                                            | —     |                                                  | $          | — |   |
| Expenses                           |       | $                                                            | 174        |                                                  | $          | 174 |   |
| Net  income                        |       | $                                                            | (174       | )                                                     | $          | (174 | ) |
| Company’s  equity in earnings |       | $                                                            | (87        | )                                                     | $          | (87 | ) |

 

Otay Mesa Power Partners

 

During 2007, the Companyestablished a joint venture, Otay Mesa Power Partners (“OMPP”), for the solepurpose of constructing a power plant near San Diego, California. The Companyhas a 40% interest in the venture and accounts for its investment in OMPP usingthe equity method. ARB acts as one of OMPP’s primary subcontractors. AtSeptember 30, 2010, ARB had total project contracts with OMPP amounting to$49,019, which are essentially complete.  The Company recognized $83 inrelated party revenues in the nine months ended September 30, 2010 and$13,158 in the nine months ended September 30, 2009. These revenues are includedin the contract revenues earned from related parties as stated in Note 5, “*Accounts Receivable*”. The following is asummary of the financial position and results as of and for the periods ended:

 
| ** **                                   | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                         |       |                         |       |                        |       |
| **OMPP—Joint Venture**                  |       |                         |       |                        |       |
| Balance  sheet data                          |       |                         |       |                        |       |
| Assets                                       |       | $                            | 200        |                        | $          | 9,176 |   |
| Liabilities                                  |       | 183                          |       | 1,493                       |       |
| Net  assets                                  |       | $                            | 17         |                        | $          | 7,683 |   |
| Company’s  equity investment in venture |       | $                            | 10         |                        | $          | 4,610 |   |

 
| ** **                         | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                         | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
|                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Earnings  data:                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Revenue                            |       | $                                                        | 308        |                                                    | $          | 19,229 |   | $ | 308 |   | $ | 97,615 |   |
| Gross  profit                      |       | $                                                        | 45         |                                                    | $          | 2,439 |   | $ | 45 |   | $ | 17,997 |   |
| Earnings  before taxes             |       | $                                                        | 45         |                                                    | $          | 2,439 |   | $ | 45 |   | $ | 18,002 |   |
| Company’s  equity in earnings |       | $                                                        | 27         |                                                    | $          | 1,500 |   | $ | 27 |   | $ | 6,585 |   |

 

OMPP distributed $7,711 toits equity holders during the nine months ended September 30, 2010, ofwhich the Company’s share, as calculated under the joint venture agreement, was$4,627.  For the nine months ended September 30, 2009, OMPPdistributed $8,500, of which the Company’s share was $3,400. The OMPP agreementstates that distributions made prior to the completion of the contract areconsidered advances on account of each partner’s share as determined at thecompletion of the underlying contract. The joint venture will be closed out atthe end of the warranty period in December 2010.

 

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All Day Electric

 

The Company purchased a 49%interest in All Day Electric (“All Day”) in December 2008 for $500 andaccounts for this investment under the equity method. All Day engages inelectrical construction activities mainly in Northern California.  TheCompany performed services for All Day and recognized $1,281 in related partyrevenues during the nine months ended September 30, 2010 and $1,020 duringthe nine months ended September 30, 2009.  The following is a summaryof the financial position and results as of and for the periods ended:

 
| ** **                                   | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                         |       |                         |       |                        |       |
| ***All Day Electric***                       |       |                         |       |                        |       |
| Balance  sheet data                          |       |                         |       |                        |       |
| Assets                                       |       | $                            | 6,879      |                        | $          | 5,661 |   |
| Liabilities                                  |       | 6,101                        |       | 4,615                       |       |
| Net  assets                                  |       | $                            | 778        |                        | $          | 1,046 |   |
| Company’s  equity investment in venture |       | $                            | 381        |                        | $          | 513 |   |

 
| ** **                         | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------|------------|------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                         | ** ** | **2010**                                       | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
|                               |       |                                           |       |                                                    |       |   |   |   |   |
| Earnings  data:                    |       |                                           |       |                                                    |       |   |   |   |   |
| Revenue                            |       | $                                              | 10,388     |                                                    | $          | 4,107 |   | $ | 17,294 |   | $ | 7.377 |   |
| Gross  profit                      |       | $                                              | 559        |                                                    | $          | 164 |   | $ | 698 |   | $ | 755 |   |
| Net  income                        |       | $                                              | 165        |                                                    | $          | (122 | ) | $ | (269 | ) | $ | (420 | ) |
| Company’s  equity in earnings |       | $                                              | 81         |                                                    | $          | (60 | ) | $ | (132 | ) | $ | (206 | ) |

 

St.—Bernard Levee Partners

 

The Company purchased a 30%interest in St.—Bernard Levee Partners (“Bernard”) in the fourth quarter 2009for $300 and accounts for this investment under the equity method. Bernardengages in construction activities in Louisiana. Bernard distributed $15,990 toits equity holders during the nine months ended September 30, 2010, ofwhich the Company’s share, as calculated under the joint venture agreement, was$3,924.  The following is a summary of the financial position and resultsas of and for the periods ended:

 
| ** **                                   | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                         |       |                         |       |                        |       |
| ***St. — Bernard Levee Partners***      |       |                         |       |                        |       |
| Balance  sheet data                          |       |                         |       |                        |       |
| Assets                                       |       | $                            | 20,803     |                        | $          | 3,149 |   |
| Liabilities                                  |       | 16,797                       |       | 1,966                       |       |
| Net  assets                                  |       | $                            | 4,006      |                        | $          | 1,183 |   |
| Company’s  equity investment in venture |       | $                            | 904        |                        | $          | 378 |   |

 
| ** **                         | ** ** | **Three months  ended  September 30,  2010** | ** ** | **Nine months********ended********September 30,********2010** | ** ** |
|------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
|                               |       |                                                   |       |                                                                    |       |
| Earnings  data:                    |       |                                                   |       |                                                                    |       |
| Revenue                            |       | $                                                      | 51,603     |                                                                    | $          | 159,625 |   |
| Gross  profit                      |       | $                                                      | 6,389      |                                                                    | $          | 18,806 |   |
| Earnings  before taxes             |       | $                                                      | 6,389      |                                                                    | $          | 18,806 |   |
| Company’s  equity in earnings |       | $                                                      | 1,445      |                                                                    | $          | 4,450 |   |

 

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**Note 8 —Business Combinations**

 

The December 18, 2009acquisition of JCG was accounted for using the acquisition method ofaccounting. The preliminary allocation of the purchase price based on the fairvalue of the acquired assets, less liabilities assumed, as of December 18,2009, amounted to $133,190.

 

As part of the acquisition,the Company has agreed to issue $10,000 in common stock to the sellers,contingent upon JCG meeting a specific operating performance target for theyear 2010.  As discussed in Note 13 — *“OtherLiabilities”*, the estimated fair value of this contingency was$8,190 and $9,154 at December 31, 2009 and September 30, 2010,respectively.

 

As further evaluations werecompleted and information was received from third parties subsequent to theacquisition date, the Company made revisions to the preliminary estimates ofthe fair value of the acquired assets and liabilities.  During the quarter, the revisions resulted inan increase in casualty and health insurance liabilities assumed andadjustments to deferred tax liabilities related to the fair value of assetsacquired.  These changes in the valuationof liabilities increased the amount of goodwill recorded by $2,000.  The Company expects to complete its finaldetermination of the estimated fair value of the acquisition prior to the endof 2010.

 

*SupplementalUnaudited Pro Forma Information for the three and nine months endedSeptember 30, 2009*

 

The following pro formainformation for the three and nine months ended September 30, 2009presents the results of operations as if the JCG acquisition had occurred atthe beginning of 2009. The supplemental pro forma information has been adjustedto 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; and

 

·                                          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 and nine months ended September 30, 2009.

 

The pro forma results arepresented for illustrative purposes only and are not necessarily indicative ofor intended to represent the results that would have been achieved had thetransaction been completed on January 1, 2009.  The pro forma results do not reflect anyoperating efficiencies and associated cost savings that the Company may haveachieve with respect to the combined companies.

 
| ** **                                                            | ** ** | **Three months ended  September 30, 2009** | ** ** | **Nine months ended  September 30, 2009** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
|                                                                  |       |                                                           |       |                                                          |       |
| Revenues                                                              |       | $                                                              | 207,718    |                                                          | $          | 635,228 |   |
| Income  from continuing operations, before provision for income taxes |       | $                                                              | 19,004     |                                                          | $          | 48,981 |   |
| Income  from continuing operations                                    |       | $                                                              | 11,829     |                                                          | $          | 30,153 |   |
| Net  income                                                           |       | $                                                              | 11,050     |                                                          | $          | 29,353 |   |
|                                                                  |       |                                                           |       |                                                          |       |
| Weighted  average common shares outstanding:                          |       |                                                           |       |                                                          |       |
| Basic  — (1)                                                     |       | 39,473                                                         |       | 38,695                                                        |       |
| Diluted  — (1)                                                   |       | 42,233                                                         |       | 41,313                                                        |       |
|                                                                  |       |                                                           |       |                                                          |       |
| Earnings  per share:                                                  |       |                                                           |       |                                                          |       |
| Basic  — income from continuing operations                       |       | $                                                              | 0.30       |                                                          | $          | 0.78 |   |
| Basic  — net income                                              |       | $                                                              | 0.28       |                                                          | $          | 0.76 |   |
| Diluted  — income from continuing operations                     |       | $                                                              | 0.28       |                                                          | $          | 0.73 |   |
| Diluted  — net income                                            |       | $                                                              | 0.26       |                                                          | $          | 0.71 |   |

 

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(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 suchshares were converted into 8,185 shares of common stock, at a conversion rateof 100 common shares per share.  On April 12, 2010, the PreferredStock was converted into common stock.

 

The adjustment to weightedaverage shares outstanding excludes the potential impact of the Earnout Sharesthat may be issued contingent upon meeting a certain financial target at theend of 2010.  Pro forma basic shares outstanding included a total of 8,185shares, less 1,190 Escrow Shares, totaling 6,995 shares of common stock. Shares included in pro forma diluted shares outstanding include the 8,185shares of common stock.

 

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**Note 9—IntangibleAssets**

 

At September 30, 2010and December 31, 2009, intangible assets totaled $28,404 and $32,695,respectively, net of amortization.  The following table summarizes theintangible asset categories, average amortization periods, which are generallyon a straight-line basis, and the fair value, as follows:

 
| ** **              | ** ** | **Amortization**    | ** ** | ** ** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------|------------|---------------------|------------|------------|------------|------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **Period**          | ** ** | ** ** | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Tradename               |       | 5  to 10 years      |       |       |       | $                      | 14,538     |                  | $          | 15,785 |   |
| Non-compete  agreements |       | 5  years            |       |       |       | $                      | 4,585      |                  | $          | 5,403 |   |
| Customer  relationships |       | 5  to 10 years      |       |       |       | $                      | 6,245      |                  | $          | 6,793 |   |
| Backlog                 |       | 0.75  to 2.25 years |       |       |       | $                      | 3,036      |                  | $          | 4,714 |   |
|                    |       |                |       | Total      |       | $                      | 28,404     |                  | $          | 32,695 |   |

 

Amortization expense on intangibleassets was $1,413 and $10 for the three months ended September 30, 2010and 2009, respectively, and amortization expense for the nine months endedSeptember 30, 2010 and 2009 was $4,291 and $28, respectively. Estimatedfuture amortization expense for intangible assets is as follows:

 
| **For the Years Ending  December 31,** | ** ** | **Estimated  Intangible  Amortization  Expense** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------|------------|
| 2010  (remaining three months)                             |       | $                                                | 1,387      |   |
| 2011                                                       |       | 5,544                                            |       |
| 2012                                                       |       | 3,873                                            |       |
| 2013                                                       |       | 3,455                                            |       |
| 2014                                                       |       | 3,360                                            |       |
| Thereafter                                                 |       | 10,785                                           |       |
|                                                       |       | $                                                | 28,404     |   |

 

**Note 10—DiscontinuedOperations**

 

During December 2009,the Company discontinued all operations in Ecuador, and a plan was put in placeto sell the stock ownership of the Ecuador company.  Consequently, theresults of operations and cash flows for these operations are reflected asdiscontinued operations for all periods presented.  Previously, theEcuador operations were included in the Company’s Construction Servicessegment.

 

In February 2010, theCompany entered into an agreement for the sale of the Ecuador business. The Company agreed to pay $1,000 of remaining liabilities of the business, andthe buyer agreed to acquire the business for $700, which was comprised of $400in Primoris common stock owned by the buyer and an interest free $300 notepayable, 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 $400 in Primoris common stock wascancelled when received by the Company during the second quarter 2010. The sale of the Ecuador business had no material impact to the Company.

 

At September 30, 2010,the balance sheet reflects a net liability of $733 for potential remainingliabilities under this agreement.

 

**Note 11—AccountsPayable and Accrued Liabilities**

 

At September 30, 2010and December 31, 2009, accounts payable includes retentions ofapproximately $13,378 and $12,616, respectively, due to subcontractors, whichhave been retained pending contract completion and customer acceptance of jobs.

 

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

 
| ** **                                               | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                                     |       |                         |       |                        |       |
| Payroll  and related employee benefits                   |       | $                            | 22,842     |                        | $          | 18,321 |   |
| Insurance,  including self-insurance reserves            |       | 10,413                       |       | 11,245                      |       |
| Provision  for estimated losses on uncompleted contracts |       | 445                          |       | 332                         |       |
| Sales  and other taxes                                   |       | 1,711                        |       | 640                         |       |
| Accrued  leases and rents                                |       | 240                          |       | 262                         |       |
| Other                                                    |       | 3,554                        |       | 4,192                       |       |
|                                                     |       | $                            | 39,205     |                        | $          | 34,992 |   |

 

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**Note 12—CreditArrangements**

 

***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 $35,000.  The Agreement was amended on September 30,2010 to extend the maturity dates of the two revolving loans provided under theAgreement.  The maturity dates, asamended, are as follows:

 

·                  a revolving loan in theamount of $20,000 (the “Revolving Loan A”), with a maturity date ofOctober 26, 2013; and

·                  a revolving loan in theamount of $15,000 (the “Revolving Loan B”), with a maturity date ofOctober 26, 2011.

 

Under the Agreement, the Lenderagreed to issue letters of credit of up to $15,000 under Revolving LoanA.  At September 30, 2010 and December 31, 2009, totalcommercial letters of credit outstanding under Revolving Loan A totaled $4,339and $850, respectively.  There were no other borrowings under these twolines during the nine months ended September 30, 2010, leaving availableborrowing capacity under Revolving Loan A at $15,661 and $15,000 underRevolving Loan B.

 

The principal amount of eachof Revolving Loan A and Revolving Loan B will bear interest at either:(i) LIBOR plus an applicable margin as specified in the Agreement, or(ii) the prime rate announced by the Lender plus an applicable margin asspecified in the Agreement. The principal amount of any loan bearing interest atLIBOR plus an applicable margin may not be prepaid at any time without beingsubject to certain penalties. There is no prepayment penalty for any loanbearing interest at the prime rate announced by the Lender plus an applicablemargin.

 

All loans made by the Lenderunder the Agreement are secured by our assets, including, among others, ourcash, inventory, goods, equipment (excluding equipment subject to certainpermitted liens) and accounts receivable. Certain of our subsidiaries haveexecuted joint and several guaranties in favor of the Lender for all amountsunder the Agreement.  The Agreement and the line of credit facilitiescontain various restrictive covenants, including, among others, restrictions oninvestments, capital expenditures, minimum tangible net worth and debt servicecoverage requirements.  The Company was in compliance with its restrictivecovenants as of September 30, 2010.

 

In January 2008, theCompany entered into a credit facility (as amended) for purposes of issuingcommercial letters of credit in Canada, for an amount of up to $10,000 inCanadian dollars. The credit facility with a Canadian bank is for a term of5 years, and provides for an annual fee of 1% for any issued andoutstanding commercial letters of credit. Letters of credit can be denominatedin either Canadian or U.S. dollars. At September 30, 2010, totalcommercial letters of credit outstanding under this credit facility totaled$4,953 in Canadian dollars and $5,543 in Canadian dollars at December 31,2009.  As of September 30, 2010, the available borrowing capacityunder this credit facility was $5,047 in Canadian dollars.

 

At the time of the JCGacquisition on December 18, 2009, the Company assumed outstanding lettersof credit of $5,600 under an amended credit agreement that expired onFebruary 28, 2010. Upon termination of the credit agreement, the Companymade a cash deposit as replacement for the letters of credit.

 

***Equipment Loans. *** On June 25, 2010, weentered into a loan for the financing of existing equipment for the totalaggregate amount of $10,000 and paid a loan commitment fee of 0.5%.  Thisloan is secured by certain construction and automotive equipment and is payablein equal monthly installments over a five year period. The principal amount ofthe loan bears interest at 4.12% per annum and may be prepaid after one year,subject to certain prepayment penalties, and after three years without penalty.

 

Under a master loanagreement dated August 2009, we executed an equipment note onJune 25, 2010 for an aggregate amount of $10,000.  This note issecured by certain existing construction and automotive equipment and ispayable in equal monthly installments over a seven year period. The principalamount of this note bears interest at 4.71% per annum.

 

***Subordinated Promissory Note****.*   Inconnection with the acquisition of JCG, the Company executed an unsecuredPromissory Note on December 18, 2009 in favor of the sellers of JCG withan initial principal amount of $53,500. The Promissory Note is due and payableon December 15, 2014 and bears interest at differing rates untilmaturity.  For the first 9 months of the term of the note, the PromissoryNote bore interest at an annual rate equal to 5%.  For months 10 through18, the Promissory Note will bear interest at an annual rate of 7%.  Formonths 19 until the maturity date, the Promissory Note will bear interest at anannual rate of 8%.  Payments of principal and interest will be made on anamortizing basis over 60 months.  The Promissory Note is subordinated toamounts owed to our commercial banks for lines of credit and to our bondingagencies.

 

The Promissory Note may beprepaid in whole or in part at any time, and partial prepayment is required inthe event the Company completes certain equity financing, receives warrantexercise proceeds or obtains proceeds under certain new indebtedness. As longas more than $10,000 is outstanding under the Promissory Note, we have agreedto not take certain actions without the prior written consent of the PromissoryNote holders, including, among others, purchase, acquire, redeem or retire anyshares of our common stock. At September 30, 2010, a total of $43,116 wasoutstanding on the Promissory Note.  The Company made prepayments of thePromissory Note in the amounts of $2,328 in April 2010, $757 inJuly 2010 and $13,182 in October 2010, using proceeds from theexercise of warrants for the issuance of common stock.

 

**Note 13 —Contingent Earnout Liabilities**

 

Contingent earnoutliabilities consist of following amounts resulting from our acquisitions of JCGand Cravens in the fourth quarter of 2009.

 

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As part of theDecember 2009 JCG acquisition agreement, the Company agreed to issue$10,000 in common stock to the sellers, contingent upon JCG meeting a specificoperating performance target for the year 2010.  The number of shares arecalculated by dividing $10,000 by the average closing price of our commonstock, as reported on NASDAQ, for the 20 business days prior toDecember 31, 2010.  Upon meeting the contingency target, the sharesof common stock are to be issued at the time the Company’s audited financialstatements are available, but in no event later than April 15, 2011. At December 31, 2009, the estimated fair value of the contingentconsideration was $8,190.  The estimated fair value at September 30,2010 was $9,154. The $964 change in the fair value was a non-cash charge to “otherexpense” in the consolidated statement of income for the nine month periodended September 30, 2010.

 

In October 2009, the Companyacquired the assets of Cravens Partners, Ltd., a Texas-based provider ofcivil and utility infrastructure construction services.  The Cravensacquisition included potential consideration for an additional $2,000 in commonstock and $500 in cash to the sellers, contingent upon meeting specificoperating performance targets for the years 2009, 2010 and 2011.  AtDecember 31, 2009, the estimated fair value of the contingentconsideration was $1,839 of which $750 was current at 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 the remaining estimated fair value of $1,089at September 30, 2010 for the earnout consideration compared to thebalance at December 31, 2009.

 

**Note 14—RelatedParty Transactions**

 

Primoris has entered intovarious transactions with Stockdale Investment Group, Inc. (“SIGI”). Brian Pratt, one of our largest stockholders and our Chief Executive Officer, Presidentand Chairman of the Board of Directors, also holds a majority interest in SIGIand is the chairman and a director of SIGI.  John M. Perisich, our SeniorVice President and General Counsel, is secretary of SIGI.

 

Primoris leases propertieslocated in Bakersfield, Pittsburg and San Dimas, California and in Pasadena,Texas from SIGI.  During the nine monthsended September 30, 2010 and 2009, the Company paid $668 and $613,respectively, in lease payments to SIGI for the use of these properties.

 

Primoris leases a propertyfrom Roger Newnham, one of our stockholders and a manager at our subsidiaryBorn Heaters Canada. The property is located in Calgary, Canada. During thenine months ended September 30, 2010 and 2009, Primoris paid $188 and $256,respectively, in lease payments to Mr. Newnham for the use of thisproperty. The term of the lease is through December 31, 2014.

 

The Company owns severalnon-consolidated investments and has recognized revenues on work performed forthose joint ventures.  The Company recognized $83 and $13,158 in relatedparty revenues during the nine months ended September 30, 2010 and 2009,respectively, on the OMPP joint venture.  The Company also recognized$1,281 and $1,020 in related party revenues during the nine months endedSeptember 30, 2010 and 2009, respectively, from the All Day jointventure.  See Note 7— “*EquityMethod Investments”*.

 

**Note 15—IncomeTaxes**

 

The effective tax rate forthe three and nine months ended September 30, 2010 was 42.7% and 39.2%respectively. The rate differs from the U.S. federal statutory rate of 35% dueprimarily to federal and state return to provision adjustments, state incometaxes and the “Domestic Production Activity Deduction”.

 

To determine its quarterlyprovision for income taxes, the Company uses an estimated annual effective taxrate, which is based on expected annual income, statutory tax rates and taxplanning opportunities available in the various jurisdictions to which theCompany is subject. Certain significant or unusual items are separatelyrecognized in the quarter in which they occur and can be a source ofvariability in the effective tax rate from quarter to quarter.  TheCompany recognizes interest and penalties related to uncertain tax positions,if any, as an income tax expense.

 

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

 

The tax years 2007 through2009 remain open to examination by the United States Internal RevenueService.  The tax years 2006 through 2009 remain open to examination bythe other major taxing jurisdictions to which the Company is subject.

 

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**Note 16—Dividendsand Earnings Per Share**

 

The Company has declaredcash dividends on three occasions during 2010, as follows:

 

·                  OnMarch 4, 2010, the Company declared a cash dividend of $0.025 per commonshare, payable to stockholders of record as of March 31, 2010 and toholders of shares of the Company’s Series A Non-Voting ContingentConvertible Preferred stock (“Preferred Stock”) issued in connection with theDecember 18, 2009 acquisition of JCG.  The dividend, totaling $1,103,was paid on April 15, 2010.

·                  On May 11,2010, the Company declared a cash dividend of $0.025 per common share, payableto stockholders of record as of 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 dividend, totaling $1,107 was paid on July 15,2010.

·                  On August 6,2010, the Company declared a cash dividend of $0.025 per common share, payableto stockholders of record as of September 30, 2010.  The dividend, totaling $1,173, was paid on October 15,2010.

 

The table below presents thecomputation of basic and diluted earnings per share for the three and ninemonths ended September 30, 2010 and 2009:

 
| ** **                                                             | ** ** | **Three months  ended September 30,** | ** ** | **Nine months  ended September 30,** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                             | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Numerator:**                                                         | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  income                                                            |       | $                                                    | 7,577      |                                                | $          | 7,947 |   | $ | 21,362 |   | $ | 22,167 |   |
| **Denominator:**                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted  average shares for computation of basic earnings per share   |       | 44,887                                               |       | 32,477                                              |       | 40,499 |   | 31,699 |   |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Dilutive  effect of warrants and units                                 |       | 641                                                  |       | 1,571                                               |       | 1,136 |   | 650 |   |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Dilutive  effect of contingently issuable shares (1) (2)          |       | —                                               |       | —                                              |       | 793 |   | 779 |   |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Dilutive  effect of conversion of Preferred Stock (3)                  |       | —                                               |       | —                                              |       | 3,058 |   | — |   |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted  average shares for computation of diluted earnings per share |       | 45,528                                               |       | 34,048                                              |       | 45,486 |   | 33,128 |   |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Basic  earnings per share                                              |       | $                                                    | 0.17       |                                                | $          | 0.24 |   | $ | 0.53 |   | $ | 0.70 |   |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Diluted  earnings per share                                            |       | $                                                    | 0.17       |                                                | $          | 0.23 |   | $ | 0.47 |   | $ | 0.67 |   |

 

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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 of Cravens. The shares were issued in March 2010 upon meeting a defined performancetarget 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 stockholdersapproved the issuance of shares of common stock to the holders of 81.8 sharesof Preferred Stock and approved the conversion of the Preferred Stock to 8,185shares of common stock.

 

**Note 17—Stockholders’Equity**

 

***Preferred stock*****—** The Company is authorized to issue 1,000 shares of $0.0001par 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 thestockholders, the stockholders approved the conversion of the 81.8 shares ofPreferred Stock into 8,185 shares of common stock.  There are no shares ofPreferred Stock outstanding at September 30, 2010.

 

***Warrants*****—** AtSeptember 30, 2010, there were 807 warrants outstanding to purchase theCompany’s common stock.  Each warrant entitled the holder to purchase oneshare of common stock at a price of $5.00 per share and was exercisable at anytime on or prior to October 2, 2010 at 5:00 PM EDT (“Warrant”), unlessearlier redeemed by the Company.  From July 1,2010 through September 30, 2010, a total of 2,742 warrants were exercised,with an additional 773 warrants exercised on October 1, 2010, resulting incash proceeds paid to the Company of $17,576. The remaining 34 warrants expired unexercised on October 2, 2010.

 

On September 7, 2010,the Company adopted a Rule 10b5-1 trading plan with a broker to facilitatethe repurchase of Warrants.  From September 7,2010 through the plan termination date of September 28, 2010, the brokercompleted the repurchase of 246 Warrants in accordance with the plan for $277.

 

***Unit Purchase Options*****—** At September 30, 2010, the Company had 450 UnitPurchase Options (“UPO”) outstanding.  Each UPO entitled the holder topurchase one unit, comprised of one share of common stock and one Warrant, at aprice of $8.80 per unit.  The Warrantsunderlying the UPO’s also expired on October 2, 2010.  As a result, the UPO’s, which will expire on October 2,2011, now entitle the holder to purchase one share of common stock at a priceof $8.80 per share.

 

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**Note 18—Commitmentsand Contingencies**

 

***Leases****—* TheCompany leases certain property and equipment under non-cancellable operatingleases which expire at various dates through 2019. The leases require theCompany to pay all taxes, insurance, maintenance and utilities and areclassified as operating leases in accordance with ASC Topic 840-”Leases”.  The leases related to property are withentities related through common ownership by stockholders, officers, anddirectors of the Company.

 

Total lease expense duringthe three and nine months ended September 30, 2010 amounted to $2,475 and$7,411, respectively, including amounts paid to related parties of $281 and$856, respectively.  Total lease expense during the three and nine monthsended September 30, 2009 amounted to $1,481 and $4,775, including amountspaid to related parties of $303 and $868, respectively.

 

***Letters of credit****—* At September 30, 2010, the Company had letters ofcredit outstanding of $9,292 and at December 31, 2009, the Company hadletters of credit outstanding of $11,989.  The outstanding amounts includethe U.S. dollar equivalent for letters of credit issued in Canadian dollars.

 

***Litigation—*** The Company is subject to claims and legalproceedings arising out of its business. Management believes that the Companyhas meritorious defenses to such claims. Although management is unable toascertain the ultimate outcome of such matters, after review and consultationwith counsel and taking into consideration relevant insurance coverage andrelated deductibles, management believes that the outcome of these matters willnot have a materially adverse effect on the consolidated financial position ofthe Company.

 

***Bonding—*** At September 30, 2010 and December 31,2009, the Company had bid and completion bonds issued and outstanding totalingapproximately $902,373 and $773,762, respectively.

 

**Note 19—ReportableOperating Segments**

 

Prior to January 1,2010, the Company reported two operating segments:  the ConstructionServices segment and the Engineering segment. As a result of the acquisition ofJCG and changes in our management structure, the Company changed the reportableoperating segments on January 1, 2010, by separating the formerConstruction Services segment into two separate segments. The prior yearinformation for the Construction Services segment has been reclassified intothe new segments. The three new segments are East Construction Services, WestConstruction Services and Engineering.

 

The East ConstructionServices segment incorporates the JCG construction business, located primarilyin the southeastern United States.  The segment also includes thebusinesses located in the Gulf Coast region of the United States that wereformerly included in the Construction Services segment, including CardinalContractors, Inc., Cardinal Mechanical, L.P. and Cravens.

 

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

 

The Engineering segmentremains unchanged and includes the results of Onquest, Inc. and BornHeaters Canada, ULC.

 

In the following tables, allintersegment revenues and gross profit, which were immaterial, have beeneliminated.

 

***Segment Revenues***

 

Revenue by segment for thethree months ended September 30, 2010 and 2009 were as follows:

 
| ** **                  | ** ** | **For the three months ended September 30,** | ** ** |
|-----------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **2010**                                                                   | ** ** | **2009** | ** ** |
| **Segment**                 | ** ** | **Revenue**                                                                | ** ** | **% of  Segment  Revenue** | ** ** | **Revenue** | ** ** | **% of  Segment  Revenue** | ** ** |
|                        |       |                                                                       |       |   |   |   |   |   |   |
| East  Construction Services |       | $                                                                          | 126,876    |   | 55.0 | % | $ | 13,830 |   | 13.0 | % |
| West  Construction Services |       | 86,594                                                                     |       | 37.6 | % | 80,933 |   | 75.9 | % |
| Engineering                 |       | 16,887                                                                     |       | 7.4 | % | 11,848 |   | 11.1 | % |
| Total                       |       | $                                                                          | 230,357    |   | 100.0 | % | $ | 106,611 |   | 100.0 | % |

 

Revenue by segment for thenine months ended September 30, 2010 and 2009 were as follows:

 
| ** **                  | ** ** | **For the Nine months ended September 30,** | ** ** |
|-----------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **2010**                                                                  | ** ** | **2009** | ** ** |
| **Segment**                 | ** ** | **Revenue**                                                               | ** ** | **% of  Segment  Revenue** | ** ** | **Revenue** | ** ** | **% of  Segment  Revenue** | ** ** |
|                        |       |                                                                      |       |   |   |   |   |   |   |
| East  Construction Services |       | $                                                                         | 351,583    |   | 57.8 | % | $ | 42,028 |   | 12.0 | % |
| West  Construction Services |       | 216,302                                                                   |       | 35.5 | % | 263,765 |   | 75.4 | % |
| Engineering                 |       | 40,641                                                                    |       | 6.7 | % | 43,978 |   | 12.6 | % |
| Total                       |       | $                                                                         | 608,526    |   | 100.0 | % | $ | 349,771 |   | 100.0 | % |

 

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***Segment Gross Profit***

 

Gross profit by segment forthe three months ended September 30, 2010 and 2009 were as follows:

 
| ** **                  | ** ** | **For the three months ended September 30,** | ** ** |
|-----------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **2010**                                                                   | ** ** | **2009** | ** ** |
| **Segment**                 | ** ** | **Gross  Profit**                                                          | ** ** | **% of  Segment  Revenue** | ** ** | **Gross  Profit** | ** ** | **% of  Segment  Revenue** | ** ** |
|                        |       |                                                                       |       |   |   |   |   |   |   |
| East  Construction Services |       | $                                                                          | 12,889     |   | 10.1 | % | $ | 1,383 |   | 10.0 | % |
| West  Construction Services |       | 12,689                                                                     |       | 14.7 | % | 17,449 |   | 21.6 | % |
| Engineering                 |       | 2,302                                                                      |       | 13.6 | % | 1,322 |   | 11.2 | % |
| Total                       |       | $                                                                          | 27,880     |   | 12.1 | % | $ | 20,154 |   | 18.9 | % |

 

Gross profit by segment forthe nine months ended September 30, 2010 and 2009 were as follows:

 
| ** **                  | ** ** | **For the Nine months ended September 30,** | ** ** |
|-----------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **2010**                                                                  | ** ** | **2009** | ** ** |
| **Segment**                 | ** ** | **Gross  Profit**                                                         | ** ** | **% of  Segment  Revenue** | ** ** | **Gross  Profit** | ** ** | **% of  Segment  Revenue** | ** ** |
|                        |       |                                                                      |       |   |   |   |   |   |   |
| East  Construction Services |       | $                                                                         | 36,103     |   | 10.3 | % | $ | 4,441 |   | 10.6 | % |
| West  Construction Services |       | 35,081                                                                    |       | 16.2 | % | 46,663 |   | 17.7 | % |
| Engineering                 |       | 7,805                                                                     |       | 19.2 | % | 4,299 |   | 9.8 | % |
| Total                       |       | $                                                                         | 78,989     |   | 13.0 | % | $ | 55,403 |   | 15.8 | % |

 

***Segment Goodwill***

 

The following presents theamount of goodwill recorded by segment at September 30, 2010 and atDecember 31, 2009.

 
| **Segment**                 | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                        |       |                         |       |                        |       |
| East  Construction Services |       | $                            | 59,272     |                        | $          | 57,237 |   |
| West  Construction Services |       | —                       |       | —                      |       |
| Engineering                 |       | 2,441                        |       | 2,441                       |       |
| Total                       |       | $                            | 61,713     |                        | $          | 59,678 |   |

 

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

 

Revenue and total assets bygeographic area for the nine months ended September 30, 2010 and 2009 wasas follows:

 
| ** **         | ** ** | **Revenues**                                                              | ** ** | ** **             | ** ** | ** **            | ** ** |
|--------------------|------------|---------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **         | ** ** | **For the Nine months ended September 30,** | ** ** | ** **             | ** ** | ** **            | ** ** |
| ** **         | ** ** | **2010**                                                                  | ** ** | **2009**               | ** ** | **Total Assets** | ** ** |
| **Country:**       | ** ** | **Revenue**                                                               | ** ** | **% of  Revenue** | ** ** | **Revenue**           | ** ** | **% of  Revenue** | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|               |       |                                                                      |       |                   |       |                  |       |   |   |   |   |   |   |
| United  States     |       | $                                                                         |       | 593,727                |       | 97.6                  | %          | $ |   | 332,952 |   | 95.2 | % | $ |   | 524,563 |   | $ |   | 465,025 |   |
| Non-United  States |       | 14,799                                                                    |       | 2.4                    |       | 16,819                |       | 4.8 |   | 8,905 |   | 11,002 |   |
| Total              |       | $                                                                         |       | 608,526                |       | 100.0                 | %          | $ |   | 349,771 |   | 100.0 | % | $ |   | 533,468 |   | $ |   | 476,027 |   |

 

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

 

**Note 20 — Subsequent Event**

 

On November 8, 2010,the Company signed a definitive agreement to acquire privately held RockfordCorporation (“Rockford”).  Based inHillsboro (Portland), Oregon, Rockford specializes in large diameter naturalgas and liquid pipeline projects and related facilities construction.  Closing of the transaction, which is subjectto customary conditions, is expected to occur on or before November 12,2010, with the effective date of the acquisition retroactive to October 1,2010.  The sellers include severalprivate equity firms and two senior members of management.

 

Total consideration isapproximately $82,600, $64,200 of which will be paid at closing consisting of:$35,000 in cash; $12,500 of the Company’s common stock, the number of shareswill be calculated using the average closing stock price for the 20 tradingdays prior to closing; and three-year $16,700 promissory notes with escalatinginterest of 5% to 8% with certain prepayment and conversion features. Thedefinitive agreement also contains incentive provisions that could provideadditional consideration of cash and Company common stock totaling $18,400based on Rockford attaining specified financial goals for the three yearsending December 31, 2010, 2011 and 2012.

 

The incentive provisionscontained in the definitive agreement take into account the impact of a currentlarge Rockford project, as well as results of future work by Rockford’s coreoperations.  These incentives couldprovide additional merger consideration of cash and Company common stocktotaling $18,400 based on Rockford attaining the following EBITDA measures, asdefined in the definitive agreement:

 

·      EBITDA of$9,000 for the three months ended December 31, 2010 would result in theissuance of $4,600 of Company common stock to the sellers.

 

·      EBITDA of$34,000 for the five quarters ending December 31, 2011 would result inadditional consideration of $4,600 to the sellers, divided equally betweenCompany common stock and cash.  ShouldEBITDA for this period meet or exceed $38,000, the sellers would receiveadditional consideration of $2,300, also divided equally between Company commonstock and cash.

 

·      EBITDA of$14,000 for 2012 would result in a cash payment to the sellers of $6,900.

 

For its fiscal year endedMarch 31, 2010, Rockford generated revenues of approximately $166,000 andan operating profit of approximately $24,000. At September 30, 2010, Rockford’sbalance sheet included stockholders’ equity of $39,000, working capital of$16,600, and cash and equivalents of approximately $26,800. After closing,additional financial information will be provided in subsequent filings withthe Securities and Exchange Commission as soon as practicable.

 

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**PRIMORIS SERVICES CORPORATION**

**MANAGEMENT’S DISCUSSION AND ANALYSIS**

 

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

 

***Forward Looking Statements***

 

*ThisQuarterly Report on Form 10-Q for the quarterly period endedSeptember 30, 2010 (“Third Quarter 2010 Report”) contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended (the “Securities Act”), and Section 21E of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”), which are subject to the“safe harbor” created by those sections. Forward-looking statements includeinformation concerning our possible or assumed future results of operations,business strategies, financing plans, competitive position, industryenvironment, potential growth opportunities, the effects of regulation and theeconomy, generally. Forward-looking statements include all statements that arenot historical facts and can be identified by terms such as “anticipates,” “believes,”“could,” “estimates,” “expects,” “intends, “may,” “plans,” “potential,” “predicts,”“projects,” “should,” “will,” “would” or similar expressions.*

 

*Forward-lookingstatements involve known and unknown risks, uncertainties and other factorswhich may cause our actual results, performance or achievements to bematerially different from any future results, performance or achievementsexpressed or implied by the forward-looking statements. We discuss many ofthese risks in detail in Part I, Item 1A “Risk Factors” of ourAnnual Report on Form 10-K for the year ended December 31, 2009 andour other filings with the Securities and Exchange Commission (“SEC”). Also,forward-looking statements represent our management’s beliefs and assumptionsonly as of the date of this Third Quarter 2010 Report. You should read thisThird Quarter 2010 Report, our Annual Report on Form 10-K for the yearended December 31, 2009 and our other filings with the SEC completely andwith the understanding that our actual future results may be materiallydifferent from what we expect.*

 

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

 

*Thefollowing discussion and analysis should be read in conjunction with theunaudited financial statements and notes thereto included inPart 1, Item 1 of this Third Quarter 2010 Report.*

 

**Introduction**

 

Primoris ServicesCorporation is a holding company with various subsidiaries that cumulativelyform a diversified construction company providing a wide range ofconstruction and product engineering services.  These services includefabrication, maintenance, replacement and other services to major publicutilities, petrochemical companies, energy companies, municipalities and othercustomers.  Our activities are performed primarily in the Southeast andSouthwest United States, primarily in Louisiana and California, with strategicpresences in Florida, Texas and Canada.

 

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

 

Through our acquisition ofJames Construction Group, LLC (“JCG”) in December 2009, we provideservices in heavy civil construction projects, including highway and bridgeconstruction, concrete paving, levee construction, airport runway and taxiwayconstruction 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.

 

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

 

On July 1, 2010, weacquired a 50% membership interest in WesPac Energy LLC (“WesPac”), which developspipeline and terminal projects in the United States, Canada and Mexico.  The investment is being accounted for underthe equity method and is recorded as an investment in non-consolidated entitieson our balance sheet.

 

We make our press releases,our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q,our Current Reports on Form 8-K and all other required filings with theSEC available, free of charge through our Internet Web site, as reasonablypractical after they are electronically filed with, or furnished to, the SEC.Our principal executive offices are located at 26000 Commercentre Drive, LakeForest, California 92630, and our telephone number is (949) 598-9242. OurWeb site address is *www.prim.com*.The information on our Internet Web site is neither part of nor incorporated byreference into this Third Quarter 2010 Report.

 

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We provide services in threesegments: the East Construction Services segment, the West ConstructionServices segment and the Engineering segment.

 

In prior periods, theCompany reported two operating segments:  the Construction Servicessegment and the Engineering segment. As a result of the acquisition of JCG andchanges in the management structure, the Company changed the reportableoperating segments on January 1, 2010, by separating the formerConstruction Services segment into two separate segments. The prior yearinformation for the Construction Services segment has been reclassified intothe two new segments. The three segments are outlined as follows:

 

The East ConstructionServices segment incorporates the JCG construction services business, locatedprimarily in the southern United States, specializing in highway, industrialand environmental projects.  The East Construction Services segment alsoconsists of the businesses located in the Gulf Coast region of the UnitedStates that were formerly a part of the Construction Services segment,including Cardinal Contractors, Inc., Cardinal Mechanical, L.P. andCravens Services, Inc.  The East Construction Services segmentprovides a range of services that include:

 

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

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

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

·                  Providing installation andmaintenance of infrastructure projects.

 

The West ConstructionServices segment includes construction services performed in the western UnitedStates, primarily in the states of California and Nevada.  The entitiesthat are included in West Construction Services include ARB, ARB Structures, Inc.,and Stellaris, LLC. The West Construction Services segment provides arange of services that include:

 

·                  Providing installation ofunderground pipeline, cable and conduits for entities primarily in thepetroleum, petrochemical and gas industries and projects with water/wastewaterdistribution requirements;

·                  Providing installation andmaintenance of industrial facilities for entities in the power, petroleum andpetrochemical industries;

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

·                  Providing other earthwork,site development and remediation work.

 

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

 

·                  Designing, supplying andinstalling high-performance furnaces, heaters, burner management systems andrelated combustion and process technologies for clients in the oil refining,petrochemical and power generation industries; and

·                  Furnishing turn-key projectmanagement with technical expertise and the ability to deliver custom productengineering solutions worldwide.

 

The following table providesthe historical revenues for the previously reported quarters for 2009 into thethree 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 |   |

 

**Materialtrends and uncertainties**

 

We generate our revenue fromboth large and small construction and product engineering projects. The awardof these contracts is dependent on a number of factors, many of which are notwithin our control. Business in the construction industry is cyclical. Wedepend in part on spending by companies in the energy and oil and gasindustries, as well as on municipal water and wastewater customers. Over thepast few years, we have benefited from demand for more efficient and moreenvironmentally friendly energy and power facilities and from the strength ofthe oil and gas industry.

 

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Current economic conditionsin the United States have affected our business during the past year,especially in our Industrial business in California and our water andwastewater business in Florida.  While wecurrently have adequate backlog and projects to bid, we are uncertain as to howthe current economy will impact our clients.  Factors outside of ourcontrol may affect the number and size of contracts awarded to us in anyparticular period.  It is possible thatthe current uncertainty for our business will continue as the impact of theAmerican Recovery and Reinvestment Act (“ARRA”) of 2009 wanes and Federalhighway funding legislation continues to be nearly non-existent.

 

**Seasonalityand cyclicality**

 

Our operating results can besubject to seasonal and cyclical variations. Weather, particularly rain, canimpact our ability to perform construction work. Our clients’ budget cyclesalso may have an impact on the timing of project awards. Accordingly, ourfinancial condition and operating results may vary fromquarter-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 ofoperations**

 

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

 
| ** **                                   | ** ** | **Three Months Ended September 30,** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                   | ** ** | **2010**                                                 | ** ** | **2009** | ** ** |
| ** **                                   | ** ** | **(Thousands,  except per  share  amounts)**        | ** ** | **% of  Revenue** | ** ** | **(Thousands,  except per  share  amounts)** | ** ** | **% of  Revenue** | ** ** |
| Revenues                                     |       | $                                                        | 230,357    |   | 100.0 | % | $ | 106,611 |   | 100.0 | % |
| Gross  profit                                |       | 27,880                                                   |       | 12.1 | % | 20,154 |   | 18.9 | % |
| Selling,  general and administrative expense |       | 14,580                                                   |       | 6.3 | % | 7,266 |   | 6.8 | % |
| Operating  income                            |       | 13,300                                                   |       | 5.8 | % | 12,888 |   | 12.1 | % |
| Other  income (expense)                      |       | (81                                                      | )          | 0.0 | % | 961 |   | 0.9 | % |
| Income  before income taxes                  |       | 13,219                                                   |       | 5.8 | % | 13,849 |   | 13.0 | % |
| Income  tax provision                        |       | (5,642                                                   | )          | (2.5 | )% | (5,123 | ) | (4.8 | )% |
| Net  income from continuing operations       |       | $                                                        | 7,577      |   | 3.3 | % | $ | 8,726 |   | 8.2 | % |

 

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

 
| ** **                                   | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                   | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| ** **                                   | ** ** | **(Thousands,  except per  share  amounts)**       | ** ** | **% of  Revenue** | ** ** | **(Thousands,  except per  share  amounts)** | ** ** | **% of  Revenue** | ** ** |
| Revenues                                     |       | $                                                       | 608,526    |   | 100.0 | % | $ | 349,771 |   | 100.0 | % |
| Gross  profit                                |       | 78,989                                                  |       | 13.0 | % | 55,403 |   | 15.8 | % |
| Selling,  general and administrative expense |       | 43,849                                                  |       | 7.2 | % | 22,825 |   | 6.5 | % |
| Operating  income                            |       | 35,140                                                  |       | 5.8 | % | 32,578 |   | 9.3 | % |
| Other  income (expense)                      |       | 4                                                       |       | — | % | 4,466 |   | 1.3 | % |
| Income  before income taxes                  |       | 35,144                                                  |       | 5.8 | % | 37,044 |   | 10.6 | % |
| Income  tax provision                        |       | (13,782                                                 | )          | (2.3 | )% | (14,077 | ) | (4.0 | )% |
| Net  income from continuing operations       |       | $                                                       | 21,362     |   | 3.5 | % | $ | 22,967 |   | 6.6 | % |

 

Revenues for the threemonths ended September 30, 2010 were $230.4 million, an increase of$123.7 million or 116.1%, compared to the same period in 2009.  The increase in revenues was due primarily to the acquisition of JCG andCravens in the fourth quarter 2009, which contributed $120.2 million for the threemonths ended September 30, 2010. Revenues for the nine months ended September 30, 2010 were $608.5million, an increase of $258.8 million, or 74.0%, compared to the same periodin 2009.  The acquired businessescontributed $329.1 million for the nine months ended September 30,2010.  Excluding the impact of the acquired businesses, revenues for thethree months ended September 30, 2010 increased by $3.6 million, anddeclined by $70.3 million for the nine months ended September 30, 2010,compared to the same period a year ago.  The decreased revenues wereacross most business lines, but especially in oil and gas pipeline, parkingstructures and industrial projects in the West Construction segment.  This reflects the impact of a significantdecrease of projects that were awarded in 2009.

 

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Gross profit increased by$7.7 million, or 38.3% for the three months ended September 30, 2010and increased by $23.6 million, or 42.6%, for the nine months endedSeptember 30, 2010 compared to the same periods in 2009.  This wasdue primarily to a $12.3 million and $34.3 million profit contribution from ourrecent acquisitions in the East Construction Services segment for the three andnine months ended September 30, 2010, respectively.

 

Gross profit as a percent ofrevenues decreased to 12.1% for the three months ended September 30, 2010and 13.0% for the nine months ended September 30, 2010, respectively,compared to 18.9% and 15.8% in the same periods of 2009, respectively. Themargins were primarily impacted by the typically lower margin percentages onJCG’s heavy civil projects and the lower utilization of equipment and manpowerin the West Construction segment.

 

**Geographicareas financial information**

 

Revenue by geographic areafor the nine months ended September 30, 2010 and 2009 was as follows:

 
| ** **              | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------|------------|---------------------------------------------------------|------------|
| ** **              | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| ** **              | ** ** | **(Thousands)**                                         | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
|                    |       |                                                    |       |   |   |   |   |   |   |
| ***Country:***          |       |                                                    |       |   |   |   |   |   |   |
| United  States          |       | $                                                       | 593,458    |   | 97.5 | % | $ | 332,952 |   | 95.2 | % |
| Non—United  States |       | 15,068                                                  |       | 2.5 | % | 16,519 |   | 4.8 | % |
| Total  revenues         |       | $                                                       | 608,526    |   | 100.0 | % | $ | 349,771 |   | 100.0 | % |

 

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

 

**Segmentresults**

 

The following discusses thesignificant factors contributing to the results of our operating segments.

 

*EastConstruction Services Segment*

 

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

 
| ** **                       | ** ** | **Three Months Ended September 30,** | ** ** |
|----------------------------------|------------|----------------------------------------------------------|------------|
| ** **                       | ** ** | **2010**                                                 | ** ** | **2009** | ** ** |
| ** **                       | ** ** | **(Thousands)**                                          | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
| ***East Construction Services*** |       |                                                     |       |   |   |   |   |   |   |
| Revenue                          |       | $                                                        | 126,876    |   |   |   | $ | 13,830 |   |   |   |
| Gross  profit                    |       | 12,889                                                   |       | 10.2 | % | 1,383 |   | 10.0 | % |
|                                  |            |                                                          |            |  |  |  |  |  |  |  |  |

 
| ** **                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------|------------|---------------------------------------------------------|------------|
| ** **                       | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| ** **                       | ** ** | **(Thousands)**                                         | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
| ***East Construction Services*** |       |                                                    |       |   |   |   |   |   |   |
| Revenue                          |       | $                                                       | 351,583    |   |   |   | $ | 42,028 |   |   |   |
| Gross  profit                    |       | 36,103                                                  |       | 10.3 | % | 4,441 |   | 10.6 | % |
|                                  |            |                                                         |            |  |  |  |  |  |  |  |  |

 

Revenue for the EastConstruction Services segment increased by $113.0 million and $309.6 million,respectively, for the three and nine months ended September 30, 2010compared to the same periods in 2009.  This increase was due to theaddition of $120.2 million and $329.1 million in revenues attributable to theacquisition of JCG and Cravens in the fourth quarter 2009.  This was partially offset by $7.2 million and$19.5 million decrease in revenue for the three and nine month periods endedSeptember 30, 2010, primarily as a result of reduced revenues on Floridawater andwastewater projects.

 

Gross profit for the EastConstruction Services segment increased by $11.5 million and $31.7 million forthe three and nine months ended September 30, 2010, respectively,primarily as a result of the $12.2 million and $33.0 million gross margincontribution from the JCG acquisition compared to those of the water andwastewater projects in the same periods in 2009, respectively.  Includedin the gross profit amount is intangible amortization expense related to the JCGacquisition of $0.5 million for the three months and $1.7 million for the ninemonths ended September 30, 2010, respectively.

 

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Gross profit as a percent ofrevenues increased to 10.2% during the three months ended September 30,2010 from 10.0% in the prior year quarter, reflecting the increased marginpercentages realized on JCG projects.  For the nine months endedSeptember 30, 2010, gross profit as a percent of revenues decreased to10.3% compared to 10.6% in the same period in the prior year due to thetypically lower margin percentages on JGC’s projects.

 

*WestConstruction Services Segment*

 

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

 
| ** **                       | ** ** | **Three Months Ended September 30,** | ** ** |
|----------------------------------|------------|----------------------------------------------------------|------------|
| ** **                       | ** ** | **2010**                                                 | ** ** | **2009** | ** ** |
| ** **                       | ** ** | **(Thousands)**                                          | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
| ***West Construction Services*** |       |                                                     |       |   |   |   |   |   |   |
| Revenue                          |       | $                                                        | 86,594     |   |   |   | $ | 80,933 |   |   |   |
| Gross  profit                    |       | 12,689                                                   |       | 14.7 | % | 17,449 |   | 21.6 | % |
|                                  |            |                                                          |            |  |  |  |  |  |  |  |  |

 
| ** **                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------|------------|---------------------------------------------------------|------------|
| ** **                       | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| ** **                       | ** ** | **(Thousands)**                                         | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
| ***West Construction Services*** |       |                                                    |       |   |   |   |   |   |   |
| Revenue                          |       | $                                                       | 216,302    |   |   |   | $ | 263,765 |   |   |   |
| Gross  profit                    |       | 35,081                                                  |       | 16.2 | % | 46,664 |   | 17.7 | % |
|                                  |            |                                                         |            |  |  |  |  |  |  |  |  |

 

Revenue for the WestConstruction Services segment increased by $5.7 million, or 7.0%, and decreasedby $47.5 million, or 18.0%, respectively, for the three and nine months endedSeptember 30, 2010 compared to the same periods in 2009. The increase inthe quarter ended September 30, 2010 as compared to the same period in2009, was due to an increase in California underground water and sewer project workof $10.1 million, partially offset by a decrease in activity in the horizontaldirectional drilling projects and parking structure business.  The decrease for the nine months ended September 30,2010, as compared to the same period in 2009, was primarily due to a decline inproject revenues from oil and gas pipelines of $20.8 million, power plantprojects of $12.3 million and parking structure projects of $14.7 million.

 

Gross profit for the WestConstruction Services decreased by $4.8 million, or 27.3%, for the three monthsended September 30, 2010 primarily as a result of a decline in grossprofit of $2.0 million related to oil and gas pipeline projects and a declineof gross profit of $1.7 million in power plant projects, because of high profitmargins in the same period of 2009.  Gross profit for the nine monthsended September 30, 2010 decreased by $11.6 million, or 24.8%, compared tothe same period in 2009.  Lower business volume accounts for $7.7 millionof the gross profit decrease. The balance of the decrease was due to lowerequipment and manpower utilization, primarily in the first quarter of 2010.

 

Gross profit as a percent ofrevenues decreased to 14.7% during the three months ended September 30, 2010from 21.6% in the prior year quarter, reflecting high margins in the thirdquarter of 2009 primarily as a result of the completion of several highermargin projects in the previous year. For the nine months ended September 30, 2010, gross profit as a percentof revenues decreased to 16.2% compared to 17.7% in the same period in theprior year primarily due to the completion of several higher margin projects inthe third quarter 2009.

 

*EngineeringSegment*

 

Revenue and gross profit forthe Engineering segment for the three and nine months ended September 30,2010 and 2009 were as follows:

 
| ** **        | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------|------------|----------------------------------------------------------|------------|
| ** **        | ** ** | **2010**                                                 | ** ** | **2009** | ** ** |
| ** **        | ** ** | **(Thousands)**                                          | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
| ***Engineering*** |       |                                                     |       |   |   |   |   |   |   |
| Revenue           |       | $                                                        | 16,887     |   |   |   | $ | 11,848 |   |   |   |
| Gross  profit     |       | 2,302                                                    |       | 13.6 | % | 1,322 |   | 11.2 | % |
|                   |            |                                                          |            |  |  |  |  |  |  |  |  |

 
| ** **        | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------|------------|---------------------------------------------------------|------------|
| ** **        | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| ** **        | ** ** | **(Thousands)**                                         | ** ** | **% of  Revenue** | ** ** | **(Thousands)** | ** ** | **% of  Revenue** | ** ** |
| ***Engineering*** |       |                                                    |       |   |   |   |   |   |   |
| Revenue           |       | $                                                       | 40,641     |   |   |   | $ | 43,978 |   |   |   |
| Gross  profit     |       | 7,805                                                   |       | 19.2 | % | 4,299 |   | 9.8 | % |
|                   |            |                                                         |            |  |  |  |  |  |  |  |  |

 

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Revenue for the Engineeringsegment increased by $5.0 million, or 42.5%, for the three months ended September 30,2010, compared to the same period in 2009, due to several new projects begun inthe first six months of 2010. Revenue for the nine months ended September 30,2010 decreased by $3.3 million, or 7.6%, compared to the same period in2009.  This decrease was due to slower activity in the first and secondquarters of 2010, compared to the same periods in 2009.

 

Gross profit for theEngineering segment for the three months ended September 30, 2010increased to $2.3 million from $1.3 million for the same period in 2009, anincrease of $1.0 million.  Gross marginas a percent of revenues was 13.6% compared to 11.2% for the same period in2009.  The increase was due primarily tothe contribution from several higher than historical margin projects for thethree months ended September 30, 2010.

 

Gross profit for the ninemonths ended September 30, 2010 increased $3.5 million over the sameperiod in 2009, with gross profit as a percent of revenues increasing to 19.2%from 9.8% in the prior year.   Asignificant portion of the increase was due to improvements in the final costsof several complex projects completed in 2010 compared to the estimated costs forthese projects identified in the prior year. These improvements resulted in a favorable impact to gross profit of$1.9 million for the nine months ended September 30, 2010.  Excluding the impact of these projects, grossprofit for the current nine month period was $5.9 million, a net decrease of$0.3 million compared to the same period in the prior year.  Excluding the impact of the reversal, grossprofit as a percentage of revenues was 14.6% for the nine months ended September 30,2010 compared to 14.0% for the same period in 2009.

 

**Selling,general and administrative expenses**

 

Selling, general andadministrative expenses (“SG&A”) increased $7.3 million, or 100.7%,for the three months ended September 30, 2010 compared to the same periodin 2009. Of the increased amount, approximately $5.7 million was added by theacquisitions of JCG and Cravens, including $0.9 million for amortization ofintangible assets. The balance of the increase of $1.6 million was dueprimarily to recording $0.1 million gain on the sale of equipment during thethree months ended September 30, 2010 compared to $1.7 million recordedduring the same period in 2009.

 

SG&A increased by $21.0million, or 92.1%, for the nine months ended September 30, 2010 comparedto the same period in 2009.  A total of $16.4 million of the increase wasdue to the acquisitions of JGC and Cravens during the fourth quarter of 2009,including $2.6 million for amortization of intangible assets.  Theremaining increase of $4.6 million was primarily due to lower overhead recoveryallocation of $2.0 million as a result of reduced Engineering and non-JCG EastConstruction Segment activities, decreased gain on the sale of equipment of$1.9 million, and increased professional fees incurred as a result of theacquisitions of JCG of $1.0 million.

 

SG&A as a percentage ofrevenue decreased to 6.3% for the three months ended September 30, 2010,from 6.8% for the same period in 2009 and increased to 7.2% for the nine monthsended September 30, 2010 compared to 6.5% for the same period in the prioryear.  Excluding the impact ofamortization of intangible assets for the 2009 acquisitions, SG&A as apercentage of revenues was 5.9% and 6.8% for the three and nine months ending September 30,2010, respectively.

 

**Otherincome and expense**

 

Non-operating income andexpense items for the three and nine months ended September 30, 2010 and2009 were as follows:

 
| ** **                                | ** ** | **Three Months  Ended September 30,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| ** **                                | ** ** | **(Thousands)**                                      | ** ** |
| ***Other income (expense)***              |       |                                                 |       |   |   |
| Income  from non-consolidated investments |       | $                                                    | 1,366      |   | $ | 1,439 |   |
| Foreign  exchange gain (loss)             |       | 80                                                   |       | (170 | ) |
| Other  income (expense)                   |       | (333                                                 | )          | — |   |
| Interest  income                          |       | 151                                                  |       | 90 |   |
| Interest  (expense)                       |       | (1,345                                               | )          | (398 | ) |
| Total  other income                       |       | $                                                    | (81        | ) | $ | 961 |   |

 
| ** **                                | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **2010**                                            | ** ** | **2009** | ** ** |
| ** **                                | ** ** | **(Thousands)**                                     | ** ** |
| ***Other income (expense)***              |       |                                                |       |   |   |
| Income  from non-consolidated investments |       | $                                                   | 4,090      |   | $ | 5,342 |   |
| Foreign  exchange gain                    |       | 266                                                 |       | 33 |   |
| Other  expense                            |       | (964                                                | )          | — |   |
| Interest  income                          |       | 484                                                 |       | 554 |   |
| Interest  expense                         |       | (3,872                                              | )          | (1,463 | ) |
| Total  other income                       |       | $                                                   | 4          |   | $ | 4,466 |   |

 

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For the three months ended September 30,2010, income from non-consolidated joint ventures was $1.4 million which wasprimarily due to income from the St.-Bernard Levee Partners joint venture, aconstruction project near New Orleans, Louisiana.  Income fromnon-consolidated joint ventures for the same period in 2009 amounted to $1.4million, which consisted of income of $1.5 million from the Otay MesaPower Partners (“OMPP”) joint venture, a power plant construction project nearSan Diego, California and a loss of $0.1 million from All Day Electric, anelectrical construction company in Northern California.

 

Income from non-consolidatedjoint ventures for the nine months ended September 30, 2010 of $4.1million included $4.4 million from the St.-Bernard Levee Partners jointventure, a loss of $0.1 million for All Day Electric, and $0.1 million lossfrom Wespac Energy, a developer of pipeline and terminal projects in which theCompany acquired a 50% interest in July 2010.  Income for the sameperiod in 2009 was $5.3 million, which included $6.5 million from the OMPPjoint venture, reduced by a loss of $0.2 million from All Day Electric and the$1.0 million reserve recorded for a foreign operation which was sold in thefourth quarter of 2009.

 

Foreign exchange gains forboth the nine months ended September 30, 2010 and for the same period in2009 reflect currency exchange fluctuations of the United States dollarcompared to the Canadian dollar. Our contracts in Calgary, Canada are soldbased on United States dollars, but a portion of the work is paid for withCanadian dollars, which can create a currency exchange difference.

 

Other expense reflects thechange in the estimated fair value of the contingent earnout liabilitiesresulting from the acquisitions of JCG and Cravens in the fourth quarter 2009,which amounted to an expense of $0.3 million for the three months and $1.0million during the nine months ended September 30, 2010, respectively.

 

For the three and ninemonths ended September 30, 2010, interest expense was $1.3 million and$3.9 million, respectively, compared to $0.4 million and $1.5 million for thesame periods in 2009.  The increase over both the prior periods was dueprimarily to interest payments due on the subordinated debt related to the JCGacquisition.

 

**Provisionfor income taxes**

 

Our provision for income taxincreased $0.5 million for the three months ended September 30, 2010to $5.6 million, and decreased $0.3 million for the nine months endedSeptember 30, 2010 to $13.8 million, compared to the same periods in2009.  The tax rate applied in the three months ended September 30,2010 was 42.7% as compared to 37.0% for the same period in 2009, and 39.2% forthe nine months ended September 30, 2010 compared to 38.0% for the sameperiod in 2009.  A change in tax rates used depends on a combination offactors, including our estimated full year results and assumptions of our mixof revenues and profits in the various tax jurisdictions throughout the USA andCanada. Additionally, for the three months ended September 30, 2010, werecorded a one time tax charge of $0.8 million. This charge consists of truing up the tax returns filed for the yearended December 31, 2009 and calculating the look back interest payable oncompleted lump-sum projects with a sales price in excess of $1 million, andduration of more than two years.

 

**Liquidityand Capital Resources**

 

Liquidity represents ourability to pay our liabilities when they become due, fund business operationsand meet our contractual obligations.  Our primary sources of liquidityare our cash balances at the beginning of each period and our net cashflow.  In addition to cash flow from operations, we have availabilityunder our lines of credit to augment liquidity needs.  In order tomaintain sufficient liquidity, we evaluate our working capital requirements ona regular basis.  We may elect to raise additional capital by issuingcommon stock, convertible notes, term debt or increasing our credit facility asnecessary to fund our operations or to fund the acquisition of new businesses.

 

At September 30, 2010,our balance sheet included net cash and investments of $107.6 million,consisting of net cash of $81.6 million, and $26.0 million inshort-term investments.  We currentlyhave the following credit facilities:

 

·                  a $20 million creditfacility which expires on October 28, 2013, under which we can issueletters of credit for up to $15 million.  At September 30, 2010, wehave issued letters of credit of $4.3 million on this facility, resulting in$15.7 million in available borrowing capacity;

·                  a credit facility of $15million, with the full borrowing amount available at September 30, 2010,which expires on October 27, 2011; and

·                  a $10 million (Canadiandollars) facility for commercial letters of credit in Canada with an expirationdate of December 31, 2012. At September 30, 2010, $5.0 million ofletters of credit (Canadian dollars) were outstanding, with $5.0 millionavailable under this credit facility for additional letters of credit.

 

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**Cash Flows**

 

Cash flows during the ninemonths ended September 30, 2010 and 2009 are summarized as follows:

 
| ** **                                           | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **2010**                                            | ** ** | **2009** | ** ** |
| ** **                                           | ** ** | **(Thousands)**                                     | ** ** |
| ***Change in cash:***                                |       |                                                |       |   |   |
| Net  cash provided by operating activities           |       | $                                                   | 10,121     |   | $ | 22,326 |   |
| Net  cash used in investing activities               |       | (29,480                                             | )          | 5,193 |   |
| Net  cash provided by (used in) financing activities |       | 11,823                                              |       | (18,190 | ) |
| Net  cash used by discontinued operations            |       | (874                                                | )          | (2,920 | ) |
| Net  change in cash                                  |       | $                                                   | (8,410     | ) | $ | 6,409 |   |

 

**Operatingactivities**

 

The source of our cash flowfrom operating activities and the use of a portion of that cash in ouroperations for the nine months ended September 30, 2010 and 2009 were asfollows:

 
| ** **                                 | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                 | ** ** | **2010**                                            | ** ** | **2009** | ** ** |
| ** **                                 | ** ** | **(Thousands)**                                     | ** ** |
| ***Operating Activities:***                |       |                                                |       |   |   |
| Operating  Income                          |       | $                                                   | 35,140     |   | $ | 32,578 |   |
| Depreciation                               |       | 12,575                                              |       | 5,918 |   |
| Amortization  of intangible assets         |       | 4,291                                               |       | 28 |   |
| Gain  on sale of property and equipment    |       | (1,352                                              | )          | (3,183 | ) |
| Net  deferred tax                          |       | (1,598                                              | )          | (591 | ) |
| Changes  in assets and liabilities         |       | (30,511                                             | )          | (871 | ) |
| Non-consolidated  entity distributions     |       | 8,480                                               |       | 3,400 |   |
| Foreign  exchange gain                     |       | 266                                                 |       | 33 |   |
| Other  income (expense)                    |       | (964                                                | )          | — |   |
| Change  in contingent earnout liabilities  |       | 964                                                 |       | — |   |
| Interest  income                           |       | 484                                                 |       | 554 |   |
| Interest  expense                          |       | (3,872                                              | )          | (1,463 | ) |
| Provision  for income taxes                |       | (13,782                                             | )          | (14,077 | ) |
| Net  cash provided by operating activities |       | $                                                   | 10,121     |   | $ | 22,326 |   |

 

Cash flow provided byoperating activities for the nine months ended September 30, 2010decreased by $12.2 million compared to the same period in 2009 due primarily tothe increased use of cash related to changes in assets and liabilities of $29.5million. This was partially offset by an increase in depreciation andamortization of intangible assets of $10.9 million as a result of thecontribution of the JCG acquisition and interest expense of $2.4 million.

 

The changes in assets andliabilities decreased operating cash flow by $30.5 million in the ninemonths ended September 30, 2010, primarily as a result of theacquisition of JCG.  The JCG acquisitionincreased accounts receivable by $35.4 million, offset by a $9.1 millionincrease in accounts payable, for a net increase of working capital of $26.3million.

 

The components of the $30.5million change in assets and liabilities, including the impact of the JCGacquisition, are included in the consolidated statements of cash flow. Thefollowing summarizes the significant changes:

 

·                  a $40.5 millionincrease in accounts receivable. At September 30, 2010, accountsreceivable represented 27.9% of total assets. We continue to have an excellent collection history for our receivablesand have certain lien rights that can provide additional security forcollection;

·                  a $14.2 millionincrease in accounts payable (including $9.1 million increase due to the JCGacquisition);

·                  costs and estimated earningsin excess of billings increased by $11.9 million;

·                  billings in excess of costsand estimated earnings increased by $8.3 million;

·                  inventory, prepaid expensesand other current assets increased by $4.7 million;

·                  other long-term liabilitiesincreased by $4.0 million;

·                  accrued expenses and othercurrent liabilities increased by $2.4 million; and

·                    a $2.3 million increase incustomer retention deposits.

 

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***Investing activities***

 

During the nine month endedSeptember 30, 2010, we purchased property and equipment for$17.8 million in cash, compared to $8.0 million during the sameperiod in 2009. These purchases were principally for construction equipment,including the purchase of an equipment yard for $7.3 million in the Los Angelesarea.  We believe the ownership of equipment is generally preferable torenting equipment on a project by project basis, as ownership helps to ensurethe equipment is available for our workloads when needed. In addition, ownershiphas historically resulted in lower overall equipment costs.

 

As part of our cashmanagement program, we sold $4.1 million in short term investments duringthe nine months ended September 30, 2010. Our short term investmentsconsist primarily of CDs purchased through the CDARS (Certificate of DepositAccount Registry Service) program to provide FDIC backing of the CDs.

 

In July 2010, weacquired a 50% interest in Wespac Energy, LLC for $18.1 million, which developspipeline and terminal projects in the United States, Canada and Mexico.  The investment is being accounted for underthe equity method and is included on the balance sheet as investment innon-consolidated entities at September 30, 2010.

 

***Financing activities***

 

Financing activitiesprovided $11.8 million of cash during the nine months endedSeptember 30, 2010. Significant transactions using cash flows fromfinancing activities included:

 

·                    Proceeds from $20.0 millionin long term debt for equipment financing.  We secured these borrowingswith existing equipment.

 

·                  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 toallow them to pay their personal income tax liability stemming from the JCGprofits prior to the December 2009 acquisition. This final distribution tothe former members of JCG was made in accordance with the terms of theacquisition agreement.

 

·                  $10.1 million inrepayment of long-term debt and capital leases during the nine months endedSeptember 30, 2010.

 

·                    $10.4 million in payment ofthe subordinated note related to the JCG acquisition.

 

·                  $3.2 million was paidas dividends to our stockholders during the nine months endedSeptember 30, 2010, representing an annualized dividend rate of $0.10 pershare of common stock (or $0.075 per share of common stock for the nine monthsended September 30, 2010).

 

·                  $17.8 million wasreceived upon the conversion of warrants to common stock during the nine monthsended September 30, 2010.

 

**Capitalrequirements**

 

We believe that we will beable to support our ongoing working capital needs for the next twelve monthsusing cash on hand, short term investments, operating cash flows and theavailability under our existing credit facilities.

 

**Commonstock**

 

On July 31, 2008, theCompany completed the merger (“Merger”) of Rhapsody Acquisition Corp. (theCompany’s former name) and Primoris Corporation, a privately held Nevadacorporation (“Former Primoris”).  The July 2008 merger agreementprovided that the Former Primoris stockholders would receive up to anadditional 5.0 million shares of the Company’s common stock, contingent uponthe combined company attaining certain financial targets in 2008 and 2009. TheCompany achieved the specified financial milestones for both 2009 and2008.  As a result, 2.5 million shares of common stock were issued toFormer Primoris stockholders in March 2009 and 2.5 million shares ofcommon stock were issued to Former Primoris stockholders in March 2010.

 

As part of the considerationfor the acquisition of JCG, the Company issued 81,852.78 shares of PreferredStock to JCG’s former members.  On April 12, 2010, at a specialmeeting of the stockholders, the stockholders approved the conversion of the81,852.78 shares of Preferred Stock into an aggregate of 8.18 million shares ofcommon stock.

 

At September 30, 2010,there were 806,870 warrants outstanding to purchase the Company’s commonstock.  Each warrant entitled the holder to purchase one share of commonstock at a price of $5.00 per share and was exercisable at any time on or priorto October 2, 2010 at 5:00 PM EDT (“Warrant”), unless earlier redeemed bythe Company.  From July 1, 2010 throughSeptember 30, 2010, a total of 2,742,154 warrants were exercised, with anadditional 773,126 warrants exercised on October 1, 2010, resulting incash proceeds paid to the Company of $17,576,400.  The remaining 33,744 warrants expiredunexercised on October 2, 2010.

 

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On September 7, 2010,the Company adopted a Rule 10b5-1 trading plan with a broker to facilitatethe repurchase of Warrants.  From September 7,2010 through the plan termination date of September 28, 2010, the brokercompleted the repurchase of 245,846 Warrants in accordance with the plan for$277,000.

 

At September 30, 2010,the Company had 450,000 Unit Purchase Options (“UPO”) outstanding.  EachUPO entitled the holder to purchase one unit, comprised of one share of commonstock and one Warrant, at a price of $8.80 per unit.  The Warrants underlying the UPO’s alsoexpired on October 2, 2010.  As a result,the UPO’s, which will expire on October 2, 2011, now entitle the holder topurchase one share of common stock at a price of $8.80 per share.

 

**Creditagreements**

 

On October 28, 2009, weentered into a Loan and Security Agreement (the “Agreement”) with ThePrivateBank and Trust Company (the “Lender”) for a revolving line of credit inthe total aggregate amount of $35.0 million. The Agreement was amended on September 30, 2010 to extend thematurity dates of the two revolving loans provided under the Agreement.  The maturity dates, as amended, are asfollows:

 

·                  a revolving loan in theamount of $20.0 million (the “Revolving Loan A”), with a maturity date ofOctober 26, 2013; and

·                  a revolving loan in theamount of $15.0 million (the “Revolving Loan B”), with a maturity date ofOctober 26, 2011.

 

The Lender has agreed toissue for our account letters of credit of up to $15.0 million under RevolvingLoan A.  At September 30, 2010 and December 31, 2009, totalcommercial letters of credit outstanding under Revolving Loan A totaled $4.3million and $0.85 million, respectively.  There were no other borrowingsunder these two lines during the nine months ended September 30, 2010,leaving available borrowing capacity under Revolving Loan A at $15.7 millionand $15.0 million under Revolving Loan B. The letters of credit may from time to time cover the risk of insurancedeductible programs and can be drawn upon by the insurance company if we failto pay the deductible of certain insurance policies in case of a claim.

 

The principal amount of eachof Revolving Loan A and Revolving Loan B will bear interest at either:(i) LIBOR plus an applicable margin as specified in the Agreement, or(ii) the prime rate announced by the Lender plus an applicable margin asspecified in the Agreement. The principal amount of any loan bearing interestat LIBOR plus an applicable margin may not be prepaid at any time without beingsubject to certain penalties. There is no prepayment penalty for any loanbearing interest at the prime rate announced by the Lender plus an applicablemargin.

 

All loans made by the Lenderunder the Agreement are secured by our assets, including, among others, ourcash, inventory, goods, equipment (excluding equipment subject to certainpermitted liens) and accounts receivable. Certain of our subsidiaries haveexecuted joint and several guaranties in favor of the Lender for all amountsunder the Agreement.  The Agreement and the line of credit facilitiescontain various restrictive covenants, including, among others, restrictions oninvestments, capital expenditures, minimum tangible net worth and debt servicecoverage requirements.  The Company was in compliance with its restrictivecovenants as of September 30, 2010.

 

In January 2008, theCompany entered into a credit facility (as amended) for purposes of issuingcommercial letters of credit in Canada, for an amount of up to $10.0 million inCanadian dollars. The credit facility with a Canadian bank is for a term of5 years, and provides for an annual fee of 1% for any issued andoutstanding commercial letters of credit. Letters of credit can be denominatedin either Canadian or U.S. dollars. At September 30, 2010, totalcommercial letters of credit outstanding under this credit facility totaled$5.0 million in Canadian dollars and $5.5 million in Canadian dollars at December 31,2009.  As of September 30, 2010, the available borrowing capacityunder this credit facility was $5.0 million in Canadian dollars.

 

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 toprovide the contracted services or equipment. Most of these letters of creditare for Canadian exports, of which 90% is guaranteed by the EconomicDevelopment Bank of Canada against “unfair” calling.

 

At the time of the JCGacquisition on December 18, 2009, the Company assumed outstanding lettersof credit of $5.6 million under an amended credit agreement that expired onFebruary 28, 2010. Upon termination of the credit agreement, the Companymade a cash deposit as replacement for the letters of credit, and is recordedas a prepaid asset on the Company’s balance sheet.

 

**Relatedparty transactions**

 

We have entered into varioustransactions with Stockdale Investment Group, Inc. (“SIGI”). Brian Pratt,one of our largest stockholders and our Chief Executive Officer, President andChairman of the Board of Directors, holds a majority interest in SIGI and isthe chairman and a director of SIGI. In addition, John M. Perisich, our SeniorVice President and General Counsel, is secretary of SIGI.

 

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We lease properties locatedin Bakersfield, Pittsburg and San Dimas, California, and in Pasadena, Texas forSIGI.  During the nine months endedSeptember 30, 2010 and 2009, we paid $0.67 million and $0.61 million,respectively, in lease payments to SIGI for the use of these properties. Theseleases with SIGI were entered into on similar terms that we believe would havebeen negotiated with an independent third party.  Also, SIGI occupiescertain space in our corporate offices and pays a pro rata portion of facilitycosts based on square footage occupied.

 

We lease a property fromRoger Newnham, a manager at our subsidiary, Born Heaters Canada. The propertyis located in Calgary, Canada.  During the nine months endedSeptember 30, 2010 and 2009, we paid $0.19 million and $0.26 million,respectively, in lease payments to Mr. Newnham for the use of thisproperty. The three-year lease for the Calgary property began inOctober 2005 and has been renewed and extended until December 31,2014.

 

We own several non-consolidatedinvestments and we recognized revenues on work performed for those jointventures.  ARB recognized $0.08 million and $13.2 million in projectrevenues during the nine months ended September 30, 2010 and 2009,respectively, on the OMPP joint venture. ARB also recognized $1.3 million and$1.0 million in project revenues during the nine months endedSeptember 30, 2010 and 2009, respectively on the All Day joint venture.

 

**Contractualobligations**

 

At September 30, 2010,we had $54.7 million of outstanding debt and capital lease obligations,and $43.1 million of subordinated debt.

 

A summary of contractualobligations at September 30, 2010 were as follows:

 
| **Payments due by period**       | ** ** | **Total**       | ** ** | **1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After  5 Years** | ** ** |
|-------------------------------------------------|------------|-----------------|------------|-----------------|------------|--------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **(Thousands)** | ** ** |
| Debt  and capital lease obligations             |       | $               | 54,660     |            | $          | 12,047             |       | $                  | 24,462     |                    | $          | 15,334 |   | $ | 2,817 |   |
| Interest  on debt and capital lease obligations |       | 6,531           |       | 2,500           |       | 3,177              |       | 731                |       | 123                     |       |
| Subordinated  debt                              |       | 43,116          |       | 23,952          |       | 19,164             |       | —             |       | —                  |       |
| Interest  on subordinated debt                  |       | 3,201           |       | 1,886           |       | 1,315              |       | —             |       | —                  |       |
| Equipment  operating leases                     |       | 5,565           |       | 3,928           |       | 1,637              |       | —             |       | —                  |       |
| Real  property leases                           |       | 11,123          |       | 1,900           |       | 2,506              |       | 1,916              |       | 4,801                   |       |
| Real  property leases—related parties      |       | 7,254           |       | 1,138           |       | 2,372              |       | 1,985              |       | 1,758                   |       |
|                                            |       | $               | 131,450    |            | $          | 47,351             |       | $                  | 54,633     |                    | $          | 19,966 |   | $ | 9,499 |   |
|                                            |       |            |       |            |       |               |       |               |       |                    |       |
| Stand-by  letters of credit                     |       | $               | 9,292      |            | $          | 2,147              |       | $                  | 3,383      |                    | $          | 3,762 |   | $ | — |   |

 

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

 

**Off balancesheet transactions**

 

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

 

·                  Letters of credit issuedunder our lines of credit. At September 30, 2010, we had letters of creditoutstanding of $9.3 million.

 

·                  Equipment operating leaseswith a balance of $5.6 million at September 30, 2010.

 

·                  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 September 30,2010 we had $902.4 million in outstanding bonds.

 

**Backlog**

 

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

 

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Any contract, includingfixed price contracts, may be terminated by our customers on relatively shortnotice. In the event of a project cancellation, we may be reimbursed forcertain costs, but typically, we have no contractual right to the totalrevenues reflected in backlog. Projects may remain in backlog for extendedperiods of time, especially with the longer-term nature of the JCG heavy civilhighway projects.

 

At September 30, 2010,our total backlog was $967.5 million representing an increase of$172.1 million, or 21.6%, from our total backlog of $795.4 million atDecember 31, 2009. We expect that approximately $187.3 million, or19.4%, of the total backlog at September 30, 2010, will be recognized asrevenue during the remainder of 2010, with $107.2 million expected for the EastConstruction segment, $67.6 million for the West Construction segment and $12.5million for the Engineering segment.

 

Backlog by operating segmentat September 30, 2010 and December 31, 2009 was as follows:

 
| ** **                  | ** ** | **September 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 |       | $                                                | 649,355    |                                                       | 67.1       | %                                                 | $          | 572,545 |   | 74.8 | % | $ | 572,545 |   | 72.0 | % |
| West  Construction Services |       | 271,149                                          |       | 28.0                                                       | %          | 136,722                                           |       | 17.9 | % | 166,822 |   | 21.0 | % |
| Engineering                 |       | 47,026                                           |       | 4.9                                                        | %          | 56,012                                            |       | 7.3 | % | 56,012 |   | 7.0 | % |
|                        |       | $                                                | 967,530    |                                                       | 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.  Theproject was performed under a contract from Praxair, Inc. AtDecember 31, 2009, approximately $40 million was included in the backlogamount shown for West Construction Services segment.

 

In April 2010, theCalifornia Court of Appeals ruled that there were deficiencies in theEnvironment Impact Report for the project, and at the same time,Praxair, Inc. provided us with a notice of termination for theproject.  In accordance with the terms of our contract, the projectconverted from a fixed price contract to a reimbursed cost plus margincontract.  Due to the termination, we adjusted our cost estimates for thecontract and reduced the contingent amounts normally associated with fixedprice contracts, which resulted in a reduction of approximately $30 million inour backlog amount at December 31, 2009, as set forth in the tableabove.  In the nine months ended September 30, 2010, we recognizedrevenues of $10.1 million related to this project and at September 30,2010 have a remaining backlog amount of $0.01 million for this project.

 

In accordance with the termsof the contract, Praxair, Inc. has engaged a firm to perform an audit ofthe costs related to the project.  We do not anticipate that the resultsof the audit will have a material impact on our financial condition, results ofoperations and cash flows.

 

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

 

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

 

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

 

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

 

The carrying amounts forcash and cash equivalents, accounts receivable, long-term debt and accountspayable and accrued liabilities shown in the consolidated balance sheetsapproximate fair value at September 30, 2010 and December 31, 2009due to the generally short maturities of these items. At September 30,2010, we invested primarily in short-term dollar denominated bank deposits. Weexpect to hold our investments to maturity.

 

At September 30, 2010,all of our long-term debt was under fixed interest rates.

 

At September 30, 2010,we had no derivative financial instrument for the purpose of hedging futurecurrency exchange rates in Canadian dollars. We intend to continue to hedgeforeign currency risks in those situations where we believe such transactionsare prudent.

 

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**Item 4. Controls and Procedures**

 

***Disclosure Controls and Procedures***

 

As of September 30,2010, we carried out an evaluation, under the supervision and with theparticipation of our management, including our chief executive officer (“CEO”)and chief financial officer (“CFO”), of the effectiveness of the design andoperation of our “disclosure controls and procedures”, as such term is definedunder Exchange Act Rules 13a-15(e) and 15d-15(e).

 

Based on this evaluation,our CEO and CFO concluded that, at September 30, 2010, the disclosurecontrols and procedures were effective at the reasonable assurance level toensure that information required to be disclosed by us in the reports we fileor submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the rules and forms of theSEC, and accumulated and communicated to our management, including our CEO andCFO, as appropriate to allow timely decisions regarding required disclosure.

 

In designing and evaluatingthe disclosure controls and procedures, our management recognized that anycontrols and procedures, no matter how well designed and operated, can provideonly reasonable assurance of achieving the desired control objectives and inreaching a reasonable level of assurance our management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.  The Company’s disclosure controls andprocedures are designed to provide reasonable assurance of achieving theirstated objectives.

 

***Changes in Internal Control Over FinancialReporting***

 

During the last fiscalquarter ended September 30, 2010, there were no changes in our internalcontrol over financial reporting that materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

**Part II.Other Information**

 

**Item 1. Legal Proceedings**

 

From time to time, we aresubject to claims and legal proceedings arising out of our business. Ourmanagement believes that we have meritorious defenses to such claims. Althoughwe are unable to ascertain the ultimate outcome of such matters, after reviewand consultation with counsel and taking into consideration relevant insurancecoverage and related deductibles, our management believes that the outcome ofthese matters will not have a materially adverse effect on our financialcondition or results of operations.

 

**Item 1A. Risk Factors.**

 

In addition to the otherinformation set forth in this Report, you should carefully consider the factorsdiscussed in the section entitled “ *RiskFactors* “ in our Annual Report on Form 10-K for the year endedDecember 31, 2009, which to our knowledge have not materially changed.Those risks, which could materially affect our business, financial condition orfuture results, are not the only risks we face. Additional risks anduncertainties 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 and Use of Proceeds.**

 

On September 7, 2010,we adopted a Rule 10b5-1 trading plan with CJS Securities, Inc. tofacilitate the repurchase of up to $2.0 million of our common stock purchasewarrants (“Warrants”).  Each Warrantentitled the holder to purchase one share of our common stock at a price of$5.00 per share and was exercisable at any time on or prior to October 2,2010, unless earlier redeemed.

 

The following lists thepurchases made:

 
| ** **                                              | ** ** | **(a)**                                            | ** ** | **(b)**                                            | ** ** | **(c)**                                                                                                                        | ** ** | **(d)**                                                                                                                                                                       | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Period**                                              | ** ** | **Total Number  of Warrants  Purchased** | ** ** | **Average Price  Paid per Warrant** | ** ** | **Total Number of  Warrants  Purchased as Part  of Publicly  Announced Plans  or Programs** | ** ** | **Maximum Number  (or Approximate  Dollar Value) of  Shares that May  Yet Be Purchased  Under the Plans  or Programs** | ** ** |
| July 1, 2010 through July 31, 2010            |       | —                                             |       | —                                             |       | —                                                                                                                         |       | $                                                                                                                                                                             | —     |   |
| August 1, 2010 through August 31, 2010        |       | —                                             |       | —                                             |       | —                                                                                                                         |       | $                                                                                                                                                                             | —     |   |
| September 1, 2010 through September 30,  2010 |       | 245,846                                            |       | $                                                  | 1.13       |                                                                                                                           | 245,846    |                                                                                                                                                                          | $          | — |   |
|                                                         |            |                                                    |            |                                                    |            |                                                                                                                                |            |                                                                                                                                                                               |            |  |  |

 

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

 

None.

 

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

 

**Item 5. Other Information.**

 

None.

 

**Item 6. Exhibits.**

 

The following exhibits arefiled as part of this Quarterly Report on Form 10-Q.

 

 

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

 

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(*)                                 Filed herewith

 

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**SIGNATURES**

 

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

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

 

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

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

 

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