PRIM

Primoris Services Corp. Q2 2010 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2010. Primoris Services Corporation is a diversified construction and product engineering company operating in three segments: East Construction Services, West Construction Services, and Engineering. The reporting period reflects the full impact of the December 2009 acquisition of James Construction Group (JCG) and the October 2009 acquisition of Cravens Services, which significantly altered the company's revenue mix and segment reporting structure.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 69.9% for the quarter and 55.6% for the six-month period compared to 2009. This growth is primarily attributed to the inclusion of JCG and Cravens, which contributed $112.9 million in Q2 revenue. Excluding these acquisitions, organic revenues declined due to a slowdown in project awards, particularly in the West Construction segment.
• Margin Compression: Gross profit margins decreased to 13.1% in Q2 2010 from 17.3% in Q2 2009. This was driven by lower equipment utilization in the West segment and lower margins on heavy civil projects in the East segment (JCG) during the wet winter months.
• SG&A Expenses: Selling, general, and administrative expenses rose 94.3% year-over-year for the quarter, largely due to the integration of acquired entities ($6.0 million impact).
• Segment Performance:
  • East Construction: Revenue surged due to JCG and Cravens; gross margin improved to 11.3% from 10.0%.
  • West Construction: Revenue declined 24.8% due to reduced activity in power plant and pipeline projects; gross margin dropped to 14.6% from 19.5%.
  • Engineering: Revenue was relatively flat (-3.5%), but gross margin expanded significantly to 22.2% from 9.5% due to project close-outs and lower reserves.

Outlook, Risks, and Unusual Items

• Backlog: Total backlog increased to $872.8 million as of June 30, 2010, a 9.7% increase from year-end 2009. Approximately $338.7 million is expected to be recognized as revenue in the remainder of 2010.
• Subsequent Event: On July 1, 2010, the company acquired a 50% membership interest in WesPac Energy LLC for $18.1 million, expanding exposure to pipeline and terminal projects.
• Contingent Liabilities: The company recorded a $0.6 million non-cash charge related to the change in fair value of contingent earnout liabilities from the JCG and Cravens acquisitions.
• Liquidity: The company maintains $120.3 million in net cash and investments. It has $35 million in revolving credit facilities with approximately $30.7 million available (after letters of credit). The company is in compliance with all debt covenants.
• Risks: Management cites macroeconomic issues, cyclical nature of construction, weather impacts, and client budget cycles as key uncertainties. A specific project termination (Chevron/Praxair) resulted in a $30 million backlog adjustment, though the company does not anticipate a material financial impact.

Investor Verification Checklist

• Organic Growth: Verify the extent of revenue decline in legacy businesses (West Construction) excluding the impact of JCG and Cravens.
• Margin Sustainability: Assess whether the lower gross margins in the East segment (heavy civil) are seasonal or indicative of a structural shift in profitability.
• Debt Service: Review the amortization schedule and interest rate steps (5% to 8%) on the $46.3 million subordinated promissory note related to the JCG acquisition.
• Backlog Quality: Confirm the convertibility of the $872.8 million backlog, noting that unit-price and time-and-materials contracts are excluded from this figure.
• Contingent Consideration: Monitor the performance targets for JCG and Cravens that could trigger additional stock issuance or cash payments in 2010 and 2011.