Business Context and Reporting Period
Company: Primoris Services Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: A diversified engineering and construction company operating in two segments: Construction Services (underground drilling, industrial facilities, parking structures) and Engineering (furnaces, heaters, combustion technologies). Operations are primarily in the Western United States, with strategic presences in Florida, Texas, Canada, and Ecuador.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Revenues | $111,491 | $367,129 |
| Gross Profit | $19,076 | $54,727 |
| Gross Margin | 17.1% | 14.9% |
| Operating Income | $11,653 | $31,302 |
| Net Income | $7,947 | $22,167 |
| Diluted EPS | $0.23 | $0.67 |
| Cash and Cash Equivalents | $80,346 | $80,346 |
| Short-term Investments | $5,016 | $5,016 |
| Total Debt (Current + Long-term) | $27,695 | $27,695 |
| Operating Cash Flow (9 Months) | $20,344 |
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 24.0% ($35.2 million) for the quarter and 19.9% ($91.4 million) for the nine months compared to 2008. This was driven by reduced activity in refining and water/wastewater sectors and the absence of an unusually large engineering project recorded in 2008.
- Margin Expansion: Despite lower revenue, gross profit margins improved significantly. For the nine months, margins rose from 11.3% in 2008 to 14.9% in 2009, attributed to a shift in business mix toward higher-margin underground and petroleum projects.
- Net Income: Net income decreased 21.2% for the quarter and 22.6% for the nine months year-over-year. The decline is partly due to the change in tax status from an S-Corporation to a C-Corporation following the 2008 merger, resulting in a higher effective tax rate (37.0% vs. 14.7% in Q3 2008).
- Segment Performance:
- Construction Services: Revenue down 14.7% (Q3) and 15.7% (9M), but gross profit increased 6.5% for the nine months due to improved margins.
- Engineering: Revenue down 60.0% (Q3) and 41.4% (9M) due to the completion of a large project in the prior year.
Outlook, Risks, and Unusual Items
- Guidance: Management expects revenues for the remainder of 2009 to decline from the record levels achieved in 2008 due to current economic issues.
- Backlog: Total backlog was $220.8 million as of September 30, 2009, down from $271.0 million in June 2009. Approximately $39.9 million of this backlog relates to the Chevron Richmond Refinery project, which was halted by a court ruling; excluding this, net backlog is $180.9 million.
- Subsequent Events:
- Acquired assets of Cravens Partners, Ltd. (Texas-based civil/utility construction) in October 2009 for cash and stock.
- Terminated a $30 million credit facility and entered a new $35 million revolving line of credit with The PrivateBank and Trust Company in October 2009.
- Risks: Exposure to cyclical economic conditions, specifically in the energy and oil/gas sectors. Uncertainty regarding the outcome of the Chevron project appeal and potential delays in project awards due to global financial turmoil.
- Unusual Items: A $1.0 million impairment charge was recorded in June 2009 related to advances made to a Mexican joint venture (ARB Arendal) due to uncertainty in customer negotiations.
Investor Verification Checklist
- Chevron Project Status: Verify the legal status of the Chevron Richmond Refinery project and the likelihood of the $39.9 million backlog being realized.
- Backlog Quality: Assess the composition of the remaining $180.9 million net backlog and the timing of expected revenue recognition.
- Debt Covenants: Review the restrictive covenants in the new $35 million credit facility (minimum tangible net worth, debt service coverage) to ensure compliance.
- Joint Venture Exposure: Monitor the resolution of negotiations for the ARB Arendal joint venture in Mexico to determine if further impairments are necessary.
- Acquisition Integration: Evaluate the accretive impact of the Cravens Partners acquisition on future earnings.