Primoris Services Corp (PRIM) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to Primoris Services Corporation 2010 second quarter conference call. At this time I would like to inform you that this conference is being recorded and that all participants are currently in a listen-only mode. I will now turn the conference over to Devin Sullivan, please go ahead, sir.

Thank you. Thank you for joining us today. Our speakers for today will be Brian Pratt, Chairman, President and Chief Executive Officer of Primoris Services Corporation and Peter Moerbeek, the Executive Vice President and Chief Financial Officer. Before we get started, I would like to remind everyone, the statements made during today's call may contain certain forward-looking statements, including with regard to the Company's future performance. Words such as estimated, believes, expects, projects, and future or similar expression unintended to identify forward-looking statements.

Forward-looking statements inherently involve risks and uncertainties, including without limitation, those described in today's conference call, and those detailed in the risk factors section and other portions of Primoris's filings with the Security and Exchange Commission, including the Company's form 10-K, which was filed on March 11, 2010 and form 10-Q, for the second quarter, which will be filed on August 9, 2010. Primoris does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. I'd now like to turn the call over to Brian Pratt. Brian, please go ahead.

Thanks, Devin. Good morning, everyone. As we end our second quarter and almost halfway into the next quarter, I am somewhat pleased with our results. The integration of James Construction Group into our eastern business unit continues to proceed well. This unit is a strong contributor to our Q2 results, and indications are this trend will continue for the foreseeable future. As most of you know, our Western segments suffered the cancellation of two large projects in the second half of 2009 in our industrial division. This sudden loss of work in process resulted in less than desirable results for the group, we are seeing a recovery in our backlog and the relative workload. This is evidenced by a recent announcement of several new large power projects, which have strengthened our backlog for this segment,

To the extent of mirroring the pre-financial crisis level we enjoyed over a year and a half ago. Underground group and our construction West segment, continues to navigate its markets well and enjoy good work flow and margins. The Engineering segment is also performing well in spite of lower volumes, they continue to be good bottom line contributers. Both on quest performance and market conditions show more and more signs of additional improvement. Revenue for the quarter increased nearly 70% to $203 million, with a majority of that growth coming from our Eastern Construction Services group. Our Western groups results in Q2 comparison continued to be impacted by both sluggish economic conditions, we think now improving a bit, and an inability to hurdle some exceptional comparables in the 2009 second quarter.

We've maintained our disciplined approach to pricing, which we believe is reflected in solid profit margins for the quarter. We do believe that this discipline will bring additional benefits, via our recovering backlog to downstream earnings. As we have said before, we have not chased unprofitable business especially on smaller less technically challenging jobs, where competition remains high. A significant number of our markets and geographies remain very challenging, but we are continuing to see good opportunities for our legacy and niche skills. These specializations along with leverage in our geographical presence and size are allowing to us continue to operate with a reasonable profit and to add quality profitable backlog. Since January of 2010, we have announced over $500 million in new project awards, with more than 60% of these awards on a dollar basis, booked after the close of second quarter.

The breath and flavor of these wins is very encouraging, with the split being nearly equal between our Eastern and Western segments. While our parking structure and water and wastewater markets remain intensely competitive, our groups in these markets are maintaining reasonable proximately to profitability ability and are seeing signs, all be it, small signs, of market improvements. Our engineering group keeps plugging away and has demonstrated remarkable resilience in contributing to our profitability. We see improving prospects for this group, largely on the international markets, that these are markets well known by us. At June 30, 2010, our backlog was $872.8 million, up more than $48 million from the end of the first quarter in 2010. As we announced last month, however, our backlog as of today is in excess of $1 billion, owing to the new contract awards I referenced earlier.

I would like to remind everyone that backlog is not a metric that we highlight as brightly as some of our peers or investors. The reason is our business model generates a significant amount of revenue from unit price, fixed price, MSA's and other contracts that never see our backlog. So while we expect that approximately $339 million, that's $339 million, of total backlog at June 30, 2010, will be recognized as revenue during the remainder of 2010, we also expect to realize a significant portion of our revenue for the balance of the year to come from work that has never represented or back -- I'm sorry comes from work that's never represented in our backlog, or quick-turn work yet to be back logged. Having said that, the billion dollar markets are remarkable milestone for our Company and myself, and it's something worth announcing, especially in these more trying times.

It recognizes the ability of our entire team to build good backlog during a difficult industry environment. It also reflects the progress we have made growing our business since becoming public in 2008, with the aid of a very supportive shareholder base. We remain well capitalized and ended the quarter with more than $120 million cash and equivalence and a modest debt profile.

This puts us in an enviable position with a level of balance sheet flexibility that allows us to consider any number of organic and acquisition-driven growth opportunities, while ensuring our financial partners will remain comfortable with your support of both our ongoing operations and growth. An example of this type of opportunity is the acquisition of our stake in WesPac LLC, which we announced in July. WesPac has extensive experience in developing pipeline and terminal projects in the United States, Canada and Mexico.

We're very familiar with WesPac and have worked with their principals for decades on numerous projects. Because of our investment, Primoris will receive access to a stream of potential projects in a very attractive niche market, in which we are experts. With a partner in which we have great faith in their ability to execute. WesPac gains a participant with a proven track record and a financial and management operating infrastructure that should -- that they should be able to advantage to win and finance new projects. We think we'll begin to see construction opportunities from our subsidiaries through this enhanced relationship as soon as the second half of 2011. In summary, in the continuing challenges for us on our markets aren't much different than those of our peers.

However, we've built a terrific base in which to weather and even profit from circumstances presented by such difficult environments. As is the case with most of whom we share our industry, we remain unable to say things are back to normal more profitable times. But we can say that recently we have experienced the marked improvement of our markets and our encouraged by what we are experiencing in our every day bidding wars. I'd now like to turn the conversation over to Pete Moerbeek, our Chief Financial Officer. Pete?

Thank you, Brian and thanks to each of you for taking time to join us on this call. I will review some of the highlights of the second quarter of 2010. And I would then be happy to go into further detail during the Q&A segment. Our second quarter 2010 revenues of $203.2 million were an increase of 69.9% from the second quarter of 2009. This was due primarily to the acquisition of James, and to a lesser extent Cravens.

These acquired businesses contributed $112.9 million in revenues for the second quarter. By contrast, revenues at our legacy businesses declined by $29.9 million from the prior-year period. This decline in revenues was across all of our business segments, but notably sewn underground in industrial projects in the Western Construction Services segment.

Our overall gross profit for the second quarter of 2010 rose by $5.9 million to $26.6 million, due primarily to a $12.8 million contribution from the acquired businesses and higher margins resulting from the successful close-out of projects in the West Construction Services segment. As a percentage of revenues, gross margin declined to 13.1% from an unusually high 17.3% in last year's second quarter, due to some lower asset utilization in the West Construction segment, and the lower margins in the East Construction segment, especially in our water and wastewater construction business.

On a segment basis for the second quarter of 2010, our West Construction Services segment revenues were $69.8 million, a 24.8% decline from $92.8 million in the second quarter of 2009. Reflecting these core business volumes, we incurred a $7.9 million decline in West Construction gross profit for the second quarter of 2010. As Brian discussed earlier, we've seen some pick-up in the energy side of our business in recent months. At our Engineering segment, revenues declined by about $0.5 million from the prior-year second quarter, primarily attributable to the benefit in 2009 of closing out several larger projects.

Gross profit rose by $1.6 million, due to lower profit margins in the 2009 period because of reserves taken. As Brian mentioned, we are seeing slow but steady growth in this segment. In our newest segment, East Construction Services, revenues rose to $120.5 million, primarily attributable to the James Construction crew, their contribution offset a $5.9 million decline in our water and wastewater business. Gross profit rose to $13.6 million, or 11.3% of revenues from $1.4 million or 10% of revenues in last year's second quarter, due almost exclusively to James.

Before discussing selling general and administrative expenses, let me talk about two aspects of purchase accounting as it relates to our acquisitions in the fourth quarter of last year. We recorded an amount of approximately $32 million for intangible assets, such as customer lists, [praveam] and acquired backlog at the time of the acquisitions. And we amortizing these intangible assets. In the second quarter this year, we charged amortization of $606,000 to cost of revenues and an additional $885,000 to SG&A expense. That works out to a tax effected impact of just over $0.02 per share for the quarter.

The second impact of the acquisition accounting, is the impact of recording an expense for the potential earn-out shares. If the seller's obtain their financial target for this year, we will issue shares with a value of $10 million for James and a lesser number for Cravens. Purchase accounting requires that we recognize an expense when there is a change in the probability and present value for these earn-out shares. At the end of the second quarter, we had expensed $621,000 so far this year, and for the James earn-out, the balance sheet shows the liability of approximately $8.8 million.

Thus, if JCG, attains a financial target, we will need to recognize an additional expense of $1.2 million before the end of the year. Switching back to our results, our selling, general & administrative expenses, increased by $7.7 million or 94.3% for the 2010 second quarter, compared to the prior-year period. Approximately $6 million of the increase was attributable to the acquisitions in the fourth quarter, but the balance of the increase attributable to higher professional fees, decline in profit on sale of equipment and a slowdown in product engineering activities.

In last year's quarter, we had a gain on sale of assets of approximately $300,000 more than this year's amount of $89,000. Operating income for the 2010 second quarter was $10.8 million, or 5.3% of total revenues, compared to $12.6 million or 10.5% of total revenues for the same period last year. Net other income for the second quarter of 2010 was $0.5 million, compared to net other income of $1.4 million for the second quarter of 2009.

Reflecting an increase of $700,000 in interest expense on the subordinated note from the JCG acquisition and the $300,000 associated with the change in fair value for the earn-out stock that I discussed earlier. Income from continuing operations before provision for income taxes for the second quarter of 2010 was $11.3 million or 5.5% of revenues, as compared to $14 million or 11% of revenues in the second quarter of 2009. The provision for income taxes for the second quarter was $4.2 million this year, using an effective tax rate of 37.1%, compared to $5.4 million with an effective tax rate of 38.3% in last year's prior -- in the prior-year's quarter.

Net income for the second quarter of 2010 was $7.1 million, or $0.16 per diluted share, compared to net income of $8.6 million or $0.26 per diluted share in the same period in 2009. Net income for the 2009 second quarter included a $0.01 per share loss on discontinued operations. Fully diluted shares outstanding for the second quarter of 2010, increased by 38.2%, to 45.4 million shares from 32.8 million shares last year's second quarter. This change reflects the 8.2 million shares issued for the James acquisition, 2.5 million shares issued as a firm final earn-out portion of the Rhapsody and Primoris merger, the conversion of 866,000 warrants, and the diluted impact of the remaining warrants outstanding.

We maintained a solid financial position at June 30, with cash and short-term investments totaling $120.3 million, working capital of $66.1 million, total debt and capital leases secured by equipment of $59.7 million, subordinated acquisition debt of $46.3 million, and stockholder equity of $159.9 million. Additionally, the balance sheet included a $9.9 million liability representing the estimated fair value for earn-out payments related to the 2009 acquisition.

At the end of the quarter, we added $20 million to or debt, secured by equipment at very attractive interest rates, in anticipation of the $18.1 million investments we made in WesPac in early July. At June 30, total backlog was $872.8 million an increase of $77.4 million or 9.7%, from total backlog at December 31, 2009. Backlog by segment at June 30, was as follow, East Construction services, $618.4 million, West Construction services, $193.4 million, and engineering $61 million.

We expect that approximately $338.7 million or 38.8% of the total backlog will be recognized as revenue during the remainder of 2010, with $210.5 million expected for the East Construction Services, $88 million for the West Construction segment and $40.2 million for the Engineering segment. I will give my usual warning regarding backlog, namely, that backlog is not a guarantee that we will get the business nor is it the comprehensible indicator of future revenues. Depending on the time of year, a significant portion of our revenues can be derived from projects that are not part of backlog calculations.

At June 30, there were 3.795 million warrants outstanding. Subsequent quarter's end, we have received $3.3 million for the conversion of 671,000 warrants to common stock. All warrants will expire on Saturday, October 2, this year at 5.00 pm, New York time. Finally, we expect to file our form 10-Q at the SEC today and with that, let me turn the call over to the operator so that we may respond to your questions. Operator?

(Operator Instructions) Your first question comes from the line of Lee Jagoda with CJS Securities.

Good morning. It's actually Arnie Ursaner backing up Lee. A couple of quick questions. What percent of your business right now is private versus public?

We've seen a pretty large increase because of the JCG work. We're probably still 40% public and 60% private, magnitude.

Okay. And just remind us again of your -- what you believe is your direct exposure to state funding, specifically California.

Direct exposure is very little. We don't do a lot of work for Caltrans or any of the state agencies. Even DWR, we don't work a lot for.

Okay. And my final question, if I can. More globally, transmission and distribution and renewable energy activity is or was one of the corner cornerstones of the expected growth in the Company, looking out to 2011 and beyond. And we've seen a large number of these projects either be deferred, postponed, not expected to come back until probably mid-2011 at the earliest. How are you seeing that part of the business? And, how important is that segment? And how might we think about it on a go-forward basis for Primoris?

Your going to use the rest of the hour, aren't you, Arnie.

Just -- you can answer it in a minute or two. I know you can.

Well, we've seen -- renewables remains a quandary. There's just not a lot of financing available for those. There be has been some stimulus money set aside for some larger projects. But short of some real subsidies of some kind, renewables just aren't competitive. And compound that with difficult financing environment, I just don't see them launching. We are doing some small renewables, if you look at you are release. Gorgon, a project is a waste heat project. It's not really a direct renewables, because it relates to an LNG plant. The T&D part of it, our T&D is mostly on gas distribution and products and crude. We did see some electrical T cancellations. On the D, side we're still seeing pretty healthy environment for that. That's mostly based on local utilities. And they -- they don't have the continued growth they had a couple years ago. So they're spending a lot of their money doing what's called rule 20 work, where they take overheads and bury them and upgrading their D side. There still is the transmission work here in California is yet to be built. Although it's in process. So I haven't seen any T in California get canceled on the electrical side. On the pipeline side, we still see a fairly good flow of projects, although diminished from what they were a couple years ago. But the MSA, work continues pretty strong for us. There is no new subdivision work, so the D side of what we're doing on the gas is mostly replacement of old services that are you know, 80, 90, 100 years old that need to be changed out because of seismic issues or just general [degrogation].

Thank you very much.

You're welcome.

Your next question comes from the line of Richard Paget with Morgan Joseph. Please go ahead.

Good morning, guys.

Hi, Richard.

Brian, I wanted to know if you could talk a little more about the bid environment, I know you said that things are getting better but you're still cautiously optimistic. I just want to get a sense of with the way the bid environment is going, do you expect to continue to grow backlog sequentially throughout the balance of the year? Or that these -- this recent influx of order flow might have been some pent up demand and a little near term pump, might not be sustainable over the next couple of quarters?

You know, it's cats and dogs. The smaller work remains extremely competitive, particularly on the water and water wastewater and in the parking structure business. Anything that doesn't require a large bond or a large financial statement is very, very competitive. So you know that hurts us a little bit on the quick-turn work. And only in some markets. The power work, which was a little pent up because of the credit markets, and there wasn't a lot of regulatory clarity here in California. It's kind of back. We picked up two nice power projects this last quarter. And there's several more bidding. We have several more in house right now. We're going to run out of capacity I think in terms of our large project teams before we run out of opportunities to bid there. I think we're kind of a big dog in that market on the West Coast. Although there is competition. The pipeline work is getting a little bit more competitive, particularly on the small end. The big end, most of that's done under MSAs. The work in Texas for the Eastern segment is really, really tenacious. The smaller work particularly. Very, very competitive for Cravens and Cardinal. The larger work is also competitive but not nearly to the extent because of the bonding requirement kind of peels out a lot of the smaller capitalized competition. But it's -- it's tough. I think we're holding to our mantra that we're not going to take cheap work and it's beginning to bring rewards. Because the work that we do have, is good, solid backlog. And I do like -- they aren't the great margins we were achieving a couple years ago, but they're still good margins. We're not buying any market. We really aren't. So I'm pleased. I don't know if the backlog will continue to grow. It probably will because these large power jobs that have just been awarded, we're not going to serious burn off until late fourth quarter. One is design-build and that takes a little while to get it designed before we can really start burning some dollars in the field. And the other one is only partially designed and they're trying to expedite getting it starting, but I think it's going to be slow starting. So the big power work to help the western side will be a little bit late in starting to it make much impact in this year. But it will -- it's going to lay there and not get worked off so I would look for backlog to continue to grow through the year. But I can't promise that, of course.

Okay. Is there any way to quantify term backlog that is split between the kind of larger project, that probably has better margin compared to the smaller project work?

Well, the smaller project work burns off for the same quarter you book it. So you really don't ever get visibility on it. Most of the backlog you have there is larger projects I would guess. And based on Pete's number of 300 plus burning off for the next six months, out of the billion, obviously, most of that's big work or you'd see it burn off quicker.

Okay. Great. I'll get back in queue.

Your next question comes from the line of Al Kaschalk with Wedbush Securities.

Good morning, guys.

Hi, Al.

Just a follow-up on the backlog question, Brian. Not to hammer this, but it does seem as if there is a fair amount of backlog that will continue in the 2011. And I guess my question is directed at, is there any quarter or projects contained in that, that may be lumpy, that you may take a little bit bigger drop in backlog as it's worked off. Obviously I'm not considering anything you'll be adding in. Just trying to think through, because I think Pete said 300 -- the round number 340 million, burns off second half of this year. You're at $1 billion today. That leaves a couple of quarters of work for 2011.

I wouldn't see a drop-off. I just see a slower build. I don't think we're going to be -- you can't straight line, prorate this work and say it's going to work off over six quarters or four quarters. The power work again on the West Coast is slow ramping up. And a lot of the heavy highway work that James builds is a little bit slow wrapping up. Some of that's design-build. So you spend a lot of time and energy on engineering up front, but you don't generate a lot of dollars. So I don't see a drop-off or a spike. Really what I see is more of a gradual build. Because this is bigger work and you're not getting the quick hits that you get off the immediate -- the small work.

And then on the MSA work, I know it doesn't get into backlog. Where do you feel the Company is at in terms of your ability to look out to quarter or two on the level of revenue from MSA type contracts? Are we still trying to -- climb back to levels?

We never really lost any serious component of MSA work. It's normally back-end -- annually weighted towards the back two quarters. The utilities typically kind of get their feet on the ground the first quarter. Get engineered and then they spend the serious construction dollars in third and fourth quarter. Historically, what they've done -- it's actually what makes our market, because of our capacity and that business, we're able to handle the work, where sometimes our competitors can't, as lumpy as it is. But we really didn't suffer a big setback in terms of MSA, work. We just renewed several of them not too long ago, it's competitive. These are typically longer term MSAs. Some of them are, three, four, five years. So other than the seasonality of it, we really don't -- we really haven't suffered any changes in our MSA work.

And then a final. Just kind of a two-part. The easy part. Pete, I was wondering if you could share the cash flow from ops, either for the quarter, or for the first six months? And then the real question I guess is driven at, it doesn't appear that there were a lot of one-time items in the quarter, whether that was benefits or charges. And I was wondering how you thought through the margin profile of the work, given the number of acquisitions the Company has done and the dynamics in the end markets. So is Q2 a good proxy for the balance of this year or should we think about some of the in and outs, including the power market that could help drive that a little bit higher?

Let me do the easy one. We did $5.152 million of cash flow, positive net cash provided by operations for the first six months. And on the second one, we are certainly in a much more historical level than we were last year's second quarter. I think that if you look out going forward, I hate to be locked in and say this is what we're going to see, so we did not see dramatic benefits in any one of our segments from, we obviously -- because the numbers are fairly small, showed a fairly good increase percentage wise in engineering than I think you're going to see us go a lot more towards historical numbers in the engineering the rest of the year. But I think that overall the Eastern Construction Services margins are about where they are. And my guess is will come down a little bit in the west as we start to gear up for some of the larger construction projects. But it's not as far out of line as the second quarter last year was compared to where we ended up for the whole year.

Thank you.

If I could supplement, Pete, a little bit. The larger projects we start were fairly conservative in the way we reflect those because of the uncertainty when they're first starting. So we have a tendency for the margins to grow over the life of the project, the gross margin. And so when you start a new fleet of projects, as industrial really is, I mean, when they lost those two jobs, one was just starting. Which was about a $100 million power job -- cost plus for one of the refineries and as you know, Al, one was in the middle. Both of them were pretty traumatic, as we had booked space and booked teams to do those jobs. But going forward, so industrial is kind of starting almost from scratch. So as these projects build, you probably should see increased margin as the projects mature. Hopefully you will, if were right in our assumptions. But they do diminish, we do see a little of diminished project margin at the start.

Your next question comes from the line of Tahira Afzal with KeyBanc.

Good morning, gentlemen.

Hi, Tahira.

That's good quarter. Many congrats. I know it's a fairly tough environment for ENC companies. Just wanted to go over some -- the trend you're seeing in the bidding activity on the power plant side. On the natural gas power plant side. Could you talk about what the triable are behind that, if you don't mind.

Most of what we're seeing, we don't bid a lot of power off the West Coast, we can. James bids some power small jobs. Most of what we see is in California, Nevada, and Oregon and Washington. But Pete had said earlier that our mix had remained about 60% private. I think we don't typically look at private versus public. I think actually it may have shifted a little bit because the power jobs we're seeing are either public or quasi public. There are a few private jobs that were -- actually one we're working towards negotiating. But most of the power we're seeing or public jobs in California, they continue to -- they continue to retire older plants and bring on new plants. One of the big stimulus to the power here, is we've talked before about the poor guy that has to balance renewables with gas and all the other aspects of power, when somebody flips a switch, he's got to deliver power. One of the answers to that, is the Siemens and G.E. both have new technology, which allows you to run your merchant plants more as peekers. So, in other words, you can turn them on and off based on the need, not just run them 24 hours a day, which most big merchant plants kind of require that or they fly apart over a period of time. That is causing some growth because of the one project we picked up, one private project we're looking at picking up has got the new Siemens technology and has to do with -- I don't want to bore you with the technical side. That's kind of driving us, plus California is -- we're still popping out babies here. We still need electricity, in spite of the economy. So we still need -- we still need to add power, because we were pretty marginal a couple of years ago. As you know Tahira, virtually nothing got built. So we're catching back up again. It's a really plentiful field of opportunities on the power side right now, traditional.

Okay. That's very helpful. The second question is in terms of west side. I know that it's levered a lot to terminals, et cetera and I would love to get an idea of what, you're seeing out there in the sort of longer term that makes you excited about this business?

Well, on a micro-basis with California is, we've talked, our oil is depleting and we need to import more oil. Some of the angels we're looking at with WesPac is shifting from transporting domestic oil, home-grown oil to foreign oil. There's a new raft of terminals that need to be built, offloading facilities and then distribution systems that need to be in place so we can take advantage of foreign crude, or we're going to be really short really quickly. We see that. At WesPac is not out competing with the big guys. They're actually working with a lot of the major oils. They're a little bit more fleet of feet, so they can -- permit and build projects that the majors can't build or don't have the staff to build or can't build nearly as efficiently. In California we see some opportunities there. We have the same problems in the Gulf Coast. We are still running out of domestic oil, and where the oil is coming from and where it needs to go is slightly changing. So we see opportunities there in the Gulf Coast on the terminal lane side. WesPac typically doesn't do a lot of grassroots or green field development. They typically come in and rehab or re-complete or rebuild facilities and use existing facilities. So the permitting is a bit easier. Plus being a small local guy, they don't usually run into the kind of resistance that the big oils run into when they want to build something. Now obviously we're a little bit disappointed with the B.P. issue and how that might impact permitting for new projects like this. That's of concern to us. But that's where we see the opportunity, plus some gas processing. We're just now beginning to work with them. But we have no shortage of opportunities to look at. And some of them are fairly far along in terms of development process.

Okay. Great. I guess last question on the macro side, you touched on B.P. And there's some investors who have been concerned about any impact on the Louisiana economy. Would love to get a sense from you. I haven't seen bidding's and letting slow down at all. I would love to get a sense from you on what you're seeing in regards to James?

We haven't seen any letting slowdown. The work is there. It's become a little more competitive. We have a few stray dogs wandering into the yard wanting to share our bowl of food. But in general, the lettings have been holding up well. Texas is kind of a really -- as much focus right now as Louisiana is. We picked up a job there. And part of our strategy to try and do more work along that I-35 corridor. But, New Orleans, the core keeps turning out work. There's a there to do to rebuild what was damaged. The highway work continues on. They're looking at some design-build. There's been some controversies in that. But in general the work is there. It's just a little bit -- we're seeing a few more competitors.

Got it. Okay. And last question and then I'll hop back into the queue . You have talked about MSA as percentage of your business in the past, in terms of revenue. I would love to get a sense, as these power plants ramp up in terms of earnings -- revenue contribution, how should we be viewing MSA work as a -- percentage of revenue as you go into 2011?

MSA work is -- we experienced in a couple difference places. One of its pipeline work and distribution work, gas distribution work here on the West Coast. And that's going to continue on, kind of the clip. I believe that it's run so far, although the couple utilities are a little bit behind on their regulatory requirements to upgrade their systems. So I could see a crescendo in that part of the work. Also we see a lot out of the -- James has the group that does a lot of mine, open pit mine maintenance. And a lot of MSA work there to. Some of that is derivative to the general economy. But it's also derivative to tightening the environmental regulations, which we don't seem to suffer from a lack of those. So we think the MSA work will continue fairly strong also. I really couldn't give you too big of a idea how big it is without just a pure guess. Pete, you have any idea?

I think we're -- right now running at a rate that gets us in the 50 million to 70 million out here in California and this year. And I'm not so sure that it won't go up slightly next year. But, one of the things that being a larger company, it becomes much lesser percentage of our total revenues.

Got it. Okay. Thank you very much, gentlemen.

Don't forget, Tahira, that's year-end heavily weighted. That's big-time third and fourth quarter. You don't see the first two.

Okay. So you have outside of the $338 million, out of backlog, would you say the MSA is additive to that, outside of that? Or is it a bit of overlap?

No, it will be additive.

None of that's in the backlog.

Okay. Great quarter, guys. Thanks a lot.

Thanks.

Your next question comes from the line of Rob Young with Williams Smith and Company.

Yes, good morning.

Hi, Rob.

Just quickly on kind of a three-part question on the M&A front. Can you talk a little bit about the pricing environment, the magnitude that might look to accomplish, as well as whether or not you'll be interested in consolidation or kind of like the WesPac from one liner standpoint?

That was a three-part question. Did we miss one of them?

Well, our pricing is -- it's got pretty egregious there a while back. It's more reasonable now. We're seeing a lot of things priced in the 3.4, 4.5, 5. Although it has rebound a little bit depending on the industry you are in. We are a little bit hard pressed to advantage that because we don't have -- as good occurrences as we like to have, compared to our peer groups. We think our stock is at lot more valuable than apparently the market does. So we have to be a little more creative in -- you saw that with James. We have to be a little more creative in how we structure a deal, because obviously we want management to have long-term alliance with us in terms of our goals. So we want them to have shares as dear as they are to us. And so we end up using cash and a little bit of stock and shares to management. And we're able to kind of tune that, where management ends up with a higher percentage of stock than does sometimes the absentee sellers. But we're seeing in our markets anywhere from 3.5 to 6, I would have said five, six months ago. There's a lot of people running towards some of the less bad markets. I'd like to say better, but less bad typifies it. And that's driving up some of the multiples in the areas where the hurt mentality is taking people. But in the niche stuff, it's a mixed bag.

Okay.

We're not selling for much different than that, it's hard to do those kinds of deals without using cash. We kind of like having the cash, too.

Have you talked anything just on overall size at all? Or is it just as kind of opportunities present themselves?

Well, we want to keep it transactionally appropriate. So we're not looking at too many small things, unless they just really, really good fits. So, we look at larger things, just because of the transactional -- the cost.

Right. Okay. Sorry.

There isn't a dearth of things to look at. I can tell you that.

Okay. Okay. And kind of on the other side. We've talked about water, how that requires a deep relationship business. You kind of need to be over there in order to really benefit from that type of work. I mean, is that something that you look to continual to grow or is that something that, continues to kind of just chip along as we move down through the year?

The --

In terms of like an investment, or are you kind of -- do you look to kind of be a net investor and divesture of that kind of business?

We're growing organically our geographic presence. We've opened up our presence and we've actually gotten some work up in kind of the southeast, the north part of the southeast. That market is extremely competitive because it's -- everybody that can write a bid bond is deemed qualified by public -- by the law. There is no real pre-qualification issue, unless you get into kind of the unique situation, where it's design-build, or there's a public-private partnership of some kind. We like the market. Eventually it will come back. We've seen it kind of hammered by two things, kind of a lack of funding, due to the paceness of the economy. And the fact that a lot of the guys -- that's the first place you can run if you run out of work in the private sector, you get into water and wastewater. Because it's so prevalent. But we do see some of our markets, the available work increasing. And we've seen the first wave of the guys that have run to that business. We think they'll probably last another six months or a year and we might see a second wave. But the first wave, most of them will be gone.

Okay. Perfect. And so from your inquisitive strategy, is that kind of your -- your expectations, your strategy to increase the flow? Or has there been some other discussions to kind of increase the volume?

Are you talking about our shares?

Yes.

We're going to see what impact is after we get the warrants converted.

Okay.

Which is hopeful -- well, we'll know for sure in less than two months. And at that time I think the Board will look to see, what the opportunities are, kind of depends where we are, how many warrants were converted, where they ended up and I think that's something that's a -- certainly nothing that will happen in third quarter. Worry about it as the year goes on.

Okay. And then lastly, these power projects that you announced, were those base load, or were those peekers?

A little bit of both. One of them can go both ways. You have to be careful how you say that in California. And the other one is a merchant.

Okay. Great. Thank you very much.

Your next question comes from the line of John Wolf with Oregonian Capital.

Hi. A couple of quick questions. The $620,000 charge, your estimate, the change in the estimate of the earn-out payment. Was that all in the second quarter or was that spread over the first two quarters?

No. Both first and second quarter. First quarter we ended up putting it up in SG&A expense and probably belongs as a separate line item. And it really represents the undoing of the present value calculation that we made at 12/31.

Okay. And secondly, just in terms of margins, I appreciate your comments earlier about, sort of margin trends in the back half of the year. But if I'm looking on more of a kind of long-term normalized basis, would you say that currently you have a higher or lower percentage of, these sort of large start-up projects that you're working on then you would kind of expect to have, again on a another long-term normalized basis? I guess I'm just trying to figure out if sort of the current, margin levels are compared to a more long-term normalized basis, are being unduly depressed or not by a higher than sort of average number of these large start-up project expenses.

No. The current numbers wouldn't have changed at all, because those numbers aren't bled into that number yet. In other words, those projects haven't started yet. So you're not seeing any impact at all by those margins.

Okay.

Yes. You got to remember the Company, the complexion of the Company has changed dramatically over the last six months, because of the addition of James. And so the -- to go back and look at historical gross margins, you really have to be careful you look at the segmentation, more than the overall.

Okay. Great. Okay. Thank you.

Your next question comes from the line of Al Kaschalk with Wedbush Securities.

A couple of follow-ups, guys. Brian, on the environmental regulation scrutiny that's certainly increased over the years and continues. Do you expect that to cause further, not only growth opportunities in the market, but probably more importantly driving an increased competition? And that should -- whether that's just a stray dog today, do you expect more strays to come into your markets over time here?

I never say it can't get any worse. But I'm not sure how much more environmental regulation can drive industry. It's already extremely oppressive. Obviously, even more so in California. I mean we have our own Cal-OSHA. The rest of the country has OSHA, we have California OSHA. Because we can do it worse. But -- so I don't know that you'll see a lot more changes in what's going on due to the environmental-- increase in environmental standards. With the exception of one thing in California, they have what's called the once through rule, where you can't use ester aerials or ocean water to cool power plants any more. So you'll be able to bring the water up, but you have to recycle that. And that should be a fairly significant business opportunity for us, because there's a lot of plants that do once-through cooling. That takes effect over the next couple of years. And that means more air-cooled condenser units and those kinds of installations. So we see an opportunity there. Most of the areas we see more oppressive, environmental rules to our clients, are areas that require fairly specialized and specific contractors to do the work. Not general guys that can kind of take a briefcase around the country and pick up subcontractors as they go. So it's harder to penetrate our markets on the West Coast with those kinds of characteristics. On the East Coast, a lot of that work isn't regulatory driven. Other than the clean water stuff, which is what we talked about, the water and waste water for us is just not real opportunity at this point. So I think there's -- there's some more work here in California. The rule is, is California goes, so goes the rest of the country. But I'm not sure that's going to apply. Because I think regulations in general, we're over regulated and I think maybe some of the other states are going to start pushing back in terms of competition. I think we'll continue to get our fair share.

Helpful. And then, Pete, just two questions to tighten up the commentary. The acquisition accounting in the quarter, I think you gave some gross margin impact and others in SG&A. Are those run rates then for each quarter going out? And then, secondly, on the earn-out share, did I hear correctly that you had recorded $10 million on the balance sheet? I see there's $9 million number on the balance sheet. But you could be at a spot where you need to book another 1.7 or 1.5 depending on the earn-out and that would actually go through the P&L?

Let me do those -- the first one, the run rate on intangibles for at least the next two quarters should be about there, actually I think it's going to be that way through several quarters next year, until we lose some of the impact of amortization of contracts, acquisition contracts. The accounting for the earn-out is such that of that the $9.9 million, about $8.8 million of it is for James and $1.1 million is for Cravens. The $8.8 million needs to be 10 by the end of the year, assuming that they make their target. So we will record roughly the same as we did this quarter, it's a little over $300,000 in Q3, with the balance then hitting in Q4, unless by the end of Q3 we believe that James will have hit its target, in which case all of that $1.2 million will show up in Q3.

Not to turn this into an accounting 101 class, but is it -- has this -- does this indicate anything in terms of their ability -- your confidence and their ability to hit those targets. In other words, they're right on track or a little bit behind. And at the moment it's not certain as to what's going to happen, so you don't book it?

No. Actually it's the opposite. And that was my comment, they make it in Q3. We are required and we were required at the time we did the acquisition accounting to do an estimate and we actually chose a very high percentage estimate, of what we thought the opportunities were that they would make it. And then we take that estimate and we had the present value it. So what you're looking at, is that we ended up with about $8.2 million at year-end and we have to get that 8.2 million to $10 million this year in expenses. So it is strictly an accounting non-cash accounting requirement. It has nothing to do with our belief below they can make their target.

Thanks a lot, guys.

(Operator Instructions) And there are no further questions. I will now turn the conference back to management.

I want to thank everybody for participating and your continued support in our Company and I hope to have good news again next quarter. Thank you.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.