UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended June 30, 2020
OR
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to .
Commission file number 001-34145
Primoris Services Corporation
(Exact name of registrant as specified in its charter)
|
Delaware |
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20-4743916 |
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(State or Other Jurisdiction of |
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(I.R.S. Employer |
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Incorporation or Organization) |
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Identification No.) |
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2300 N. Field Street, Suite 1900 |
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Dallas, Texas |
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75201 |
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(Address of Principal Executive Offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (214) 740-5600
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading symbol(s) |
Name of each exchange on which registered |
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Common Stock, $0.0001 par value |
PRIM |
The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
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Large accelerated filer ⌧ |
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Accelerated filer ☐ |
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Non-accelerated filer ☐ |
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Smaller reporting company ☐ |
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Emerging growth company ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧
At July 27, 2020, 48,251,599 shares of the registrant’s common stock, par value $0.0001 per share, were outstanding.
PRIMORIS SERVICES CORPORATION
INDEX
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Page No. |
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—Condensed Consolidated Balance Sheets at June 30, 2020 and December 31, 2019 (Unaudited) |
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3 |
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4 |
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5 |
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6 |
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8 |
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—Notes to Condensed Consolidated Financial Statements (Unaudited) |
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10 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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27 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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42 |
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43 |
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43 |
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43 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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44 |
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44 |
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45 |
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46 |
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRIMORIS SERVICES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
(Unaudited)
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June 30, |
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December 31, |
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2020 |
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2019 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
155,670 |
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$ |
120,286 |
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Accounts receivable, net |
|
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468,949 |
|
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404,911 |
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Contract assets |
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376,733 |
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344,806 |
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Prepaid expenses and other current assets |
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45,943 |
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42,704 |
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Total current assets |
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1,047,295 |
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912,707 |
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Property and equipment, net |
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368,086 |
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375,888 |
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Operating lease assets |
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240,072 |
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242,385 |
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Deferred tax assets |
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1,116 |
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1,100 |
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Intangible assets, net |
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65,146 |
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69,829 |
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Goodwill |
|
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215,103 |
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215,103 |
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Other long-term assets |
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16,736 |
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13,453 |
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Total assets |
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$ |
1,953,554 |
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$ |
1,830,465 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
256,980 |
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$ |
235,972 |
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Contract liabilities |
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223,077 |
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192,397 |
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Accrued liabilities |
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222,472 |
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183,501 |
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Dividends payable |
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2,893 |
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2,919 |
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Current portion of long-term debt |
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51,913 |
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55,659 |
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Total current liabilities |
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757,335 |
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670,448 |
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Long-term debt, net of current portion |
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300,899 |
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295,642 |
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Noncurrent operating lease liabilities, net of current portion |
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163,947 |
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171,225 |
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Deferred tax liabilities |
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17,820 |
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17,819 |
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Other long-term liabilities |
|
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68,649 |
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|
45,801 |
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Total liabilities |
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1,308,650 |
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1,200,935 |
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Commitments and contingencies (See Note 16) |
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Stockholders’ equity |
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Common stock—$.0001 par value; 90,000,000 shares authorized; 48,220,811 and 48,665,138 issued and outstanding at June 30, 2020 and December 31, 2019, respectively |
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5 |
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5 |
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Additional paid-in capital |
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91,257 |
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97,130 |
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Retained earnings |
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554,717 |
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531,291 |
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Accumulated other comprehensive (loss) income |
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(1,109) |
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76 |
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Noncontrolling interest |
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34 |
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1,028 |
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Total stockholders’ equity |
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644,904 |
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629,530 |
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Total liabilities and stockholders’ equity |
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$ |
1,953,554 |
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$ |
1,830,465 |
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See Accompanying Notes to Condensed Consolidated Financial Statements
3
PRIMORIS SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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||||||||
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2020 |
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2019 |
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2020 |
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2019 |
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Revenue |
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$ |
908,216 |
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$ |
789,929 |
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$ |
1,651,459 |
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$ |
1,451,487 |
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Cost of revenue |
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807,249 |
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709,398 |
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1,502,682 |
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1,318,496 |
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Gross profit |
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100,967 |
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80,531 |
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148,777 |
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132,991 |
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Selling, general and administrative expenses |
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51,422 |
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48,719 |
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95,810 |
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91,650 |
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Operating income |
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49,545 |
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31,812 |
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52,967 |
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41,341 |
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Other income (expense): |
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Foreign exchange gain (loss), net |
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(200) |
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(403) |
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(64) |
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(588) |
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Other income (expense), net |
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706 |
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177 |
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718 |
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(193) |
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Interest income |
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64 |
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219 |
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345 |
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568 |
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Interest expense |
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(3,690) |
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(6,716) |
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(12,802) |
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(12,308) |
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Income before provision for income taxes |
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46,425 |
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25,089 |
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41,164 |
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28,820 |
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Provision for income taxes |
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(13,463) |
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(7,265) |
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(11,936) |
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(8,060) |
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Net income |
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32,962 |
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17,824 |
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29,228 |
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20,760 |
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Less net income attributable to noncontrolling interests |
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(3) |
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(37) |
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(6) |
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(1,026) |
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Net income attributable to Primoris |
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$ |
32,959 |
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$ |
17,787 |
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$ |
29,222 |
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$ |
19,734 |
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Dividends per common share |
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$ |
0.06 |
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$ |
0.06 |
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$ |
0.12 |
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$ |
0.12 |
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Earnings per share: |
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Basic |
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$ |
0.68 |
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$ |
0.35 |
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$ |
0.60 |
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$ |
0.39 |
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Diluted |
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$ |
0.68 |
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$ |
0.35 |
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$ |
0.60 |
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$ |
0.39 |
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Weighted average common shares outstanding: |
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Basic |
|
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48,270 |
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50,912 |
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48,429 |
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50,841 |
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Diluted |
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48,668 |
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51,228 |
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48,782 |
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|
51,208 |
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See Accompanying Notes to Condensed Consolidated Financial Statements
4
PRIMORIS SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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||||||||
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2020 |
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2019 |
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2020 |
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2019 |
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Net income |
|
$ |
32,962 |
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$ |
17,824 |
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$ |
29,228 |
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$ |
20,760 |
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Other comprehensive income, net of tax: |
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|
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|
|
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Foreign currency translation adjustments |
|
|
552 |
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|
362 |
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(1,185) |
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|
736 |
|
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Comprehensive income |
|
|
33,514 |
|
|
18,186 |
|
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28,043 |
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21,496 |
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Less net income attributable to noncontrolling interests |
|
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(3) |
|
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(37) |
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(6) |
|
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(1,026) |
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Comprehensive income attributable to Primoris |
|
$ |
33,511 |
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$ |
18,149 |
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$ |
28,037 |
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$ |
20,470 |
|
See Accompanying Notes to Condensed Consolidated Financial Statements
5
PRIMORIS SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
|
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|
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|
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Accumulated |
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Additional |
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Other |
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Non |
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Total |
|
||||
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Common Stock |
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Paid-in |
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Retained |
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Comprehensive |
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Controlling |
|
Stockholders’ |
|
||||||||
|
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Shares |
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Amount |
|
Capital |
|
Earnings |
0 |
Loss |
|
Interest |
|
Equity |
|
||||||
|
Balance, March 31, 2020 |
|
48,254,575 |
|
$ |
5 |
|
$ |
91,414 |
|
$ |
524,655 |
|
$ |
(1,661) |
|
$ |
1,031 |
|
$ |
615,444 |
|
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
32,959 |
|
|
— |
|
|
3 |
|
|
32,962 |
|
|
Foreign currency translation adjustments, net of tax |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
552 |
|
|
— |
|
|
552 |
|
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Issuance of shares to employees and directors |
|
10,451 |
|
|
— |
|
|
163 |
|
|
— |
|
|
— |
|
|
— |
|
|
163 |
|
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Conversion of Restricted Stock Units, net of shares withheld for taxes |
|
13,516 |
|
|
— |
|
|
(77) |
|
|
— |
|
|
— |
|
|
— |
|
|
(77) |
|
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Amortization of Restricted Stock Units |
|
— |
|
|
— |
|
|
703 |
|
|
— |
|
|
— |
|
|
— |
|
|
703 |
|
|
Dividend equivalent Units accrued - Restricted Stock Units |
|
— |
|
|
— |
|
|
4 |
|
|
(4) |
|
|
— |
|
|
— |
|
|
— |
|
|
Repurchase of stock |
|
(57,731) |
|
|
— |
|
|
(950) |
|
|
— |
|
|
— |
|
|
— |
|
|
(950) |
|
|
Distribution of noncontrolling entities |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(1,000) |
|
|
(1,000) |
|
|
Dividends declared ($0.06 per share) |
|
— |
|
|
— |
|
|
— |
|
|
(2,893) |
|
|
— |
|
|
— |
|
|
(2,893) |
|
|
Balance, June 30, 2020 |
|
48,220,811 |
|
$ |
5 |
|
$ |
91,257 |
|
$ |
554,717 |
|
$ |
(1,109) |
|
$ |
34 |
|
$ |
644,904 |
|
6
PRIMORIS SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
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|
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|
|
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|
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|
|
|
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Accumulated |
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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Additional |
|
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Other |
|
Non |
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Total |
|
||||
|
|
|
Common Stock |
|
Paid-in |
|
Retained |
|
Comprehensive |
|
Controlling |
|
Stockholders’ |
|
||||||||
|
|
|
Shares |
|
Amount |
|
Capital |
|
Earnings |
0 |
Loss |
|
Interest |
0 |
Equity |
|
||||||
|
Balance, March 31, 2019 |
|
50,842,902 |
|
$ |
5 |
|
$ |
147,208 |
|
$ |
459,959 |
|
$ |
(534) |
|
$ |
3,747 |
|
$ |
610,385 |
|
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
17,787 |
|
|
— |
|
|
37 |
|
|
17,824 |
|
|
Foreign currency translation adjustments, net of tax |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
362 |
|
|
— |
|
|
362 |
|
|
Conversion of Restricted Stock Units, net of shares withheld for taxes |
|
122,319 |
|
|
— |
|
|
(1,519) |
|
|
— |
|
|
— |
|
|
— |
|
|
(1,519) |
|
|
Amortization of Restricted Stock Units |
|
— |
|
|
— |
|
|
371 |
|
|
— |
|
|
— |
|
|
— |
|
|
371 |
|
|
Dividend equivalent Units accrued - Restricted Stock Units |
|
— |
|
|
— |
|
|
4 |
|
|
(4) |
|
|
— |
|
|
— |
|
|
— |
|
|
Distribution of noncontrolling entities |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(3,500) |
|
|
(3,500) |
|
|
Dividends declared ($0.06 per share) |
|
— |
|
|
— |
|
|
— |
|
|
(3,058) |
|
|
— |
|
|
— |
|
|
(3,058) |
|
|
Balance, June 30, 2019 |
|
50,965,221 |
|
$ |
5 |
|
$ |
146,064 |
|
$ |
474,684 |
|
$ |
(172) |
|
$ |
284 |
|
$ |
620,865 |
|
See Accompanying Notes to Condensed Consolidated Financial Statements
7
PRIMORIS SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
||||
|
|
|
June 30, |
|
||||
|
|
|
2020 |
|
2019 |
|
||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
29,228 |
|
$ |
20,760 |
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
39,231 |
|
|
43,392 |
|
|
Stock-based compensation expense |
|
|
1,202 |
|
|
858 |
|
|
Gain on sale of property and equipment |
|
|
(7,332) |
|
|
(4,713) |
|
|
Unrealized loss on interest rate swap |
|
|
4,907 |
|
|
4,194 |
|
|
Other non-cash items |
|
|
2,823 |
|
|
160 |
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(65,860) |
|
|
(97,964) |
|
|
Contract assets |
|
|
(32,765) |
|
|
(51,048) |
|
|
Other current assets |
|
|
(3,268) |
|
|
5,309 |
|
|
Other long-term assets |
|
|
223 |
|
|
(137) |
|
|
Accounts payable |
|
|
21,897 |
|
|
(31,405) |
|
|
Contract liabilities |
|
|
30,784 |
|
|
4,205 |
|
|
Operating lease assets and liabilities, net |
|
|
(551) |
|
|
(918) |
|
|
Accrued liabilities |
|
|
22,125 |
|
|
13,481 |
|
|
Other long-term liabilities |
|
|
18,007 |
|
|
(2,698) |
|
|
Net cash provided by (used in) operating activities |
|
|
60,651 |
|
|
(96,524) |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(21,703) |
|
|
(56,907) |
|
|
Proceeds from sale of property and equipment |
|
|
12,086 |
|
|
21,196 |
|
|
Net cash used in investing activities |
|
|
(9,617) |
|
|
(35,711) |
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Borrowings under revolving line of credit |
|
|
— |
|
|
140,000 |
|
|
Payments on revolving line of credit |
|
|
— |
|
|
(85,000) |
|
|
Proceeds from issuance of long-term debt |
|
|
33,873 |
|
|
23,105 |
|
|
Repayment of long-term debt |
|
|
(32,469) |
|
|
(34,320) |
|
|
Proceeds from issuance of common stock purchased under a long-term incentive plan |
|
|
578 |
|
|
1,804 |
|
|
Payment of taxes on conversion of Restricted Stock Units |
|
|
(77) |
|
|
(1,519) |
|
|
Cash distribution to noncontrolling interest holders |
|
|
(1,000) |
|
|
(3,505) |
|
|
Repurchase of common stock |
|
|
(8,343) |
|
|
— |
|
|
Dividends paid |
|
|
(5,814) |
|
|
(6,094) |
|
|
Other |
|
|
(2,014) |
|
|
(39) |
|
|
Net cash (used in) provided by financing activities |
|
|
(15,266) |
|
|
34,432 |
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(384) |
|
|
854 |
|
|
Net change in cash and cash equivalents |
|
|
35,384 |
|
|
(96,949) |
|
|
Cash and cash equivalents at beginning of the period |
|
|
120,286 |
|
|
151,063 |
|
|
Cash and cash equivalents at end of the period |
|
$ |
155,670 |
|
$ |
54,114 |
|
See Accompanying Notes to Condensed Consolidated Financial Statements
8
PRIMORIS SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands)
(Unaudited)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
||||
|
|
|
2020 |
|
2019 |
|
||
|
Cash paid for interest |
|
$ |
7,735 |
|
$ |
7,955 |
|
|
Cash paid for income taxes, net of refunds received |
|
|
(13) |
|
|
(9,599) |
|
|
Leased assets obtained in exchange for new operating leases |
|
|
42,450 |
|
|
51,060 |
|
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
||||
|
|
|
2020 |
|
2019 |
|
||
|
Dividends declared and not yet paid |
|
$ |
2,893 |
|
$ |
3,058 |
|
See Accompanying Notes to Condensed Consolidated Financial Statements
9
PRIMORIS SERVICES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Share and Per Share Amounts)
(Unaudited)
Note 1—Nature of Business
Organization and operations — Primoris Services Corporation is one of the leading providers of specialty contracting services operating mainly in the United States and Canada. We provide a wide range of specialty construction services, fabrication, maintenance, replacement, and engineering services to a diversified base of customers through our five segments.
We have longstanding customer relationships with major utility, refining, petrochemical, power, midstream, and engineering companies, and state departments of transportation. We provide our services to a diversified base of customers, under a range of contracting options. A substantial portion of our services are provided under Master Service Agreements (“MSA”), which are generally multi-year agreements. The remainder of our services are generated from contracts for specific construction or installation projects.
We are incorporated in the State of Delaware, and our corporate headquarters are located at 2300 N. Field Street, Suite 1900, Dallas, Texas 75201. Unless specifically noted otherwise, as used throughout these consolidated financial statements, “Primoris”, “the Company”, “we”, “our”, “us” or “its” refers to the business, operations and financial results of the Company and its wholly-owned subsidiaries.
Reportable Segments — We segregate our business into five reportable segments: the Power, Industrial and Engineering (“Power”) segment, the Pipeline and Underground (“Pipeline”) segment, the Utilities and Distribution (“Utilities”) segment, the Transmission and Distribution (“Transmission”) segment, and the Civil segment. See Note 17 – “Reportable Segments” for a brief description of the reportable segments and their operations.
The classification of revenue and gross profit for segment reporting purposes can at times require judgment on the part of management. Our segments may perform services across industries or perform joint services for customers in multiple industries. To determine reportable segment gross profit, certain allocations, including allocations of shared and indirect costs, such as facility costs, equipment costs and indirect operating expenses were made.
Joint Ventures — We own a 50% interest in the Carlsbad Power Constructors joint venture (“Carlsbad”), which engineered and constructed a gas-fired power generation facility located in Southern California, and its operations are included as part of the Power segment. As a result of determining that we are the primary beneficiary of the variable interest entity (“VIE”), the results of the Carlsbad joint venture are consolidated in our financial statements. The project was substantially complete as of December 31, 2018, and the warranty period expires in December 2020.
Financial information for the joint ventures is presented in Note 10 – “Noncontrolling Interests”.
Note 2—Basis of Presentation
Interim condensed consolidated financial statements — The interim condensed consolidated financial statements for the three and six month periods ended June 30, 2020 and 2019 have been prepared in accordance with Rule 10-01 of Regulation S-X of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As such, certain disclosures, which would substantially duplicate the disclosures contained in our Annual Report on Form 10-K, filed on February 24, 2020, which contains our audited consolidated financial statements for the year ended December 31, 2019, have been omitted.
This Form 10-Q should be read in conjunction with our most recent Annual Report on Form 10-K. The interim financial information is unaudited. In the opinion of management, the interim information includes all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the interim financial information.
Customer concentration — We operate in multiple industry segments encompassing the construction of commercial, industrial and public works infrastructure assets primarily throughout the United States. Typically, the top ten customers in any one calendar year generate revenue that is approximately 50% of total revenue; however, the companies that comprise the top ten vary from year to year.
10
For the three and six months ended June 30, 2020, approximately 52.3% and 50.7%, respectively, of total revenue was generated from our top ten customers. For the three and six months ended June 30, 2020, one pipeline customer represented approximately 15.6% and 13.6% of total revenue, respectively.
For the three and six months ended June 30, 2019, approximately 47.1% and 48.0%, respectively, of total revenue was generated from our top ten customers, and no one customer accounted for more than 10% of total revenue, respectively.
Note 3—Recent Accounting Pronouncements
Recently adopted accounting pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which introduced an expected credit loss methodology for the measurement and recognition of credit losses on most financial assets, including trade accounts receivables. The expected credit loss methodology under ASU 2016-13 is based on historical experience, current conditions and reasonable and supportable forecasts, and replaces the probable/incurred loss model for measuring and recognizing expected losses under current GAAP. The ASU also requires disclosure of information regarding how a company developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. The ASU and its related clarifying updates are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. We adopted the new standard on January 1, 2020, and it did not have a material impact on our estimate of the allowance for uncollectable accounts.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”, which eliminates certain disclosure requirements for recurring and nonrecurring fair value measurements. The ASU eliminates such disclosures as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and adds new disclosure requirements for Level 3 measurements. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for any eliminated or modified disclosures. We adopted the new standard on January 1, 2020, and it did not have a material impact on our disclosures.
Recently issued accounting pronouncements not yet adopted
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Depending on the amendment, adoption may be applied on the retrospective, modified retrospective, or prospective basis. We are currently evaluating the potential effects of adopting the provisions of ASU No. 2019-12.
Note 4—Fair Value Measurements
ASC Topic 820, “Fair Value Measurements and Disclosures”, defines fair value, establishes a framework for measuring fair value in GAAP and requires certain disclosures about fair value measurements. ASC Topic 820 addresses fair value GAAP for financial assets and financial liabilities that are re-measured and reported at fair value at each reporting period and for non-financial assets and liabilities that are re-measured and reported at fair value on a non-recurring basis.
In general, fair values determined by Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs use data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are “unobservable data points” for the asset or liability and include situations where there is little, if any, market activity for the asset or liability.
11
The following table presents, for each of the fair value hierarchy levels identified under ASC Topic 820, our financial assets and liabilities that are required to be measured at fair value at June 30, 2020 and December 31, 2019 (in thousands):
Other financial instruments not listed in the table consist of accounts receivable, accounts payable and certain accrued liabilities. These financial instruments generally approximate fair value based on their short-term nature. The carrying value of our long-term debt approximates fair value based on comparison with current prevailing market rates for loans of similar risks and maturities.
In the second quarter of 2019, we sold certain assets that included an earnout of $2.0 million, contingent upon the buyer meeting a certain performance target. The estimated fair value of the contingent consideration on the sale date was approximately $0.9 million which is included in “Other long-term assets” on the Condensed Consolidated Balance Sheets. We measured the fair value of the contingent consideration using the income approach, which discounts the future cash payments expected upon meeting the performance target to present value. The fair value of the contingent consideration was impacted by two unobservable inputs, management’s estimate of the probability of meeting the performance target and the estimated discount rate (a rate that approximates our cost of capital). Significant changes in either of those inputs in isolation would result in a different fair value measurement. During the six months ended June 30, 2020, there was no change to the fair value of the contingent consideration.
The interest rate swap is measured at fair value using the income approach, which discounts the future net cash settlements expected under the derivative contracts to a present value. These valuations primarily utilize indirectly observable inputs, including contractual terms, interest rates and yield curves observable at commonly quoted intervals. See Note 9 – “Derivative Instruments” for additional information.
Note 5—Revenue
We generate revenue under a range of contracting types, including fixed-price, unit-price, time and material, and cost reimbursable plus fee contracts, each of which has a different risk profile. A substantial portion of our revenue is derived from contracts where scope is adequately defined, and therefore we can reasonably estimate total contract value. For these contracts, revenue is recognized over time as work is completed because of the continuous transfer of control to the customer (typically using an input measure such as costs incurred to date relative to total estimated costs at completion to measure progress). For certain contracts, where scope is not adequately defined and we can’t reasonably estimate total contract value, revenue is recognized primarily on an input basis, based on contract costs incurred as defined within the respective contracts. Costs to obtain contracts are generally not significant and are expensed in the period incurred.
We evaluate whether two or more contracts should be combined and accounted for as one single performance obligation and whether a single contract should be accounted for as more than one performance obligation. ASC 606 defines a performance obligation as a contractual promise to transfer a distinct good or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the
12
performance obligation is satisfied. Our evaluation requires significant judgment and the decision to combine a group of contracts or separate a contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. The majority of our contracts have a single performance obligation, as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contract and, therefore, is not distinct. However, occasionally we have contracts with multiple performance obligations. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using the observable standalone selling price, if available, or alternatively our best estimate of the standalone selling price of each distinct performance obligation in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach for each performance obligation.
As of June 30, 2020, we had $2.44 billion of remaining performance obligations. We expect to recognize approximately 67% of our remaining performance obligations as revenue during the next four quarters and substantially all of the remaining balance by the end of 2022.
Accounting for long-term contracts involves the use of various techniques to estimate total transaction price and costs. For long-term contracts, transaction price, estimated cost at completion and total costs incurred to date are used to calculate revenue earned. Unforeseen events and circumstances can alter the estimate of the costs and potential profit associated with a particular contract. Total estimated costs, and thus contract revenue and income, can be impacted by changes in productivity, scheduling, the unit cost of labor, subcontracts, materials and equipment. Additionally, external factors such as weather, client needs, client delays in providing permits and approvals, labor availability, governmental regulation, politics and any prevailing impacts from the pandemic caused by the coronavirus may affect the progress of a project’s completion, and thus the timing of revenue recognition. To the extent that original cost estimates are modified, estimated costs to complete increase, delivery schedules are delayed, or progress under a contract is otherwise impeded, cash flow, revenue recognition and profitability from a particular contract may be adversely affected.
The nature of our contracts gives rise to several types of variable consideration, including contract modifications (change orders and claims), liquidated damages, volume discounts, performance bonuses, incentive fees, and other terms that can either increase or decrease the transaction price. We estimate variable consideration as the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent we believe we have an enforceable right, and it is probable that a significant reversal of cumulative revenue recognized will not occur. Our estimates of variable consideration and the determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us at this time.
Contract modifications result from changes in contract specifications or requirements. We consider unapproved change orders to be contract modifications for which customers have not agreed to both scope and price. We consider claims to be contract modifications for which we seek, or will seek, to collect from customers, or others, for customer-caused changes in contract specifications or design, or other customer-related causes of unanticipated additional contract costs on which there is no agreement with customers. Claims can also be caused by non-customer-caused changes, such as rain or other weather delays. Costs associated with contract modifications are included in the estimated costs to complete the contracts and are treated as project costs when incurred. In most instances, contract modifications are for goods or services that are not distinct, and, therefore, are accounted for as part of the existing contract. The effect of a contract modification on the transaction price, and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis. In some cases, settlement of contract modifications may not occur until after completion of work under the contract.
As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the cumulative impact of the profit adjustment is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. In the three and six months ended June 30, 2020, revenue recognized from performance obligations satisfied in previous periods was $4.4 million and $8.0 million, respectively. If at any time the estimate of contract profitability indicates an anticipated loss on a contract, the projected loss is recognized in full, including any previously recognized profit, in the period it is identified and recognized as an “accrued loss provision” which is included in “Contract liabilities” on the Condensed Consolidated Balance Sheets. For contract revenue recognized over time, the accrued loss provision is adjusted so that the gross profit for the contract remains zero in future periods.
13
At June 30, 2020, we had approximately $101.6 million of unapproved contract modifications included in the aggregate transaction prices. These contract modifications were in the process of being negotiated in the normal course of business. Approximately $85.7 million of the contract modifications had been recognized as revenue on a cumulative catch-up basis through June 30, 2020.
In all forms of contracts, we estimate the collectability of contract amounts at the same time that we estimate project costs. If we anticipate that there may be issues associated with the collectability of the full amount calculated as the transaction price, we may reduce the amount recognized as revenue to reflect the uncertainty associated with realization of the eventual cash collection. For example, when a cost reimbursable project exceeds the client’s expected budget amount, the client frequently requests an adjustment to the final amount. Similarly, some utility clients reserve the right to audit costs for significant periods after performance of the work.
The timing of when we bill our customers is generally dependent upon agreed-upon contractual terms, milestone billings based on the completion of certain phases of the work, or when services are provided. Sometimes, billing occurs subsequent to revenue recognition, resulting in unbilled revenue, which is a contract asset. Also, we sometimes receive advances or deposits from our customers before revenue is recognized, resulting in deferred revenue, which is a contract liability.
The caption “Contract assets” in the Condensed Consolidated Balance Sheets represents the following:
| ● | unbilled revenue, which arise when revenue has been recorded but the amount will not be billed until a later date; |
| ● | retainage amounts for the portion of the contract price earned by us for work performed, but held for payment by the customer as a form of security until we reach certain construction milestones; and |
| ● | contract materials for certain job specific materials not yet installed, which are valued using the specific identification method relating the cost incurred to a specific project. |
Contract assets consist of the following (in thousands):
Contract assets increased by $31.9 million compared to December 31, 2019 due primarily to higher unbilled revenue.
The caption “Contract liabilities” in the Condensed Consolidated Balance Sheets represents deferred revenue, which arises when billings are in excess of contract revenue recognized to date, and the accrued loss provision.
Contract liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
||
|
|
|
2020 |
|
2019 |
|
||
|
Deferred revenue |
|
$ |
211,582 |
|
$ |
186,081 |
|
|
Accrued loss provision |
|
|
11,495 |
|
|
6,316 |
|
|
|
|
$ |
223,077 |
|
$ |
192,397 |
|
Contract liabilities increased by $30.7 million compared to December 31, 2019 primarily due to higher deferred revenue.
Revenue recognized for the six months ended June 30, 2020, that was included in the contract liability balance at December 31, 2019 was approximately $117.6 million.
14
The following tables present our revenue disaggregated into various categories.
Master Service Agreements (“MSA”) and Non-MSA revenue was as follows (in thousands):
15
Revenue by contract type was as follows (in thousands):
| (1) | Includes time and material and cost reimbursable plus fee contracts. |
| (1) | Includes time and material and cost reimbursable plus fee contracts. |
Each of these contract types has a different risk profile. Typically, we assume more risk with fixed-price contracts. Unforeseen events and circumstances can alter the estimate of the costs and potential profit associated with a particular fixed-price contract. However, these types of contracts offer additional profits when we complete the work for less cost than originally estimated. Unit-price and cost reimbursable contracts generally subject us to lower risk. Accordingly, the associated fees are usually lower than fees earned on fixed-price contracts. Under these contracts, our profit may vary if actual costs vary significantly from the negotiated rates.
16
Note 6—Goodwill and Intangible Assets
The carrying amount of goodwill by reportable segment is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
||
|
Reporting Segment |
|
2020 |
|
2019 |
|
||
|
Power |
|
$ |
26,194 |
|
$ |
26,194 |
|
|
Pipeline |
|
|
52,415 |
|
|
52,415 |
|
|
Utilities |
|
|
37,312 |
|
|
37,312 |
|
|
Transmission |
|
|
59,032 |
|
|
59,032 |
|
|
Civil |
|
|
40,150 |
|
|
40,150 |
|
|
Total Goodwill |
|
$ |
215,103 |
|
$ |
215,103 |
|
The table below summarizes the intangible asset categories and amounts, which are amortized on a straight-line basis (in thousands):
Amortization expense of intangible assets was $2.3 million and $3.0 million for the three months ended June 30, 2020 and 2019, respectively, and $4.7 million and $5.7 million for the six months ended June 30, 2020 and 2019, respectively. Estimated future amortization expense for intangible assets is as follows (in thousands):
Note 7—Accounts Payable and Accrued Liabilities
At June 30, 2020 and December 31, 2019, accounts payable included retention amounts of approximately $10.1 million and $11.3 million, respectively. These amounts owed to subcontractors have been retained pending contract completion and customer acceptance of jobs.
The following is a summary of accrued liabilities (in thousands):
17
Note 8—Credit Arrangements
Long-term debt and credit facilities consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
||
|
|
|
2020 |
|
2019 |
|
||
|
Term loan |
|
$ |
198,000 |
|
$ |
203,500 |
|
|
Revolving credit facility |
|
|
— |
|
|
— |
|
|
Commercial equipment notes |
|
|
106,119 |
|
|
105,114 |
|
|
Mortgage notes |
|
|
49,374 |
|
|
43,474 |
|
|
Total debt |
|
|
353,493 |
|
|
352,088 |
|
|
Unamortized debt issuance costs |
|
|
(681) |
|
|
(787) |
|
|
Total debt, net |
|
$ |
352,812 |
|
$ |
351,301 |
|
|
Less: current portion |
|
|
(51,913) |
|
|
(55,659) |
|
|
Long-term debt, net of current portion |
|
$ |
300,899 |
|
$ |
295,642 |
|
The weighted average interest rate on total debt outstanding at June 30, 2020 and December 31, 2019 was 3.7% and 4.0%, respectively.
Credit Agreement
Our amended and restated credit agreement (“Credit Agreement”) consists of a $220.0 million term loan and a $200.0 million revolving credit facility (“Revolving Credit Facility”), whereby the lenders agreed to make loans on a revolving basis from time to time and to issue letters of credit for up to the $200.0 million committed amount. The Credit Agreement also includes the ability to increase the borrowing capacity thereunder by $75.0 million, subject to obtaining additional or increased lender commitments. The maturity date of the Credit Agreement is July 9, 2023. At June 30, 2020, there were no outstanding borrowings under the Revolving Credit Facility, commercial letters of credit outstanding were $57.2 million, and available borrowing capacity was $142.8 million.
The Credit Agreement contains various restrictive and financial covenants including, among others, a senior debt/EBITDA ratio and debt service coverage requirements. In addition, the Credit Agreement includes restrictions on investments, change of control provisions and provisions in the event we dispose of more than 20% of our total assets. We were in compliance with the covenants for the Credit Agreement at June 30, 2020.
Canadian Credit Facilities
We have a demand credit facility for $4.0 million in Canadian dollars with a Canadian bank for purposes of issuing commercial letters of credit in Canada. At June 30, 2020, commercial letters of credit outstanding were $0.6 million in Canadian dollars, and the available borrowing capacity was $3.4 million in Canadian dollars. The credit facility contains a working capital restrictive covenant for OnQuest Canada, ULC, our wholly owned subsidiary. At June 30, 2020, OnQuest Canada, ULC was in compliance with the covenant.
We have a credit facility for $10.0 million in Canadian dollars with CIBC Bank for working capital purposes in the normal course of business (“Working Capital Credit Facility”). At June 30, 2020, there were no outstanding borrowings under the Working Capital Credit Facility, and available borrowing capacity was $10.0 million in Canadian dollars. The Working Capital Credit Facility contains a cross default restrictive covenant where a default under our Credit Agreement will represent a default in the Working Capital Credit Facility.
Note 9 — Derivative Instruments
We are exposed to certain market risks related to changes in interest rates. To monitor and manage these market risks, we have established risk management policies and procedures. We do not enter into derivative instruments for any purpose other than hedging interest rate risk. None of our derivative instruments are used for trading purposes.
Interest Rate Risk. We are exposed to variable interest rate risk as a result of variable-rate borrowings under our Credit Agreement. To manage fluctuations in cash flows resulting from changes in interest rates on a portion of our
18
variable-rate debt, we entered into an interest rate swap agreement on September 13, 2018 with an initial notional amount of $165.0 million, or 75% of the debt outstanding under our Term Loan, which was not designated as a hedge for accounting purposes. The notional amount of the swap will be adjusted down each quarter by 75% of the required principal payments made on the Term Loan. The swap effectively changes the variable-rate cash flow exposure on the debt obligations to fixed rates. The fair value of outstanding interest rate swap derivatives can vary significantly from period to period depending on the total notional amount of swap derivatives outstanding and fluctuations in market interest rates compared to the interest rates fixed by the swaps. As of June 30, 2020, and December 31, 2019, our outstanding interest rate swap agreement contained a notional amount of $148.5 million and $152.6 million, respectively, with a maturity date of July 10, 2023.
Credit Risk. By using derivative instruments to economically hedge exposures to changes in interest rates, we are exposed to counterparty credit risk. Credit risk is the failure of a counterparty to perform under the terms of a derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, we do not possess credit risk. We minimize the credit risk in derivative instruments by entering into transactions with high quality counterparties. We have entered into netting agreements, including International Swap Dealers Association (“ISDA”) Agreements, which allow for netting of contract receivables and payables in the event of default by either party.
The following table summarizes the fair value of our derivative contracts included in the Condensed Consolidated Balance Sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
||
|
|
|
Balance Sheet Location |
|
2020 |
|
2019 |
|
||
|
Interest rate swap |
|
Other long-term liabilities |
|
|
11,350 |
|
|
6,443 |
|
The following table summarizes the amounts recognized with respect to our derivative instruments within the Condensed Consolidated Statements of Income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
Location of Loss Recognized |
|
June 30, |
|
June 30, |
|
||||||||
|
|
|
on Derivatives |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
||||
|
Interest rate swap |
|
Interest expense |
|
$ |
838 |
|
$ |
2,912 |
|
$ |
6,273 |
|
$ |
4,508 |
|
Cash flows from derivatives settled are reported as cash flows from operating activities.
Note 10 — Noncontrolling Interests
We own a 50% interest in the Carlsbad joint venture which operates in the Power segment. The joint venture has been determined to be a VIE and we were determined to be the primary beneficiary as a result of our significant influence over the joint venture operations.
The joint venture is a partnership, and consequently, only the tax effect of our share of the income was recognized by us. The net assets of the joint venture are restricted for use by the specific project and are not available for our general operations.
The Carlsbad joint venture’s operating activities began in 2015 and are included in our Condensed Consolidated Statements of Income as follows (in thousands):
The Carlsbad joint venture made distributions of $1.0 million to the noncontrolling interest and $1.0 million to us during the three and six months ended June 30, 2020. The Carlsbad joint venture made distributions of $3.5 million to the noncontrolling interest and $3.5 million to us during the three and six months ended June 30, 2019. In addition, we did not
19
make any capital contributions to the Carlsbad joint venture during the six months ended June 30, 2020 and 2019. The project was substantially complete as of December 31, 2018 and the warranty period expires in December 2020.
The following table summarizes the total balance sheet amounts for the Carlsbad joint venture, which is included in our Condensed Consolidated Balance Sheets, and the total consolidated balance sheet amounts (in thousands):
Note 11—Stock-Based Compensation
In May 2013, the shareholders approved and we adopted the Primoris Services Corporation 2013 Long-term Incentive Equity Plan (“Equity Plan”). Our Board of Directors has granted 597,008 Restricted Stock Units (“Units”), net of forfeitures, to employees under the Equity Plan. The grants were documented in RSU Award Agreements, which provide for a vesting schedule and require continuing employment of the employee. The Units are subject to earlier acceleration, termination, cancellation or forfeiture as provided in the underlying RSU Award Agreement.
At June 30, 2020, a total of 271,938 Units were vested. The vesting schedule for the remaining Units are as follows:
|
|
|
|
|
|
|
Number of Units |
|
For the Years Ending December 31, |
|
to Vest |
|
2020 (remaining six months) |
|
18,504 |
|
2021 |
|
166,141 |
|
2022 |
|
82,892 |
|
2023 |
|
57,533 |
|
|
|
325,070 |
Under guidance of ASC Topic 718 “Compensation — Stock Compensation”, stock-based compensation cost is measured at the date of grant, based on the calculated fair value of the stock-based award, and is recognized as expense over the employee’s requisite service period (generally the vesting period of the award).
The fair value of the Units was based on the closing market price of our common stock on the day prior to the date of the grant. Stock compensation expense for the Units is being amortized using the straight-line method over the service period. We recognized $0.7 million and $0.4 million in compensation expense for the three months ended June 30, 2020 and 2019, respectively, and $1.2 million and $0.9 million for the six months ended June 30, 2020 and 2019, respectively. At June 30, 2020, approximately $4.4 million of unrecognized compensation expense remained for the Units, which will be recognized over a weighted average period of 2.4 years.
Vested Units accrue “Dividend Equivalent Units” (as defined in the Equity Plan), which will be accrued as additional Units until the Units are converted to Common Stock. At June 30, 2020, a total of 2,596 Dividend Equivalent Units were accrued.
Note 12—Income Taxes
We are subject to tax liabilities imposed by multiple jurisdictions. We determine our best estimate of the annual effective tax rate at each interim period using expected annual pre-tax earnings, statutory tax rates, and available tax planning opportunities. Certain significant or unusual items are separately recognized in the quarter in which they occur which can cause variability in the effective tax rate from quarter to quarter. We recognize interest and penalties related to uncertain tax positions, if any, as an income tax expense.
20
We do not include the income tax expense or benefit related to the net earnings or loss attributable to noncontrolling interest in our income tax expense as the entities are considered pass-through entities and, as such, the income tax expense or benefit is attributable to its owners. The effective tax rate on income including noncontrolling interests for the six months ended June 30, 2020 and 2019 was 29.0% and 28.0%, respectively. Excluding noncontrolling interest, the effective tax rate on income attributable to Primoris for each of the six months ended June 30, 2020 and 2019 was 29.0%. For the first six months of 2020 and 2019, our tax rate differs from the U.S. federal statutory rate of 21.0% primarily due to the impact of state income taxes and nondeductible components of per diem expenses.
Our U.S. federal income tax returns are generally no longer subject to examination for tax years before 2016. The statutes of limitation of state and foreign jurisdictions generally vary between 3 to 5 years. Accordingly, our state and foreign income tax returns are generally no longer subject to examination for tax years before 2014.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for temporary differences between the financial reporting bases and tax bases of assets and liabilities based on enacted tax rates expected to be in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based upon consideration of available evidence, including future reversals of existing taxable temporary differences, future projected taxable income, the length of the tax asset carryforward periods, and tax planning strategies. The effects of remeasurement of deferred tax assets and liabilities resulting from changes in tax rates are recognized in income in the period of enactment.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted by the US Government in response to the COVID-19 pandemic. Similarly, the Canada Emergency Wage Subsidy legislation was enacted on April 11, 2020 to provide employment retention incentives to certain Canadian employers. We are deferring FICA tax payments through the end of 2020 as allowed under the CARES Act. This deferral was $13.7 million at June 30, 2020, and is included in Other long-term liabilities on our Condensed Consolidated Balance Sheet. Half of the deferral is due on December 31, 2021, and the other half is due on December 31, 2022.
Note 13—Dividends and Earnings Per Share
We paid cash dividends during 2020 and 2019 as follows:
|
|
|
|
|
|
|
|
|
|
Declaration Date |
|
Record Date |
|
Date Paid |
|
Amount Per Share |
|
|
November 2, 2018 |
|
December 31, 2018 |
|
January 15, 2019 |
|
|
0.06 |
|
February 26, 2019 |
|
March 29, 2019 |
|
April 15, 2019 |
|
|
0.06 |
|
May 3, 2019 |
|
June 28, 2019 |
|
July 15, 2019 |
|
|
0.06 |
|
August 2, 2019 |
|
September 30, 2019 |
|
October 15, 2019 |
|
|
0.06 |
|
October 31, 2019 |
|
December 31, 2019 |
|
January 15, 2020 |
|
|
0.06 |
|
February 21, 2020 |
|
March 31, 2020 |
|
April 15, 2020 |
|
|
0.06 |
|
May 1, 2020 |
|
June 30, 2020 |
|
July 15, 2020 |
|
|
0.06 |
The payment of future dividends is contingent upon our revenue and earnings, capital requirements and our general financial condition, as well as contractual restrictions and other considerations deemed relevant by the Board of Directors.
21
The table below presents the computation of basic and diluted earnings per share for the three and six months ended June 30, 2020 and 2019 (in thousands, except per share amounts).
Note 14—Stockholders’ Equity
Common stock
We issued 34,524 and 114,106 shares of common stock in the six months ended June 30, 2020 and 2019, respectively, under our long-term retention plan (“LTR Plan”). The shares were purchased by the participants in the LTR Plan with payment made to us of $0.6 million and $1.8 million in the six months ended June 30, 2020 and 2019, respectively. Our LTR Plan for certain managers and executives allows participants to use a portion of their annual bonus amount to purchase our common stock at a discount from the market price. The shares purchased in the six months ended June 30, 2020 were a portion of bonus amounts earned in 2019, and the number of shares purchased was calculated based on 75% of the average daily closing market price of our common stock during December 2019. The shares purchased in the six months ended June 30, 2019 were for bonus amounts earned in 2018, and the number of shares was calculated at 75% of the average daily closing market price during December 2018.
In the six months ended June 30, 2020 and 2019, we issued 27,195 and 13,278 shares of common stock, respectively, as part of the quarterly compensation of the non-employee members of the Board of Directors.
During the three and six months ended June 30, 2020, a total of 13,516 Units, net of forfeitures for tax withholdings, were converted to common stock. There were 122,319 Units converted to common stock during the three and six months ended June 30, 2019.
As discussed in Note 11 — “Stock–Based Compensation”, as of June 30, 2020, the Board of Directors has granted a total of 597,008 shares of Units, net of forfeitures under the Equity Plan and a total of 2,596 Dividend Equivalent Units were accrued at June 30, 2020.
Share Repurchase Plan
In February 2020, our Board of Directors authorized a $25.0 million share repurchase program. Under the share repurchase program, we can, depending on market conditions, share price and other factors, acquire shares of our common stock on the open market or in privately negotiated transactions. In the three months ended June 30, 2020, we purchased and cancelled 57,731 shares of common stock, which in the aggregate, equaled $0.9 million at an average share price of $16.46. In the six months ended June 30, 2020, we purchased and cancelled 519,562 shares of common stock, which in the aggregate, equaled $8.3 million at an average share price of $16.06. The share repurchase plan expires on December 31, 2020.
22
Note 15—Leases
We lease administrative and various operational facilities, which are generally longer-term, project specific facilities or yards, and construction equipment under non-cancelable operating leases. We determine if an arrangement is a lease at inception. We have lease agreements with lease and non-lease components, which are generally accounted for separately. Operating leases are included in operating lease assets, accrued liabilities, and noncurrent operating lease liabilities on our Condensed Consolidated Balance Sheets.
Operating lease assets and operating lease liabilities are recognized at commencement date based on the present value of the future minimum lease payments over the lease term. In determining our lease term, we include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date to determine the present value of future payments. Lease expense from minimum lease payments is recognized on a straight-line basis over the lease term.
Our leases have remaining lease terms that expire at various dates through 2030, some of which may include options to extend the leases for up to 5 years. The exercise of lease extensions is at our sole discretion. Periodically, we sublease excess facility space, but any sublease income is generally not significant. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The components of lease expense are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
||||||
|
|
|
2020 |
2019 |
|
2020 |
2019 |
||||
|
Operating lease expense (1) |
|
$ |
23,153 |
$ |
17,654 |
|
$ |
46,131 |
$ |
34,167 |
________________________________________
| (1) | Includes short-term leases which are immaterial. |
Our operating lease liabilities are reported on the Condensed Consolidated Balance Sheets as follows (in thousands):
Note 16—Commitments and Contingencies
NTTA settlement — On February 7, 2012, we were sued in an action entitled North Texas Tollway Authority (“NTTA”), Plaintiff v. James Construction Group, LLC, and KBR, Inc., Defendants, v. Reinforced Earth Company, Third-Party Defendant (the “Lawsuit”). On February 25, 2015, the Lawsuit was settled, and we recorded a liability for $17.0 million. A second defendant agreed to provide up to $5.4 million to pay for the total expected remediation cost of approximately $22.4 million. We will pay a third-party contractor approved by the NTTA to complete the remediation. During the six months ended June 30, 2020, we increased our estimate of the total expected remediation costs by $1.3 million. We also spent $5.1 million for remediation during the six months ended June 30, 2020. While we continue to monitor the progress toward remediation and the total remediation costs, at this time we cannot determine the total eventual remediation cost. At June 30, 2020, the remaining accrual balance was $4.7 million.
Legal proceedings — We had been engaged in dispute resolution to collect money we believe we were owed for a construction project completed in 2014. The dispute resolution for the receivable initially required international arbitration; however, in the first half of 2016, the owner sought bankruptcy protection in U.S. bankruptcy court. We initiated litigation against the sureties who had provided lien and stop payment release bonds for the amount owed. During 2018, we settled with the sureties. In addition, we believe we are owed amounts from the bankruptcy trustee. We expect that we will collect a portion of the amount owed to us but cannot predict the timing of such collection.
We are subject to other claims and legal proceedings arising out of our business. We provide for costs related to contingencies when a loss from such claims is probable and the amount is reasonably estimable. In determining whether it
23
is possible to provide an estimate of loss, or range of possible loss, we review and evaluate our litigation and regulatory matters on a quarterly basis in light of potentially relevant factual and legal developments. If we determine an unfavorable outcome is not probable or probable but not reasonably estimable, we do not accrue for a potential litigation loss.
Management is unable to ascertain the ultimate outcome of other claims and legal proceedings; however, after review and consultation with counsel and taking into consideration relevant insurance coverage and related deductibles/self-insurance retention, management believes that it has meritorious defenses to such claims and believes that the reasonably possible outcome of such claims will not, individually or in the aggregate, have a material adverse effect on our consolidated results of operations, financial condition or cash flow.
Bonding — At June 30, 2020 and December 31, 2019, the Company had bid and completion bonds issued and outstanding totaling approximately $710.6 million and $648.6 million, respectively.
Note 17—Reportable Segments
We segregate our business into five reportable segments: the Power segment, the Pipeline segment, the Utilities segment, the Transmission segment, and the Civil segment. Each of our reportable segments is comprised of similar business units that specialize in services unique to the segment. Driving the end-user focused segments are differences in the economic characteristics of each segment, the nature of the services provided by each segment; the production processes of each segment; the type or class of customer using the segment’s services; the methods used by the segment to provide the services; and the regulatory environment of each segment’s customers.
The classification of revenue and gross profit for segment reporting purposes can at times require judgment on the part of management. Our segments may perform services across industries or perform joint services for customers in multiple industries. To determine reportable segment gross profit, certain allocations, including allocations of shared and indirect costs, such as facility costs, equipment costs and indirect operating expenses, were made.
The following is a brief description of the reportable segments:
The Power segment operates throughout the United States and in Canada and specializes in a range of services that include engineering, procurement, and construction, retrofits, upgrades, repairs, outages, and maintenance services for entities in the petroleum and petrochemical industries, as well as traditional and renewable power generators.
The Pipeline segment operates throughout the United States and specializes in a range of services, including pipeline construction and maintenance, pipeline facility and integrity services, installation of compressor and pump stations, and metering facilities for entities in the petroleum and petrochemical industries, as well as gas, water, and sewer utilities.
The Utilities segment operates primarily in California, the Midwest, the Atlantic Coast, and the Southeast regions of the United States and specializes in a range of services, including installation and maintenance of new and existing natural gas utility distribution systems and pipeline integrity services for entities in the gas utility market.
The Transmission segment operates primarily in the Southeastern, Midwest, Atlantic Coast, and Gulf Coast regions of the United States and specializes in a range of services, including installation and maintenance of new and existing electric utility transmission, substation, and distribution systems for entities in the electric utility market.
The Civil segment operates primarily in the Southeastern and Gulf Coast regions of the United States and specializes in highway and bridge construction, airport runway construction, demolition, site work, soil stabilization, mass excavation, flood control, and drainage projects for entities in the petroleum and petrochemical industries, state and municipal departments of transportation, and airports.
All intersegment revenue and gross profit, which was immaterial, has been eliminated in the following tables. Total assets by segment is not presented as our Chief Operating Decision Maker as defined by ASC 280 does not review or allocate resources based on segment assets.
24
Segment Revenue
Revenue by segment was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, |
||||||||
|
|
|
2020 |
|
2019 |
||||||
|
|
|
|
|
|
% of |
|
|
|
|
% of |
|
|
|
|
|
|
Total |
|
|
|
|
Total |
|
Segment |
|
Revenue |
|
Revenue |
|
Revenue |
|
Revenue |
||
|
Power |
|
$ |
157,476 |
|
17.3% |
|
$ |
172,170 |
|
21.8% |
|
Pipeline |
|
|
289,559 |
|
31.9% |
|
|
137,243 |
|
17.4% |
|
Utilities |
|
|
230,175 |
|
25.4% |
|
|
222,312 |
|
28.1% |
|
Transmission |
|
|
109,948 |
|
12.1% |
|
|
135,354 |
|
17.1% |
|
Civil |
|
|
121,058 |
|
13.3% |
|
|
122,850 |
|
15.6% |
|
Total |
|
$ |
908,216 |
|
100.0% |
|
$ |
789,929 |
|
100.0% |
Segment Gross Profit
Gross profit by segment was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, |
||||||||
|
|
|
2020 |
|
2019 |
||||||
|
|
|
|
|
|
% of |
|
|
|
|
% of |
|
|
|
|
|
|
Segment |
|
|
|
|
Segment |
|
Segment |
|
Gross Profit |
|
Revenue |
|
Gross Profit |
|
Revenue |
||
|
Power |
|
$ |
6,703 |
|
4.3% |
|
$ |
23,167 |
|
13.5% |
|
Pipeline |
|
|
27,030 |
|
9.3% |
|
|
11,531 |
|
8.4% |
|
Utilities |
|
|
42,392 |
|
18.4% |
|
|
30,866 |
|
13.9% |
|
Transmission |
|
|
13,445 |
|
12.2% |
|
|
10,200 |
|
7.5% |
|
Civil |
|
|
11,397 |
|
9.4% |
|
|
4,767 |
|
3.9% |
|
Total |
|
$ |
100,967 |
|
11.1% |
|
$ |
80,531 |
|
10.2% |
25
Segment Goodwill
The amount of goodwill recorded by each segment at June 30, 2020 and at December 31, 2019 is presented in Note 6 – “Goodwill and Intangible Assets”.
Geographic Region — Revenue and Total Assets
The majority of our revenue is derived from customers in the United States with approximately 3.3% and 5.0% generated from sources outside of the United States during the six months ended June 30, 2020 and 2019, respectively, principally in Canada. At June 30, 2020 and December 31, 2019, approximately 3.5% and 4.4%, respectively, of total assets were located outside of the United States, principally in Canada.
Note 18—Subsequent Events
Cash Dividend
On July 31, 2020, the Board of Directors declared a cash dividend of $0.06 per share of common stock for stockholders of record as of September 30, 2020, payable on or about October 15, 2020.
26
PRIMORIS SERVICES CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020 (“Second Quarter 2020 Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of regulation and the economy, generally. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates”, “believes”, “could”, “estimates”, “expects”, “intends”, “may”, “plans”, “potential”, “predicts”, “projects”, “should”, “will”, “would” or similar expressions.
Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of regulation and the economy, generally. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Actual results may differ materially as a result of a number of factors, including, among other things, customer timing, project duration, weather, and general economic conditions; changes in our mix of customers, projects, contracts and business; regional or national and/or general economic conditions and demand for our services; price, volatility, and expectations of future prices of oil, natural gas, and natural gas liquids; variations and changes in the margins of projects performed during any particular quarter; increases in the costs to perform services caused by changing conditions; the termination, or expiration of existing agreements or contracts; the budgetary spending patterns of customers; increases in construction costs that we may be unable to pass through to our customers; cost or schedule overruns on fixed-price contracts; availability of qualified labor for specific projects; changes in bonding requirements and bonding availability for existing and new agreements; the need and availability of letters of credit; costs we incur to support growth, whether organic or through acquisitions; the timing and volume of work under contract; losses experienced in our operations; the results of the review of prior period accounting on certain projects; developments in governmental investigations and/or inquiries; intense competition in the industries in which we operate; failure to obtain favorable results in existing or future litigation or regulatory proceedings, dispute resolution proceedings or claims, including claims for additional costs; failure of our partners, suppliers or subcontractors to perform their obligations; cyber-security breaches; failure to maintain safe worksites; risks or uncertainties associated with events outside of our control, including severe weather conditions, public health crises and pandemics (such as COVID-19), political crises or other catastrophic events; client delays or defaults in making payments; the availability of credit and restrictions imposed by credit facilities; failure to implement strategic and operational initiatives; risks or uncertainties associated with acquisitions, dispositions and investments; possible information technology interruptions or inability to protect intellectual property; the Company’s failure, or the failure of our agents or partners, to comply with laws; the Company's ability to secure appropriate insurance; new or changing legal requirements, including those relating to environmental, health and safety matters; the loss of one or a few clients that account for a significant portion of the Company's revenues; asset impairments; and risks arising from the inability to successfully integrate acquired businesses. We discuss many of these risks in detail in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019 and our other filings with the Securities and Exchange Commission (“SEC”), including in Part II, Item 1A “Risk Factors” of this Second Quarter 2020 report. You should read this Second Quarter 2020 Report, our Annual Report on Form 10-K for the year ended December 31, 2019 and our other filings with the SEC completely and with the understanding that our actual future results may be materially different from what we expect.
Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Second Quarter 2020 Report. We assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available.
27
The following discussion and analysis should be read in conjunction with the unaudited financial statements and the accompanying notes included in Part 1, Item 1 of this Second Quarter 2020 Report and our Annual Report on Form 10-K for the year ended December 31, 2019.
Introduction
We are one of the leading providers of specialty contracting services operating mainly in the United States and Canada. We provide a wide range of specialty construction services, fabrication, maintenance, replacement, and engineering services to a diversified base of customers through our five segments: Power, Industrial, and Engineering (“Power”), Pipeline and Underground (“Pipeline”), Utilities and Distribution (“Utilities”), Transmission and Distribution (“Transmission”), and Civil. The structure of our reportable segments is generally focused on broad end-user markets for our services.
The Power segment operates throughout the United States and in Canada and specializes in a range of services that include engineering, procurement, and construction, retrofits, upgrades, repairs, outages, and maintenance services for entities in the petroleum and petrochemical industries, as well as traditional and renewable power generators.
The Pipeline segment operates throughout the United States and specializes in a range of services, including pipeline construction and maintenance, pipeline facility and integrity services, installation of compressor and pump stations, and metering facilities for entities in the petroleum and petrochemical industries, as well as gas, water, and sewer utilities.
The Utilities segment operates primarily in California, the Midwest, the Atlantic Coast, and the Southeast regions of the United States and specializes in a range of services, including installation and maintenance of new and existing natural gas utility distribution systems and pipeline integrity services for entities in the gas utility market.
The Transmission segment operates primarily in the Southeastern, Midwest, Atlantic Coast, and Gulf Coast regions of the United States and specializes in a range of services, including installation and maintenance of new and existing electric utility transmission, substation, and distribution systems for entities in the electric utility market.
The Civil segment operates primarily in the Southeastern and Gulf Coast regions of the United States and specializes in highway and bridge construction, airport runway construction, demolition, site work, soil stabilization, mass excavation, flood control, and drainage projects for entities in the petroleum and petrochemical industries, state and municipal departments of transportation, and airports.
We have longstanding customer relationships with major utility, refining, petrochemical, power, midstream, and engineering companies, and state departments of transportation. We have completed major underground and industrial projects for a number of large natural gas transmission and petrochemical companies in the United States, major electrical and gas projects for a number of large utility companies in the United States, as well as significant projects for our engineering customers. We enter into a large number of contracts each year, and the projects can vary in length from daily work orders to as long as 36 months, and occasionally longer, for completion on larger projects. Although we have not been dependent upon any one customer in any year, a small number of customers tend to constitute a substantial portion of our total revenue in any given year.
We generate revenue under a range of contracting types, including fixed-price, unit-price, time and material, and cost reimbursable plus fee contracts. A substantial portion of our revenue is derived from contracts where scope is adequately defined, and therefore we can reasonably estimate total contract value. For these contracts, revenue is recognized over time as work is completed because of the continuous transfer of control to the customer (typically using an input measure such as costs incurred to date relative to total estimated costs at completion to measure progress). For certain contracts, where scope is not adequately defined and we can’t reasonably estimate total contract value, revenue is recognized primarily on an input basis, based on contract costs incurred as defined within the respective contracts.
The classification of revenue and gross profit for segment reporting purposes can at times require judgment on the part of management. Our segments may perform services across industries or perform joint services for customers in multiple industries. To determine reportable segment gross profit, certain allocations, including allocations of shared and indirect costs, such as facility costs, equipment costs and indirect operating expenses were made.
28
Material trends and uncertainties
We generate our revenue from construction and engineering projects, as well as from providing a variety of construction services. We depend in part on spending by companies in the gas and electric utility industries, the energy, chemical, and oil and gas industries, as well as state departments of transportation and municipal water and wastewater customers. Over the past several years, each segment has benefited from demand for more efficient and more environmentally friendly energy and power facilities, more reliable gas and electric utility infrastructure, local highway and bridge needs, and from the activity level in the oil and gas industry. However, periodically, each of these industries and government agencies is adversely affected by macroeconomic conditions. Economic and other factors outside of our control may affect the amount and size of contracts we are awarded in any particular period.
In March 2020, the novel coronavirus (“COVID-19”) outbreak was declared a National Public Health Emergency which continues to spread throughout the world and has adversely impacted global activity and contributed to significant declines and volatility in financial markets. In an effort to contain COVID-19 or slow its spread, governments around the world have also enacted various measures, including orders to close all businesses not deemed “essential”, isolate residents to their homes or places of residence, and practice social distancing when engaging in essential activities. While our services have generally been deemed to be essential services, all segments have reported various levels of project interruptions and restrictions that have delayed project timelines from those originally planned. In some cases, we have experienced temporary work stoppages. This led to general inefficiencies from having to start and stop work, re-sequencing work, requiring on-site health screenings before entering a job site, and following proper social distancing practices. We have also been restricted from completing work or have been prevented from starting work on certain projects. However, despite these impacts our work has been deemed essential, our business model appears to be resilient, and we have adapted accordingly, including making salary or headcount reductions where appropriate.
We anticipate that the pandemic could have a continued adverse impact on economic and market conditions and we could see an extended period of global economic slowdown. When COVID-19 is demonstrably contained, we anticipate a rebound in economic activity, depending on the rate, pace, and effectiveness of the containment efforts deployed by various national, state, and local governments.
To date, the inefficiencies experienced have had an unquantifiable impact to our business. We will continue to actively monitor the situation and may take further actions to alter our business operations that we determine are in the best interests of our employees, customers, suppliers, and stakeholders, or as required by federal, state, or local authorities. It is not clear what the potential effects any such alterations or modifications may have on our business or on our financial results for the remainder of 2020.
We also monitor our customers and their industries to assess the effect that changes in economic, market, and regulatory conditions may have on them. We have experienced reduced spending, project delays, and project cancellations by some of our customers over the last several months, which we attribute to negative economic and market conditions, and we anticipate that these negative conditions and the impact of COVID-19 may continue to affect demand for our services in the near-term.
Fluctuations in market prices of oil, gas and other fuel sources have affected demand for our services. The volatility in the prices of oil, gas, and liquid natural gas that has occurred in the past few years could create uncertainty with respect to demand for our oil and gas pipeline services, specifically in our oil field services and Canadian operations. The recent significant reduction in the price of oil could create uncertainty with respect to demand for our oil and gas pipeline services in the near term, with additional uncertainty resulting over the length of time that prices remain depressed. When the current oversupply eases and with a return to increasing global demand for oil, we expect oil prices to recover from the current levels. While the construction of gathering lines within the oil shale formations may remain at lower levels for an extended period, we believe that over time, the need for pipeline infrastructure for mid-stream and gas utility companies will result in a continuing need for our services. However, a prolonged period of depressed oil prices could delay midstream pipeline opportunities.
The continuing changes in the regulatory environment may affect the demand for our services, either by increasing our work, delaying projects, or cancelling projects. For example, environmental laws and regulation can provide challenges to major pipeline projects, resulting in delays or cancellations that impact the timing of revenue recognition. In addition, the regulatory environment in California may result in delays for the construction of gas-fired power plants, while regulators continue to search for significant renewable resources. Renewable resources are also creating a demand for our
29
construction and specialty services, such as the need for battery storage and the construction of solar power production facilities.
Seasonality, cyclicality and variability
Our results of operations are subject to quarterly variations. Some of the variation is the result of weather, particularly rain, ice, snow, and named storms, which can impact our ability to perform construction and specialty services. These seasonal impacts can affect revenue and profitability in all of our businesses since utilities defer routine replacement and repair during their period of peak demand. Any quarter can be affected either negatively, or positively by atypical weather patterns in any part of the country. In addition, demand for new projects tends to be lower during the early part of the calendar year due to clients’ internal budget cycles. As a result, we usually experience higher revenue and earnings in the third and fourth quarters of the year as compared to the first two quarters.
Our project values range in size from several hundred dollars to several hundred million dollars. The bulk of our work is comprised of project sizes that average less than $5.0 million. We also perform construction projects which tend not to be seasonal, but can fluctuate from year to year based on customer timing, project duration, weather, and general economic conditions. Our business may be affected by declines, or delays in new projects, or by client project schedules. Because of the cyclical nature of our business, the financial results for any period may fluctuate from prior periods, and our financial condition and operating results may vary from quarter to quarter. Results from one quarter may not be indicative of our financial condition, or operating results for any other quarter, or for an entire year.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and that affect the amounts of revenue and expenses reported for each period. These estimates and assumptions must be made because certain information that is used in the preparation of our financial statements cannot be calculated with a high degree of precision from data available, is dependent on future events, or is not capable of being readily calculated based on generally accepted methodologies. Often, these estimates are particularly difficult to determine, and we must exercise significant judgment. Actual results could differ significantly from our estimates, and our estimates could change if they were made under different assumptions or conditions. Our critical accounting policies are described in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019. There have been no material changes to our critical accounting policies since December 31, 2019.
30
Results of Operations
Consolidated Results
The following discussion compares the results of the three and six months ended June 30, 2020 to the three and six months ended June 30, 2019.
Revenue
Revenue was $908.2 million for the three months ended June 30, 2020, an increase of $118.3 million, or 15.0%, compared to the same period in 2019. The increase was primarily due to growth in our Pipeline segment, partially offset by lower revenue in our Power and Transmission segments.
Revenue was $1,651.5 million for the six months ended June 30, 2020, an increase of $200.0 million, or 13.8%, compared to the same period in 2019. The increase was primarily due to growth in our Pipeline and Power segments, partially offset by lower revenue in our Transmission segment.
Gross Profit
Gross profit was $101.0 million for the three months ended June 30, 2020, an increase of $20.4 million, or 25.4%, compared to the same period in 2019. The increase was primarily due to an increase in revenue and margins. Gross profit as a percentage of revenue increased to 11.1% for the three months ended June 30, 2020, compared to 10.2% for the same period in 2019 as described in the forthcoming segment results.
Gross profit was $148.8 million for the six months ended June 30, 2020, an increase of $15.8 million, or 11.9%, compared to the same period in 2019. The increase was primarily due to revenue growth. Gross profit as a percentage of revenue was comparable to 2019.
Selling, general and administrative expenses
Selling, general and administrative (“SG&A”) expenses were $51.4 million during the three months ended June 30, 2020, an increase of $2.7 million, or 5.5%, compared to 2019 primarily due to a $3.5 million increase in compensation related expenses, including incentive compensation, partially offset by a $0.7 million decrease in travel expense. SG&A expense as a percentage of revenue decreased to 5.7% compared to 6.2% for the corresponding period in 2019 due to increased revenue.
SG&A expenses were $95.8 million during the six months ended June 30, 2020, an increase of $4.2 million, or 4.5%, compared to 2019 primarily due to a $2.5 million increase in compensation related expenses, including incentive compensation and a $1.4 million increase in consulting expense. SG&A expense as a percentage of revenue decreased to 5.8% compared to 6.3% for the corresponding period in 2019 due to increased revenue.
31
Other income and expense
Non-operating income and expense items for the three and six months ended June 30, 2020 and 2019 were as follows (in thousands):
Foreign exchange gain (loss), net reflects currency exchange fluctuations associated with our Canadian engineering operation, which operates principally in United States dollars.
Interest expense for the three months ended June 30, 2020, decreased compared to the same period in 2019 due primarily to a $0.1 million unrealized gain on the change in the fair value of our interest rate swap agreement during the three months ended June 30, 2020, compared to a $2.7 million loss in 2019. Interest expense for the six months ended June 30, 2020 was comparable to the same period in 2019.
Provision for income taxes
We are subject to tax liabilities imposed by multiple jurisdictions. We determine our best estimate of the annual effective tax rate at each interim period using expected annual pre-tax earnings, statutory tax rates, and available tax planning opportunities. Certain significant or unusual items are separately recognized in the quarter in which they occur which can cause variability in the effective tax rate from quarter to quarter. We recognize interest and penalties related to uncertain tax positions, if any, as income tax expense.
The effective tax rate on income attributable to Primoris (excluding noncontrolling interests) was 29.0% for the six months ended June 30, 2020. The rate differs from the U.S. federal statutory rate of 21.0% primarily due to state income taxes and nondeductible components of per diem expenses.
We recorded income tax expense for the three months ended June 30, 2020 of $13.5 million compared to $7.3 million for the three months ended June 30, 2019. The $6.2 million increase in income tax expense was primarily driven by a $21.4 million increase in pre-tax income (excluding noncontrolling interests).
We recorded income tax expense for the six months ended June 30, 2020 of $11.9 million compared to $8.1 million for the six months ended June 30, 2019. The $3.8 million increase in income tax expense was primarily driven by a $13.4 million increase in pre-tax income (excluding noncontrolling interests).
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Segment results
Power Segment
Revenue and gross profit for the Power segment for the three and six months ended June 30, 2020 and 2019 were as follows:
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Three Months Ended June 30, |
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2020 |
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2019 |
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% of |
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% of |
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Segment |
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Segment |
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(Thousands) |
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Revenue |
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(Thousands) |
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Revenue |
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||
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Power Segment |
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|
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Revenue |
|
$ |
157,476 |
|
|
|
$ |
172,170 |
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|
|
|
Gross profit |
|
|
6,703 |
|
4.3% |
|
|
23,167 |
|
13.5% |
|
Revenue decreased by $14.7 million, or 8.5%, for the three months ended June 30, 2020, compared to the same period in 2019. The decrease is primarily due to lower revenue at our Canadian operations and the substantial completion of a Louisiana industrial plant project in 2019 ($26.8 million combined), partially offset by an industrial project for a major utility customer in California that began in the third quarter of 2019 ($13.6 million).
Revenue increased by $36.1 million, or 11.4%, for the six months ended June 30, 2020, compared to the same period in 2019. The increase is primarily due to a carbon monoxide and hydrogen plant project that began in the second quarter of 2019 and an industrial project for a major utility customer in California that began in the third quarter of 2019 ($63.2 million combined). These amounts were partially offset by the substantial completion of a Louisiana industrial plant project and refinery projects in Southern California in the second half of 2019 ($33.9 million combined).
Gross profit for the three months ended June 30, 2020, decreased by $16.5 million, or 71.1%, compared to the same period in 2019 due to lower revenue and margins. Gross profit as a percentage of revenue decreased to 4.3% during the three months ended June 30, 2020, compared to 13.5% in the same period in 2019 primarily due to higher costs associated with a liquified natural gas (“LNG”) plant project in the northeast in 2020, partially offset by strong performance and favorable margins realized on Texas solar projects.
Gross profit for the six months ended June 30, 2020, decreased by $18.0 million, or 41.5% compared to the same period in 2019. The decrease is attributable to lower margins, partially offset by higher revenue. Gross profit as a percentage of revenue decreased to 7.2% during the six months ended June 30, 2020, compared to 13.7% in the same period in 2019 due to higher costs associated with an LNG plant project in the northeast in 2020, as well as higher costs on an engineering project and a Canadian tank farm project in 2020. These amounts are partially offset by strong performance and favorable margins realized on our Texas solar projects.
33
Pipeline Segment
Revenue and gross profit for the Pipeline segment for the three and six months ended June 30, 2020 and 2019 were as follows:
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Three Months Ended June 30, |
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2020 |
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2019 |
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||||||
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% of |
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% of |
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Segment |
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Segment |
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(Thousands) |
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Revenue |
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(Thousands) |
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Revenue |
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||
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Pipeline Segment |
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Revenue |
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$ |
289,559 |
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|
|
$ |
137,243 |
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|
|
|
Gross profit |
|
|
27,030 |
|
9.3% |
|
|
11,531 |
|
8.4% |
|
Revenue increased by $152.3 million, or 111.0%, for the three months ended June 30, 2020, compared to the same period in 2019. The increase is primarily due to pipeline projects in Texas that began in the first quarter of 2020 ($190.0 million combined), partially offset by the substantial completion of a major pipeline project in West Texas in the second quarter of 2019 and reduced activity on a pipeline project in the Mid-Atlantic ($30.9 million combined).
Revenue increased by $209.0 million, or 76.8%, for the six months ended June 30, 2020, compared to the same period in 2019. The increase is primarily due to pipeline projects in Texas and Virginia that began in the first quarter of 2020 ($314.8 million combined), partially offset by the substantial completion of a major pipeline project in West Texas in the second quarter of 2019, reduced activity on a pipeline project in the Mid-Atlantic, and a decrease in pipeline maintenance, facility construction and specialty services activity ($103.5 million combined).
Gross profit for the three months ended June 30, 2020 increased by $15.5 million, or 134.4%, compared to the same period in 2019 due to higher revenue and margins. Gross profit as a percentage of revenue increased to 9.3% during the three months ended June 30, 2020, compared to 8.4% in the same period in 2019 primarily due to unfavorable weather conditions on a West Texas pipeline project and the impact of a client delay on a project in Southern California in 2019.
Gross profit for the six months ended June 30, 2020 increased by $17.0 million, or 63.9%, compared to the same period in 2019 due to revenue growth, partially offset by lower margins. Gross profit as a percentage of revenue decreased to 9.0% during the six months ended June 30, 2020, compared to 9.8% in the same period in 2019 primarily due to startup costs on pipeline projects in Texas in 2020 and the favorable impact from the closeout of multiple pipeline projects in 2019, partially offset by unfavorable weather conditions on a West Texas pipeline project in 2019 and the impact of a client delay on a project in Southern California in 2019.
34
Utilities Segment
Revenue and gross profit for the Utilities segment for the three and six months ended June 30, 2020 and 2019 were as follows:
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Three Months Ended June 30, |
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2020 |
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2019 |
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% of |
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% of |
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Segment |
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Segment |
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Revenue |
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(Thousands) |
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Revenue |
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Utilities Segment |
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Revenue |
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$ |
230,175 |
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$ |
222,312 |
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Gross profit |
|
|
42,392 |
|
18.4% |
|
|
30,866 |
|
13.9% |
|
Revenue increased by $7.9 million, or 3.5%, for the three months ended June 30, 2020, compared to the same period in 2019 primarily due to increased activity with customers in the Midwest, Southeast, California and Texas ($24.0 million combined), partially offset by decreased activity with a utility customer in California ($17.0 million).
Revenue increased by $8.8 million, or 2.4%, for the six months ended June 30, 2020, compared to the same period in 2019 primarily due to increased activity with customers in the Midwest, California and Texas ($29.7 million combined), partially offset by decreased activity with a utility customer in California ($20.4 million).
Gross profit for the three and six months ended June 30, 2020 increased by $11.5 million, or 37.3%, and $7.9 million, or 20.2%, respectively compared to the same periods in 2019 primarily due to higher revenue and margins.
Gross profit as a percentage of revenue increased to 18.4% and 12.5%, respectively, during the three and six months ended June 30, 2020, compared to 13.9% and 10.6%, respectively, in the same periods in 2019 primarily due to favorable margins on projects in the Southeast from increased productivity in 2020 and unfavorable weather conditions experienced in the Midwest in 2019.
35
Transmission Segment
Revenue and gross profit for the Transmission segment for the three and six months ended June 30, 2020 and 2019 were as follows:
Revenue decreased by $25.4 million, or 18.8%, and $41.1 million, or 16.2% for the three and six months ended June 30, 2020, respectively, compared to the same periods in 2019 primarily due to decreased activity with a utility customer in Texas.
Gross profit for the three months ended June 30, 2020, increased by $3.2 million, or 31.8%, compared to the same period in 2019, due primarily to higher margins, partially offset by lower revenue. Gross profit as a percentage of revenue increased to 12.2% during the three months ended June 30, 2020, compared to 7.5% in the same period in 2019 primarily due to upfront costs to expand our operations and unfavorable weather conditions experienced in certain regions in 2019.
Gross profit for the six months ended June 30, 2020, decreased by $1.7 million, or 9.9%, compared to the same period in 2019, due primarily to lower revenue, partially offset by higher margins. Gross profit as a percentage of revenue increased to 7.1% during the six months ended June 30, 2020, compared to 6.6% in the same period in 2019 primarily due to upfront costs to expand our operations and unfavorable weather conditions experienced in certain regions in 2019, partially offset by slower than anticipated release of work by certain customers resulting in higher relative carrying costs for equipment and personnel in the first quarter of 2020.
36
Civil Segment
Revenue and gross profit for the Civil segment for the three and six months ended June 30, 2020 and 2019 were as follows:
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Three Months Ended June 30, |
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2020 |
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2019 |
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% of |
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% of |
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Segment |
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Segment |
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(Thousands) |
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Civil Segment |
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Revenue |
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$ |
121,058 |
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$ |
122,850 |
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Gross profit |
|
|
11,397 |
|
9.4% |
|
|
4,767 |
|
3.9% |
|
Revenue decreased by $1.8 million, or 1.5%, for the three months ended June 30, 2020, compared to the same period in 2019. The decrease is primarily due to the substantial completion of a project with a major refining customer, a port project, and an ethylene plant project in 2019, as well as lower Texas Department of Transportation volumes ($24.7 million combined). These amounts were mostly offset by an LNG plant project in Texas that began in 2020.
Revenue decreased by $12.9 million, or 5.4%, for the six months ended June 30, 2020, compared to the same period in 2019. The decrease is primarily due to the substantial completions of a project with a major refining customer, a port project, and an ethylene plant project in 2019 ($46.0 million combined). These amounts were partially offset by an LNG plant project in Texas that began in 2020 ($36.8 million).
Gross profit for the three months ended June 30, 2020 increased by $6.6 million compared to the same period in 2019 due primarily to higher margins. Gross profit as a percentage of revenue increased to 9.4% during the three months ended June 30, 2020, compared to 3.9% in the same period in 2019 due primarily to strong performance on the LNG plant project in Texas that began in 2020 and increased profit on Louisiana Department of Transportation and Development (“DOTD”) projects.
Gross profit increased by $10.6 million for the six months ended June 30, 2020, compared to the same period in 2019 primarily due to higher margins, partially offset by lower revenue. Gross profit as a percentage of revenue increased to 7.8% during the six months ended June 30, 2020, compared to 3.0% in the same period in 2019 due primarily to strong performance on the LNG plant project in Texas that began in 2020, increased profit on Louisiana DOTD projects, and higher costs on Arkansas Department of Transportation projects in 2019.
At June 30, 2020, we had approximately $28.2 million of unapproved contract modifications included in the aggregate transaction prices associated with the Belton area projects, all of which had been recognized as revenue on a cumulative catch-up basis through June 30, 2020.
37
Geographic area financial information
The majority of our revenue is derived from customers in the United States with approximately 3.3% generated from sources outside of the United States during the six months ended June 30, 2020, principally in Canada.
Backlog
For companies in the construction industry, backlog can be an indicator of future revenue streams. Different companies define and calculate backlog in different manners. We define backlog as a combination of: (1) anticipated revenue from the uncompleted portions of existing contracts where scope is adequately defined, and therefore we can reasonably estimate total contract value (“Fixed Backlog”), and (2) the estimated revenue on MSA work for the next four quarters (“MSA Backlog”). We do not include certain contracts in the calculation of backlog where scope, and therefore contract value is not adequately defined.
The two components of backlog, Fixed Backlog and MSA Backlog, are detailed below.
Fixed Backlog
Fixed Backlog by reportable segment as of December 31, 2019 and June 30, 2020 and the changes in Fixed Backlog for the six months ended June 30, 2020 are as follows (in millions):
| (1) | Includes $0.51 billion of backlog associated with a major pipeline project in the Mid-Atlantic as of June 30, 2020. In July 2020, the customer announced the planned cancellation of the project. However, we have not received formal termination of the contract from the customer. |
Revenue recognized from non-Fixed Backlog projects shown above are generated by MSA projects and projects completed under time and material and cost reimbursable plus fee contracts where scope, and therefore contract value is not adequately defined, or are generated from the sale of construction materials, such as rock or asphalt to outside third parties.
At June 30, 2020, our total Fixed Backlog was $2.31 billion, representing an increase of $545.6 million, or 31.0%, compared to $1.76 billion at December 31, 2019.
MSA Backlog
The following table outlines historical MSA revenue for the past six quarters (in millions):
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Quarterly MSA Revenue |
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2019 |
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2020 |
||
|
First Quarter |
|
$ |
292.9 |
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$ |
270.4 |
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Second Quarter |
|
|
348.3 |
|
|
335.3 |
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Third Quarter |
|
|
366.9 |
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|
|
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Fourth Quarter |
|
|
348.5 |
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|
|
MSA Backlog includes anticipated MSA revenue for the next twelve months. We estimate MSA revenue based on historical trends, anticipated seasonal impacts and estimates of customer demand based on information from our customers.
38
The following table shows our estimated MSA Backlog at June 30, 2020 by reportable segment (in millions):
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MSA Backlog |
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|
at June 30, |
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|
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Reportable Segment: |
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2020 |
|
|
|
Power |
|
$ |
88.0 |
|
|
Pipeline |
|
|
74.4 |
|
|
Utilities |
|
|
642.1 |
|
|
Transmission |
|
|
412.5 |
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|
Civil |
|
|
4.1 |
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Total |
|
$ |
1,221.1 |
|
Total Backlog
The following table shows total backlog (Fixed Backlog plus MSA Backlog), by reportable segment as of the quarter-end dates shown below (in millions):
We expect that during the next four quarters, we will recognize as revenue approximately 77% of the total backlog at June 30, 2020, comprised of backlog of approximately: 89% of the Power segment; 45% of the Pipeline segment; 100% of the Utilities segment; 100% of the Transmission segment; and 65% of the Civil segment.
Backlog should not be considered a comprehensive indicator of future revenue, as a percentage of our revenue is derived from projects that are not part of a backlog calculation. The backlog estimates include amounts from estimated MSA contracts, but our customers are not contractually obligated to purchase an amount of services from us under the MSAs. Any of our contracts, MSA, fixed-price or unit-price, may be terminated by our customers on relatively short notice. In the event of a project cancellation, we may be reimbursed for certain costs, but typically we have no contractual right to the total revenue reflected in backlog. Projects may remain in backlog for extended periods of time as a result of customer delays, regulatory requirements or project specific issues. Future revenue from certain projects completed under time and material and cost reimbursable plus fee contracts may not be included in our estimated backlog amount.
Liquidity and Capital Resources
Liquidity represents our ability to pay our liabilities when they become due, fund business operations and meet our contractual obligations and execute our business plan. Our primary sources of liquidity are our cash balances at the beginning of each period and our net cash flow. If needed, we have availability under our lines of credit to augment liquidity needs. At June 30, 2020, there were no outstanding borrowings under the Revolving Credit Facility, commercial letters of credit outstanding were $57.2 million, and available borrowing capacity was $142.8 million. In order to maintain sufficient liquidity, we evaluate our working capital requirements on a regular basis. We may elect to raise additional capital by issuing common stock, convertible notes, term debt or increasing our credit facility as necessary to fund our operations or to fund the acquisition of new businesses.
Due to the uncertainties around COVID-19 and the general economic conditions, we reduced capital expenditures and temporarily suspended our share repurchase program early in the second quarter of 2020 in order to conserve cash and cash equivalents. Late in the second quarter of 2020, we resumed spending for share repurchases. Additionally, we are deferring FICA tax payments through the end of 2020 as allowed under The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). This deferral was $13.7 million at June 30, 2020. Half of the deferral is due on December 31, 2021, and the other half is due on December 31, 2022.
39
Our cash and cash equivalents totaled $155.7 million at June 30, 2020, compared to $120.3 million at December 31, 2019. We anticipate that our cash and investments on hand, existing borrowing capacity under credit facilities and our future cash flows from operations will provide sufficient funds to enable us to meet our operating needs, our planned capital expenditures, and settle our commitments and contingencies for at least the next twelve months. In evaluating our liquidity, we do not consider cash and cash equivalents held by our consolidated VIEs.
The construction industry is capital intensive, and we expect to continue to make capital expenditures to meet anticipated needs for our services. Historically, we have invested an amount that approximated the sum of depreciation and amortization expenses plus proceeds from equipment sales. During the six months ended June 30, 2020, we spent approximately $21.7 million for capital expenditures, which included $14.1 million for construction equipment. The total of our depreciation, amortization and equipment sales was approximately $51.3 million. Capital expenditures for the remaining six months of 2020 are expected to total between $20.0 million and $30.0 million.
Cash Flows
Cash flows during the six months ended June 30, 2020 and 2019 are summarized as follows (in thousands):
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|
Six months ended |
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||||
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|
|
June 30, |
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||||
|
|
|
2020 |
|
2019 |
|
||
|
Change in cash: |
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
$ |
60,651 |
|
$ |
(96,524) |
|
|
Net cash used in investing activities |
|
|
(9,617) |
|
|
(35,711) |
|
|
Net cash (used in) provided by financing activities |
|
|
(15,266) |
|
|
34,432 |
|
|
Effect of exchange rate changes |
|
|
(384) |
|
|
854 |
|
|
Net change in cash and cash equivalents |
|
$ |
35,384 |
|
$ |
(96,949) |
|
Operating Activities
The source of our cash flows from operating activities for the six months ended June 30, 2020 and 2019 were as follows (in thousands):
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|
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|
Six months ended |
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||||
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|
|
June 30, |
|
|
|
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||||
|
|
|
2020 |
|
2019 |
|
Change |
|
|||
|
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
29,228 |
|
$ |
20,760 |
|
$ |
8,468 |
|
|
Depreciation and amortization |
|
|
39,231 |
|
|
43,392 |
|
|
(4,161) |
|
|
Changes in assets and liabilities |
|
|
(9,408) |
|
|
(161,175) |
|
|
151,767 |
|
|
Other |
|
|
1,600 |
|
|
499 |
|
|
1,101 |
|
|
Net cash provided by (used in) operating activities |
|
$ |
60,651 |
|
$ |
(96,524) |
|
$ |
157,175 |
|
Net cash provided by operating activities for the six months ended June 30, 2020 was $60.7 million compared to net cash used of $96.5 million for the six months ended June 30, 2019. The change year-over-year was primarily due to a favorable impact from the changes in assets and liabilities.
The significant components of the $9.4 million change in assets and liabilities for the six months ended June 30, 2020 are summarized as follows:
| ● | Accounts receivable and contract assets increased by $98.7 million from December 31, 2019, primarily due to increased revenue; |
| ● | Accounts payable and accrued liabilities increased by $44.0 million from December 31, 2019, due to the timing of payments to our vendors and suppliers; |
| ● | Contract liabilities increased by $30.8 million from December 31, 2019, primarily due to higher deferred revenue; and |
40
| ● | Other long-term liabilities increased by $18.0 million from December 31, 2019 primarily due to the deferral of FICA tax payments under the CARES Act. |
The significant components of the $161.2 million change in assets and liabilities for the six months ended June 30, 2019 are summarized as follows:
| ● | Accounts receivable increased by $98.0 million from December 31, 2018, due primarily to an increase in revenue and a $58.9 million increase from the delay in payments from one of our utility customers while they went through bankruptcy proceedings. |
| ● | Contract assets increased by $51.0 million from December 31, 2018, primarily due to an increase in unbilled revenue; and |
| ● | Accounts payable and accrued liabilities decreased by $17.9 million from December 31, 2018, due to the timing of payments and increased costs and revenue. |
Investing activities
For the six months ended June 30, 2020, we used $9.6 million in cash for investing activities compared to $35.7 million for the six months ended June 30, 2019.
During the six months ended June 30, 2020, we purchased property and equipment for $21.7 million compared to $56.9 million during the same period in the prior year. In addition, we received proceeds from the sale of property and equipment of $12.1 million during the six months ended June 30, 2020, compared to $21.2 million during the same period in the prior year. We believe the ownership of equipment is generally preferable to renting equipment on a project-by-project basis, as ownership helps to ensure the equipment is available for our projects when needed. In addition, ownership has historically resulted in lower overall equipment costs.
Financing activities
Financing activities used cash of $15.3 million for the six months ended June 30, 2020, which was primarily due to the following:
| ● | Repayment of long-term debt of $32.5 million; |
| ● | Repurchase of common stock of $8.3 million; |
| ● | Dividend payments to our stockholders of $5.8 million; and |
| ● | Proceeds from the issuance of debt secured by our equipment and real estate of $33.9 million |
Financing activities provided cash of $34.4 million for the six months ended June 30, 2019, which was primarily due to the following:
| ● | Net borrowings under our revolving credit facility of $55.0 million; |
| ● | Proceeds from the issuance of debt secured by our equipment of $23.1 million; |
| ● | Repayment of long-term debt of $34.3 million; |
| ● | Dividend payments to our stockholders of $6.1 million; and |
| ● | Cash distributions to non-controlling interest holders of $3.5 million. |
Credit Agreements
For a description of our credit agreements, see Note 8 — “Credit Arrangements” in Item 1, Financial Statements of this Second Quarter 2020 Report.
Common stock
For a discussion of items affecting our common stock, please see Note 14 — “Stockholders’ Equity” in Item 1, Financial Statements of this Second Quarter 2020 Report.
41
Off-balance sheet transactions
We enter into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected on our balance sheet. We have no off-balance sheet financing arrangement with VIEs. The following represents transactions, obligations or relationships that could be considered material off-balance sheet arrangements.
| ● | At June 30, 2020, we had letters of credit outstanding of $57.7 million under the terms of our credit agreements. These letters of credit are used by our insurance carriers to ensure reimbursement for amounts that they are disbursing on our behalf, such as beneficiaries under our self-funded insurance program. In addition, from time to time, certain customers require us to post a letter of credit to ensure payments to our subcontractors or guarantee performance under our contracts. Letters of credit reduce our borrowing availability under our Credit Agreement and Canadian Credit Facility. If these letters of credit were drawn on by the beneficiary, we would be required to reimburse the issuer of the letter of credit, and we may be required to record a charge to earnings for the reimbursement. As of the date of this Second Quarter 2020 Report, we do not believe that it is likely that any material claims will be made under a letter of credit; |
| ● | In the ordinary course of our business, we may be required by our customers to post surety bid or completion bonds in connection with services that we provide. At June 30, 2020, we had $710.6 million in outstanding bonds. As of the date of this Second Quarter 2020 Report, we do not anticipate that we would have to fund material claims under our surety arrangements; |
| ● | Certain of our subsidiaries are parties to collective bargaining agreements with unions. In most instances, these agreements require that we contribute to multi-employer pension and health and welfare plans. For many plans, the contributions are determined annually and required future contributions cannot be determined since contribution rates depend on the total number of union employees and actuarial calculations based on the demographics of all participants. The Employee Retirement Income Security Act of 1974 (ERISA), as amended by the Multi-Employer Pension Amendments Act of 1980, subjects employers to potential liabilities in the event of an employer’s complete or partial withdrawal of an underfunded multi-employer pension plan. The Pension Protection Act of 2006 added new funding rules for multi-employer plans that are classified as “endangered”, “seriously endangered”, or “critical”. We do not currently anticipate withdrawal from any multi-employer pension plans. Withdrawal liabilities or requirements for increased future contributions could negatively impact our results of operations and liquidity; |
| ● | We enter into employment agreements with certain employees which provide for compensation and benefits under certain circumstances and which may contain a change of control clause. We may be obligated to make payments under the terms of these agreements; and |
| ● | From time to time, we make other guarantees, such as guaranteeing the obligations of our subsidiaries. |
Effects of Inflation and Changing Prices
Our operations are affected by increases in prices, whether caused by inflation or other economic factors. We attempt to recover anticipated increases in the cost of labor, equipment, fuel and materials through price escalation provisions in certain major contracts or by considering the estimated effect of such increases when bidding or pricing new work or by entering into back-to-back contracts with suppliers and subcontractors. To date, our operations have not been materially impacted by the effects of increases in prices.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the ordinary course of business, we are exposed to risks related to market conditions. These risks primarily include fluctuations in foreign currency exchange rates, interest rates and commodity prices. We may seek to manage these risks through the use of financial derivative instruments. These instruments may include foreign currency exchange contracts and interest rate swaps.
Interest rate risk. Our revolving credit facility and term loan bear interest at a variable rate and exposes us to interest rate risk. From time to time, we may use certain derivative instruments to hedge our exposure to variable interest
42
rates. As of June 30, 2020, $148.5 million of our variable rate debt outstanding was economically hedged. Based on our variable rate debt outstanding as of June 30, 2020, a 1.0% increase or decrease in interest rates would change annual interest expense by approximately $0.5 million.
We do not execute transactions or use financial derivative instruments for trading or speculative purposes. We generally enter into transactions with counter parties that are financial institutions as a means to limit significant exposure with any one party.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As of June 30, 2020, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our “disclosure controls and procedures”, as such term is defined under Exchange Act Rules 13a-15(e) and 15d-15(e).
Based on this evaluation, our CEO and CFO concluded that, at June 30, 2020, the disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their stated objectives.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting practices or processes that occurred during the quarter ended June 30, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
The information required for this item is provided in Note 16 — “Commitments and Contingencies”, included in the unaudited notes to our condensed consolidated financial statements included under Part I of this Form 10-Q, which is incorporated herein by reference.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A entitled “Risk Factors” in our most recently filed Annual Report on Form 10-K for the year ended December 31, 2019, which could materially affect our business, financial condition or future results. The COVID-19 pandemic has heightened, and in some cases manifested, certain of the risks we normally face in operating our business, including those disclosed in our most recently filed Annual Report on Form 10-K, and the risk factor disclosure in the Form 10-K is qualified by the information relating to COVID-19 that is described in this Second Quarter 2020 Report, including the updated risk factor set forth below. Except as set forth below or otherwise discussed in this Second Quarter 2020 Report, there have been no material changes from the risk factors previously disclosed in our most recently filed Annual Report on Form 10-K.
Our results could be adversely affected by natural disasters, public health crises, political crises, or other catastrophic events.
Natural disasters, such as hurricanes, tornadoes, floods, earthquakes, and other adverse weather and climate conditions; unforeseen public health crises, such as pandemics and epidemics; political crises, such as terrorist attacks, war,
43
labor unrest, and other political instability; or other catastrophic events could disrupt our operations, or the operations of one or more of our vendors or customers, and could adversely affect our financial results. In particular, these types of events could impact our product supply chain from or to the impacted region and could cause our customers to delay or cancel projects, which could impact our ability to operate. In addition, these types of events could lead to general inefficiencies from having to start and stop work, re-sequencing work, requiring on-site health screenings before entering a job site, and following proper social distancing practices.
For example, in December 2019, a novel strain of coronavirus (“COVID-19”) emerged and has since extensively impacted global health and the economic environment. In an effort to contain COVID-19 or slow its spread, governments around the world have also enacted various measures, including orders to close all businesses not deemed “essential”, isolate residents to their homes or places of residence, and practice social distancing when engaging in essential activities. While our services have generally been deemed to be essential services, we have experienced project interruptions and restrictions that have delayed project timelines from those originally planned. In some cases, we have experienced temporary work stoppages, which has led to general inefficiencies from having to start and stop work, re-sequence work, require on-site health screenings before entering a job site, and follow proper social distancing practices. We have also been restricted from completing work or have been prevented from starting work on certain projects. There are no comparable recent events that can provide guidance as to the effect of the COVID-19 global pandemic, and, as a result, the ultimate impact of COVID-19 or a similar health epidemic is highly uncertain. We will continue to actively monitor the situation and may take further actions to alter our business operations that we determine are in the best interests of our employees, customers, suppliers, and stakeholders, or as required by federal, state, or local authorities. We will also continue to monitor our customers and their industries to assess the effect that changes in economic, market and regulatory conditions may have on them. Due to uncertainties regarding the duration and impact of the current COVID-19 pandemic, we are unable to predict the extent to which the COVID-19 pandemic may have a material adverse effect on our business, financial condition or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share repurchase activity during the three months ended June 30, 2020 was as follows:
______________________________
(1) In February 2020, our Board of Directors authorized a share repurchase program for the repurchase of up to $25.0 million of our outstanding common stock. Under the share repurchase program, we can, depending on market conditions, share price and other factors, acquire shares of our common stock on the open market or in privately negotiated transactions. In June 2020, we purchased an aggregate of 57,731 shares of our Common Stock for an aggregate purchase price of $0.9 million or $16.46 per share. As of June 30, 2020, we have $16.7 million remaining of common stock authorized to be purchased under the share repurchase program. The share repurchase plan expires on December 31, 2020.
Item 5. Other Information
Bylaw Amendment
On August 2, 2019, the Board of Directors of the Company amended the Company’s Amended and Restated Bylaws (the “Bylaws”). The amendment changed the authorized number of directors of the Company stated in Section 3.2 of the Bylaws from seven to nine, which may continue to be changed by resolution of the board of directors in accordance with Section 3.2 of the Bylaws. The foregoing summary and description of the Bylaws is subject to, and qualified in its entirety by, the full text of the Bylaws, a copy of which is filed as Exhibit 3.1 to this Second Quarter 2020 Report and incorporated herein by reference.
44
Item 6. Exhibits
The following exhibits are filed as part of this Quarterly Report on Form 10-Q.
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Exhibit
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Description |
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3.1 31.1 |
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Amended and Restated Bylaws of Primoris Services Corporation, as amended August 2, 2019 (*) Rule 13a-14(a)/15d-14(a) Certification by the Registrant’s Chief Executive Officer (*) |
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31.2 |
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Rule 13a-14(a)/15d-14(a) Certification by the Registrant’s Chief Financial Officer (*) |
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32.1 |
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Section 1350 Certification by the Registrant’s Chief Executive Officer (**) |
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32.2 |
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Section 1350 Certification by the Registrant’s Chief Financial Officer (**) |
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101 INS |
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Inline XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document (*) |
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101 SCH |
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Inline XBRL Taxonomy Extension Schema Document (*) |
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101 CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document (*) |
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101 LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document (*) |
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101 PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document (*) |
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101 DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document (*) |
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104 |
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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(*) |
Filed herewith. |
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(**) |
Furnished herewith. |
45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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PRIMORIS SERVICES CORPORATION |
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Date: August 4, 2020 |
/s/ Kenneth M. Dodgen |
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Kenneth M. Dodgen |
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Executive Vice President, Chief Financial Officer (Principal Financial Officer) |
46
Exhibit 3.1
AMENDED AND RESTATED
BYLAWS
OF
RHAPSODY ACQUISITION CORP.
a Delaware corporation
PREAMBLE
These bylaws are subject to, and governed by, the General Corporation Law of the State of Delaware (the “Delaware General Corporation Law”) and the certificate of incorporation, as it may be amended from time to time, of RHAPSODY ACQUISITION CORPORATION, a Delaware corporation (the “Corporation”). In the event of a direct conflict between the provisions of these bylaws and the mandatory provisions of the Delaware General Corporation Law or the provisions of the certificate of incorporation, such provisions of the Delaware General Corporation Law or the certificate of incorporation of the Corporation, as the case may be, will be controlling.
ARTICLE I
CORPORATE OFFICES
1.1REGISTERED OFFICE
The registered office of the Corporation shall be at 615 S. DuPont Highway, Kent County, Dover, Delaware. The name of the registered agent of the Corporation at such location is National Corporate Research, Ltd. The registered office of the Corporation may be changed from time to time by the board of directors in the manner provided by law and need not be identical to the principal place of business of the Corporation.
1.2OTHER OFFICES
The Corporation may also maintain or establish an office or offices at such other place or places, within or without the State of Delaware, as the board of directors may from time to time determine by resolution.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1PLACE OF MEETINGS
Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the board of directors. The board of directors may, in its sole discretion, determine that a meeting of stockholders shall not be held at any place, but may instead be held solely by means of remote communication as authorized by Section 211(a)(2) of the Delaware General Corporation Law. In the absence of any such designation, meetings of stockholders shall be held at the principal office of the Corporation.
2.2ANNUAL MEETING
The annual meeting of the stockholders shall be held each year at such place within or without the State of Delaware and on a date and at a time as may be designated from time to time by the board of directors, for the purpose of electing directors and for the transaction of any and all such other business as may properly be brought before the meeting. Any and all business of any nature or character whatsoever may be transacted, and action may be taken thereon, at any annual meeting, except as otherwise provided by law or by these bylaws.
2.3SPECIAL MEETING
Special meetings of the stockholders for any purpose or purposes, unless otherwise prescribed by law, may be called by the board of directors, the chairman of the board, the chief executive officer or president (in the absence of a chief executive officer), and shall be called by the secretary of the Corporation at the request in writing by holders
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of not less than 10% of the total voting power of all outstanding securities of the Corporation then entitled to vote. Each special meeting of stockholders shall be held, respectively, at any place within or without the State of Delaware as determined by the board of directors, or as designated in a waiver of notice signed by all of the stockholders then entitled to vote.
If a special meeting is called by any person or persons other than the board of directors, the chairman of the board, the chief executive officer or the president, then the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the secretary of the Corporation. The secretary shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting. No business may be transacted at such special meeting other than the business specified in such notice to stockholders. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of stockholders called by action of the board of directors may be held.
2.4NOTICE OF MEETINGS OF STOCKHOLDERS
All notices of meetings with stockholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.5 or Article IX of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. The notice shall specify the place, date, and hour of the meeting, the means of remote communication, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called.
2.5MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation or, if electronically transmitted, as provided in Article IX of these bylaws. An affidavit of the secretary or an assistant secretary or of the transfer agent of the Corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein.
2.6QUORUM; REQUIRED VOTE
The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business, except where otherwise provided by statute, the certificate of incorporation or these bylaws. Any shares, the voting of which at such meeting has been enjoined, or which for any reason cannot be lawfully voted at such meeting, shall not be counted to determine a quorum at such meeting. Any meeting at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Except as otherwise provided by law, the certificate of incorporation or these bylaws, in all matters other than the election of directors, the affirmative vote of the majority of the shares present in person or represented by proxy at a meeting at which a quorum is present and entitled to vote on the subject matter shall be the act of the stockholders. Directors shall be elected by a plurality of the shares present in person or represented by proxy at a meeting at which a quorum is present and entitled to vote on the election of directors. Except as otherwise provided by law, the certificate of incorporation or these bylaws, where a separate vote by a class or series or classes or series is required, a majority of the outstanding shares of such class or series or classes or series, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and the affirmative vote of the majority of shares of such class or series or classes or series present in person or represented by proxy at the meeting shall be the act of such call or series or classes or series.
2.7ADJOURNED MEETING; NOTICE
If a quorum is not present or represented at any meeting of the stockholders, then either (i) the chairperson of the meeting or (ii) the stockholders holding a majority of the shares represented thereat in person or by proxy shall
-2-
have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. When a meeting is adjourned to another time or place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time, place if any thereof, and the means of remote communications if any by which stockholders and proxy holders may be deemed to be present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.
The chairperson of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of business.
2.8VOTING
The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of Section 217 of the Delaware General Corporation Law (relating to voting rights of fiduciaries, pledgors and joint owners of stock) and Section 218 of the Delaware General Corporation Law (relating to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation or these bylaws, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder.
2.9WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the Delaware General Corporation Law or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice or any waiver by electronic transmission unless so required by the certificate of incorporation or these bylaws.
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2.10 |
STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING |
Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders of the Corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken and bearing the dates of signature of the stockholders who signed the consent or consents, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.
Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents signed by a sufficient number of holders to take the action were delivered to the Corporation as provided in Section 228 of the Delaware General Corporation Law. In the event that the action which is consented to is such as would have required the filing of a certificate under any provision of the Delaware General Corporation Law, if such action had been voted on by stockholders at a meeting thereof, the certificate filed under such provision shall state, in lieu of any statement required by such provision concerning any vote of stockholders, that written consent has been given in accordance with Section 228 of the Delaware General Corporation Law. Any action taken pursuant to such written consent or consents of the stockholders shall have the same force and effect as if taken by the stockholders at a meeting thereof.
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2.11 |
RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS |
In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than ten (10) days after the date upon which the resolution fixing the record date for a written consent is adopted by the board of directors, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i)The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held.
(ii)The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the board of directors is necessary, shall be the day on which the first written consent is delivered to the Corporation as provided in Section 213(b) of the Delaware General Corporation Law.
(iii)The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting.
2.12PROXIES
Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy authorized by an instrument in writing or by a transmission permitted by law filed in accordance with the procedure established for the meeting, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212 of the Delaware General Corporation Law.
2.13LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. The Corporation shall not be required to include electronic mail addresses or other electronic contact information on such list. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either: (i) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting; or (ii) during ordinary business hours, at the Corporation’s principal executive office; or (iii) if not so specified, at the place where the meeting is to be held. In the event the Corporation determines to make the list available on an electronic network, the Corporation may take reasonable steps to ensure that such information is available only to stockholders of the Corporation. If the meeting is to be held at a place, then the list shall be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible
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electronic network, and the information required to access such list shall be provided with the notice of the meeting. Such list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them.
2.14NOMINATIONS AND PROPOSALS
Nominations of persons for election to the board of directors of the Corporation and the proposal of business to be considered by the stockholders may be made at any meeting of stockholders only (a) pursuant to the Corporation’s notice of meeting, (b) by or at the direction of the board of directors or (c) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in these bylaws, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 2.14; provided that stockholder nominations of persons for election to the board of directors of the Corporation at a special meeting may only be made if the board of directors has determined that directors are to be elected at the special meeting.
For nominations or other business to be properly brought before a meeting of stockholders by a stockholder pursuant to clause (c) of the preceding sentence, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder’s notice must be delivered to the secretary of the Corporation not later than: (A) in the case of an annual meeting, the close of business on the forty-fifth (45th) day before the first anniversary of the date on which the Corporation first mailed its proxy materials for the prior year’s annual meeting of stockholders; provided, however, that if the date of the meeting has changed more than thirty (30) days from the date of the prior year’s meeting, then in order for the stockholder’s notice to be timely it must be delivered to the secretary of the Corporation a reasonable time before the Corporation mails its proxy materials for the current year’s meeting; provided further, that for purposes of the preceding sentence, a “reasonable time” shall conclusively be deemed to coincide with any adjusted deadline publicly announced by the Corporation pursuant to Rule 14a-5(f) or otherwise; and (B) in the case of a special meeting, the close of business on the seventh (7th) day following the day on which public announcement is first made of the date of the special meeting. In no event shall the public announcement of an adjournment of a meeting of stockholders commence a new time period for the giving of a stockholder’s notice as described above.
Such stockholder’s notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (or any successor thereto, “Exchange Act”) and Rule 14a-11 thereunder (or any successor thereto) (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made, the text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend the bylaws of the Corporation, the language of the proposed amendment); and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation’s books, and of such beneficial owner, (ii) the class and number of shares of the Corporation that are owned beneficially and of record by such stockholder and such beneficial owner, (iii) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business or nomination, and (iv) a representation whether the stockholder or the beneficial owner, if any, intends or is part of a group that intends (X) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation’s outstanding capital stock required to approve or adopt the proposal or elect the nominee and/or (Y) otherwise to solicit proxies from stockholders in support of such proposal or nomination.
The Corporation may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such proposed nominee to serve as a director of the Corporation. Notwithstanding any provision of these bylaws to the contrary, no business shall be conducted at a meeting of stockholders except in accordance with the procedures set forth in this Section 2.14.
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For purposes of this Section 2.14, “public announcement” shall include disclosure in a press release reported by the Dow Jones News Service, Associated Press, Reuters, Market Wire or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
Notwithstanding the foregoing provisions of this Section 2.14, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 2.14. Nothing in this Section 2.14 shall be deemed to affect any rights (1) of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act, if applicable to the Corporation, or (2) of the holders of any series of preferred stock to elect directors pursuant to any applicable provisions of the certificate of incorporation.
Except as otherwise provided by law, the chairperson of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 2.14 and, if any proposed nomination or business was not made or proposed in compliance with this Section 2.14, to declare that such nomination shall be disregarded or that such proposed business shall not be transacted.
ARTICLE III
DIRECTORS
3.1POWERS
Subject to the provisions of the Delaware General Corporation Law and any limitations in the certificate of incorporation or these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors.
3.2NUMBER OF DIRECTORS
The authorized number of directors of the Corporation shall be nine (9) until changed by resolution of the board of directors. No reduction of the authorized number of directors shall have the effect of removing any director before that director’s term of office expires.
3.3ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
The board of directors shall be divided into three classes designated as Class A, Class B and Class C, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the board of directors and shall be elected as described in the certificate of incorporation.
All elections of directors shall be by written ballot, unless otherwise provided in the certificate of incorporation. If authorized by the board of directors, such requirement of a written ballot shall be satisfied by a ballot submitted by electronic transmission, provided that any such electronic transmission must be either set forth or be submitted with information from which it can be determined that the electronic transmission was authorized by the stockholder or proxy holder.
Notwithstanding the foregoing provisions of this Section 3.3, each director shall serve until his or her successor is duly elected and qualified or until his or her death, resignation or removal. No decrease in the number of directors constituting the board of directors shall shorten the term of any incumbent director.
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3.4RESIGNATION AND VACANCIES
Any director may resign at any time upon notice given in writing or by electronic transmission to the secretary of the Corporation. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this Section in the filling of other vacancies.
Any vacancies on the board of directors resulting from death, resignation, disqualification, removal, newly created directorships or other causes shall, except as otherwise provided by the Delaware General Corporation Law or by the certificate of incorporation, be filled only by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the board of directors, or by a sole remaining director. Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director’s successor shall have been elected and qualified.
3.5PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The board of directors of the Corporation may hold meetings, both regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.
3.6REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by resolution of the board.
3.7SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors may be called by the chairman of the board or the chief executive officer or the president or the secretary or by any two directors. Notice of the time and place of special meetings shall be delivered either personally by hand, by courier or by telephone, sent by United States first-class mail, postage prepaid, sent by facsimile or sent by electronic mail, directed to each director at that director’s address, telephone number, facsimile number or electronic mail address, as the case may be, as shown on the Corporation’s records.
If the notice is (i) delivered personally by hand, by courier or by telephone, (ii) sent by facsimile or (iii) sent by electronic mail, it shall be delivered or sent at least twenty-four (24) hours before the time of the holding of the meeting. If the notice is sent by United States mail, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. Any oral notice may be communicated to the director. The notice need not specify the place of the meeting (if the meeting is to be held at the Corporation’s principal executive office) nor the purpose of the meeting. It shall not be necessary that the same method of giving notice be employed in respect of all directors, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others.
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3.8QUORUM
At all meetings of the board of directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting.
3.9WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the Delaware General Corporation Law or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice or any waiver by electronic transmission unless so required by the certificate of incorporation or these bylaws.
3.10BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing or by electronic transmission and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the board or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.
3.11FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or these bylaws, the board of directors shall have the authority to fix the compensation of directors.
3.12APPROVAL OF LOANS TO OFFICERS OR EMPLOYEES
The Corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the Corporation or of its subsidiary, including any officer or employee who is a director of the Corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the Corporation and is not prohibited by applicable laws, rules or regulations. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the Corporation.
3.13REMOVAL OF DIRECTORS
Except as may be provided in the Delaware General Corporation Law, the certificate of incorporation or these bylaws, any director, or the entire board of directors of the Corporation may be removed at any time, but only for cause. The removal shall be accomplished by the affirmative vote, at a special meeting of stockholders called for that purpose in the manner provided in these bylaws, of the holders of at least a majority of the outstanding shares entitled to vote at an election for directors.
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3.14INTERESTED TRANSACTIONS
No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board of directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if (i) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board of directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes the contract or transaction.
ARTICLE IV
COMMITTEES
4.1COMMITTEES OF DIRECTORS
The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the Corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors or in the bylaws of the Corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the Delaware General Corporation Law, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation), (ii) approve or adopt, or recommend to the stockholders, any matter expressly required by the Delaware General Corporation Law to be submitted to stockholders for approval, (iii) adopt, amend or repeal any bylaw of the Corporation, or (iv) declare any dividend.
The board of directors may at any time increase or decrease the number of members of a committee or terminate the existence of a committee. The board of directors may at any time and for any reason remove any individual committee member or fill any committee vacancy created by death, resignation, removal or increase in the number of members of a committee.
4.2COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required.
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4.3MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), Section 3.10 (adjournment and notice of adjournment), and Section 3.11 (action without a meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees and special meetings of committees may also be called by resolution of the board of directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws.
4.4ADVISORY COMMITTEES
The board of directors may, by resolution passed by a majority of the whole board, designate one or more advisory committees, with each committee to consist of one or more of the directors of the Corporation or any other such persons as the board may appoint. The board may designate one or more persons as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Members who are not board members shall not have the responsibilities or obligations of board members nor be deemed directors of the Corporation for any purpose.
ARTICLE V
OFFICERS
5.1OFFICERS
The officers of the Corporation shall be a chief executive officer, a secretary, and a chief financial officer. The Corporation may also have, at the discretion of the board of directors, a chairman of the board, a vice chairman of the board, a treasurer, one or more presidents, one or more vice presidents, one or more assistant vice presidents, assistant secretaries, assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of these bylaws. Any number of offices may be held by the same person.
5.2APPOINTMENT OF OFFICERS
The board of directors shall appoint the officers of the Corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, subject to the rights, if any, of an officer under any contract of employment.
5.3SUBORDINATE OFFICERS
The board of directors may appoint, or empower the chief executive officer or, in the absence of a chief executive officer, one or more presidents, to appoint, such other officers and agents as the business of the Corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine.
5.4REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the board of directors at any regular or special meeting of the board or, except in the case of an officer chosen by the board, by any officer upon whom such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the board of directors, president or secretary of the Corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified
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in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party.
5.5VACANCIES IN OFFICES
Any vacancy occurring in any office of the Corporation shall be filled by the board of directors or as provided in Section 5.2.
5.6CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these bylaws. If there is no chief executive officer or president, then the chairman of the board shall also be the chief executive officer of the Corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws.
5.7CHIEF EXECUTIVE OFFICER
Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the chief executive officer of the Corporation shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and affairs of the Corporation and shall report directly to the board of directors. All other officers, officials, employees and agents shall report directly or indirectly to the chief executive officer. The chief executive officer shall see that all orders and resolutions of the board of directors are carried into effect. He shall serve as the chairperson and preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the chief executive officer of a Corporation, and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws.
5.8PRESIDENT
The president may assume and perform the duties of the chief executive officer in the absence or disability of the chief executive officer or whenever the office of the chief executive officer is vacant. When acting as the chief executive officer, a president shall have all the powers of, and be subject to all the restrictions upon, the chief executive officer. The president of the Corporation shall exercise and perform such powers and duties as may from time to time be assigned to him by the board of directors, the chairman of the board, the chief executive officer or as may be prescribed by these bylaws. The president shall have authority to execute in the name of the Corporation bonds, contracts, deeds, leases and other written instruments to be executed by the Corporation. In the absence or nonexistence of the chairman of the board and chief executive officer, he shall preside at all meetings of the stockholders and, in the absence or nonexistence of a Chairman of the board of directors and chief executive officer, at all meetings of the board of directors and shall perform such other duties as the board of directors may from time to time determine.
5.9VICE PRESIDENTS
In the absence or disability of the chief executive officer and any president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of a president and when so acting shall have all the powers of, and be subject to all the restrictions upon, a president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the chairman of the board, the chief executive officer or, in the absence of a chief executive officer, one or more of the presidents.
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5.10SECRETARY
The secretary shall keep or cause to be kept, at the principal executive office of the Corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at meetings of the board of directors or committees, the number of shares present or represented at meetings of stockholders, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive office of the Corporation or at the office of the Corporation’s transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these bylaws. He or she shall keep the seal of the Corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws.
5.11CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director.
The chief financial officer shall deposit all monies and other valuables in the name and to the credit of the Corporation with such depositories as the board of directors may designate. The chief financial officer shall disburse the funds of the Corporation as may be ordered by the board of directors, shall render to the chief executive officer or, in the absence of a chief executive officer, any president and directors, whenever they request it, an account of all his or her transactions as chief financial officer and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. The chief financial officer may be the treasurer of the Corporation.
5.12TREASURER
The treasurer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director.
The treasurer shall deposit all monies and other valuables in the name and to the credit of the Corporation with such depositories as the board of directors may designate. The treasurer shall disburse the funds of the Corporation as may be ordered by the board of directors, shall render to the chief executive officer or, in the absence of a chief executive officer, any president and directors, whenever they request it, an account of all his or her transactions as treasurer and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws.
5.13ASSISTANT SECRETARY
The assistant secretary, or, if there is more than one, the assistant secretaries in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors or the stockholders may from time to time prescribe.
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5.14ASSISTANT TREASURER
The assistant treasurer, or, if there is more than one, the assistant treasurers, in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the treasurer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the board of directors or the stockholders may from time to time prescribe.
5.15AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the Corporation shall respectively have such authority and perform such duties in the management of the business of the Corporation as may be designated from time to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
6.1INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Corporation shall, to the fullest extent and in the manner permitted by the Delaware General Corporation Law as it presently exists or may hereafter be amended, indemnify and hold harmless each of its directors and officers who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal or administrative or investigative (a “proceeding”), by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, non-profit entity or other enterprise, including service with respect to employee benefit plans, against all liability and loss suffered and expenses reasonably incurred by such person in connection with any such action, suit, or proceeding. The Corporation shall be required to indemnify a person in connection with a proceeding initiated by such person only if the proceeding was authorized by the board of directors of the Corporation.
6.2INDEMNIFICATION OF OTHERS
The Corporation shall have the power, to the fullest extent and in the manner permitted by the Delaware General Corporation Law as it presently exists or may hereafter be amended, to indemnify and hold harmless, each of its employees and agents who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal or administrative or investigative (a “proceeding”) by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was an employee or agent of the Corporation or is or was serving at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust, non-profit entity or other enterprise, including service with respect to employee benefit plans, against all liability and loss suffered and expenses reasonably incurred by such person in connection with any such action, suit, or proceeding.
6.3INSURANCE
The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation or its subsidiaries as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of the Delaware General Corporation Law.
6.4EXPENSES
The Corporation shall pay the expenses incurred by any officer or director of the Corporation, and may pay the expenses incurred by any employee or agent of the Corporation, in defending any proceeding in advance of its
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final disposition; provided, however, that the payment of expenses incurred by a person in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the person to repay all amounts advanced if it should ultimately be determined that he is not entitled to be indemnified by the Corporation under this Article VI or otherwise. Such expenses incurred by other employees and agents described in Section 6.2 of this Article VI may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate.
6.5OTHER INDEMNIFICATION
The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office. However, the Corporation’s obligation, if any, to indemnify a person who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, non-profit entity or other enterprise shall be reduced by any amount such person may collect as indemnification from such other corporation, partnership, joint venture, trust, non-profit entity or other enterprise.
6.6AMENDMENT OR REPEAL
Any repeal or modification of the foregoing provisions of this Article VI shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification.
6.7MERGER OR CONSOLIDATION
For purposes of this Article VI, references to “the Corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, non-profit entity or other enterprise, shall stand in the same position under this Article VI with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued.
6.8SEVERABILITY
The invalidity or unenforceability of any provision of this Article VI shall not affect the validity or enforceability of the remaining provisions of this Article VI.
ARTICLE VII
RECORDS AND REPORTS
7.1MAINTENANCE AND INSPECTION OF RECORDS
The Corporation shall, either at its principal executive office or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each shareholder, a copy of these bylaws as amended to date, accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the Corporation’s stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person’s interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act
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on behalf of the stockholder. The demand under oath shall be directed to the Corporation at its registered office in Delaware or at its principal executive office.
7.2INSPECTION BY DIRECTORS
Any director shall have the right to examine the Corporation’s stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court of Chancery may summarily order the Corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court of Chancery may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper.
7.3REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the chief executive officer, the chief financial officer or any other person authorized by the board of directors or the chief executive officer, is authorized to vote, represent, and exercise on behalf of the Corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of the Corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1CHECKS
From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the Corporation, and only the persons so authorized shall sign or endorse those instruments.
8.2EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, agent or employee, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount.
8.3STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of the Corporation shall be represented by paper or electronic certificates, provided that the board of directors of the Corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the Corporation by the chairman or vice chairman of the board of directors, or a president or vice president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the Corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be electronic or a facsimile. In case any officer, transfer agent or registrar who has signed or whose electronic or facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue.
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The Corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the Corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the Corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon.
8.4SPECIAL DESIGNATION ON CERTIFICATES
If the Corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the Corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the Delaware General Corporation Law, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the Corporation shall issue to represent such class or series of stock a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.
8.5LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the Corporation and canceled at the same time. The Corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares.
8.6CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term “person” includes both a corporation and a natural person.
8.7DIVIDENDS
The directors of the Corporation, subject to any restrictions contained in either the Delaware General Corporation Law or the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the Corporation’s capital stock.
The directors of the Corporation may set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the Corporation, and meeting contingencies.
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8.8FISCAL YEAR
The fiscal year of the Corporation shall end on December 31 of each year until changed by the board of directors.
8.9SEAL
The Corporation may adopt a corporate seal, which shall be adopted and which may be altered by the board of directors. The Corporation may use the corporate seal by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced.
8.10TRANSFER OF STOCK
Stock of the Corporation shall be transferable in the manner prescribed by law and in these bylaws. Transfers of certificated stock shall be made on the books of the Corporation only by the person named in the certificate or by his attorney lawfully constituted in writing and upon the surrender of the certificate therefor, which shall be canceled before a new certificate shall be issued. Transfers of uncertificated stock shall be made on the books of the Corporation only by the person then registered on the books of the Corporation as the owner of such shares or by such person's attorney lawfully constituted in writing and written instruction to the Corporation containing such information as the Corporation or its agents may prescribe. No transfer of uncertificated stock shall be valid as against the Corporation for any purpose until it shall have been entered in the stock records of the Corporation by an entry showing from and to whom transferred. The Corporation shall have no duty to inquire into adverse claims with respect to any stock transfer unless (a) the Corporation has received a written notification of an adverse claim at a time and in a manner which affords the Corporation a reasonable opportunity to act on it prior to the issuance of a new, reissued or re-registered share certificate, in the case of certificated stock, or entry in the stock record books of the Corporation, in the case of uncertificated stock, and the notification identifies the claimant, the registered owner and the issue of which the share or shares is a part and provides an address for communications directed to the claimant; or (b) the Corporation has required and obtained, with respect to a fiduciary, a copy of a will, trust, indenture, articles of co-partnership, bylaws or other controlling instruments, for a purpose other than to obtain appropriate evidence of the appointment or incumbency of the fiduciary, and such documents indicate, upon reasonable inspection, the existence of an adverse claim. The Corporation may discharge any duty of inquiry by any reasonable means, including notifying an adverse claimant by registered or certified mail at the address furnished by him or, if there be no such address, at his residence or regular place of business that the security has been presented for registration of transfer by a named person, and that the transfer will be registered unless within thirty days from the date of mailing the notification, either (a) an appropriate restraining order, injunction or other process issues from a court of competent jurisdiction; or (b) an indemnity bond, sufficient in the Corporation’s judgment to protect the Corporation and any transfer agent, registrar or other agent of the Corporation involved from any loss which it or they may suffer by complying with the adverse claim, is filed with the Corporation.
8.11STOCK TRANSFER AGREEMENTS
The Corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the Corporation to restrict the transfer of shares of stock of the Corporation of any one or more classes owned by such stockholders in any manner not prohibited by the Delaware General Corporation Law.
8.12REGISTERED STOCKHOLDERS
The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.
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ARTICLE IX
NOTICE BY ELECTRONIC TRANSMISSION
Without limiting the manner by which notice otherwise may be given effectively to stockholders pursuant to the Delaware General Corporation Law, the certificate of incorporation or these bylaws, any notice to stockholders given by the Corporation under any provision of the Delaware General Corporation Law, the certificate of incorporation or these bylaws shall be effective if given by a form of electronic transmission consented to by the stockholder to whom the notice is given. Any such consent shall be revocable by the stockholder by written notice to the Corporation. Any such consent shall be deemed revoked if: (i) the Corporation is unable to deliver by electronic transmission two consecutive notices given by the Corporation in accordance with such consent; and (ii) such inability becomes known to the secretary or an assistant secretary of the Corporation or to the transfer agent, or other person responsible for the giving of notice. However, the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action.
Any notice given pursuant to the preceding paragraph shall be deemed given: (i) if by facsimile telecommunication, when directed to a number at which the stockholder has consent to receive notice; (ii) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice; (iii) if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and (iv) if by any other form of electronic transmission, when directed to the stockholder. An affidavit of the secretary or an assistant secretary or of the transfer agent or other agent of the Corporation that the notice has been given by a form of electronic transmission shall, in the absence of fraud, be prima facie evidence of the facts stated therein. Notice by a form of electronic transmission shall not apply to Sections 164, 296, 311, 312 or 324 of the Delaware General Corporation Law.
An “electronic transmission” means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved, and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.
ARTICLE X
AMENDMENTS
These bylaws may be amended, altered or repealed, and new bylaws may be adopted, by the stockholders entitled to vote. However, the Corporation may, in its certificate of incorporation, confer the power to adopt, amend, alter or repeal bylaws upon the board of directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend, alter or repeal bylaws.
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Exhibit 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas E. McCormick, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q for the period ended June 30, 2020, of Primoris Services Corporation; |
| 2. | Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation; and |
| (d) | Disclosed in this Quarterly Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: August 4, 2020 |
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/s/ Thomas E. McCormick |
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Thomas E. McCormick |
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President, Chief Executive Officer and Director |
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(Principal Executive Officer) |
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Exhibit 31.2
RULE 13a-14(a)/15d-14(a) CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kenneth M. Dodgen, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q for the period ended June 30, 2020, of Primoris Services Corporation; |
| 2. | Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation; and |
| (d) | Disclosed in this Quarterly Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: August 4, 2020 |
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/s/ Kenneth M. Dodgen |
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Kenneth M. Dodgen |
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Executive Vice President, Chief Financial Officer |
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(Principal Financial Officer) |
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Exhibit 32.1
Certification Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
In connection with the Quarterly Report of Primoris Services Corporation (the “Company”) on Form 10-Q for the period ended June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David L. King, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
In witness whereof, the undersigned has executed and delivered this certificate as of the date set forth opposite his signature below.
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Date: August 4, 2020 |
/s/ Thomas E. McCormick |
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Thomas E. McCormick |
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President, Chief Executive Officer and Director |
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(Principal Executive Officer) |
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Exhibit 32.2
Certification Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
In connection with the Quarterly Report of Primoris Services Corporation (the “Company”) on Form 10-Q for the period ended June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kenneth M. Dodgen, Executive Vice President, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
In witness whereof, the undersigned has executed and delivered this certificate as of the date set forth opposite his signature below.
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Date: August 4, 2020 |
/s/ Kenneth M. Dodgen |
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Kenneth M. Dodgen |
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Executive Vice President, Chief Financial Officer |
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(Principal Financial Officer) |
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