NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 1 - General
Business Description
Construction Partners, Inc. (the "Company") is a leading infrastructure and road construction company operating in Alabama, Florida, Georgia, North Carolina and South Carolina through its wholly owned subsidiaries. The Company provides site development, paving, utility and drainage systems, as well as construction materials including hot mix asphalt ("HMA"), aggregates, ready-mix concrete and liquid asphalt. The Company executes projects for a mix of private, municipal, state, and federal customers that are both privately and publicly funded. The majority of the work is performed under fixed unit price contracts and, to a lesser extent, fixed total price contracts.
The Company was formed as a Delaware corporation in 2007 as a holding company for its wholly owned subsidiary, Construction Partners Holdings, Inc., a Delaware corporation ("CPHI"), which incorporated in 1999 and began operations in 2001 to execute an acquisition growth strategy in the hot mix asphalt paving and construction industry. SunTx Capital Partners ("SunTx"), a private equity firm based in Dallas, Texas, is the Company's majority investor and has owned a controlling interest in the Company's stock since the Company's inception.
Seasonality
The use and consumption of our products and services fluctuate due to seasonality. Our products are used, and our construction operations and production facilities are located, outdoors. Therefore, seasonal changes and other weather-related conditions, in particular extended snowy, rainy or cold weather in the winter, spring or fall and major weather events, such as hurricanes, tornadoes, tropical storms and heavy snows, can adversely affect our business and operations through a decline in both the use of our products and demand for our services. In addition, construction materials production and shipment levels follow activity in the construction industry, which typically occurs in the spring, summer and fall. Warmer and drier weather during the third and fourth quarters of our fiscal year typically result in higher activity and revenues during those quarters. The first and second quarters of our fiscal year typically have lower levels of activity due to adverse weather conditions.
Note 2 - Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. These interim consolidated statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"), which permit reduced disclosure for interim periods. The Consolidated Balance Sheet as of September 30, 2018 was derived from audited financial statements for the fiscal year then ended, but does not include all necessary disclosures required by generally accepted accounting principles in the United States of America ("GAAP") with respect to annual financial statements. In the opinion of management, the unaudited consolidated financial statements include all recurring adjustments and normal accruals necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the dates and periods presented. These consolidated financial statements and accompanying notes should be read in conjunction with the Company's audited annual consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2018 (the "2018 Form 10-K"). Results for interim periods are not necessarily indicative of the results to be expected for a full fiscal year or for any future period.
Management's Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the recorded amounts of assets, liabilities, stockholders' equity, revenues and expenses during the reporting period, and the disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates are used in accounting for items such as recognition of revenues and cost of revenues, goodwill and other intangible assets, allowance for doubtful accounts, valuation allowances related to income taxes, accruals for potential liabilities related to lawsuits or insurance claims, and the fair value of equity-based compensation awards. Estimates are continually evaluated based on historical information and actual experience; however, actual results could differ from these estimates.
A description of certain critical accounting policies of the Company is presented below. Additional critical accounting policies and the underlying judgments and uncertainties are described in the notes to the Company's annual consolidated financial statements included in its 2018 Form 10-K.
Emerging Growth Company
The Company is an "emerging growth company" as defined by the Jumpstart Our Business Startups Act (the "JOBS Act"), enacted in April 2012. As an emerging growth company, the Company could have taken advantage of an exemption that would have allowed the Company to wait to comply with new or revised financial accounting standards until the effective date of such standards for private companies. However, the JOBS Act provides that a company may elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but such election to opt out is irrevocable. The Company has elected to opt out of such extended transition period, which means that when a standard is issued or revised and it has different effective dates for public and private companies, the Company is required to adopt the new or revised standard at the effective date applicable to public companies that are not emerging growth companies.
Cash and Cash Equivalents
Cash consists principally of currency on hand and demand deposits at commercial banks. Cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts of cash and are so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Cash equivalents include investments with original maturities of three months or less. The Company maintains demand accounts, money market accounts and certificates of deposit at several banks.
Contracts Receivable Including Retainage, net
Contracts receivable are generally based on amounts billed and currently due from customers, amounts currently due but unbilled, and amounts retained by the customer pending completion of a project. It is common in the Company's industry for a small portion of progress billings or the contract price, typically 10%, to be withheld by the customer until the Company completes a project to the satisfaction of the customer in accordance with contract terms. Such amounts, defined as retainage, represent a contract asset and are included on the Consolidated Balance Sheet as "Contracts receivable including retainage, net". Based on the Company's experience with similar contracts in recent years, billings for such retainage balances are generally collected within one year of the completion of the project.
The carrying value of contracts receivable including retainage, net of the allowance for doubtful accounts, represents their estimated net realizable value. Management provides for uncollectible accounts through a charge to earnings and a credit to the allowance for doubtful accounts based on its assessment of the current status of individual accounts, type of service performed, and current economic conditions. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts and an adjustment of the contract receivable.
Contract Assets and Contract Liabilities
Billing practices for the Company's contracts are governed by the contract terms of each project based on (i) progress toward completion approved by the owner, (ii) achievement of milestones or (iii) pre-agreed schedules. Billings do not necessarily correlate with revenues recognized under the percentage-of-completion method of accounting. The Company records contract assets and contract liabilities to account for these differences in timing.
The contract asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," arises when the Company recognizes revenues for services performed under its construction projects, but the Company is not yet entitled to bill the customer under the terms of the contract. Amounts billed to customers are excluded from this asset and reflected on the Consolidated Balance Sheet as "Contracts receivable including retainage, net". Included in costs and estimated earnings on uncompleted contracts are amounts the Company seeks or will seek to collect from customers or others for (i) errors, (ii) changes in contract specifications or design, (iii) contract change orders in dispute, unapproved as to scope and price, or (iv) other customer-related causes of unanticipated additional contract costs (such as claims). Such amounts are recorded at estimated net realizable value when realization is probable and can be reasonably estimated. Claims and unapproved change orders made by the Company may involve negotiation and, in rare cases, litigation. Unapproved change orders and claims also involve the use of estimates, and revenues associated with unapproved change orders and claims are included when realization is probable and amounts can be reliably determined. The Company did not recognize any material amounts associated with claims and unapproved change orders during the periods presented.
The contract liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents the Company's obligation to transfer goods or services to a customer for which the Company has been paid by the customer or for which the Company has billed the customer under the terms of the contract. Revenue for future services reflected in this account are recognized, and the liability is reduced, as the Company subsequently satisfies the performance obligation under the contract.
Concentration of Risks
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of contracts receivable including retainage. In the normal course of business, the Company provides credit to its customers and does not generally require collateral. Concentrations of credit risk associated with these receivables are monitored on an ongoing basis. The Company has not historically experienced significant credit losses, due primarily to management's assessment of customers' credit ratings. The Company principally deals with recurring customers, state and local governments and well-known local companies whose reputations are known to management. The Company performs credit checks for significant new customers and generally requires progress payments for significant projects. The Company generally has the ability to file liens against the property if payments are not made on a timely basis. No single customer accounted for more than 10% of the Company's contracts receivable including retainage, net balance at June 30, 2019 or September 30, 2018.
Projects performed for various Departments of Transportation accounted for 41.8% and 45.6% of consolidated revenues for the three months ended June 30, 2019 and 2018, respectively, and for 39.4% and 40.9% of consolidated revenues for the nine months ended June 30, 2019 and 2018, respectively. Customers that accounted for more than 10% of consolidated revenues during those periods are presented below:
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% of Consolidated Revenues
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For the Three Months Ended June 30,
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For the Nine Months Ended June 30,
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|
2019
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|
2018
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|
2019
|
|
2018
|
Alabama Department of Transportation
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|
15.4
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%
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|
17.0
|
%
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|
12.9
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%
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|
14.8
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%
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North Carolina Department of Transportation
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|
13.9
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%
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|
14.8
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%
|
|
13.4
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%
|
|
13.5
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%
|
Revenues from Contracts with Customers
The Company derives all of its revenues from contracts with its customers, predominantly by performing construction services for both public and private infrastructure projects, with an emphasis on highways, roads, bridges, airports and commercial and residential developments. These projects are performed for a mix of federal, state, municipal and private customers. In addition, the Company generates revenues from the sale of construction materials including HMA, aggregates, liquid asphalt and ready-mix concrete to third-party public and private customers pursuant to contracts with those customers. The following table reflects, for the periods presented, (i) revenues generated from public infrastructure construction projects and the sale of construction materials to public customers and (ii) revenues generated from private infrastructure construction projects and the sale of construction materials to private customers.
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For the Three Months Ended June 30,
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For the Nine Months Ended June 30,
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2019
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2018
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2019
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2018
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Private
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$
|
66,207
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|
$
|
56,293
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|
$
|
166,193
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|
$
|
148,525
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Public
|
|
$
|
161,083
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|
$
|
138,782
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|
$
|
379,728
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|
$
|
315,870
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Revenues derived from construction projects are recognized over time, using the percentage-of-completion method of accounting, as the Company satisfies its performance obligations by transferring control of the asset created or enhanced by the project to the customer. Recognition of revenues and cost of revenues for construction projects requires significant judgment by management, including, among other things, estimating total costs expected to be incurred to complete a project and measuring progress toward completion. Management reviews contract estimates regularly to assess revisions of estimated costs to complete a project and measurement of progress toward completion.
Management believes the Company maintains reasonable estimates based on prior experience; however, many factors contribute to changes in estimates of contract costs. Accordingly, estimates made with respect to uncompleted projects are subject to change as each project progresses and better estimates of contract costs become available. All contract costs are recorded as incurred, and revisions to estimated total costs are reflected as soon as the obligation to perform is determined. Provisions are recognized for the full amount of estimated losses on uncompleted contracts whenever evidence indicates that the estimated total cost of a contract exceeds its estimated total revenue, regardless of the stage of completion. When the Company incurs additional costs related to work performed by subcontractors, the Company may be able to utilize contractual provisions to back charge the subcontractors for those costs. A reduction to costs related to back charges is recognized when the estimated recovery is probable and the amount can be reasonably estimated. Contract costs consist of (i) direct costs on contracts, including labor, materials, and amounts payable to subcontractors and
(ii) indirect costs related to contract performance, such as insurance, employee benefits, and equipment (primarily depreciation, fuel, maintenance and repairs).
Progress toward completion is estimated using the input method, measured by the relationship of total cost incurred through the measurement date to total estimated costs required to complete the project (cost-to-cost method). The Company believes this method best depicts the transfer of goods and services to the customer because it represents satisfaction of the Company's performance obligation under the contract, which occurs as the Company incurs costs. The Company measures percentage of completion based on the performance of a single performance obligation under its construction projects. Each of the Company's construction contracts represents a single performance obligation to complete a defined construction project. This is because goods and services promised for delivery to a customer are not distinct, as the customer cannot benefit from any individual portion of the services on its own. All deliverables under a contract are part of a project defined by a customer and represent a series of integrated goods and services that have the same pattern of delivery to the customer and use the same measure of progress toward satisfaction of the performance obligation as the customer's asset is created or enhanced by the Company. The Company's obligation is not satisfied until the entire project is complete.
Revenue recognized during a reporting period is based on the estimated incremental percentage-of-completion applied to the total contract price, including adjustments for variable consideration such as liquidated damages, penalties or bonuses related to the timeliness or quality of project performance. Such adjustments are made to reflect the most likely amount of consideration management expects the Company to be entitled to at the completion of the contract, based on the best information available to the Company. The basis for total contract price is a stated amount in the contract, which is generally either fixed unit price or fixed total price, as described below. The Company adjusts the estimated contract price to include variable consideration to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. Total contract price is adjusted to reflect expected liquidated damages assessments or other penalties in the period the Company determines they will be incurred or when the customer imposes the penalty. Total contract price is adjusted to reflect contract bonus provisions related to timeliness or quality metrics when realization is probable and amounts can be reliably determined, which is generally when they are awarded by the customer. We account for changes in the measure of progress and changes to the estimated transaction price using a cumulative catch-up adjustment.
The majority of the Company's public construction contracts are fixed unit price contracts. Under fixed unit price contracts, the Company is committed to providing materials or services required by a contract at fixed unit prices (for example, dollars per ton of asphalt placed). The Company's private customer contracts are primarily fixed total price contracts, also known as lump sum contracts, which require that the total amount of work be performed for a single price. Contract cost is recorded as incurred, and revisions in contract revenue and cost estimates are reflected in the accounting period when known. Changes in job performance, job conditions and estimated profitability, including those changes arising from contract change orders, penalty provisions and final contract settlements, may result in revisions to estimated revenues and costs and are recognized in the period in which the revisions are determined.
Change orders are modifications of an original contract that effectively change the existing provisions of the contract and become part of the single performance obligation that is partially satisfied at the date of the contract modification. This is because goods and services promised under change orders are generally not distinct from the remaining goods and services under the existing contract, due to the significant integration of services performed in the context of the contract. Accordingly, change orders are generally accounted for as a modification of the existing contract and single performance obligation. We account for the modification using a cumulative catch-up adjustment. Either the Company or its customers may initiate change orders, which may include changes in specifications or designs, manner of performance, facilities, equipment, materials, sites and period of completion of the work.
Revenues derived from the sale of HMA, aggregates, ready-mix concrete, and liquid asphalt are recognized at a point in time, which is when control of the product is transferred to the customer. Generally, that point in time is when the customer accepts delivery at its facility or receives product in its own transport vehicles from one of the Company's HMA plants. Upon purchase, the Company generally provides an invoice or similar document detailing the goods transferred to the customer. The Company generally offers payment terms customary in the industry, which typically require payment ranging from point-of-sale to 30 days following purchase.
Income Taxes
The provision for income taxes includes federal and state income taxes. Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which the temporary differences are expected to be reversed or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management evaluates the realization of deferred tax assets and establishes a valuation allowance when it is more likely than not that all or a portion of the deferred tax assets will not be realized. Deferred tax assets and deferred tax liabilities are presented on a net basis by taxing authority and classified as non-current on the Consolidated Balance Sheets. The Company classifies income tax-related interest and penalties as interest expense and other expenses, respectively.
Earnings per Share
As described in Note 8 – Equity, the Company completed an initial public offering (the "IPO") and reclassification (the "Reclassification") of its common stock during the fiscal year ended September 30, 2018, involving, among other things, a 25.2 to 1 split of shares of common stock (the "Stock Split") and the creation of a dual-class common stock structure. Prior to the Reclassification, all net income of the Company was attributable to the holders of shares of common stock immediately prior to the Reclassification. During the period beginning from the Reclassification through the IPO, all net income of the Company was attributable to holders of Class B common stock. Since the IPO, all net income of the Company has been attributable equally, on a per share basis, to the holders of Class A common stock and Class B common stock.
Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted average number of aggregate shares of pre-Reclassification common stock, Class A common stock and Class B common stock, as applicable for the respective periods, calculated on a post-Stock Split basis. Diluted earnings per share is calculated by dividing net income attributable to common stockholders by the weighted average number of aggregate shares of pre-Reclassification common stock, Class A common stock, Class B common stock and potential dilutive common shares determined using the treasury method, calculated on a post-Stock Split basis as applicable for the respective periods. Securities that are anti-dilutive are not included in the calculation of diluted earnings per share.
Note 3 - Accounting Standards
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASC 606"), which revises and consolidates current guidance, eliminates industry-specific revenue recognition guidance and establishes a comprehensive principle-based approach for determining revenue recognition. The core principle of the guidance is that an entity shall recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for providing those goods or services. Amendments of this update set forth a five-step revenue recognition model to be applied consistently to all contracts with customers, except those that are within the scope of other topics in the Accounting Standards Codification ("ASC"): (i) identify the contract with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The update also provides guidance regarding the recognition of costs related to obtaining and fulfilling customer contracts. This update also requires quantitative and qualitative disclosures sufficient to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including disclosures on significant judgments made when applying the guidance. The FASB subsequently amended ASC 606 on multiple occasions to, among other things, delay its effective date and clarify certain implementation guidance.
The update permits adoption using either (i) a full retrospective approach, under which all years included in the financial statements are presented under the revised guidance, or (ii) a modified retrospective approach, under which financial statements are prepared under the revised guidance for the year of adoption, but not for prior years. Under the latter method, entities recognize a cumulative adjustment to the opening balance of retained earnings for contracts that still require performance by the entity at the date of adoption.
Management adopted this update for the Company's fiscal year beginning October 1, 2018, using the modified retrospective approach. The adoption of ASC 606 on October 1, 2018 did not result in a material impact that required recognition of a cumulative adjustment of the opening retained earnings balance for contracts that still required performance at September 30, 2018. Application of ASC 606 for the nine months ended June 30, 2019 had the following impact on the Company's Consolidated Balance Sheet at June 30, 2019 and Consolidated Statements of Income for the three and nine months ended June 30, 2019 (in thousands):
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|
As Reported
|
|
Impact of ASC 606
|
|
Without Application of ASC 606
|
At June 30, 2019
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|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
14,043
|
|
$
|
(982)
|
|
$
|
15,025
|
Inventories
|
|
37,069
|
|
1,205
|
|
35,864
|
Accrued expenses and other liabilities
|
|
19,028
|
|
(29)
|
|
19,057
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
$
|
32,344
|
|
$
|
338
|
|
$
|
32,006
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2019
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|
|
|
|
|
|
Revenues
|
|
$
|
227,290
|
|
$
|
(343)
|
|
$
|
227,633
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Cost of revenues
|
|
189,198
|
|
311
|
|
188,887
|
Provision (benefit) for income taxes
|
|
4,941
|
|
9
|
|
4,932
|
Net income
|
|
$
|
17,202
|
|
$
|
(23)
|
|
$
|
17,225
|
|
|
|
|
|
|
|
For the Nine Months Ended June 30, 2019
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|
|
|
|
|
|
Revenues
|
|
$
|
545,921
|
|
$
|
(1,321)
|
|
$
|
547,242
|
Cost of revenues
|
|
466,900
|
|
(1,205)
|
|
468,105
|
Provision (benefit) for income taxes
|
|
8,080
|
|
(29)
|
|
8,109
|
Net income
|
|
$
|
26,568
|
|
$
|
(87)
|
|
$
|
26,655
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|
The Company has refined its accounting policies and related internal controls affected by this update. Management's assessment of the Company's construction contracts under the new standard supports the recognition of revenue over time using the percentage-of-completion method of accounting, measured by the relationship of total cost incurred to total estimated contract costs (cost-to-cost method), which is consistent with the Company's historical revenue recognition practices. As such, the Company's construction contracts continue to be recognized over time considering the continuous transfer of control to its customers during the performance of construction projects. The Company also enhanced its disclosures regarding judgments and estimates used by management in the application of ASC 606 in Note 2 - Significant Accounting Policies.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("ASC 805"). The amendments of this update refine the definition of a business. Prior to this update, guidance in ASC 805 defined a business as having an integrated set of assets along with three elements or activities: inputs, processes, and outputs (collectively referred to as a "set"). The amendments of this update provided a framework to assist in the evaluation of when a set is not a business. If substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If that threshold is not met, the Company must perform further analysis to determine whether the set is a business. At a minimum, the set must include an input and a substantive process that together significantly contribute to the ability to create outputs. The Company adopted this update for the Company’s fiscal year beginning October 1, 2018 and applied the guidance to acquisitions during the second quarter of the fiscal year ending September 30, 2019 as described in Note 4 - Business Acquisitions and Note 7 - Property, Plant and Equipment.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which becomes effective for the Company on October 1, 2019. The standard requires that lessees present right-of-use assets and lease liabilities on the balance sheet. The Company’s implementation efforts are focused on accounting policy and disclosure updates and system enhancements required to meet the new standard. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and related disclosures.
Note 4 - Business Acquisitions
Florida Acquisition
On February 26, 2019, a subsidiary of the Company executed an asset purchase agreement to acquire substantially all of the assets of an HMA and ready-mix concrete business located in Okeechobee, Florida. This transaction enables the Company to serve new markets
in south central Florida through an expanded geographic presence in the state. The acquisition was accounted for as a business combination in accordance with ASC 805. The purchase price of $8.9 million was paid from cash on hand at closing on February 28, 2019.
The provisional allocation of the purchase price to assets acquired and liabilities assumed, based on their estimated fair values at the acquisition date, was determined in accordance with the methodology described under Fair Value Measurements in Note 3 to the Company's audited financial statements for the fiscal year ended September 30, 2018. The amounts allocated were not material to the Company's Consolidated Balance Sheet. The purchase price exceeding the net fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill in the amount of $4.0 million, which is deductible for income tax purposes. Goodwill primarily represents the assembled work force and synergies expected to result from the acquisition. Upon finalizing the accounting for this transaction, management expects to ascribe value to other identifiable intangible assets, including customer relationships and customer backlog, which will reduce the amount allocated to goodwill.
The results of operations since the February 28, 2019 acquisition date attributable to this acquisition are included in the consolidated financial statements since the acquisition date and were not material to the Consolidated Statements of Income for the three or nine months ended June 30, 2019. Pro forma results of operations as if the acquisition had been consummated on October 1, 2017 would not be material to the Consolidated Statements of Income.
The Company recorded certain costs to effect the acquisition as they were incurred, which are reflected as general and administrative expenses on the Company's Consolidated Statements of Income in the amount of $0.1 million for the three and nine months ended June 30, 2019.
The Scruggs Company
On May 15, 2018, the Company executed a stock purchase agreement (the "Stock Purchase Agreement") to complete the acquisition of 100% of the common shares and voting interests of The Scruggs Company ("Scruggs"), which complemented the Company's vertically integrated southeastern United States operations, providing new bidding areas in the expanding Georgia market (the "Scruggs Acquisition"). This acquisition was accounted for as a business combination in accordance with ASC 805.
The Consolidated Statements of Income include $18.5 million of revenue and $2.3 million of net income attributable to operations of Scruggs for the three months ended June 30, 2019, and $53.2 million of revenue and $5.2 million of net income attributable to the operations of Scruggs for the nine months ended June 30, 2019. The following presents unaudited pro forma revenues and net income for the three and nine months ended June 30, 2018 as though the Scruggs Acquisition had occurred on October 1, 2016 (in thousands):
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For the Three Months Ended June 30, 2018
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For the Nine Months Ended June 30, 2018
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Pro forma revenues
|
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$
|
206,924
|
|
$
|
519,735
|
Pro forma net income
|
|
$
|
15,379
|
|
$
|
40,653
|
|
|
|
|
|
Unaudited pro forma financial information is presented as if the operations of Scruggs had been included in the consolidated results of the Company and gives effect to transactions that are directly attributable to the Scruggs Acquisition, including adjustments to:
a.Include the pro forma results of operations of Scruggs for the three and nine months ended June 30, 2018.
b.Include additional depreciation and depletion expense related to the fair value of acquired property, plant and equipment and quarry reserves, as applicable, as if such assets were acquired on October 1, 2016 and the Company's depreciation and depletion methodologies were consistently applied to such assets.
c.Include interest expense under the Compass Term Loan, defined in Note 9 - Debt, as if the $22.0 million borrowed to partially finance the purchase price was borrowed on October 1, 2016. Interest expense calculations further assume that no principal payments were made applicable to the $22.0 million borrowed during the period from October 1, 2016 through June 30, 2018, and that the interest rate in effect on the date the Company made the additional $22.0 million borrowing on May 15, 2018 was in effect for the period from October 1, 2016 through June 30, 2018.
Unaudited pro forma information is presented for informational purposes only and may not be indicative of revenue or net income that have been achieved if the Scruggs Acquisition had occurred on October 1, 2016.
Note 5 - Contracts Receivable Including Retainage, net
Contracts receivable including retainage, net consisted of the following at June 30, 2019 and September 30, 2018 (in thousands):
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|
|
|
|
|
|
June 30, 2019
|
|
September 30, 2018
|
|
(unaudited)
|
|
|
Contracts receivable
|
$
|
117,046
|
|
$
|
104,541
|
Retainage
|
19,182
|
|
16,848
|
|
136,228
|
|
121,389
|
Allowance for doubtful accounts
|
(1,519)
|
|
(1,098)
|
Contracts receivable including retainage, net
|
$
|
134,709
|
|
$
|
120,291
|
|
|
|
|
Retainage receivables have been billed, but are not due until contract completion and acceptance by the customer.
Note 6 - Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings compared to billings on uncompleted contracts at June 30, 2019 and September 30, 2018 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
September 30, 2018
|
|
(unaudited)
|
|
|
Costs on uncompleted contracts
|
$
|
913,628
|
|
$
|
743,322
|
Estimated earnings to date on uncompleted contracts
|
123,914
|
|
95,155
|
|
1,037,542
|
|
838,477
|
Billings to date on uncompleted contracts
|
(1,055,843)
|
|
(867,881)
|
Net billings in excess of costs and estimated earnings on uncompleted contracts
|
$
|
(18,301)
|
|
$
|
(29,404)
|
|
|
|
|
Significant changes to balances of costs and estimated earnings in excess of billings (contract asset) and billings in excess of costs and estimated earnings (contract liability) on uncompleted contracts from September 30, 2018 to June 30, 2019 are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Estimated Earnings in Excess of Billings on
Uncompleted Contracts
|
|
Billings in Excess of Costs and Estimated Earnings on
Uncompleted Contracts
|
|
Net Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts
|
September 30, 2018
|
$
|
9,334
|
|
$
|
(38,738)
|
|
$
|
(29,404)
|
Changes in revenue billed, contract price or cost estimates
|
4,709
|
|
6,394
|
|
11,103
|
June 30, 2019 (unaudited)
|
$
|
14,043
|
|
$
|
(32,344)
|
|
$
|
(18,301)
|
|
|
|
|
|
|
At June 30, 2019, the Company had unsatisfied or partially unsatisfied performance obligations under construction project contracts representing approximately $522 million in aggregate transaction price. The Company expects to earn revenue as it satisfies its performance obligations under those contracts in the amount of approximately $201 million during the remainder of the fiscal year ending September 30, 2019 and approximately $321 million thereafter.
Note 7 - Property, Plant and Equipment
Property, plant and equipment at June 30, 2019 and September 30, 2018 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
September 30, 2018
|
|
|
(unaudited)
|
|
|
Construction equipment
|
|
$
|
217,662
|
|
$
|
190,420
|
Asphalt plants
|
|
82,855
|
|
79,563
|
Land and improvements
|
|
34,888
|
|
29,624
|
Quarry reserves
|
|
20,749
|
|
20,908
|
Buildings
|
|
14,248
|
|
12,416
|
Furniture and fixtures
|
|
4,588
|
|
4,422
|
Leasehold improvements
|
|
1,347
|
|
765
|
Total property, plant and equipment, gross
|
|
376,337
|
|
338,118
|
Accumulated depreciation, depletion and amortization
|
|
(175,660)
|
|
(160,795)
|
Construction in progress
|
|
1,035
|
|
1,369
|
Total property, plant and equipment, net
|
|
$
|
201,712
|
|
$
|
178,692
|
|
|
|
|
|
On February 28, 2019, the Company acquired a liquid asphalt terminal located in Panama City, Florida. The purchase price of $10.8 million was paid in cash on the date of acquisition. The Company uses the terminal to receive, store and process liquid asphalt primarily for use in its construction projects. The transaction was accounted for as an asset acquisition in accordance with ASC 805. Accordingly, the purchase price and direct costs of $0.1 million incurred to complete the transaction were allocated to asset categories based on their relative fair value at the date of acquisition.
Depreciation, depletion and amortization expense related to property, plant and equipment was $7.8 million and $6.5 million for the three months ended June 30, 2019 and June 30, 2018, respectively, and $22.1 million and $17.6 million for the nine months ended June 30, 2019 and June 30, 2018, respectively.
Note 8 - Equity
At June 30, 2019 and September 30, 2018, the Company had authorized for issuance 10,000,000 shares of preferred stock, par value $0.001. No shares of preferred stock were issued and outstanding at June 30, 2019 or September 30, 2018.
Reclassification of Common Stock and Initial Public Offering
On April 23, 2018, the Company completed the Reclassification by amending and restating its certificate of incorporation to effectuate a dual class common stock structure consisting of Class A common stock and Class B common stock. As a result, each share of common stock, was reclassified into 25.2 shares of Class B common stock so that all holders of shares of outstanding common stock became the holders of 41,817,537 shares of Class B common stock, and shares held by the Company in treasury became 3,170,034 Class B treasury shares. All share and per share amounts have been retroactively adjusted for all periods presented to give effect to the Stock Split.
On May 8, 2018, the Company completed its IPO, in which it sold 11,250,000 shares of Class A common stock at a price of $12.00 per share. Of these shares, 9,000,000 were shares of Class A common stock sold by the Company and 2,250,000 were sold by holders of Class B common stock, which shares upon sale automatically converted into 2,250,000 shares of Class A common stock. On May 24, 2018, the underwriters of the IPO partially exercised their over-allotment option to purchase an additional 700,000 shares of Class A common stock at the IPO price of $12.00, less the underwriting discount and commissions. Of these shares, 350,000 were shares of Class A common stock sold by the Company and 350,000 were sold by holders of Class B common stock, which shares upon sale automatically converted into 350,000 shares of Class A common stock.
At June 30, 2019 and September 30, 2018, the Company had authorized for issuance 400,000,000 shares of Class A common stock, of which 32,442,545 were issued and outstanding at June 30, 2019, and 11,950,000 were issued and outstanding at September 30, 2018.
At June 30, 2019 and September 30, 2018, the Company had authorized for issuance 100,000,000 shares of Class B common stock, of which 22,162,369 were issued and 19,239,417 were outstanding at June 30, 2019, and 42,387,571 were issued and 39,464,619 were
outstanding at September 30, 2018. At June 30, 2019 and September 30, 2018, the Company held 2,922,952 Class B shares in treasury, at an average cost of $5.34 per share.
Conversion of Class B common stock to Class A common stock
During the three months ended June 30, 2019, certain stockholders of the Company converted a total of 20,225,202 shares of the Company's Class B common stock, on a one-for-one basis, into shares of the Company's Class A common stock. Following the conversion, there were 32,442,545 shares of Class A common stock and 19,239,417 shares of Class B common stock outstanding.
Grant of Restricted Shares of Class A common stock
As described in Note 14 – Equity-Based Compensation, during the three months ended June 30, 2019, the Company awarded a total of 267,343 restricted shares of Class A common stock to its non-employee directors under the Construction Partners, Inc. 2018 Equity Incentive Plan (as amended, the "Equity Incentive Plan").
Amendment to the Equity Incentive Plan
On May 24, 2019, the Compensation Committee of the Company’s Board of Directors (the “Board”) adopted an amendment (the “Amendment”) to the Equity Incentive Plan relating to exceptions from the Equity Incentive Plan’s $750,000 limit on the aggregate dollar value of equity-based awards granted during any calendar year to a non-employee director. Prior to the adoption of the Amendment, the limit could be multiplied by two with respect to awards granted in the calendar year in which a non-employee director first joined the Board. The Amendment changed the period within which the aggregate value of equity-based awards may be multiplied by two to be the calendar year in which a non-employee director is first granted equity-based awards under the Equity Incentive Plan.
Note 9 - Debt
The Company maintains various credit facilities from time to time to finance acquisitions, the purchase of real estate, construction equipment, asphalt plants and other fixed assets, and for general working capital purposes. This includes, among other things, a credit agreement with BBVA Compass Bank (formerly known as Compass Bank) as agent, sole lead arranger and sole book runner (as amended, the "Compass Credit Agreement") providing for a $72.0 million term loan (the "Compass Term Loan") and a $30.0 million revolving credit facility (the "Compass Revolving Credit Facility"). Debt at June 30, 2019 and September 30, 2018 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
September 30,
|
|
2019
|
|
2018
|
|
(unaudited)
|
|
|
Long-term debt:
|
|
|
|
Compass Term Loan
|
$
|
46,500
|
|
$
|
57,300
|
Compass Revolving Credit Facility
|
5,000
|
|
5,000
|
Other long-term debt
|
661
|
|
964
|
Total long-term debt
|
52,161
|
|
63,264
|
Deferred debt issuance costs
|
(288)
|
|
(362)
|
Debt discount
|
(6)
|
|
(14)
|
Current maturities of long-term debt
|
(14,771)
|
|
(14,773)
|
Long-term debt, net of current maturities
|
$
|
37,096
|
|
$
|
48,115
|
|
|
|
|
Note 10 - Earnings Per Share
As described in Note 8 - Equity, the Company completed an IPO and Reclassification of common stock during the third quarter of the fiscal year ended September 30, 2018.
As described in Note 2 - Significant Accounting Policies, Earnings Per Share, diluted earnings per share is calculated by dividing net income attributable to common stockholders by the basic weighted average number of common shares outstanding and potential
dilutive common shares determined using the treasury method, as applicable for the respective periods. Securities that are anti-dilutive are not included in the calculation of diluted earnings per share.
The following table summarizes the weighted-average number of basic and diluted common shares outstanding and the calculation of basic and diluted earnings per share for the periods presented (in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
|
|
For the Nine Months Ended June 30,
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Numerator
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
|
$
|
17,202
|
|
$
|
13,403
|
|
$
|
26,568
|
|
$
|
35,647
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding, basic
|
|
51,414,619
|
|
46,557,785
|
|
51,414,619
|
|
43,648,309
|
Net income per common share attributable to common shareholders, basic
|
|
$
|
0.33
|
|
$
|
0.29
|
|
$
|
0.52
|
|
$
|
0.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
|
|
For the Nine Months Ended June 30,
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Numerator
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
|
$
|
17,202
|
|
$
|
13,403
|
|
$
|
26,568
|
|
$
|
35,647
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding, basic
|
|
51,414,619
|
|
46,557,785
|
|
51,414,619
|
|
43,648,309
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Non-Plan Stock Options
|
|
—
|
|
387,892
|
|
—
|
|
271,163
|
2018 Restricted Stock Grants
|
|
—
|
|
42,682
|
|
—
|
|
13,074
|
2019 Restricted Stock Grants
|
|
8,280
|
|
—
|
|
268
|
|
—
|
Weighted average number of common
shares outstanding, diluted
|
|
51,422,899
|
|
46,988,359
|
|
51,414,887
|
|
43,932,546
|
Net income per common share attributable
to common stockholders, diluted
|
|
$
|
0.33
|
|
$
|
0.29
|
|
$
|
0.52
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
Note 11 - Provision for Income Taxes
The Company files a consolidated United States income tax return and income tax returns in various states. Management evaluated the Company's tax positions at June 30, 2019, based on appropriate provisions of applicable enacted tax laws and regulations, and believes that they are supportable based on their specific technical merits and the facts and circumstances of the respective transactions.
On December 22, 2017, the United States government enacted comprehensive tax legislation known as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act included broad and complex changes to the United States tax code, including a reduction in the United States federal corporate income tax rate from 35.0% to 21.0% effective January 1, 2018. For periods during the fiscal year ended September 30, 2018, the Company recorded its income tax provision based on a blended U.S. statutory rate of 24.5%, which is based on a prorated applicable tax rate before and after the effective date of the Tax Act, and the applicable state income taxes.
During the nine months ended June 30, 2018, the Company recorded a provisional discrete tax benefit of $4.4 million related to the Tax Act, primarily related to an adjustment of its United States deferred tax liabilities by the same amount, reflecting the reduction in the United States federal corporate income tax rate. This net reduction in deferred tax liabilities also included the estimated impact on the Company's net state deferred tax assets. The Company completed its accounting for the income tax effects of the Tax Act during the fourth quarter of its fiscal year ended September 30, 2018.
The Company's effective tax rate for the three months ended June 30, 2019 and June 30, 2018 was 22.3% and 9.5%, respectively. The lower effective tax rate for the three months ended June 30, 2018 compared to the three months ended June 30, 2019 was primarily due
to the benefit of a tax credit recorded during the three months ended June 30, 2018 related to the enactment of the Tax Act. The Company's effective tax rate for the nine months ended June 30, 2019 and June 30, 2018 was 23.3% and 13.1%, respectively. The lower effective tax rate for the nine months ended June 30, 2018 compared to the nine months ended June 30, 2019 was primarily due to the benefit of the tax credit recorded during the nine months ended June 30, 2018 related to the enactment of the Tax Act.
Note 12 - Related Parties
On December 31, 2017, the Company sold an indirect wholly owned subsidiary to an immediate family member of a Senior Vice President of the Company ("Purchaser of subsidiary") in consideration for an interest-bearing note receivable in the amount of $0.9 million, which approximated the net book value of the disposed entity. At June 30, 2019, $0.1 million and $0.8 million was reflected on the Company's Consolidated Balance Sheet within other current assets and other assets, respectively, representing the remaining balances on this note receivable. In connection with this transaction, the Company also received an interest-bearing note receivable from the disposed entity ("Disposed entity") on December 31, 2017 in the amount of $1.0 million representing certain accounts payable of the Disposed entity that were paid by the Company. At June 30, 2019, $0.1 million and $0.9 million was reflected on the Company's Consolidated Balance Sheet within other current assets and other assets, respectively, representing the remaining balances on this note receivable. Remaining principal and interest payments are scheduled to be made in periodic installments during fiscal year 2019 through fiscal year 2026.
From time to time, the Company conducts or has conducted business with the following related parties:
•Entities owned by immediate family members of a Senior Vice President of the Company perform subcontract work for a subsidiary of the Company, including trucking and grading services ("Subcontracting Services").
•From time to time, a subsidiary of the Company provides construction services to various companies owned by family members of a Senior Vice President of the Company ("Construction Services").
•For periodic corporate events, the Company has chartered a boat from Deep South Adventures, LLC, which is owned by a Senior Vice President of the Company.
•The Company rents and purchases vehicles from an entity owned by a family member of a Senior Vice President of the Company ("Vehicles").
•Family members of a Senior Vice President of the Company provide consulting services to a subsidiary of the Company ("Consulting Services").
•A law firm previously owned by a family member of a Senior Vice President of the Company provided legal services to a subsidiary of the Company ("Legal Services").
•A subsidiary of the Company leases office space for its Dothan, Alabama office from H&K, Ltd. ("H&K"), an entity partially owned by a Senior Vice President of the Company. The office space was originally leased through early 2020, but the subsidiary terminated the lease in June 2019 and paid $15,000 to H&K as consideration for the early termination. Under the lease agreement, the Company paid a fixed minimum rent per month.
•A subsidiary of the Company leased office space for its Montgomery, Alabama office from H&A Properties LLC ("H&A"), an entity partially owned by two Senior Vice Presidents of the Company. Under the lease agreement, the Company paid a fixed minimum rent per month. In September 2018, the subsidiary purchased this office from H&A for $0.5 million.
•On June 1, 2014, the Company entered into an access agreement with Island Pond Corporate Services, LLC ("Island Pond"), which provides a location for the Company to conduct business development activities from time to time on a property owned by the Executive Chairman of the Company's Board of Directors.
•The Company is party to a management services agreement with SunTx, under which the Company pays SunTx $0.25 million per fiscal quarter and reimburses certain travel and other out-of-pocket expenses.
The following table presents revenues earned and expenses incurred by the Company during the three and nine months ended June 30, 2019 and June 30, 2018, if and to the extent the Company engaged in transactions with the parties described above during the respective periods, and accounts receivable and accounts payable balances at June 30, 2019 and September 30, 2018, related to transactions with such parties (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Earned (Expense Incurred)
|
|
|
|
|
|
|
|
Accounts Receivable (Payable)
|
|
|
|
|
For the Three Months Ended June 30,
|
|
|
|
For the Nine Months Ended June 30,
|
|
|
|
June 30,
|
|
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
|
Purchaser of subsidiary
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
876
|
|
$
|
850
|
Disposed entity
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
966
|
|
$
|
937
|
Subcontracting Services (1)
|
|
$
|
(7,195)
|
|
$
|
(4,321)
|
|
$
|
(13,561)
|
|
$
|
(8,687)
|
|
$
|
(1,724)
|
|
$
|
(790)
|
Construction Services
|
|
$
|
1,609
|
|
$
|
57
|
|
$
|
2,783
|
|
$
|
1,633
|
|
$
|
4,350
|
|
$
|
2,863
|
Deep South Adventures, LLC (2)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(33)
|
|
$
|
—
|
|
$
|
—
|
Vehicles (2)
|
|
$
|
(496)
|
|
$
|
(288)
|
|
$
|
(1,128)
|
|
$
|
(864)
|
|
$
|
—
|
|
$
|
—
|
Consulting Services (2)
|
|
$
|
(64)
|
|
$
|
(87)
|
|
$
|
(198)
|
|
$
|
(203)
|
|
$
|
—
|
|
$
|
—
|
Legal Services (2)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(58)
|
|
$
|
—
|
|
$
|
—
|
H&K (2)
|
|
$
|
(36)
|
|
$
|
(21)
|
|
$
|
(78)
|
|
$
|
(63)
|
|
$
|
—
|
|
$
|
—
|
H&A (2)
|
|
$
|
—
|
|
$
|
(17)
|
|
$
|
—
|
|
$
|
(51)
|
|
$
|
—
|
|
$
|
—
|
Island Pond (2)
|
|
$
|
(80)
|
|
$
|
(80)
|
|
$
|
(240)
|
|
$
|
(240)
|
|
$
|
—
|
|
$
|
—
|
SunTx (2)
|
|
$
|
(316)
|
|
$
|
(468)
|
|
$
|
(957)
|
|
$
|
(1,119)
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Cost is reflected as cost of revenues on the Company's Consolidated Statements of Income.
(2) Cost is reflected as general and administrative expenses on the Company's Consolidated Statements of Income.
Note 13 - Settlement Agreement
On April 19, 2018, certain of the Company's subsidiaries entered into settlement agreements with a third party, pursuant to which they will receive aggregate net payments of approximately $15.7 million. These agreements provided for the payments to be made in four equal installments between January 2019 and July 2020, in exchange for releasing and waiving all current and future claims against the third party relating to a business interruption event that occurred more than five years ago that did not directly relate to the Company's business and that has not, and is not expected to, recur (the "Settlement"). The Company recorded a pre-tax gain of $14.8 million during the nine months ended June 30, 2018 related to the Settlement. The subsidiaries received the first installment payments in the total amount of $3.9 million in January 2019. Future payments are reflected on the Consolidated Balance Sheet at June 30, 2019 as other current assets and other assets in the amount of $7.9 million and $3.7 million, respectively.
Note 14 - Equity-Based Compensation
During the three months and nine months ended June 30, 2019, the Company awarded a total of 267,343 restricted shares of Class A common stock to its non-employee directors under the Equity Incentive Plan in lieu of any cash compensation. The grants are classified as equity awards. The aggregate grant date fair value of these restricted stock grants was $3.4 million. The grants will vest as to two-thirds of the underlying shares on January 1, 2021 and as to the remaining one-third of the underlying shares on January 1, 2022.
During the three months and nine months ended June 30, 2019, the Company recorded compensation expense in connection with these grants in the amount of $0.1 million, which is reflected as general and administrative expenses in the Company’s Consolidated Statements of Income.
Note 15 - Subsequent Events
Alabama Acquisition
On July 12, 2019, a subsidiary of the Company acquired substantially all of the assets of an HMA manufacturing plant and paving company located near Gadsden, Alabama. The acquired business is expected to benefit from geographic synergies resulting from its
proximity to the Company’s current operations in northeast Alabama, including an aggregates quarry. The acquisition was accounted for as a business combination in accordance with ASC 805. The purchase price of $5.0 million was paid from cash on hand at closing.
The provisional allocation of the purchase price to assets acquired and liabilities assumed, based on their estimated fair values at the acquisition date, was determined in accordance with the methodology described under Fair Value Measurements in Note 3 to the Company's audited financial statements for the fiscal year ended September 30, 2018, as set forth in the 2018 Form 10-K. The amounts allocated were not material to the Company's Consolidated Balance Sheet. The purchase price exceeding the net fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill in the amount of $2.4 million, which is deductible for income tax purposes. Goodwill primarily represents the assembled workforce and synergies expected to result from the acquisition. Upon finalizing the accounting for this transaction, management expects to ascribe value to other identifiable intangible assets, including customer relationships and customer backlog, which will reduce the amount allocated to goodwill.
Conversion of Class B common stock to Class A common stock
Subsequent to June 30, 2019, a stockholder of the Company converted a total of 125,000 shares of the Company's Class B common stock, on a one-for-one basis, into shares of the Company's Class A common stock. Following the conversion, there were 32,567,545 shares of Class A common stock and 19,114,417 shares of Class B common stock outstanding.