NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - General
Business Description
Construction Partners, Inc. (the “Company”) is a civil infrastructure company that specializes in the construction and maintenance of roadways across Alabama, Florida, Georgia, North Carolina and South Carolina. Through its wholly owned subsidiaries, the Company provides a variety of products and services to both public and private infrastructure projects, with an emphasis on highways, roads, bridges, airports, and commercial and residential developments. The Company’s primary operations consist of (i) manufacturing and distributing hot mix asphalt (“HMA”) for both internal use and sales to third parties in connection with construction projects, (ii) paving activities, including the construction of roadway base layers and application of asphalt pavement, (iii) site development, including the installation of utility and drainage systems, (iv) mining aggregates, such as sand and gravel, that are used as raw materials in the production of HMA, and (v) distributing liquid asphalt cement for both internal use and sales to third parties in connection with HMA production.
The Company was formed as a Delaware corporation in 2007 as a holding company for its wholly owned subsidiary, Construction Partners Holdings, Inc., to facilitate an acquisition growth strategy in the HMA paving and construction industry. On December 31, 2019, Construction Partners Holdings, Inc. merged with and into the Company, with the Company surviving the merger. 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.
Management’s Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“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, business acquisition accounting estimates, valuation of operating lease right-of-use assets, allowance for doubtful accounts, valuation allowances related to income taxes, accruals for potential liabilities related to lawsuits or insurance claims, the fair value of derivative instruments 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.
Note 2 - Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.
Emerging Growth Company
The Company is an “emerging growth company” as defined by the Jumpstart Our Business Startups Act (the “JOBS Act”) enacted in 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 Company has irrevocably elected to opt out of such extended transition period, which means that when a new or revised standard has different effective dates for public and private companies, the Company is required to adopt the 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. From time to time, account balances have exceeded the maximum available federal deposit insurance coverage limit. The Company has not experienced any losses in such accounts and regularly monitors its credit risk.
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 customers pending completion of a project. It is common in the Company’s industry for a small portion of either
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 the applicable contract terms. Such amounts, defined as retainage, represent a contract asset and are included on the Consolidated Balance Sheets 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 cost-to-cost input method (formerly known as the percentage-of-completion method). 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 Sheets 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 to the extent that the amount can be reasonably estimated and recovery is probable. 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 in the transaction price for which it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is resolved. 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.
Costs and estimated earnings in excess of billings on uncompleted contracts and billings in excess of costs and estimated earnings on uncompleted contracts are typically resolved within one year and are not considered significant financing components.
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. The Company monitors concentrations of credit risk associated with these receivables 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 September 30, 2020 or September 30, 2019.
Projects performed for various Departments of Transportation accounted for 32.5% and 40.4% of consolidated revenues for the fiscal years ended September 30, 2020 and 2019, respectively. Customers that accounted for more than 10.0% of consolidated revenues during either of those periods are presented below:
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% of Consolidated
Revenues
for the Fiscal
Year Ended September 30,
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2020
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2019
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Alabama Department of Transportation
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11.6
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%
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13.8
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%
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North Carolina Department of Transportation
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7.8
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%
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13.1
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%
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Inventories
The Company’s inventories are stated at the lower of cost or net realizable value and are accounted for on an average cost basis or a first-in, first-out cost basis. The cost of inventory includes the cost of material, labor, trucking and other equipment costs associated with procuring and transporting materials to HMA plants for production and delivery to customers. Inventories consist primarily of raw materials, including asphalt cement, aggregate and millings that the Company expects to utilize on construction projects within one year.
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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% of Consolidated
Revenues
for the Fiscal
Year Ended September 30,
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2020
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2019
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Public
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65.3%
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69.3%
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Private
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34.7%
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30.7%
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Revenues derived from construction projects are recognized over time 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. During the fiscal years ended September 30, 2020 and 2019, revisions in estimates related to amounts recorded in prior periods resulted in the Company recording net increases in revenues of $1.6 million and $3.8 million, respectively.
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 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 cost-to-cost input method applied to the total transaction price, including adjustments for variable consideration, such as liquidated damages, penalties or bonuses, related to the timeliness or quality of project performance. The Company includes variable consideration in the estimated transaction price at the most likely amount to which the Company expects to be entitled or the most likely amount the Company expects to incur, in the case of liquidated damages or penalties. Such amounts are included in the transaction price for which it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is resolved. The Company accounts for 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.
Fair Value Measurements
The Company measures and discloses certain financial assets and liabilities at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Inputs used to measure fair value are classified using the following hierarchy:
Level 1. Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2. Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data.
Level 3. Inputs are unobservable for the asset or liability and include situations in which there is little, if any, market activity for the asset or liability. The inputs used in the determination of fair value are based on the best information available under the circumstances and may require significant management judgment or estimation.
The Company endeavors to utilize the best available information in measuring fair value.
The Company’s financial instruments include cash and cash equivalents, contracts receivable including retainage and accounts payable reflected as current assets and current liabilities on its Consolidated Balance Sheets at September 30, 2020 and 2019. Due to the short-term nature of these instruments, management considers their carrying value to approximate their fair value.
The Company also has term loans and a revolving credit facility, as described in Note 11 - Debt. The carrying value of amounts outstanding under these credit facilities is reflected as long-term debt, net of current maturities and current maturities of debt on the
Company’s Consolidated Balance Sheets at September 30, 2020 and 2019. Due to the variable rate or short-term nature of these instruments, management considers their carrying value to approximate their fair value.
The Company also has derivative instruments. The fair value of commodity and interest rate swaps are based on forward and spot prices, as described in Note 22 - Fair Value Measurements.
Management applies fair value measurement guidance to its impairment analysis for tangible and intangible assets.
Property, Plant and Equipment
Property, plant and equipment are initially recorded at cost or, if acquired as a business combination, at fair value and depreciated on a straight-line basis over their estimated useful lives. Leasehold improvements for operating leases are amortized over the lesser of the term of the related lease or the estimated useful lives of the improvements. Quarry reserves are depleted in accordance with the units-of-production method as aggregate is extracted, using the initial allocation of cost based on proven and probable reserves. Routine repair and maintenance costs are expensed as incurred. Asset improvements are capitalized at cost and amortized over the remaining useful life of the related asset.
The estimated useful lives of property, plant and equipment categories are as follows:
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Category
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Estimated Useful Life
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Land and improvements
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Land, unlimited; improvements, 15-25 years
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Quarry reserves
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Based on depletion
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Buildings
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5 - 39 years
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Plants
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3 - 20 years
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Construction equipment
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3 - 10 years
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Furniture and fixtures
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5 - 10 years
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Leasehold improvements
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The shorter of 15 years or the remaining lease term
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Management periodically assesses the estimated useful life over which assets are depreciated, depleted or amortized. If the analysis warrants a change in the estimated useful life of property, plant and equipment, management will reduce the estimated useful life and depreciate, deplete or amortize the carrying value prospectively over the shorter remaining useful life.
The carrying amounts of assets sold or retired and the related accumulated depreciation are eliminated in the period of disposal, and the resulting gains and losses are included in the Company’s Consolidated Statements of Income during the same period.
Impairment of Long-Lived Assets
The carrying value of property, plant and equipment and intangible assets subject to amortization is evaluated whenever events or changes in circumstances indicate that the carrying amount of such assets, or an asset group, may not be recoverable. Events or circumstances that might cause management to perform impairment testing include, but are not limited to, (i) a significant decrease in the market price of an asset, (ii) a significant adverse change in the extent or manner in which an asset is used or in its physical condition, (iii) an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of an asset, (iv) an operating or cash flow performance combined with a history of operating or cash flow losses or a forecast that demonstrates continuing losses associated with the use of an asset, and (v) an expectation that an asset will be disposed of significantly before the end of its previously estimated useful life. If indicators of potential impairment are present, management performs a recoverability test and, if necessary, records an impairment loss. If the total estimated future undiscounted cash flows to be generated from the use and ultimate disposition of an asset or asset group is less than its carrying value, an impairment loss is recorded in the Company’s Consolidated Statements of Income, measured as the amount required to reduce the carrying value to fair value. Fair value is determined in accordance with the best available information based on the hierarchy described under “Fair Value Measurements” above. For example, the Company would first seek to identify quoted prices or other observable market data. If observable data is not available, management would apply the best available information under the circumstances to a technique, such as a discounted cash flow model, to estimate fair value. Impairment analysis involves estimates and the use of assumptions in connection with judgments made in forecasting long-term estimated inflows and outflows resulting from the use and ultimate disposition of an asset, and determining the ultimate useful lives of assets. Actual results may differ from these estimates using different assumptions, which could materially impact the results of an impairment assessment.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net assets acquired and liabilities assumed in business combinations. Other intangible assets consist of an indefinite-lived trade name license in connection with a business acquired, and finite-lived assets, including a non-compete agreement, customer relationships and construction backlog, each acquired in business acquisitions. Goodwill and indefinite-lived intangible assets are not amortized, but are reviewed for impairment at least annually, or more frequently when events or changes in circumstances indicate that the carrying value may not be recoverable. In addition, management evaluates whether events and circumstances continue to support an indefinite useful life. Judgments regarding indicators of potential impairment are based on market conditions and operational performance of the business.
Annually, on the first day of the Company’s fourth fiscal quarter, management performs an analysis of the carrying value of goodwill at its reporting unit for potential impairment. In accordance with GAAP, the Company may assess its goodwill for impairment initially using a qualitative approach to determine whether conditions exist to indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value. If management concludes, based on its assessment of relevant events, facts and circumstances, that it is more likely than not that a reporting unit’s carrying value is greater than its fair value, then a quantitative analysis will be performed to determine whether there is any impairment. The Company may also elect to initially perform a quantitative analysis instead of starting with a qualitative assessment. Because the Company has only one reporting unit, a market capitalization calculation can be performed as the first step of the quantitative assessment by comparing the book value of the Company’s stock (determined by reference to the Company’s stockholders’ equity) to the fair value of a share of the Company’s stock. If the fair value of the stock is greater than the book value of the stock, goodwill is deemed not to be impaired, and no further testing is required. If the fair value is less than the calculated book value, then the Company must take a second step to determine the impairment amount, as described below.
The second step requires comparing the carrying value of a reporting unit, including goodwill, to its fair value, typically using the multiple period discounting method under the income approach and market approach. The income approach uses a discounted cash flow model, which involves significant estimates and assumptions, including preparation of revenues and profitability growth forecasts, selection of a discount rate, and selection of a terminal year multiple, to estimate fair value. The market approach could include applying a control premium to the market price of the Company’s common stock or utilizing guideline public company multiples. Management’s assessment of facts and circumstances at each analysis date could cause these assumptions to change. If the fair value of the respective reporting unit exceeds its carrying amount, goodwill is not considered to be impaired, and no further testing is required. If the carrying amount of a reporting unit exceeds its fair value, an impairment charge is recorded to write down goodwill to its fair value and is recorded in the Company’s Consolidated Statements of Income. The Company performed a quantitative assessment of goodwill using the market capitalization calculation for fiscal years 2020 and 2019 and determined that the fair value of its reporting unit exceeded its carrying value, and thus concluded that the carrying value of goodwill was not impaired at September 30, 2020 or 2019. Accordingly, no further analysis was required or performed.
Management also annually assesses the carrying value of the Company’s indefinite-lived intangible assets other than goodwill on the first day of the fiscal fourth quarter. Management tests indefinite-lived intangible assets for impairment by comparing their carrying value to their estimated fair value. An impairment loss is recorded in the Company’s Consolidated Statements of Income to the extent that the carrying value of an indefinite-lived intangible asset exceeds its fair value. Similar to the assessment of goodwill, events and changes in circumstances could cause management to utilize different assumptions in subsequent evaluations, which could materially impact the results of an impairment assessment. Management concluded that the carrying value of the Company’s indefinite-lived intangible assets other than goodwill was not impaired at September 30, 2020 or 2019.
Deferred Debt Issuance Costs
Costs directly associated with obtaining debt financing are deferred and amortized over the term of the related debt agreement. Unamortized amounts related to long-term debt are reflected on the Consolidated Balance Sheets as a direct deduction from the carrying amount of the related long-term debt liability.
Comprehensive Income
Comprehensive income is a measure of net income and all other changes in equity that result from transactions other than transactions with stockholders. Management has determined that net income is the Company’s only component of comprehensive income. Accordingly, there is no difference between net income and comprehensive income.
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 of a change in tax rates on deferred tax assets and liabilities 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.
We recognize the financial statement benefit of the Company’s tax positions that are at least more likely than not to be sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not to be sustained upon audit, management accrues the largest amount of the benefit that is more likely than not to be sustained. The Company classifies income tax-related interest and penalties as interest expense and other expenses, respectively. Refer to Note 15 - Provision for Income Taxes for further information regarding our federal and state income taxes.
Equity-Based Incentive Plans
Compensation costs related to equity-classified share-based awards are recognized in the consolidated financial statements based on grant date fair value. Compensation cost for graded-vesting awards is recognized ratably over the respective vesting periods.
Accrued Insurance Costs
The Company carries insurance policies to cover various risks, primarily including general liability, automobile liability and workers’ compensation, under which it is liable to reimburse the insurance company for a portion of each claim paid. The amount for which the Company is liable for general liability, automobile liability and workers’ compensation claims ranges from $100,000 to $500,000 per occurrence. Management accrues insurance costs for probable losses, both reported and unreported, that are reasonably estimable using actuarial methods based on historic trends modified, if necessary, by recent events. Changes in loss assumptions caused by changes in actual experience would affect the assessment of the ultimate liability and could have an effect on the Company’s operating results and financial position up to $500,000 per occurrence for general liability, automobile liability and workers’ compensation claims.
The Company provides employee medical insurance under policies that are both fixed-premium, fully-insured policies and self-insured policies that are administered by the insurance company. Under the self-insured policies, the Company is liable to reimburse the insurance company for actual claims paid plus an administrative fee. The Company purchases separate stop-loss insurance that limits the individual participant claim loss to amounts ranging from $100,000 to $160,000.
In addition to the retention items noted above, the Company’s insurance provider requires the Company to maintain a standby letter of credit. This letter of credit serves as a guarantee by the banking institution to pay the Company’s insurance provider the incurred claim costs attributable to general liability, workers’ compensation and automobile liability claims, up to the amount stated in the standby letter of credit, in the event that these claims are not paid by the Company (see Note 18 - Commitments and Contingencies).
Earnings per Share
Basic net income per share attributable to common stockholders is computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per common share attributable to common stockholders is the same as basic net income per share attributable to common stockholders, but includes dilutive unvested stock awards using the treasury stock method.
Segment Reporting and Reporting Units
The Company operates in Alabama, Florida, Georgia, North Carolina and South Carolina through its wholly owned subsidiaries located in four southeastern states. Each of the Company’s platform operating companies engages in essentially the same business, which consists primarily of infrastructure and road construction.
Management determined that the Company functions as a single operating segment, and thus reports as a single reportable segment. This determination is based on rules prescribed by GAAP applied to the manner in which management operates the Company. In particular, management assessed the discrete financial information routinely reviewed by the Company’s chief operating decision maker (“CODM”), its Chief Executive Officer, to monitor the Company’s operating performance and support decisions regarding allocation of resources to its operations. Specifically, performance is continuously monitored at the consolidated level and at the individual contract level to timely identify deviations from expected results. Resource allocations are based on the capacity of the Company’s operating facilities to pursue new project opportunities, including reallocation of assets that are underutilized from time to time at a certain operating facility to another operating facility where additional resources might be required to fully meet demand. Other factors further supporting this conclusion include substantial similarities throughout all of the Company’s operations with respect to services provided, type of customers, sourcing of materials and manufacturing and delivery methodologies.
Management further determined that, based on their economic similarities, the Company’s five platform operating companies, representing components, should be aggregated into one reporting unit for purposes of assessing potential impairment of goodwill in accordance with ASC Topic 350, Intangibles — Goodwill and Other. These legal entities represent material acquisitions that occurred over time in Alabama, Florida, Georgia and North Carolina pursuant to the Company’s strategic growth strategy. Each platform company is managed by its president, who has primary responsibility for the respective operating company. Collectively, these presidents are directly accountable to, and maintain regular contact with, the CODM as a team to discuss operating activities, financial results, forecasts, and operating plans for the Company’s single operating segment.
Reclassifications
Certain amounts in prior periods have been reclassified to conform to the current period presentation. These reclassifications had no effect on previously reported net income.
Note 3 - Accounting Standards
Recently Adopted Accounting Pronouncements
ASC Topic 842
ASC Topic 842, Leases (“Topic 842”) requires lessees to recognize operating lease right-of-use assets and operating lease liabilities on the Consolidated Balance Sheets as described below. Prior to the adoption of Topic 842, operating leases were expensed on a straight-line basis over the lease term on the Company’s Consolidated Statements of Income, and the Company did not recognize operating lease right-of-use assets and operating lease liabilities on its Consolidated Balance Sheets.
The Company adopted Topic 842 effective October 1, 2019 using a modified retrospective transition approach with no prior-period retrospective adjustments. As a result, on the adoption date, the Company recognized (i) a net cumulative decrease to retained earnings of $0.2 million, (ii) additional operating lease right-of-use assets of $9.1 million, (iii) current operating lease liabilities of $2.9 million and (iv) non-current operating lease liabilities of $6.4 million. The Company elected to apply optional practical expedients that
allowed the Company to forego reassessments of (i) the classification of leases existing at the date of adoption, (ii) the initial direct costs of any existing leases and (iii) whether any expired or existing contracts were, or contained, leases. Accordingly, prior comparable periods were not restated.
In connection with the adoption of Topic 842, the Company implemented several accounting policies relating to the identification and measurement of operating lease right-of-use assets and liabilities. At the inception of a contractual arrangement, the Company determines whether a contract contains a lease by assessing whether the contract conveys to the Company the right to control the use of an identified asset in exchange for consideration over a period of time. If so, the Company measures and records an operating lease liability equal to the present value of the future lease payments. Because most of the Company’s leases do not provide an implicit rate, the Company’s incremental borrowing rate is used in determining the present value of lease payments. The amount of the operating lease right-of-use asset consists of: (i) the amount of the initial measurement of the operating lease liability; (ii) any lease payments made at or before the commencement date, minus any lease incentives received; and (iii) any initial direct costs incurred. The present value calculation may account for an option to extend or terminate the lease when it is reasonably certain that the Company will exercise the option.
The Company has elected not to apply the recognition requirements of Topic 842 to short-term leases (those with terms of 12 months or less) or leases to explore for or use minerals. Instead, for these types of leases, the Company recognizes lease expense in the Consolidated Statements of Income on a straight-line basis over the lease term.
Recently Issued Accounting Pronouncements Not Yet Adopted
The FASB has issued certain Accounting Standards Updates (“ASUs”) that are applicable to the Company and will be adopted in future periods. The consolidated financial statements and related disclosures for the fiscal years ended September 30, 2020 and 2019 do not reflect the requirements of this guidance. The following is a brief description of recently issued ASUs and management’s current assessment regarding the methods, timing and impact of adoption of such ASUs by the Company in the future.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“Topic 326”), which introduces an impairment model that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The amendments pursuant to Topic 326 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company expects to adopt this guidance as required and does not expect such adoption to cause a material impact to the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). This ASU requires customers in a hosting arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company expects to adopt this guidance as required and does not expect such adoption to cause a material impact to the Company’s consolidated financial statements.
Note 4 - Business Acquisitions
Alabama Acquisition - July 2019
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 synergies resulting from its proximity to the Company’s preexisting 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.
Identifiable assets acquired and liabilities assumed were recorded at their estimated fair values based on the methodology described under “Fair Value Measurements” in Note 2 - Significant Accounting Policies. The amounts allocated were not material to the Company’s Consolidated Balance Sheets. The amount of the purchase price exceeding the net fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill in the amount of approximately $2.4 million, which is deductible for income tax purposes. Goodwill primarily represents the assembled work force and synergies expected to result from the acquisition.
The results of operations since the July 12, 2019 acquisition date attributable to this acquisition are included in the Company’s consolidated financial statements and were not material to the Consolidated Statements of Income for the fiscal year ended September 30, 2019. Pro forma results of operations as if the acquisition had been consummated on October 1, 2018 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 Consolidated Statements of Income in the amount of $0.1 million for the fiscal year ended September 30, 2019.
Florida Acquisition - February 2019
On February 28, 2019, a subsidiary of the Company acquired 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.
Identifiable assets acquired and liabilities assumed were recorded at their estimated fair values based on the methodology described under “Fair Value Measurements” in Note 2 - Significant Accounting Policies. The amounts allocated were not material to the Company’s Consolidated Balance Sheets. The purchase price exceeding the net fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill and other identifiable intangible assets, including customer relationships and customer backlog, in the amount of $3.2 million, which is deductible for income tax purposes. Goodwill primarily represents the assembled work force and synergies expected to result from the acquisition.
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 year fiscal ended September 30, 2019. Pro forma results of operations as if the acquisition had been consummated on October 1, 2018 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 Consolidated Statements of Income in the amount of $0.1 million for the fiscal year ended September 30, 2019.
Florida Acquisition - October 2019
On October 1, 2019, a subsidiary of the Company acquired substantially all of the assets of an HMA manufacturing plant and paving company located in Palm City, Florida. The acquisition was accounted for as a business combination in accordance with ASC Topic 805, Business Combinations (“Topic 805”). The purchase price of $17.7 million was paid from cash on hand at closing.
Identifiable assets acquired and liabilities assumed were recorded at their estimated fair values based on the methodology described under Fair Value Measurements in Note 2 - Significant Accounting Policies. The amounts allocated were not material to the Company’s Consolidated Balance Sheets. The amount of the purchase price exceeding the net fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill in the amount of approximately $7.7 million, which is deductible for income tax purposes. Goodwill primarily represents the assembled work force and synergies expected to result from the acquisition.
The results of operations since the October 1, 2019 acquisition date attributable to this acquisition are included in the Company's consolidated financial statements and were not material to the Consolidated Statements of Income for the fiscal year ended September, 30, 2020.
The Company recorded certain costs to effect the acquisition as they were incurred, which are reflected in general and administrative expenses on the Company’s Consolidated Statements of Income in the amount of $0.1 million for the fiscal year ended September 30, 2020.
Florida Acquisition - March 2020
On March 23, 2020, a subsidiary of the Company acquired two HMA manufacturing plants and certain related assets located in Pensacola and DeFuniak Springs, Florida. The acquisition was accounted for as a business combination in accordance with Topic 805. The $9.8 million purchase price was paid in cash at closing, with an additional $2.7 million of cash paid for plant inventory.
Identifiable assets acquired and liabilities assumed were recorded at their estimated fair values based on the methodology described under Fair Value Measurements in Note 2 - Significant Accounting Policies. The amounts allocated were not material to the Company’s Consolidated Balance Sheets. The amount of the purchase price exceeding the net fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill in the amount of approximately $0.1 million, which is deductible for income tax purposes. Goodwill primarily represents the assembled work force and synergies expected to result from the acquisition.
The results of operations since the March 23, 2020 acquisition date attributable to this acquisition are included in the Company's consolidated financial statements and were not material to the Consolidated Statements of Income for the fiscal year ended September, 30, 2020. Pro forma results of operations as if the acquisition had been consummated October 1, 2019 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 in general and administrative expenses on the Company’s Consolidated Statements of Income in the amount of $0.1 million for the fiscal year ended September 30, 2020.
Combined Acquisitions Completed During the Fiscal Year Ended September 30, 2020
For acquisitions completed during the fiscal year ended September 30, 2020, we paid combined consideration of $30.2 million, allocated as follows: $3.1 million of inventory, $19.3 million of property, plant and equipment and goodwill of $7.8 million. The Consolidated Statement of Income for the fiscal year ended September 30, 2020 includes $42.9 million of revenue attributable to the operations of fiscal year 2020 acquisitions from their respective acquisition dates through September 30, 2020.
Unaudited pro forma revenues, as if the fiscal year 2020 acquisitions had been completed as of October 1, 2018, are $793.7 million and $831.8 million for the fiscal years ended September 30, 2020 and 2019, respectively. Pro forma information is presented for informational purposes and may not be indicative of revenue that would have been achieved if the acquisitions had actually occurred on October 1, 2018.
Note 5 - Contracts Receivable Including Retainage, net
Contracts receivable including retainage, net consisted of the following at September 30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2020
|
|
2019
|
Contracts receivable
|
$
|
112,197
|
|
|
$
|
121,050
|
|
Retainage
|
21,013
|
|
|
19,835
|
|
|
133,210
|
|
|
140,885
|
|
Allowance for doubtful accounts
|
(1,440)
|
|
|
(1,003)
|
|
Contracts receivable including retainage, net
|
$
|
131,770
|
|
|
$
|
139,882
|
|
|
|
|
|
The following is a summary of changes in the allowance for doubtful accounts balance during the fiscal years ended September 30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended
September 30,
|
|
2020
|
|
2019
|
Balance at beginning of period
|
$
|
1,003
|
|
|
$
|
1,098
|
|
Charged to bad debt expense
|
705
|
|
|
995
|
|
Write-off of contracts receivable including retainage
|
(268)
|
|
|
(1,090)
|
|
Balance at end of period
|
$
|
1,440
|
|
|
$
|
1,003
|
|
|
|
|
|
Retainage receivables have been billed, but are not due, until contract completion and acceptance by the customer.
Note 6 - Contract Assets and Liabilities
Costs and estimated earnings compared to billings on uncompleted contracts at September 30, 2020 and 2019 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2020
|
|
2019
|
|
|
|
|
Costs on uncompleted contracts
|
$
|
876,229
|
|
|
$
|
900,880
|
|
Estimated earnings to date on uncompleted contracts
|
101,055
|
|
|
123,256
|
|
|
977,284
|
|
|
1,024,136
|
|
Billings to date on uncompleted contracts
|
(1,003,115)
|
|
|
(1,043,221)
|
|
Net billings in excess of costs and estimated earnings on uncompleted contracts
|
$
|
(25,831)
|
|
|
$
|
(19,085)
|
|
|
|
|
|
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, 2019 to September 30, 2020 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, 2019
|
$
|
12,030
|
|
|
$
|
(31,115)
|
|
|
$
|
(19,085)
|
|
Changes in revenue billed, contract price or cost estimates
|
(4,157)
|
|
|
(2,589)
|
|
|
(6,746)
|
|
September 30, 2020
|
$
|
7,873
|
|
|
$
|
(33,704)
|
|
|
$
|
(25,831)
|
|
|
|
|
|
|
|
At September 30, 2020, the Company had unsatisfied or partially unsatisfied performance obligations under construction project contracts representing approximately $469.7 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 $421.0 million during the fiscal year ending September 30, 2021 and approximately $48.7 million thereafter.
Note 7 - Other Assets
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following at September 30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2020
|
|
2019
|
Settlement receivable
|
|
$
|
—
|
|
|
$
|
7,706
|
|
Prepaid expenses
|
|
3,612
|
|
|
3,043
|
|
Other current assets
|
|
1,429
|
|
|
2,395
|
|
Total prepaid expenses and other current assets
|
|
$
|
5,041
|
|
|
$
|
13,144
|
|
|
|
|
|
|
The settlement receivable was received in full during the fiscal year ended September 30, 2020 (See Note 20 - Settlement Agreement).
Other Assets
Other assets consisted of the following at September 30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2020
|
|
2019
|
Notes receivable
|
|
$
|
1,622
|
|
|
$
|
2,124
|
|
Other assets
|
|
162
|
|
|
160
|
|
Total other assets
|
|
$
|
1,784
|
|
|
$
|
2,284
|
|
|
|
|
|
|
Note 8 - Property, Plant and Equipment
Property, plant and equipment at September 30, 2020 and 2019 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2020
|
|
2019
|
Construction equipment
|
|
$
|
253,157
|
|
|
$
|
214,500
|
|
Plants
|
|
102,392
|
|
|
92,279
|
|
Land and improvements
|
|
40,614
|
|
|
34,365
|
|
Quarry reserves
|
|
20,238
|
|
|
20,678
|
|
Buildings
|
|
18,307
|
|
|
15,458
|
|
Furniture and fixtures
|
|
5,648
|
|
|
4,864
|
|
Leasehold improvements
|
|
1,135
|
|
|
1,135
|
|
Total property, plant and equipment, gross
|
|
441,491
|
|
|
383,279
|
|
Accumulated depreciation, depletion and amortization
|
|
(209,532)
|
|
|
(177,927)
|
|
Construction in progress
|
|
5,271
|
|
|
518
|
|
Total property, plant and equipment, net
|
|
$
|
237,230
|
|
|
$
|
205,870
|
|
|
|
|
|
|
Depreciation, depletion and amortization expense related to property, plant and equipment for the fiscal years ended September 30, 2020 and 2019 was $39.1 million and $30.1 million, respectively.
Note 9 - Goodwill and Other Intangible Assets
The following presents goodwill activity during the fiscal years ended September 30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
Balance at September 30, 2018
|
$
|
32,919
|
|
Additions
|
5,627
|
|
Balance at September 30, 2019
|
38,546
|
|
Additions
|
7,802
|
|
Balance at September 30, 2020
|
$
|
46,348
|
|
|
|
A summary of other intangible assets at September 30, 2020 and 2019 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2020
|
|
2019
|
|
Useful
Life
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
Indefinite-lived:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
Indefinite
|
|
$
|
2,000
|
|
|
N/A
|
|
$
|
2,000
|
|
|
$
|
2,000
|
|
|
N/A
|
|
$
|
2,000
|
|
Definite-lived:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationship
|
8 years
|
|
1,645
|
|
|
(435)
|
|
|
1,210
|
|
|
1,645
|
|
|
(229)
|
|
|
1,416
|
|
Non-compete agreements
|
5 years
|
|
20
|
|
|
(6)
|
|
|
14
|
|
|
1,520
|
|
|
(1,502)
|
|
|
18
|
|
Total intangible assets
|
|
|
$
|
3,665
|
|
|
$
|
(441)
|
|
|
$
|
3,224
|
|
|
$
|
5,165
|
|
|
$
|
(1,731)
|
|
|
$
|
3,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense related to definite-lived intangible assets was $0.2 million and $1.1 million for the fiscal years ended September 30, 2020 and 2019, respectively.
Estimated future total amortization expense related to definite-lived intangible assets is as follows (in thousands):
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Estimated Amortization Expense
|
2021
|
|
$
|
210
|
|
2022
|
|
210
|
|
2023
|
|
210
|
|
2024
|
|
206
|
|
2025
|
|
206
|
|
Thereafter
|
|
182
|
|
Total
|
|
$
|
1,224
|
|
|
|
|
Note 10 - Liabilities
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following at September 30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2020
|
|
2019
|
Accrued payroll and benefits
|
$
|
17,123
|
|
|
$
|
15,173
|
|
Accrued insurance costs
|
2,662
|
|
|
1,761
|
|
Other current liabilities
|
2,562
|
|
|
2,144
|
|
Total accrued expenses and other current liabilities
|
$
|
22,347
|
|
|
$
|
19,078
|
|
|
|
|
|
Other Long-Term Liabilities
Other long-term liabilities consisted of the following at September 30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2020
|
|
2019
|
|
|
|
|
Accrued insurance costs
|
$
|
6,035
|
|
|
$
|
5,358
|
|
Other
|
2,445
|
|
|
750
|
|
Total other long-term liabilities
|
$
|
8,480
|
|
|
$
|
6,108
|
|
|
|
|
|
Note 11 - Debt
The Company maintains credit facilities to finance acquisitions, to fund the purchase of real estate, construction equipment, plants and other fixed assets, and for general working capital purposes. Debt at September 30, 2020 and 2019 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2020
|
|
2019
|
Long-term debt:
|
|
|
|
BBVA Term Loan
|
$
|
92,850
|
|
|
$
|
44,700
|
|
BBVA Revolving Credit Facility
|
—
|
|
|
5,000
|
|
Other long-term debt
|
—
|
|
|
563
|
|
Total long-term debt
|
92,850
|
|
|
50,263
|
|
Deferred debt issuance costs
|
(797)
|
|
|
(263)
|
|
Debt discount
|
—
|
|
|
(4)
|
|
Current maturities of long-term debt
|
(13,000)
|
|
|
(7,538)
|
|
Long-term debt, net of current maturities
|
$
|
79,053
|
|
|
$
|
42,458
|
|
|
|
|
|
The Company and each of its subsidiaries are parties to a credit agreement with BBVA USA (formerly known as Compass Bank), as agent, issuing bank and a lender, and certain other lenders (as amended and restated, the “Credit Agreement”). The Credit Agreement provides for a term loan (the “Term Loan”) and a revolving credit facility (the “Revolving Credit Facility”). The obligations of the Company and its subsidiaries under the Credit Agreement are secured by a first priority security interest in substantially all of the Company’s assets.
Following an amendment and restatement of the Credit Agreement in July 2020, the principal amount of Term Loan advances made prior to April 30, 2020 is repaid in quarterly installments of $2,050,000, and the principal amount of Term Loan advances made on or after April 30, 2020 is repaid in quarterly installments of $1,200,000, in each case beginning on September 30, 2020 and at the end of each calendar quarter thereafter. Interest is due and payable on the last business day of each month. In addition, the Company and its subsidiaries pay, among other fees: (i) a quarterly unused revolver commitment fee equal to 0.20% of the daily average amount of unused commitments under the Revolving Credit Facility during the quarter, (ii) a quarterly letter of credit fee equal to the greater of (A) $600 or (B) the product of either 0.70% or 0.75% (depending on the Company’s consolidated leverage ratio) and the aggregate average daily undrawn amounts of all letters of credit outstanding during the quarter and (iii) a letter of credit facility fee equal to 0.20% of the face amount of each such letter of credit. All outstanding advances under the Term Loan and the Revolving Credit Facility are due and payable in full on October 1, 2024. The Company generally may (and must, under certain circumstances), subject to various requirements, prepay all or a portion of the outstanding balance of the advances, together with accrued interest thereon, prior to their contractual maturity.
At September 30, 2020 and 2019, there was $92.9 million and $44.7 million, respectively, of principal outstanding under the Term Loan, $0.0 million and $5.0 million, respectively, of principal outstanding under the Revolving Credit Facility, and availability of $39.3 million and $14.4 million, respectively, under the Revolving Credit Facility, including reduction for outstanding letters of credit.
The Credit Agreement contains customary negative covenants for agreements of this type, including, but not limited to, restrictions on the Company’s ability to make acquisitions, make loans or advances, make capital expenditures and investments, pay dividends, create or incur indebtedness, create liens, wind up or dissolve, consolidate, merge or liquidate, or sell, transfer or dispose of assets. The Credit Agreement also requires the Company to satisfy certain financial covenants, including a minimum fixed charge coverage ratio of 1.20-to-1.00 and a maximum consolidated leverage ratio of 2.75-to-1.00, subject to certain adjustments. At September 30, 2020 and 2019,
the Company’s fixed charge coverage ratio was 2.85-to-1.00 and 4.04-to-1.00, respectively, and the Company’s consolidated leverage ratio was 1.08-to-1.00 and 0.66-to-1.00, respectively. At both September 30, 2020 and 2019, the Company was in compliance with all covenants under the Credit Agreement.
From time to time, the Company has entered into interest rate swap agreements to hedge against the risk of changes in interest rates. These interest rate swap agreements do not meet the criteria for hedge accounting treatment under GAAP. At September 30, 2020 and 2019, the aggregate notional value of these interest rate swap agreements was $46.5 million and $21.5 million, respectively, and the fair value was $(1.7) million and $(0.3) million, respectively, which is included within other liabilities on the Company’s Consolidated Balance Sheets.
The scheduled contractual repayment terms of long-term debt at September 30, 2020 were as follows:
|
|
|
|
|
|
Fiscal Year
|
Amount
|
2021
|
$
|
13,000
|
|
2022
|
13,000
|
|
2023
|
13,000
|
|
2024
|
53,850
|
|
|
|
Total
|
$
|
92,850
|
|
|
|
Interest expense was $3.6 million and $3.3 million for the fiscal years ended September 30, 2020 and 2019, respectively. Amortization of deferred debt issuance costs and debt discounts included in interest expense was $0.2 million and $0.1 million for the fiscal years ended September 30, 2020 and 2019, respectively.
Note 12 - Equity
Shares of Class A common stock and Class B common stock are identical in all respects, except with respect to voting rights, conversion rights and transfer restrictions applicable to shares of Class B common stock. The holders of Class A common stock are entitled to one vote per share, and the holders of Class B common stock are entitled to ten votes per share. The holders of Class A common stock and Class B common stock vote together as a single class on all matters submitted to a vote of stockholders, including the election of directors, unless otherwise required by applicable law or the Company’s certificate of incorporation or bylaws. Shares of Class B common stock are convertible into shares of Class A common stock at any time at the option of the holder or upon any transfer, subject to certain limited exceptions. In addition, upon the election of the holders of a majority of the then-outstanding shares of Class B common stock, all outstanding shares of Class B common stock will be converted into shares of Class A common stock. Once converted into shares of Class A common stock, shares of Class B common stock will not be reissued. Class A common stock is not convertible into any other class of the Company’s capital stock.
Conversion of Class B Common Stock to Class A Common Stock
During the fiscal year ended September 30, 2020, certain stockholders of the Company converted a total of 1,278,148 shares of Class B common stock into shares of Class A common stock on a one-for-one basis. As of September 30, 2020, there were 33,875,884 shares of Class A common stock and 17,905,861 shares of Class B common stock outstanding.
Restricted Stock Awards and Options
During the fiscal year ended September 30, 2019, the Company awarded a total of 292,534 restricted shares of Class A common stock to its non-employee directors under the Construction Partners, Inc. 2018 Equity Incentive Plan (the “Equity Incentive Plan”). In addition, an employee of the Company exercised an option to purchase 74,592 shares of Class B common stock at an exercise price of $0.0357 per share. No restricted shares of Class A common stock were issued, and no options to purchase shares of Class A or Class B common stock were exercised, during the fiscal year ended September 30, 2020.
Additional information about these transactions is set forth in Note 14 - Equity-Based Compensation.
Amendment to the Equity Incentive Plan
On May 24, 2019, the Company adopted an amendment to the Equity Incentive Plan relating to exceptions from the $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 Company’s board of directors. 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.
Registration Rights Agreement
The Company is a party to a registration rights agreement (the “Registration Rights Agreement”) with certain of the Company’s directors and officers and affiliates of SunTx (collectively, the “RRA Holders”). Under the Registration Rights Agreement, the RRA Holders have “demand” registration rights, meaning that the Company must register under the Securities Act shares of the Company’s common stock owned by such RRA Holders upon their demand under certain circumstances, and “piggyback” registration rights, meaning that, if the Company proposes to register an offering of securities, it generally must give written notice to the RRA Holders to allow each to include its shares in the registration. In general, the Company must pay all out-of-pocket expenses in connection with a registration under the Registration Rights Agreement, including filing and registration fees, printing costs, fees and expenses of the Company’s legal counsel and independent registered public accountants and fees and expenses for one legal counsel for the applicable RRA Holders. The RRA Holders whose shares are registered must pay all incremental selling expenses relating to any offering, such as underwriters’ commissions and discounts, brokerage fees, underwriter marketing costs and any additional legal counsel that they may engage. As of September 30, 2020, a total of 22,235,744 shares of the Company’s common stock were subject to the Registration Rights Agreement, of which 4,848,010 shares had been previously registered but not yet sold. The Registration Rights Agreement expires on May 4, 2023.
Secondary Offerings of Class A Common Stock
In September 2019, certain stockholders of the Company (the “Selling Stockholders”) completed an underwritten secondary offering (the “2019 Secondary Offering”) of 5,000,000 shares of Class A common stock at a public offering price of $14.25 per share. In addition, the underwriters of the 2019 Secondary Offering exercised in full their option to purchase an additional 750,000 shares of Class A common stock from the Selling Stockholders. The Company did not receive any proceeds from the sale of shares by the Selling Stockholders and, pursuant to the Registration Rights Agreement, incurred approximately $0.7 million in expenses in connection with the 2019 Secondary Offering.
In June 2020, the Selling Stockholders completed an underwritten secondary offering (the “2020 Secondary Offering”) of 5,750,000 shares of Class A common stock at a public offering price of $16.50 per share. In addition, the underwriters of the 2020 Secondary Offering exercised in full their option to purchase an additional 862,500 shares of Class A common stock from the Selling Stockholders. The Company did not receive any proceeds from the sale of shares by the Selling Stockholders and, pursuant to the Registration Rights Agreement, incurred approximately $0.2 million in expenses in connection with the 2020 Secondary Offering.
Note 13 - Earnings Per Share
As discussed in Note 12 - Equity, the Company has Class A common stock and Class B common stock. Because the only differences between the two classes of common stock are related to voting rights, conversion rights and transfer restrictions applicable to shares of Class B common stock, the Company has not presented earnings per share under the two-class method, as the earnings per share are the same for both Class A common stock and Class B common stock. The following table summarizes the weighted-average number of basic common shares outstanding and the calculation of basic earnings per share for the periods presented (in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended September 30,
|
|
2020
|
|
2019
|
Numerator
|
|
|
|
Net income attributable to common stockholders
|
$
|
40,297
|
|
|
$
|
43,121
|
|
Denominator
|
|
|
|
Weighted average number of common shares outstanding, basic
|
51,489,211
|
|
|
51,421,159
|
|
Net income per common share attributable to common stockholders, basic
|
$
|
0.78
|
|
|
$
|
0.84
|
|
|
|
|
|
The following table summarizes the calculation of the weighted-average number of diluted common shares outstanding and the calculation of diluted earnings per share for the periods presented (in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended September 30,
|
|
2020
|
|
2019
|
Numerator
|
|
|
|
Net income attributable to common stockholders
|
$
|
40,297
|
|
|
$
|
43,121
|
|
Denominator
|
|
|
|
Weighted average number of basic common
shares outstanding, basic
|
51,489,211
|
|
|
51,421,159
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
2019 restricted stock grants
|
147,723
|
|
|
6,061
|
|
Weighted average number of diluted common
shares outstanding:
|
51,636,934
|
|
|
51,427,220
|
|
Net income per diluted common share attributable
to common stockholders
|
$
|
0.78
|
|
|
$
|
0.84
|
|
|
|
|
|
Note 14 - Equity-Based Compensation
Restricted Stock Awards and Options
During the fiscal year ended September 30, 2019, the Company awarded a total of 292,534 restricted shares of Class A common stock to its non-employee directors under the Equity Incentive Plan in lieu of cash compensation. The grants are classified as equity awards. The aggregate grant date fair value of these restricted stock awards was $3.8 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 fiscal years ended September 30, 2020 and 2019, the Company recorded $1.6 million and $0.5 million, respectively, of compensation expense in connection with these grants, which is reflected as general and administrative expenses in the Company’s Consolidated Statements of Income. At September 30, 2020, there was approximately $1.7 million of unrecognized compensation expense related to these awards.
Option Exercises
In August 2019, an employee of the Company exercised an option to purchase 74,592 shares of Class B common stock at a price of $0.0357 per share. The option was granted in March 2017 pursuant to a non-plan option agreement. The option was fully vested upon the date of grant, but, until the option agreement was subsequently amended, the option was exercisable only during the ten-day period immediately preceding a change in control of the Company. In August 2019, the Company and the employee amended the option agreement to (i) adjust the number of underlying shares and exercise price of the option to account for the 25.2-to-1 stock split and share reclassification that occurred in April 2018; (ii) reduce the exercise price (as adjusted) for the shares underlying the option; (iii) make the option immediately exercisable; and (iv) provide that the option would expire on the earlier of December 31, 2019 or the occurrence of one of the other expiration events set forth in the option agreement. During the fiscal year ended September 30, 2019, the Company recorded approximately $0.4 million of compensation expense in connection with the option amendment, which is reflected in general administrative expenses on the Company’s Consolidated Statements of Income. At September 30, 2020, there was no unrecognized compensation expense related to the option.
Note 15 - Provision for Income Taxes
The Company files a consolidated United States federal income tax return and income tax returns in various states. Management evaluated the Company’s tax positions 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 transactions.
The provision for income taxes for the fiscal years ended September 30, 2020 and 2019 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended
September 30,
|
|
2020
|
|
2019
|
Current
|
|
|
|
U.S. Federal
|
$
|
8,960
|
|
|
$
|
9,780
|
|
State
|
490
|
|
|
1,132
|
|
Total current
|
9,450
|
|
|
10,912
|
|
Deferred
|
|
|
|
U.S. Federal
|
2,222
|
|
|
2,203
|
|
State
|
1,088
|
|
|
794
|
|
Total deferred
|
3,310
|
|
|
2,997
|
|
Provision for income taxes
|
$
|
12,760
|
|
|
$
|
13,909
|
|
|
|
|
|
Differences exist between income and expenses reported on the consolidated financial statements and those deducted for U.S. federal and state income tax reporting. The Company’s deferred tax assets and liabilities consisted of the following temporary difference tax effects at September 30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2020
|
|
2019
|
Deferred tax assets
|
|
|
|
Allowance for bad debt
|
$
|
527
|
|
|
$
|
425
|
|
Amortization of finite-lived intangible assets
|
405
|
|
|
487
|
|
State net operating loss
|
664
|
|
|
1,330
|
|
|
|
|
|
Accrued insurance claims
|
1,583
|
|
|
1,332
|
|
Other
|
593
|
|
|
0
|
|
Total deferred tax assets, net
|
3,772
|
|
|
3,574
|
|
Deferred tax liabilities
|
|
|
|
Amortization of goodwill
|
(5,048)
|
|
|
(4,278)
|
|
Property, plant and equipment
|
(12,341)
|
|
|
(9,525)
|
|
Other
|
—
|
|
|
(78)
|
|
Total deferred tax liabilities, net
|
(17,389)
|
|
|
(13,881)
|
|
Net deferred tax assets (liabilities)
|
$
|
(13,617)
|
|
|
$
|
(10,307)
|
|
|
|
|
|
The Consolidated Balance Sheets at September 30, 2020 and 2019 include gross deferred tax assets of $3.8 million and $3.6 million, respectively. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected taxable income, and tax-planning strategies in making this assessment. Based on the weight of all evidence known and available as of the balance sheet date, management believes that these tax benefits are more likely than not to be realized in the future. To the extent that management does not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established.
Income taxes payable have been reduced by fuel tax credits of $0.3 million for each of the fiscal years ended September 30, 2020 and 2019. The remaining amount of goodwill expected to be deductible for tax purposes was $22.6 million and $19.0 million at September 30, 2020 and 2019, respectively.
The following is a reconciliation of net deferred tax assets (liabilities) to amounts reflected on the Company’s Consolidated Balance Sheets at September 30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2020
|
|
2019
|
Asset: Deferred income taxes, net
|
$
|
386
|
|
|
$
|
1,173
|
|
Liability: Deferred income taxes, net
|
(14,003)
|
|
|
(11,480)
|
|
Net deferred tax assets (liabilities)
|
$
|
(13,617)
|
|
|
$
|
(10,307)
|
|
|
|
|
|
At September 30, 2020 and 2019, the Company had a state net operating loss carryforward of $15.3 million and $31.6 million, respectively. The state net operating loss credit carryforwards expire in varying amounts between the fiscal years ended September 30, 2021 and 2030.
The U.S. statutory federal income tax rate applicable to the Company was 21% during the fiscal years ended September 30, 2020 and 2019. The following table reconciles income taxes based on the U.S. federal statutory tax rate to the Company’s income before provision for income taxes for the fiscal years ended September 30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended
September 30,
|
|
2020
|
|
2019
|
Provision for income tax at federal statutory rate
|
$
|
11,142
|
|
|
$
|
11,976
|
|
State income taxes
|
1,272
|
|
|
1,521
|
|
Permanent differences
|
330
|
|
|
319
|
|
Other
|
16
|
|
|
93
|
|
Provision for income taxes
|
$
|
12,760
|
|
|
$
|
13,909
|
|
|
|
|
|
Uncertain Tax Positions
ASC Topic 740, Income Taxes (“ASC 740”), prescribes a recognition threshold and measurement model for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return and provides guidance on derecognition classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company is subject to tax audits in various jurisdictions in the United States. Tax audits, by their nature, are often complex. In the normal course of business, the Company is subject to challenges from the Internal Revenue Service (“IRS”) and other tax authorities regarding amounts of taxes due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. As part of the calculation of the provision for income taxes on earnings, management determines whether the benefits of the Company’s tax positions are at least more likely than not to be sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not to be sustained upon audit, management accrues the largest amount of the benefit that is more likely than not to be sustained. Such accruals require management to make estimates and judgments with respect to the ultimate outcome of a tax audit. Actual results could vary materially from these estimates. The Company performed an analysis of its tax positions and determined that no uncertain tax positions existed at September 30, 2020 or 2019. Accordingly, there was no liability for uncertain tax positions at September 30, 2020 or 2019. Based on the provisions of ASC 740, the Company had no material unrecognized tax benefits at September 30, 2020 or 2019. Due to the utilization of net operating loss carryforwards, the Company’s federal income tax returns for fiscal years ended September 30, 2014 through September 30, 2020 are subject to examination. Various state income tax returns for fiscal years ended September 30, 2012 through September 30, 2020 are also subject to examination.
Note 16 - Employee Benefit Plans
The Company offers a 401(k) retirement plan covering substantially all employees who are at least 18 years old and have more than one year of service. The Company makes discretionary employer contributions, subject to IRS safe harbor rules. Employer contributions charged to earnings during the fiscal years ended September 30, 2020 and 2019 were $3.4 million and $2.9 million, respectively.
Note 17 - 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 $1.0 million, which approximated the net book value of the disposed entity. At September 30, 2020, $0.1 million and $0.5 million was
reflected on the Company’s Consolidated Balance Sheets 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 subsidiary that were paid by the Company. At September 30, 2020, $0.1 million and $0.3 million was reflected on the Company’s Consolidated Balance Sheets 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 2021 through fiscal year 2026.
From time to time, the Company conducts or has conducted business with the following related parties:
•Prior to its acquisition by the Company, a current subsidiary of the Company advanced funds to an entity owned by an immediate family member of a Senior Vice President of the Company in connection with a land development project. The obligations of the borrower entity to repay the advances are guaranteed by a separate entity owned by the same family member of the officer. Amounts outstanding under the advances do not bear interest and are reflected on the Company's Consolidated Balance Sheet within other assets (“Land Development Project”).
•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”).
•Since June 1, 2014, the Company has been a party to an access agreement with Island Pond Corporate Services, LLC, 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 (“Island Pond”).
•The Company purchases vehicles from an entity owned by a family member of a Senior Vice President of the Company (“Vehicles - Purchases”).
•The Company rents vehicles from an entity owned by a family member of a Senior Vice President of the Company (“Vehicles - Rent Expense”).
•Family members of a Senior Vice President of the Company provide consulting services to a subsidiary of the Company (“Consulting Services”).
•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 associated with services rendered under the management services agreement.
The following table presents revenues earned and expenses incurred by the Company during the fiscal years ended September 30, 2020 and 2019, and receivable and accounts payable balances at September 30, 2020 and 2019, related to transactions with the related parties described above (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Earned (Expense Incurred)
|
|
|
Receivable (Payable)
|
|
For the Fiscal Year Ended September 30,
|
|
|
September 30,
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
Purchaser of subsidiary
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
621
|
|
|
$
|
756
|
|
Disposed entity
|
—
|
|
|
—
|
|
|
|
396
|
|
|
846
|
|
Land Development Project
|
—
|
|
|
—
|
|
|
|
774
|
|
|
774
|
|
Subcontracting Services
|
(11,110)
|
|
(1)
|
(19,491)
|
|
(1)
|
|
(654)
|
|
|
(1,238)
|
|
Construction Services
|
824
|
|
|
5,936
|
|
|
|
123
|
|
|
2,434
|
|
Island Pond
|
(320)
|
|
(2)
|
(320)
|
|
(2)
|
|
—
|
|
|
—
|
|
Vehicles - Purchases
|
(869)
|
|
(3)
|
(441)
|
|
(3)
|
|
—
|
|
|
—
|
|
Vehicles - Rent expense
|
(677)
|
|
(1)
|
(1,050)
|
|
(1)
|
|
—
|
|
|
—
|
|
Consulting Services
|
(271)
|
|
(2)
|
(265)
|
|
(2)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
SunTx
|
(1,403)
|
|
(2)
|
(1,252)
|
|
(2)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
(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.
|
(3) Purchases reflected in Property, plant & equipment, net, on the Company's Consolidated Balance Sheets.
|
Note 18 - Commitments and Contingencies
From time to time, the Company is subject to inquiries or audits by taxing authorities arising from its operations, covering a wide range of matters that arise in the ordinary course of business, such as income taxes and other types of taxes. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may not be resolved in the Company’s favor. The Company is also involved in other legal and administrative proceedings arising in the ordinary course of business. Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The outcomes of these inquiries and legal proceedings are not expected to have a material effect on the Company’s financial position or results of operations on an individual basis, and management did not accrue any material loss contingencies for the periods presented. However, adverse outcomes in a significant number of such ordinary course inquiries and legal proceedings could, in the aggregate, have a material adverse effect on the Company’s financial condition and results of operations.
Letters of Credit
Under the Revolving Credit Facility, the Company has a total capacity of $50.0 million that may be used for a combination of cash borrowings and letter of credit issuances. At each of September 30, 2020 and 2019, the Company had aggregate letters of credit outstanding in the amount of $10.9 million, primarily related to certain insurance policies as described in Note 2 - Significant Accounting Policies.
Purchase Commitments
As of September 30, 2020, the Company had unconditional purchase commitments for diesel fuel in the normal course of business in the aggregate amount of $1.3 million. Management does not expect any significant changes in the market value of these goods during the commitment period that would have a material adverse effect on the financial condition, results of operations and cash flows of the Company. As of September 30, 2020, our purchase commitments annually thereafter are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Amount
|
2021
|
|
$
|
1,219
|
|
2022
|
|
51
|
|
Total
|
|
$
|
1,270
|
|
|
|
|
Note 19 - Joint Venture
In November 2017, one of the Company’s wholly owned subsidiaries entered into a joint venture agreement (the “JV”) with a third party for the sole purpose of bidding on and performing a construction project for the Alabama Department of Transportation. The Company and the third party each own a 50% partnership interest in the JV and share revenue and expenses equally. The JV is jointly managed by representatives of the Company and the third party, and all labor, material and equipment required to perform the contract is subcontracted, with both of the participants of the JV performing some portion of the subcontracted work.
The Company accounts for this joint venture as an equity method investment in accordance with GAAP. At September 30, 2020 and 2019, the Company’s investment in the JV was $0.2 million and $0.5 million, respectively, which is reflected as “Investment in joint venture” on the Company’s Consolidated Balance Sheets. During the fiscal years ended September 30, 2020 and 2019, the Company recognized $0.6 million and $1.3 million, respectively, of pre-tax income, representing its 50% interest in the earnings of the JV, which is reflected as “Earnings from investment in joint venture” on the Company’s Consolidated Statements of Income. The income tax impact attributable to the Company’s investment in the JV is included within the provision for income taxes in the Company’s Consolidated Statements of Income.
Note 20 - Settlement Agreement
On April 19, 2018, certain of the Company’s subsidiaries entered into settlement agreements with a third party arising from an interruption event not directly related to the Company’s business that the Company does not expect to reoccur (the “Settlement”). The Settlement provided for the Company’s subsidiaries to receive aggregate net payments of approximately $15.7 million 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. The Company recorded a pre-tax gain of $14.8 million during the fiscal year ended September 30, 2018 related to the Settlement. As of September 30, 2020, all amounts due pursuant to the Settlement have been received in full.
Note 21 - Leases
The Company leases certain facilities, office space, vehicles and equipment. As of September 30, 2020, operating leases under Topic 842 were included in (i) operating lease right-of use assets, (ii) current portion of operating lease liabilities and (iii) operating lease liabilities, net of current portion on the Company’s Consolidated Balance Sheets in the amounts of $7.4 million, $2.0 million and $5.6 million, respectively. As of September 30, 2020, the Company did not have any lease contracts that had not yet commenced but had created significant rights and obligations. In October 2019, the Company used cash in the amount of $11.5 million to buy out certain operating lease obligations.
The components of lease expense were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended September 30, 2020
|
|
|
|
Operating lease cost
|
|
$
|
3,498
|
|
Short-term lease cost
|
|
13,374
|
|
Total lease expense
|
|
$
|
16,872
|
|
|
|
|
Short-term leases (those with terms of 12 months or less) are not capitalized but are expensed on a straight-line basis over the lease term. The majority of our short-term leases relate to equipment used on construction projects. These leases are entered into at periodic rental rates for an unspecified duration and typically have a termination for convenience provision. Short-term lease cost includes leases with terms of one month or less.
As of September 30, 2020, the weighted-average remaining term of the Company’s leases was 8.8 years, and the weighted-average discount rate was 4.00%. As of September 30, 2020, the lease liability was equal to the present value of the remaining lease payments, discounted using the incremental borrowing rate on the Company’s secured debt using a single maturity discount rate, as such rate is not materially different from the discount rate applied to each of the leases in the portfolio.
The following table summarizes the Company’s undiscounted lease liabilities outstanding as of September 30, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Amount
|
2021
|
|
$
|
2,301
|
|
2022
|
|
1,251
|
|
2023
|
|
838
|
|
2024
|
|
749
|
|
2025
|
|
586
|
|
Thereafter
|
|
3,466
|
|
Total future minimum lease payments
|
|
$
|
9,191
|
|
Less: imputed interest
|
|
1,591
|
|
Total
|
|
$
|
7,600
|
|
|
|
|
The Company has lease agreements associated with quarry facilities under which the Company makes royalty payments. The payments are generally based on tons sold in a particular period; however, certain agreements have minimum annual payments. Royalty expense recorded in cost of revenue during the fiscal years ended September 30, 2020 and 2019 was $1.3 million and $1.7 million, respectively.
Note 22 - Fair Value Measurements
The following table presents the Company’s liabilities measured at fair value on a recurring basis as of September 30, 2020 and 2019 under ASC 820, Fair Value Measurements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2020
|
|
2019
|
|
Level 2
|
|
Level 2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
Commodity swaps
|
$
|
503
|
|
|
$
|
—
|
|
Interest rate swaps
|
1,708
|
|
|
311
|
|
|
|
|
|
Derivative liabilities included in Level 2 include commodity and interest rate swap contracts. The fair values of our Level 2 derivative liabilities are estimated using an analysis of the expected cash flow of the contract in combination with marketable observable inputs, including forward and spot prices for commodity swaps and interest rate curves for interest rate swaps.
Note 23 - Investment in Derivative Instruments
The Company’s operations expose it to a variety of market risks, including the effects of changes in commodity prices and changes in interest rates. As part of its risk management process, the Company began entering into commodity swap transactions through regulated commodity exchanges in February 2020. To manage interest rate exposure, the Company has entered into derivative instruments using interest rate swaps. The objective of entering into interest rate swaps is to eliminate the variability of cash
flows associated with movements in interest rates over the life of the loans.
The following table represents the approximate amount of realized and unrealized gains (losses) and changes in fair value recognized in earnings on commodity derivative contracts for the fiscal years ended September 30, 2020 and 2019 and the fair value of these derivatives as of September 30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended September 30,
|
|
|
|
|
|
2020
|
|
|
|
|
|
2019
|
|
|
|
|
|
Change in
|
|
Change in
|
|
Income Statement Classification
|
|
Realized Gain (Loss)
|
|
Unrealized Gain (Loss)
|
|
Total Gain (Loss)
|
|
Realized Gain (Loss)
|
|
Unrealized Gain (Loss)
|
|
Total Gain (Loss)
|
|
Cost of revenues
|
|
$
|
(432)
|
|
|
$
|
(503)
|
|
|
$
|
(935)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest expense, net
|
|
(388)
|
|
|
(1,397)
|
|
|
(1,785)
|
|
|
5
|
|
|
(565)
|
|
|
(560)
|
|
|
Total
|
|
$
|
(820)
|
|
|
$
|
(1,900)
|
|
|
$
|
(2,720)
|
|
|
$
|
5
|
|
|
$
|
(565)
|
|
|
$
|
(560)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
Balance Sheet Classification
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expense and other current liabilities - commodity swaps
|
|
$
|
(183)
|
|
|
$
|
—
|
|
|
Other long-term liabilities - commodity swaps
|
|
(320)
|
|
|
—
|
|
|
Other long-term liabilities - interest rate swaps
|
|
(1,708)
|
|
|
(311)
|
|
|
Net unrealized (loss) position
|
|
$
|
(2,211)
|
|
|
$
|
(311)
|
|
|
|
|
|
|
|
|
Note 24 - COVID-19 Pandemic
The Company is closely monitoring the impact of the pandemic of the novel strain of coronavirus, known as COVID-19, on all aspects of its business, including how it has impacted and may continue to impact the Company’s customers, employees, suppliers, and vendors. While the Company did not incur significant disruptions in its operations during the fiscal year ended September 30, 2020 from COVID-19, due to the uncertainties surrounding the COVID-19 pandemic, it is unable to predict the impact that COVID-19 will have on its financial position, operating results and cash flows in future periods.
Note 25 - Condensed Financial Statements of Parent Company
CONSTRUCTION PARTNERS, INC.
PARENT COMPANY ONLY
CONDENSED BALANCE SHEETS
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2020
|
|
2019
|
ASSETS
|
|
|
|
Cash and cash equivalents
|
$
|
78,041
|
|
|
$
|
63,947
|
|
Prepaid expenses and other current assets
|
928
|
|
|
745
|
|
Total current assets
|
78,969
|
|
|
64,692
|
|
Property, plant and equipment, net
|
2,994
|
|
|
2,268
|
|
Investment in subsidiaries
|
383,740
|
|
|
322,947
|
|
Deferred income taxes, net
|
441
|
|
|
16
|
|
Other assets
|
6
|
|
|
—
|
|
Total assets
|
$
|
466,150
|
|
|
$
|
389,923
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Due to subsidiaries
|
$
|
75,044
|
|
|
$
|
35,303
|
|
Accrued expenses and other current liabilities
|
1,969
|
|
|
2,934
|
|
Total current liabilities
|
77,013
|
|
|
38,237
|
|
Long-term liabilities:
|
|
|
|
Due to subsidiaries
|
2,234
|
|
|
7,825
|
|
Other long-term liabilities
|
1,708
|
|
|
311
|
|
Total long-term liabilities
|
3,942
|
|
|
8,136
|
|
Total liabilities
|
80,955
|
|
|
46,373
|
|
Stockholders’ Equity
|
|
|
|
Preferred stock, par value $0.001; 10,000,000 shares authorized at September 30, 2020 and September 30, 2019 and no shares issued and outstanding
|
—
|
|
|
—
|
|
Class A common stock, par value $0.001; 400,000,000 shares authorized, 33,875,884 shares issued and outstanding at September 30, 2020, and 32,597,736 shares issued and outstanding at September 30, 2019
|
34
|
|
|
33
|
|
Class B common stock, par value 0.001; 100,000,000 shares authorized, 20,828,813 shares issued and 17,905,861 shares outstanding at September 30, 2020, and 22,106,961 shares issued and 19,184,009 shares outstanding at September 30, 2019
|
21
|
|
|
22
|
|
|
|
|
|
Additional paid-in capital
|
245,022
|
|
|
243,452
|
|
Treasury stock, at cost, 2,922,952 shares of Class B common stock, par value $0.001
|
(15,603)
|
|
|
(15,603)
|
|
Retained earnings
|
155,721
|
|
|
115,646
|
|
Total stockholders’ equity
|
385,195
|
|
|
343,550
|
|
Total liabilities and stockholders’ equity
|
$
|
466,150
|
|
|
$
|
389,923
|
|
|
|
|
|
See note to condensed financial statements of parent company.
CONSTRUCTION PARTNERS, INC.
PARENT COMPANY ONLY
CONDENSED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended
September 30,
|
|
2020
|
|
2019
|
Equity in net income of subsidiaries
|
$
|
43,712
|
|
|
$
|
45,679
|
|
Equity-based compensation expense
|
(1,570)
|
|
|
(957)
|
|
General and administrative expenses
|
(2,597)
|
|
|
(2,666)
|
|
Interest expense, net
|
(1,218)
|
|
|
(153)
|
|
Gain on sale of equipment, net
|
—
|
|
|
1
|
|
Other income
|
—
|
|
|
5
|
|
Income before provision for income taxes
|
38,327
|
|
|
41,909
|
|
Income tax benefit
|
1,970
|
|
|
1,212
|
|
Net income
|
$
|
40,297
|
|
|
$
|
43,121
|
|
Net income per share attributable to common stockholders:
|
|
|
|
Basic
|
$
|
0.78
|
|
|
$
|
0.84
|
|
Diluted
|
$
|
0.78
|
|
|
0.84
|
|
Weighted average number of common shares outstanding:
|
|
|
|
Basic
|
51,489,211
|
|
|
51,421,159
|
Diluted
|
51,636,934
|
|
|
51,427,220
|
|
|
|
|
See note to condensed financial statements of parent company.
CONSTRUCTION PARTNERS, INC.
PARENT COMPANY ONLY
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended
September 30,
|
|
2020
|
|
2019
|
Cash flows from operating activities:
|
|
|
|
Net income
|
$
|
40,297
|
|
|
$
|
43,121
|
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
|
|
|
|
Depreciation, depletion and amortization of long-lived assets
|
463
|
|
|
179
|
|
Gain on sale of equipment
|
—
|
|
|
(1)
|
|
Equity-based compensation expense
|
1,570
|
|
|
957
|
|
Equity in net income of subsidiaries
|
(43,712)
|
|
|
(45,679)
|
|
Deferred income tax (benefit) expense
|
(425)
|
|
|
99
|
|
Changes in operating assets and liabilities:
|
|
|
|
Prepaid expenses and other current assets
|
(183)
|
|
|
771
|
|
Other assets
|
(6)
|
|
|
257
|
|
Accrued expenses and other current liabilities
|
(965)
|
|
|
1,662
|
|
Other liabilities
|
1,397
|
|
|
311
|
|
Net cash (used in) provided by operating activities
|
(1,564)
|
|
|
1,677
|
|
Cash flows from investing activities:
|
|
|
|
Purchases of property, plant and equipment
|
(1,189)
|
|
|
(755)
|
|
Proceeds from sale of equipment
|
—
|
|
|
1
|
|
Investment in subsidiary
|
(17,303)
|
|
|
(19,703)
|
|
Net cash (used in) investing activities
|
(18,492)
|
|
|
(20,457)
|
|
Cash flows from financing activities:
|
|
|
|
Change in amounts due to (from) subsidiaries, net
|
34,150
|
|
|
16,959
|
|
Payment of treasury stock purchase obligation
|
—
|
|
|
(569)
|
|
Proceeds from sale of stock
|
—
|
|
|
3
|
|
Net cash provided by financing activities
|
34,150
|
|
|
16,393
|
|
Net change in cash and cash equivalents
|
14,094
|
|
|
(2,387)
|
|
Cash and cash equivalents:
|
|
|
|
Beginning of period
|
63,947
|
|
|
66,334
|
|
End of period
|
$
|
78,041
|
|
|
$
|
63,947
|
|
|
|
|
|
See note to condensed financial statements of parent company.
Note to Condensed Financial Statements of Parent Company
On December 31, 2019, the Company completed an internal reorganization by merging Construction Partners Holdings, Inc. with and into the Company, with the Company surviving the merger. Therefore, the condensed parent company-only financial statements above reflect the retroactive combination of these entities as if it had occurred on October 1, 2018 for comparative purposes. The presentation change for September 30, 2019 had no effect on previously reported net income of the Company.
These condensed parent company-only financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X, as the restricted net assets of the subsidiaries of Construction Partners, Inc. (as defined in Rule 4-08(e)(3) of Regulation S-X) exceed 25% of the consolidated net assets of the Company. The ability of Construction Partners, Inc.’s operating subsidiaries to pay dividends is restricted by the terms of the credit facilities described in Note 11 - Debt.
These condensed parent company-only financial statements have been prepared using the same accounting principles and policies described in the notes to the consolidated financial statements, with the exception that the parent company accounts for its subsidiaries using the equity method. These condensed parent company-only financial statements should be read in conjunction with the consolidated financial statements and related notes thereto.
Note 26 - Subsequent Events
Subsequent to September 30, 2020, a subsidiary of the Company acquired the operations of three asphalt and paving companies in North Carolina. The acquired businesses collectively added eleven hot-mix asphalt plants in North Carolina, providing the Company with access to additional markets and expanding its footprint in the state. The acquisitions will be accounted for as business combinations in accordance with ASC 805. The aggregate purchase price of $57.4 million (exclusive of reimbursement to the respective sellers for inventory assets acquired) was paid from cash on hand at closing.
In each case, 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 above in Note 2 - Significant Accounting Policies. The amount of the purchase price exceeding the preliminary net fair value of identifiable assets acquired and liabilities assumed is expected to be recorded as goodwill in the aggregate amount of $21.1 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 preliminary amount allocated to goodwill.