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, gravel and construction stone, that are used as raw materials in the production of HMA and for sales to third parties, 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 to facilitate an acquisition growth strategy in the HMA paving and construction industry. SunTx Capital Partners (“SunTx”), a private equity firm based in Dallas, Texas, is the Company’s majority investor and has owned a controlling interest in the Company’s stock since the Company’s inception.
On October 1, 2021, Construction Partners Risk Management, Inc. (the "Captive"), a captive insurance company and wholly-owned subsidiary of the Company, commenced operations. The purpose of the Captive is to provide general liability, automobile liability and workers’ compensation insurance coverage to the Company and its subsidiaries.
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, investments, mineral reserves, 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, asset retirement obligations, 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.
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.
Restricted Cash
Restricted cash represents cash held in a fiduciary capacity by the Captive for the payment of casualty insurance claims for the Company and its subsidiaries. The Company had restricted cash of $28,261 and $0 at September 30, 2022 and 2021, respectively.
Restricted Investments
The Company's restricted investments consist of debt securities, which are held in a fiduciary capacity by the Captive for the payment of casualty insurance claims for the Company and its subsidiaries. The Company determines the classification of its securities at the time of purchase and re-evaluates the determination at each balance sheet date. The Company has classified these securities as available-for-sale. As a result, these securities are carried at their fair value. Purchases and sales of debt securities are recorded on the trade date. Interest income on debt securities is recorded when earned using an "effective yield method." Unrealized gains and losses are reported as components of accumulated other comprehensive income (loss), net. These securities have been classified as non-current assets based on their respective maturity dates. The Company had restricted investments of $6.9 million and $0.0 million at September 30, 2022 and 2021, respectively.
The Company evaluates its available-for-sale debt securities quarterly to determine if there has been a decline in the fair value below the amortized cost due to credit losses or other factors. This evaluation process entails judgement by the Company, and considers factors including the issuer's financial condition and near-term prospects, future economic conditions, interest rate changes and changes in the rating of the security. When the Company has determined that it has an intent to sell, or it is more likely than not that the Company will be required to sell a security before it recovers its amortized cost basis above fair value, the individual security is written down to fair value, with a corresponding charge to Other income within the Consolidated Statements of Comprehensive Income. For available-for-sale debt securities that do not meet the intent impairment criteria but the Company has determined that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss allowance is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. For the fiscal years ended September 30, 2022 and 2021, the Company had $0 in intent impairments and credit losses.
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 satisfactory 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, 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.
Contracts receivable including retainage, net is stated at the amount management expects to collect from outstanding balances. 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, current economic conditions, historical losses and other information available to management. 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 to 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. 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, 2022 or September 30, 2021.
Projects performed for various departments of transportation accounted for 36.8%, 33.7% and 32.5% of consolidated revenues for the fiscal years ended September 30, 2022, 2021 and 2020, respectively. Customers that accounted for more than 10% of consolidated revenues during any of the fiscal years ended September 30, 2022, 2021 and 2020 are presented below:
| | | | | | | | | | | | | | | | | | | | |
| | % of Consolidated Revenues for the Fiscal Year Ended September 30, |
| | 2022 | | 2021 | | 2020 |
Alabama Department of Transportation | | 10.0% | | 10.8% | | 11.6% |
North Carolina Department of Transportation | | 11.2% | | 10.3% | | 7.8% |
| | | | | | |
| | | | | | |
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 construction stone that has been removed from aggregates facilities and processed for future sale or internal use, raw materials, including asphalt cement, aggregates and millings that the Company expects to utilize on construction projects within one year. Inventories valued on the average cost basis totaled $64.8 million and $46.2 million, respectively, at September 30, 2022 and 2021. Inventories valued on the first-in, first-out cost basis totaled $9.4 million and $7.6 million, respectively, at September 30, 2022 and 2021.
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. | | | | | | | | | | | | | | | | | | | | |
| | % of Consolidated Revenues for the Fiscal Year Ended September 30, |
| | 2022 | | 2021 | | 2020 |
Public | | 60.9% | | 61.3% | | 65.3% |
Private | | 39.1% | | 38.7% | | 34.7% |
| | | | | | |
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. No material adjustments to a contract were noted in the fiscal year ended September 30, 2022.
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 or aggregates facilities. 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, restricted cash, contracts receivable including retainage, accounts payable and accrued expenses reflected as current assets and current liabilities on its Consolidated Balance Sheets at September 30, 2022 and 2021. Due to the short-term nature of these instruments, management considers their carrying value to approximate their fair value.
The Company also has debt securities reflected as restricted investments on its Consolidated Balance Sheets at September 30, 2022. These investments are adjusted to fair value at each balance sheet date and are considered Level 2 inputs.
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 debt issuance costs and current maturities of long-term debt on the Company’s Consolidated Balance Sheets at September 30, 2022 and 2021. 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 21 - Fair Value Measurements.
Level 3 fair values are used to value acquired mineral reserves and leased mineral interests. The fair values of mineral reserves and leased mineral interests are determined using an excess earnings approach, which requires management to estimate future cash flows. The estimate of future cash flows is based on available historical information and forecasts determined by management, but is inherently uncertain. Key assumptions in estimating future cash flows include sales price, volumes and expected profit margins, net of capital requirements. The present value of the projected net cash flows represents the fair value assigned to mineral reserves and mineral interests. The discount rate is a significant assumption used in the valuation model and is based on the required rate of return that a hypothetical market participant would assume if purchasing the acquired business.
Management applies fair value measurement guidance to its impairment analysis for tangible and intangible assets, including goodwill.
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. Mineral reserves and mine development costs, including stripping costs incurred during the development stage of a mine, are depleted in accordance with the units-of-production method as aggregates are 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: | | | | | |
Category | Estimated Useful Life |
Land and improvements | Land, unlimited; improvements, 15-25 years |
Mineral reserves | Based on depletion |
Buildings | 5 - 39 years |
Plants | 3 - 20 years |
Construction equipment | 3 - 10 years |
Furniture and fixtures | 5 - 10 years |
Leasehold improvements | The shorter of 15 years or the remaining lease term |
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 Comprehensive 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 Comprehensive 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 Comprehensive Income. The Company performed a quantitative assessment of goodwill using the market capitalization calculation for fiscal years 2022 and 2021 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 as of our annual goodwill and intangible assets impairment test date, which is July 1. 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. The Company performed a qualitative impairment assessment of its indefinite-lived trade name license. The qualitative assessment did not identify indicators of impairment, and it was determined that is more likely than not the indefinite-lived trade name license fair value was more than its carrying amount. Accordingly, no further analysis was required or performed.
Deferred Financing Costs
Costs directly associated with obtaining debt financing are capitalized upon the issuance of long-term debt and amortized over the term of the related debt agreement. Unamortized amounts are presented on the Consolidated Balance Sheets as a direct deduction from the carrying amount of the related long-term debt liability. Loan issuance costs associated with the Revolving Credit Facility are presented as a component of other assets. Loan issuance costs incurred in connection with the Revolving Credit Facility are amortized using the straight-line method over the life of the Credit Agreement.
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. Effective October 1, 2021, the Captive retains the first $1,000,000 per claim liability for each claim paid. Also effective October 1, 2021, the Company became a member of CIRCA, Limited, a group captive insurance company, that retains the next $550,000 per claim liability for each claim paid. The Company utilizes various primary and excess insurance companies to cover the liability for claims in excess of the retained amounts. 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 $1,000,000 per occurrence for general liability, automobile liability and workers’ compensation claims.
Prior to October 1, 2021, the amount for which the Company was liable for general liability, automobile liability and workers’ compensation claims ranged 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.
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).
Warranties
For some contracts, the Company is required to furnish a warranty that is usually one year in length. Because of the nature of these contracts, including contract owner inspections of the work both during construction and prior to acceptance, the Company has not experienced material warranty costs for these short-term warranties and, therefore, has not established an accrual of these costs. Certain contracts carry longer warranty periods, for which the Company has accrued an estimate of warranty costs. The warranty liability is estimated based on the Company's experience with the specific type of construction work and was not material as of September 30, 2022 and 2021.
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.
Stripping Costs
Stripping costs are costs incurred for the removal of overburden or waste materials for the purpose of obtaining access to aggregate materials that will be commercially produced.
Stripping costs incurred during the development stage of a mine (pre-production stripping) are capitalized and reported within property, plant and equipment, net in our accompanying Consolidated Balance Sheets. Capitalized pre-production stripping costs are depleted in accordance with the units-of-production method as aggregates are extracted, once the mine is no longer in the development stage. Pre-production stripping costs included in property, plant and equipment were $3.9 million and $2.7 million, respectively, for the fiscal years ended September 30, 2022 and 2021.
Stripping costs incurred during the production phase of a mine are variable production costs and are included in the costs of the inventory produced during the period that the stripping costs are incurred. The production phase of a mine is deemed to begin when saleable minerals are extracted, regardless of the level of production. However, the production phase does not commence with the removal of de minimis saleable mineral material that occurs in conjunction with the removal of overburden or waste material for the purpose of obtaining access to aggregate materials. Stripping costs considered as production costs and included in the costs of inventory produced for the fiscal years ended September 30, 2022, 2021 and 2020 was $1.7 million, $1.8 million and $1.3 million, respectively.
Asset Retirement Obligations
Asset retirement obligations (AROs) are legal obligations associated with the retirement of tangible long-lived assets resulting from the acquisition, construction, development and/or normal use of the underlying assets. The ARO is recognized at its estimated fair value in the period in which it is incurred. These obligations generally include the estimated net future costs of dismantling, restoring and reclaiming operating mines and related mine sites, in accordance with federal, state, local regulatory and land lease agreement requirements. Upon initial recognition of a liability, the associated asset retirement costs are capitalized as part of the related long-lived asset and depreciated over the estimated useful life of the related asset. The liability is accreted over time through charges to earnings. Reclamation costs are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation and abandonment costs. If the ARO is settled for an amount other than the carrying amount of the liability, the Company recognizes a gain or loss on settlement. The Company reviews, on an annual basis, unless otherwise deemed necessary, the asset retirement obligation at each mine site in accordance with ASC guidance for accounting for reclamation obligations.
To determine the fair value of the AROs, the Company estimates the cost for a third party to perform the legally required reclamation activities including a reasonable profit margin. This cost is then increased for future estimated inflation based on the estimated years to complete and discounted to fair value using present value techniques with a credit-adjusted, risk-free rate. See Note 24 - Asset Retirement Obligations.
Right of Use Assets and Lease 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. Leases are recognized in accordance with ASC Topic 842, Leases (“Topic 842”).
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. Within the provisions of certain leases, there are escalations in payments over the base lease term, which have been reflected in lease expense on a straight-line basis for operating leases over the expected lease term.
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 Comprehensive Income on a straight-line basis over the lease term.
Comprehensive Income
We report comprehensive income in our Consolidated Statements of Comprehensive Income and Consolidated Statements of Stockholders’ Equity. Comprehensive income comprises two subsets: net income and other comprehensive income (OCI). OCI includes adjustments for changes in fair value of an interest rate swap contract derivative and available-for-sale restricted investments. For additional information about comprehensive income see Note 23 - Other Comprehensive Income.
Segment Reporting and Reporting Units
As of September 30, 2022, the Company operated in Alabama, Florida, Georgia, North Carolina and South Carolina through its wholly owned subsidiaries located in five 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 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.
Business Acquisitions
The Company accounts for business combinations using the acquisition method of accounting in accordance with ASC 805 - Business Combinations, which allocates the fair value of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.
Determining the fair values of assets acquired and liabilities assumed requires judgment and often involves the use of significant estimates and assumptions. We engage third-party appraisal firms when appropriate to assist in the fair value determination of assets acquired and liabilities assumed. Acquisition-related expenses and transaction costs associated with business combinations are expensed as incurred.
The Company may adjust the amounts recognized in an acquisition during a measurement period not to exceed one year from the date of acquisition. Any such adjustments are the result of subsequently obtaining additional information that existed at the acquisition date regarding the assets acquired or the liabilities assumed. Measurement period adjustments are generally recorded as increases or decreases to goodwill, if any, recognized in the transaction. The cumulative impact of measurement period adjustments on depreciation, amortization and other income statement items are recognized in the period the adjustment is determined.
Note 3 - Accounting Standards
Recently Adopted Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2019-12, “Simplifying the Accounting for Income Taxes,” which adds new guidance to simplify the accounting for income taxes and changes the accounting for certain income tax transactions. The new standard is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company adopted this guidance effective October 1, 2021 as required and noted no material impact to the Company's consolidated financial statements.
In October 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-08, "Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers," which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers. The new standard is effective on a prospective basis for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company adopted this guidance for the fiscal year ended September 30, 2022 and applied the guidance to business acquisitions that had contract assets and contract liabilities.
Note 4 - Business Acquisitions
Acquisitions - Final
During the fiscal year ended September 30, 2022, the Company and its subsidiaries made the following business acquisitions:
On October 1, 2021, the Company acquired all of the capital stock of King Asphalt, Inc., an HMA production and paving company headquartered in Liberty, South Carolina. The transaction established the Company's first platform company in South Carolina and added three HMA plants in the Greenville, South Carolina metro area.
On October 18, 2021, a subsidiary of the Company acquired substantially all of the assets of J. Miller Construction Inc., a grading and sitework company headquartered in Pensacola, Florida. The transaction enhanced the Company’s vertical integration of construction services and supplemented the Company’s capabilities in the Pensacola, Florida market area.
On March 18, 2022, a subsidiary of the Company acquired substantially all of the assets of GAC Contractors, Inc., an asphalt paving, grading and sitework company headquartered in Panama City, Florida. The transaction enhanced the Company's operational resources and capabilities in the Panama City, Florida market area.
These acquisitions were accounted for as business combinations in accordance with Topic 805. The Company consulted with independent third parties to assist in the valuation process. As of September 30, 2022, the Company has finalized its purchase price allocation for these acquisitions. Total consideration transferred for these three acquisitions was $92.4 million as of September 30, 2022.
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 amount of the purchase price exceeding the net fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill in the aggregate amount of $37.6 million for these three acquisitions, 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 attributable to these acquisitions are included in the Company’s Consolidated Statements of Comprehensive Income for the fiscal year ended September 30, 2022, from the date of acquisition forward. 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 Comprehensive Income in the amount of $0.4 million for the fiscal year ended September 30, 2022.
North Carolina Acquisition - Provisional
On March 7, 2022, a subsidiary of the Company acquired substantially all of the assets of Southern Asphalt, Inc., an asphalt paving company headquartered in Burgaw, North Carolina. The transaction provided access to the Wilmington, North Carolina metro area market. The acquisition was accounted for as a business combination in accordance with Topic 805. As of September 30, 2022, the purchase price allocation was provisional pending certain information necessary to finalize estimates of liabilities assumed. The Company consulted with independent third-parties to assist in the valuation process. The Company expects to finalize these values as soon as practicable and no later than one year from the acquisition date. Total consideration transferred for this acquisition was $11.7 million as of September 30, 2022.
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 amount of the purchase price exceeding the net fair value of identifiable assets acquired and liabilities assumed was recorded as provisional goodwill in the amount of approximately $7.4 million, of which $6.6 million 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 7, 2022 acquisition date attributable to this acquisition are included in the Company’s Consolidated Statements of Comprehensive Income for the fiscal year ended September 30, 2022. 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 Comprehensive Income in the amount of $0.1 million for the fiscal year ended September 30, 2022.
South Carolina Acquisition - Provisional
On August 1, 2022, a subsidiary of the Company acquired substantially all of the assets of Southern Asphalt, Inc., an asphalt paving, grading and sitework company headquartered in Conway, South Carolina. The transaction provides access to Horry County and the larger Myrtle Beach metro area market. The acquisition was accounted for as a business combination in accordance with Topic 805. As of September 30, 2022, the purchase price allocation has not yet been finalized due to the recent timing of this acquisition, as certain information is pending to finalize estimates of fair value of certain assets acquired and liabilities assumed. The Company consulted with independent third-parties to assist in the valuation process. The Company expects to finalize these values as soon as practicable and no later than one year from the acquisition date. Total consideration transferred for this acquisition was $25.6 million as of September 30, 2022.
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 amount of the purchase price exceeding the net fair value of identifiable assets acquired and liabilities assumed was recorded as provisional goodwill in the amount of approximately $0.3 million, of which $0.0 million 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 August 1, 2022 acquisition date attributable to this acquisition are included in the Company’s Consolidated Statements of Comprehensive Income for the fiscal year ended September 30, 2022. 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 Comprehensive Income in the amount of $0.3 million for the fiscal year ended September 30, 2022.
Combined Acquisitions During the Fiscal Year Ended September 30, 2022
The following table summarizes the consideration for the aforementioned acquisitions and the amounts of identified assets acquired and liabilities assumed as of September 30, 2022 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Acquisitions - Final | | North Carolina Acquisition - Provisional | | South Carolina Acquisition - Provisional | | Total |
Cash and cash equivalents | $ | 1,168 | | | $ | — | | | $ | — | | | $ | 1,168 | |
Contracts receivable including retainage | 7,162 | | | 1,854 | | | — | | | 9,016 | |
Cost and estimated earnings in excess of billings on uncompleted contracts | 125 | | | — | | | — | | | 125 | |
Inventories | 1,928 | | | 64 | | | 988 | | | 2,980 | |
Prepaid expenses and other current assets | 213 | | | — | | | — | | | 213 | |
Property, plant and equipment | 45,776 | | | 3,879 | | | 30,636 | | | 80,291 | |
Deferred tax assets | 2,237 | | | 234 | | | — | | | 2,471 | |
Intangible assets | 9,000 | | | — | | | — | | | 9,000 | |
Total assets | 67,609 | | | 6,031 | | | 31,624 | | | 105,264 | |
| | | | | | | |
Accounts payable | 2,759 | | | — | | | — | | | 2,759 | |
Billings in excess of costs and estimated earnings on uncompleted contracts | 2,697 | | | 426 | | | — | | | 3,123 | |
Accrued expenses and other current liabilities | 2,526 | | | 594 | | | 2,980 | | | 6,100 | |
Unfavorable contract liabilities | 4,900 | | | — | | | 3,000 | | | 7,900 | |
Deferred tax liabilities | — | | | — | | | 282 | | | 282 | |
Total liabilities | 12,882 | | | 1,020 | | | 6,262 | | | 20,164 | |
| | | | | | | |
Goodwill | 37,647 | | | 7,369 | | | 284 | | | 45,300 | |
| | | | | | | |
Total cash consideration transferred | 92,374 | | | 11,716 | | | 25,646 | | | 129,736 | |
Total consideration payable | — | | | 664 | | | — | | | 664 | |
Total purchase price | $ | 92,374 | | | $ | 12,380 | | | $ | 25,646 | | | $ | 130,400 | |
| | | | | | | |
The Consolidated Statements of Comprehensive Income for the fiscal year ended September 30, 2022 includes $120.8 million of revenue and $0.9 million of net income attributable to the operations of the businesses acquired during the 2022 fiscal year from their respective acquisition dates through September 30, 2022.
The following presents pro forma revenues and net income as though the acquisitions had occurred on October 1, 2019 (unaudited, in thousands):
| | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended September 30, |
| 2022 | | 2021 | | 2020 |
Pro forma revenues | $ | 1,374,936 | | | $ | 1,104,850 | | | $ | 979,790 | |
Pro forma net income | $ | 19,137 | | | $ | 18,016 | | | $ | 38,136 | |
Pro forma financial information is presented as if the operations of the acquisitions had been included in the consolidated results of the Company since October 1, 2019, and gives effect to transactions that are directly attributable to the acquisitions, including adjustments to:
(a)Include the pro forma results of operations of the acquisitions for the fiscal years ended September 30, 2022, 2021 and 2020.
(b)Include additional depreciation and depletion expense related to the fair value of acquired property, plant and equipment and reserves at aggregates facilities, as applicable, as if such assets were acquired on October 1, 2019 and consistently applied to the Company’s depreciation and depletion methodologies.
(c)Include interest expense under the Term Loan as if the funds borrowed to finance the purchase price were borrowed on October 1, 2019. Interest expense calculations further assume that no principal payments were made during the period from October 1, 2019 through September 30, 2022, and that the interest rate in effect on the date the Company made the acquisitions was in effect for the period from October 1, 2019 through September 30, 2022.
(d)Exclude $0.8 million of acquisition-related expenses from the fiscal year ended September 30, 2022, as though such expenses were incurred prior to the pro forma acquisition date of October 1, 2019.
Pro forma information is presented for informational purposes and may not be indicative of revenue or net income that would have been achieved if these acquisitions had occurred on October 1, 2019.
Combined Acquisitions During the Fiscal Year Ended September 30, 2021
North Carolina Acquisitions
During the fiscal year ended September 30, 2021, a subsidiary of the Company purchased five HMA production and paving companies and a grading and sitework company on the following dates and based in the following locations: (i) on October 8, 2020, in Carthage, North Carolina, (ii) on October 30, 2020, in Ahoskie, North Carolina, (iii) on December 3, 2020, in Raleigh, North Carolina, (iv) on December 18, 2020, in Kitty Hawk, North Carolina, (v) on June 22, 2021, in Wilson, North Carolina and (vi) on September 10, 2021, in Albemarle, North Carolina. These acquisitions were accounted for as business combinations in accordance with Topic 805. Total consideration transferred for these six acquisitions was $98.7 million. The amount of the purchase price exceeding the net fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill in the aggregate amount of $33.3 million for these acquisitions.
On August 2, 2021, a subsidiary of the Company acquired a crushed stone and aggregates facility located near Goldston, North Carolina. This acquisition was accounted for as a business combination in accordance with Topic 805. Total consideration transferred for this acquisition was $31.4 million. The amount of the purchase price exceeding the net fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill in the aggregate amount of $2.4 million for this acquisition. The prior year provisional accounting for this acquisition was finalized as of September 30, 2022.
Alabama Acquisition
On July 30, 2021, a subsidiary of the Company acquired an HMA contracting company and related entities, all headquartered in Cullman, Alabama. This acquisition was accounted for as a business combination in accordance with Topic 805. Total consideration transferred for this acquisition was $82.1 million. The amount of the purchase price exceeding the net fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill in the aggregate amount of $2.1 million for this acquisition. The prior year provisional accounting for this acquisition was finalized as of September 30, 2022.
The following table summarizes the consideration for the aforementioned acquisitions and the amounts of identified assets acquired and liabilities assumed (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| North Carolina Acquisitions | | Alabama Acquisition | | Total as of September 30, 2021 | | Finalized as of September 30, 2022 |
Accounts receivable | $ | 110 | | | $ | — | | | $ | 110 | | | $ | 110 | |
Inventories | 4,819 | | | 6,480 | | | 11,299 | | | 11,209 | |
Property, plant and equipment | 70,613 | | | 35,020 | | | 105,633 | | | 105,847 | |
Mineral reserves (included in property, plant and equipment) | 18,600 | | | 38,118 | | | 56,718 | | | 56,718 | |
Intangible assets | — | | | 75 | | | 75 | | | 3,700 | |
Total assets | 94,142 | | | 79,693 | | | 173,835 | | | 177,584 | |
| | | | | | | |
Total liabilities | — | | | (718) | | | (718) | | | (3,210) | |
| | | | | | | |
Goodwill | 35,917 | | | 3,157 | | | 39,074 | | | 37,817 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total purchase price | $ | 130,059 | | | $ | 82,132 | | | $ | 212,191 | | | $ | 212,191 | |
| | | | | | | |
Combined Acquisitions During the Fiscal Year Ended September 30, 2020
During the fiscal year ended September 30, 2020, a subsidiary of the Company purchased an HMA production and paving company and two HMA manufacturing plants and certain related assets on the following dates and based in the following locations: (i) on October 1, 2019, in Palm City, Florida, (ii) on March 23, 2020, in Pensacola and DeFuniak Springs, Florida. These acquisitions were accounted for as business combinations in accordance with Topic 805. Total consideration transferred for these two acquisitions was $27.5 million. The amount of the purchase price exceeding the net fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill in the aggregate amount of $7.8 million for these acquisitions.
Note 5 - Contracts Receivable Including Retainage, net
Contracts receivable including retainage, net consisted of the following at September 30, 2022 and 2021 (in thousands): | | | | | | | | | | | |
| September 30, |
| 2022 | | 2021 |
Contracts receivable | $ | 221,566 | | | $ | 132,456 | |
Retainage | 44,253 | | | 27,640 | |
| 265,819 | | | 160,096 | |
Allowance for doubtful accounts | (612) | | | (1,926) | |
Contracts receivable including retainage, net | $ | 265,207 | | | $ | 158,170 | |
| | | |
The following is a summary of changes in the allowance for doubtful accounts balance during the fiscal years ended September 30, 2022 and 2021 (in thousands): | | | | | | | | | | | |
| For the Fiscal Year Ended September 30, |
| 2022 | | 2021 |
Balance at beginning of period | $ | 1,926 | | | $ | 1,440 | |
Charged (credited) to bad debt expense | (947) | | | 784 | |
Write-off of contracts receivable including retainage | (367) | | | (298) | |
Balance at end of period | $ | 612 | | | $ | 1,926 | |
| | | |
Retainage receivables have been billed and the Company has an unconditional right to payment, but are not due until satisfactory 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, 2022 and 2021 consisted of the following (in thousands): | | | | | | | | | | | |
| September 30, |
| 2022 | | 2021 |
Costs on uncompleted contracts | $ | 1,520,510 | | | $ | 1,058,434 | |
Estimated earnings to date on uncompleted contracts | 146,459 | | | 110,430 | |
| 1,666,969 | | | 1,168,864 | |
Billings to date on uncompleted contracts | (1,690,175) | | | (1,179,560) | |
Net billings in excess of costs and estimated earnings on uncompleted contracts | $ | (23,206) | | | $ | (10,696) | |
| | | |
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, 2021 to September 30, 2022 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, 2021 | $ | 23,023 | | | $ | (33,719) | | | $ | (10,696) | |
Changes in revenue billed, contract price or cost estimates | 6,248 | | | (18,758) | | | (12,510) | |
September 30, 2022 | $ | 29,271 | | | $ | (52,477) | | | $ | (23,206) | |
| | | | | |
At September 30, 2022, the Company had unsatisfied or partially unsatisfied performance obligations under construction project contracts representing approximately $1,027.8 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 $783.5 million during the fiscal year ending September 30, 2023 and approximately $244.3 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, 2022 and 2021 (in thousands): | | | | | | | | | | | | | | |
| | September 30, |
| | 2022 | | 2021 |
Prepaid expenses | | $ | 7,221 | | | $ | 5,438 | |
Other current assets | | 5,736 | | | 2,352 | |
Total prepaid expenses and other current assets | | $ | 12,957 | | | $ | 7,790 | |
| | | | |
Other Assets
Other assets consisted of the following at September 30, 2022 and 2021 (in thousands): | | | | | | | | | | | | | | |
| | September 30, |
| | 2022 | | 2021 |
Interest rate swap contract | | $ | 24,719 | | | $ | — | |
Notes receivable | | 1,121 | | | 1,367 | |
Other assets | | 4,701 | | | 4,167 | |
Total other assets | | $ | 30,541 | | | $ | 5,534 | |
| | | | |
Note 8 - Property, Plant and Equipment
Property, plant and equipment at September 30, 2022 and 2021 consisted of the following (in thousands): | | | | | | | | | | | | | | |
| | September 30, |
| | 2022 | | 2021 |
Construction equipment | | $ | 402,581 | | | $ | 333,966 | |
Plants | | 167,625 | | | 143,172 | |
Land and improvements | | 59,454 | | | 53,415 | |
Mineral reserves | | 91,992 | | | 86,556 | |
Buildings | | 32,566 | | | 27,163 | |
Furniture and fixtures | | 7,110 | | | 6,426 | |
Leasehold improvements | | 1,230 | | | 1,230 | |
Total property, plant and equipment, gross | | 762,558 | | | 651,928 | |
Accumulated depreciation, depletion and amortization | | (304,935) | | | (250,803) | |
Construction in progress | | 23,789 | | | 3,707 | |
Total property, plant and equipment, net | | $ | 481,412 | | | $ | 404,832 | |
| | | | |
Depreciation, depletion and amortization expense related to property, plant and equipment for the fiscal years ended September 30, 2022, 2021 and 2020 was $68.9 million, $49.5 million and $39.1 million, respectively.
Mineral reserves, net of accumulated depletion, for the years ended September 30, 2022 and 2021 were $87.6 million and $84.1 million, respectively. These amounts include $2.0 million and $2.1 million of asset retirement obligation assets, net of accumulated depletion associated with active mining operations for the years ended September 30, 2022 and 2021, respectively and $3.9 million and $2.7 million of capitalized stripping costs, net of accumulated depletion associated with development stage mining operations for the fiscal years ended September 30, 2022 and 2021, respectively.
Note 9 - Goodwill and Other Intangible Assets
The following presents goodwill activity during the fiscal years ended September 30, 2022 and 2021 (in thousands):
| | | | | |
Balance at September 30, 2020 | $ | 46,348 | |
Additions | 39,074 | |
Balance at September 30, 2021 | 85,422 | |
Additions | 45,300 | |
Measurement period adjustments | $ | (1,257) | |
Balance at September 30, 2022 | $ | 129,465 | |
| |
The additions in goodwill as of September 30, 2022 compared to September 30, 2021 were attributable to $45.3 million for various Business Acquisitions (see Note 4 - Business Acquisitions) completed during the fiscal year ended September 30, 2022 and a reduction of $1.3 million for measurement period adjustments that were finalized for acquisitions completed during the fiscal year ended September 30, 2021.
A summary of other intangible assets at September 30, 2022 and 2021 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, |
| | | 2022 | | 2021 |
| Weighted Average Life | | Gross Value | | Accumulated Amortization | | Net Book Value | | Gross Value | | Accumulated Amortization | | Net Book Value |
Indefinite-lived: | | | | | | | | | | | | | |
Trade name license | Indefinite | | $ | 5,300 | | | N/A | | $ | 5,300 | | | $ | 2,000 | | | N/A | | $ | 2,000 | |
Finite-lived: | | | | | | | | | | | | | |
Customer relationship | 13 years | | 11,045 | | | (1,304) | | | 9,741 | | | 1,645 | | | (640) | | | 1,005 | |
Non-compete agreements | 7 years | | 1,220 | | | (285) | | | 935 | | | 1,295 | | | (137) | | | 1,158 | |
Total intangible assets | | | $ | 17,565 | | | $ | (1,589) | | | $ | 15,976 | | | $ | 4,940 | | | $ | (777) | | | $ | 4,163 | |
| | | | | | | | | | | | | |
The change in gross value as of September 30, 2022 compared to September 30, 2021 is attributable to $9.0 million for various Business Acquisitions (see Note 4 - Business Acquisitions) completed during the fiscal year ended September 30, 2022 and $3.7 million for provisional accounting adjustments that were finalized for acquisitions completed during the fiscal year ended September 30, 2021.
Total amortization expense related to finite-lived intangible assets was $0.8 million, $0.3 million and $0.2 million for the fiscal years ended September 30, 2022, 2021 and 2020, respectively.
Estimated future total amortization expense related to finite-lived intangible assets is as follows (in thousands): | | | | | | | | |
Fiscal Year | | Estimated Amortization Expense |
2023 | | $ | 981 | |
2024 | | 978 | |
2025 | | 977 | |
2026 | | 925 | |
2027 | | 776 | |
Thereafter | | 6,039 | |
Total | | $ | 10,676 | |
| | |
Note 10 - Liabilities
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following at September 30, 2022 and 2021 (in thousands): | | | | | | | | | | | | | | |
| | September 30, |
| | 2022 | | 2021 |
Accrued payroll and benefits | | $ | 12,980 | | | $ | 19,302 | |
Accrued insurance costs | | 3,081 | | | 3,444 | |
Unfavorable contract liabilities | | 4,824 | | | — | |
Other current liabilities | | 7,599 | | | 3,713 | |
Total accrued expenses and other current liabilities | | $ | 28,484 | | | $ | 26,459 | |
| | | | |
Unfavorable contract liabilities represent liabilities acquired as part of the Company's business acquisitions during the fiscal year ended September 30, 2022, as described in Note 4 - Business Acquisitions. Total amortization expense related to the acquired unfavorable contract liabilities was $4.1 million, $0.0 million and $0.0 million for the fiscal years ended September 30, 2022, 2021 and 2020, respectively.
Other Long-Term Liabilities
Other long-term liabilities consisted of the following at September 30, 2022 and 2021 (in thousands): | | | | | | | | | | | |
| September 30, |
| 2022 | | 2021 |
| | | |
Accrued insurance costs | $ | 8,210 | | | $ | 6,497 | |
Other | 3,456 | | | 4,422 | |
Total other long-term liabilities | $ | 11,666 | | | $ | 10,919 | |
| | | |
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, 2022 and 2021 consisted of the following (in thousands):
| | | | | | | | | | | |
| September 30, |
| 2022 | | 2021 |
Long-term debt: | | | |
Term Loan | $ | 271,875 | | | $ | 197,500 | |
Revolving Credit Facility | 105,100 | | | 20,000 | |
| | | |
Total long-term debt | 376,975 | | | 217,500 | |
Deferred debt issuance costs | (1,409) | | | (1,325) | |
| | | |
Current maturities of long-term debt | (12,500) | | | (10,000) | |
Long-term debt, net of current maturities and debt issuance costs | $ | 363,066 | | | $ | 206,175 | |
| | | |
Since 2017, the Company and each of its subsidiaries have been parties to a credit agreement with PNC Bank, National Association (successor in interest to BBVA USA) and certain other lenders party from time to time thereto. The credit agreement has been amended and restated on multiple occasions since its inception in order to provide for changes in the economic terms of the credit facility and developments at the Company. 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.
On June 30, 2022, the Company and each of its subsidiaries entered into a Third Amended and Restated Credit Agreement with PNC Bank, National Association, as administrative agent and lender, PNC Capital Markets LLC, as joint lead arranger and sole bookrunner, Regions Bank and BofA Securities, Inc., each as a joint arranger, and certain other lenders (as amended and restated, the “Credit Agreement”). The Credit Agreement provides for (i) a term loan facility in an initial aggregate principal amount of $250.0 million (the “Term Loan”) the full amount of which was drawn at closing, (ii) a revolving credit facility in an initial aggregate principal amount of $325.0 million, (the “Revolving Credit Facility”), and (iii) a delayed draw term loan facility in an initial aggregate principal amount of $50.0 million (the "Delayed Draw Term Loan"). Among other things, the proceeds of the Term Loan were used to refinance indebtedness of the Company and its subsidiaries under its prior credit facility.
All outstanding advances under the Term Loan and Revolving Credit Facility are due and payable in full on June 30, 2027 (the “Maturity Date”). The Term Loan (commencing on September 30, 2022) and the Delayed Draw Term Loan (commencing with the earliest of (i) December 31, 2023, or (ii) the last day of the fiscal quarter in which the commitments under the Delayed Draw Term Loan are fully drawn or terminated, as applicable) will amortize in quarterly installments in an amount (subject, in each case, to adjustments for prior mandatory and voluntary prepayments of principal) equal to: (a) 1.25% of the original principal amount of the Term Loan (and, to the extent any Delayed Draw Term Loans are then outstanding, the original principal amount of such loans) and continuing on each of the following eleven quarter-end payment dates; (b) 1.875% of the original principal amount of the Term Loan (and, to the extent any Delayed Draw Term Loans are then outstanding, the original principal amount of such loans) on each of the next eight quarter-end payment dates; and (c) all remaining principal of the Term Loan and the Delayed Draw Term Loans are due and payable in full on the Maturity Date. The annual interest rates applicable to advances will be calculated, at the Company’s option, by using either a base rate, Daily Simple SOFR plus 0.10%, or Term SOFR plus 0.10%, and in each case, plus an applicable margin percentage that corresponds to the Company’s consolidated net leverage ratio. Subject to various requirements, the Company generally may (and, under certain circumstances, must), prepay all or a portion of the outstanding balance of the advances, together with accrued interest thereon, prior to their contractual maturity. 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.
At September 30, 2022 and 2021, there was $271.9 million and $197.5 million, respectively, of principal outstanding under the Term Loan, $105.1 million and $20.0 million, respectively, of principal outstanding under the Revolving Credit Facility, and availability of $208.6 million and $193.7 million, respectively, under the Revolving Credit Facility, including a 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 3.50-to-1.00, subject to certain adjustments. At September 30, 2022 and 2021, the Company’s fixed charge coverage ratio was 2.56-to-1.00 and 3.29-to-1.00, respectively, and the Company’s consolidated leverage ratio was 2.79-to-1.00 and 1.99-to-1.00, respectively. At both September 30, 2022 and 2021, 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. At September 30, 2022 and 2021, the aggregate notional value of these interest rate swap agreements was $300.0 million and $198.3 million, respectively, and the fair value was $24.7 million and $(0.8) million, respectively, which is included within other assets or other long-term liabilities on the Company’s Consolidated Balance Sheets.
The scheduled contractual repayment terms of long-term debt at September 30, 2022 are as follows: | | | | | | | | |
Fiscal Year | | Amount |
2023 | | $ | 12,500 | |
2024 | | 13,750 | |
2025 | | 17,188 | |
2026 | | 20,625 | |
2027 | | 312,912 | |
Total | | $ | 376,975 | |
| | |
Interest expense was $7.9 million, $2.5 million and $3.6 million for the fiscal years ended September 30, 2022, 2021 and 2020, respectively. Amortization of deferred debt issuance costs and debt discounts included in interest expense was $0.2 million, $0.3 million and $0.2 million for the fiscal years ended September 30, 2022, 2021 and 2020, respectively.
Note 12 - Equity
Shares of Class A common stock and Class B common stock are identical, 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, 2022, certain stockholders of the Company converted a total of 4,338,924 shares of Class B common stock into shares of Class A common stock on a one-for-one basis. As of September 30, 2022, there were 41,193,024 shares of Class A common stock and 11,352,915 shares of Class B common stock outstanding.
Restricted Stock Awards
During the fiscal year ended September 30, 2022, the Company awarded a total of 256,167 restricted shares of Class A common stock to certain members of Company management under the Construction Partners, Inc. 2018 Equity Incentive Plan (the “Equity Incentive Plan”).
Additional information about these transactions is set forth in Note 14 - Equity-Based Compensation.
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, 2022, a total of 3,796,670 shares of the Company’s common stock were subject to the Registration Rights Agreement, of which 37,248 shares had been previously registered but not yet sold. The Registration Rights Agreement expires on May 4, 2023.
Treasury Stock
During the fiscal year ended September 30, 2022, the Company received a total of 1,183 shares of Class A common stock from employees for reimbursement of income taxes paid by the Company on behalf of these employees related to the vesting of restricted stock awards. The Company received another 1,523 shares of Class A common stock through forfeitures of restricted stock awards by terminated employees.
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, |
| 2022 | | 2021 | | 2020 |
Numerator | | | | | |
Net income attributable to common stockholders | $ | 21,376 | | | $ | 20,177 | | | $ | 40,297 | |
Denominator | | | | | |
Weighted average number of common shares outstanding, basic | 51,773,559 | | | 51,636,955 | | | 51,489,211 | |
Net income per common share attributable to common stockholders, basic | $ | 0.41 | | | $ | 0.39 | | | $ | 0.78 | |
| | | | | |
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, |
| 2022 | | 2021 | | 2020 |
Numerator | | | | | |
Net income attributable to common stockholders | $ | 21,376 | | | $ | 20,177 | | | $ | 40,297 | |
Denominator | | | | | |
Weighted average number of basic common shares outstanding, basic | 51,773,559 | | | 51,636,955 | | | 51,489,211 | |
Effect of dilutive securities: | | | | | |
| | | | | |
Restricted stock unit grants | 183,861 | | | 136,258 | | | 147,723 | |
Weighted average number of diluted common shares outstanding: | 51,957,420 | | | 51,773,213 | | | 51,636,934 | |
Net income per diluted common share attributable to common stockholders | $ | 0.41 | | | $ | 0.39 | | | $ | 0.78 | |
| | | | | |
Note 14 - Equity-Based Compensation
Restricted Stock Units
A summary of the changes in the Company's restricted stock units ("RSUs") is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended September 30, |
| 2022 | | 2021 | | 2020 |
| RSUs | Weighted Average Grant Date Fair Value Per RSU | | RSUs | Weighted Average Grant Date Fair Value Per RSU | | RSUs | Weighted Average Grant Date Fair Value Per RSU |
Unvested, beginning balance | 595,561 | $ | 25.42 | | | 292,534 | $ | 12.88 | | | 292,534 | $ | 12.88 | |
Granted | 256,167 | 32.62 | | | 510,733 | 26.52 | | | — | — | |
Vested | (134,481) | 18.19 | | | (207,706) | 10.47 | | | — | — | |
Forfeited | (1,523) | 33.77 | | | — | — | | | — | — | |
Unvested, ending balance | 715,724 | $ | 29.34 | | | 595,561 | $ | 25.42 | | | 292,534 | $ | 12.88 | |
| | | | | | | | |
| | | | | | | | |
The Company measures and recognizes stock-based compensation expense, net of forfeitures, over the requisite vesting periods for all stock-based payment awards made, and recognizes forfeitures as they occur. Stock-based compensation is included in general and administrative expenses in the Consolidated Statements of Comprehensive Income.
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. The grants are classified as equity awards. The aggregate grant date fair value of these restricted stock awards was $3.8 million. During the fiscal years ended September 30, 2022, 2021 and 2020, the Company recorded $0.4 million, $1.3 million and $1.6 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 Comprehensive Income. At September 30, 2022, the Company had no unrecognized compensation expense related to these awards due to full vesting.
During the fiscal year ended September 30, 2021, the Company awarded a total of 510,733 restricted shares of Class A common stock to certain members of Company management under the Equity Incentive Plan. The grants are classified as equity awards. The aggregate grant date fair value of these restricted awards was $13.6 million. During the fiscal years ended September 30, 2022 and 2021, the Company recorded compensation expense of $3.5 million and $2.2 million, respectively, in connection with these grants, which is reflected as general and administrative expenses in the Company’s Consolidated Statements of Comprehensive Income. At September 30, 2022, there was approximately $7.8 million of unrecognized compensation expense related to these awards, which will be recognized over a remaining weighted-average period of 2.5 years.
During the fiscal year ended September 30, 2022, the Company awarded a total of 256,167 restricted shares of Class A common stock to certain members of Company management under the Equity Incentive Plan. The grants are classified as equity awards. The aggregate grant date fair value of these restricted awards was $8.3 million. During the fiscal year ended September 30, 2022, the Company recorded compensation expense in connection with these grants in the amount of $3.1 million, which is reflected as general and administrative expenses in the Company’s Consolidated Statements of Comprehensive Income. At September 30, 2022, there was approximately $5.2 million of unrecognized compensation expense related to these awards, which will be recognized over a remaining weighted-average period of 2.4 years.
The underlying RSU shares subject to awards granted under the Equity Incentive Plan will vest, as applicable, as follows:
| | | | | | | | |
Fiscal Year | | Number of Shares |
| | |
2023 | | 36,969 | |
2024 | | 351,967 | |
2025 | | 311,788 | |
2026 | | 15,000 | |
Total | | 715,724 | |
| | |
Performance Stock Units
Performance stock units ("PSUs") provide for the issuance of shares of Class B common stock upon vesting, which occurs at the end of the performance period based on achievement of certain Company performance metrics established by the Compensation Committee of the Company’s Board of Directors. The final number of shares of common stock issuable upon vesting of PSUs can range from 0% to 150% of the number of PSUs initially granted, depending on the level of achievement, as determined by the Compensation Committee of the Company’s Board of Directors. The achievement of performance goals is modified by the total shareholder return ranking of the Company against the Russell 2000 Index over the performance period and can increase or decrease the achieved award by up to 15%. The Company recognizes expense, net of estimated forfeitures, for PSUs based on the forecasted achievement of the Company performance metrics, multiplied by the fair value of the total number of shares of common stock that the Company anticipates will be issued based on such achievement.
During the fiscal year ended September 30, 2022, the Company awarded PSUs of 131,341 shares and forecasted vesting of 98,505 restricted shares of Class B common stock to certain members of Company management under the Equity Incentive Plan. The grants are classified as equity awards. The aggregate grant date fair value of these restricted awards was $3.0 million. During the fiscal year ended September 30, 2022, the Company recorded compensation expense in connection with these grants in the amount of $1.0 million, which is reflected as general and administrative expenses in the Company’s Consolidated Statements of Comprehensive Income. At September 30, 2022, there was approximately $2.0 million of unrecognized compensation expense related to these awards.
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, 2022, 2021 and 2020 consisted of the following (in thousands): | | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended September 30, |
| 2022 | | 2021 | | 2020 |
Current | | | | | |
U.S. Federal | $ | — | | | $ | 3,609 | | | $ | 8,960 | |
State | 949 | | | 995 | | | 490 | |
Total current | 949 | | | 4,604 | | | 9,450 | |
Deferred | | | | | |
U.S. Federal | 5,662 | | | 3,029 | | | 2,222 | |
State | 304 | | | 716 | | | 1,088 | |
Total deferred | 5,966 | | | 3,745 | | | 3,310 | |
Provision for income taxes | $ | 6,915 | | | $ | 8,349 | | | $ | 12,760 | |
| | | | | |
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, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| September 30, |
| 2022 | | 2021 |
Deferred tax assets | | | |
Allowance for bad debt | $ | 150 | | | $ | 413 | |
Amortization of finite-lived intangible assets | 943 | | | 586 | |
Federal net operating loss carryforward | 2,632 | | | — | |
State net operating loss carryforward | 1,205 | | | 488 | |
Employee benefits | 1,986 | | | 736 | |
Acquisition liabilities | 2,127 | | | — | |
Accrued insurance claims | 911 | | | 1,610 | |
Other | 998 | | | 335 | |
Total deferred tax assets | 10,952 | | | 4,168 | |
Deferred tax liabilities | | | |
Amortization of goodwill | (6,582) | | | (6,541) | |
Property, plant and equipment | (24,131) | | | (14,530) | |
Interest rate swap contract | (5,692) | | | — | |
Other | (1,260) | | | (459) | |
Total deferred tax liabilities, | (37,665) | | | (21,530) | |
Net deferred tax liabilities | $ | (26,713) | | | $ | (17,362) | |
| | | |
The Consolidated Balance Sheets at September 30, 2022 and 2021 include gross deferred tax assets of $11.0 million and $4.2 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 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, 2022 and 2021. The remaining amount of goodwill expected to be deductible for tax purposes was $92.5 million and $68.5 million at September 30, 2022 and 2021, 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, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| September 30, |
| 2022 | | 2021 |
Asset: Deferred income taxes, net | $ | — | | | $ | — | |
Liability: Deferred income taxes, net | (26,713) | | | (17,362) | |
Net deferred tax assets (liabilities) | $ | (26,713) | | | $ | (17,362) | |
| | | |
At September 30, 2022 and 2021, the Company had federal net operating loss carryforwards of $10.5 million and $0.0 million, respectively, and state net operating loss carryforwards of $38.0 million and $15.2 million, respectively. The federal net operating loss credit carryforward is indefinite and the state net operating loss credit carryforwards expire in varying amounts between the fiscal years ended September 30, 2032 and 2041 or are indefinite.
The U.S. statutory federal income tax rate applicable to the Company was 21% during the fiscal years ended September 30, 2022, 2021 and 2020. 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, 2022, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended September 30, |
| 2022 | | 2021 | | 2020 |
Provision for income tax at federal statutory rate | $ | 5,941 | | | $ | 5,990 | | | $ | 11,142 | |
State income taxes | 569 | | | 1,351 | | | 1,272 | |
Permanent differences | 353 | | | 961 | | | 330 | |
Other | 52 | | | 47 | | | 16 | |
Provision for income taxes | $ | 6,915 | | | $ | 8,349 | | | $ | 12,760 | |
| | | | | |
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, 2022 or 2021. Accordingly, there was no liability for uncertain tax positions at September 30, 2022 or 2021. Based on the provisions of ASC 740, the Company had no material unrecognized tax benefits at September 30, 2022 or 2021. Due to the utilization of net operating loss carryforwards, the Company’s federal income tax returns for fiscal years ended September 30, 2018 through 2022 are subject to examination. Various state income tax returns for fiscal years ended September 30, 2011 through 2022 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 six months 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, 2022, 2021 and 2020 were $5.5 million, $3.9 million, and $3.4 million, respectively.
Note 17 - Related Parties
On December 31, 2017, the Company sold an indirect wholly owned subsidiary to an immediate family member of an executive officer 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, 2022, $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. In connection with this transaction, the Company also received an interest-bearing note receivable from the disposed entity (“Disposed Entity”) on December 31, 2017 in the amount of $1.0 million representing certain accounts payable of the disposed entity that were paid by the Company. At September 30, 2022, $0.1 million and $0.2 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 2023 through fiscal year 2026.
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 an officer of the Company in connection with a land development project. The obligations of the borrower entity to repay the advances were guaranteed by a separate entity owned by the same family member of the officer. Amounts outstanding under the advances did not bear interest and matured in full in March 2021. In March 2021, the subsidiary of the Company amended and restated the terms of the repayment obligation, as a result of which the officer personally assumed the remaining balance of the obligation. No new amounts were advanced to the officer by the Company or any subsidiary or affiliate thereof in connection with the transaction. Under the amended and restated terms, the officer executed a promissory note in favor of the Company’s subsidiary in the principal amount of $0.8 million. The note bears simple interest at a rate of 4.0% and requires annual minimum payments of $0.1 million inclusive of principal and accrued interest, with any remaining principal and accrued interest due and payable in full on December 31, 2027. As security for his payment obligations, the officer pledged as collateral 30,000 shares of the 140,389 shares of Class B common stock that had previously been pledged as collateral and 7,500 shares of Class A common stock owned by the officer personally. Amounts outstanding under the note are reflected on the Company’s Consolidated Balance Sheets within other current assets and other assets (“Land Development Project”).
From time to time, the Company conducts or has conducted business with the following related parties:
•Entities owned by immediate family members of an executive officer of the Company perform subcontract work for a subsidiary of the Company, including trucking and grading services (“Subcontracting 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 is party to a management services agreement with SunTx, under which the Company pays SunTx $0.29 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, 2022, 2021 and 2020, and receivable and accounts payable balances at September 30, 2022 and 2021, 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, |
| 2022 | | 2021 | | 2020 | | | 2022 | | 2021 |
Purchaser of subsidiary | $ | — | | | $ | — | | | $ | — | | | | $ | 414 | | | $ | 518 | |
Disposed entity | — | | | — | | | — | | | | 264 | | | 330 | |
Land Development Project | — | | | — | | | — | | | | 712 | | | 788 | |
Subcontracting Services | (8,655) | | (1) | (9,385) | | (1) | (11,110) | | (1) | | (695) | | | (563) | |
| | | | | | | | | | |
Island Pond | (320) | | (2) | (320) | | (2) | (320) | | (2) | | — | | | — | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
SunTx | (1,451) | | (2) | (1,935) | | (2) | (1,403) | | (2) | | — | | | — | |
| | | | | | | | | | |
(1) Cost is reflected as cost of revenues on the Company’s Consolidated Statements of Comprehensive Income. |
(2) Cost is reflected as general and administrative expenses on the Company’s Consolidated Statements of Comprehensive Income. |
|
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 $325.0 million that may be used for a combination of cash borrowings and letter of credit issuances. At each of September 30, 2022 and 2021, the Company had aggregate letters of credit outstanding in the amount of $11.3 million, primarily related to certain insurance policies as described in Note 2 - Significant Accounting Policies.
Purchase Commitments
As of September 30, 2022, the Company had unconditional purchase commitments for diesel fuel and natural gas in the normal course of business in the aggregate amount of $5.2 million and $1.2 million, respectively. 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, 2022, our purchase commitments annually thereafter are as follows (in thousands):
| | | | | | | | |
Fiscal Year | | Amount |
2023 | | $ | 5,436 | |
2024 | | 976 | |
Total | | $ | 6,412 | |
| | |
Minimum Royalties
The Company has lease agreements associated with aggregates facilities under which the Company makes royalty payments. These agreements are outside the scope of Topic 842. The payments are generally based on tons sold in a particular period; however, certain agreements have minimum annual payments. The Company has commitments in the form of minimum royalties as of September 30, 2022 in the amount of $2.7 million, due as follows (in thousands):
| | | | | | | | |
Fiscal Year | | Amount |
2023 | | $ | 255 | |
2024 | | 246 | |
2025 | | 207 | |
2026 | | 182 | |
2027 | | 170 | |
Thereafter | | 1,615 | |
Total | | $ | 2,675 | |
| | |
Royalty expense recorded in cost of revenue during the fiscal years ended September 30, 2022, 2021 and 2020 was $1.6 million, $1.2 million and $1.3 million, respectively.
Note 19 - Joint Venture
One of the Company’s wholly owned subsidiaries is party to 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 each of September 30, 2022 and 2021, the Company’s investment in the JV was $0.1 million, which is reflected as “Investment in joint venture” on the Company’s Consolidated Balance Sheets. During the fiscal years ended September 30, 2022, 2021 and 2020, the Company recognized $0.0 million, $0.0 million and $0.6 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 Comprehensive 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 Comprehensive Income.
Note 20 - Leases
The Company leases certain facilities, office space, vehicles and equipment. As of September 30, 2022, 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 $14.0 million, $2.2 million and $12.1 million, respectively. As of September 30, 2022, the Company did not have any lease contracts that had not yet commenced but had created significant rights and obligations.
The components of lease expense were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended September 30, |
| 2022 | | 2021 | | 2020 |
Operating lease cost | $ | 2,568 | | | $ | 2,475 | | | $ | 3,498 | |
Short-term lease cost | 21,177 | | | 13,346 | | | 13,374 | |
Total lease expense | 23,745 | | | 15,821 | | | 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.
As of September 30, 2022, the weighted-average remaining term of the Company’s operating leases was 8.5 years, and the weighted-average discount rate was 3.19%. As of September 30, 2022, 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, 2022 (in thousands):
| | | | | | | | |
Fiscal Year | | Amount |
2023 | | $ | 2,621 | |
2024 | | 2,213 | |
2025 | | 1,833 | |
2026 | | 1,816 | |
2027 | | 1,709 | |
Thereafter | | 6,304 | |
Total future minimum lease payments | | $ | 16,496 | |
Less: imputed interest | | 2,228 | |
Total | | $ | 14,268 | |
| | |
Note 21 - Fair Value Measurements
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2022 and 2021 under ASC 820, Fair Value Measurements (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurement at Reporting Date Using |
September 30, 2022 | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | |
Commodity swap contracts | | $ | — | | | $ | 1,187 | | | $ | — | |
Interest rate swaps | | — | | | 24,719 | | | — | |
Corporate debt securities | | — | | | 2,537 | | | — | |
U.S. government securities | | — | | | 2,481 | | | — | |
Municipal government securities | | — | | | 1,055 | | | — | |
Other debt securities | | — | | | 793 | | | — | |
Total Assets | | $ | — | | | $ | 32,772 | | | $ | — | |
| | | | | | |
Liabilities: | | | | | | |
Commodity swap contracts | | $ | — | | | $ | 661 | | | $ | — | |
Total Liabilities | | $ | — | | | $ | 661 | | | $ | — | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurement at Reporting Date Using |
September 30, 2021 | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | |
Commodity swap contracts | | $ | — | | | $ | 1,812 | | | $ | — | |
Total Assets | | $ | — | | | $ | 1,812 | | | $ | — | |
| | | | | | |
Liabilities: | | | | | | |
Interest rate swaps | | $ | — | | | $ | 845 | | | $ | — | |
Total Liabilities | | $ | — | | | $ | 845 | | | $ | — | |
| | | | | | |
The fair value of interest rate swap contracts is based on a model-driven valuation using the observable components (e.g., interest rates), which are observable at commonly quoted intervals for the full term of the contracts. The fair value of our commodity swap contracts is based on an analysis of the expected cash flow of the contract in combination with observable forward price inputs obtained from a third-party pricing source. The calculations are adjusted for credit risk. Therefore, our derivative assets and liabilities are classified within Level 2 of the fair value hierarchy. Derivative assets are included within “Prepaid expenses and other current assets” and “Other assets” on the Company’s Consolidated Balance Sheets. Derivative liabilities are included within “Accrued expense and other current liabilities” and “Other long-term liabilities” on the Company’s Consolidated Balance Sheets. Debt securities primarily consist of corporate bonds and U.S. Government and agency obligations. The fair value of these investments is determined based on market quotes. These investments are included within "Restricted Investments" on the Company's Consolidated Balance Sheets.
Note 22 - Investment in Derivative Instruments
Interest Rate Swap Contracts
The Company uses derivative instruments as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates. We regularly monitor the financial stability and credit standing of the counterparties to our derivative instruments. We do not enter into derivative financial instruments for speculative purposes.
The Company records all derivatives at fair value. On the date the derivative contract is entered into, the Company may designate the derivative as one of the following: (i) a hedge of a forecasted transaction or the variability of cash flows to be paid (“cash flow hedge”) or (ii) a hedge of the fair value of a recognized asset or liability (“fair value hedge”).
Changes in the fair value of a derivative that is qualified and designated as a cash flow hedge or net investment hedge are recorded in other comprehensive income (loss) in the Company’s Consolidated Statements of Comprehensive Income until they are reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.
Changes in the fair value of a derivative that is qualified and designated as a fair value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings.
If the Company does not specifically designate a derivative as one of the above, changes in the fair value of the undesignated derivative instrument are reported in current period earnings. Cash flows from designated derivative financial instruments are classified within the same category as the item being hedged in the Consolidated Statements of Cash Flows, while cash flows from undesignated derivative financial instruments are included as an investing activity.
If the Company determines that it qualifies for and will designate a derivative as a hedging instrument, the Company formally documents all relationships between hedging activities, including the risk management objective and strategy for undertaking various hedge transactions. This process includes matching all derivatives that are designated as cash flow hedges to specific forecasted transactions and linking all derivatives designated as fair value hedges to specific assets and liabilities in the Consolidated Balance Sheets.
The Company performs an initial prospective assessment of hedge effectiveness on a quantitative basis between the inception date and the earlier of the first quarterly hedge effectiveness date or the issuance of the financial statements that include the hedged transaction. On a quarterly basis, the Company assesses the effectiveness of our designated hedges in offsetting the variability in the cash flows or fair values of the hedged assets or obligations using the Hypothetical Derivative Method. The Company would discontinue hedge accounting prospectively when the derivative is no longer highly effective as a hedge, the underlying hedged transaction is no longer probable or the hedging instrument expires, is sold, terminated or exercised.
Commodity Swap Contracts
The Company’s operations expose it to a variety of market risks, including the effects of changes in commodity prices. As part of its risk management process, the Company began entering into commodity swap transactions through regulated commodity exchanges in February 2020. The Company does not enter into derivative financial instruments for speculative purposes. Changes in fair value of commodity swaps are recognized in earnings.
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, 2022, 2021 and 2020 and the fair value of these derivatives as of September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Fiscal Year Ended September 30, |
| | | | 2022 | | | | | | 2021 | | | | | | 2020 | | |
| | Change in | | Change in | | Change in |
| | Realized Gain (Loss) | | Unrealized Gain (Loss) | | Total Gain (Loss) | | Realized Gain (Loss) | | Unrealized Gain (Loss) | | Total Gain (Loss) | | Realized Gain (Loss) | | Unrealized Gain (Loss) | | Total Gain (Loss) |
Cost of revenues | | $ | 3,472 | | | $ | (1,286) | | | $ | 2,186 | | | $ | 830 | | | $ | 2,315 | | | $ | 3,145 | | | $ | (432) | | | $ | (503) | | | $ | (935) | |
Interest expense, net | | (806) | | | 1,668 | | | 862 | | | (890) | | | 894 | | | 4 | | | (388) | | | (1,397) | | | (1,785) | |
Total | | $ | 2,666 | | | $ | 382 | | | $ | 3,048 | | | $ | (60) | | | $ | 3,209 | | | $ | 3,149 | | | $ | (820) | | | $ | (1,900) | | | $ | (2,720) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | September 30, | |
Balance Sheet Classification | | 2022 | | 2021 | |
| | | | | |
| | | | | |
Prepaid expenses and other current assets - commodity swaps | | $ | 1,032 | | | $ | 990 | | |
Other assets - commodity swaps | | 155 | | | 822 | | |
Other assets - interest rate swap (1) | | 24,719 | | | | |
Accrued expense and other current liabilities - commodity swaps | | (601) | | | — | | |
Accrued expense and other current liabilities - interest rate swaps | | — | | | (97) | | |
Other long-term liabilities - commodity swaps | | (60) | | | — | | |
Other long-term liabilities - interest rate swaps (2) | | — | | | (748) | | |
Net unrealized gain (loss) position | | $ | 25,245 | | | $ | 967 | | |
| | | | | |
(1) Includes designated cash flow hedge of $24,719 as of September 30, 2022.
(2) Includes designated cash flow hedge of $(31) as of September 30, 2021.
Note 23 - Other Comprehensive Income
Comprehensive income comprises two subsets: net income and other comprehensive income ("OCI"). The components of other comprehensive income are presented in the accompanying Consolidated Statements of Comprehensive Income and Consolidated Statements of Stockholders’ Equity, net of applicable taxes. The Company’s interest rate swap contract hedge included in other comprehensive income for the fiscal year ended September 30, 2022 was entered into on July 1, 2022 with an original notional value of $300.0 million. The maturity date of this swap is June 30, 2027. The Company received a credit of $12.6 million under the "blend and extend" arrangement utilizing the fair values of the existing interest rate swap agreements at June 30, 2022.
Amounts in accumulated other comprehensive income ("AOCI"), net of tax, at September 30, are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
AOCI | | 2022 | | 2021 | | 2020 |
Interest rate swap contract, net of blend and extend arrangement | | 23,761 | | | (31) | | | — | |
Unrealized loss on available-for-sale securities | | (566) | | | — | | | — | |
Less tax effect of other comprehensive income (loss) items | | (5,575) | | | 8 | | | — | |
Total | | $ | 17,620 | | | $ | (23) | | | $ | — | |
| | | | | | |
Changes in AOCI, net of tax, are as follows (in thousands): | | | | | | | | |
| | |
AOCI | | |
| | |
| | |
Balance at September 30, 2020 | | — | |
Net OCI changes | | (23) | |
Balance at September 30, 2021 | | (23) | |
Net OCI changes | | 17,643 | |
Balance at September 30, 2022 | | $ | 17,620 | |
| | |
Amounts reclassified from AOCI to earnings, are as follows (in thousands): | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | 2022 | | 2021 | | 2020 |
Interest expense | | $ | 468 | | | $ | 224 | | | $ | — | |
Benefit from income taxes | | (108) | | | (56) | | | — | |
Total reclassifications from AOCI to earnings | | $ | 360 | | | $ | 168 | | | $ | — | |
| | | | | | |
Note 24 - Asset Retirement Obligations
As discussed in Note 2, the Company has asset retirement obligations (“AROs”), which are liabilities associated with our legally required obligations to reclaim owned and leased aggregates facilities. At September 30, 2022 and 2021, the Company’s AROs were $2.9 million and $2.8 million, respectively, which are reflected as “Other long-term liabilities” on the Company’s Consolidated Balance Sheets. Accretion and depreciation expense related to AROs for the fiscal years ended September 30, 2022, 2021 and 2020 was $0.1 million, $0.0 million and $0.0 million, respectively.
The following is a reconciliation of these asset retirement obligations (in thousands):
| | | | | | | | | | | | | | |
| | For the Fiscal Year Ended September 30, |
| | 2022 | | 2021 |
Asset Retirement Obligations | | | | |
Balance at beginning of year | | $ | 2,788 | | | $ | — | |
Liabilities incurred | | — | | | 2,070 | |
Liabilities settled | | — | | | — | |
Liabilities assumed | | — | | | 718 | |
Accretion expense | | 70 | | | — | |
Balance at end of year | | $ | 2,858 | | | $ | 2,788 | |
| | | | |
Note 25 - Investments
The following is a summary of the Company's debt securities as of September 30, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2022 | | | | | | | | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Corporate debt securities | | $ | 2,797 | | | $ | — | | | $ | 260 | | | $ | 2,537 | |
U.S. government securities | | 2,622 | | | — | | | 141 | | | 2,481 | |
Municipal government securities | | 1,151 | | | — | | | 96 | | | 1,055 | |
Other debt securities | | 862 | | | — | | | 69 | | | 793 | |
Total | | $ | 7,432 | | | $ | — | | | $ | 566 | | | $ | 6,866 | |
| | | | | | | | |
The amortized cost and fair value of debt securities classified as available for sale by contractual maturity, as of September 30, 2022, are as follows (in thousands):
| | | | | | | | | | | | | | |
| | September 30, 2022 |
| | Amortized Cost | | Fair Value |
Less than five years | | $ | 4,836 | | | $ | 4,562 | |
Six to ten years | | 2,252 | | | 1,984 | |
Greater than ten years | | 344 | | | 320 | |
Total | | $ | 7,432 | | | $ | 6,866 | |
| | | | |
Note 26 - Unpaid Losses and Loss Adjustment Expenses
The following is a summary of the Company's activity in the liability for loss and loss adjustment expense reserves for workers' compensation, general liability and automobile liability as of as of September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | |
| | For the Fiscal Year Ended September 30, |
| | 2022 | | 2021 |
Balance at beginning of year | | $ | 9,941 | | | $ | 8,697 | |
Total incurred | | 5,993 | | | 6,323 | |
Total paid | | (4,643) | | | (5,079) | |
Balance at end of year | | $ | 11,291 | | | $ | 9,941 | |
| | | | |
Note 27 - 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, |
| 2022 | | 2021 |
ASSETS | | | |
Cash and cash equivalents | $ | 43,130 | | | $ | 65,225 | |
Prepaid expenses and other current assets | 2,995 | | | 1,063 | |
Total current assets | 46,125 | | | 66,288 | |
Property, plant and equipment, net | 4,646 | | | 5,160 | |
Investment in subsidiaries | 444,473 | | | 409,245 | |
Deferred income taxes, net | — | | | 892 | |
Due from subsidiaries | 58,593 | | | — | |
Other assets | 28,140 | | | 2,014 | |
Total assets | $ | 581,977 | | | $ | 483,599 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Due to subsidiaries | $ | — | | | $ | 46,304 | |
Accrued expenses and other current liabilities | 3,477 | | | 2,970 | |
Current maturities of long-term debt | 1,204 | | | 238 | |
Total current liabilities | 4,681 | | | 49,512 | |
Long-term liabilities: | | | |
Due to subsidiaries | 39,275 | | | — | |
Deferred income taxes, net | 4,553 | | | — | |
Long-term debt, net of current maturities and debt issuance costs | 77,589 | | | 24,440 | |
Other long-term liabilities | — | | | 748 | |
Total long-term liabilities | 121,417 | | | 25,188 | |
Total liabilities | 126,098 | | | 74,700 | |
Stockholders’ Equity | | | |
Preferred stock, par value $0.001; 10,000,000 shares authorized at September 30, 2022 and September 30, 2021 and no shares issued and outstanding | — | | | — | |
Class A common stock, par value $0.001; 400,000,000 shares authorized, 41,195,730 shares issued and 41,193,024 shares outstanding at September 30, 2022, and 36,600,639 shares issued and outstanding at September 30, 2021 | 41 | | | 37 | |
Class B common stock, par value $0.001; 100,000,000 shares authorized, 14,275,867 shares issued and 11,352,915 shares outstanding at September 30, 2022, and 18,614,791 shares issued and 15,691,839 shares outstanding at September 30, 2021 | 15 | | | 19 | |
| | | |
Additional paid-in capital | 256,571 | | | 248,571 | |
Treasury stock, at cost, 2,706 shares of Class A common stock at September 30, 2022, and no shares at September 30, 2021, par value $0.001 | (39) | | | — | |
Treasury stock, at cost, 2,922,952 shares of Class B common stock, par value $0.001 | (15,603) | | | (15,603) | |
Accumulated other comprehensive loss | 17,620 | | | (23) | |
Retained earnings | 197,274 | | | 175,898 | |
Total stockholders’ equity | 455,879 | | | 408,899 | |
Total liabilities and stockholders’ equity | $ | 581,977 | | | $ | 483,599 | |
| | | |
See note to condensed financial statements of parent company.
CONSTRUCTION PARTNERS, INC.
PARENT COMPANY ONLY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except share and per share amounts) | | | | | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended September 30, | |
| 2022 | | 2021 | | 2020 | |
Equity in net income of subsidiaries | $ | 24,690 | | | $ | 25,505 | | | $ | 43,712 | | |
General and administrative expenses | (4,758) | | | (6,399) | | | (4,167) | | |
Interest expense, net | 68 | | | 834 | | | (1,218) | | |
Gain on sale of equipment, net | 6 | | | — | | | — | | |
Other income | 13 | | | 3 | | | — | | |
Income before provision for income taxes | 20,019 | | | 19,943 | | | 38,327 | | |
Income tax benefit | 1,357 | | | 234 | | | 1,970 | | |
Net income | $ | 21,376 | | | $ | 20,177 | | | $ | 40,297 | | |
Other comprehensive (loss), net of tax | | | | | | |
Unrealized gain (loss) on interest rate swap contract, net | 18,091 | | | (23) | | | — | | |
Unrealized (loss) on restricted investments, net | (448) | | | — | | | — | | |
Other comprehensive (loss) | 17,643 | | | (23) | | | — | | |
Comprehensive income | $ | 39,019 | | | $ | 20,154 | | | $ | 40,297 | | |
| | | | | | |
Net income per share attributable to common stockholders: | | | | | | |
Basic | $ | 0.41 | | | $ | 0.39 | | | $ | 0.78 | | |
Diluted | $ | 0.41 | | | $ | 0.39 | | | $ | 0.78 | | |
Weighted average number of common shares outstanding: | | | | | | |
Basic | 51,773,559 | | | 51,636,955 | | | 51,489,211 | | |
Diluted | 51,957,420 | | | 51,773,213 | | | 51,636,934 | | |
| | | | | | |
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, |
| 2022 | | 2021 | | 2020 |
Cash flows from operating activities: | | | | | |
Net income | $ | 21,376 | | | $ | 20,177 | | | $ | 40,297 | |
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | | | |
Depreciation, depletion and amortization of long-lived assets | 757 | | | 475 | | | 463 | |
Gain on sale of equipment | (6) | | | — | | | — | |
Loss (gain) on derivative instruments | (1,668) | | | (894) | | | 1,397 | |
Equity-based compensation expense | 8,000 | | | 3,549 | | | 1,570 | |
Equity in net income of subsidiaries | (24,690) | | | (25,505) | | | (43,712) | |
Deferred income tax benefit | (248) | | | (451) | | | (425) | |
Other non-cash adjustments | (73) | | | 9 | | | — | |
Changes in operating assets and liabilities: | | | | | |
Prepaid expenses and other current assets | (1,932) | | | (135) | | | (183) | |
Other assets | (593) | | | (2,008) | | | (6) | |
Accrued expenses and other current liabilities | 507 | | | 1,001 | | | (965) | |
Other liabilities | (748) | | | (97) | | | — | |
Net cash (used in) provided by operating activities | 682 | | | (3,879) | | | (1,564) | |
Cash flows from investing activities: | | | | | |
Purchases of property, plant and equipment | (243) | | | (2,641) | | | (1,189) | |
Proceeds from sale of equipment | 6 | | | — | | | — | |
Investment in subsidiary | (10,986) | | | — | | | (17,303) | |
Net cash (used in) investing activities | (11,223) | | | (2,641) | | | (18,492) | |
Cash flows from financing activities: | | | | | |
Change in amounts due to (from) subsidiaries, net | (65,622) | | | (6,296) | | | 34,150 | |
Purchase of treasury stock | (39) | | | — | | | — | |
Principal payments on long-term debt | (420) | | | — | | | — | |
Proceeds from issuance of long-term debt, net of debt issuance costs and discount | 54,527 | | | — | | | — | |
Net cash (used in) provided by financing activities | (11,554) | | | (6,296) | | | 34,150 | |
Net change in cash and cash equivalents | (22,095) | | | (12,816) | | | 14,094 | |
Cash and cash equivalents: | | | | | |
Beginning of period | 65,225 | | | 78,041 | | | 63,947 | |
End of period | $ | 43,130 | | | $ | 65,225 | | | $ | 78,041 | |
| | | | | |
See note to condensed financial statements of parent company.
Note to Condensed Financial Statements of Parent 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 28 - Subsequent Events
Restricted Stock Awards
On November 3, 2022, the Company awarded a total of 150,798 restricted shares of Class A common stock to certain members of Company management under the Equity Incentive Plan. The grants are classified as equity awards and have four-year graded vesting. The aggregate grant date fair value of these restricted awards was $4.6 million.
Performance Stock Units
On November 3, 2022, the Company awarded PSUs of 84,371 shares of Class A common stock to certain executive officers of the Company under the Equity Incentive Plan. The grants are classified as equity awards. The aggregate grant date fair value of these restricted awards was $2.6 million. The PSUs provide for the issuance of shares of Class A common stock upon vesting, which occurs over a three-year performance period based on achievement of the following metrics: (i) compound aggregate revenue growth rate and (ii) average Adjusted EBITDA margin. The final number of shares of Class A common stock issuable upon vesting of PSUs can range from 0% to 150% of the number of PSUs initially granted, depending on the level of achievement, as determined by the Compensation Committee of the Company’s Board of Directors. The achievement of performance goals is modified by the total shareholder return ranking of the Company against the Russell 2000 Index over the performance period and can increase or decrease the achieved award by up to 15%.
Treasury Stock
On November 4, 2022, the Company received a total of 5,267 shares of Class A common stock from employees for reimbursement of income taxes paid by the Company on behalf of these employees related to restricted stock awards that vested on September 30, 2022.
Amendment to Credit Agreement
On November 18, 2022, the Company and each of its wholly owned subsidiaries (collectively, the “Borrowers”) entered into a First Amendment to the Third Amended and Restated Credit Agreement (the “Amendment” and the “Credit Agreement,” respectively). Among other things, the Amendment modified the provisions of the Credit Agreement requiring a prepayment of outstanding indebtedness following a disposition of property or assets exceeding certain thresholds. As a result of the Amendment, the Borrowers may receive up to $10.0 million in the aggregate of net cash proceeds from the disposal of property or assets (other than inventory in the ordinary course of business) in any fiscal year without the requirement to prepay any outstanding indebtedness. However, the Borrowers also may reinvest all or any portion of such net cash proceeds in fixed capital or operating assets, including real property (which reinvested amount will not count against the $10.0 million threshold), provided that (i) if any of the disposed property or assets constitute collateral under the Credit Agreement, the reinvestment must be in fixed capital or operating investments that also constitute collateral, (ii) the reinvestment (or entry into a definitive agreement providing for such reinvestment) must occur within 180 days after receipt of such net cash proceeds and (iii) if a definitive agreement to reinvest the net cash proceeds has been executed within such 180-day period, then the reinvestment must occur within 180 days after the entering into such definitive agreement. Any net cash proceeds not reinvested or subject to a definitive agreement must be applied to the prepayment of the outstanding indebtedness upon the conclusion of the applicable 180-day period.
Acquisition of HMA Plants and Disposition of Quarry
On November 18, 2022, the Company’s Alabama-based subsidiary acquired three HMA plants in the Nashville, Tennessee metro area from Blue Water Industries. The transaction extended the Company’s footprint into the fast-growing Nashville, Tennessee metro area. In connection with the transaction, the Company’s North Carolina-based subsidiary received cash and transferred ownership of its Daurity Springs Quarry in North Carolina to Blue Water Industries, while retaining aggregate sourcing rights from the quarry for its HMA plants in the central North Carolina area. The Company received net cash consideration of $28.0 million related to these transactions. The total amount of consideration for these transactions remains subject to post-closing adjustments with respect to inventory quantities and other matters as of the date of this report.