NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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, has owned a controlling interest in the Company’s stock since the Company’s inception.
On October 1, 2021, Construction Partners Risk Management, Inc., a captive insurance company and wholly-owned subsidiary of the Company (the “Captive”), 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.
Seasonality
The use and consumption of the Company’s products and services fluctuate due to seasonality. The Company’s products are used, and its construction operations and production facilities are located, outdoors. Therefore, seasonal changes and other weather-related conditions, in particular, extended snowy, rainy or cold weather in the winter, spring or fall and major weather events, such as hurricanes, tornadoes, tropical storms and heavy snows, can adversely affect the Company’s business and operations through a decline in both the use of the Company’s products and demand for the Company’s services. In addition, construction materials production and shipment levels follow activity in the construction industry, which typically occurs in the spring, summer and fall. Warmer and drier weather during the third and fourth quarters of the Company’s fiscal year typically result in higher activity and revenues during those quarters. The first and second quarters of the Company’s fiscal year typically have lower levels of activity due to less favorable weather conditions.
Note 2 - Significant Accounting Policies
Basis of Presentation
These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. These interim consolidated statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), which permit reduced disclosure for interim periods. The Company's Consolidated Balance Sheets as of September 30, 2021 were derived from the Company's audited financial statements for the fiscal year then ended, but do not include all necessary disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) with respect to annual financial statements. In the opinion of management, these unaudited consolidated financial statements include all recurring adjustments and normal accruals necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the dates and periods presented. These consolidated financial statements and accompanying notes should be read in conjunction with the Company’s audited annual consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2021 (the “2021 Form 10-K”). Results for interim periods are not necessarily indicative of the results to be expected for a full fiscal year or for any future period.
Management’s Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the recorded amounts of assets, liabilities, stockholders’ equity, revenues and expenses during the reporting period, and the disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates are used in accounting for items such as recognition of revenues and cost of revenues, marketable securities, 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.
A description of certain critical accounting policies of the Company is presented below. Additional critical accounting policies and the underlying judgments and uncertainties are described in the notes to the Company’s annual consolidated financial statements included in the 2021 Form 10-K.
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's subsidiaries. The Company had restricted cash of $1.7 million and $0.0 million at March 31, 2022 and September 30, 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's 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 based on quoted market prices. 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 $6.2 million and $0.0 million at March 31, 2022 and September 30, 2021, respectively.
Contracts Receivable Including Retainage, Net
Contracts receivable are generally based on amounts billed and currently due from customers, amounts currently due but unbilled, and amounts retained by customers pending completion of a project. It is common in the Company’s industry for a small portion of either progress billings or the contract price, typically 10%, to be withheld by the customer until the Company completes a project to the satisfaction of the customer in accordance with the applicable contract terms. Such amounts, defined as retainage, represent a contract asset and are included on the Consolidated Balance Sheets as “Contracts receivable including retainage, net.” Based on the Company’s experience with similar contracts in recent years, billings for such retainage balances are generally collected within one year of the completion of the project.
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 (formerly known as the percentage-of-completion method). The Company records contract assets and contract liabilities to account for these differences in timing.
The contract asset, “Costs and estimated earnings in excess of billings on uncompleted contracts,” arises when the Company recognizes revenues for services performed under its construction projects, but the Company is not yet entitled to bill the customer under the terms of the contract. Amounts billed to customers are excluded from this asset and reflected on the Consolidated Balance Sheets as “Contracts receivable including retainage, net.” Included in costs and estimated earnings in excess of billings 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 March 31, 2022 or September 30, 2021.
Projects performed for various departments of transportation accounted for 30.8% and 26.1% of consolidated revenues for the three months ended March 31, 2022 and 2021, respectively, and for 32.3% and 27.0% of consolidated revenues for the six months ended March 31, 2022 and 2021, respectively. Customers that accounted for more than 10% of consolidated revenues during the three and six months ended March 31, 2022 and 2021 are presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | % of Consolidated Revenues |
| | For the Three Months Ended March 31, | | For the Six Months Ended March 31, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
Florida Department of Transportation | | 12.5 | % | | 9.5 | % | | 11.2 | % | | 9.1 | % |
Revenues from Contracts with Customers
The Company derives 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 Three Months Ended March 31, | | For the Six Months Ended March 31, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Private | | 42.1 | % | | 41.8 | % | | 40.5 | % | | 41.2 | % |
Public | | 57.9 | % | | 58.2 | % | | 59.5 | % | | 58.8 | % |
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.
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.
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.
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.
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 March 31, 2022 and September 30, 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 March 31, 2022 and September 30, 2021. These investments are adjusted to fair value at each balance sheet date based on quoted prices which are considered Level 1 inputs.
The Company also has a Term Loan and a Revolving Credit Facility, as defined and further described in Note 8 - Debt. The carrying value of amounts outstanding under these credit facilities is reflected as long-term debt, net of current maturities and current maturities of long-term debt on the Company’s Consolidated Balance Sheets at March 31, 2022 and September 30, 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 16 - 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.
Comprehensive Income
The Company reports comprehensive income in its 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 debt securities. For additional information about comprehensive income, see Note 18 - Other Comprehensive Income.
Note 3 - Accounting Standards
New 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 March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting,” which provides optional expedients and exceptions for applying GAAP to contract modification and hedging relationships affected by reference rate reform. The guidance only applies to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. This optional guidance was effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company does not expect such adoption to have a material impact on the Company’s consolidated financial statements.
Note 4 - Business Acquisitions
On March 7, 2022, the Company acquired substantially all of the assets of Southern Asphalt, Inc., an asphalt paving company headquartered in Burgaw, North Carolina. The transaction provides access to the Wilmington, North Carolina metro area market. On March 18, 2022, 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 enhances the Company's operational resources and capabilities in the growing Panama City, Florida market area.
On October 1, 2021, the Company acquired all of the capital stock of King Asphalt, Inc., a 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, the Company acquired substantially all of the assets of J. Miller Construction Inc., a grading and site work company headquartered in Pensacola, Florida. The transaction enhanced the Company’s vertical integration of construction services and supplemented the Company’s capabilities in the greater Pensacola, Florida market area.
These acquisitions were accounted for as business combinations in accordance with FASB Accounting Standards Codification Topic 805 Business Combinations ("ASC"). 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. Identifiable tangible 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 $46.4 million, which is deductible for income tax purposes. Goodwill primarily represents the assembled work force and synergies expected to result from the acquisition. Upon finalizing the accounting for these transactions, management expects to ascribe value to other identifiable intangible assets, including customer relationships and customer backlog, which will reduce the provisional amount allocated to goodwill.
Total consideration for these four acquisitions was $104.7 million, of which $104.1 million has been paid with cash as of March 31, 2022. These acquisitions were funded with borrowings under the Company's Revolving Credit Facility. The total consideration has been provisionally allocated as follows: $1.2 million of cash and cash equivalents, $8.9 million of contracts receivable including retainage, net, $0.1 million of costs and estimated earnings in excess of billings on uncompleted contracts, $2.0 million of inventory, $0.5 million of prepaid expenses and other current assets, $2.8 million of accounts payable, $0.4 million of billings in excess of costs and estimated earnings on uncompleted contracts, $1.2 million of accrued expenses and other current liabilities, $50.0 million of property, plant and equipment and $46.4 million of goodwill.
Combined Acquisitions During the Three Months and Six Months Ended March 31, 2022
The Consolidated Statements of Comprehensive Income includes $15.2 million of revenue and $1.0 million of net loss
attributable to the operations of these acquisitions for the three months ended March 31, 2022 and $29.8 million of revenue and $1.3 million of net loss attributable to the operations of these acquisitions for the six months ended March 31, 2022 from their respective acquisition dates. The Company recorded certain costs to effect the acquisitions 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 $0.2 million for the three months ended March 31, 2022 and $0.4 million for the six months ended March 31, 2022.
The following presents pro forma revenues and net income as though the acquisitions had occurred on October 1, 2020 (unaudited, in thousands):
| | | | | | | | | | | | | |
| For the Three Months Ended March 31, |
| 2022 | | 2021 | | |
Pro forma revenues | $ | 271,322 | | | $ | 222,760 | | | |
Pro forma net income | $ | (8,180) | | | $ | (3,335) | | | |
| | | | | | | | | | | | | |
| For the Six Months Ended March 31, |
| 2022 | | 2021 | | |
Pro forma revenues | $ | 583,301 | | | $ | 457,765 | | | |
Pro forma net income | $ | (1,479) | | | $ | 6,352 | | | |
Pro forma financial information is presented as if the acquired operations had been included in the consolidated results of the Company since October 1, 2020, 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 three and six months ended March 31, 2022 and 2021.
(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, 2020 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 prices were borrowed on October 1, 2020. Interest expense calculations further assume that no principal payments were made during the period from October 1, 2020 through March 31, 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, 2020 through March 31, 2022.
(d)Exclude $0.4 million of acquisition-related expenses from the three and six months ended March 31, 2022, as though such expenses were incurred prior to the pro forma acquisition date of October 1, 2020.
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, 2020.
Provisional Accounting
In July 2021, the Company acquired a HMA contracting company and related entities, all headquartered in Cullman, Alabama. In August 2021, the Company acquired a crushed stone and aggregates facility located near Goldston, North Carolina. As of March 31, 2022, there have been no material adjustments to the September 30, 2021 provisional accounting for either acquisition.
Note 5 - Contracts Receivable Including Retainage, net
Contracts receivable including retainage, net consisted of the following at March 31, 2022 and September 30, 2021 (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | September 30, 2021 |
| (unaudited) | | |
Contracts receivable | $ | 143,583 | | | $ | 132,456 | |
Retainage | 29,242 | | | 27,640 | |
| 172,825 | | | 160,096 | |
Allowance for doubtful accounts | (2,086) | | | (1,926) | |
Contracts receivable including retainage, net | $ | 170,739 | | | $ | 158,170 | |
| | | |
Retainage receivables have been billed, but are not due until contract completion and acceptance by the customer.
Note 6 - Contract Assets and Liabilities
Costs and estimated earnings compared to billings on uncompleted contracts at March 31, 2022 and September 30, 2021 consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | September 30, 2021 |
| (unaudited) | | |
Costs on uncompleted contracts | $ | 1,239,920 | | | $ | 1,058,434 | |
Estimated earnings to date on uncompleted contracts | 120,673 | | | 110,430 | |
| 1,360,593 | | | 1,168,864 | |
Billings to date on uncompleted contracts | (1,382,625) | | | (1,179,560) | |
Net billings in excess of costs and estimated earnings on uncompleted contracts | $ | (22,032) | | | $ | (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 March 31, 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 | 1,386 | | | (12,722) | | | (11,336) | |
March 31, 2022 (unaudited) | $ | 24,409 | | | $ | (46,441) | | | $ | (22,032) | |
| | | | | |
At March 31, 2022, the Company had unsatisfied or partially unsatisfied performance obligations under construction project contracts representing approximately $985.9 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 $577.1 million during the remainder of the fiscal year ending September 30, 2022 and $408.8 million thereafter.
Note 7 - Property, Plant and Equipment
Property, plant and equipment at March 31, 2022 and September 30, 2021 consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| | March 31, 2022 | | September 30, 2021 |
| | (unaudited) | | |
Construction equipment | | $ | 377,311 | | | $ | 333,966 | |
Plants | | 153,140 | | | 143,172 | |
Mineral reserves | | 86,920 | | | $ | 86,556 | |
Land and improvements | | 61,547 | | | 53,415 | |
Buildings | | 29,720 | | | 27,163 | |
Furniture and fixtures | | 6,639 | | | 6,426 | |
Leasehold improvements | | 1,230 | | | 1,230 | |
Total property, plant and equipment, gross | | 716,507 | | | 651,928 | |
Accumulated depreciation, depletion and amortization | | (275,953) | | | (250,803) | |
Construction in progress | | 14,076 | | | 3,707 | |
Total property, plant and equipment, net | | $ | 454,630 | | | $ | 404,832 | |
| | | | |
Depreciation, depletion and amortization expense related to property, plant and equipment was $17.0 million and $12.2 million for the three months ended March 31, 2022 and 2021, respectively, and $32.8 million and $23.2 million for the six months ended March 31, 2022 and 2021, respectively.
Note 8 - Debt
Since 2017, the Company and each of its subsidiaries have been parties to a credit agreement with certain lenders party from time to time thereto (as amended and restated, the “Credit Agreement”). 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 Credit Agreement provides for a credit facility consisting of a term loan (the “Term Loan”) and a revolving credit facility (the “Revolving Credit Facility”). The obligations of the Company and its subsidiaries under the Credit Agreement are secured by a first priority security interest in substantially all of the Company’s assets.
In June 2021, the Credit Agreement was amended and restated to provide for a Term Loan in an initial aggregate principal amount of $200 million and a Revolving Credit Facility in an initial aggregate principal amount of $225 million. Among other things, the proceeds of the Term Loan were used to refinance indebtedness of the Company that was outstanding immediately prior to the restatement. The Term Loan, inclusive of any incremental borrowings made in the form of a term loan, will amortize in quarterly installments commencing on September 30, 2021 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 on September 30, 2021 and on each of the following eleven quarter-end payment dates, and (b) 1.875% of the original principal amount of the Term Loan on each of the next seven quarter-end payment dates. The annual interest rates applicable to advances will be calculated, at the Company’s option, by using either a base rate or LIBOR, in each case plus an applicable margin percentage that corresponds to the Company’s consolidated net leverage ratio. Upon the occurrence of certain triggering events relating to the end of the LIBOR reference rate, a different benchmark rate will be selected to replace LIBOR as the reference rate for interest accruing on certain advances. All outstanding advances under the Term Loan and Revolving Credit Facility are due and payable in full on June 24, 2026. 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 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 March 31, 2022 and September 30, 2021 consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | September 30, 2021 |
| (unaudited) | | |
Long-term debt: | | | |
Term Loan | $ | 192,500 | | | $ | 197,500 | |
Revolving Credit Facility | 136,000 | | | 20,000 | |
Total long-term debt | 328,500 | | | 217,500 | |
Deferred debt issuance costs | (1,197) | | | (1,325) | |
Current maturities of long-term debt | (10,000) | | | (10,000) | |
Long-term debt, net of current maturities | $ | 317,303 | | | $ | 206,175 | |
| | | |
Note 9 - 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 six months ended March 31, 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 March 31, 2022, there were 41,192,039 shares of Class A common stock and 11,352,915 shares of Class B common stock outstanding.
Treasury Stock
During the six months ended March 31, 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.
Restricted Stock Awards
During the six months ended March 31, 2022, the Company awarded a total of 253,659 restricted shares of Class A common stock to certain directors, officers and employees of the Company under the Construction Partners, Inc. 2018 Equity Incentive Plan (the “Equity Incentive Plan”).
Additional information about these transactions is set forth in Note 13 - Equity-Based Compensation.
Note 10 - Earnings Per Share
As discussed in Note 9 - 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 (unaudited in thousands, except share and per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, | | For the Six Months Ended March 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Numerator | | | | | | | |
Net income (loss) attributable to common stockholders | $ | (9,418) | | | $ | (4,935) | | | $ | (3,907) | | | $ | 2,936 | |
Denominator | | | | | | | |
Weighted average number of common shares outstanding, basic | 51,793,443 | | | 51,686,652 | | | 51,744,052 | | | 51,586,846 | |
Net income (loss) per common share attributable to common stockholders, basic | $ | (0.18) | | | $ | (0.10) | | | $ | (0.08) | | | $ | 0.06 | |
| | | | | | | |
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 (unaudited in thousands, except share and per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, | | For the Six Months Ended March 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Numerator | | | | | | | |
Net income (loss) attributable to common stockholders | $ | (9,418) | | | $ | (4,935) | | | $ | (3,907) | | | $ | 2,936 | |
Denominator | | | | | | | |
Weighted average number of basic common shares outstanding, basic | 51,793,443 | | | 51,686,652 | | | 51,744,052 | | | 51,586,846 | |
Effect of dilutive securities: | | | | | | | |
| | | | | | | |
Restricted stock grants under 2018 Equity Incentive Plan | — | | | — | | | — | | | 86,736 | |
Weighted average number of diluted common shares outstanding | 51,793,443 | | | 51,686,652 | | | 51,744,052 | | | 51,673,582 | |
Net income (loss) per diluted common share attributable to common stockholders | $ | (0.18) | | | $ | (0.10) | | | $ | (0.08) | | | $ | 0.06 | |
| | | | | | | |
Note 11 - 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 tax laws and regulations and believes that they are supportable based on their specific technical merits and the facts and circumstances of the respective transactions.
The Company’s effective income tax rate for the three months ended March 31, 2022 and 2021 was 23.5% and 23.5%, respectively. The Company’s effective tax rate for the six months ended March 31, 2022 and 2021 was 21.8% and 28.4%, respectively. The changes in the Company's effective rates are due to differences in state tax rates at its operating subsidiaries.
Note 12 - 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 a note receivable in the amount of $1.0 million, which approximated the net book value of the disposed entity. At March 31, 2022, $0.1 million and $0.4 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 a 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 March 31, 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. The notes do not bear interest, and are scheduled to be made in periodic installments during fiscal year 2022 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”).
•From time to time, a subsidiary of the Company provides construction services to various companies owned by family members of an executive officer of the Company (“Construction Services”).
•The Company purchases vehicles from an entity owned by a family member of an executive officer of the Company (“Vehicles - Purchases”).
•The Company rents vehicles from an entity owned by a family member of an executive officer of the Company (“Vehicles - Rent Expense”).
•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 $0.27 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 three and six months ended March 31, 2022 and 2021, and accounts receivable and payable balances at March 31, 2022 and September 30, 2021, related to transactions with the related parties described above (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue Earned (Expense Incurred) | | Accounts Receivable (Payable) |
| For the Three Months Ended March 31, | | For the Six Months Ended March 31, | | March 31, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) | | |
Purchaser of Subsidiary | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 518 | | | $ | 518 | |
Disposed Entity | — | | | — | | | — | | | — | | | 330 | | | 330 | |
Land Development Project | — | | | — | | | — | | | — | | | 701 | | | 788 | |
Subcontracting Services | (853) | | (1) | (425) | | (1) | (3,092) | | (1) | (2,603) | | (1) | (226) | | | (563) | |
Construction Services | — | | (2) | 119 | | (2) | 3 | | (2) | 119 | | (2) | — | | | — | |
Island Pond | (80) | | (2) | (80) | | (2) | (160) | | (2) | (160) | | (2) | — | | | — | |
Vehicles - Purchases | — | | (3) | (98) | | (3) | — | | (3) | (408) | | (3) | — | | | — | |
Vehicles - Rent Expense | — | | (2) | (49) | | (2) | — | | (2) | (127) | | (2) | — | | | — | |
| | | | | | | | | | | |
SunTx | (384) | | (2) | (521) | | (2) | (759) | | (2) | (1,138) | | (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. |
(3) Purchases reflected in property, plant & equipment, net, on the Company's Consolidated Balance Sheets. |
| | | | | | | | | | | |
Note 13 - Equity-Based Compensation
Restricted Stock Awards
During the six months ended March 31, 2022, the Company awarded a total of 253,659 restricted shares of Class A common stock to certain directors, officers and employees of the Company under the Equity Incentive Plan.
Compensation expense in connection with the Equity Incentive Plan, is reflected as general and administrative expenses in the Company’s Consolidated Statements of Comprehensive Income. Compensation expense was $1.7 million and $0.4 million for the three months ended March 31, 2022 and 2021, respectively, and $3.2 million and $0.9 million for the six months ended March 31, 2022 and 2021, respectively. At March 31, 2022, there was approximately $16.5 million of unrecognized compensation expense related to these awards.
The underlying shares subject to awards granted under the Equity Incentive Plan will vest, as follows:
| | | | | | | | |
Fiscal Year | | Number of Shares |
2022 | | 34,058 | |
2023 | | 36,558 | |
2024 | | 351,556 | |
2025 | | 311,378 | |
2026 | | 15,000 | |
Total | | 748,550 | |
| | |
Note 14 - Leases
The Company leases certain facilities, office space, vehicles and equipment. As of March 31, 2022, operating leases under ASC Topic 842, Leases (“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 $11.5 million, $2.1 million and $9.6 million, respectively. As of March 31, 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 (unaudited, in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, |
| | 2022 | | 2021 | | | | | | |
Operating lease cost | | $ | 637 | | | $ | 553 | | | | | | | |
Short-term lease cost | | 4,114 | | | 2,635 | | | | | | | |
Total lease expense | | $ | 4,751 | | | $ | 3,188 | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | For the Six Months Ended March 31, |
| | 2022 | | 2021 | | | | | | |
Operating lease cost | | $ | 1,234 | | | $ | 1,353 | | | | | | | |
Short-term lease cost | | 8,207 | | | 5,125 | | | | | | | |
Total lease expense | | $ | 9,441 | | | $ | 6,478 | | | | | | | |
| | | | | | | | | | |
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 March 31, 2022, the weighted-average remaining term of the Company’s leases was 7.9 years, and the weighted-average discount rate was 3.29%. As of March 31, 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 March 31, 2022 (unaudited, in thousands):
| | | | | | | | | |
Fiscal Year | | Amount | |
Remainder of 2022 | | $ | 1,213 | | |
2023 | | 2,290 | | |
2024 | | 1,931 | | |
2025 | | 1,602 | | |
2026 | | 1,592 | | |
2027 and thereafter | | 4,893 | | |
Total future minimum lease payments | | $ | 13,521 | | |
Less: imputed interest | | 1,812 | | |
Total | | $ | 11,709 | | |
| | | |
Note 15 - 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 designates 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 its 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 Hypothetical Derivative Method compares the change in fair value or cash flows of the hedging instrument with the change in fair value or cash flows of a hypothetical derivative that represents the hedged risk. 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 the 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 three and six months ended March 31, 2022 and 2021 and the fair value of these derivatives as of March 31, 2022 and September 30, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, |
| | | | 2022 | | | | | | 2021 | | | | | | | | |
| | Change in | | Change in | | |
Income Statement Classification | | Realized Gain (Loss) | | Unrealized Gain (Loss) | | Total Gain (Loss) | | Realized Gain (Loss) | | Unrealized Gain (Loss) | | Total Gain (Loss) | | | | | | |
Cost of revenues | | $ | 364 | | | $ | 1,055 | | | $ | 1,419 | | | $ | 94 | | | $ | 813 | | | $ | 907 | | | | | | | |
Interest expense, net | | (431) | | | 939 | | | 508 | | | (168) | | | 400 | | | 232 | | | | | | | |
Total | | $ | (67) | | | $ | 1,994 | | | $ | 1,927 | | | $ | (74) | | | $ | 1,213 | | | $ | 1,139 | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Six Months Ended March 31, |
| | | | 2022 | | | | | | 2021 | | | | | | | | |
| | Change in | | Change in | | |
Income Statement Classification | | Realized Gain (Loss) | | Unrealized Gain (Loss) | | Total Gain (Loss) | | Realized Gain (Loss) | | Unrealized Gain (Loss) | | Total Gain (Loss) | | | | | | |
Cost of revenues | | $ | 857 | | | $ | 778 | | | $ | 1,635 | | | $ | (45) | | | $ | 1,758 | | | $ | 1,713 | | | | | | | |
Interest expense, net | | (909) | | | 1,352 | | | 443 | | | (348) | | | 619 | | | 271 | | | | | | | |
Total | | $ | (52) | | | $ | 2,130 | | | $ | 2,078 | | | $ | (393) | | | $ | 2,377 | | | $ | 1,984 | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | September 30, 2021 | |
Balance Sheet Classification | | (unaudited) | | | |
| | | | | |
| | | | | |
Prepaid expenses and other current assets - commodity swaps | | $ | 2,616 | | | $ | 990 | | |
Other assets - commodity swaps | | 39 | | | 822 | | |
Other assets - interest rate swaps (1) | | 9,991 | | | — | | |
| | | | | |
Accrued expense and other current liabilities - interest rate swaps | | (16) | | | (97) | | |
Other long-term liabilities - commodity swaps | | (65) | | | — | | |
Other long-term liabilities - interest rate swaps (2) | | — | | | (748) | | |
Net unrealized gain position | | $ | 12,565 | | | $ | 967 | | |
| | | | | |
(1) Includes designated cash flow hedge of $9,437 and $0 as of March 31, 2022 and September 30, 2021, respectively.
(2) Includes designated cash flow hedge of $0 and $(31) as of March 31, 2022 and September 30, 2021, respectively.
Note 16 - Fair Value Measurements
The following table presents the Company’s liabilities measured at fair value on a recurring basis as of March 31, 2022 and September 30, 2021 under ASC 820, Fair Value Measurements (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | September 30, 2021 |
| (unaudited) | | |
| Level 2 | | Level 2 |
Assets | | | |
Commodity swap contracts | $ | 2,655 | | | $ | 1,812 | |
Interest rate swaps | 9,991 | | | — | |
| | | |
Liabilities: | | | |
Commodity swap contracts | $ | 65 | | | $ | — | |
Interest rate swap contracts | 16 | | | 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 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, 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.
Note 17 - Commitments
Letters of Credit
Under the Revolving Credit Facility, the Company has a total capacity of $225.0 million that may be used for a combination of cash borrowings and letter of credit issuances. At March 31, 2022, the Company had aggregate letters of credit outstanding in the amount of $11.3 million, primarily related to certain insurance policies.
Purchase Commitments
As of March 31, 2022, the Company had unconditional purchase commitments for diesel fuel and natural gas in the normal course of business in the aggregate amount of $5.6 million and $2.1 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 March 31, 2022, our purchase commitments annually thereafter are as follows (in thousands):
| | | | | | | | |
Fiscal Year | | Amount |
Remainder of 2022 | | $ | 3,164 | |
2023 | | 3,781 | |
2024 | | 780 | |
Total | | $ | 7,725 | |
| | |
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 March 31, 2022 in the amount of $2.6 million, due as follows (in thousands):
| | | | | | | | |
Fiscal Year | | Amount |
Remainder of 2022 | | $ | 89 | |
2023 | | 230 | |
2024 | | 220 | |
2025 | | 184 | |
2026 | | 157 | |
Thereafter | | 1,760 | |
Total | | $ | 2,640 | |
| | |
Royalty expense recorded in cost of revenue was $0.5 million and $0.3 million for the three months ended March 31, 2022 and 2021, respectively, and $0.8 million and $0.5 million for the six months ended March 31, 2022 and 2021, respectively.
Note 18 - 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 was entered into on August 13, 2021 with an original notional value of $160.0 million. The maturity date of this swap is June 24, 2026.
In March 2022, the Captive purchased debt securities, which have been classified as available-for-sale as of March 31, 2022. These securities are carried at their fair value based on quoted market prices. Unrealized gains and losses are reported as components of accumulated other comprehensive income (loss), net.
Amounts in accumulated other comprehensive income (AOCI), net of tax, at March 31, 2022 and September 30, 2021, were as follows (in thousands):
| | | | | | | | | | | | | | |
AOCI | | March 31, 2022 (unaudited) | | September 30, 2021 |
| | | | |
Interest rate swap contract | | $ | 9,437 | | | $ | (31) | |
Unrealized loss on available-for-sale securities | | (154) | | | — | |
Less tax effect of other comprehensive income (loss) items | | (2,403) | | | 8 | |
Total | | 6,880 | | | (23) | |
| | | | |
Changes in AOCI, net of tax, are as follows (in thousands):
| | | | | | | | |
| | |
AOCI | | Interest Rate Hedge |
Balance at September 30, 2020 | | $ | — | |
Net OCI changes | | — | |
Balance at March 31, 2021 | | $ | — | |
| | |
| | | | | | | | |
| | |
AOCI | | Interest Rate Hedge |
Balance at September 30, 2021 | | $ | (23) | |
Net OCI changes | | 6,903 | |
Balance at March 31, 2022 | | $ | 6,880 | |
| | |
Amounts reclassified from AOCI to earnings are as follows (in thousands): | | | | | | | | | | | | | | | | |
| | | | | | |
| | For the Three Months Ended March 31, |
| | 2022 | | 2021 | | |
Interest expense | | $ | 304 | | | $ | — | | | |
Benefit from income taxes | | (78) | | | — | | | |
Total reclassifications from AOCI to earnings | | $ | 226 | | | $ | — | | | |
| | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | |
| | For the Six Months Ended March 31, |
| | 2022 | | 2021 | | |
Interest expense | | $ | 636 | | | $ | — | | | |
Benefit from income taxes | | (164) | | | — | | | |
Total reclassifications from AOCI to earnings | | $ | 472 | | | $ | — | | | |
| | | | | | |