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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One) | | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2021
OR | | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-38479
Construction Partners, Inc.
(Exact Name of Registrant as Specified in its Charter) | | | | | | | | |
Delaware | | 26-0758017 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
290 Healthwest Drive, Suite 2 Dothan, Alabama | | 36303 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (334) 673-9763
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934: | | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A common stock, par value $0.001 per share | ROAD | The Nasdaq Stock Market LLC |
| | (Nasdaq Global Select Market) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | |
Large accelerated filer | ☐ | Accelerated filer | ☒ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
Emerging growth company | ☒ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 4, 2021, the registrant had 36,506,570 shares of Class A common stock, $0.001 par value, and 15,785,908 shares of Class B common stock, $0.001 par value, outstanding. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements related to future events, business strategy, future performance, future operations, backlog, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as “seek,” “anticipate,” “plan,” “continue,” “estimate,” “expect,” “may,” “will,” “project,” “predict,” “potential,” “targeting,” “intend,” “could,” “might,” “should,” “believe,” “outlook” and variations of such words or their negative and similar expressions. Forward-looking statements should not be read as a guarantee of future performance or results, and may not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on management’s belief, based on currently available information, as to the outcome and timing of future events. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those expressed in such forward-looking statements. When evaluating forward-looking statements, you should consider the risk factors and other cautionary statements described in this Quarterly Report on Form 10-Q and under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020. We believe the expectations reflected in the forward-looking statements contained in this report are reasonable, but no assurance can be given that these expectations will prove to be correct. Forward-looking statements should not be unduly relied upon.
Important factors that could cause actual results or events to differ materially from those expressed in forward-looking statements include, but are not limited to:
•declines in public infrastructure construction and reductions in government funding, including the funding by transportation authorities and other state and local agencies;
•risks related to our operating strategy;
•competition for projects in our local markets;
•risks associated with our capital-intensive business;
•a pandemic, such as the pandemic related to the novel strain of coronavirus known as COVID-19 (“COVID-19”), which may disrupt our business as a result of employee absences, supply chain interruptions or declines or delays in customer demand for our services;
•government inquiries, requirements and initiatives, including those related to funding for public or infrastructure construction, land usage, environmental, health and safety matters, and government contracting requirements and other laws and regulations;
•our ability to successfully identify, manage and integrate acquisitions;
•our ability to obtain sufficient bonding capacity to undertake certain projects;
•our ability to accurately estimate the overall risks, requirements or costs when we bid on or negotiate contracts that are ultimately awarded to us;
•the cancellation of a significant number of contracts or our disqualification from bidding for new contracts;
•risks related to adverse weather conditions;
•our substantial indebtedness and the restrictions imposed on us by the terms thereof;
•our ability to maintain favorable relationships with third parties that supply us with equipment and essential supplies;
•our ability to retain key personnel and maintain satisfactory labor relations;
•property damage and other claims and insurance coverage issues;
•the outcome of litigation or disputes, including employment-related, workers’ compensation and breach of contract claims;
•risks related to our information technology systems and infrastructure, including cybersecurity incidents;
•our ability to maintain effective internal control over financial reporting; and
•other events outside of our control.
These factors are not necessarily all of the important factors that could cause actual results or events to differ materially from those expressed in the forward-looking statements. Other unknown or unpredictable factors could also cause actual results or events to differ materially from those expressed in the forward-looking statements. Our future results will depend upon various other risks and uncertainties, including those described in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. Forward-looking statements speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements after the date on which any such statement is made, whether as a result of new information, future events or otherwise, except as required by law.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSTRUCTION PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) | | | | | | | | | | | |
| June 30, | | September 30, |
| 2021 | | 2020 |
| (unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 134,468 | | | $ | 148,316 | |
Contracts receivable including retainage, net | 164,305 | | | 131,770 | |
Costs and estimated earnings in excess of billings on uncompleted contracts | 15,770 | | | 7,873 | |
Inventories | 50,841 | | | 38,561 | |
Prepaid expenses and other current assets | 7,967 | | | 5,041 | |
Total current assets | 373,351 | | | 331,561 | |
| | | |
Property, plant and equipment, net | 296,697 | | | 237,230 | |
Operating lease right-of-use assets | 6,661 | | | 7,383 | |
Goodwill | 78,444 | | | 46,348 | |
Intangible assets, net | 5,134 | | | 3,224 | |
Investment in joint venture | 108 | | | 198 | |
Other assets | 6,591 | | | 1,784 | |
Deferred income taxes, net | 386 | | | 386 | |
Total assets | $ | 767,372 | | | $ | 628,114 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 82,817 | | | $ | 64,732 | |
Billings in excess of costs and estimated earnings on uncompleted contracts | 31,555 | | | 33,704 | |
Current portion of operating lease liabilities | 1,501 | | | 2,046 | |
Current maturities of debt | 10,000 | | | 13,000 | |
Accrued expenses and other current liabilities | 25,684 | | | 22,347 | |
Total current liabilities | 151,557 | | | 135,829 | |
Long-term liabilities: | | | |
Long-term debt, net of current maturities | 188,591 | | | 79,053 | |
Operating lease liabilities, net of current portion | 5,320 | | | 5,554 | |
Deferred income taxes, net | 14,003 | | | 14,003 | |
Other long-term liabilities | 8,228 | | | 8,480 | |
Total long-term liabilities | 216,142 | | | 107,090 | |
Total liabilities | 367,699 | | | 242,919 | |
Commitments and contingencies | | | |
Stockholders’ equity: | | | |
Preferred stock, par value $0.001; 10,000,000 shares authorized at June 30, 2021 and September 30, 2020 and no shares issued and outstanding | — | | | — | |
Class A common stock, par value $0.001; 400,000,000 shares authorized, 36,506,570 shares issued and outstanding at June 30, 2021, and 33,875,884 shares issued and outstanding at September 30, 2020 | 36 | | | 34 | |
Class B common stock, par value $0.001; 100,000,000 shares authorized, 18,708,860 shares issued and 15,785,908 outstanding at June 30, 2021 and 20,828,813 shares issued and 17,905,861 outstanding at September 30, 2020 | 19 | | | 21 | |
Additional paid-in capital | 247,224 | | | 245,022 | |
Treasury stock, at cost, 2,922,952 shares of Class B common stock, par value $0.001 | (15,603) | | | (15,603) | |
Retained earnings | 167,997 | | | 155,721 | |
Total stockholders’ equity | 399,673 | | | 385,195 | |
Total liabilities and stockholders’ equity | $ | 767,372 | | | $ | 628,114 | |
| | | |
See notes to consolidated financial statements (unaudited).
CONSTRUCTION PARTNERS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited in thousands, except share and per share data) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended June 30, | | For the Nine Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Revenues | | $ | 261,656 | | | $ | 217,041 | | | $ | 631,697 | | | $ | 561,034 | |
Cost of revenues | | 225,039 | | | 180,155 | | | 546,414 | | | 480,217 | |
Gross profit | | 36,617 | | | 36,886 | | | 85,283 | | | 80,817 | |
General and administrative expenses | | (23,195) | | | (16,852) | | | (67,754) | | | (50,786) | |
| | | | | | | | |
Gain on sale of equipment, net | | 835 | | | 390 | | | 1,177 | | | 1,134 | |
Operating income | | 14,257 | | | 20,424 | | | 18,706 | | | 31,165 | |
Interest expense, net | | (568) | | | (575) | | | (1,334) | | | (2,690) | |
| | | | | | | | |
Other income (expense) | | 252 | | | 251 | | | 661 | | | 360 | |
Income before provision for income taxes and earnings from investment in joint venture | | 13,941 | | | 20,100 | | | 18,033 | | | 28,835 | |
Provision for income taxes | | (4,600) | | | (4,772) | | | (5,767) | | | (6,622) | |
Earnings (loss) from investment in joint venture | | (1) | | | 419 | | | 10 | | | 532 | |
Net income | | $ | 9,340 | | | $ | 15,747 | | | $ | 12,276 | | | $ | 22,745 | |
| | | | | | | | |
Net income per share attributable to common stockholders: | | | | | | | | |
Basic | | $ | 0.18 | | | $ | 0.31 | | | $ | 0.24 | | | $ | 0.44 | |
| | | | | | | | |
Diluted | | $ | 0.18 | | | $ | 0.30 | | | $ | 0.24 | | | $ | 0.44 | |
| | | | | | | | |
Weighted average number of common shares outstanding: | | | | | | | | |
Basic | | 51,686,735 | | | 51,489,211 | | | 51,620,143 | | | 51,489,211 | |
Diluted | | 51,864,403 | | | 51,646,385 | | | 51,726,994 | | | 51,623,627 | |
| | | | | | | | |
| | | | | | | | |
See notes to consolidated financial statements (unaudited).
CONSTRUCTION PARTNERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the nine months ended June 30, 2021 |
| Class A Common Stock | | Class B Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Retained Earnings | | Total Stockholders’ Equity |
| Shares | | Amount | | Shares | | Amount | | | | |
September 30, 2020 | 33,875,884 | | | $ | 34 | | | 20,828,813 | | | $ | 21 | | | $ | 245,022 | | | $ | (15,603) | | | $ | 155,721 | | | $ | 385,195 | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | 7,871 | | | 7,871 | |
Equity-based compensation expense | — | | | — | | | — | | | — | | | 395 | | | — | | | — | | | 395 | |
December 31, 2020 | 33,875,884 | | | $ | 34 | | | 20,828,813 | | | $ | 21 | | | $ | 245,417 | | | $ | (15,603) | | | $ | 163,592 | | | $ | 393,461 | |
Net loss | — | | | — | | | — | | | — | | | — | | | — | | | (4,935) | | | (4,935) | |
Conversion of Class B common stock to Class A common stock | 1,332,952 | | | 1 | | | (1,332,952) | | | (1) | | | — | | | — | | | — | | | — | |
Equity-based compensation expense | — | | | — | | | — | | | — | | | 460 | | | — | | | — | | | 460 | |
Issuance of stock grant awards | 510,733 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
March 31, 2021 | 35,719,569 | | | $ | 35 | | | 19,495,861 | | | $ | 20 | | | $ | 245,877 | | | $ | (15,603) | | | $ | 158,657 | | | $ | 388,986 | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | 9,340 | | | 9,340 | |
Conversion of Class B common stock to Class A common stock | 787,001 | | | 1 | | | (787,001) | | | (1) | | | — | | | — | | | — | | | — | |
Equity-based compensation expense | — | | | — | | | — | | | — | | | 1,347 | | | — | | | — | | | 1,347 | |
June 30, 2021 | 36,506,570 | | | $ | 36 | | | 18,708,860 | | | $ | 19 | | | $ | 247,224 | | | $ | (15,603) | | | $ | 167,997 | | | $ | 399,673 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the nine months ended June 30, 2020 |
| Class A Common Stock | | Class B Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Retained Earnings | | Total Stockholders’ Equity |
| Shares | | Amount | | Shares | | Amount | | | | |
September 30, 2019 | 32,597,736 | | | $ | 33 | | | 22,106,961 | | | $ | 22 | | | $ | 243,452 | | | $ | (15,603) | | | $ | 115,646 | | | $ | 343,550 | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | 5,461 | | | 5,461 | |
Equity-based compensation expense | — | | | — | | | — | | | — | | | 395 | | | — | | | — | | | 395 | |
Conversion of Class B common stock to Class A common stock | 107,682 | | | — | | | (107,682) | | | — | | | — | | | — | | | — | | | — | |
Effect of adopting ASU Topic 842 | — | | | — | | | — | | | — | | | — | | | — | | | (222) | | | (222) | |
December 31, 2019 | 32,705,418 | | | $ | 33 | | | 21,999,279 | | | $ | 22 | | | $ | 243,847 | | | $ | (15,603) | | | $ | 120,885 | | | $ | 349,184 | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | 1,537 | | | 1,537 | |
Equity-based compensation expense | — | | | — | | | — | | | — | | | 390 | | | — | | | — | | | 390 | |
March 31, 2020 | 32,705,418 | | | $ | 33 | | | 21,999,279 | | | $ | 22 | | | $ | 244,237 | | | $ | (15,603) | | | $ | 122,422 | | | $ | 351,111 | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | 15,747 | | | 15,747 | |
Equity-based compensation expense | — | | | — | | | — | | | — | | | 390 | | | — | | | — | | | 390 | |
Conversion of Class B common stock to Class A common stock | 724,946 | | | 1 | | | (724,946) | | | (1) | | | — | | | — | | | — | | | — | |
June 30, 2020 | 33,430,364 | | | $ | 34 | | | 21,274,333 | | | $ | 21 | | | $ | 244,627 | | | $ | (15,603) | | | $ | 138,169 | | | $ | 367,248 | |
| | | | | | | | | | | | | | | |
See notes to consolidated financial statements (unaudited).
CONSTRUCTION PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited in thousands) | | | | | | | | | | | |
| For the Nine Months Ended June 30, |
| 2021 | | 2020 |
Cash flows from operating activities: | | | |
Net income | $ | 12,276 | | | $ | 22,745 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation, depletion and amortization of long-lived assets | 36,011 | | | 29,065 | |
Amortization of deferred debt issuance costs and debt discount | 190 | | | 115 | |
Unrealized (gain) loss on derivative instruments | (3,141) | | | 1,989 | |
Provision for bad debt | 440 | | | 451 | |
Gain on sale of equipment, net | (1,177) | | | (1,134) | |
Equity-based compensation expense | 2,202 | | | 1,175 | |
Earnings from investment in joint venture | (10) | | | (532) | |
Distribution of earnings from investment in joint venture | 100 | | | 139 | |
Deferred income taxes | — | | | (197) | |
Other non-cash adjustments | (57) | | | (12) | |
Changes in operating assets and liabilities, net of acquisition: | | | |
Contracts receivable including retainage, net | (32,975) | | | 6,345 | |
Costs and estimated earnings in excess of billings on uncompleted contracts | (7,897) | | | (3,574) | |
Inventories | (8,061) | | | (1,878) | |
Prepaid expenses and other current assets | (1,723) | | | 3,867 | |
Other assets | (4,123) | | | 311 | |
Accounts payable | 16,789 | | | (12,863) | |
Billings in excess of costs and estimated earnings on uncompleted contracts | (2,149) | | | 3,396 | |
Accrued expenses and other current liabilities | 2,970 | | | 2,029 | |
Other long-term liabilities | (331) | | | (23) | |
Net cash provided by operating activities, net of acquisitions | 9,334 | | | 51,414 | |
Cash flows from investing activities: | | | |
Purchases of property, plant and equipment | (39,588) | | | (41,535) | |
Proceeds from sale of equipment | 2,361 | | | 2,182 | |
Business acquisitions, net of cash acquired | (92,303) | | | (30,191) | |
| | | |
Return of investment in joint venture | — | | | 361 | |
Net cash used in investing activities | (129,530) | | | (69,183) | |
Cash flows from financing activities: | | | |
| | | |
| | | |
Proceeds from issuance of long-term debt, net of debt issuance costs and discount | 199,198 | | | 42,719 | |
Repayments of long-term debt | (92,850) | | | (26,874) | |
| | | |
| | | |
| | | |
| | | |
| | | |
Net cash provided by financing activities | 106,348 | | | 15,845 | |
Net change in cash and cash equivalents | (13,848) | | | (1,924) | |
Cash and cash equivalents: | | | |
Beginning of period | 148,316 | | | 80,619 | |
End of period | $ | 134,468 | | | $ | 78,695 | |
| | | |
Supplemental cash flow information: | | | |
Cash paid for interest | $ | 1,950 | | | $ | 1,416 | |
Cash paid for income taxes | $ | 3,568 | | | $ | 5,600 | |
Operating lease right-of-use assets obtained in exchange for operating lease liabilities | $ | 1,089 | | | $ | 1,241 | |
Cash paid for operating lease liabilities | $ | 1,795 | | | $ | 2,464 | |
Non-cash items: | | | |
Property, plant and equipment included with accounts payable at period end | $ | 778 | | | $ | 1,073 | |
| | | |
| | | |
Non-compete agreements to seller in business combination | $ | 1,700 | | | $ | — | |
Amounts payable to sellers in business combinations | $ | 1,296 | | | $ | — | |
See notes to consolidated financial statements (unaudited).
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 and gravel, that are used as raw materials in the production of HMA, and (v) distributing liquid asphalt cement for both internal use and sales to third parties in connection with HMA production.
The Company was formed as a Delaware corporation in 2007 as a holding company for its wholly owned subsidiary, Construction Partners Holdings, Inc., to facilitate an acquisition growth strategy in the HMA paving and construction industry. On December 31, 2019, Construction Partners Holdings, Inc. merged with and into the Company, with the Company surviving the merger. SunTx Capital Partners (“SunTx”), a private equity firm based in Dallas, Texas, is the Company’s majority investor and has owned a controlling interest in the Company’s stock since the Company’s inception.
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, 2020 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, 2020 (the “2020 Form 10-K”). Results for interim periods are not necessarily indicative of the results to be expected for a full fiscal year or for any future period.
Management’s Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the recorded amounts of assets, liabilities, stockholders’ equity, revenues and expenses during the reporting period, and the disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates are used in accounting for items such as recognition of revenues and cost of revenues, goodwill and other intangible assets, business acquisition accounting estimates, valuation of operating lease right-of-use assets, allowance for doubtful accounts, valuation allowances related to income taxes, accruals for potential liabilities related to lawsuits or insurance claims, the fair value of derivative instruments and the fair value of equity-based compensation awards. Estimates are continually evaluated based on historical information and actual experience; however, actual results could differ from these estimates.
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 2020 Form 10-K.
Emerging Growth Company
The Company is an “emerging growth company,” as defined by the Jumpstart Our Business Startups Act enacted in April 2012. As an emerging growth company, the Company could have taken advantage of an exemption that would have allowed the Company to wait to comply with new or revised financial accounting standards until the effective date of such standards for private companies. However, the Company has irrevocably elected to opt out of such extended transition period, which means that when a new or revised standard has a different effective date for public and private companies, the Company is required to adopt the standard on the effective date applicable to public companies that are not emerging growth companies.
Cash and Cash Equivalents
Cash consists principally of currency on hand and demand deposits at commercial banks. Cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts of cash and are so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Cash equivalents include investments with original maturities of three months or less. The Company maintains demand accounts, money market accounts and certificates of deposit at several banks. From time to time, the account balances have exceeded the maximum available federal deposit insurance coverage limit. The Company has not experienced any losses in such accounts and regularly monitors its credit risk.
Contracts Receivable Including Retainage, net
Contracts receivable are generally based on amounts billed and currently due from customers, amounts currently due but unbilled, and amounts retained by the customer 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 Company's 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 are 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 and are typically based on (i) progress toward completion approved by the owner or customer, (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 to the extent that 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 to a customer goods or services 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, net. 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 June 30, 2021 or September 30, 2020.
Projects performed for various Departments of Transportation accounted for 35.9% and 36.8% of consolidated revenues for the three months ended June 30, 2021 and 2020, respectively, and for 30.7% and 32.3% of consolidated revenues for the nine months ended June 30, 2021 and 2020, respectively. Customers that accounted for more than 10.0% of consolidated revenues during any of those periods are presented below.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | % of Consolidated Revenues |
| | For the Three Months Ended June 30, | | For the Nine Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Alabama Department of Transportation | | 10.9 | % | | 13.2 | % | | 9.3 | % | | 11.1 | % |
North Carolina Department of Transportation | | 12.2 | % | | 9.0 | % | | 8.7 | % | | 8.4 | % |
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 derives revenues from the sale of construction materials, including HMA, aggregates, liquid asphalt cement 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) the percentage of revenues generated from public infrastructure construction projects and the sale of construction materials to public customers and (ii) the percentage of revenues generated from private infrastructure construction projects and the sale of construction materials to private customers. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | % of Consolidated Revenues |
| | For the Three Months Ended June 30, | | For the Nine Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Private | | 38.5 | % | | 30.9 | % | | 40.0 | % | | 36.1 | % |
Public | | 61.5 | % | | 69.1 | % | | 60.0 | % | | 63.9 | % |
Revenues derived from construction projects are recognized over time as the Company satisfies its performance obligations by transferring to the customer control of the asset created or enhanced by the project. Recognition of revenues and cost of revenues for construction projects requires significant judgment by management, including, among other things, estimating total costs expected to be incurred to complete a project and measuring progress toward completion. Management reviews contract estimates regularly to assess revisions of estimated costs to complete a project and measurement of progress toward completion.
Management believes the Company maintains reasonable estimates based on prior experience; however, many factors contribute to changes in estimates of contract costs. Accordingly, estimates made with respect to uncompleted projects are subject to change as each project progresses and better estimates of contract costs become available. All contract costs are recorded as incurred, and revisions to estimated total costs are reflected as soon as the obligation to perform is determined. Provisions are recognized for the full amount of estimated losses on uncompleted contracts whenever evidence indicates that the estimated total cost of a contract exceeds its estimated total revenue, regardless of the stage of completion. When the Company incurs additional costs related to work performed by subcontractors, the Company may be able to utilize contractual provisions to back charge the subcontractors for those costs. A reduction to costs related to back charges is recognized when the estimated recovery is probable and the amount can be reasonably estimated. Contract costs consist of (i) direct costs on contracts, including labor, materials, and amounts payable to subcontractors and
(ii) indirect costs related to contract performance, such as insurance, employee benefits, and equipment (primarily depreciation, fuel, maintenance and repairs).
Progress toward completion is estimated using the input method, measured by the relationship of total cost incurred through the measurement date to total estimated costs required to complete the project (cost-to-cost method). The Company believes this method best depicts the transfer of goods and services to the customer because it represents satisfaction of the Company’s performance obligation under the contract, which occurs as the Company incurs costs. The Company measures percentage of completion based on the performance of a single performance obligation under its construction projects. Each of the Company’s construction contracts represents a single performance obligation to complete a defined construction project. This is because goods and services promised for delivery to a customer are not distinct, as the customer cannot benefit from any individual portion of the services on its own. All deliverables under a contract are part of a project defined by a customer and represent a series of integrated goods and services that have the same pattern of delivery to the customer and use the same measure of progress toward satisfaction of the performance obligation as the customer’s asset is created or enhanced by the Company. The Company’s obligation is not satisfied until the entire project is complete.
Revenue recognized during a reporting period is based on the 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, in the case of liquidated damages or penalties, the most likely amount the Company expects to incur. Such amounts are included in the transaction price to the extent that 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 a single performance obligation. The Company accounts 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 the point in time at which control of the product is transferred to the customer. Usually, that point in time is when the customer accepts delivery at its facility or receives product in its own transport vehicles from one of the Company’s HMA plants. Upon purchase, the Company generally provides an invoice or similar document detailing the goods transferred to the customer. The Company generally offers payment terms customary in the industry, which typically require payment ranging from point-of-sale to 30 days following purchase.
Income Taxes
The provision for income taxes includes federal and state income taxes. Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which the temporary differences are expected to be reversed or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period in which the change is enacted. Management evaluates the realization of deferred tax assets and establishes a valuation allowance when it is more likely than not that all or a portion of the deferred tax assets will not be realized. Deferred tax assets and deferred tax liabilities are presented on a net basis by taxing authority and classified as non-current on the Consolidated Balance Sheets. The Company classifies income tax-related interest and penalties as interest expense and other expenses, respectively.
Earnings per Share
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.
Derivative Instruments
The Company’s derivative instruments consist of commodity and interest rate swap contracts. None of the Company’s derivative instruments are designated as hedges for accounting purposes under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging. Accordingly, the Company records derivative instruments on its Consolidated Balance Sheets as either an asset or liability measured at fair value and records changes in the fair value of derivatives in current earnings in the Consolidated Statements of Income for the period in which the change occurs. Gains and losses on derivatives are included in cash flows from operating activities.
Fair Value Measurements
The Company measures and discloses certain financial assets and liabilities at fair value. ASC Topic 820, Fair Value Measurements and Disclosures ("ASC 820"), defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Inputs used to measure fair value are classified using the following hierarchy:
Level 1. Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2. Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data.
Level 3. Inputs are unobservable for the asset or liability and include situations in which there is little, if any, market activity for the asset or liability. The inputs used in the determination of fair value are based on the best information available under the circumstances and may require significant management judgment or estimation.
The Company endeavors to utilize the best available information in measuring fair value.
The Company’s financial instruments include cash and cash equivalents, contracts receivable including retainage and accounts payable reflected as current assets and current liabilities on its Consolidated Balance Sheets at June 30, 2021 and September 30, 2020. Due to the short-term nature of these instruments, management considers their carrying value to approximate their fair value.
The Company also has term loans and a revolving credit facility, as described in Note 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 debt on the Company’s Consolidated Balance Sheets at June 30, 2021 and September 30, 2020. 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 derivative instruments is based on forward and spot prices, as described in Note 16 - Fair Value Measurements.
Management applies fair value measurement guidance to its impairment analysis for tangible and intangible assets.
Reclassifications
Certain amounts in prior periods have been reclassified to conform to the current period presentation. These reclassifications had no effect on previously reported net income.
Note 3 - Accounting Standards
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (“Topic 326”), which introduces an impairment model that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The amendments pursuant to Topic 326 were effective for fiscal years beginning after December 15, 2019, including
interim periods within those fiscal years. The Company adopted this guidance effective October 1, 2020 as required and noted no material impact to the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). This ASU requires customers in a hosting arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project. ASU 2018-15 was effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted this guidance effective October 1, 2020 as required and noted no material impact to the Company’s consolidated financial statements.
Note 4 - Business Acquisitions
North Carolina Acquisitions
During the three months ended December 31, 2021, a subsidiary of the Company purchased four HMA production and paving companies 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, and (iv) on December 18, 2020, in Kitty Hawk, North Carolina . The acquired businesses added thirteen HMA plants in central and eastern North Carolina, providing the Company with access to additional markets and expanding its footprint in the state.
On June 22, 2021, a subsidiary of the Company acquired a grading and site work company in Wilson, North Carolina, complementing other recent acquisitions in the state and further enhancing the Company's vertical integration of construction services across multiple markets in North Carolina.
The acquisitions were accounted for as business combinations in accordance with ASC 805. The provisional allocation of the purchase price to assets acquired and liabilities assumed, based on their estimated fair values at the acquisition date, was determined in accordance with the methodology described under the heading “Fair Value Measurements” above in Note 2 - Significant Accounting Policies. Goodwill primarily represents the assembled workforce 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.
For these acquisitions, total consideration is $93.6 million, of which $92.3 million has been paid with cash on hand as of June 30, 2021. The total consideration has been provisionally allocated as follows: $4.2 million of inventory, $56.6 million of property, plant and equipment, $32.1 million of goodwill, and $0.7 million of other intangibles, which are expected to be deductible for income tax purposes. Included in total consideration is a payable to sellers of $1.3 million for purchase price adjustments, which is included in accounts payable at June 30, 2021. The Consolidated Statements of Income includes $31.4 million of revenue and $(1.0) million of net loss attributable to the operations of these acquisitions for the three months ended June 30, 2021 and $50.7 million of revenue and $(4.2) million of net loss attributable to the operations of these acquisitions for the nine months ended June 30, 2021 from their respective acquisition dates.
Results of Operations of Acquisitions Completed Subsequent to June 30, 2020
Unaudited consolidated pro forma revenues and net income, as if acquisitions completed by the Company subsequent to June 30, 2020 (including those described above) had been completed as of October 1, 2019 are as follows (in thousands):
| | | | | | | | | | | | | | |
| | For the Three Months Ended June 30, |
| | 2021 | | 2020 |
Pro forma revenues | | $ | 268,401 | | | $ | 255,186 | |
Pro forma net income | | $ | 9,785 | | | $ | 15,192 | |
| | | | |
| | | | | | | | | | | | | | |
| | For the Nine Months Ended June 30, |
| | 2021 | | 2020 |
Pro forma revenues | | $ | 669,616 | | | $ | 657,461 | |
Pro forma net income | | $ | 13,961 | | | $ | 20,936 | |
| | | | |
Pro forma information is presented for informational purposes and may not be indicative of revenue or net income that would have been achieved if the acquisitions had actually been completed as of October 1, 2019.
Note 5 - Contracts Receivable Including Retainage, net
Contracts receivable including retainage, net consisted of the following at June 30, 2021 and September 30, 2020 (in thousands): | | | | | | | | | | | |
| June 30, 2021 | | September 30, 2020 |
| (unaudited) | | |
Contracts receivable | $ | 137,958 | | | $ | 112,197 | |
Retainage | 28,197 | | | 21,013 | |
| 166,155 | | | 133,210 | |
Allowance for doubtful accounts | (1,850) | | | (1,440) | |
Contracts receivable including retainage, net | $ | 164,305 | | | $ | 131,770 | |
| | | |
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 June 30, 2021 and September 30, 2020 consisted of the following (in thousands): | | | | | | | | | | | |
| June 30, 2021 | | September 30, 2020 |
| (unaudited) | | |
Costs on uncompleted contracts | $ | 979,380 | | | $ | 876,229 | |
Estimated earnings to date on uncompleted contracts | 108,771 | | | 101,055 | |
| 1,088,151 | | | 977,284 | |
Billings to date on uncompleted contracts | (1,103,936) | | | (1,003,115) | |
Net billings in excess of costs and estimated earnings on uncompleted contracts | $ | (15,785) | | | $ | (25,831) | |
| | | |
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, 2020 to June 30, 2021 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, 2020 | $ | 7,873 | | | $ | (33,704) | | | $ | (25,831) | |
Changes in revenue billed, contract price or cost estimates | 7,897 | | | 2,149 | | | 10,046 | |
June 30, 2021 (unaudited) | $ | 15,770 | | | $ | (31,555) | | | $ | (15,785) | |
| | | | | |
At June 30, 2021, the Company had unsatisfied or partially unsatisfied performance obligations under construction project contracts representing approximately $627.5 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 $282.3 million during the remainder of the fiscal year ending September 30, 2021 and $345.2 million thereafter.
Note 7 - Property, Plant and Equipment
Property, plant and equipment at June 30, 2021 and September 30, 2020 consisted of the following (in thousands): | | | | | | | | | | | | | | |
| | June 30, 2021 | | September 30, 2020 |
| | (unaudited) | | |
Construction equipment | | $ | 301,821 | | | $ | 253,157 | |
Plants | | 123,124 | | | 102,392 | |
Land and improvements | | 49,016 | | | 38,760 | |
Quarry reserves | | 24,378 | | | 22,092 | |
Buildings | | 24,379 | | | 18,307 | |
Furniture and fixtures | | 6,054 | | | 5,648 | |
Leasehold improvements | | 1,135 | | | 1,135 | |
Total property, plant and equipment, gross | | 529,907 | | | 441,491 | |
Accumulated depreciation, depletion and amortization | | (241,061) | | | (209,532) | |
Construction in progress | | 7,851 | | | 5,271 | |
Total property, plant and equipment, net | | $ | 296,697 | | | $ | 237,230 | |
| | | | |
Depreciation and depletion expense related to property, plant and equipment was $12.4 million and $10.0 million for the three months ended June 30, 2021 and 2020, respectively, and $35.6 million and $28.9 million for the nine months ended June 30, 2021 and 2020, respectively.
Note 8 - 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 June 30, 2021 and September 30, 2020 consisted of the following (in thousands): | | | | | | | | | | | |
| June 30, 2021 | | September 30, 2020 |
| (unaudited) | | |
Long-term debt: | | | |
Term Loan | $ | 200,000 | | | $ | 92,850 | |
Revolving Credit Facility | — | | | — | |
Total long-term debt | 200,000 | | | 92,850 | |
Deferred debt issuance costs | (1,409) | | | (797) | |
Current maturities of long-term debt | (10,000) | | | (13,000) | |
Long-term debt, net of current maturities | $ | 188,591 | | | $ | 79,053 | |
| | | |
Since June 24, 2021, the Company and each of its subsidiaries have been parties to a Second Amended and Restated Credit Agreement with BBVA USA, as administrative agent, joint lead arranger, sole bookrunner and lender, 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 a term loan in an initial aggregate principal amount of $200 million (the “Term Loan”) and a revolving credit facility in an initial aggregate principal amount of $225 million (the “Revolving Credit Facility”). 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.
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 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.
Note 9 - Equity
Shares of Class A common stock and Class B common stock are identical in all respects, except with respect to voting rights, conversion rights and transfer restrictions applicable to shares of Class B common stock. The holders of Class A common stock are entitled to one vote per share, and the holders of Class B common stock are entitled to ten votes per share. The holders of Class A common stock and Class B common stock vote together as a single class on all matters submitted to a vote of stockholders, including the election of directors, unless otherwise required by applicable law or the Company’s certificate of incorporation or bylaws. Shares of Class B common stock are convertible into shares of Class A common stock at any time at the option of the holder or upon any transfer, subject to certain limited exceptions. In addition, upon the election of the holders of a majority of the then-outstanding shares of Class B common stock, all outstanding shares of Class B common stock will be converted into shares of Class A common stock. Once converted into shares of Class A common stock, shares of Class B common stock will not be reissued. Class A common stock is not convertible into any other class of the Company’s capital stock.
Conversion of Class B Common Stock to Class A Common Stock
During the three months ended June 30, 2021, certain stockholders of the Company converted a total of 787,001 shares of Class B common stock into shares of Class A common stock on a one-for-one basis. As of June 30, 2021, there were 36,506,570 shares of Class A common stock and 15,785,908 shares of Class B common stock outstanding.
Restricted Stock Awards
During the nine months ended June 30, 2021, the Company awarded a total of 510,733 restricted shares of Class A common stock to 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 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 June 30, | | For the Nine Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Numerator | | | | | | | |
Net income (loss) attributable to common shareholders | $ | 9,340 | | | $ | 15,747 | | | $ | 12,276 | | | $ | 22,745 | |
Denominator | | | | | | | |
Weighted average number of common shares outstanding, basic | 51,686,735 | | | 51,489,211 | | | 51,620,143 | | | 51,489,211 | |
Net income (loss) per common share attributable to common shareholders, basic | $ | 0.18 | | | $ | 0.31 | | | $ | 0.24 | | | $ | 0.44 | |
| | | | | | | |
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 June 30, | | For the Nine Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Numerator | | | | | | | |
Net income (loss) attributable to common stockholders | $ | 9,340 | | | $ | 15,747 | | | $ | 12,276 | | | $ | 22,745 | |
Denominator | | | | | | | |
Weighted average number of basic common shares outstanding, basic | 51,686,735 | | | 51,489,211 | | | 51,620,143 | | | 51,489,211 | |
Effect of dilutive securities: | | | | | | | |
| | | | | | | |
Restricted stock grants under 2018 Equity Incentive Plan | 177,668 | | | 157,174 | | | 106,852 | | | 134,416 | |
Weighted average number of diluted common shares outstanding | 51,864,403 | | | 51,646,385 | | | 51,726,994 | | | 51,623,627 | |
Net income (loss) per diluted common share attributable to common stockholders | $ | 0.18 | | | $ | 0.30 | | | $ | 0.24 | | | $ | 0.44 | |
| | | | | | | |
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 June 30, 2021 and 2020 was 33.0% and 23.3%, respectively. The Company’s effective tax rate for the nine months ended June 30, 2021 and 2020 was 32.0% and 22.5%, respectively. The effective income tax rate for the three and nine months ended June 30, 2021 was unfavorably impacted by a non-deductible legal settlement and related legal expenses, as described in Note 19 - Legal Proceedings.
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 an interest-bearing note receivable in the amount of $1.0 million, which approximated the net book value of the disposed entity. At June 30, 2021, $0.1 million and $0.5 million was reflected on the Company’s Consolidated Balance Sheets within other current assets and other assets, respectively, representing the remaining balances on this note receivable. In connection with this transaction, the Company also received an interest-bearing note receivable from the disposed entity (“Disposed Entity”) on December 31, 2017 in the amount of $1.0 million representing certain accounts payable of the disposed entity that were paid by the Company. At June 30, 2021, $0.1 million and $0.3 million was reflected on the Company’s Consolidated Balance Sheets within other current assets and other assets, respectively, representing the remaining balances on this note receivable. Remaining principal and interest payments are scheduled to be made in periodic installments during fiscal year 2021 through fiscal year 2026.
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”).
•Since June 1, 2014, the Company has been a party to an access agreement with Island Pond Corporate Services, LLC, which provides a location for the Company to conduct business development activities from time to time on a property owned by the Executive Chairman of the Company’s Board of Directors (“Island Pond”).
•The Company purchases vehicles from an entity owned by a family member of 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”).
•A family member of an executive officer of the Company provides consulting services to a subsidiary of the Company (“Consulting Services”).
•The Company is party to a management services agreement with SunTx, under which the Company pays SunTx $0.27 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 nine months ended June 30, 2021 and 2020, and accounts receivable and payable balances at June 30, 2021 and September 30, 2020, related to transactions with the related parties described above (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue Earned (Expense Incurred) | | Accounts Receivable (Payable) |
| For the Three Months Ended June 30, | | For the Nine Months Ended June 30, | | June 30, | | September 30, |
| 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
| (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) | | |
Purchaser of Subsidiary | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 621 | | | $ | 621 | |
Disposed Entity | — | | | — | | | — | | | — | | | 396 | | | 396 | |
Land Development Project | 7 | | | — | | | 8 | | | — | | | 782 | | | 774 | |
Subcontracting Services | (2,689) | | (1) | (2,983) | | (1) | (5,292) | | (1) | (5,008) | | (1) | (521) | | | (654) | |
Construction Services | 17 | | (2) | — | | (2) | 136 | | (2) | 1,534 | | (2) | 208 | | | 123 | |
Island Pond | (80) | | (2) | (80) | | (2) | (240) | | (2) | (240) | | (2) | — | | | — | |
Vehicles - Purchases | (128) | | (3) | (525) | | (3) | (536) | | (3) | (639) | | (3) | — | | | — | |
Vehicles - Rent Expense | (31) | | (2) | (161) | | (2) | (158) | | (2) | (562) | | (2) | — | | | — | |
Consulting Services | — | | (2) | (76) | | (2) | (32) | | (2) | (219) | | (2) | — | | | — | |
SunTx | (412) | | (2) | (355) | | (2) | (1,550) | | (2) | (1,026) | | (2) | — | | | — | |
| | | | | | | | | | | |
(1) Cost is reflected as cost of revenues on the Company’s Consolidated Statements of Income. |
(2) Cost is reflected as general and administrative expenses on the Company’s Consolidated Statements of Income. |
(3) Purchases reflected in property, plant and equipment, net, on the Company's Consolidated Balance Sheets. |
| | | | | | | | | | | |
Note 13 - Equity-Based Compensation
During the fiscal year ended September 30, 2019, the Company awarded a total of 292,534 restricted shares of Class A common stock to its non-employee directors under the Equity Incentive Plan in lieu of any cash compensation. The grants are classified as equity awards. The aggregate grant date fair value of these restricted awards was $3.8 million. During the three and nine months ended June 30, 2021, the Company recorded compensation expense in connection with these grants in the amount of $0.3 million and $1.0 million, respectively, which is reflected as general and administrative expenses in the Company’s Consolidated Statements of Income. At June 30, 2021, there was approximately $0.7 million of unrecognized compensation expense related to these awards.
During the quarter ended March 31, 2021, the Company awarded a total of 510,733 restricted shares of Class A common stock to 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 three and nine months ended June 30, 2021, the Company recorded compensation expense in connection with these grants in the amount of $1.0 million and $1.2 million, respectively, which is reflected as general and administrative expenses in the Company’s Consolidated Statements of Income. At June 30, 2021, there was approximately $12.4 million of unrecognized compensation expense related to these awards.
The underlying shares subject to awards granted under the Equity Incentive Plan vested or will vest, as applicable, as follows: | | | | | | | | |
Fiscal Year | | Number of Shares |
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