Note 6 – Business Acquisition

On May 15, 2018, the Company executed a stock purchase agreement (the “Stock Purchase Agreement”) to complete the acquisition of 100% of the common shares and voting interest of The Scruggs Company (“Scruggs”), a privately-owned infrastructure and road construction company headquartered in Hahira, Georgia, which operates three hot mix asphalt plants, three aggregate mines and one industrial plant (“Scruggs Acquisition”). The Scruggs Acquisition complemented the Company’s vertically integrated Southeastern U.S. operations, providing new bidding areas in the expanding Georgia market. The Company funded the purchase price with cash on hand plus an additional $22.0 million borrowed under its existing Term Loan as described in Note 9. The purchase price of $51.3 million, excluding cash acquired, was paid in cash at closing.

This acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The allocation of the purchase price has not yet been finalized due to the recent timing of the acquisition, and will be completed within one year of the acquisition date.

 

The following presents the provisional allocation of the purchase price to assets acquired and liabilities assumed, based on their estimated fair values at the acquisition date, determined in accordance with the methodology described under Fair Value Measurements in Note 2 to the Company’s audited financial statements for the year ended September 30, 2017 (unaudited, in thousands):

 

Contracts receivable, including retainage		$	9,184
Costs and estimated earnings in excess of billings on uncompleted contracts			2,027
Inventory			4,323
Other current assets (1)			731
Property, plant and equipment
Land and improvements			7,302
Quarry reserves			13,986
Asphalt plants			6,917
Buildings			1,552
Construction equipment			17,571
Goodwill			3,798
Accounts payable			(3,646	)
Billings in excess of costs and estimated earnings on uncompleted contracts			(4,589	)
Current maturities of long-term debt			(388	)
Other current liabilities			(1,638	)
Due to seller			(4,940	)
Long-term debt, net of current maturities			(738	)
Other liabilities			(133	)
		$	51,319

 

(1)

Other current assets excludes cash acquired

The $3.8 million of purchase price exceeding the net fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill. Under the terms of the Stock Purchase Agreement, the selling stockholders made a Section 338(h)(10) election under the Internal Revenue Code. Accordingly, goodwill allocated to the purchase price and the step-up to fair value of property, plant and equipment reflected in the acquisition date balance sheet are deductible to the Company for income tax purposes. Goodwill primarily represents the assembled work force and synergies expected to result from the acquisition. Management has determined that Scruggs represents a new reporting unit for purposes of assessing potential impairment of goodwill and has allocated all $3.8 million of goodwill recognized in connection with the acquisition to that new reporting unit. Scruggs represents the Company’s fifth platform operating company and functions one level below the Company’s single operating segment, along with its other platform operating companies, each representing reporting units.

The Consolidated Statements of Income for the three and nine months ended June 30, 2018 includes $11.4 million of revenue and $1.0 million of net income attributable to operations of Scruggs since the acquisition date of May 15, 2018. The Company recorded certain costs to effect the acquisition as they were incurred, which are reflected as general and administrative expenses on the Consolidated Statements of Income in the amount of $0.2 million for the three and nine months ended June 30, 2018. The following presents pro forma revenues and net income as though the Scruggs Acquisition had occurred on October 1, 2016 (unaudited, in thousands):

 

		For the three months ended June 30,								For the nine months ended June 30,
		2018				2017				2018				2017
Revenues		$	206,924			$	173,663			$	519,735			$	450,484
Net income		$	15,379			$	8,775			$	40,653			$	20,582

 

Pro forma financial information is presented as if the operations of Scruggs had been included in the consolidated results of the Company since October 1, 2016, and gives effect to transactions that are directly attributable to the Scruggs Acquisition, including adjustments to:

 

a)

Include the pro forma results of operations of Scruggs for the three and nine months ended June 30, 2018 and June 30, 2017

 

b)

Include additional depreciation and depletion expense related to the fair value of acquired property, plant and equipment and quarry reserves, as applicable, as if such assets were acquired on October 1, 2016 and consistently applied to the Company’s depreciation and depletion methodologies.

 

c)

Include interest expense under the Company’s Term Loan as if the $22.0 million borrowed to partially finance the purchase price was borrowed on October 1, 2016. Interest expense calculations further assume that no principal payments were made applicable to the $22.0 million borrowed during the period from October 1, 2016 through June 30, 2018, and that the interest rate in effect on the date the Company made the additional $22.0 million borrowing on May 15, 2018 was in effect for the period from October 1, 2016 through June 30, 2018.

 

d)

Exclude $0.2 million of acquisition-related expenses from the three and nine months ended June 30, 2018, as though such expenses were incurred prior to the pro forma acquisition date of October 1, 2016.

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 Scruggs Acquisition had occurred on October 1, 2016.