Item 2. Management’s Discussion and Analysis
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of the financial condition and results of operations of Energy Services in conjunction with the “Financial Statements” appearing in this report as well as the historical financial statements and related notes contained elsewhere herein. Among other things, those historical consolidated financial statements include more detailed information regarding the basis of presentation for the following information. The term “Energy Services” refers to the Company, West Virginia Pipeline, SQP, Tri-State Paving, and C.J. Hughes and C.J. Hughes’ wholly owned subsidiaries on a consolidated basis.
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Forward Looking Statements
Within Energy Services’ consolidated financial statements and this discussion and analysis of the financial condition and results of operations, there are included statements reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended as “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “project,” “forecast,” “may,” “will,” “should,” “could,” “expect,” “believe,” “intend” and other words of similar meaning.
These forward-looking statements are not guarantees of future performance and involve or rely on a number of risks, uncertainties, and assumptions that are difficult to predict or beyond Energy Services’ control. Energy Services has based its forward-looking statements on management’s beliefs and assumptions based on information available to management at the time the statements are made. Actual outcomes and results may differ materially from what is expressed, implied and forecasted by forward-looking statements and any or all of Energy Services’ forward-looking statements may turn out to be wrong. The accuracy of such statements can be affected by inaccurate assumptions and by known or unknown risks and uncertainties.
All of the forward-looking statements, whether written or oral, are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements or that are otherwise included in this report. In addition, Energy Services does not undertake and expressly disclaims any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or otherwise.
Company Overview
Energy Services of America Corporation (“Energy Services” or the “Company”), formed in 2006, is a contractor and service company that operates primarily in the mid-Atlantic region of the United States and provides services to customers in the natural gas, petroleum, water distribution, automotive, chemical, and power industries. C.J. Hughes Construction Company, Inc. (“C.J. Hughes”), a wholly owned subsidiary of the Company, is a general contractor primarily engaged in pipeline construction for utility companies. Contractors Rental Corporation (“Contractors Rental”), a wholly owned subsidiary of C.J. Hughes, provides union building trade employees for projects managed by C.J. Hughes. Nitro Construction Services, Inc. (“Nitro”), a wholly owned subsidiary of C.J. Hughes, provides electrical, mechanical, HVAC/R, solar installation, and fire protection services to customers primarily in the automotive, chemical, and power industries. Pinnacle Technical Solutions, Inc. (“Pinnacle”), a wholly owned subsidiary of Nitro, operates as a data storage facility within Nitro’s office building. Pinnacle is supported by Nitro and has no employees of its own. All C.J. Hughes, Nitro, and Contractors Rental construction personnel are union members of various related construction trade unions and are subject to collective bargaining agreements that expire at varying time intervals.
West Virginia Pipeline, Inc. (“West Virginia Pipeline”), a wholly owned subsidiary of Energy Services, operates as a gas and water distribution contractor primarily in southern West Virginia. The employees of West Virginia Pipeline are non-union and are managed independently from the Company’s union subsidiaries.
SQP Construction Group, Inc. (“SQP”), a wholly owned subsidiary of Energy Services, operates as a general contractor primarily in West Virginia. SQP engages in the construction and renovation of buildings and other civil construction projects for state and local government agencies and commercial customers. As a general contractor, SQP manages the overall construction project and subcontracts most of the work. The employees of SQP are non-union and are managed independently from the Company’s union subsidiaries.
Tri-State Paving & Sealcoating, Inc. (“Tri-State Paving” or “TSP”) is a wholly owned subsidiary of Energy Services that provides utility paving services to water distribution customers in the Charleston, West Virginia, Lexington, Kentucky, and Chattanooga, Tennessee markets. The employees of TSP are non-union and are managed independently from the Company’s union subsidiaries.
On October 6, 2021, the Company’s transfer agent completed a redemption of the Company’s 6.0% Convertible Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Stock”), which resulted in the issuance of 2,626,492 new shares of the Company’s common stock, the issuance of 317,500 common shares that were included in Series A Preferred Stock units, and cash redemption payments of $1.3 million.
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On February 16, 2022, the stockholders of Energy Services approved the Company’s 2022 Equity Incentive Plan (the “Plan”), which provides for the grant of stock-based awards to officers and employees of the Company and its subsidiaries. The maximum number of shares of stock, in the aggregate, that may be granted under the Plan as stock options, restricted stock or restricted stock units is 1,500,000 shares. A description of the material terms of the Plan is contained in the Company’s definitive proxy statement for the Annual Meeting of Stockholders filed with the Securities and Exchange Commission on January 11, 2022. To date, no grants of stock-based awards have been made.
On March 23, 2022, the Company’s common stock began trading on the Nasdaq Capital Market operated by The Nasdaq Stock Market, LLC under the symbol “ESOA”.
On April 29, 2022, the Company completed the acquisition of Tri-State Paving & Sealcoating, LLC (“Tri-State Paving, LLC”), located in Hurricane, West Virginia. Tri-State Paving, LLC was later renamed Corns Enterprises. Pursuant to the Asset Purchase Agreement signed on April 6, 2022, and amended on April 29, 2022, the Company acquired substantially all the assets (including but not limited to customer contracts, employees, and equipment) of Tri-State Paving, LLC for $7.5 million in cash, a $1.0 million promissory note, and $1.0 million in Energy Services Common Stock. The $7.5 million in cash was funded through a loan with United Bank, Inc., Huntington, West Virginia. The transaction resulted in the issuance of 419,287 common shares, bringing the total outstanding common shares to 16,667,185 as of April 29, 2022. David E. Corns continued his role as President of the Company’s new subsidiary, Tri-State Paving & Sealcoating, Inc., which earned revenues of $2.0 million for the three and nine months ended June 30, 2022.
On July 6, 2022, the Company issued a press release announcing that the Company’s Board of Directors authorized a share repurchase program (the “Program”), pursuant to which the Company may, from time to time, purchase shares of its common stock for an aggregate repurchase not to exceed 1,000,000 shares, which is approximately 6.0% of its outstanding common stock. The Program does not obligate the Company to purchase any particular number of shares, and there is no guarantee as to the exact number of shares to be repurchased by the Company. To date, no repurchases have been made in connection with the Program.
Energy Services provides contracting services for utilities and energy related companies including gas, petroleum, power, chemical, water utility, and automotive industries. For the gas and petroleum transmission industry, the Company is primarily engaged in the construction, replacement and repair of natural gas pipelines, compressor stations, and storage facilities. Energy Services is involved in the construction of both interstate and intrastate pipelines, with an emphasis on the latter. For the gas distribution and water utility industries, the Company is primarily engaged in the construction and replacement and repair of natural gas and water distribution pipelines. The Company also provides paving services for water utility customers. For the power, chemical, and automotive industries, the Company provides a full range of electrical and mechanical installations and repairs including substation and switchyard services, site preparation, equipment setting, pipe fabrication and installation, packaged buildings, transformers and other ancillary work with regards thereto. Energy Services’ other services include liquid pipeline construction, pump station construction, production facility construction, water and sewer pipeline installations, various maintenance and repair services and other services related to pipeline construction. The Company has also added the ability to install residential, commercial, and industrial solar systems and perform civil and general contracting services.
Energy Services’ customers include many of the leading companies in the industries it serves, including:
TransCanada Corporation
Columbia Gas Distribution
Marathon Petroleum
Mountaineer Gas
American Electric Power
Toyota Motor Manufacturing
Clearon Corporation
Dow Chemical
Kentucky American Water
West Virginia American Water
Various state, county and municipal public service districts.
The majority of the Company’s customers are located in West Virginia, Virginia, Ohio, Pennsylvania, and Kentucky. However, the Company also performs work in other states including Alabama, Michigan, Illinois, Tennessee, and Indiana.
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Energy Services’ sales force consists of industry professionals with significant relevant sales experience, who utilize industry contacts and available public data to determine how to most appropriately market the Company’s line of products. The Company relies on direct contact between its sales force and customers’ engineering and contracting departments in order to obtain new business. The Company’s website address is www.energyservicesofamerica.com.
A substantial portion of the Company’s workforce are union members of various construction related trade unions and are subject to separately negotiated collective bargaining agreements that expire at varying time intervals. The Company believes its relationship with its unionized workforce is good.
COVID-19 Response
In March 2020, the World Health Organization recognized the novel strain of coronavirus, COVID-19, as a pandemic. This coronavirus and related variants have significantly impacted both the world and U.S. economies. In response the governments of many cities, counties, states, and other geographic regions have taken preventative or protective actions. In the geographic regions in which the Company operates, state ordered business closures and masking policies have been lifted during 2021; however, some businesses may implement their own policies related to masks and vaccination. While a federal vaccine mandate enforceable by OSHA has been overturned, certain customers, or potential customers, may require all construction employees working on a project to be vaccinated.
Some of the procedures that the Company has implemented to help protect employees from COVID-19 and variant exposure are guidelines for social distancing, office sanitation, hand washing, mask wearing, limited office admittance, and immediate symptom reporting. The Company has provided personal protective equipment and hand-sanitizers to employees, made arrangements for administrative personnel to work from home, and provided access to vaccines to employees. The Company works closely with our customers to limit exposure risk and cooperate with symptom reporting and contact tracing. Construction employees are required to meet all procedures established by our customers in addition to the Company’s own procedures. The Company also followed the paid sick and expanded family and medical leave guidelines set forth in the Families First Coronavirus Response Act, which expired on December 31, 2020.
During the three and nine months ended June 30, 2022, the Company had employees test positive for or were exposed to COVID-19; however, it did not have a material effect on the Company’s financial statements. Given the uncertainty regarding the spread of this coronavirus and variants, the related financial impact on the Company’s results of operations, financial position, and liquidity or capital resources cannot be reasonably estimated at this time.
Seasonality: Fluctuation of Results
Our revenues and results of operations can and usually are subject to seasonal variations. These variations are the result of weather, customer spending patterns, bidding seasons and holidays. The first quarter of the calendar year is typically the slowest in terms of revenues because inclement weather conditions cause delays in production and customers usually do not plan large projects during that time. While usually better than the first quarter, the second calendar year quarter often has some inclement weather which can cause delays in production, reducing the revenues the Company receives and/or increasing the production costs. The third and fourth calendar year quarters usually are less impacted by weather and usually have the largest number of projects underway. Many projects are completed in the fourth calendar year quarter and revenues are often impacted by customers seeking to either spend their capital budget for the year or scale back projects due to capital budget overruns.
In addition to the fluctuations discussed above, the pipeline industry can be highly cyclical, reflecting variances in capital expenditures in proportion to energy price fluctuations. As a result, our volume of business may be adversely affected by where our customers are in the cycle and thereby their financial condition as to their capital needs and access to capital to finance those needs.
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Three and Nine Months Ended June 30, 2022, and 2021 Overview
The following is an overview of results from operations for the three and nine months ended June 30, 2022, and 2021:
Three Months Ended
Three Months Ended
Nine Months Ended
Nine Months Ended
June 30,
June 30,
June 30,
June 30,
2022
2021
2022
2021
Revenue
$
51,171,939
$
25,285,951
$
129,223,642
$
82,901,159
Cost of revenues
44,754,346
22,580,340
114,632,057
75,478,966
Gross profit
6,417,593
2,705,611
14,591,585
7,422,193
Selling and administrative expenses
3,821,043
3,207,864
10,870,677
10,627,607
Income from (loss) operations
2,596,550
(502,253)
3,720,908
(3,205,414)
Other income (expense)
Interest income
—
108
576
151,877
Paycheck Protection Program loan forgiveness
—
9,799,100
—
9,799,100
Other nonoperating expense
(174,957)
(35,833)
(438,195)
(121,343)
Interest expense
(206,394)
(136,995)
(548,885)
(356,505)
Gain on sale of equipment
58,311
135,269
418,103
627,580
(323,040)
9,761,649
(568,401)
10,100,709
Income before income taxes
2,273,510
9,259,396
3,152,507
6,895,295
Income tax (benefit) expense
651,396
(53,844)
945,216
(458,812)
Net income
1,622,114
9,313,240
2,207,291
7,354,107
Dividends on preferred stock
—
77,250
—
231,750
Net income available to common shareholders
$
1,622,114
$
9,235,990
$
2,207,291
$
7,122,357
Weighted average shares outstanding-basic
16,449,829
13,621,406
16,270,499
13,621,406
Weighted average shares outstanding-diluted
16,449,829
17,089,722
16,270,499
17,089,722
Earnings per share available to common shareholders
$
0.10
$
0.68
$
0.14
$
0.52
Earnings per share-diluted available to common shareholders
$
0.10
$
0.54
$
0.14
$
0.42
Results of Operations for the Three and Nine Months Ended June 30, 2022, Compared to the Three and Nine Months Ended June 30, 2021
Revenues. A table comparing the Company’s revenues for the three and nine months ended June 30, 2022, compared to the three and nine months ended June 30, 2021, is below:
Three Months Ended
June 30, 2022
% of total
June 30, 2021
% of total
Change
% Change
Gas & Water Distribution
$
13,667,006
26.7
%
$
11,780,986
46.6
%
$
1,886,020
16.0
%
Gas & Petroleum Transmission
15,443,917
30.2
%
1,967,647
7.8
%
13,476,270
684.9
%
Electrical, Mechanical, and General
22,061,016
43.1
%
11,537,318
45.6
%
10,523,698
91.2
%
Total
$
51,171,939
100.0
%
$
25,285,951
100.0
%
$
25,885,988
102.4
%
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Nine Months Ended
June 30, 2022
% of total
June 30, 2021
% of total
Change
% Change
Gas & Water Distribution
$
36,282,234
28.08
%
$
27,517,763
33.19
%
$
8,764,471
31.85
%
Gas & Petroleum Transmission
35,217,113
27.25
%
14,343,251
17.30
%
20,873,862
145.53
%
Electrical, Mechanical, and General
57,724,295
44.67
%
41,040,145
49.50
%
16,684,150
40.65
%
Total
$
129,223,642
100.0
%
$
82,901,159
100.0
%
$
46,322,483
55.88
%
Total revenues increased by $25.9 million to $51.2 million for the three months ended June 30, 2022, as compared to $25.3 million for the three months ended June 30, 2021. Total revenues increased by $46.3 million to $129.2 million for the nine months ended June 30, 2022, as compared to $82.9 million for the nine months ended June 30, 2021. The increases were a result of increased work in all categories of business.
Gas & Water Distribution revenues totaled $13.7 million for the three months ended June 30, 2022, a $1.9 million increase from $11.8 million for the three months ended June 30, 2021. Gas & Water Distribution revenues totaled $36.3 million for the nine months ended June 30, 2022, an $8.8 million increase from $27.5 million for the nine months ended June 30, 2021. The revenue increases were primarily related to the Company’s overall commitment to growing this line of business through adding new distribution crews and acquisitions. The latest acquisition, Tri-State Paving, works primarily for water utility companies and added $2.0 million in revenue for the three and nine months ended June 30, 2022.
Gas & Petroleum Transmission revenues totaled $15.4 million for the three months ended June 30, 2022, a $13.4 million increase from $2.0 million for the three months ended June 30, 2021. Gas & Petroleum Transmission revenues totaled $35.2 million for the nine months ended June 30, 2022, a $20.9 million increase from $14.3 million for the nine months ended June 30, 2021. The revenue increases were primarily related to transmission work that was awarded due to increased construction opportunities from the Company’s existing transmission clients.
Electrical, Mechanical, & General services and construction revenues totaled $22.1 million for the three months ended June 30, 2022, a $10.6 million increase from $11.5 million for the three months ended June 30, 2021. Electrical, Mechanical, & General services and construction revenues totaled $57.7 million for the nine months ended June 30, 2022, a $16.7 million increase from $41.0 million for the nine months ended June 30, 2021. The revenue increases were primarily related to general building and civil construction revenues which increased $6.5 million and $14.3 million, respectively, during the three and nine months ended June 30, 2022, as compared to the same period in the prior year.
Cost of Revenues. A table comparing the Company’s costs of revenues for the three and nine months ended June 30, 2022, compared to the three and nine months ended June 30, 2021, is below:
Three Months Ended
June 30, 2022
% of total
June 30, 2021
% of total
Change
% Change
Gas & Water Distribution
$
10,887,169
24.3
%
$
9,345,937
41.4
%
$
1,541,232
16.5
%
Gas & Petroleum Transmission
14,286,300
31.9
%
1,692,010
7.5
%
12,594,290
744.3
%
Electrical, Mechanical, and General
20,432,562
45.7
%
10,546,397
46.7
%
9,886,165
93.7
%
Unallocated Shop Expense (Profit)
(851,685)
-1.9
%
995,996
4.4
%
(1,847,681)
-185.5
%
Total
$
44,754,346
100.0
%
$
22,580,340
100.0
%
$
22,174,006
98.20
%
Nine Months Ended
June 30, 2022
% of total
June 30, 2021
% of total
Change
% Change
Gas & Water Distribution
$
29,425,050
25.7
%
$
22,612,678
30.0
%
$
6,812,372
30.13
%
Gas & Petroleum Transmission
31,600,023
27.6
%
11,153,690
14.8
%
20,446,333
183.31
%
Electrical, Mechanical, and General
53,861,256
47.0
%
38,021,128
50.4
%
15,840,128
41.66
%
Unallocated Shop Expense (Profit)
(254,272)
-0.2
%
3,691,470
4.9
%
(3,945,742)
-106.89
%
Total
$
114,632,057
100.0
%
$
75,478,966
100.0
%
$
39,153,091
51.87
%
Total cost of revenues increased by $22.2 million to $44.8 million for the three months ended June 30, 2022, as compared to $22.6 million for the three months ended June 30, 2021. Total cost of revenues increased by $39.1 million to $114.6 million for the nine months ended June 30, 2022, as compared to $75.5 million for the nine months ended June 30, 2021.The increases were a result of increased work in all categories excluding profit generated by internal charges from the Company’s equipment and shop activities.
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Gas & Water Distribution cost of revenues totaled $10.9 million for the three months ended June 30, 2022, a $1.6 million increase from $9.3 million for the three months ended June 30, 2021. Gas & Water Distribution cost of revenues totaled $29.4 million for the nine months ended June 30, 2022, a $6.8 million increase from $22.6 million for the nine months ended June 30, 2021. The cost of revenue increases were primarily related to the Company’s overall commitment to growing this line of business through adding new distribution crews and acquisitions. The latest acquisition, Tri-State Paving, works primarily for water utility companies and added $1.3 million in cost of revenues for the three and nine months ended June 30, 2022.
Gas & Petroleum Transmission cost of revenues totaled $14.3 million for the three months ended June 30, 2022, a $12.6 million increase from $1.7 million for the three months ended June 30, 2021. Gas & Petroleum Transmission cost of revenues totaled $31.6 million for the nine months ended June 30, 2022, a $20.4 million increase from $11.2 million for the nine months ended June 30, 2021. The cost of revenue increases were primarily related to transmission work that was awarded due to increased construction opportunities from the Company’s existing transmission clients.
Electrical, Mechanical, & General services and construction cost of revenues totaled $20.4 million for the three months ended June 30, 2022, a $9.9 million increase from $10.5 million for the three months ended June 30, 2021. Electrical, Mechanical, & General services and construction cost of revenues totaled $53.9 million for the nine months ended June 30, 2022, a $15.9 million increase from $38.0 million for the nine months ended June 30, 2021. The costs of revenue increases were primarily related to general building and civil construction cost of revenues which increased $5.5 million and $12.3 million, respectively, during the three and nine months ended June 30, 2022, as compared to the same period in the prior year.
Unallocated shop expenses totaled ($852,000) for the three months ended June 30, 2022, a $1.8 million decrease from $1.0 million for the three months ended June 30, 2022. Unallocated shop expenses totaled ($255,000) for the nine months ended June 30, 2022, a $3.9 million decrease from $3.7 million for the nine months ended June 30, 2022. The decrease in unallocated shop expenses was due to increased internal equipment charges to projects for the three and nine months ended June 30, 2022, as compared to the same period in the prior year and a focused effort to manage project and shop costs.
Gross Profit. A table comparing the Company’s gross profit for the three and nine months ended June 30, 2022, compared to the three and nine months ended June 30, 2021, is below:
Three Months Ended
June 30, 2022
% of revenue
June 30, 2021
% of revenue
Change
% Change
Gas & Water Distribution
$
2,779,837
20.3
%
$
2,435,049
20.7
%
$
344,788
14.2
%
Gas & Petroleum Transmission
1,157,617
7.5
%
275,637
14.0
%
881,980
320.0
%
Electrical, Mechanical, and General
1,628,454
7.4
%
990,921
8.6
%
637,533
64.3
%
Unallocated Shop Profit (Loss)
851,685
(995,996)
1,847,681
-185.5
%
Total
$
6,417,593
12.5
%
$
2,705,611
10.7
%
$
3,711,982
137.2
%
Nine Months Ended
June 30, 2022
% of revenue
June 30, 2021
% of revenue
Change
% Change
Gas & Water Distribution
$
6,857,184
18.9
%
$
4,905,085
17.8
%
$
1,952,099
39.8
%
Gas & Petroleum Transmission
3,617,090
10.3
%
3,189,561
22.2
%
427,529
13.4
%
Electrical, Mechanical, and General
3,863,039
6.7
%
3,019,017
7.4
%
844,022
28.0
%
Unallocated Shop Profit (Loss)
254,272
(3,691,470)
3,945,742
-106.9
%
Total
$
14,591,585
11.3
%
$
7,422,193
9.0
%
$
7,169,392
96.6
%
Total gross profit increased by $3.7 million to $6.4 million for the three months ended June 30, 2022, as compared to $2.7 million for the three months ended June 30, 2021. Total gross profit increased by $7.2 million to $14.6 million for the nine months ended June 30, 2022, as compared to $7.4 million for the nine months ended June 30, 2021.
Gas & Water Distribution gross profit totaled $2.8 million for the three months ended June 30, 2022, a $345,000 increase from $2.4 million for the three months ended June 30, 2021. Gas & Water Distribution gross profit totaled $6.9 million for the nine months ended June 30, 2022, a $2.0 million increase from $4.9 million for the nine months ended June 30, 2021. The gross profit increases were primarily related to the Company’s overall commitment to growing this line of business through adding new distribution crews and acquisitions. The latest acquisition, Tri-State Paving, works primarily for water utility companies and added $700,000 in gross profit for the three and nine months ended June 30, 2022.
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Gas & Petroleum Transmission gross profit totaled $1.2 million for the three months ended June 30, 2022, a $882,000 increase from $276,000 for the three months ended June 30, 2021. Gas & Petroleum Transmission gross profit totaled $3.6 million for the nine months ended June 30, 2022, a $428,000 increase from $3.2 million for the nine months ended June 30, 2021. The gross profit increases were primarily related to transmission work that was awarded due to increased construction opportunities from the Company’s existing transmission clients.
Electrical, Mechanical, & General services and construction gross profit totaled $1.6 million for the three months ended June 30, 2022, a $638,000 increase from $1.0 million for the three months ended June 30, 2021. Electrical, Mechanical, & General services and construction gross profit totaled $3.9 million for the nine months ended June 30, 2022, a $844,000 increase from $3.0 million for the nine months ended June 30, 2021. The increases were primarily related to an increase in gross profit generated by general and civil construction services, partially offset by gross losses generated by start-up mechanical and electrical divisions.
Unallocated shop gross profit totaled $852,000 for the three months ended June 30, 2022, a $1.8 million increase from ($1.0 million) for the three months ended June 30, 2021. Unallocated shop gross profit totaled $255,000 for the nine months ended June 30, 2022, a $3.9 million increase from ($3.7 million) for the nine months ended June 30, 2021. The increase in unallocated shop gross profit was due to increased internal equipment charges to projects for the three and nine months ended June 30, 2022, as compared to the same periods in the prior year and a focused effort to manage project and shop costs.
Selling and administrative expenses . Total selling and administrative expenses increased by $613,000 to $3.8 million for the three months ended June 30, 2022, as compared to $3.2 million for the same period in the prior year. Total selling and administrative expenses increased by $243,000 to $10.9 million for the nine months ended June 30, 2022, as compared to $10.6 million for the same period in the prior year.
Selling and administrative expenses increased by $200,000 for the three months ended June 30, 2022, as compared to the same period in the prior year for new business operations acquired in fiscal year 2022. Also, selling and administrative expenses for companies started in fiscal year 2021 grew by $250,000 for the three months ended June 30, 2022, as compared to the same period in the prior year.
Selling and administrative expenses increased by $1.5 million for the nine months ended June 30, 2022, as compared to the same period in the prior year for growth related to new business, partially offset by a $990,000 reduction in incentive compensation and increased labor charges to projects.
Interest income. Interest income totaled $0 and $600, respectively, for the three and nine months ended June 30, 2022, as compared to $0 and $152,000 for the same periods in the prior year. The decrease in interest income was primarily due to the timing of recognizing interest earned from the Company’s captive insurance surety deposit.
Paycheck Protection Program loan forgiveness. The Company recorded $9.8 million in non-taxable income related to PPP loan forgiveness during the three and nine months ended June 30, 2021, to extinguish all PPP loan debt.
Other nonoperating (expense) income. Other nonoperating expense totaled $175,000 for the three months ended June 30, 2022, an increase of $139,000 from $36,000 for the same period in the prior year. Other nonoperating expense totaled $438,000 for the nine months ended June 30, 2022, an increase of $317,000 from $121,000 for the same period in the prior year. The increases were primarily related to an increase in intangible asset amortization expense.
Interest expense. Interest expense totaled $206,000 for the three months ended June 30, 2022, an increase of $69,000 from $137,000 for the same period in the prior year. Interest expense totaled $549,000 for the nine months ended June 30, 2022, an increase of $192,000 from $357,000 for the same period in the prior year. The increase in interest expense was primarily due to the financing of the recent acquisitions.
Gain on sale of equipment. Gain on sale of equipment totaled $58,000 for the three months ended June 30, 2022, a decrease of $77,000 from $135,000 for the same period in the prior year. Gain on sale of equipment totaled $418,000 for the nine months ended June 30, 2022, a decrease of $210,000 from $628,000 for the same period in the prior year. The decrease was related to a decrease in equipment sold.
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Net income. Income before income taxes was $2.3 million for the three months ended June 30, 2022, compared to $9.3 million for the same period in the prior year. Income before income taxes was $3.2 million for the nine months ended June 30, 2022, compared to $6.9 million for the same period in the prior year. The decrease in income before income taxes for the three and nine months ended June 30, 2022, as compared to the same periods in the prior year, was due primarily to the $9.8 million in PPP loan forgiveness.
Income tax expense for the three months ended June 30, 2022, was $651,000 compared to income tax benefit of ($54,000) for the same period in the prior year. Income tax expense for the nine months ended June 30, 2022, was $945,000 compared to income tax benefit of ($459,000) for the same period in the prior year.
There were no dividends on preferred stock for the three and nine months ended June 30, 2022, due to the redemption date on the preferred stock being September 1, 2021. Dividends on preferred stock for the three and nine months ended June 30, 2021, were $77,250 and $231,750, respectively.
Net income available to common shareholders for the three months ended June 30, 2022, was $1.6 million, as compared to $9.2 million for the same period in the prior year. Net income available to common shareholders for the nine months ended June 30, 2022, was $2.2 million, as compared to $7.1 million for the same period in the prior year.
Comparison of Financial Condition at June 30, 2022, and September 30, 2021
The Company had total assets of $87.1 million at June 30, 2022, an increase of $16.9 million from the prior fiscal year end balance of $70.2 million.
The Company had property, plant and equipment of $29.6 million at June 30, 2022, an increase of $6.6 million from the prior fiscal year end balance of $23.0 million. The increase was due to $5.7 million in assets acquired in the purchase of assets from Tri-State Paving, LLC and $5.1 million in other additions. The increase was partially offset by $4.0 million in depreciation and net equipment disposals of $200,000.
Contract assets totaled $11.9 million at June 30, 2022, an increase of $3.2 million from the prior fiscal year end balance of $8.7 million. The increase was due to a difference in the timing of project billings at June 30, 2022, compared to September 30, 2021.
Accounts receivable totaled $24.2 million at June 30, 2022, an increase of $3.1 million from the prior fiscal year end balance of $21.1 million. The increase was primarily due to the timing of cash collections and project invoicing since September 30, 2021.
Goodwill totaled $4.1 million at June 30, 2022, an increase of $2.3 million from the prior fiscal year end balance of $1.8 million. The increase was due to the Tri-State Paving acquisition.
Retainage receivable totaled $3.1 million at June 30, 2022, an increase of $2.2 million from the prior fiscal year end balance of $918,000. The increase was primarily due to more current year projects that require retainages to be withheld.
Intangible assets, net totaled $4.0 million at June 30, 2022, an increase of $1.6 million from the prior fiscal year end balance of $2.4 million. The increase was due to acquisition of Tri-State Paving, partially offset by the amortization of intangible assets during the nine months ended June 30, 2022.
Prepaid expenses and other totaled $4.5 million at June 30, 2022, an increase of $1.0 million from the prior fiscal year end balance of $3.5 million. The increase was primarily due to prepaid insurance premiums financed for calendar year 2022, partially offset by insurance premiums expensed during the nine months ended June 30, 2022.
Right-of-use assets totaled $348,000 at June 30, 2022, an increase of $348,000 from the prior fiscal year end balance. The increase was primarily due to operating leases for facilities acquired related to the Tri-State Paving acquisition.
Cash and cash equivalents totaled $5.4 million at June 30, 2022, a decrease of $2.8 million from the prior fiscal year end balance of $8.2 million. The increase was primarily due to $10.6 million provided from operating activities, partially offset by $1.2 million in cash payments for redeemed preferred stock, $3.3 million in net long-term debt repayments, $4.9 million in net short-term debt repayments, and a net $4.0 million used in investing activities.
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Other receivables totaled $54,000 at June 30, 2022, a $490,000 decrease from the prior fiscal year end balance of $543,000. The decrease was primarily due to the receipt of insurance premium refunds receivable.
The Company had total liabilities of $50.4 million at June 30, 2022, an increase of $15.9 million from the prior fiscal year end balance of $35.5 million.
Long-term debt totaled $18.8 million at June 30, 2022, an increase of $6.4 million from the prior fiscal year end balance of $12.4 million. The increase in long-term debt was primarily due to $8.9 million in debt acquired to finance the Tri-State Paving acquisition, $462,000 in new equipment debt, and $365,000 in debt related to operating leases liabilities, partially offset by $3.3 million in debt repayments.
Accounts payable totaled $11.3 million at June 30, 2022, an increase of $4.0 million from the prior fiscal year end balance of $7.3 million. The increase was due to the timing of accounts payable payments as compared to September 30, 2021.
Contract liabilities totaled $6.0 million at June 30, 2022, an increase of $2.8 million from the prior fiscal year end balance of $3.2 million. The increase was due to a difference in the timing of project billings at June 30, 2022, as compared to September 30, 2021.
Accrued expenses and other current liabilities totaled $7.8 million at June 30, 2022, an increase of $2.2 million from the prior fiscal year end balance of 5.6 million. The increase was due to the timing of accrued expense payments, as compared to September 30, 2021.
Deferred tax liabilities totaled $2.9 million at June 30, 2022, an increase of $845,000 from the prior fiscal year end balance of $2.0 million. The increase was primarily related to the reduction of the net operating loss carry forward during the nine months ended June 30, 2022.
Income tax payable totaled $100,000 at June 30, 2022, an increase of $100,000 from the prior fiscal year end balance. The increase was related to the net operating loss deduction limitations.
Lines of credit and short-term borrowings totaled $3.5 million at June 30, 2022, a decrease of $1.5 million from the prior fiscal year end balance of $5.0 million. The decrease was due to $2.4 million net line of credit repayments, partially offset by $900,000 of insurance premiums financed, net of repayments.
Shareholders’ equity was $36.7 million at June 30, 2022, an increase of $2.1 million from the prior fiscal year end balance of $34.6 million. The increase was due to net income of $2.2 million for the nine months ended June 30, 2022, and $1.0 million in additional paid in capital related to the Tri-State Paving acquisition, partially offset by $1.2 million in preferred stock redemption payments.
Liquidity and Capital Resources
Indebtedness
On December 16, 2014, the Company’s Nitro subsidiary entered into a 20-year $1.2 million loan agreement with First Bank of Charleston, Inc. (West Virginia) to purchase the office building and property it had previously been leasing for $6,300 monthly. The interest rate on this loan agreement is 4.82% with monthly payments of $7,800. The interest rate on this note is subject to change from time to time based on changes in The U.S. Treasury yield, adjusted to a constant maturity of three years as published by the Federal Reserve weekly. As of June 30, 2022, the Company had made principal payments of $319,000. The loan is collateralized by the building purchased under this agreement. The note is currently held by Peoples Bank, Inc.
On November 13, 2015, the Company entered into a 10-year $1.1 million loan agreement with United Bank, Inc. to purchase the fabrication shop and property Nitro had previously been leasing for $12,900 each month. The interest rate on the loan agreement is 4.25% with monthly payments of $11,602. As of June 30, 2022, the Company had made principal payments of $658,000. The loan is collateralized by the building and property purchased under this agreement.
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On June 28, 2017, the Company entered into a $5.0 million Non-Revolving Note agreement with United Bank, Inc. This five-year agreement gave the Company access to a $5.0 million line of credit (“Equipment Line of Credit 2017”), specifically for the purchase of equipment, for a period of three months with an interest rate of 4.99%. After three months, all borrowings against the Equipment Line of Credit 2017 were converted to a five-year term note agreement with an interest rate of 4.99% with monthly payments of $98,865. As of June 30, 2022, the Company had repaid this note in full.
On December 31, 2020, West Virginia Pipeline Acquisition Company, later renamed West Virginia Pipeline, Inc., entered into a $3.0 million sellers’ note agreement with David and Daniel Bolton for the remaining purchase price of West Virginia Pipeline, Inc. For the purchase price allocation, the $3.0 million note had a fair value of $2.85 million. As part of the $6.35 million acquisition price, the Company paid $3.5 million in cash in addition to the note. The unsecured five-year term note requires annual payments of at least $500,000 with a fixed interest rate of 3.25% on the $3.0 million sellers’ note, which equates to 5.35% on the carrying value of the note. As of June 30, 2022, the Company had made annual installment payments of $500,000, interest payments of $138,000 and expensed $45,000 in accreted interest.
On January 4, 2021, the Company entered into a $3.0 million Non-Revolving Note agreement with United Bank, Inc. This five-year agreement gave the Company access to a $3.0 million line of credit (“Equipment Line of Credit 2021”), specifically for the purchase of equipment, for a period of twelve months with a variable interest rate initially established at 4.25% as based on the Prime Rate as published by The Wall Street Journal . After twelve months, all borrowings against the Equipment Line of Credit 2021 were converted to a four-year term note agreement with a variable interest rate initially established at 4.25%. The loan is collateralized by the equipment purchased under this agreement. As of June 30, 2022, the Company borrowed $3.0 million against this line of credit with monthly payments of $68,073 that started in February 2022. The Company has made principal payments of $287,000 on this note as of June 30, 2022.
On April 2, 2021, the Company entered into a $3.5 million Non-Revolving Note agreement with United Bank, Inc. This five-year agreement repaid the outstanding $3.5 million line of credit that was used for the down payment on the West Virginia Pipeline acquisition. This loan has monthly installment payments of $64,853 and has a variable interest rate initially established at 4.25% as based on the Prime Rate as published by The Wall Street Journal . The loan is collateralized by the Company’s equipment and receivables. As of June 30, 2022, the Company had made principal payments of $805,000.
On April 29, 2022, the Company entered into a $7.5 million Non-Revolving Note agreement with United Bank, Inc. This five-year agreement was used to finance the purchase of Tri-State Paving and has monthly payments of $140,000 with a variable interest rate of 4.5%. The Company has made principal payments of 224,000 on this note as of June 30, 2022.
On April 29, 2022, the Company entered into a $1.0 million Promissory Note agreement with Corns Enterprises, a related party, as partial consideration for the purchase of Tri- State Paving. This four-year agreement, with a fair value of $936,000, requires $250,000 principal installment payments on or before the end of each twelve (12) full calendar month period beginning April 29, 2022. Interest payments due shall be calculated on the principal balance remaining and shall be at the annual rate of 3.5% which equates to 6.85% on the carrying value of the note. The Company recorded $2,700 in accreted interest and has not made any principal payments on this note as of June 30, 2022.
The Company leases office space for SQP Construction Group for $1,500 per month. The lease, signed on March 25, 2021, is for a period of two years with five one-year renewals available immediately following the end of the base term. Rental terms for the option periods shall be negotiated and agreed mutually between the parties and shall not exceed five percent increases to rent, if any. The lease is expensed monthly and not treated as a right-of-use asset as it does not have a material impact on the Company’s consolidated financial statements.
During the nine months ended June 30, 2022, the Company entered into two lease agreements of construction equipment for a combined $160,000. The leases have a term of twenty-two months with a stated interest rate of 0%, combined monthly installment payments of $6,645 and are cancellable at any time without penalty. The Company has the right to purchase the equipment at the expiration of the leases by applying the two-month deposit paid. The right-of-use assets and operating lease obligations associated with these lease agreements are included in the consolidated balance sheets within property, plant and equipment and long-term debt, respectively, and do not have a material impact on the Company’s financial statements.
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The Company has two right-of-use operating leases acquired on April 29, 2022, as part of the Tri-State Paving, LLC transaction. The first operating lease, for the Hurricane, WV facility, had a net present value of $236,000 at April 29, 2022, and a carrying value of $219,000 at June 30, 2022. The second operating lease, for the Chattanooga, Tennessee facility, had a net present value of $129,000 at April 29, 2022, and a carrying value of $124,000 at June 30, 2022. The 4.5% interest rate on the operating leases is based on the Company’s incremental borrowing rate .
Operating Line of Credit
On July 13, 2022, the Company received a one-year extension on its line of credit (“Operating Line of credit (2022)”) effective June 28, 2022. The $15.0 million revolving line of credit has a $12.5 million component and a $2.5 million component, each with separate borrowing requirements. The interest rate on the line of credit is the “ Wall Street Journal ” Prime Rate (the index) with a floor of 4.99%. Based on the borrowing base calculation, the Company was able to borrow up to $11.9 million and had $2.1 million borrowed, leaving $9.8 million available on the line of credit as of June 30, 2022. The interest rate at June 30, 2022, was 4.99%. Based on the borrowing base calculation, the Company was able to borrow up to $12.2 million as of September 30, 2021. The Company had $4.5 million in borrowings on the line of credit, leaving $7.7 million available on the line of credit as of September 30, 2021. The interest rate at September 30, 2021, was 4.99%.
Major items excluded from the borrowing base calculation are receivables from bonded jobs and retainage as well as all items greater than ninety (90) days old. Line of credit borrowings are collateralized by the Company’s accounts receivable. Cash available under the line is calculated based on 70.0% of the Company’s eligible accounts receivable.
Under the terms of the agreement, the Company must meet the following loan covenants to access the first $12.5 million:
1. Minimum tangible net worth of $21.5 million to be measured quarterly,
2. Minimum traditional debt service coverage of 1.25x to be measured quarterly on a rolling twelve- month basis,
3. Minimum current ratio of 1.50x to be measured quarterly,
4. Maximum debt to tangible net worth ratio (“TNW”) of 1.5 to be measured semi-annually,
5. Full review of accounts receivable aging report and work in progress. The results of the review shall be satisfactory to the lender in its sole and unfettered discretion.
Under the terms of the agreement, the Company must meet the following additional requirements for draw requests causing the borrowings to exceed $12.5 million:
1. Minimum traditional debt service coverage of 2.0x to be measured quarterly on a rolling twelve-month basis,
2. Minimum tangible net worth of $24.0 million to be measured quarterly.
The Company was not in compliance with all covenants but received a waiver on the $12.5 million component of the line of credit at June 30, 2022. The Company projects to be in compliance with all covenants for the next twelve months.
Off-Balance Sheet Arrangements
Due to the nature of our industry, we often enter into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected in our balance sheets. Though for the most part not material in nature, some of these are:
Letters of Credit
Certain customers or vendors may require letters of credit to secure payments that the vendors are making on our behalf or to secure payments to subcontractors and vendors on various customer projects. At June 30, 2022, the Company did not have any letters of credit outstanding.
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Performance Bonds
Some customers, particularly new ones or governmental agencies require the Company to post bid bonds, performance bonds and payment bonds (collectively, performance bonds). These bonds are obtained through insurance carriers and guarantee to the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors. If the Company fails to perform under a contract or to pay subcontractors and vendors, the customer may demand that the insurer make payments or provide services under the bond. The Company must reimburse the insurer for any expenses or outlays it is required to make.
The ability to obtain bonding for future contracts is an important factor in the contracting industry with respect to the type and number of contracts that can be bid. Depending upon the size and conditions of a contract, the Company may be required to post letters of credit or other collateral in favor of the insurer. Posting of these letters or other collateral will reduce our borrowing capabilities. The Company does not anticipate any claims against outstanding performance bonds in the foreseeable future. At June 30, 2022, the Company had $59.6 million in performance bonds outstanding.
Concentration of Credit Risk
In the ordinary course of business, the Company grants credit under normal payment terms, generally without collateral, to our customers, which include natural gas and oil companies, general contractors, and various commercial and industrial customers located within the United States. Consequently, the Company is subject to potential credit risk related to business and economic factors that would affect these companies. However, the Company generally has certain statutory lien rights with respect to services provided. Under certain circumstances such as foreclosure, the Company may take title to the underlying assets in lieu of cash in settlement of receivables.
Please see the tables below for customers that represent 10.0% or more of the Company’s revenue or accounts receivable net of retention at or for the nine months ended June 30, 2022 and 2021:
Nine Months Ended
Revenue
June 30, 2022
June 30, 2021
TransCanada Corporation
16.4
%
*
All other
83.6
%
100.0
%
Total
100.0
%
100.0
%
* Less than 10.0% and included in “All other” if applicable
At
Accounts receivable net of retention
June 30, 2022
June 30, 2021
TransCanada Corporation
22.0
%
*
NIPSCO
*
11.5
%
All other
78.0
%
88.5
%
Total
100.0
%
100.0
%
* Less than 10.0% and included in “All other” if applicable
Litigation
In February 2018, the Company filed a lawsuit against a former customer (“Defendant”) in the United States District Court for the Western District of Pennsylvania. The lawsuit is related to a dispute over work performed on a pipeline construction project. On November 9, 2021, the Company was awarded $5.8 million, none of which has been recognized in the Company’s consolidated financial statements. The Defendant filed motions to request a new trial or a renewed judgement as a matter of law, which were denied by the judge. As of August 15, 2022, the Company has filed motions to submit claims for interest and legal fees to the court and expects all responses to those claims to be filed by mid-September 2022. The Company anticipates that a final judgement order will be issued by the end of calendar year 2022. A party to a civil lawsuit usually has 30 days from the entry of judgment to file a notice of appeal.
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On November 12, 2021, the Company received a withdrawal liability claim from a pension plan to which the Company made pension contributions for union construction employees performing covered work in a particular jurisdiction. The Company has not performed covered work in their jurisdiction since 2011; however, the Company disagrees with the withdrawal claim and believes it is covered by an exemption under federal law. The demand called for thirty-four quarterly installment payments of $41,000 starting December 15, 2021. The Company must comply with the demand under federal pension law; however, the Company firmly believes no withdrawal liability exists and plans to seek arbitration to resolve the matter. If successfully arbitrated, the Company expects to receive repayment of all installment payments made, currently included within prepaid assets in the accompanying consolidated balance sheets.
Other than described above, at June 30, 2022, the Company was not involved in any legal proceedings other than in the ordinary course of business. The Company is a party from time to time to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract and/or property damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claims, and proceedings, we record reserves when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. At June 30, 2022, the Company does not believe that any of these proceedings, separately or in aggregate, would be expected to have a material adverse effect on our financial position, results of operations or cash flows.
Related Party Transactions
We intend that all transactions between us and our executive officers, directors, holders of 10% or more of the shares of any class of our common stock and affiliates thereof, will be on terms no less favorable than those terms given to unaffiliated third parties and will be approved by a majority of our independent outside directors not having any interest in the transaction.
On December 16, 2014, the Company’s Nitro subsidiary entered into a 20-year $1.2 million loan agreement with First Bank of Charleston, Inc. (West Virginia) to purchase the office building and property it had previously been leasing for $6,300 each month. The interest rate on the loan agreement is 4.82% with monthly payments of $7,800. As of June 30, 2022, the Company had paid approximately $319,000 in principal and approximately $373,000 in interest since the beginning of the loan. Mr. Douglas Reynolds, President of Energy Services, was a director and secretary of First Bank of Charleston. Mr. Samuel Kapourales, a director of Energy Services, was also a director of First Bank of Charleston. On October 15, 2018, First Bank of Charleston was merged into Premier Bank, Inc., a wholly owned subsidiary of Premier Financial Bancorp, Inc. Mr. Marshall Reynolds, Chairman of the Board of Energy Services, held the same position with Premier Financial Bancorp Inc. Mr. Douglas Reynolds is the president and a director of Energy Services and was a director of Premier Financial Bancorp, Inc. On September 17, 2021, Peoples Bancorp, Inc., parent company of Peoples Bank, completed an acquisition of Premier Financial Bancorp, Inc. and its wholly owned subsidiaries, Premier Bank and Citizens Deposit Bank & Trust. On October 26, 2021, Mr. Douglas Reynolds was elected a director of Peoples Bancorp, Inc., and its subsidiary Peoples Bank.
On April 29, 2022, the Company entered into a $1.0 million Promissory Note agreement with Corns Enterprises as partial consideration for the purchase of Tri- State Paving. This four-year agreement, with a fair value of $936,000, requires $250,000 principal installment payments on or before the end of each twelve (12) full calendar month period beginning April 29, 2022. Interest payments due shall be calculated on the principal balance remaining and shall be at the annual rate of 3.5% which equates to 6.85% on the carrying value of the note. The Company recorded $2,700 in accreted interest and has not made any principal payments on this note as of June 30, 2022.
Subsequent to the April 29, 2022, acquisition of Tri-State Paving, the Company entered into a operating lease for facilities in Hurricane, West Virginia with Corns Enterprises. This thirty-six-month lease is treated as a right-of-use asset and has payments of $7,000 per month. The total net present value of all payments was $236,000 with a carrying value of $230,000 at June 30, 2022.
Other than mentioned above, there were no new material related party transactions entered into during the nine months ended June 30, 2022.
Certain Energy Services subsidiaries routinely engage in transactions in the normal course of business with each other, including sharing employee benefit plan coverage, payment for insurance and other expenses on behalf of other affiliates, and other services incidental to business of each of the affiliates. All revenue and related expense transactions, as well as the related accounts payable and accounts receivable have been eliminated in consolidation.
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Inflation
Most significant project materials, such as pipe or electrical wire, are provided by the Company’s customers. The Company did experience costs increases on materials for fire protection projects, which had been bid several months prior, during the three months and nine months ended June 30, 2022. While significant to those smaller projects, the costs increases were immaterial to the overall operations of the Company. When possible, the Company attempts to lock in pricing with vendors and include qualifications regarding material costs increases in bids. Where allowed by contract, the Company will address fuel cost increases with customers. Significant inflation or supply chain issues could cause customers to delay or cancel planned projects; however, inflation did not have a significant effect on our results for the three and nine months ended June 30, 2022, and 2021.
Critical Accounting Estimates
The discussion and analysis of the Company’s financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. We evaluate our estimates on an ongoing basis, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates. Management believes the following accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenues
The Company recognizes revenue as performance obligations are satisfied and control of the promised good and service is transferred to the customer. For Lump Sum and Unit Price contracts, revenue is ordinarily recognized over time as control is transferred to the customers by measuring the progress toward complete satisfaction of the performance obligation(s) using an input (i.e., “cost to cost”) method. For Cost Plus and Time and Material (“T&M”) contracts, revenue is ordinarily recognized over time as control is transferred to the customers by measuring the progress toward satisfaction of the performance obligation(s) using an output method. The Company also does certain T&M service work that is generally completed in a short duration and is recognized at a point in time.
The accuracy of our revenue and profit recognition in a given period depends on the accuracy of our estimates of the cost to complete each project. We believe our experience allows us to create materially reliable estimates. There are a number of factors that can contribute to changes in estimates of contract cost and profitability. The most significant of these include:
● the completeness and accuracy of the original bid;
● costs associated with scope changes;
● changes in costs of labor and/or materials;
● extended overhead and other costs due to owner, weather and other delays;
● subcontractor performance issues;
● changes in productivity expectations;
● site conditions that differ from those assumed in the original bid;
● changes from original design on design-build projects;
● the availability and skill level of workers in the geographic location of the project;
● a change in the availability and proximity of equipment and materials;
● our ability to fully and promptly recover on affirmative claims and back charges for additional contract costs; and
● the customer’s ability to properly administer the contract.
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The foregoing factors, as well as the stage of completion of contracts in process and the mix of contracts at different margins may cause fluctuations in gross profit from period to period. Significant changes in cost estimates, particularly in our larger, more complex projects could have, a significant effect on our profitability.
Our contract assets include cost and estimated earnings in excess of billings that represent amounts earned and reimbursable under contracts, including claim recovery estimates, but have a conditional right for billing and payment such as achievement of milestones or completion of the project. With the exception of customer affirmative claims, generally, such unbilled amounts will become billable according to the contract terms and generally will be billed and collected over the next three months. Settlement with the customer of outstanding affirmative claims is dependent on the claims resolution process and could extend beyond one year. Based on our historical experience, we generally consider the collection risk related to billable amounts to be low. When events or conditions indicate that it is probable that the amounts outstanding become unbillable, the transaction price and associated contract asset is reduced.
Our contract liabilities consist of provisions for losses and billings in excess of costs and estimated earnings. Provisions for losses are recognized in the consolidated statements of income at the uncompleted performance obligation level for the amount of total estimated losses in the period that evidence indicates that the estimated total cost of a performance obligation exceeds its estimated total revenue. Billings in excess of costs and estimated earnings are billings to customers on contracts in advance of work performed, including advance payments negotiated as a contract condition. Generally, unearned project-related costs will be earned over the next twelve months.
The following table presents our costs and estimated earnings in excess of billings and billings in excess of costs and estimated earnings at June 30, 2022, and September 30, 2021:
June 30, 2022
September 30, 2021
Costs incurred on contracts in progress
$
91,041,602
$
64,903,618
Estimated earnings, net of estimated losses
13,060,983
13,280,334
104,102,585
78,183,952
Less billings to date
98,180,380
72,606,840
$
5,922,205
$
5,577,112
Costs and estimated earnings in excess of billed on uncompleted contracts
$
11,937,080
$
8,730,402
Less billings in excess of costs and estimated earnings on uncompleted contracts
6,014,875
3,153,290
$
5,922,205
$
5,577,112
Allowance for doubtful accounts
The Company provides an allowance for doubtful accounts when collection of an account is considered doubtful. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates relating to, among others, our customers’ access to capital, our customers’ willingness or ability to pay, general economic conditions and the ongoing relationship with the customers. While most of our customers are large well capitalized companies, should they experience material changes in their revenues and cash flows or incur other difficulties and not be able to pay the amounts owed, this could cause reduced cash flows and losses in excess of our current reserves.
Materially incorrect estimates of bad debt reserves could result in an unexpected loss in profitability for the Company. Additionally, frequently changing reserves could be an indication of risky or unreliable customers. At June 30, 2022, the management review deemed that the allowance for doubtful accounts was adequate.
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Please see the allowance for doubtful accounts table below:
June 30, 2022
September 30, 2021
Balance at beginning of year
$
70,310
$
70,310
Charged to expense
—
—
Deductions for uncollectible receivables written off, net of recoveries
—
—
Balance at end of year
$
70,310
$
70,310
Impairment of goodwill and intangible assets
The Company follows the guidance of ASC 350-20-35-3 Intangibles-Goodwill and Other (Topic 350) which requires a company to record an impairment charge based on the excess of a reporting unit’s carrying amount of goodwill over its fair value. Under the current guidance, companies can first choose to assess any impairment based on qualitative factors (Step 0). If a company fails this test or decides to bypass this step, it must proceed with a two-step quantitative assessment of goodwill impairment. The Company did not have a goodwill impairment at June 30, 2022.
Materially incorrect estimates could cause an impairment to goodwill or intangible assets and result in a loss in profitability for the Company.
A table of the Company’s intangible assets subject to amortization is below:
Amortization and
Impairment Nine
Remaining Life at
Amortization and
Amortization and
Months Ended
June 30,
Impairment at
Impairment at
June 30,
Net Book
Intangible assets:
2022
Original Cost
June 30, 2022
September 30, 2021
2022
Value
West Virginia Pipeline
Customer Relationships
102 months
$
2,209,724
$
331,451
$
165,725
$
165,726
$
1,878,273
Tradename
102 months
263,584
39,545
19,772
19,773
224,039
Non-competes
6 months
83,203
62,405
31,202
31,203
20,798
Revolt Energy
Employment agreement/non-compete
22 months
100,000
69,445
13,889
55,556
30,555
Tri-State Paving
Customer Relationships
118 months
1,649,159
25,552
—
25,552
1,623,607
Tradename
118 months
203,213
3,288
—
3,288
199,925
Non-competes
10 months
39,960
6,600
—
6,600
33,360
Total intangible assets
$
4,548,843
$
538,286
$
230,588
$
307,698
$
4,010,557
Depreciation
The purpose of depreciation is to represent an accurate value of assets on the books. Every year, as assets are used, their values are reduced on the balance sheet and expensed on the income statement. As depreciation is a noncash expense, the amount must be estimated. Each year a certain amount of depreciation is written off and the book value of the asset is reduced.
Property and equipment are recorded at cost. Costs which extend the useful lives or increase the productivity of the assets are capitalized, while normal repairs and maintenance that do not extend the useful life or increase productivity of the asset are expensed as incurred. Property and equipment are depreciated principally on the straight-line method over the estimated useful lives of the assets: buildings 39 years; operating equipment and vehicles 5-7 years; and office equipment, furniture and fixtures 5-7 years.
The Company’s depreciation expense for the nine months ended June 30, 2022, and 2021 was $4.0 million and $3.5 million, respectively. In general, depreciation is included in “cost of revenues” on the Company’s consolidated statements of income.
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Materially incorrect estimates of depreciation and/or the useful lives of assets could significantly impact the value of property, plant, and equipment on the Company’s consolidated financial statements. A material over valuation could result in impairment charges and reduced profitability for the Company.
Income Taxes
The Company’s income tax expense and deferred tax assets and liabilities reflect management’s best estimate of current and future taxes to be paid. Significant judgments and estimates are required in the determination of the consolidated income tax expense. The Company’s provision for income taxes is computed by applying a federal rate of 21.0% and a state rate of 6.0%.
Permanent income tax differences result in an increase or decrease to taxable income and impact the Company’s effective tax rates, which were 28.7% and (0.6%) for the three months ended June 30, 2022, and 2021, respectively. The effective income tax rate for the nine months ended June 30, 2022, was 30.0%, as compared to (6.7%) for the same period in the prior year. Our tax rate is affected by recurring items, such as non-deductible expenses, which we expect to be fairly consistent in the near term.
On June 16, 2021, the Company received notice that the SBA had granted forgiveness and repaid $9.8 million of Paycheck Protection Program (“PPP”) borrowings to its lender. The forgiveness was recorded as “other nonoperating income” for the three and nine months ended June 30, 2021. According to the CARES Act passed by Congress in March 2020, PPP loan forgiveness is not taxable. In accordance with the Consolidated Appropriations Act, 2021, the Company’s PPP related expenditures in fiscal year 2020 were considered deductible expenses for federal income tax purposes. The PPP forgiveness had a significant impact on the effective income tax rate for the three and nine months ended June 30, 2021, as taxable income was decreased by $9.8 million.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. At June 30, 2022, the Company had a net deferred income tax liability of $2.9 million as compared to $2.0 million at September 30, 2021. The Company’s deferred income tax liabilities at June 30, 2022, was $5.0 million and primarily related to depreciation on property and equipment. The Company’s deferred income tax assets at June 30, 2022, was $2.1 million and primarily related to a net operating loss (“NOL”) carryforward. The Company believes that it is more likely than not that all NOL carryforwards will be realized.
New Accounting Pronouncements
On October 28, 2021, the FASB released ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”. The amendments of this ASU require entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The amendments are effective for public business entities for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2022. For all other entities they are effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Entities should apply the amendments prospectively to business combinations that occur after the effective date. Early adoption is permitted, including in any interim period, for public business entities for periods for which financial statements have not yet been issued, and for all other entities for periods for which financial statements have not yet been made available for issuance. The Company is currently assessing the effect that ASU 2021-08 will have on their results of operations, financial position and cash flows; however, the Company does not expect a significant impact.
The FASB recently issued ASU 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance”, which aims to provide increased transparency by requiring business entities to disclose information about certain types of government assistance they receive in the notes to the financial statements. Entities are required to provide the new disclosures prospectively for all transactions with a government entity that are accounted for under either a grant or a contribution accounting model and are reflected in the financial statements at the date of initially applying the new amendments, and to new transactions entered into after that date. Retrospective application of the guidance is permitted. The guidance in ASU 2021-10 is effective for financial statements of all entities, including private companies, for annual periods beginning after December 15, 2021, with early application permitted. ASU 2021-10 has not become effective for the Company; however, a significant impact is not expected.
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Subsequent Events
On July 6, 2022, the Company issued a press release announcing that the Company’s Board of Directors authorized a share repurchase program (the “Program”), pursuant to which the Company may, from time to time, purchase shares of its common stock for an aggregate repurchase not to exceed 1,000,000 shares, which is approximately 6.0% of its outstanding common stock. The Program does not obligate the Company to purchase any particular number of shares, and there is no guarantee as to the exact number of shares to be repurchased by the Company. To date, no share purchases have been made in connection with the with Program.
On August 11, 2022, the Company acquired substantially all the assets of Ryan Environmental, LLC (“Debtor”), located in Bridgeport, West Virginia after having its bid previously accepted by the United States Bankruptcy Court for the Northern District of West Virginia. In the transaction, the Company paid $2.5 million at closing for substantially all the vehicles, equipment, small tools, and accounts receivable. In separate transactions, the Company will assume the Debtor’s vehicle leases with Enterprise Fleet Management for approximately $1.1 million and purchased equipment from a related party of the Debtor for approximately $1.0 million.
Management has evaluated all subsequent events for accounting and disclosure. There have been no other material events during the period, other than noted above, that would either impact the results reflected in the report or the Company’s results going forward.
Outlook
The following statements are based on current expectations. These statements are forward looking, and actual results may differ materially.
Transmission pipeline construction opportunities have increased compared to fiscal year 2021 and the Company has been successful in securing several transmission projects for fiscal year 2022. The Company is also experiencing a greater demand for its gas and water distribution services. Several potentially significant electrical and mechanical projects have been delayed until the Company’s fourth fiscal quarter; however, electrical, mechanical, and general construction opportunities have increased in fiscal year 2022.
The Company’s backlog at June 30, 2022, was $135.0 million, as compared to $73.1 million and $72.2 million at June 30, 2021, and September 30, 2021, respectively. While adding additional projects appears likely, no assurances can be given that the Company will be successful in bidding on projects that become available. Moreover, even if the Company obtains contracts, there can be no guarantee that the projects will go forward.
ITEM 3. Quantitative and Quantitative Disclosures About Market Risk
Not required for a smaller reporting company.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.