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, Ryan Construction, and C.J. Hughes and C.J. Hughes’ wholly owned subsidiaries on a consolidated basis.
Forward Looking Statements
Within Energy Services’ (as defined below) consolidated financial statements and this Quarterly Report on Form 10-Q, 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 do not guarantee future performance and involve or rely on 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 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 and central regions of the United States and provides services to customers in the natural gas, petroleum, water distribution, automotive, chemical, and power industries. For the gas industry, the Company is primarily engaged in the construction, replacement and repair of natural gas pipelines and storage facilities for utility companies and private natural gas companies. Energy Services is involved in the construction of both interstate and intrastate pipelines, with an emphasis on the latter. For the oil industry, the Company provides a variety of services relating to pipeline, storage facilities and plant work. 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 pipeline services include corrosion protection services, horizontal drilling services, 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 broadband and solar electric 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
NiSource, Inc.
Marathon Petroleum
Mountaineer Gas
American Electric Power
Toyota Motor Manufacturing
Bayer Chemical
Dow Chemical
Kentucky American Water
West Virginia American Water
Various state, county and municipal public service districts.
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The majority of the Company’s customers are in West Virginia, Virginia, Ohio, Pennsylvania, and Kentucky. However, the Company also performs work in other states including Alabama, Michigan, Illinois, Tennessee, North Carolina, and Indiana.
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 market the Company’s line of products most appropriately. The Company relies on direct contact between its sales force and customers’ engineering and contracting departments to obtain new business.
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.
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. (“NCS”), a wholly owned subsidiary of C.J. Hughes, provides electrical, mechanical, HVAC/R, and fire protection services to customers primarily in the automotive, chemical, and power industries. Revolt Energy, LLC (“Revolt”), a wholly owned subsidiary of NCS, performs residential solar installation projects. Nitro Electric Company, LLC (“Nitro Electric”), a wholly owned subsidiary of NCS, performs industrial electrical work and has a satellite office registered in Michigan. Pinnacle Technical Solutions, Inc. (“Pinnacle”), a wholly owned subsidiary of NCS, operates as a data storage facility within Nitro’s office building. Pinnacle is supported by NCS and has no employees of its own. NCS and its subsidiaries will collectively be referred to “Nitro”.
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” or “WVP”), 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 of 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 of the Company’s union subsidiaries.
Tri-State Paving & Sealcoating, Inc. (“TSP” or “Tri-State Paving”), a wholly owned subsidiary of Energy Services, completed the acquisition of substantially all the assets of Tri-State Paving & Sealcoating, LLC (“Tri-State Paving, LLC”) on April 29, 2022. Tri-State Paving 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 of the Company’s union subsidiaries.
Ryan Construction Services Inc. (“Ryan Construction” or “RCS”), a wholly owned subsidiary of Energy Services, formed in August 2022 in connection with the acquisition of substantially all the assets of Ryan Environmental, LLC and Ryan Environmental Transport, LLC (collectively “Ryan Environmental”), provides directional drilling services for broadband service providers along with offering natural gas distribution services, cathodic protection and corrosion prevention services, and civil construction services. Ryan Construction operates primarily in West Virginia and Pennsylvania. The employees of RCS are non-union and are managed independently of the Company’s union subsidiaries.
The Company’s website address is www.energyservicesofamerica.com.
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
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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.
Three and Six Months Ended March 31, 2024 and 2023 Overview
The following is an overview of results from operations for the three and six months ended March 31,2024 and 2023:
Three Months Ended
Three Months Ended
Six Months Ended
Six Months Ended
March 31,
March 31,
March 31,
March 31,
2024
2023
2024
2023
Revenue
$
71,127,655
$
53,673,443
$
161,290,842
$
113,716,028
Cost of revenues
64,888,101
49,772,790
144,212,327
103,829,113
Gross profit
6,239,554
3,900,653
17,078,515
9,886,915
Selling and administrative expenses
7,321,951
5,887,747
14,520,671
11,203,885
(Loss) income from operations
(1,082,397)
(1,987,094)
2,557,844
(1,316,970)
Other income (expense)
Interest income
0
124
0
196
Other nonoperating expense
(81,790)
(10,524)
(6,789)
(91,187)
Interest expense
(622,616)
(574,546)
(1,224,300)
(1,073,974)
Gain on sale of equipment
304,923
48,280
291,595
16,937
(399,483)
(536,666)
(939,494)
(1,148,028)
(Loss) income before income taxes
(1,481,880)
(2,523,760)
1,618,350
(2,464,998)
Income tax (benefit) expense
(373,052)
(650,160)
684,983
(729,772)
Net (loss) income
$
(1,108,828)
$
(1,873,600)
$
933,367
$
(1,735,226)
Weighted average shares outstanding-basic
16,569,871
16,666,683
16,567,853
16,667,062
Weighted average shares-diluted
16,569,871
16,666,683
16,606,075
16,667,062
(Loss) earnings per share-basic
$
(0.07)
$
(0.11)
$
0.06
$
(0.10)
(Loss) earnings per share-diluted
$
(0.07)
$
(0.11)
$
0.06
$
(0.10)
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Results of Operations for the Three and Six Months Ended March 31, 2024 Compared to the Three and Six Months Ended March 31, 2023
Revenues. A table comparing the Company’s revenues for the three and six months ended March 31, 2024 compared to the three and six months ended March 31, 2023 is below:
Three Months Ended
March 31, 2024
% of total
March 31, 2023
% of total
Change
% Change
Gas & Water Distribution
$
14,273,691
20.1
%
$
13,432,107
25.0
%
841,584
6.3
%
Gas & Petroleum Transmission
9,763,078
13.7
%
5,334,861
9.9
%
4,428,217
83.0
%
Electrical, Mechanical, and General
47,090,886
66.2
%
34,906,475
65.0
%
12,184,411
34.9
%
Total
$
71,127,655
100.0
%
$
53,673,443
100.0
%
17,454,212
32.5
%
Six Months Ended
March 31, 2024
% of total
March 31, 2023
% of total
Change
% Change
Gas & Water Distribution
$
31,356,586
19.4
%
25,919,952
22.8
%
$
5,436,634
21.0
%
Gas & Petroleum Transmission
38,326,321
23.8
%
22,229,675
19.5
%
16,096,646
72.4
%
Electrical, Mechanical, and General
91,607,935
56.8
%
65,566,401
57.7
%
26,041,534
39.7
%
Total
$
161,290,842
100.0
%
113,716,028
100.0
%
$
47,574,814
41.8
%
Total revenues increased by $17.5 million to $71.1 million for the three months ended March 31, 2024, as compared to $53.7 million for the three months ended March 31, 2023. Total revenues increased by $47.6 million to $161.3 million for the six months ended March 31, 2024, as compared to $113.7 million for the six months ended March 31, 2023. The increases were a result of increased work in all categories of business.
Gas & Water Distribution revenues totaled $14.3 million for the three months ended March 31, 2024, an $842,000 increase from $13.4 million for the three months ended March 31, 2023. Gas & Water Distribution revenues totaled $31.4 million for the six months ended March 31, 2024, a $5.4 million increase from $25.9 million for the six months ended March 31, 2023. The revenue increases were primarily related to increased paving and gas and water distribution services performed during the three and six months ended March 31, 2024, as compared to the same periods in 2023.
Gas & Petroleum Transmission revenues totaled $9.8 million for the three months ended March 31, 2024, a $4.5 million increase from $5.3 million for the three months ended March 31, 2023. Gas & Petroleum Transmission revenues totaled $38.3 million for the six months ended March 31, 2024, a $16.1 million increase from $22.2 million for the six months ended March 31, 2023. The revenue increases were primarily related to gas transmission work that was awarded during the fiscal year ended September 30, 2023 and continued into fiscal year 2024.
Electrical, Mechanical, & General construction services revenues totaled $47.1 million for the three months ended March 31, 2024, a $12.2 million increase from $34.9 million for the three months ended March 31, 2023. Electrical, Mechanical, & General construction services revenues totaled $91.6 million for the six months ended March 31, 2024, a $26.0 million increase from $65.6 million for the six months ended March 31, 2023. The revenue increases were primarily related to an increase in general contracting and electrical services performed during the three and six months ended March 31, 2024, 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 six months ended March 31, 2024, compared to the three and six months ended March 31, 2023, is below:
Three Months Ended
March 31, 2024
% of total
March 31, 2023
% of total
Change
% Change
Gas & Water Distribution
$
11,872,154
18.3
%
$
10,592,157
21.3
%
$
1,279,997
12.1
%
Gas & Petroleum Transmission
9,532,562
14.7
%
5,754,933
11.6
%
3,777,629
65.6
%
Electrical, Mechanical, & General
42,375,485
65.3
%
32,491,030
65.3
%
9,884,455
30.4
%
Unallocated Shop Expense
1,107,900
1.7
%
934,670
1.9
%
173,230
18.5
%
Total
$
64,888,101
100.0
%
$
49,772,790
100.0
%
$
15,115,311
30.4
%
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Six Months Ended
March 31, 2024
% of total
March 31, 2023
% of total
Change
% Change
Gas & Water Distribution
$
24,969,147
17.3
%
$
21,264,430
20.5
%
$
3,704,717
17.4
%
Gas & Petroleum Transmission
34,699,168
24.1
%
19,835,710
19.1
%
14,863,458
74.9
%
Electrical, Mechanical, & General
83,430,618
57.9
%
61,497,995
59.2
%
21,932,623
35.7
%
Unallocated Shop Expense
1,113,394
0.8
%
1,230,978
1.2
%
(117,584)
(9.6)
%
Total
$
144,212,327
100.0
%
$
103,829,113
100.0
%
$
40,383,214
38.9
%
Total cost of revenues increased by $15.1 million to $64.9 million for the three months ended March 31, 2024, as compared to $49.8 million for the three months ended March 31, 2023. Total cost of revenues increased by $40.4 million to $144.2 million for the six months ended March 31, 2024, as compared to $103.8 million for the six months ended March 31, 2023. The cost of revenues increases were a result of increased work in all categories of business, partially offset by less unallocated shop expenses for the three and six months ended March 31, 2024 as compared to the same period in 2023.
Gas & Water Distribution cost of revenues totaled $11.9 million for the three months ended March 31, 2024, a $1.3 million increase from $10.6 million for the three months ended March 31, 2023. Gas & Water Distribution cost of revenues totaled $25.0 million for the six months ended March 31, 2024, a $3.7 million increase from $21.3 million for the six months ended March 31, 2023. The cost of revenues increases were primarily related to increased paving and gas and water distribution services performed during the six months ended March 31, 2024, as compared to the same periods in 2023.
Gas & Petroleum Transmission cost of revenues totaled $9.5 million for the three months ended March 31, 2024, a $3.8 million increase from $5.8 million for the three months ended March 31, 2023. Gas & Petroleum Transmission cost of revenues totaled $34.7 million for the six months ended March 31, 2024, a $14.9 million increase from $19.8 million for the six months ended March 31, 2023. The cost of revenues increases were primarily related to gas transmission work that was awarded during the fiscal year ended September 30, 2023 and continued into fiscal year 2024.
Electrical, Mechanical, & General construction services cost of revenues totaled $42.4 million for the three months ended March 31, 2024, a $9.9 million increase from $32.5 million for the three months ended March 31, 2023. Electrical, Mechanical, & General construction services cost of revenues totaled $83.4 million for the six months ended March 31, 2024, a $21.9 million increase from $61.5 million for the six months ended March 31, 2023. The cost of revenues increases were primarily related to an increase in general contracting and electrical services performed during the three and six months ended March 31, 2024, as compared to the same period in the prior year.
Unallocated shop expenses totaled $1.1 million for the three months ended March 31, 2024, a $173,000 increase from $935,000 for the three months ended March 31, 2023. Unallocated shop expenses totaled $1.1 million for the six months ended March 31, 2024, a $118,000 decrease from $1.2 million for the six months ended March 31, 2023. The changes in unallocated shop expenses were due to changes in the amount of internal equipment charged to projects for the three and six months ended March 31, 2024, as compared to the same period in the prior year.
Gross Profit (Loss) . A table comparing the Company’s gross profit (loss) for the three and six months ended March 31, 2024, compared to the three and six months ended March 31, 2023, is below:
Three Months Ended
March 31, 2024
% of revenue
March 31, 2023
% of revenue
Change
Pct.
Gas & Water Distribution
$
2,401,537
16.82
%
$
2,839,950
21.14
%
(438,413)
(15.4)
%
Gas & Petroleum Transmission
230,516
2.36
%
(420,072)
(7.87)
%
650,588
(154.9)
%
Electrical, Mechanical, & General
4,715,401
10.01
%
2,415,445
6.92
%
2,299,956
95.2
%
Unallocated Shop Expense
(1,107,900)
(934,670)
(173,230)
18.5
%
Total
$
6,239,554
8.8
%
$
3,900,653
7.3
%
2,338,901
60.0
%
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Six Months Ended
March 31, 2024
% of revenue
March 31, 2023
% of revenue
Change
% Change
Gas & Water Distribution
$
6,387,439
20.37
%
$
4,655,522
17.96
%
$
1,731,917
37.2
%
Gas & Petroleum Transmission
3,627,153
9.46
%
2,393,965
10.77
%
1,233,188
51.5
%
Electrical, Mechanical, & General
8,177,317
8.93
%
4,068,406
6.21
%
4,108,911
101.0
%
Unallocated Shop Expense
(1,113,394)
(1,230,978)
117,584
(9.6)
%
Total
$
17,078,515
10.6
%
$
9,886,915
8.7
%
$
7,191,600
72.7
%
Total gross profit increased by $2.4 million to $6.2 million for the three months ended March 31, 2024, as compared to $3.9 million for the three months ended March 31, 2023. Total gross profit increased by $7.2 million to $17.1 million for the six months ended March 31, 2024, as compared to $9.9 million for the six months ended March 31, 2023.
Gas & Water Distribution gross profit totaled $2.4 million for the three months ended March 31, 2024, a $438,000 decrease from $2.8 million for the three months ended March 31, 2023. The gross profit decrease was primarily due to inclement weather conditions and training and certification expenses incurred during the three months ended March 31, 2024. Gas & Water Distribution gross profit totaled $6.4 million for the six months ended March 31, 2024, a $1.7 million increase from $4.7 million for the six months ended March 31, 2023. The gross profit increase was primarily related to increased paving and gas and water distribution services performed during the six months ended March 31, 2024, as compared to the same period in 2023.
Gas & Petroleum Transmission gross profit totaled $231,000 for the three months ended March 31, 2024, a $651,000 increase from ($420,000) for the three months ended March 31, 2023. Gas & Petroleum Transmission gross profit totaled $3.6 million for the six months ended March 31, 2024, a $1.2 million increase from $2.4 million for the six months ended March 31, 2023. The gross profit increases were primarily related to gas transmission work that was awarded during the fiscal year ended September 30, 2023 and continued into fiscal year 2024.
Electrical, Mechanical, & General construction services gross profit totaled $4.7 million for the three months ended March 31, 2024, a $2.3 million increase from $2.4 million for the three months ended March 31, 2023. Electrical, Mechanical, & General construction services gross profit totaled $8.2 million for the six months ended March 31, 2024, a $4.1 million increase from $4.1 million for the six months ended March 31, 2023. The gross profit increases were primarily related to an increase in general contracting and electrical services performed during the three and six months ended March 31, 2024, as compared to the same periods in the prior year.
Gross loss attributable to unallocated shop expenses totaled $1.1 million for the three months ended March 31, 2024, a $173,000 increase from $935,000 for the three months ended March 31, 2023. Gross loss attributable to unallocated shop expenses totaled $1.1 million for the six months ended March 31, 2024, a $118,000 decrease from $1.2 million for the six months ended March 31, 2023. The changes in unallocated shop expenses were due to changes in the amount of internal equipment charged to projects for the three and six months ended March 31, 2024, as compared to the same periods in the prior year.
Selling and administrative expenses . Total selling and administrative expenses increased by $1.4 million to $7.3 million for the three months ended March 31, 2024, as compared to $5.9 million for the same period in the prior year. Total selling and administrative expenses increased by $3.3 million to $14.5 million for the six months ended March 31, 2024, as compared to $11.2 million for the same period in the prior year. The increase was primarily related to additional personnel hired to secure and manage work for expected growth.
Other nonoperating income (expense) . Other nonoperating expenses totaled $81,000 for the three months ended March 31, 2024, as compared to $11,000 for the same period in the prior year. The change was primarily related to an increase in charitable contributions. Other nonoperating expenses totaled $6,000 for the six months ended March 31, 2024, as compared to $91,000 for the same period in the prior year. The change was primarily related to an immaterial legal settlement that recouped costs expended in a prior period.
Interest expense . Interest expense totaled $623,000 for the three months ended March 31, 2024, an increase of $48,000 from $575,000 for the same period in the prior year. Interest expense totaled $1.2 million for the six months ended March 31, 2024, an increase of $150,000 from $1.1 million for the same period in the prior year. The increase in interest expense was primarily due to interest paid for equipment financing added in late fiscal year 2023 and an increase in interest rates.
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Gain on sale of equipment . Gain on sale of equipment totaled $305,000 for the three months ended March 31, 2024, an increase of $257,000 from $48,000 for the same period in the prior year. Gain on sale of equipment totaled $292,000 for the six months ended March 31, 2024, an increase of $275,000 from $17,000 for the same period in the prior year. The Company sold certain underutilized or non-working pieces of equipment during the three and six months ended March 31, 2024, with no comparable sale occurring during the three and six months ended March 31, 2023.
Net income (loss) . Loss before income taxes was $1.5 million for the three months ended March 31, 2024, as compared to $2.5 million for the same period in the prior year. Income before income taxes was $1.6 million for the six months ended March 31, 2024, as compared to a loss before income taxes of $2.5 million for the same period in the prior year. The increases were primarily related to the items mentioned above.
Income tax benefit for the three months ended March 31, 2024, was $373,000 compared to $650,000 for the same period in the prior year. The decrease in income tax benefit was due to the increase in taxable income for the three months ended March 31, 2024, as compared to the prior period. Income tax expense for the six months ended March 31, 2024, was $685,000 compared to an income tax benefit of $730,000 for the same period in the prior year. The increase in income tax expense was due to the increase in taxable income for the six months ended March 31, 2024, as compared to the prior year period.
Net loss for the three months ended March 31, 2024, was $1.1 million, as compared to $1.9 million for the same period in the prior year. Net income for the six months ended March 31, 2024 was $933,000, as compared to a net loss of $1.7 million for the same period in 2023.
Comparison of Financial Condition at March 31, 2024, and September 30, 2023
The Company had total assets of $136.1 million at March 31, 2024, a decrease of $6.4 million from the prior fiscal year end balance of $142.5 million.
Accounts receivable, net of allowance for doubtful accounts, totaled $46.4 million at March 31, 2024, a decrease of $4.8 million from the prior fiscal year end balance of $51.2 million. The decrease was primarily due to the timing of cash collections and project invoicing since September 30, 2023.
Cash and cash equivalents totaled $12.1 million at March 31, 2024, a decrease of $4.3 million from the prior fiscal year end balance of $16.4 million. The decrease was primarily due to a net $2.6 million investment in equipment, and a net $1.9 million used in financing activities, partially offset by a net $183,000 provided from operating activities.
Contract assets totaled $14.6 million at March 31, 2024, a decrease of $1.3 million from the prior fiscal year end balance of $16.0 million. The decrease was due to a difference in the timing of project billings at March 31, 2024, compared to September 30, 2023.
Right-of-use assets totaled $2.8 million at March 31, 2024, a decrease of $560,000 from the prior fiscal year end balance of $3.3 million. The decrease was primarily due to the amortization of operating leases during the six months ended March 31, 2024, partially offset by a net increase in leased vehicles.
Intangible assets, net totaled $3.2 million at March 31, 2024, a decrease of $216,000 from the prior fiscal year end balance of $3.4 million. The decrease was due to the amortization of intangible assets during the six months ended March 31, 2024.
Retainage receivable totaled $10.1 million at March 31, 2024, an increase of $2.5 million from the prior fiscal year end balance of $7.6 million. The increase was primarily due to more current year projects that require retainages to be withheld.
Prepaid expenses and other totaled $5.1 million at March 31, 2024, an increase of $1.6 million from the prior fiscal year end balance of $3.5 million. The increase was primarily due to an increase in prepaid insurance that will be expense throughout fiscal year 2024.
The Company had net property, plant and equipment of $37.0 million at March 31, 2024, an increase of $448,000 from the prior fiscal year end balance of $36.5 million. The increase was due to $5.3 million in asset additions, partially offset by $4.2 million in depreciation and net equipment disposals of $652,000.
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Goodwill totaled $4.1 million at March 31, 2024 and September 30, 2023.
The Company had total liabilities of $101.6 million at March 31, 2024, a decrease of $6.4 million from the prior fiscal year end balance of $107.9 million.
Accounts payable totaled $18.7 million at March 31, 2024, a decrease of approximately $3.3 million from the prior fiscal year end balance of $22.0 million. The decrease was due to the timing of accounts payable payments as compared to September 30, 2023.
Accrued expenses and other current liabilities totaled $10.9 million at March 31, 2024, a decrease of $2.2 million from the prior fiscal year end balance of $13.1 million. The decrease was due to the timing of accrued expense payments, as compared to September 30, 2023.
Long-term debt totaled $23.2 million at March 31, 2024, a decrease of $1.8 million from the prior fiscal year end balance of $25.0 million. The decrease in long-term debt was primarily due to $3.5 million in payments on long-term debt, partially offset by $1.8 million in new equipment financing.
Contract liabilities totaled $16.3 million at March 31, 2024, a decrease of $1.4 million from the prior fiscal year end balance of $17.7 million. The decrease was due to a difference in the timing of project billings at March 31, 2024, as compared to September 30, 2023.
Current and long-term operating lease liabilities totaled $2.8 million at March 31, 2024, a decrease of $569,000 from the prior fiscal year end balance of $3.4 million. The decrease was due to payments made during the six months ended March 31, 2024.
Lines of credit and short-term borrowings totaled $22.5 million at March 31, 2024, an increase of $2.6 million from the prior fiscal year end balance of $19.8 million. The increase was primarily due to additional line of credit borrowings.
Deferred tax liabilities totaled $7.2 million at March 31, 2024, an increase of $331,000 from the prior fiscal year end balance of $6.9 million. The increase was primarily related to the reduction of the net operating loss carry forward during the six months ended March 31, 2024.
Shareholders’ equity was $34.6 million at March 31, 2024, a decrease of $25,000 from the prior fiscal year end balance of $34.6 million. The increase was primarily due to net income of $933,000 for the six months ended March 31, 2024, mostly offset by an annual cash dividend payment of $994,000 on January 2, 2024.
Liquidity and Capital Resources
Operating Line of Credit
On July 13, 2022, the Company received a one-year extension on its $15.0 million operating line of credit effective June 28, 2022. The interest rate on the line of credit is the “ Wall Street Journal ” Prime Rate (the index) with a floor of 4.99%. On January 19, 2023, the Company received an amendment to the agreement which increased the line of credit to $30.0 million with a maturity date of June 28, 2023. On June 1, 2023, the agreement was renewed through June 28, 2024.
The line of credit is limited to a borrowing base calculation as summarized below:
March 31, 2024
September 30, 2023
Eligible borrowing base
$
21,267,302
$
23,942,868
Borrowed on line of credit
12,300,000
8,712,915
Line of credit balance available
$
8,967,302
$
15,229,953
Interest rate
8.5
%
8.5
%
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The modified financial covenants for the quarter ended June 30, 2023, and all subsequent quarters, are below:
● Minimum tangible net worth of $28.0 million,
● Minimum traditional debt service coverage of 1.50x on a rolling twelve- month basis,
● Minimum current ratio of 1.20x,
● Maximum debt to tangible net worth ratio (“TNW”) of 2.75x,
● Each ratio and covenant shall be determined, tested, and measured as of each calendar quarter beginning June 30, 2023,
● The Company shall maintain a ratio of Maximum Senior Funded Debt (“SFD”) to Earnings before Interest, Taxes, Depreciation and Amortization (“EBDITA”) equal to or less than 3.5:1. SFD shall mean any funded debt or lease of the Company, other than subordinated debt. The covenant shall be tested quarterly, at the end of each fiscal quarter, with EBITDA based on the preceding four quarters.
The Company’s lender has agreed to omit the effect of the PPP loan restatement from the Company’s covenant compliance calculations while a final decision on PPP loan forgiveness remains in question. Thus, the Company was in compliance with all covenants at March 31, 2024. The Company projects to meet all covenant requirements for the next twelve months.
Insurance Premiums Financed
The Company financed its captive insurance policy premiums on a short-term basis through a financing company for the calendar year ended December 31, 2023. These insurance policies include workers’ compensation, general liability, automobile, umbrella, and equipment policies. The Company made a down payment in January 2023 and financed the remaining premium amount over eleven monthly payments. At March 31, 2024 and September 30, 2023, the remaining balance of the insurance premiums was $0 and $950,000, respectively.
For the calendar year beginning January 1, 2024, the Company’s insurance company is accepting quarterly payments on certain insurance policies and the Company has prepaid the balance of the remaining policies as of March 31, 2024. The Company has no insurance premiums financed as of March 31, 2024.
Paycheck Protection Program Loans
Due to the economic uncertainties created by COVID-19 and limited operating funds available, the Company applied for loans under the PPP. On April 15, 2020, the Company and its subsidiaries, C.J. Hughes, Contractors Rental and Nitro, entered into separate PPP notes effective April 7, 2020, with its Lender in an aggregate principal amount of $13.1 million pursuant to the PPP Loans. In a special meeting held on April 27, 2020, the Board of Directors of the Company unanimously voted to return $3.3 million of the PPP Loans after discussing the financing needs of the Company and subsidiaries. That left the Company and subsidiaries with $9.8 million in PPP Loans to fund operations. During fiscal year 2021, the Company received notice that the SBA had granted forgiveness of the $9.8 million of PPP Loans and the SBA repaid the Lender in full. The forgiveness was recorded as other income for the fiscal year ended September 30, 2021.
During April 2023, management received notification from the SBA that one of the Company’s forgiveness applications related to the PPP Loans was under review. As part of the review, the SBA requested additional payroll information. Additionally, the SBA requested information regarding the ability of the Company’s affiliates to meet SBA size standards and/or PPP corporate maximum limits. The requested information was subsequently provided to the SBA through the Lender. The Company recognizes that there is a possibility that the SBA could reverse its previous determination on the forgiveness of the PPP Loans. As a result of this uncertainty, the Company restated the previously audited financial statements of the Company for the fiscal years 2022 and 2021. The Company has recorded a short-term borrowing due to the SBA inquiry for the full $9.8 million, plus accrued interest.
During July 2023, management received notification from the SBA that two additional forgiveness applications related to the PPP Loans were under review. As part of the review, the SBA requested information regarding the ability of the Company’s affiliates to meet SBA size standards and/or PPP corporate maximum limits. The requested information was subsequently provided to the SBA through the Lender.
Borrowers must retain PPP documentation for at least six years after the date the loan is forgiven or paid in full, and the SBA and SBA Inspector General must be granted these files upon request. The SBA could revisit its forgiveness decision and determine that
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the Company does not qualify in whole or in part for loan forgiveness and demand repayment of the loans. In addition, it is unknown what type of penalties could be assessed against the Company if the SBA disagrees with the Company’s certification. Any penalties in addition to the potential repayment of the PPP Loans could negatively impact the Company’s business, financial condition and results of operations and prospects.
Long-Term Debt
On December 16, 2014, the Company’s Nitro subsidiary entered into a 20-year $1.2 million loan agreement with a bank to purchase the office building and property it had previously been leasing. 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 March 31, 2024, the Company had made principal payments of $413,000. The loan is collateralized by the building purchased under this agreement. The note is currently held by Peoples Bank, Inc., formerly First Bank of Charleston, Inc. (West Virginia).
On November 13, 2015, the Company entered into a 10-year $1.1 million loan agreement with United Bank to purchase the fabrication shop and property Nitro had previously been leasing. The variable interest rate on the loan agreement is 9.5% at March 31, 2024. As of March 31, 2024, the Company had made principal payments of $868,000. The loan is collateralized by the building and property purchased under this agreement.
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 March 31, 2024, the Company had made annual installment payments of $2.1 million.
On January 4, 2021, the Company entered into a $3.0 million Non-Revolving Note agreement with United Bank. 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 March 31, 2024, the Company borrowed $3.0 million against this line of credit with monthly payments of $68,150 that started in February 2022. The interest rate at March 31, 2023 was 9.5%. The Company has made principal payments of $1.5 million on this note as of March 31, 2024.
On April 2, 2021, the Company entered into a $3.5 million Non-Revolving Note agreement with United Bank. 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 fixed interest rate of 4.25%. The loan is collateralized by the Company’s equipment and receivables. As of March 31, 2024, the Company had made principal payments of $2.0 million.
On April 29, 2022, the Company entered into a $7.5 million Non-Revolving Note agreement with United Bank. This five-year agreement was used to finance the purchase of Tri-State Paving and has monthly payments of $129,910 with a fixed interest rate of 4.25%. The Company has made principal payments of $2.5 million on this note as of March 31, 2024.
On October 10, 2022, the Company entered into a $3.1 million promissory note agreement with United Bank. This five-year agreement financed the previous cash value of equipment purchased in the Ryan Construction acquisition. This loan has monthly installment payments of $59,932 and has a fixed interest rate of 6.0%. The loan is collateralized by the Company’s equipment and receivables. As of March 31, 2024, the Company had made principal payments of $783,000.
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. David E. Corns remained as president of Tri-State Paving. This four-year agreement 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 stated rate of 3.5% per year. The Company has made principal payments of $750,000 on this note as of March 31, 2024.
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On June 1, 2023, the Company entered into a $9.3 million Non-Revolving Note agreement with United Bank. This five-year agreement gave the Company access to a $9.3 million line of credit (“Equipment Line of Credit 2023”), specifically for the purchase of equipment, for a period of six months with a fixed interest rate of 7.25%. After six months, all borrowings against the Equipment Line of Credit 2023 will convert to a fifty-four-month term note agreement with a fixed interest rate of 7.25%. The loan is collateralized by the equipment purchased under this agreement. As of March 31, 2024, the Company had borrowed $9.3 million against this line of credit and made $588,000 in principal payments.
Operating Leases
The Company leases office space for SQP for $1,500 per month. The lease, which was originally 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. The Company has only committed to a one-year renewal and is evaluating the intent to renew for additional periods.
The Company had two lease agreements for construction equipment with a combined amount of $160,000 that were paid in full as of March 31, 2024. The leases had a term of twenty-two months with a stated interest rate of 0%, combined monthly installment payments of $6,645 and were cancellable at any time without penalty. The Company exercised the right to purchase the equipment at the expiration of the leases by applying the two-month deposit paid. The related assets and finance lease obligations associated with these lease agreements had been included in the consolidated balance sheets within property, plant and equipment and long-term debt.
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, West Virginia facility, had a net present value of $236,000 at inception, and a carrying value of $86,000 at March 31, 2024. The second operating lease, for the Chattanooga, Tennessee facility, had a net present value of $144,000 at inception, and a carrying value of $24,000 at March 31, 2024. The 4.5% interest rate on the operating leases is based on the Company’s incremental borrowing rate at inception.
The Company has a right-of-use operating lease with Enterprise Fleet Management, Inc. (Enterprise) acquired on August 11, 2022, as part of the Ryan Environmental acquisition. This lease agreement was initially for thirty-one vehicles with a net present value of $1.2 million. The Company had seventy-one vehicles on lease at March 31, 2024. The right-of-use operating lease has a carrying value of $2.4 million at March 31, 2024. Each vehicle leased under the master lease program has its own implicit rate ranging from 12.8% to 15.6%.
The Company has a right-of-use operating lease with RICA Developers, LLC acquired on August 12, 2022 and renewed for one year effective October 1, 2023. This lease, for the Bridgeport, West Virginia facility, had a net present value of $125,000 at inception and a carrying value of $64,000 at March 31, 2024. The 8.5% interest rate on the operating lease was based on the Company’s incremental borrowing rate at renewal.
The Company has a right-of-use operating lease acquired on March 28, 2023. This lease, for the Winchester, Kentucky facility, had a net present value of $290,000 at inception and a carrying value of $209,000 at March 31, 2024. The 7.75% interest rate on the operating lease is based on the Company’s incremental borrowing rate at inception.
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:
Rental Agreements
The Company rents equipment for use on construction projects with rental agreements being week to week or month to month. Rental expense can vary by reporting period due to equipment requirements on construction projects and the availability of Company owned equipment. Rental expense, which is included in cost of goods sold on the consolidated statements of income, was $3.3 million and $1.5 million, respectively, for the three months ended March 31, 2024 and 2023. Rental expenses were $8.7 million and $4.2 million, respectively, for the six months ended March 31, 2024 and 2023.
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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 March 31, 2024, the Company did not have any letters of credit outstanding.
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 performance 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.
Currently, the Company has an agreement with a surety company to provide bonding which will suit the Company’s immediate needs. The ability to obtain bonding for future contracts is an important factor in the contracting industry with respect to the type and value of contracts that can be bid. Depending upon the size and conditions of a particular 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 in the foreseeable future. At March 31, 2024, the Company had $94.9 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 for the three and six months ended March 31, 2024 and 2023:
Three Months Ended
Three Months Ended
Six Months Ended
Six Months Ended
March 31,
March 31,
March 31,
March 31,
Revenue
2024
2023
2024
2023
TransCanada Corporation
*
*
15.8
%
*
All other
100.0
%
100.0
%
84.2
%
100.0
%
Total
100.0
%
100.0
%
100.0
%
100.0
%
* Less than 10.0% and included in “All other” if applicable
Accounts receivable, net of retention
at March 31, 2024
at March 31, 2023
Yates Construction
14.0
%
*
All other
86.0
%
100.0
%
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 (the “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 21, 2022, a Judgment Order was issued, and the Company was awarded $13.1 million, of which $5.8 million was the jury award, $1.6 million was for attorney’s fees, and $5.7 million was for penalties and interest. The amounts awarded by the Judgment Order have not been recognized in the Company’s consolidated financial statements as of March 31, 2024. The Company’s attorney’s
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fees have been expensed as incurred. On April 17, 2024, the United States Court of Appeals for the Third Circuit (the “Appeals Court”) affirmed the decision of the United States District Court for the Western District of Pennsylvania. On May 1, 2024, the Defendant filed a Petition for Rehearing or Rehearing En Banc with the Appeals Court.
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. The Company is in negotiations with the pension fund to resolve the matter and all future payments have been suspended as part of the negotiation. The Company has expensed all $164,000 in payments made through September 30, 2022 and does not expect any future liabilities related to this claim. The Company did not make any payments during the three and six months ended March 31, 2024.
Other than described above, at March 31, 2024, 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 March 31, 2024, 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
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 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 stated rate of 3.5% per year. The Company has made $750,000 in principal payments on this note as of March 31, 2024.
Subsequent to the April 29, 2022 acquisition of Tri-State Paving, the Company entered into an operating lease for facilities in Hurricane, West Virginia with Corns Enterprises. This thirty-six-month lease is treated as a right to use asset and has payments of $7,000 per month. The total net present value at inception was $236,000 with a carrying value of $86,000 at March 31, 2024.
SQP made an equity investment of $156,000 in 1030 Quarrier Development, LLC (“Development”) in August 2022. Development is a variable interest entity (“VIE”) that is 75% owned by 1030 Quarrier Ventures, LLC (“Ventures”) and 25% owned by SQP. SQP is not the primary beneficiary of the VIE and therefore will not consolidate Development into its consolidated financial statements. Instead, SQP will apply the equity method of accounting for its investment in Development. Development, a 1% owner, and United Bank, a 99% owner, formed 1030 Quarrier Landlord, LLC (“Landlord”). Landlord decided to pursue the following development project (the “Project”): a historical building at 1030 Quarrier Street, Charleston, West Virginia as well as associated land (the “Property”) was purchased to be developed/rehabilitated into a commercial project including apartments and commercial space. Upon the completion of development, the Property will be used to generate rental income. SQP has been awarded the construction contract for the Project. United Bank provided $5.0 million in loans to fund the Project. SQP and Ventures have jointly provided an unconditional guarantee for the $5.0 million of obligations associated with the Project.
Other than mentioned above, there were no new material related party transactions entered into during the three and six months ended March 31, 2024.
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. 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 six months ended March 31, 2024 and 2023.
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 goods 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.
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
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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 March 31, 2024 and September 30, 2023:
March 31, 2024
September 30, 2023
Costs incurred on contracts in progress
$
403,385,426
$
287,347,650
Estimated earnings, net of estimated losses
42,599,658
38,976,895
445,985,084
326,324,545
Less billings to date
447,645,219
328,112,326
$
(1,660,135)
$
(1,787,781)
Costs and estimated earnings in excess of billed on uncompleted contracts
$
14,648,381
$
15,955,220
Less billings in excess of costs and estimated earnings on uncompleted contracts
16,308,516
17,743,001
$
(1,660,135)
$
(1,787,781)
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 March 31, 2024, the management review deemed that the allowance for doubtful accounts was adequate.
Please see the allowance for doubtful accounts table below:
March 31, 2024
September 30, 2023
Balance at beginning of period
$
51,063
$
70,310
Charged to expense
—
—
Deductions for uncollectible receivables written off, net of recoveries
—
(19,247)
Balance at end of period
$
51,063
$
51,063
Impairment of goodwill and intangible assets
The Company follows the guidance of Accounting Standards Codification (“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
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factors (Step 0). If a company fails this test or decides to bypass this step, it must proceed with a quantitative assessment of goodwill impairment. The Company did not have a goodwill impairment at March 31, 2024.
Materially incorrect estimates could cause an impairment of 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:
Accumulated
Accumulated
Amortization
Amortization
Amortization
Amortization
Remaining Life
Amortization
Amortization
and Impairment
and Impairment
and Impairment
and Impairment
(in months) at
and Impairment
and Impairment
Three Months
Six Months
Three Months
Six Months
Net Book Value
Net Book Value
March 31,
at March 31,
at September 30,
Ended March 31,
Ended March 31,
Ended March 31,
Ended March 31,
at March 31,
at September 30,
Intangible assets:
2024
Original Cost
2024
2023
2024
2024
2023
2023
2024
2023
West Virginia Pipeline:
Customer Relationships
81
$
2,209,724
718,145
$
607,661
55,242
110,484
65,647
120,889
$
1,491,579
$
1,602,063
Tradename
81
263,584
85,682
72,500
6,591
13,182
6,587
13,182
177,902
191,084
Non-competes
—
83,203
83,203
83,203
—
—
—
10,397
—
—
Revolt Energy:
Employment agreement/non-compete
—
100,000
100,000
100,000
—
—
4,167
8,334
—
—
Tri-State Paving:
Customer Relationships
97
1,649,159
316,089
233,631
41,229
82,458
41,178
82,458
1,333,070
1,415,528
Tradename
97
203,213
38,949
28,789
5,080
10,160
5,079
10,161
164,264
174,424
Non-competes
—
39,960
39,960
39,960
—
—
9,963
19,980
—
—
Total intangible assets
$
4,548,843
$
1,382,028
$
1,165,744
$
108,142
$
216,284
$
132,621
$
265,401
$
3,166,815
$
3,383,099
Depreciation and Amortization
The purpose of depreciation and amortization 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 and amortization are a noncash expense, the amount must be estimated. Each year a certain amount of depreciation and amortization 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.
Acquired intangible assets subject to amortization are amortized on a straight-line basis, which approximates the pattern in which the economic benefit of the respective intangible assets is realized, over their respective estimated useful lives. The definite-lived identifiable intangible assets recognized as part of the Company’s business combinations are initially recorded at their estimated fair value.
The Company’s depreciation expenses for the three months ended March 31, 2024 and 2023 were $2.1 million and $1.8 million, respectively. The Company’s depreciation expenses for the six months ended March 31, 2024 and 2023 were $4.2 million and $3.6 million, respectively. In general, depreciation is included in “cost of revenues” on the Company’s consolidated statements of income.
The Company’s amortization expenses for the three months ended March 31, 2024 and 2023 were $108,142 and $132,621, respectively. The Company’s amortization expenses for the six months ended March 31, 2024 and 2023 were $216,284 and $265,401, respectively. In general, amortization is included in “cost of revenues” on the Company’s consolidated statements of income.
Materially incorrect estimates of depreciation and amortization and/or the useful lives of assets could significantly impact the value of long-lived assets on the Company’s consolidated financial statements. A material overvaluation could result in impairment charges and reduced profitability for the Company.
Income Taxes
The Company’s income tax expenses 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.
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The Company’s provision for income taxes is computed by applying a federal rate of 21.0% and a state rate of 6.0% to taxable income or loss after consideration of non-taxable and non-deductible items.
The income tax benefit for the three months ended March 31, 2024 was $373,000 as compared to $650,000 for the three months ended March 31, 2023. The income tax expense for the six months ended March 31, 2024 was $685,000 as compared to an income tax benefit of $730,000 for the six months ended March 31, 2023. The changes were due to an increase in taxable income for the three and six months ended March 31, 2024, as compared to the same period in 2023.
The effective income tax rate for the three and six months ended March 31, 2024, was (25.2%) and 42.3%, respectively, as compared to (25.8%) and (29.6%), respectively, for the same periods in 2023. Effective income tax rates are estimates and may vary from period to period due to changes in the amount of taxable income and non-deductible expenses.
Accounting for PPP Loans
The Company’s accounting for PPP loans reflects management’s best estimate of current and future amounts to be paid. The Company applies significant judgment regarding the determination of PPP loan forgiveness based on the rules established, and subsequently clarified by the SBA, including rules related to the Company’s affiliations and meeting SBA size standards.
Refer to Note 3 “Accounting for PPP Loans” in the accompanying consolidated financial statements for additional details.
New Accounting Pronouncements
On October 28, 2021, the Financial Accounting Standards Board (“FASB”) released Accounting Standards Update (“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 the fiscal years, including interim periods within those the fiscal years, beginning after December 15, 2022. For all other entities they are effective for the fiscal years, including interim periods within those the 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 its results of operations, financial position and cash flows; however, the Company does not expect a significant impact.
Subsequent Events
On April 17, 2024, the United States Court of Appeals for the Third Circuit (the “Court”) affirmed the decision of the United States District Court for the Western District of Pennsylvania in a lawsuit filed by the Company against a former customer (“Defendant”) related to a dispute over work performed on a pipeline contract. On May 1, 2024, the Defendant filed a Petition for Rehearing or Rehearing En Banc with the Court. Please see Litigation on page 31 for further details.
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.
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The Company is seeing a significant increase in bid opportunities for natural gas transmission and distribution projects along with electrical, mechanical, and general construction projects. The Company’s backlog at March 31, 2024, was $222.8 million, as compared to $224.6 million and $229.8 million at March 31, 2023, and September 30, 2023, 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.