What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-11-22 compared with 2021-11-29 · 83 added, 81 removed, 268 unchanged (38% of the section changed)

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Fiscal 2022 Developments

We did not incur significant disruptions from the COVID-19 pandemic during the fiscal year ended September 30, 2021.

However, we continue to closely monitor the impact of the pandemic on all aspects of our business, including its impact on our customers, employees, suppliers and vendors.

Among the primary risks to our business from the pandemic are (i) employee absences, which could adversely affect our productivity and our ability to complete projects in accordance with our contractual obligations, and could require us to temporarily close our facilities or project sites, (ii) potential disruptions in our supply chains for raw materials or equipment, whether as a result of facility closures or otherwise, which could increase our labor and materials costs and impair our ability to manufacture HMA or the ability of our subcontractors to complete their required tasks, and (iii) the impact of the COVID-19 pandemic on our customers, which could cause these customers to cancel or delay current or prospective projects or become delinquent in their payments to us for work that we have performed.

These risks materialized in varying degrees during fiscal 2021, but none of these risks, individually or in the aggregate, have significantly impacted our operations to date.

In addition, the extent to which our operations may be impacted by the COVID-19 pandemic going forward will also depend on the duration of the pandemic, the emergence of different COVID-19 variants, the efficacy and adoption rates of vaccines, and actions by government authorities to contain the outbreak or mitigate the impact of the pandemic.

For example, we continue to monitor the impact of vaccination requirements imposed by our customers or governmental authorities on our workforce, which could increase employee turnover and thereby impair our ability to perform our construction projects.

Business Acquisitions

We completed eight acquisitions during the fiscal year, through which we added eighteen HMA plants and five aggregates facilities located in North Carolina and Alabama.

As a result of these acquisitions, we entered into several new markets, while also securing crushed stone and aggregates sources for certain of our markets as part of our vertical integration strategy and adding a diverse fleet of trucks and construction equipment to support our operations.

For more information about our acquisitions during fiscal 2021, see Note 4 - Business Acquisitions to our consolidated financial statements included elsewhere in this report.

Amended and Restated Credit Agreement

In June 2021, we amended and restated our existing Credit Agreement to, among other things, increase the amount of our Term Loan to an initial aggregate principal amount of $200 million (the full amount of which was drawn immediately) and the amount of our Revolving Credit Facility to an initial aggregate principal amount of $225 million.

We used a portion of the proceeds advanced to us to refinance our indebtedness outstanding on the restatement date and to pay fees and expenses incurred in connection with the transaction, with the remainder available for our general corporate purposes, including permitted acquisitions.

For more information about the Credit Agreement, see Note 11 - Debt to our consolidated financial statements included elsewhere in this report.

Inflation, Supply Chain and Labor

During fiscal 2021, we began to experience an upward trend in several inflation-sensitive inputs necessary for us to provide our products and services, including upward pressure on wages and increases in the cost of raw materials used to produce HMA and other items that are critical to our business, including fuel, concrete and steel.

Inflationary and Supply Chain Trends

During the fiscal year ended September 30, 2022, we continued to experience an upward trend in several inflation-sensitive inputs necessary for us to provide our products and services, including upward pressure on wages and increases in the cost of raw materials used to produce HMA and other items that are critical to our business, including fuel, concrete and steel.

In addition, we experienced some disruptions from various participants in our supply chain, including subcontractors, materials suppliers and equipment manufacturers, who provide the raw materials, equipment, vehicles, construction supplies and other services we require in order to manufacture HMA and perform our construction projects.

To date, we have been able to mitigate some of the effects of inflation, supply chain disruptions and labor constraints on our business by increasing prices for our products and including the anticipated cost increases in the construction

projects we bid.

However, we are limited in our ability to pass through increased costs for projects already in our backlog and, under those circumstances, may be unable to recoup losses or diminished profit margins by passing these costs through to our customers.

Business Acquisitions

We completed five acquisitions during the fiscal year, through which we added six HMA plants and a permitted plant site located in South Carolina and Florida.

As a result of these acquisitions, we entered into several new markets, while also establishing our first platform company in South Carolina and adding a diverse fleet of trucks and construction equipment to support our operations.

For more information about our acquisitions during fiscal 2022, see Note 4 - Business Acquisitions to our consolidated financial statements included elsewhere in this report.

Credit Agreement

On June 30, 2022, we entered into the Credit Agreement.

The Credit Agreement provides for (i) a Term Loan in an initial aggregate principal amount of $250.0 million, the full amount of which was drawn at closing, (ii) a Revolving Credit Facility in an initial aggregate principal amount of $325.0 million, and (iii) a Delayed Draw Term Loan facility in an initial aggregate principal amount of $50.0 million.

Among other things, the proceeds of the Term Loan were used to refinance our indebtedness under our prior credit facility.

For further discussion regarding the Credit Agreement, see Note 11 - Debt to our consolidated financial statements included elsewhere in this report.

Captive Insurance Company

On October 1, 2021, Construction Partners Risk Management, Inc.

(the "Captive"), a captive insurance company and wholly-owned subsidiary of the Company, commenced operations.

The purpose of the Captive is to provide general liability, automobile liability and workers’ compensation insurance coverage to the Company and its subsidiaries.

The activity of our business fluctuates due to seasonality because our business is primarily conducted outdoors.

Therefore, seasonal changes and other weather-related conditions, in particular extended snowy, rainy or cold weather in the winter, spring or fall and major weather events, such as hurricanes, tornadoes, tropical storms and heavy snows, can adversely affect our business and operations through a decline in both the use of our products and the demand for our services.

In addition, construction materials production and shipment levels follow activity in the construction industry, which typically occurs in the spring, summer and fall.

Warmer and drier weather during our third and fourth fiscal quarters typically result in higher activity and revenues during those quarters.

Our first and second fiscal quarters typically have lower levels of activity due to adverse weather conditions.

Our third fiscal quarter varies greatly

with spring rains and wide temperature variations.

A cool, wet spring increases drying time on projects, which can delay sales in the third fiscal quarter, while a warm, dry spring may facilitate earlier project commencement dates.

How We Assess Performance of Our Business

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Depreciation on property, plant and equipment is computed on a straight-line basis over the estimated useful life of the asset.

Amortization expense is the periodic expense related to leasehold improvements and intangible assets.

Amortization expense is the periodic expense related to leasehold improvements, intangible assets and unfavorable contract liabilities.

Leasehold improvements are amortized over the lesser of the life of the underlying asset or the remaining lease term.

Our intangible assets were recognized as a result of certain acquisitions and are generally amortized on a straight-line basis over the estimated useful lives of the assets.

Our unfavorable contract liabilities were recognized as a result of certain acquisitions and are amortized as the associated projects progress.

Mineral reserves are depleted in accordance with the units-of-production method as aggregates are extracted, using the initial allocation of cost based on proven and probable reserves.

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Adjusted EBITDA Margin 8.5 % 9.9 %

(1) Reflects fees and reimbursement of certain out-of-pocket expenses under a management services agreement with SunTx Capital Partners, the Company’s controlling stockholder (see Note 17 - Related Parties to the consolidated financial statements included elsewhere in this report).

(2) Reflects $3.2 million legal settlement and associated legal expenses (see Note 26 - Legal Settlement to the consolidated financial statements included elsewhere in this report).

(1) Reflects fees and reimbursement of certain out-of-pocket expenses under a management services agreement with SunTx Capital Partners (see Note 17 - Related Parties to the consolidated financial statements included elsewhere in this report).

(2) Reflects $3.2 million legal settlement and associated legal expenses in April 2021 unrelated to the Company's core operations.

The following table presents a reconciliation of net income, the most directly comparable measure calculated in accordance with GAAP, to adjusted net income for the periods presented (in thousands):

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Adjusted net income $ 21,376 $ 23,969

(1) Reflects $3.2 million legal settlement and associated legal expenses (see Note 26 - Legal Settlement to the consolidated financial statements included elsewhere in this report).

(1) Reflects $3.2 million legal settlement and associated legal expenses in April 2021 unrelated to the Company's core operations.

Results of Operations — Fiscal Year Ended September 30, 2022 Compared to Fiscal Year Ended September 30, 2021

The following table sets forth selected financial data for the fiscal years ended September 30, 2022 (“fiscal 2022”) and September 30, 2021 (“fiscal 2021”) (in thousands, except percentages).

Refer to the Annual Report on Form 10-K for the fiscal year ended September 30, 2020, filed with the SEC on December 11, 2020, for a discussion of results for the fiscal year ended September 30, 2019.

Refer to the Annual Report on Form 10-K for the fiscal year ended September 30, 2021, filed with the SEC on November 29, 2021, for a discussion of results for the fiscal year ended September 30, 2020 ("fiscal 2020") and a comparison of our financial results in fiscal 2021 to those of fiscal 2020.

For the Fiscal Year Ended September 30, Change from Fiscal

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The increase included $170.4 million of revenues attributable to acquisitions completed during or subsequent to fiscal 2021 and an increase of approximately $220.6 million of revenues in our remaining markets from contract work and sales of HMA and aggregates to third parties.

The 24.2% increase in revenue in our existing markets was due to strong demand in both public and private work.

Gross Profit.

Gross profit for fiscal 2021 decreased $2.3 million, or 1.9%, to $119.9 million from $122.2 million for fiscal 2020.

The lower gross profit was the result of a decrease in gross profit margin to 13.2% for fiscal 2021 from 15.6% for fiscal 2020, primarily due to (i) lower margins on construction projects in the fourth quarter of fiscal 2021 due to delays related to weather, labor and trucking and supply chain issues, and (ii) lower profit margins on the projects we assumed in connection with the North Carolina acquisitions we completed during fiscal 2021 and low utilization of the asphalt plants and equipment acquired in those acquisitions.

Gross profit for fiscal 2022 increased $19.4 million, or 16.1%, to $139.3 million from $119.9 million for fiscal 2021.

The increase in gross profit was primarily the result of the 42.9% increase in revenues for fiscal 2022 compared to fiscal 2021.

The lower gross profit margin was due to (i) increases in the costs of raw materials, fuel, labor and trucking and (ii) supply chain disruptions resulting in project delays and the use of alternative suppliers and vendors.

General and Administrative Expenses.

General and administrative expenses for fiscal 2022 increased $15.7 million, or 17.1%, to $107.6 million from $91.9 million for fiscal 2021.

The increase in general and administrative expenses for fiscal 2021 compared to fiscal 2020 was primarily the result of (i) a $2.0 million increase in equity-based compensation expense, (ii) a $3.2 million legal settlement, as described in Note 26 - Legal Settlement, and an increase of $0.7 million for legal fees associated with this settlement, (iii) a $7.8 million increase in management personnel payroll and benefits, (iv) a $3.5 million increase attributable to general and administrative expenses of businesses acquired subsequent to September 30, 2020, and (v) a $3.5 million increase in other professional fees, primarily driven by expenses incurred in support of acquisition activities, information technology expenses and increased accounting and consulting fees.

The increase in general and administrative expenses for fiscal 2022 compared to fiscal 2021 was primarily the result of (i) a $4.5 million increase in equity-based compensation expense, (ii) an $11.1 million increase attributable to general and administrative expenses associated with the operations of businesses acquired subsequent to September 30, 2021, and (iii) a $5.1 million increase in various other expenses, primarily driven by professional fees related to business acquisitions, information technology expenses and increased accounting and consulting fees.

These increases were partially offset by a $4.4 million decrease in legal expenses associated with a legal settlement and associated legal fees in April 2021 unrelated to the Company's core operations.

Interest Expense, Net.

Interest expense, net for fiscal 2021 decreased $0.7 million, or 22.8%, to $2.4 million compared to $3.1 million for fiscal 2020.

The decrease in interest expense, net reflects a $1.2 million decrease in interest expense and a decrease of $0.5 million in interest income.

The decrease was primarily due to $0.9 million of unrealized gain on interest rate swaps for fiscal 2021, compared to an unrealized loss on interest rate swaps of $1.4 million for fiscal 2020.

This change was offset by an increase in interest paid due to

the increase in long-term debt at September 30, 2021 compared to September 30, 2020.

The decrease in interest income was due to a decrease in interest rates earned on our deposits.

Interest expense, net for fiscal 2022 increased $5.3 million, or 220.3%, to $7.7 million compared to $2.4 million for fiscal 2021.

The increase in interest expense, net was primarily due to an increase in the average principal debt balance outstanding and higher interest rates during fiscal 2022 compared to fiscal 2021.

Provision for Income Taxes.

Our effective tax rate increased to 29.3% for fiscal 2021, from 24.0% for fiscal 2020.

Our higher effective tax rate was due to the unfavorable impact of a non-deductible legal settlement and related legal expenses, as described in Note 26 - Legal Settlement, and other fiscal 2021 permanent non-deductible expenses.

Earnings from Investment in Joint Venture.

Earnings from investment in joint venture decreased $0.6 million during fiscal 2021 compared to fiscal 2020, as the construction project from which these earnings were derived had a lower level of activity during fiscal 2021.

Net income decreased $20.1 million, or 49.9%, to $20.2 million for fiscal 2021 compared to $40.3 million for fiscal 2020.

The decrease in net income was primarily a result of lower gross profit and higher general and administrative expenses, partially offset by a decrease in interest expense, net, all as described above.

Our effective tax rate decreased to 24.4% for fiscal 2022, from 29.3% for fiscal 2021.

Our higher effective tax rate for fiscal 2021 was primarily due to the unfavorable impact of a non-deductible legal settlement.

Net income increased $1.2 million, or 5.9%, to $21.4 million for fiscal 2022 compared to $20.2 million for fiscal 2021.

The increase in net income was primarily a result of higher gross profit, partially offset by an increase in general and administrative expenses and interest expense, net, all as described above.

Adjusted EBITDA and Adjusted EBITDA Margin.

Adjusted EBITDA and Adjusted EBITDA Margin were $111.2 million and 8.5%, respectively, for fiscal 2022, compared to $90.6 million and 9.9%, respectively, for fiscal 2021.

The decrease in Adjusted EBITDA primarily resulted from lower gross profit and an increase in general and administrative expenses.

The lower Adjusted EBITDA Margin was primarily the result of a decrease in Adjusted EBITDA and increase in revenues, all as described above.

The increase in Adjusted EBITDA primarily resulted from an increase in gross profit and depreciation, depletion, accretion and amortization, partially offset by higher general and administrative expenses and interest expense, net, all as described above.

The lower Adjusted EBITDA Margin was primarily the result of lower gross profit margins, as described above.

For a description of Adjusted EBITDA and Adjusted EBITDA Margin, as well as a reconciliation of Adjusted EBITDA to net income, see “How We Assess Performance of Our Business.”

Adjusted Net Income .

Adjusted net income decreased $16.7 million to adjusted net income of $24.0 million for fiscal 2021, compared to adjusted net income of $40.7 million for fiscal 2020.

The decrease in adjusted net income was primarily a result of lower gross profit and higher general and administrative expenses, all as described above.

Adjusted net income decreased $2.6 million to $21.4 million for fiscal 2022, compared to adjusted net income of $24.0 million for fiscal 2021.

The decrease in adjusted net income was primarily a result of higher general and administrative expenses and interest expense, net, substantially offset by higher gross profit, all as described above.

Inflation and Price Changes

Except as described above in Item 1 of this report under the heading “2021 Fiscal Year Developments — Inflationary Trends,” inflation had an immaterial impact on our results of operations for fiscal years 2021 and 2020 due to relatively low inflation in the United States in recent years and our ability to recover increasing costs by charging higher prices for our products, including through sale price escalator clauses in most of our public infrastructure sector contracts.

Inflation risk varies with the level of activity in our industry, the number, size and strength of competitors and the availability of products to supply a local market.

As described above under the heading “2022 Fiscal Year Developments — Inflationary and Supply Chain Trends,” we continue to experience an upward trend in several inflation-sensitive inputs necessary for us to provide our products and services, including upward pressure on wages and increases in the cost of raw materials used to produce HMA and other items that are critical to our business.

Inflation had an immaterial impact on our results of operations for fiscal 2021 due to relatively low inflation in the United States during that period and our ability to recover increasing costs by obtaining higher prices for our products, including sale price escalator clauses in most of our public infrastructure sector contracts.

For more information, see the discussion under the heading “Inflation Risk” included in Item 7A of this report.

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During fiscal 2022, cash provided by operating activities, net of acquisitions, was $16.5 million, primarily as a result of:

• net income of $20.2 million, including $49.8 million of depreciation, depletion and amortization of long-lived assets, unrealized gains on derivative instruments of $3.2 million and equity-based compensation expense of $3.5 million;

• net income of $21.4 million, reflecting $65.7 million of depreciation, depletion, accretion and amortization, unrealized gains on derivative instruments of $0.4 million and equity-based compensation expense of $8.0 million;

• an increase in contracts receivable including retainage, net of $97.1 million as a result of higher overall revenues due to acquisitions and growth in existing markets;

• an increase in other assets of $2.9 million primarily due to capitalized costs related to the amended Revolving Credit Facility and deposits on property, plant and equipment assets;

• an increase in inventories of $17.5 million due to increased inventories from acquisitions, growth in existing markets, higher inventory costs and normal fluctuations in our inventory cycle;

• an increase in prepaid expenses and other current assets of $4.9 million primarily due to the timing of deposits for federal and state income taxes and timing of payments under our insurance policies and other expenses;

• an increase in accounts payable and accrued expenses and other current liabilities of $29.8 million due to an increase in construction activity;

• a net increase in the difference between costs and estimated earnings in excess of billings on uncompleted contracts and billings in excess of costs and estimated earnings on uncompleted contracts of $9.5 million due to the timing of performing and closing projects.

During fiscal 2021, cash provided by operating activities, net of acquisitions, was $48.5 million, primarily as a result of:

• net income of $20.2 million, reflecting $49.8 million of depreciation, depletion, accretion and amortization of long-lived assets, unrealized gains on derivative instruments of $3.2 million and equity-based compensation expense of $3.5 million;

• an increase in contracts receivable including retainage, net of $27.1 million as a result of higher overall revenues due to acquisitions and growth in existing markets;

• an increase in other assets of $2.9 million primarily due to capitalized costs related to the as then in effect revolving credit facility and deposits on property, plant and equipment assets;

• an increase in inventories of $3.9 million due to increased inventories from acquisitions and normal fluctuations in our inventory cycle;

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• a net decrease in the difference between costs and estimated earnings in excess of billings on uncompleted contracts and billings in excess of costs and estimated earnings on uncompleted contracts of $15.1 million due to the timing of performing and closing projects.

During fiscal 2020, cash provided by operating activities, net of acquisitions, was $105.2 million, primarily as a result of:

• net income of $40.3 million, including $39.3 million of depreciation, depletion and amortization of long-lived assets, unrealized losses on derivative instruments of $1.9 million and equity-based compensation expense of $1.6 million;

• a decrease in prepaid expenses and other current assets of $8.1 million, primarily reflecting the $7.7 million payment received by certain of our subsidiaries from January 2020 to July 2020 in connection with a settlement agreement we entered into in April 2018 related to a business interruption event;

• a decrease in contracts receivable including retainage, net of $7.4 million due to a reduction in fiscal year 2020 fourth quarter job activity in certain of our markets, including North Carolina, compared to the prior year.

Investing Activitie s

During fiscal 2021, cash used in investing activities was $263.4 million, of which $210.7 million related to acquisitions completed in the period and $56.3 million of which was invested in property, plant and equipment.

During fiscal 2022, cash used in investing activities was $197.3 million, of which $128.6 million related to acquisitions completed in the period and $68.9 million was invested in property, plant and equipment.

These amounts were partially offset by $7.5 million of proceeds from the sale of equipment.

During fiscal 2020, cash used in investing activities was $79.4 million, of which $30.2 million related to acquisitions completed in the period and $52.6 million of which was invested in property, plant and equipment, which included $11.5 million for the buyout of equipment leases.

During fiscal 2021, cash used in investing activities was $263.4 million, of which $210.7 million related to acquisitions completed in the period and $56.3 million was invested in property, plant and equipment.

These amounts were partially offset by $3.7 million of proceeds from the sale of equipment.

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During fiscal 2022, cash provided by financing activities was $159.1 million.

We received $219.2 million from proceeds on long-term debt, net of debt issuance costs and discounts, which was offset by $95.4 million of principal payments on long-term debt.

We received $167.3 million in proceeds on long-term debt, net of debt issuance costs and discounts, which was offset by $8.1 million of principal payments on long-term debt.

During fiscal 2021, cash provided by financing activities was $123.8 million.

We received $72.3 million from proceeds on long-term debt, net of debt issuance costs and discounts, which was offset by $30.4 million of principal payments on long-term debt.

We received $219.2 million in proceeds on long-term debt, net of debt issuance costs and discounts, which was offset by $95.4 million of principal payments on long-term debt.

Credit Agreement

We and each of our subsidiaries are parties to the Credit Agreement, which provides for the Term Loan and the Revolving Credit Facility.

At September 30, 2021 and 2020, we had $197.5 million and $92.9 million, respectively, of principal outstanding under the Term Loan, $20.0 million and $0.0 million, respectively, of principal outstanding under the Revolving Credit Facility, and availability of $193.7 million and $39.3 million, respectively, under the Revolving Credit Facility, including reduction for outstanding letters of credit.

The obligations of our subsidiaries under the Term Loan and the Revolving Credit Facility are secured by a first priority security interest in substantially all of our assets.

The Credit Agreement requires the Company to satisfy certain financial covenants, including a minimum fixed charge coverage ratio of 1.20-to-1.00 and a maximum consolidated leverage ratio of 3.00-to-1.00, subject to certain adjustments.

We and each of our subsidiaries are parties to the Credit Agreement, which provides for the Term Loans and the Revolving Credit Facility.

At September 30, 2022 and 2021, we had $271.9 million and $197.5 million, respectively, of principal outstanding under the Term Loans, $105.1 million and $20.0 million, respectively, of principal outstanding under the Revolving Credit Facility, and availability of $208.6 million and $193.7 million, respectively, under the Revolving Credit Facility, including reduction for outstanding letters of credit.

The obligations of our subsidiaries under the Term Loans and the Revolving Credit Facility are secured by a first priority security interest in substantially all of our assets.

The Credit Agreement requires us to satisfy certain financial covenants, including a minimum fixed charge coverage ratio of 1.20-to-1.00 and a maximum consolidated leverage ratio of 3.50-to-1.00, subject to certain adjustments.

At September 30, 2022 and 2021, our fixed charge coverage ratio was 2.56-to-1.00 and 3.29-to-1.00, respectively, and our consolidated leverage ratio was 2.79-to-1.00 and 1.99-to-1.00, respectively.

From time to time, the Company has entered into interest rate swap agreements to hedge against the risk of changes in interest rates.

At September 30, 2021 and 2020, the aggregate notional value of these interest rate swap agreements was $198.3 million and $46.5 million, respectively, and the fair value was $(0.8) million and $(1.7) million, respectively, which is included within other current liabilities or other long-term liabilities on the Company’s Consolidated Balance Sheets.

From time to time, we have entered into interest rate swap agreements to hedge against the risk of changes in interest rates.

At September 30, 2022 and 2021, the aggregate notional value of these interest rate swap agreements was $300.0 million and $198.3 million, respectively, and the fair value was $24.7 million and $(0.8) million, respectively, which is included within other assets or other long-term liabilities on our Consolidated Balance Sheets.

For more information about the Credit Amendment, see Note 11 - Debt to the consolidated financial statements included elsewhere in this report.

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Our future success will depend on our ability to access outside sources of capital.

We believe that our operating cash flow and available borrowings under the Credit Agreement will be sufficient to fund our operations through September 30, 2022.

However, future cash flows are subject to a number of variables, including the potential impacts of COVID-19, and significant additional capital expenditures will be required to conduct our operations.

We believe that our operating cash flow and available borrowings under the Credit Agreement will be sufficient to fund our operations and planned capital expenditures for at least the next 12 months.

However, future cash flows are subject to a number of variables, including the potential impacts of inflation and supply chain constraints, and significant additional capital expenditures will be required to conduct our operations.

There can be no assurance that operations and other capital resources will provide sufficient cash to maintain planned or future levels of capital expenditures.

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If we seek additional capital, we may do so through borrowings under the Credit Agreement, joint ventures, asset sales, offerings of debt or equity securities or other means.

However, the unprecedented public health and governmental efforts to contain the spread of COVID-19 have created significant uncertainty as to general economic conditions for fiscal 2022 and beyond, and our ability to engage in any such transactions may be constrained by economic conditions and other factors outside of our control.

However, our ability to engage in any such transactions may be constrained by economic conditions and other factors outside of our control.

We cannot guarantee that additional capital will be available on acceptable terms or at all.

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Off-Balance Sheet Arrangements

As of September 30, 2021, the Company had aggregate letters of credit outstanding in the amount of $11.3 million, future purchase commitments of $0.1 million for diesel fuel and $2.4 million of minimum royalty payments related to aggregates facilities.

As of September 30, 2022, the Company had aggregate letters of credit outstanding in the amount of $11.3 million, future purchase commitments for diesel fuel and natural gas of $5.2 million and $1.2 million, respectively, and $2.7 million of minimum royalty payments related to mineral leases at aggregates facilities.

Other than the letters of credit, future purchase commitments and minimum royalty payments, we do not currently have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, changes in our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

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Contractual Obligations

The following table summarizes our significant obligations outstanding as of September 30, 2021

The following table summarizes our significant obligations outstanding as of September 30, 2022 (in thousands).

Payments Due by Fiscal Year

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Many of the contracts under which we perform work contain retainage provisions.

Retainage refers to amounts that we have billed to the customer, but are being held for payment by the customer pending satisfactory completion of the project.

Retainage refers to amounts that we have billed to the customer and the Company has an unconditional right to payment, but are being held for payment by the customer pending satisfactory completion of the project.

Retainage on active contracts is classified as a current asset regardless of the term of the contract and is generally collected within one year of the completion of a contract.

At September 30, 2021 and 2020, contracts receivable included $27.6 million and $21.0 million, respectively, of retainage, which was being contractually withheld by customers until completion of the associated contracts.

At September 30, 2022 and 2021, contracts receivable included $44.3 million and $27.6 million, respectively, of retainage, which was being contractually withheld by customers until satisfactory completion of the associated contracts.

Because the majority of our construction contracts are entered into with federal, state or municipal government customers, credit risk is minimal.

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Actual useful lives and cash flows could be different from those estimated by management, and this could have a material effect on our operating results and financial position.

For the fiscal years ended September 30, 2021 and 2020, there were no events or changes in circumstances that would indicate a material impairment of our long-lived assets.

For fiscal 2022 and fiscal 2021, there were no events or changes in circumstances that would indicate a material impairment of our long-lived assets.

Goodwill and indefinite-lived intangible assets must be tested for impairment at least annually.

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Accrued Insurance Cost

We carry insurance policies to cover various risks, primarily general liability, automobile liability and workers’ compensation, under which we are liable to reimburse the insurance company for a portion of each claim paid, ranging from $100,000 to $500,000 per occurrence.

We accrue for probable losses, both reported and unreported, that are reasonably estimable using actuarial methods based on historic trends and modified, if necessary, by recent events.

Changes in our loss assumptions caused by changes in actual experience would affect our assessment of the ultimate liability and could have an effect on our operating results and financial position up to $500,000 per occurrence for general liability, automobile liability and workers’ compensation claims.

We carry insurance policies to cover various risks, primarily including general liability, automobile liability and workers’ compensation, under which we are liable to reimburse the insurance company for a portion of each claim paid.

Since October 1, 2021, the Captive has retained the first $1,000,000 per claim liability for each claim paid.

Also effective October 1, 2021, we became a member of a group captive insurance company that retains the next $550,000 per claim liability for each claim paid.

The Company utilizes various primary and excess insurance companies to cover the liability for claims in excess of the retained amounts.

Changes in loss assumptions caused by changes in actual experience would affect the assessment of the ultimate liability and could have an effect on our operating results and financial position up to $1,000,000 per occurrence for general liability, automobile liability and workers’ compensation claims.

Prior to October 1, 2021, the amount for which we were liable for general liability, automobile liability and workers’ compensation claims ranged from $100,000 to $500,000 per occurrence.

Management accrues insurance costs for probable losses, both reported and unreported, that are reasonably estimable using actuarial methods based on historic trends modified, if necessary, by recent events.

We provide employee medical insurance under policies that are both fixed-premium, fully-insured policies and self-insured policies that are administered by the insurance company.

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Our equity incentive plans are administered by the Compensation Committee of our Board of Directors.

We account for our equity-based compensation plans using a fair value-based method of accounting, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is typically the vesting period.

Other Accounting Policies and New Accounting Pronouncements

See Note 2 – Significant Accounting Policies and Note 3 – Accounting Standards, to the consolidated financial statements for the fiscal year ended September 30, 2021, which are contained in Part II, Item 8 of this report and are incorporated by reference herein.

The activity of our business fluctuates due to seasonality because our business is primarily conducted outdoors.

In addition, construction materials production and shipment levels follow activity in the construction industry, which typically occurs in the spring, summer and fall.

Warmer and drier weather during our third and fourth fiscal quarters typically result in higher activity and revenues during those quarters.

Our first and second fiscal quarters typically have lower levels of activity due to adverse weather conditions.

Our third fiscal quarter varies greatly with spring rains and wide temperature variations.

A cool, wet spring increases drying time on projects, which can delay sales in the third fiscal quarter, while a warm, dry spring may facilitate earlier project commencement dates.

We account for awards issued under our equity incentive plan using a fair value-based method of accounting, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is typically the vesting period.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis