sgu-10q_20190331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-14129

 

STAR GROUP, L.P.

(Exact name of registrants as specified in its charters)

 

 

Delaware

06-1437793

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

9 West Broad Street

Stamford, Connecticut

06902

(Address of principal executive office)

 

(203) 328-7310

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non- accelerated filer

Smaller reporting company

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

At April 30, 2019, the registrant had 50,080,375 Common Units outstanding.

 

 

 

 


STAR GROUP, L.P. AND SUBSIDIARIES

INDEX TO FORM 10-Q

 

 

 

Page

Part I Financial Information

 

 

Item 1 - Condensed Consolidated Financial Statements

 

3

Condensed Consolidated Balance Sheets as of March 31, 2019 (unaudited) and September 30, 2018

 

3

Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended March 31, 2019 and March 31, 2018

 

4

Condensed Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended March 31, 2019 and March 31, 2018

 

5

Condensed Consolidated Statement of Partners’ Capital (unaudited) for the three and six months ended March 31, 2019 and March 31, 2018

 

6

Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended March 31, 2019 and March 31, 2018

 

7

Notes to Condensed Consolidated Financial Statements (unaudited)

 

8-22

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23-38

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

 

39

Item 4 - Controls and Procedures

 

39

Part II Other Information:

 

40

Item 1 - Legal Proceedings

 

40

Item 1A - Risk Factors

 

40

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

 

40

Item 6 - Exhibits

 

41

Signatures

 

42

 

2


Part I. FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements

STAR GROUP, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

March 31,

 

 

September 30,

 

 

 

2019

 

 

2018

 

(in thousands)

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

16,372

 

 

$

14,531

 

Receivables, net of allowance of $9,804 and $8,002, respectively

 

 

286,997

 

 

 

132,668

 

Inventories

 

 

60,119

 

 

 

56,377

 

Fair asset value of derivative instruments

 

 

-

 

 

 

17,710

 

Prepaid expenses and other current assets

 

 

32,288

 

 

 

35,451

 

Total current assets

 

 

395,776

 

 

 

256,737

 

Property and equipment, net

 

 

89,346

 

 

 

87,618

 

Goodwill

 

 

239,294

 

 

 

228,436

 

Intangibles, net

 

 

89,489

 

 

 

98,444

 

Restricted cash

 

 

250

 

 

 

250

 

Captive insurance collateral (1)

 

 

54,148

 

 

 

45,419

 

Deferred charges and other assets, net

 

 

18,539

 

 

 

13,067

 

Total assets

 

$

886,842

 

 

$

729,971

 

LIABILITIES AND PARTNERS’ CAPITAL

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

33,459

 

 

$

35,796

 

Revolving credit facility borrowings

 

 

115,000

 

 

 

1,500

 

Fair liability value of derivative instruments

 

 

1,518

 

 

 

-

 

Current maturities of long-term debt

 

 

10,000

 

 

 

7,500

 

Accrued expenses and other current liabilities

 

 

157,524

 

 

 

116,436

 

Unearned service contract revenue

 

 

63,718

 

 

 

60,700

 

Customer credit balances

 

 

22,781

 

 

 

61,256

 

Total current liabilities

 

 

404,000

 

 

 

283,188

 

Long-term debt

 

 

86,857

 

 

 

91,780

 

Deferred tax liabilities, net

 

 

15,872

 

 

 

21,206

 

Other long-term liabilities

 

 

24,692

 

 

 

24,012

 

Partners’ capital

 

 

 

 

 

 

 

 

Common unitholders

 

 

373,748

 

 

 

329,129

 

General partner

 

 

(1,146

)

 

 

(1,303

)

Accumulated other comprehensive loss, net of taxes

 

 

(17,181

)

 

 

(18,041

)

Total partners’ capital

 

 

355,421

 

 

 

309,785

 

Total liabilities and partners’ capital

 

$

886,842

 

 

$

729,971

 

 

 

(1)

See Note 2 – Significant Accounting Policies – Captive Insurance Collateral.  

 

See accompanying notes to condensed consolidated financial statements.

 

3


STAR GROUP, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Three Months

Ended March 31,

 

 

Six Months

Ended March 31,

 

(in thousands, except per unit data - unaudited)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

637,400

 

 

$

622,962

 

 

$

1,096,107

 

 

$

989,696

 

Installations and services

 

 

62,182

 

 

 

61,069

 

 

 

138,502

 

 

 

131,169

 

Total sales

 

 

699,582

 

 

 

684,031

 

 

 

1,234,609

 

 

 

1,120,865

 

Cost and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product

 

 

415,639

 

 

 

403,293

 

 

 

721,865

 

 

 

646,073

 

Cost of installations and services

 

 

65,394

 

 

 

64,659

 

 

 

139,711

 

 

 

134,214

 

(Increase) decrease in the fair value of derivative instruments

 

 

(13,401

)

 

 

11,609

 

 

 

17,638

 

 

 

209

 

Delivery and branch expenses

 

 

110,684

 

 

 

106,605

 

 

 

213,357

 

 

 

197,809

 

Depreciation and amortization expenses

 

 

7,858

 

 

 

7,703

 

 

 

15,603

 

 

 

15,444

 

General and administrative expenses

 

 

9,849

 

 

 

6,221

 

 

 

17,664

 

 

 

12,872

 

Finance charge income

 

 

(1,443

)

 

 

(1,532

)

 

 

(2,294

)

 

 

(2,295

)

Operating income

 

 

105,002

 

 

 

85,473

 

 

 

111,065

 

 

 

116,539

 

Interest expense, net

 

 

(3,194

)

 

 

(2,383

)

 

 

(5,710

)

 

 

(4,470

)

Amortization of debt issuance costs

 

 

(244

)

 

 

(307

)

 

 

(503

)

 

 

(616

)

Income before income taxes

 

 

101,564

 

 

 

82,783

 

 

 

104,852

 

 

 

111,453

 

Income tax expense

 

 

29,239

 

 

 

28,005

 

 

 

30,212

 

 

 

26,493

 

Net income

 

$

72,325

 

 

$

54,778

 

 

$

74,640

 

 

$

84,960

 

General Partner’s interest in net income

 

 

454

 

 

 

319

 

 

 

469

 

 

 

494

 

Limited Partners’ interest in net income

 

$

71,871

 

 

$

54,459

 

 

$

74,171

 

 

$

84,466

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted income per Limited Partner Unit (1):

 

$

1.15

 

 

$

0.81

 

 

$

1.19

 

 

$

1.26

 

Weighted average number of Limited Partner units outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

 

51,427

 

 

 

55,642

 

 

 

52,174

 

 

 

55,766

 

 

(1)

See Note 15 - Earnings Per Limited Partner Unit.

See accompanying notes to condensed consolidated financial statements.

 

4


STAR GROUP, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

Three Months

Ended March 31,

 

 

Six Months

Ended March 31,

 

(in thousands - unaudited)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income

 

$

72,325

 

 

$

54,778

 

 

$

74,640

 

 

$

84,960

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on pension plan obligation (1)

 

 

457

 

 

 

448

 

 

 

911

 

 

 

896

 

Tax effect of unrealized gain on pension plan obligation

 

 

(125

)

 

 

(167

)

 

 

(249

)

 

 

(302

)

Unrealized gain (loss) on captive insurance collateral

 

 

905

 

 

 

(931

)

 

 

1,294

 

 

 

(931

)

Tax effect of unrealized gain (loss) on captive insurance collateral

 

 

(194

)

 

 

196

 

 

 

(276

)

 

 

196

 

Unrealized loss on interest rate hedges

 

 

(367

)

 

 

 

 

 

(1,112

)

 

 

 

Tax effect of unrealized loss on interest rate hedges

 

 

95

 

 

 

 

 

 

292

 

 

 

 

Total other comprehensive income (loss)

 

 

771

 

 

 

(454

)

 

 

860

 

 

 

(141

)

Total comprehensive income

 

$

73,096

 

 

$

54,324

 

 

$

75,500

 

 

$

84,819

 

 

(1)

This item is included in the computation of net periodic pension cost.    

See accompanying notes to condensed consolidated financial statements.

 

5


STAR GROUP, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL

 

 

 

Number of Units

 

 

 

 

 

 

 

 

 

 

Accum. Other

 

 

Total

 

(in thousands - unaudited)

 

Common

 

 

General

Partner

 

 

Common

 

 

General

Partner

 

 

Comprehensive

Income (Loss)

 

 

Partners’

Capital

 

Balance as of September 30, 2018

 

 

53,088

 

 

 

326

 

 

$

329,129

 

 

$

(1,303

)

 

$

(18,041

)

 

$

309,785

 

      Impact from adoption of ASU No. 2014-09

 

 

 

 

 

 

 

 

9,164

 

 

 

60

 

 

 

 

 

 

9,224

 

Net income

 

 

 

 

 

 

 

 

2,300

 

 

 

15

 

 

 

 

 

 

2,315

 

Unrealized gain on pension plan obligation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

454

 

 

 

454

 

Tax effect of unrealized gain on pension plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(124

)

 

 

(124

)

Unrealized gain (loss) on captive insurance collateral

 

 

 

 

 

 

 

 

 

 

 

 

 

 

389

 

 

 

389

 

Tax effect of unrealized gain (loss) on captive insurance collateral

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(82

)

 

 

(82

)

Unrealized loss on interest rate hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(745

)

 

 

(745

)

Tax effect of unrealized loss on interest rate hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

197

 

 

 

197

 

Distributions

 

 

 

 

 

 

 

 

(6,225

)

 

 

(188

)

 

 

 

 

 

(6,413

)

Retirement of units (1)

 

 

(599

)

 

 

 

 

 

(5,735

)

 

 

 

 

 

 

 

 

(5,735

)

Balance as of December 31, 2018 (unaudited)

 

 

52,489

 

 

 

326

 

 

$

328,633

 

 

$

(1,416

)

 

$

(17,952

)

 

$

309,265

 

Net income

 

 

 

 

 

 

 

 

71,871

 

 

 

454

 

 

 

 

 

 

72,325

 

Unrealized gain on pension plan obligation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

457

 

 

 

457

 

Tax effect of unrealized gain on pension plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(125

)

 

 

(125

)

Unrealized gain (loss) on captive insurance collateral

 

 

 

 

 

 

 

 

 

 

 

 

 

 

905

 

 

 

905

 

Tax effect of unrealized gain (loss) on captive insurance collateral

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(194

)

 

 

(194

)

Unrealized loss on interest rate hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(367

)

 

 

(367

)

Tax effect of unrealized loss on interest rate hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

95

 

 

 

95

 

Distributions

 

 

 

 

 

 

 

 

(6,120

)

 

 

(184

)

 

 

 

 

 

(6,304

)

Retirement of units (1)

 

 

(2,187

)

 

 

 

 

 

(20,636

)

 

 

 

 

 

 

 

 

(20,636

)

Balance as of March 31, 2019 (unaudited)

 

 

50,302

 

 

 

326

 

 

$

373,748

 

 

$

(1,146

)

 

$

(17,181

)

 

$

355,421

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Units

 

 

 

 

 

 

 

 

 

 

Accum. Other

 

 

Total

 

(in thousands - unaudited)

 

Common

 

 

General

Partner

 

 

Common

 

 

General

Partner

 

 

Comprehensive

Income (Loss)

 

 

Partners’

Capital

 

Balance as of September 30, 2017

 

 

55,888

 

 

 

326

 

 

$

325,762

 

 

$

(929

)

 

$

(18,765

)

 

$

306,068

 

Net income

 

 

 

 

 

 

 

 

30,007

 

 

 

175

 

 

 

 

 

 

30,182

 

Unrealized gain on pension plan obligation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

448

 

 

 

448

 

Tax effect of unrealized gain on pension plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(135

)

 

 

(135

)

Distributions

 

 

 

 

 

 

 

 

(6,148

)

 

 

(154

)

 

 

 

 

 

(6,302

)

Balance as of December 31, 2017 (unaudited)

 

 

55,888

 

 

 

326

 

 

$

349,621

 

 

$

(908

)

 

$

(18,452

)

 

$

330,261

 

Net income

 

 

 

 

 

 

 

 

54,459

 

 

 

319

 

 

 

 

 

 

54,778

 

Unrealized gain on pension plan obligation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

448

 

 

 

448

 

Tax effect of unrealized gain on pension plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(167

)

 

 

(167

)

Unrealized gain (loss) on captive insurance collateral

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(931

)

 

 

(931

)

Tax effect of unrealized gain (loss) on captive insurance collateral

 

 

 

 

 

 

 

 

 

 

 

 

 

 

196

 

 

 

196

 

Distributions

 

 

 

 

 

 

 

 

(6,148

)

 

 

(154

)

 

 

 

 

 

(6,302

)

Retirement of units (1)

 

 

(1,281

)

 

 

 

 

 

(12,023

)

 

 

 

 

 

 

 

 

(12,023

)

Balance as of March 31, 2018 (unaudited)

 

 

54,607

 

 

 

326

 

 

$

385,909

 

 

$

(743

)

 

$

(18,906

)

 

$

366,260

 

(1)

See Note 4 – Common Unit Repurchase and Retirement.

See accompanying notes to condensed consolidated financial statements.

6


STAR GROUP, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Six Months

Ended March 31,

 

(in thousands - unaudited)

 

2019

 

 

2018

 

Cash flows provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

74,640

 

 

$

84,960

 

Adjustment to reconcile net income to net cash provided by (used in)

   operating activities:

 

 

 

 

 

 

 

 

(Increase) decrease in fair value of derivative instruments

 

 

17,638

 

 

 

209

 

Depreciation and amortization

 

 

16,106

 

 

 

16,060

 

Provision for losses on accounts receivable

 

 

4,968

 

 

 

3,465

 

Change in deferred taxes

 

 

(9,335

)

 

 

27,254

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Increase in receivables

 

 

(159,249

)

 

 

(170,530

)

Increase in inventories

 

 

(3,741

)

 

 

(108

)

(Increase) decrease in other assets

 

 

12,778

 

 

 

(4,486

)

Increase (decrease) in accounts payable

 

 

(2,364

)

 

 

8,118

 

Decrease in customer credit balances

 

 

(38,476

)

 

 

(42,184

)

Increase in other current and long-term liabilities

 

 

44,674

 

 

 

16,967

 

Net cash used in operating activities

 

 

(42,361

)

 

 

(60,275

)

Cash flows provided by (used in) investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(6,814

)

 

 

(6,583

)

Proceeds from sales of fixed assets

 

 

746

 

 

 

132

 

Purchase of investments (1)

 

 

(7,571

)

 

 

(34,542

)

Acquisitions

 

 

(13,671

)

 

 

(224

)

Net cash used in investing activities

 

 

(27,310

)

 

 

(41,217

)

Cash flows provided by (used in) financing activities:

 

 

 

 

 

 

 

 

Revolving credit facility borrowings

 

 

139,331

 

 

 

160,104

 

Revolving credit facility repayments

 

 

(25,831

)

 

 

(45,102

)

Term loan repayments

 

 

(2,500

)

 

 

(5,000

)

Distributions

 

 

(12,717

)

 

 

(12,604

)

Unit repurchases

 

 

(26,371

)

 

 

(12,023

)

Customer retainage payments

 

 

(357

)

 

 

(912

)

Payments of debt issue costs

 

 

(43

)

 

 

-

 

Net cash provided by financing activities

 

 

71,512

 

 

 

84,463

 

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

 

1,841

 

 

 

(17,029

)

Cash, cash equivalents, and restricted cash at beginning of period

 

 

14,781

 

 

 

52,708

 

Cash, cash equivalents, and restricted cash at end of period

 

$

16,622

 

 

$

35,679

 

 

(1)

See Note 2 – Significant Accounting Policies – Captive Insurance Collateral.

See accompanying notes to condensed consolidated financial statements.

 

7


STAR GROUP, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1) Organization

Star Group, L.P. (“Star,” the “Company,” “we,” “us,” or “our”) is a full service provider specializing in the sale of home heating and air conditioning products and services to residential and commercial home heating oil and propane customers. The Company has one reportable segment for accounting purposes.  We also sell diesel fuel, gasoline and home heating oil on a delivery only basis, and in certain of our marketing areas, we provide plumbing services primarily to our home heating oil and propane customer base. We believe we are the nation’s largest retail distributor of home heating oil based upon sales volume. Including our propane locations, we serve customers in the more northern and eastern states within the Northeast, Central and Southeast U.S. regions.

The Company is organized as follows:

 

Star is a limited partnership, which at March 31, 2019, had outstanding 50.3 million Common Units (NYSE: “SGU”), representing a 99.4% limited partner interest in Star, and 0.3 million general partner units, representing a 0.6% general partner interest in Star. Our general partner is Kestrel Heat, LLC, a Delaware limited liability company (“Kestrel Heat” or the “general partner”). The Board of Directors of Kestrel Heat (the “Board”) is appointed by its sole member, Kestrel Energy Partners, LLC, a Delaware limited liability company (“Kestrel”).  Since November 1, 2017, Star elected to be treated as a corporation for Federal income tax purposes, so Star and its subsidiaries are subject to Federal and state corporate income taxes.

 

Star owns 100% of Star Acquisitions, Inc., a Minnesota corporation that owns 100% of Petro Holdings, Inc. (“Petro”). Star’s operations are conducted through Petro and its subsidiaries. At March 31, 2019 Petro served approximately 448,000 residential and commercial home heating oil and propane customers. Petro also sells diesel, gasoline and home heating oil to approximately 81,000 customers on a delivery only basis. We installed, maintained, and repaired heating and air conditioning equipment and to a lesser extent provided these services outside our heating oil and propane customer base including approximately 17,000 service contracts for natural gas and other heating systems.

 

Petroleum Heat and Power Co., Inc. (“PH&P”) is a 100% owned subsidiary of Star. PH&P is the borrower and Star is the guarantor of the fourth amended and restated credit agreement’s $100 million five-year senior secured term loan and the $300 million ($450 million during the heating season of December through April of each year) revolving credit facility, both due July 2, 2023. (See Note 11—Long-Term Debt and Bank Facility Borrowings)

2) Summary of Significant Accounting Policies

 

Basis of Presentation

The Consolidated Financial Statements include the accounts of Star Group, L.P. and its subsidiaries. All material intercompany items and transactions have been eliminated in consolidation.

The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair statement of financial condition and results for the interim periods. Due to the seasonal nature of the Company’s business, the results of operations and cash flows for the six month period ended March 31, 2019 are not necessarily indicative of the results to be expected for the full year.

These interim financial statements of the Company have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and Rule 10-01 of Regulation S-X of the U.S. Securities and Exchange Commission and should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2018.

Comprehensive Income

Comprehensive income is comprised of Net income and Other comprehensive income (loss). Other comprehensive income (loss) consists of the unrealized gain amortization on the Company’s pension plan obligation for its two frozen defined benefit pension plans, unrealized gain (loss) on available-for-sale investments, unrealized gain (loss) on interest rate hedge and the corresponding tax effects.

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Cash, Cash Equivalents, and Restricted Cash

The Company considers all highly liquid investments with an original maturity of three months or less, when purchased, to be cash equivalents. At March 31, 2019, the $16.6 million of cash, cash equivalents, and restricted cash on the condensed consolidated statement of cash flows is composed of $16.4 million of cash and cash equivalents and $0.3 million of restricted cash. At September 30, 2018, the $14.8 million of cash, cash equivalents, and restricted cash on the condensed consolidated statements of cash flow is composed of $14.5 million of cash and cash equivalents and $0.3 million of restricted cash. Restricted cash represents deposits held by our captive insurance company that are required by state insurance regulations to remain in the captive insurance company as cash.

Captive Insurance Collateral

At March 31, 2019, Captive insurance collateral is comprised of $52.7 million of Level 1 debt securities measured at fair value and $1.5 million of mutual funds measured at net asset value.  At September 30, 2018, the balance was comprised of $44.8 million of Level 1 debt securities measured at fair value and $0.6 million of mutual funds measured at net asset value. Unrealized gains and losses, net of related income taxes, are reported as accumulated other comprehensive gain (loss), except for losses from impairments which are determined to be other-than-temporary. Realized gains and losses, and declines in value judged to be other-than-temporary on available-for-sale securities are included in the determination of net income and are included in Interest expense, net, at which time the average cost basis of these securities are adjusted to fair value.

The captive insurance collateral is held by our captive insurance company in an irrevocable trust as collateral for certain workers’ compensation, general and automobile liability claims.  The collateral is required by a third party insurance carrier that insures per claim amounts above a set deductible. Due to the expected timing of claim payments, the nature of the collateral agreement with the carrier, and our captive insurance company’s source of other operating cash, the collateral is not expected to be used to pay obligations within the next twelve months.   

Weather Hedge Contract

To partially mitigate the adverse effect of warm weather on cash flows, the Company has used weather hedge contracts for a number of years. Weather hedge contracts are recorded in accordance with the intrinsic value method defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815-45-15 Derivatives and Hedging, Weather Derivatives (EITF 99-2). The premium paid is included in the caption “Prepaid expenses and other current assets” in the accompanying balance sheets and amortized over the life of the contract, with the intrinsic value method applied at each interim period.

The Company entered into weather hedge contracts for fiscal years 2018, 2019, 2020 and 2021.  Under these contracts, we are entitled to receive a payment if the total number of degree days within the hedge period is less than the prior ten year average. The “Payment Thresholds,” or strikes, are set at various levels. In addition, we will be obligated to make a payment capped at $5.0 million if degree days exceed the prior ten year average. The hedge period runs from November 1 through March 31, taken as a whole, for each respective fiscal year.  For fiscal 2019, 2020 and 2021 the maximum that the Company can receive annually is $12.5 million and the maximum that the Company would be obligated to pay annually is $5.0 million.  As of March 31, 2019, the Company recorded a charge of $2.1 million under this contract that increased delivery and branch expenses. As of March 31, 2018, the Company recorded a charge of $1.9 million under its contract. The Company ultimately paid $2.1 million and $1.9 million in April 2019 and 2018, respectively.

New England Teamsters and Trucking Industry Pension Fund (“the NETTI Fund”) Liability

As of March 31, 2019, we had $0.2 million and $17.0 million balances included in the captions “Accrued expenses and other current liabilities” and “Other long-term liabilities,” respectively, on our condensed consolidated balance sheet representing the remaining balance of the NETTI Fund withdrawal liability. Based on the borrowing rates currently available to the Company for long-term financing of a similar maturity, the fair value of the NETTI Fund withdrawal liability as of March 31, 2019 was $21.3 million. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of this liability.

Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The FASB has also issued several updates to ASU No. 2014-09. The Company adopted ASU No. 2014-09 effective October 1, 2018 by using the modified retrospective method and recognized the cumulative effect of initially applying ASU No. 2014-09 as an adjustment to the opening balance of Partners’ Capital at October 1, 2018. The historical periods have not been adjusted and continue to be reported under ASC No. 605, Revenue Recognition.  We have applied the guidance in ASU No. 2014-09 retrospectively to all contracts and have elected not to account for significant financing components if the period between revenue recognition and when the

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customer pays for product, service, or equipment installation will be one year or less.  See further detail on the impact of the adoption on our condensed consolidated statement of operations and the balance sheet as of and for the six months ended March 31, 2019 at Note 3 – Revenue Recognition.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flow (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update addresses the issues of debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The Company adopted ASU No. 2016-15 effective October 1, 2018.  The adoption of ASU No. 2016-15 did not have an impact on the Company’s consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the definition of a business. The update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2019, with early adoption permitted. The Company adopted ASU No. 2017-01 effective October 1, 2018.  The adoption of ASU No. 2017-01 did not have an impact on the Company’s consolidated financial statements and related disclosures.  

Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, Leases. The update requires all leases with a term greater than twelve months to be recognized on the balance sheet by calculating the discounted present value of such leases and accounting for them through a right-of-use asset and an offsetting lease liability, and the disclosure of key information pertaining to leasing arrangements. This new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2020, with early adoption permitted. The Company does not intend to early adopt. The Company is continuing to evaluate the effect that ASU No. 2016-02 could have on its consolidated financial statements and related disclosures, but has not yet selected a transition method. The new guidance will materially change how we account for operating leases for office space, trucks and other equipment. Upon adoption, we expect to recognize discounted right-of-use assets and offsetting lease liabilities related to our operating leases of office space, trucks and other equipment. As of March 31, 2019, the undiscounted future minimum lease payments through 2033 for such operating leases are approximately $126.5 million, but the amount of leasing activity expected between March 31, 2019, and the date of adoption, is currently unknown. For this reason we are unable to estimate the discounted right-of-use assets and lease liabilities as of the date of adoption.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses. The update broadens the information that an entity should consider in developing expected credit loss estimates, eliminates the probable initial recognition threshold, and allows for the immediate recognition of the full amount of expected credit losses. This new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2021, with early adoption permitted in the first quarter of fiscal 2020. The Company is evaluating the effect that ASU No. 2016-13 will have on its consolidated financial statements and related disclosures, but has not yet determined the timing of adoption.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 230): Simplifying the test for goodwill impairment. The update simplifies how an entity is required to test goodwill for impairment. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but not exceed the total amount of goodwill allocated to the reporting unit. This new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2021, with early adoption permitted. The Company has not determined the timing of adoption, but does not expect ASU 2017-04 to have a material impact on its consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General: Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing and adding certain disclosures for these plans. The new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2021, with early adoption permitted. The Company is evaluating the effect that ASU No. 2018-14 will have on its consolidated financial statements and related disclosures, but has not determined the timing of adoption.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which will align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2022, with early adoption permitted. The Company is evaluating the effect that

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ASU No. 2018-15 will have on its consolidated financial statements and related disclosures, but has not determined the timing of adoption.

 

3) Revenue Recognition

Effective October 1, 2018 we adopted the requirements of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The adoption was not material to the financial statements presented. In accordance with the new revenue standard requirements, our condensed consolidated statement of operations and the consolidated balance sheet were impacted due to: i) the deferment of commissions provided to Company employees that were previously expensed as incurred, ii) the deferment of certain upfront credits provided to customers upon entering into a new annual product or service contract as contra-revenue that were previously expensed as incurred and recorded as delivery and branch expense, and iii) the allocation of transaction price of certain combination of contracts that were previously accounted for as separate contracts that impacts the classification of revenue and timing of revenue recognition.  The impact of adoption on our condensed consolidated statement of operations and balance sheet, as of and for the three and six months ended March 31, 2019 was as follows (in thousands):

 

 

For the Three Months Ended March 31, 2019

 

 

For the Six Months Ended March 31, 2019

 

Statement of Operations

As Reported

 

 

Balances without Adoption of ASC 606

 

 

Effect of

Change

Higher/(Lower)

 

 

As Reported

 

 

Balances without Adoption of ASC 606

 

 

Effect of

Change

Higher/(Lower)

 

Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Product

$

637,400

 

 

$

643,407

 

 

$

(6,007

)

 

$

1,096,107

 

 

$

1,105,560

 

 

$

(9,453

)

      Installations and services

 

62,182

 

 

 

60,475

 

 

 

1,707

 

 

 

138,502

 

 

 

135,269

 

 

 

3,233

 

           Total Sales

 

699,582

 

 

 

703,882

 

 

 

(4,300

)

 

 

1,234,609

 

 

 

1,240,829

 

 

 

(6,220

)

Cost and Expenses: