| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| Delaware | 26-0758017 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
290 Healthwest Drive, Suite 2 Dothan, Alabama | 36303 | |
| (Address of principal executive offices) | (Zip Code) | |
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 ☐x No ☒
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
| Non-accelerated filer | x | Smaller reporting company | ||||
| x | ||||||
| Emerging growth company | ||||||
EXPLANATORY NOTE
The information contained in this Quarterly Report on Form10-Q should be read in conjunction with the information contained in Construction Partners, Inc.’s final prospectus dated May 3, 2018 (the “IPO Prospectus”) filed with the Securities and Exchange Commission pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the “Securities Act”), on May 4, 2018.
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ASSETS Current assets: Cash Contracts receivable including retainage, net Costs and estimated earnings in excess of billings on uncompleted contracts Inventories Other current assets Total current assets Property, plant and equipment, net Goodwill Intangible assets, net Investment in joint venture Other assets Deferred income taxes, net Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable Billings in excess of costs and estimated earnings on uncompleted contracts Current maturities of debt Accrued expenses and other current liabilities Total current liabilities Long-term liabilities: Long-term debt, net of current maturities Deferred income taxes, net Other long-term liabilities Total long-term liabilities Total liabilities Commitments and contingencies Stockholders’ Equity Preferred stock, par value $0.001; 1,000,000 shares authorized and no shares issued and outstanding Common stock, $0.001 par value, 126,000,000 shares authorized, 44,987,574 issued and 41,817,541 and 41,691,541 outstanding at March 31, 2018 and December 31, 2017, respectively Additionalpaid-in capital Treasury stock, at cost Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity Revenues Cost of revenues Gross profit General and administrative expenses Settlement income Gain on sale of equipment, net Operating income Interest expense, net Other expense Income before provision for income taxes and earnings from investment in joint venture Provision for income taxes Earnings from investment in joint venture Net income Net income per share attributable to common stockholders: Basic Diluted Weighted average number of common shares outstanding: Basic Diluted Balance, September 30, 2017 Equity-based compensation expense Issuance of restricted shares from treasury Net income Balance, March 31, 2018 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization of long-lived assets Amortization of deferred debt issuance costs Provision for bad debt Gain on sale of equipment, net Equity-based compensation expense Earnings from investment in joint venture Deferred income taxes Changes in operating assets and liabilities: Contracts receivable including retainage, net Costs and estimated earnings in excess of billings on uncompleted contracts Inventories Other current assets Other assets Accounts payable Billings in excess of costs and estimated earnings on uncompleted contracts Accrued expenses and other current liabilities Other long-term liabilities Net cash provided by operating activities Cash flows from investing activities: Purchases of property, plant and equipment Proceeds from sales of equipment Investment in joint venture Net cash used in investing activities Cash flows from financing activities: Repayments of revolving credit facility Proceeds from revolving credit facility Repayments of long-term debt Proceeds from reissuance of treasury stock Common stock dividend paid Net cash used in financing activities Net change in cash Cash: Beginning of Period End of Period Supplemental cash flow information: Cash paid for interest Cash paid for income taxes Non cash investing activities: Property, plant and equipment financed by accounts payable its 2018 Form 10-K. Contract Liabilities this account are recognized, and the liability is reduced, as the Company subsequently satisfies the performance obligation under the contract. 2018. Alabama Department of Transportation North Carolina Department of Transportation three months ended December 31, 2018 or December 31, 2017, as follows: Contract costs Sheet. The the Company completed an initial public offering (the "IPO") and reclassification (the "Reclassification") of its common stock during the fiscal year ended September 30, 2018, involving, among other things, a Contracts receivable Retainage Allowance for doubtful accounts Contracts receivable including retainage, net Costs on uncompleted contracts Estimated earnings to date on uncompleted contracts Billings to date on uncompleted contracts Net billings in excess of costs and estimated earnings on uncompleted contracts Costs and estimated earnings in excess of billings on uncompleted contracts Billings in excess of costs and estimated earnings on uncompleted contracts Net billings in excess of costs and estimated earnings on uncompleted contracts $5.34 per share. Long-term debt: Compass Term Loan Compass Revolving Credit Facility Total long-term debt Deferred debt issuance costs Current maturities of long-term debt Long-term debt, net of current maturities Current maturities of debt: Current maturities of long-term debt Total current maturities of debt 9 - Earnings Per Share Outstanding, September 30, 2017 Issuance of treasury shares Outstanding, March 31, 2018 Numerator Net income attributable to common stockholders Denominator Weighted average number of basic common shares outstanding Net income per basic common share attributable to common stockholders Numerator Net income attributable to common stockholders Denominator Weighted average number of basic common shares outstanding Effect of dilutive securities: 2016 Equity Incentive Plan options 2010Non-Plan Stock Options Agreement options Weighted average number of diluted common shares outstanding: Net income per diluted common share attributable to common stockholders 2018. December 31, 2017, respectively. During the The Company fiscal year 2026. owned by an immediate family member of a Senior Vice President of the Company provides subcontracting services to a subsidiary of the Company ("Subcontracting Services"). transactions with such parties (in thousands): AgreementConstruction Partners, Inc.Consolidated Balance Sheets March 31, 2018 September 30, 2017 (unaudited) $ 25,797 $ 27,547 75,883 120,984 10,132 4,592 19,829 17,487 12,610 4,520 144,251 175,130 125,264 115,911 30,600 30,600 2,400 2,550 630 — 14,442 2,483 2,235 1,876 $ 319,822 $ 328,550 $ 37,324 $ 52,402 32,107 32,108 10,000 10,000 16,789 20,036 96,220 114,546 37,175 47,136 6,556 9,667 4,837 5,020 48,568 61,823 144,788 176,369 — — 45 45 142,536 142,385 (11,525 ) (11,983 ) 43,978 21,734 175,034 152,181 $ 319,822 $ 328,550 The accompanying December 31, September 30, 2018 2018 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 91,567 $ 99,137 Contracts receivable including retainage, net 93,972 120,291 Costs and estimated earnings in excess of billings on uncompleted contracts 10,192 9,334 Inventories 28,538 24,556 Prepaid expenses and other current assets 16,414 14,137 Total current assets 240,683 267,455 Property, plant and equipment, net 178,972 178,692 Goodwill 32,919 32,919 Intangible assets, net 3,521 3,735 Investment in joint venture 165 1,659 Other assets 9,972 10,270 Deferred income taxes, net 1,580 1,580 Total assets $ 467,812 $ 496,310 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 38,220 $ 63,510 Billings in excess of costs and estimated earnings on uncompleted contracts 39,471 38,738 Current maturities of debt 14,836 14,773 Accrued expenses and other current liabilities 12,118 17,520 Total current liabilities 104,645 134,541 Long-term liabilities: Long-term debt, net of current maturities 44,368 48,115 Deferred income taxes, net 8,890 8,890 Other long-term liabilities 5,286 5,295 Total long-term liabilities 58,544 62,300 Total liabilities 163,189 196,841 Commitments and contingencies Stockholders' Equity: Preferred stock, par value $0.001; 10,000,000 shares authorized and no shares issued and outstanding at December 31, 2018 and September 30, 2018 — — Class A common stock, par value $0.001; 400,000,000 shares authorized, 11,950,000 issued and outstanding at December 31, 2018 and September 30, 2018 12 12 Class B common stock, par value $0.001; 100,000,000 shares authorized, 42,387,571 issued and 39,464,619 outstanding at December 31, 2018 and September 30, 2018 42 42 Additional paid-in capital 242,493 242,493 Treasury stock, at cost (15,603 ) (15,603 ) Retained earnings 77,679 72,525 Total stockholders' equity 304,623 299,469 Total liabilities and stockholders' equity $ 467,812 $ 496,310 are an integral part of theseto unaudited consolidated financial statements.Consolidated Statements of Income For the Three Months Ended
March 31, For the Six Months Ended
March 31, 2018 2017 2018 2017 $ 118,899 $ 110,366 $ 269,320 $ 232,486 105,150 96,005 232,773 199,396 13,749 14,361 36,547 33,090 (13,358 ) (10,965 ) (25,784 ) (21,528 ) 14,803 — 14,803 — 886 2,183 1,031 2,437 16,080 5,579 26,597 13,999 (253 ) (1,096 ) (550 ) (2,143 ) (39 ) (105 ) (60 ) (131 ) 15,788 4,378 25,987 11,725 4,770 1,578 3,973 4,364 230 — 230 — $ 11,248 $ 2,800 $ 22,244 $ 7,361 $ 0.27 $ 0.07 $ 0.53 $ 0.18 $ 0.27 $ 0.07 $ 0.53 $ 0.18 41,717,024 41,502,490 41,704,071 41,502,490 41,910,122 41,505,180 41,874,442 41,502,490 The accompanying For the Three Months Ended December 31, 2018 2017 Revenues $ 154,327 $ 150,421 Cost of revenues 133,199 127,623 Gross profit 21,128 22,798 General and administrative expenses (14,431 ) (12,426 ) Gain on sale of equipment, net 334 145 Operating income 7,031 10,517 Interest expense, net (515 ) (297 ) Other expense (17 ) (21 ) Income before provision (benefit) for income taxes and earnings from investment in joint venture 6,499 10,199 Provision (benefit) for income taxes 1,651 (797 ) Earnings from investment in joint venture 306 — Net income $ 5,154 $ 10,996 Net income per share attributable to common stockholders: Basic and diluted $ 0.10 $ 0.26 Weighted average number of common shares outstanding: Basic and diluted 51,414,619 41,691,541 are an integral part of theseto unaudited consolidated financial statements.Consolidated Statement of Stockholders’ Equity Additional Total Common Stock Paid-in Treasury Retained Stockholders’ Shares Amount Capital Stock Earnings Equity 44,987,574 $ 45 $ 142,385 $ (11,983 ) $ 21,734 $ 152,181 — — 604 — — 604 — — (453 ) 458 — 5 — — — — 22,244 22,244 44,987,574 $ 45 $ 142,536 $ (11,525 ) $ 43,978 $ 175,034 The accompanying Class A Common Stock Class B Common Stock Shares Amount Shares Amount September 30, 2018 11,950,000 $ 12 42,387,571 $ 42 $ 242,493 $ (15,603 ) $ 72,525 $ 299,469 Net income — — — — — — 5,154 5,154 December 31, 2018 11,950,000 $ 12 42,387,571 $ 42 $ 242,493 $ (15,603 ) $ 77,679 $ 304,623 Common Stock Additional
Paid-in
Capital Treasury
Stock Retained
Earnings Total
Stockholders'
Equity Shares Amount September 30, 2017 44,987,575 $ 45 $ 142,385 $ (11,983 ) $ 21,734 $ 152,181 Net income — — — — 10,996 10,996 December 31, 2017 44,987,575 $ 45 $ 142,385 $ (11,983 ) $ 32,730 $ 163,177 are an integral part of theseto unaudited consolidated financial statements.Consolidated Statements of Cash Flows For the Six Months Ended March 31, 2018 2017 $ 22,244 $ 7,361 11,308 10,501 39 366 290 290 (1,031 ) (2,437 ) 604 156 (230 ) — (3,470 ) 23 44,811 27,896 (5,540 ) (3,078 ) (2,342 ) (2,535 ) (8,090 ) (6,350 ) (11,960 ) (1,081 ) (15,078 ) (11,258 ) (1 ) 3,455 (3,247 ) (4,426 ) (183 ) 511 28,124 19,394 (21,966 ) (12,076 ) 2,487 3,254 (400 ) — (19,879 ) (8,822 ) (5,000 ) — — 312 (5,000 ) (7,911 ) 5 — — (31,292 ) (9,995 ) (38,891 ) (1,750 ) (28,319 ) 27,547 51,085 $ 25,797 $ 22,766 $ 970 $ 1,784 $ 2,707 $ 2,975 $ 2,347 $ 315 The accompanying For the Three Months Ended December 31, 2018 2017 Cash flows from operating activities: Net income $ 5,154 $ 10,996 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization of long-lived assets 7,138 5,675 Amortization of deferred debt issuance costs and debt discount 27 19 Provision for bad debt 145 145 Gain on sale of equipment (334 ) (145 ) Earnings from investment in joint venture (306 ) — Deferred income taxes — (3,470 ) Changes in operating assets and liabilities: Contracts receivable including retainage, net 26,174 25,479 Costs and estimated earnings in excess of billings on uncompleted contracts (858 ) (2,466 ) Inventories (3,982 ) (706 ) Other current assets (2,277 ) (2,600 ) Other assets 298 (549 ) Accounts payable (25,290 ) (11,268 ) Billings in excess of costs and estimated earnings on uncompleted contracts 733 4,599 Accrued expenses and other current liabilities (5,402 ) (6,214 ) Other long-term liabilities (9 ) (5 ) Net cash provided by operating activities 1,211 19,490 Cash flows from investing activities: Purchases of property, plant and equipment (7,406 ) (9,509 ) Proceeds from sale of equipment 536 191 Distributions received from investment in joint venture 1,800 — Net cash used in investing activities (5,070 ) (9,318 ) Cash flows from financing activities: Repayments on revolving credit facility — (5,000 ) Repayments of long-term debt (3,711 ) (2,500 ) Net cash used in financing activities (3,711 ) (7,500 ) Net change in cash and cash equivalents (7,570 ) 2,672 Cash and cash equivalents: Beginning of period 99,137 27,547 End of period $ 91,567 $ 30,219 Supplemental cash flow information: Cash paid for interest $ 747 $ 489 Cash paid for income taxes $ 60 $ 916 Non-cash items: Property, plant and equipment financed with accounts payable $ 178 $ — Note receivable obtained in consideration for disposition of assets $ — $ 1,013 are an integral part of theseto unaudited consolidated financial statements.1—1 - General“Company”"Company") is a leading infrastructure and road construction company operating in Alabama, Florida, Georgia, SouthNorth Carolina and NorthSouth Carolina through its wholly-ownedwholly owned subsidiaries. The Company provides site development, paving, utility and drainage systems, as well as hot mix asphalt ("HMA") supply. The Company executes projects for a mix of private, municipal, state, and federal customers that are both privately and publicly funded. The majority of the projects arework is performed under fixed unit price contracts where the ultimate contract amount is based on the fixed unit price appliedand, to actual units of work completed on the project. To a lesser extent, the Company also performs some fixed total price contracts.wholly-ownedwholly owned subsidiary, Construction Partners Holdings, Inc. (“Construction Partners Holdings”), a Delaware corporation incorporated in 1999 and whichthat began operations in 2001, to execute an acquisition growth strategy in the hot mix asphalt paving and construction industry. SunTx Capital Partners (“SunTx”("SunTx"), a private equity firm based in Dallas, Texas, is the Company’s majority investor and has owned a controlling interest in the Company’s stock since itsthe Company's inception. On September 20, 2017, the Company changed its name from SunTx CPI Growth Company, Inc. to Construction Partners, Inc.some due to seasonality, although weseasonality. Our products are able to performused, and our construction projects during all twelve monthsoperations and production facilities are located, outdoors. Therefore, seasonal changes and other weather-related conditions, in allparticular 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 markets.products and 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 the third and fourth quarters of our fiscal year typically result in higher activity and revenues during those quarters. The first and second quarters of our fiscal year typically have lower levels of activity due to adverse weather conditions.The results of operations and cash flows for any fiscal quarter may not be indicative of future results or of the results of operations or cash flows for a full fiscal year. These interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related notes thereto for the year ended September 30, 2017 included in the IPO Prospectus.2—2 - Significant Accounting Policieswholly-ownedwholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. These interim consolidated statements have been prepared pursuant to the rules and regulations of the U.S.United States Securities and Exchange Commission (“SEC”("SEC"), which permit reduced disclosure for interim periods. The Consolidated Balance Sheet as of September 30, 20172018 was derived from audited financial statements for the fiscal year then ended, but does not include all necessary disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”("GAAP") with respect to annual financial statements. In the opinion of management, the unaudited consolidated financial statements include all recurring adjustments and normal accruals necessary for a fair presentation of the Company’sCompany's financial position, results of operations and cash flows for the dates and periods presented. These consolidated financial statements and accompanying notes should be read in conjunction with the Company’sCompany's audited annual consolidated financial statements for the year ended September 30, 2017 and notes thereto included in its Annual Report on Form 10-K for the IPO Prospectus.fiscal year ended September 30, 2018 (the "2018 Form 10-K"). Results for interim periods are not necessarily indicative of the results to be expected for a full fiscal year or for any future period.25.2 to 1 split of the common stock (the “Stock Split”)Stock Split described in Note 12 –Subsequent Events.Management’s7 - Equity. U.S. GAAP requires management to make estimates and assumptions that affect the recorded amounts of assets, liabilities, stockholders’stockholders' equity, revenues and expenses during the reporting period, and the disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates are used in accounting for items such as recognition of revenues and cost of revenues, goodwill and other intangible assets, allowance for doubtful accounts, valuation allowances related to income taxes, accruals for potential liabilities related to lawsuits or insurance claims, and the fair value of equity-based compensation awards. Estimates are continually evaluated based on historical information and actual experience. Actualexperience; however, actual results could differ materially from thosethese estimates.Company’sCompany's annual consolidated financial statements for the fiscal year ended September 30, 2017 included in the IPO Prospectus.“emerging"emerging growth company”company" as defined by the Jumpstart Our Business Startups Act or “JOBS Act” which was(the "JOBS Act"), enacted in April 2012. As an emerging growth company, the Company may takecould have taken advantage of an exemption from being requiredthat would have allowed the Company to wait to comply with new or revised financial accounting standards until the effective date of such standards is applicable tofor private companies. TheHowever, the JOBS Act provides that a company may elect to opt out of the extended transition period and comply with the requirements that apply tonon-emerging growth companies, but any such election to opt out is irrevocable. The Company has elected to opt out of such extended transition period, which means that when a standard is issued or revised and it has different effective dates for public and private companies, the Company is required to adopt the new or revised standard at the effective date applicable to public companies that are not emerging growth companies. including retainage, net are generally based on amounts billed and currently due from customers, amounts currently due but unbilled, and amounts retained by the customer pending completion of a project. It is common in the Company’sCompany's industry for a small portion of progress billings ofor the contract price, typically 10%, to be withheld by the customer until the Company completes a project to the satisfaction of the customer in accordance with contract terms. Such amounts, defined as retainage, represent a contract asset and are also included on the consolidated balance sheet as contracts"Contracts receivable including retainage, net.net". Based on the Company’sCompany's experience with similar contracts in recent years, billings for such retainage balances are generally collected within one year of the completion of the project.CostsEstimated Earnings on Uncompleted ContractsCompany’sCompany's contracts are governed by the contract terms of each project based on (i) progress toward completion approved by the owner, (ii) achievement of milestones or (iii) pre-agreed schedules. Billings do not necessarily correlate with revenues recognized under thepercentage-of-completion method of accounting. The Company records currentcontract assets and currentcontract liabilities to account for these differences in timing.currentcontract asset, “Costs"Costs and estimated earnings in excess of billings on uncompleted contracts,” represents" arises when the Company recognizes revenues that have been recognized in amounts which havefor services performed under its construction projects, but the Company is not been billedyet entitled to bill the customer under the terms of the contracts.contract. Amounts billed to customers are excluded from this asset and reflected on the Consolidated Balance Sheet as "Contracts receivable including retainage, net". Included in costs and estimated earnings in excess of billings on uncompleted contracts are amounts the Company seeks or will seek to collect from customers or others for (i) errors, (ii) changes in contract specifications or design, (iii) contract change orders in dispute, unapproved as to scope and price, or (iv) other customer relatedcustomer-related causes of unanticipated additional contract costs (claims and unapproved change orders)(such as claims). Such amounts are recorded at estimated net realizable value when realization is probable and can be reasonably estimated. Claims and unapproved change orders made by the Company may involve negotiation and, in rare cases, litigation. Unapproved change orders and claims also involve the use of estimates, and revenues associated with unapproved change orders and claims are included when realization is probable and amounts can be reliably determined. The Company did not recognize any material amounts associated with claims and unapproved change orders during the periods presented.currentcontract liability, “Billings"Billings in excess of costs and estimated earnings on uncompleted contracts,”" represents billingsthe Company's obligation to customerstransfer goods or services to a customer for which the Company has been paid by the customer or for which the Company has billed the customer under the terms of the contract. Revenue for future services reflected in excess of revenues recognized.management’smanagement's assessment of customers’customers' credit ratings. The Company principally deals with recurring customers, state and local governments and well-known local companies whose reputations are known to the Company. Creditmanagement. The Company performs credit checks are performed for significant new customers. Progresscustomers and generally requires progress payments are generally required for significant projects. The Company generally has the ability to file liens against the customer’s property if payments are not made on a timely basis. No single customer accounted for more than 10% of the Company’sCompany's contracts receivable including retainage, net balance at MarchDecember 31, 2018 or September 30, 2017.37.6% and 33.9%37.3% of consolidated revenues for each of the three months ended MarchDecember 31, 2018 and MarchDecember 31, 2017, respectively, and 37.4% and 35.4% of consolidated revenues for the six months ended March 31, 2018 and March 31, 2017, respectively.2017. Two customers accounted for more than 10% of consolidated revenues for the periods presented below (unaudited): % of Consolidated
Revenues
for the Three Months
Ended March 31, % of Consolidated
Revenues
for the Six Months
Ended March 31, 2018 2017 2018 2017 13.2 % 10.7 % 13.2 % 12.3 % 11.8 % 11.1 % 12.6 % 11.0 % Revenues and Cost Recognition % of Consolidated Revenues for the Three Months Ended December 31, 2018 2017 Alabama Department of Transportation 9.6 % 13.2 % North Carolina Department of Transportation 14.2 % 13.2 % Company’sCompany generates revenues from the sale of HMA and aggregates to third-party public and private customers. The Company's revenue from construction contracts and revenue from sales of HMA and aggregates are both generally impacted by similar economic factors.onover time, using thepercentage-of-completion method measuredof accounting, as the Company satisfies its performance obligations by transferring control of the asset created or enhanced by the relationship of total cost incurredproject to total estimated contract costs(cost-to-cost method). Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in favorable or unfavorable revisions to estimated costs, revenues and gross profit, and are recognized in the period in which the revisions are determined.The accuracycustomer. Recognition of revenues and cost of revenues reported on the consolidated financial statements depends on,for construction projects requires significant judgment by management, including, among other things, management’sestimating total costs expected to be incurred to complete a project and measuring progress toward completion. Management reviews contract estimates regularly to assess revisions of totalestimated costs to complete projects. Thea project and measurement of progress toward completion.management’sprior experience; however, many factors contribute to changes in estimates of contract costs. Accordingly, estimates made with respect to uncompleted projects are subject to change as each project progresses and better estimates of contract costs become available. All contract costs are recorded as incurred, and revisions to estimated total costs are reflected as soon as the obligation to perform is determined. Provisions are recognized for the full amount of estimated losses on uncompleted contracts whenever evidence indicates that the estimated total cost of a contract exceeds its estimated total revenue, regardless of the stage of completion. When the Company incurs additional costs related to work performed by subcontractors, the Company may have contractual provisions to back charge the subcontractors for those costs. A reduction to costs related to back charges is recognized when the estimated recovery is probable and the amount can be reasonably estimated.includeconsist of (i) direct costs on contracts, including labor, materials, and material, amounts paidpayable to subcontractors direct overheadand (ii) indirect costs related to contract performance, such as insurance, employee benefits, and equipment costs (primarily depreciation, fuel, maintenance and repairs).recoveredreversed or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management evaluates the realization of deferred tax assets and establishes a valuation allowance when it is more likely than not that all or a portion of the deferred tax assets will not be realized. Deferred tax assets and deferred tax liabilities are presented on a net basis by taxing authority and classified asnon-current on the Company’s Consolidated Balance Sheets.Company’s policy is to classifyCompany classifies income tax relatedtax-related interest and penalties inas interest expense and other expenses, respectively.Issuance Costs As Reported Without Application of ASC 606 Costs and estimated earnings in excess of billings on uncompleted contracts $ 10,192 $ (1,060 ) $ 11,252 Inventories $ 28,538 $ 1,604 $ 26,934 Accrued expenses and other liabilities $ 12,118 $ (41 ) $ 12,159 Billings in excess of costs and estimated earnings on uncompleted contracts $ 39,471 $ 705 $ 38,766 Revenues $ 154,327 $ (1,765 ) $ 156,092 Cost of revenues $ 133,199 $ (1,604 ) $ 134,803 Provision (benefit) for income taxes $ 1,651 $ (41 ) $ 1,692 Net income $ 5,154 $ (120 ) $ 5,274 capitalizes certain third-party feeshas refined its accounting policies and related internal controls affected by this update. Management's assessment of the Company's construction contracts under the new standard supports the recognition of revenue over time using the percentage-of-completion method of accounting, measured by the relationship of total cost incurred to total estimated contract costs (cost-to-cost method), which is consistent with the Company's historical revenue recognition practices. As such, the Company's construction contracts continue to be recognized over time considering the continuous transfer of control to its customers during the performance ofPro forma revenues $ 173,360 Pro forma net income $ 10,658 associated within-processattributable to the Scruggs Acquisition, including adjustments to: equity offerings. At March(a) Include the pro forma results of operations of Scruggs for the three months ended December 31, 2017. (b) Include additional depreciation and depletion expense related to the fair value of acquired property, plant and equipment and quarry reserves, as applicable, as if such assets were acquired on October 1, 2016 and the Company's depreciation and depletion methodologies were consistently applied to such assets. (c) Include interest expense under the Compass Term Loan, defined in Note 8 - Debt, as if the $22.0 million borrowed to partially finance the purchase price was borrowed on October 1, 2016. Interest expense calculations further assume that no principal payments were made applicable to the $22.0 million borrowed during the period from October 1, 2016 through December 31, 2017, and that the interest rate in effect on the date the Company made the additional $22.0 million borrowing on May 15, 2018 was in effect for the period from October 1, 2016 through December 31, 2017. 2017, $4.0 million and $2.2 million, respectively, of capitalized equity issuance costs were recorded as prepaid expenses, included in other current assets on the Consolidated Balance Sheets.Note 3—Contracts Receivable Including Retainage, NetContracts receivable including retainage, net are comprised of the following at March 31, 2018 and September 30, 2017 (in thousands): March 31, 2018 September 30, 2017 (unaudited) $ 63,688 $ 109,538 13,528 13,180 77,216 122,718 (1,333 ) (1,734 ) $ 75,883 $ 120,984 December 31, 2018 September 30, 2018 (unaudited) Contracts receivable $ 78,500 $ 104,541 Retainage 16,715 16,848 95,215 121,389 Allowance for doubtful accounts (1,243 ) (1,098 ) Contracts receivable including retainage, net $ 93,972 $ 120,291 4—6 - Costs and Estimated Earnings on Uncompleted ContractsMarchDecember 31, 2018 and September 30, 2017 consist2018 consisted of the following (in thousands): March 31, 2018 September 30, 2017 (unaudited) $ 545,216 $ 489,661 68,428 62,193 613,644 551,854 (635,619 ) (579,370 ) $ (21,975 ) $ (27,516 ) ReconciliationDecember 31, 2018 September 30, 2018 (unaudited) Costs on uncompleted contracts $ 778,571 $ 743,322 Estimated earnings to date on uncompleted contracts 101,007 95,155 879,578 838,477 Billings to date on uncompleted contracts (908,857 ) (867,881 ) Net billings in excess of costs and estimated earnings on uncompleted contracts $ (29,279 ) $ (29,404 ) netcosts and estimated earnings in excess of billings (contract asset) and billings in excess of costs and estimated earnings (contract liability) on uncompleted contracts from September 30, 2018 to amounts reflected onDecember 31, 2018 are presented below (in thousands): Net Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts September 30, 2018 $ 9,334 $ (38,738 ) $ (29,404 ) Changes in revenue billed, contract price or cost estimates 858 (733 ) 125 December 31, 2018 (unaudited) $ 10,192 $ (39,471 ) $ (29,279 ) Company’s Consolidated Balance Sheet at MarchCompany had unsatisfied or partially unsatisfied performance obligations under construction project contracts representing $505.0 million in aggregate transaction price. The Company expects to earn revenue as it satisfies its performance obligations under those contracts in the amount of $391.5 million during the remainder of the fiscal year ending September 30, 2019 and $113.5 million thereafter.2017 is as follows (in thousands): March 31, 2018 September 30, 2017 (unaudited) $ 10,132 $ 4,592 (32,107 ) (32,108 ) $ (21,975 ) $ (27,516 ) Note 5—Joint VentureIn November 2017, one2018, the Company had authorized for issuance 10,000,000 shares of preferred stock, par value $0.001. No preferred shares were issued and outstanding at December 31, 2018 or September 30, 2018.Company’s wholly-owned subsidiaries enteredCompany completed the Reclassification by amending and restating its certificate of incorporation to effectuate a dual class common stock structure consisting of Class A common stock and Class B common stock. As a result, each share of common stock, par value $0.001, was reclassified into 25.2 shares of Class B common stock so that all holders of shares of outstanding common stock became the holders of 41,817,537 shares of Class B common stock, and shares held by the Company in treasury became 3,170,034 Class B treasury shares. All share and per share amounts have been retroactively adjusted for all periods presented to give effect to the Stock Split.joint venture agreement (the “JV”) with a third-party for the sole purposeprice of bidding on and, if awarded, performing a construction project for the Alabama Department$12.00 per share. Of these shares, 9,000,000 were shares of Transportation. The Company and the third-party each own a 50% partnership interest in the JV and share revenue and expenses on a 50/50 basis. The JV is jointly managedClass A common stock sold by representatives of the Company and 2,250,000 were sold by holders of Class B common stock, which shares upon sale automatically converted into 2,250,000 shares of Class A common stock. On May 24, 2018, the third-party and all labor, material and equipment required to perform the contract is subcontracted to parties which may include both the subsidiaryunderwriters of the IPO partially exercised their over-allotment option to purchase an additional 700,000 shares of Class A common stock at the IPO price of $12.00, less the underwriting discount and commissions. Of these shares, 350,000 were shares of Class A common stock sold by the Company that is party to the JV and the third-party.The Company accounts for this joint venture as an equity method investment in accordance with U.S. GAAP. Through March350,000 were sold by holders of Class B common stock, which shares upon sale automatically converted into 350,000 shares of Class A common stock.invested approximately $0.4 million into the JV,had authorized for issuance 400,000,000 shares of Class A common stock, par value $0.001, of which is reflected as investment in joint venture on the Consolidated Balance Sheet. During the three11,950,000 were issued and six months ended Marchoutstanding.recognized $0.2 millionpre-tax income representing its 50% interesthad authorized for issuance 100,000,000 shares of Class B common stock, par value $0.001 per share, of which 42,387,571 were issued and 39,464,619 were outstanding, respectively. At December 31, 2018 and September 30, 2018, the Company held 2,922,952 shares in the earningstreasury, at an average cost of the JV, which is reflected as earnings from investment in joint venture on the Consolidated Statements of Income and included within investment in joint venture on the Consolidated Balance Sheet.6—8 - DebtMarchDecember 31, 2018 and September 30, 20172018 consisted of the following (in thousands): March 31, 2018 September 30, 2017 (unaudited) $ 42,500 $ 47,500 5,000 10,000 47,500 57,500 (325 ) (364 ) (10,000 ) (10,000 ) $ 37,175 $ 47,136 10,000 10,000 $ 10,000 $ 10,000 See December 31, September 30, 2018 2018 (unaudited) Long-term debt: Compass Term Loan $ 53,700 $ 57,300 Compass Revolving Credit Facility 5,000 5,000 Other long-term debt 853 964 Total long-term debt 59,553 63,264 Deferred debt issuance costs (337 ) (362 ) Debt discount (12 ) (14 ) Current maturities of long-term debt (14,836 ) (14,773 ) Long-term debt, net of current maturities $ 44,368 $ 48,115 12– Subsequent Events for additional information.7—7 -Equity,The following presents changes to the Company’s outstanding sharesCompany completed an IPO and Reclassification of common stock and treasury shares forduring the six months ended March 31, 2018 (unaudited, dollars in thousands): Common Shares
Outstanding Treasury Shares Shares Cost 41,691,541 (3,296,034 ) $ (11,983 ) 126,000 126,000 458 41,817,541 (3,170,034 ) $ (11,525 ) See Note 12 –Subsequent Events for additional information regarding the Company’s initial public offering that was completed in May 2018.Note 8—Equity-based CompensationOn February 23, 2018, the Company granted to certain employees an aggregate of 126,000 restricted shares of common stock at a purchase price of $0.04 per share. The Company recorded proceeds of $5,000 from the sale of these restricted shares, which were issued from treasury shares. The Company recorded additionalpaid-in capital of approximately $0.5 million representing the cost of treasury shares issued in excessthird quarter of the purchase price paid by awardees.Half of the shares granted vested on the award date and the remaining 50% of the shares will vest on July 1, 2018, subject to continuous employment. The grant date fair value of the shares was estimated to be $7.78 per share.During the three and six monthsfiscal year ended March 31, 2018, the Company recorded compensation expense in connection with these grants in the amount of $0.6 million, which is reflected as general and administrative expenses on the Company’s Consolidated Statements of Income. At March 31, 2018, there was approximately $0.4 million of unrecognized compensation expense related to these awards.Note 9—Earnings per ShareBasic earnings per share is computed by dividing net income attributable to common stockholders by the weighted-average number of common shares outstanding during the period. September 30, 2018.earnings per share for the periods presented (in thousands, except share and per share amounts): For the Three Months
Ended March 31, For the Six Months Ended
March 31, 2018 2017 2018 2017 $ 11,248 $ 2,800 $ 22,244 $ 7,361 41,717,024 41,502,490 41,704,071 41,502,490 $ 0.27 $ 0.07 $ 0.53 $ 0.18 Diluted earnings per share is calculated by dividing net income attributable to common stockholders by the weighted-average number of common shares and potential dilutive common shares outstanding during the period, determined using the treasury stock method. Securities are excluded from the calculation of diluted earnings per share for any period during which the effect of their inclusion would be anti-dilutive. The following table summarizes the calculation of the weighted-average number of diluted common shares outstanding and the calculation of diluted earnings per share for the periods presented (in thousands, except share and per share amounts): For the Three Months
Ended March 31, For the Six Months Ended
March 31, 2018 2017 2018 2017 $ 11,248 $ 2,800 $ 22,244 $ 7,361 41,717,024 41,502,490 41,704,071 41,502,490 — 2,690 — — 193,098 — 170,371 — 41,910,122 41,505,180 41,874,442 41,502,490 $ 0.27 $ 0.07 $ 0.53 $ 0.18 For the Three Months Ended December 31, 2018 2017 Numerator Net income attributable to common shareholders $ 5,154 $ 10,996 Denominator Weighted average number of common shares outstanding, basic and diluted 51,414,619 41,691,541 Net income per common share attributable to common shareholders, basic and diluted $ 0.10 $ 0.26 had 63,000, 768,985, 63,000 and 958,035excluded 768,984 common stock equivalents whichfrom the calculation of diluted earnings per share for the three months ended December 31, 2017 because their inclusion would be anti-dilutive. There were no anti-dilutive securities excluded from the calculation of diluted earnings per share for the three months ended MarchDecember 31, 2018 and 2017 and the six months ended March 31, 2018 and 2017, respectively, because they were anti-dilutive.10—10 - Provision for Income TaxesU.S.United States government enacted comprehensive tax legislation known as the Tax Cuts and Jobs Act (the “Tax Act”"Tax Act"). The Tax Act includesincluded broad and complex changes to the U.S.United States tax code, including a reduction in the U.S.United States federal corporate income tax rate from 35%35.0% to 21%21.0% effective January 1, 2018. ForAccordingly, the fiscal year ending September 30, 2018,United States statutory income tax rate applicable to the Company will record its income tax provision based on a blended U.S. statutory tax rate of 24.5%, which is based on a proration ofwas 21.0% and 35.0% during the applicable tax rates beforethree months ended December 31, 2018 and after the effective date of the Tax Act, and the effect of applicable state income taxes. The federal statutory rate of 21% will apply for fiscal years beginning after September 30, 2018.sixthree months ended MarchDecember 31, 2018,2017, the Company recorded a provisional discrete tax benefit of $3.5 million related to the Tax Act, primarily duerelated to adjustingan adjustment of its U.S.United States deferred tax liabilities by the same amount, reflecting the reduction in the U.S.United States federal corporate tax rate. This net reduction in deferred tax liabilities also included the estimated impact on the Company’sCompany's net state deferred tax assets.The Company’s effective tax rate for the three months ended March 31, 2018 and 2017 was 29.8% and 36.0%, respectively. The effective tax rate for the three months ended March 31, 2018 was lower than the comparable prior year period primarily due to the decrease in the federal corporate tax rate. Similarly, the Company’s effective tax rate for the six months ended March 31, 2018 and 2017 was 15.2% and 37.2%, respectively, due primarily to the decrease in the federal corporate tax rate and the benefit of a tax credit recorded during the six months ended March 31, 2018 related to the enactment of the Tax Act. has not yet completed its accounting for the income tax effects of certain elementsthe Tax Act during the fourth quarter of its fiscal year ended September 30, 2018. In regards to the reduction in the U.S. corporate tax rate, the Company is continuing to analyze the temporary differences that existed on the date of the enactment and the temporary differences originating in the current fiscal year. The Company expects to complete its analysis of the accounting guidance related to the Tax Act and its evaluation of the impacts of the Tax Act by September 30, 2018.11—11 - Related Partiesa wholly-ownedan indirect wholly owned subsidiary to an immediate family member of a Senior Vice President of the Company ("Purchaser of subsidiary") in consideration for aan interest-bearing note receivable in the amount of $1.0 million, which approximated the net book value of the disposed entity. At MarchDecember 31, 2018, $0.9$0.1 million isand $0.7 million was reflected on the Company’sCompany's Consolidated Balance SheetsSheet within other current assets and other assets, respectively, representing the remaining balancebalances on this note.note receivable. In connection with this transaction, the Company also received aan interest-bearing note receivable from the disposed entity ("Disposed entity") on December 31, 2017 in the amount of $0.9$1.0 million representing certain accounts payable of the disposed subsidiary that were paid by the Company. At MarchDecember 31, 2018, $0.9$0.1 million isand $0.8 million was reflected on the Company’sCompany's Consolidated Balance SheetsSheet within other current assets and other assets, respectively, representing the remaining balance on this note. Principalnote receivable. Remaining principal and interest payments are scheduled to be made in periodic installments from January 2018during fiscal year 2019 through December 2023.(“("Austin Trucking”Trucking"), an entity owned by an immediate family member of a Senior Vice President of the Company. Pursuant to the agreement, Austin Trucking performs subcontract work for the subsidiary of the Company, including trucking services. For these subcontract services, the Company incurred costs of approximately $1.4 million and $1.5 million during each of the three months ended March 31, 2018 and 2017, respectively, and approximately $4.3 million and $4.4 million during the six months ended March 31, 2018 and 2017, respectively, which is included as cost of revenues on the Consolidated Statements of Income. At March 31, 2018 and September 30, 2017, the Company had $0.5 million and $1.0 million, respectively, due to Austin Trucking reflected as accounts payable on its Consolidated Balance Sheets.Company. Company ("Construction Services").these services,periodic corporate events, the Company earned approximately $0.3 million and $0.7 million during the three months ended March 31, 2018 and 2017, respectively, and approximately $1.5 million and $1.8 million during the six months ended March 31, 2018 and 2017, respectively,charters a boat from Deep South Adventures, LLC, which is included as revenuesowned by a Senior Vice President of the Company.the Consolidated Statements of Income. At March 31, 2018 and September 30, 2017, the Company had $4.6 million and $5.3 million, respectively, duea month-to-month basis from these companies reflected as contracts receivable including retainage, net on its Consolidated Balance Sheets.From time to time, the Company provides construction services to various companiesan entity owned by a family member of a Senior Vice President of the Company. For these services,Company ("Vehicle Rentals").earned approximately $0.1 million during the three months ended March 31, 2018, and approximately $0.2 million during the six months ended March 31, 2018, which is included as revenues on the Consolidated Statementsprovide consulting services to a subsidiary of Income. The Company did not earn any revenues from this company during the three and six months ended March 31, 2017. At March 31, 2018 and September 30, 2017, the Company had $0.6 million and $1.0 million, respectively, due("Consulting Services").reflected as contracts receivable including retainage, net on its Consolidated Balance Sheets.as well as reimbursement ofand reimburses certain travel and other out-of-pocket expenses.Company paid such feesfollowing table presents revenues earned and expense reimbursements to SunTx aggregating $0.3 million and $0.4 millionexpenses incurred by the Company during the three months ended MarchDecember 31, 2018 and December 31, 2017, respectively,if and $0.7 million during each ofto the six months ended March 31, 2018 and 2017, and recognized the cost as general and administrative expenses on its Consolidated Statements of Income. In addition,extent the Company had $0.1 million included as other assets on its Consolidated Balance Sheet at March 31, 2018, representing reimbursements paid to SunTx for certain equity issuance costs in connection with the Company’s initial public offering.In the normal course of business, the Company maintains relationships and engagesengaged in transactions with other related parties. Transaction amountsthe parties described above during the threerespective periods, and six months ended March 31, 2018accounts receivable and 2017 are not material to the Consolidated Statements of Income or to cash flows for those periods. Amounts due to or from such related parties are not material to the Company’s Consolidated Balance Sheetsaccounts payable balances at March 31, 2018 or September 30, 2017. The nature of these relationships and transactions are described in Note 16 to the Company’s audited consolidated financial statements for the year ended September 30, 2017 included in the IPO Prospectus.Note 12—Subsequent EventsAcquisitionOn May 15, 2018, the Company completed the acquisition of 100% of the ongoing operations of The Scruggs Company, a privately-owned infrastructure and road construction company headquartered in Hahira, Georgia, which operates three hot mix asphalt plants, three aggregate mines and one industrial plant. The acquisition complements the Company’s vertically integrated Southeastern U.S. operations, providing new bidding areas in the expanding Georgia market. The purchase price of $51.1 million, excluding certain working capital adjustments, was paid in cash on the date of closing. The Company funded the purchase price with cash on hand plus an additional $22.0 million borrowed under its $50.0 million term loan (the “Term Loan”) under the credit agreement with Compass Bank, as Agent, Sole Lead Arranger and Sole Bookrunner (as amended, the “Compass Credit Agreement”). The additional borrowing is subject to the same terms and conditions as the Term Loan balance outstanding at March 31, 2018. In connection with this additional Term Loan borrowing, the Company entered into an interest rate swap agreement with a notional amount of $11.0 million under which it pays a fixed percentage rate of 3.01% and receives a credit based on the applicable LIBOR rate.The Company is in the process of completing the initial accounting of this acquisition as a business combination in accordance with ASC 805,Business Combinations, including the allocation of the purchase price to the fair value of identifiable assets acquired and liabilities assumed. There are no revenues or results of operations of The Scruggs Company included in the Company’s Consolidated Statements of Income for the three or six months ended March 31, 2018. Pro forma adjustments and results of operations cannot yet be determined. The acquisition did not meet the significance criteria under SEC RegulationS-X Rule3-05.Reclassification and Initial Public OfferingOn April 23, 2018, the Company amended and restated its certificate of incorporation to effectuate a dual class common stock structure consisting of Class A common stock and Class B common stock, as a result of which each share of common stock, par value $0.001 per share, was reclassified and changed into 25.2 shares of Class B common stock so that all equity holders became the holders of 41,817,537 shares of Class B common stock (the “Reclassification”). The amended and restated certificate of incorporation authorizes 400,000,000 shares of Class A common stock and 100,000,000 shares of Class B common stock. All share and per share amounts have been retroactively adjusted for all periods presented to give effect to the Stock Split.On May 8, 2018, the Company completed an initial public offering of 11,250,000 shares of Class A common stock for $12.00 per share. Of these shares, 9,000,000 were sold by the Company, for which the Company received approximately $100.4 million in proceeds, after deducting underwriting discounts and commissions of approximately $7.6 million, and prior to additional total estimated offering expenses of approximately $5.8 million. Of the $5.8 million additional estimated offering expenses, $4.0 million and $2.2 million are reflected as capitalized equity issuance costs included within other current assets on the Consolidated Balance Sheets at MarchDecember 31, 2018 and September 30, 2017, respectively. The remaining 2,250,000 shares were sold by the holders of Class B common stock, which shares upon sale automatically converted into 2,250,000 shares of Class A common stock, which reduced the issued and outstanding shares of Class B common stock2018, related to 39,567,537. The Company did not receive any proceeds from the sale of shares sold by the holders of Class B common stock.On May 24, 2018 the underwriters of the initial public offering partially exercised their over-allotment option to purchase an additional 700,000 shares of our Class A common stock at the initial public offering price of $12.00 per share less the underwriting discount and commissions. Of these shares, 350,000 were sold by the Company for which the Company received approximately $3.9 million in proceeds, after deducting underwriting discounts and commissions of approximately $0.3 million. The remaining 350,000 shares were sold by the holders of Class B common stock, which shares upon sale automatically converted into 350,000 shares of Class A common stock, which reduced the issued and outstanding shares of Class B common stock to 39,217,537. The Company did not receive any proceeds from the sale of shares sold by the holders of Class B common stock. Revenue Earned (Expense Incurred) Accounts Receivable (Payable) For the Three Months Ended December 31, December 31, September 30, 2018 2017 2018 2018 (unaudited) (unaudited) (unaudited) Purchaser of subsidiary $ — $ — $ 864 $ 850 Disposed entity $ — $ — $ 952 $ 937 Austin Trucking $ (3,089 ) $ (2,945 ) $ (266 ) $ (790 ) Construction Services $ 113 $ 1,291 $ 2,466 $ 2,863 Deep South Adventures, LLC $ — $ (33 ) $ — $ — Vehicle Rentals $ (289 ) $ (288 ) $ — $ — Consulting Services $ (67 ) $ (60 ) $ — $ — Legal Services $ — $ (58 ) $ — $ — H&K $ (21 ) $ (21 ) $ — $ — H&A $ — $ (17 ) $ — $ — Island Pond $ (80 ) $ (80 ) $ — $ — Subcontracting Services $ (193 ) $ — $ — $ (52 ) SunTx $ (254 ) $ (340 ) $ — $ — AgreementsCompany’sCompany's subsidiaries entered into settlement agreements with a third party, pursuant to which they will receive aggregate net payments of approximately $15.7 million, payablemillion. These agreements provided for the payments to be made in four equal installments between January 2019 and July 2020, in exchange for releasing and waiving all current and future claims against the third party relating to compensation to the Company for a business interruption event that occurred more than five years ago whichthat did not directly relate to the Company’sCompany's business and whichthat has not, and is not expected to, recur (the “Settlement”"Settlement"). The Company recorded apre-tax gain of $14.8 million during the three monthsfiscal year ended March 31,September 30, 2018 related to the Settlement, which is reflected as settlement income onSettlement. The subsidiaries received the Consolidated Statementsfirst installment payments in the total amount of Income.$3.9 million in January 2019. Future payments are reflected on the Consolidated Balance SheetsSheet at December 31, 2018 as other current assets and other assets in the amount of $3.9$7.9 million and $10.9$7.4 million, respectively.
net net Net income Interest expense, net Provision for income taxes Depreciation, depletion and amortization of long-lived assets Equity-based compensation expense Loss on extinguishment of debt Settlement income (1) Management fees and expenses(2) Adjusted EBITDA Revenues Adjusted EBITDA MarginThis Management’s DiscussionAnalysisanalysis of Financial Conditionour financial condition and Resultsresults of Operationsoperations is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition. Historical results may not be indicative of future performance. This discussion includes forward-looking statements that reflect our plans, estimates and beliefs. Such statements involve risks and uncertainties. Our actual results may differ materially from those contemplated by these forward-looking statements as a result of various factors, including those set forth inunder the headings “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.” This discussion should be read in conjunction with our auditedunaudited consolidated financial statements and the notes thereto for the fiscal year ended September 30, 2017included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and notes thereto included in the IPO Prospectus.our 2018 Form 10-K. In this discussion, we use certainnon-GAAP financial measures. Explanation of thesenon-GAAP financial measures and reconciliation to the most directly comparable GAAP financial measures are included in this Management’s"Management’s Discussion and Analysis of Financial Condition and Results of Operations. These” Investors should not consider non-GAAP financial measures should not be considered in isolation or as substitutes for financial information presented in compliance with GAAP.hot mix asphalt (“HMA”)HMA plants, substantial construction assets and select material deposits. We provide construction products and services to both public and private infrastructure projects, with an emphasis on highways, roads, bridges, airports and commercial and residential sitesdevelopments in the Southeasternsoutheastern United States.Public infrastructureinfrastructure projects.forms of infrastructure. Public transportation infrastructure projects historically have been a relatively stable portion of state and federal budgets and represent a significant share of the U.S.United States construction market. Federal funds are allocated on astate-by-state basis, and each state is required to match a portion of the federal funds they receive. Federal highway spending uses funds predominantly from the Highway Trust Fund, which derives its revenues from fuel taxes and other user fees.Recent DevelopmentsAcquisitionOn May 15, 2018, we completed the acquisition of 100% of the ongoing operations of The Scruggs Company (“Scruggs”), a privately-owned civil infrastructure company headquartered in Hahira, Georgia, which operates three hot mix asphalt plants, three aggregate mines and one industrial plant. The acquisition complements our vertically integrated Southeastern U.S. operations, providing new bidding areas in the expanding Georgia market. The purchase price of $51.1 million, excluding certain working capital adjustments, was paid in cash on the date of closing. We funded the purchase price with cash on hand plus an additional $22.0 million borrowed under our Term Loan. The additional borrowing is subject to the same terms and conditions as the Term Loan balance outstanding at March 31, 2018. In connection with this additional Term Loan borrowing, we entered into an interest rate swap agreement with a notional amount of $11.0 million under which we pay a fixed percentage rate of 3.01% and receive a credit based on the applicable LIBOR rate.Reclassification and Initial Public OfferingOn April 23, 2018, we amended and restated our certificate of incorporation to effectuate a dual class common stock structure consisting of Class A common stock and Class B common stock, as a result of which each share of common stock, par value $0.001 per share, was reclassified and changed into 25.2 shares of Class B common stock so that all equity holders became the holders of 41,817,537 shares of Class B common stock (the “Reclassification”). The amended and restated certificate of incorporation authorizes 400,000,000 shares of Class A common stock and 100,000,000 shares of Class B common stock.On May 8, 2018, we completed an initial public offering of 11,250,000 shares of Class A common stock for $12.00 per share. Of these shares, 9,000,000 were sold by the Company for which we received approximately $100.4 million in proceeds, after deducting underwriting discounts and commissions of approximately $7.6 million and prior to additional total estimated offering expenses of approximately $5.8 million. Of the $5.8 million additional estimated offering expenses, $4.0 million is reflected as capitalized equity issuance costs included within other current assets on the Consolidated Balance Sheet at March 31, 2018. The remaining 2,250,000 shares were sold by holders of Class B common stock, which shares upon sale automatically converted into 2,250,000 shares of Class A common stock, which reduced the issued and outstanding shares of Class B common stock to 39,567,537. We did not receive any proceeds from the sale of shares sold by the holders of Class B common stock.On May 24, 2018 the underwriters of the initial public offering partially exercised their over-allotment option to purchase an additional 700,000 shares of our Class A common stock at the initial public offering price of $12.00 per share less the underwriting discount and commissions. Of these shares, 350,000 were sold by us for which we received approximately $3.9 million in proceeds, after deducting underwriting discounts and commissions of approximately $0.3 million. The remaining 350,000 shares were sold by the holders of Class B common stock, which shares upon sale automatically converted into 350,000 shares of Class A common stock, which reduced the issued and outstanding shares of Class B common stock to 39,217,537. We did not receive any proceeds from the sale of shares sold by the holders of Class B common stock.Settlement AgreementsOn April 19, 2018, certain of our subsidiaries entered into settlement agreements with a third party, pursuant to which they will receive aggregate net payments of approximately $15.7 million, payable in four equal installments between January 2019 and July 2020, in exchange for releasing and waiving all current and future claims against the third party relating to compensation to us for a business interruption event that occurred more than five years ago, which did not directly relate to our business and which has not, and is not expected to, recur (the “Settlement”). We recorded apre-tax gain of $14.8 million during the three months ended March 31, 2018 related to the Settlement, which is reflected as settlement income on the Consolidated Statement of Income. Future payments are reflected on our Consolidated Balance Sheets as other current assets and other assets in the amount of $3.9 million and $10.9 million, respectively.byfrom providing construction products and services for both public and private infrastructure projects, with an emphasis on highways, roads, bridges, airports and commercial and residential sites.developments. Our projects represent a mix of federal, state, municipal and private customers. We also derivegenerate revenues from the sale of HMA and aggregates to customers. Revenues derived from projects are recognized over a period of time on thepercentage-of-completion basis, measured by the relationship of total cost incurred compared to total estimated contract costs(cost-to-cost (cost-to-cost method). Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to estimated costs and income, and are recognized in the period in which the revisions are determined. Revenues derivedgenerated from the sale of HMA and aggregates are recognized at the point in time when risks associated with ownership have passed to the customer.subcontractsubcontractor costs and other expenses at our HMA plants and aggregate mining facilities. Our cost of revenues is directly affected by fluctuations in commodity prices, primarily liquid asphalt and diesel fuel. From time to time, when appropriate, we limit our exposure to increaseschanges in commodity prices by entering into forward purchase commitments or by increasing the prices for our products in anticipation of impending price increases in the cost of asphalt cement.commitments. In addition, our public infrastructure contracts often include provisions that provide for price adjustments based on fluctuations in certain commodity-related productsproduct costs. These price adjustment provisions are in place for most of our public infrastructure contracts, and we seek to include similar provisions in our private contracts.NetNetloss on extinguishment of debt and (v) certain management fees and expenses, and excludes income recognized in connection with the Settlement.Settlement (see Note 12 - Settlement Agreement to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q). Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of revenues for each period. These metricsAdjusted EBITDA and Adjusted EBITDA Margin are supplemental measures of our operating performance that are neither required by, nor presented in accordance with, GAAP. These measures should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP as an indicator of our operating performance. We present Adjusted EBITDA and Adjusted EBITDA Margin asbecause management uses these measures as key performance indicators and we believebelieves they are measures frequently used by securities analysts, investors and other parties to evaluate companies in our industry. These measures have limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP.compared toand other similar companies’companies' measures of Adjusted EBITDA may include differences in capital structures, tax positions and the age and book depreciation of intangible and tangible assets.(unaudited, in thousands)(in thousands, except percentages): For the Three Months Ended
March 31, For the Six Months Ended
March 31, 2018 2017 2018 2017 $ 11,248 $ 2,800 $ 22,244 $ 7,361 253 1,096 550 2,143 4,770 1,578 3,973 4,364 5,633 5,279 11,308 10,501 604 74 604 156 — — — — (14,803 ) — (14,803 ) — 311 373 651 684 $ 8,016 $ 11,200 $ 24,527 $ 25,209 $ 118,899 $ 110,366 $ 269,320 $ 232,486 6.7 % 10.1 % 9.1 % 10.8 % For the Three Months Ended December 31, 2018 2017 Net income $ 5,154 $ 10,996 Interest expense, net 515 297 Provision (benefit) for income taxes 1,651 (797 ) Depreciation, depletion and amortization of long-lived assets 7,138 5,675 254 340 Adjusted EBITDA $ 14,712 $ 16,511 Revenues $ 154,327 $ 150,421 Adjusted EBITDA Margin 9.5 % 11.0 % Representspre-tax income recognized in connection with the Settlement.(2)Reflects fees and reimbursement of certain out-of-pocket travel expenses under a management services agreement with SunTx.SunTx (see Note 11 - Related Parties to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q).
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Revenues | $ | 118,899 | 100.0 | $ | 110,366 | 100.0 | $ | 8,533 | 7.7 | |||||||||||||||
Cost of revenues | 105,150 | 88.4 | 96,005 | 87.0 | 9,145 | 9.5 | ||||||||||||||||||
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Gross profit | 13,749 | 11.6 | 14,361 | 13.0 | (612 | ) | (4.3 | ) | ||||||||||||||||
General and administrative expenses | (13,358 | ) | (11.3 | ) | (10,965 | ) | (9.9 | ) | (2,393 | ) | 21.8 | |||||||||||||
Settlement income | 14,803 | 12.5 | — | — | 14,803 | — | ||||||||||||||||||
Gain on sale of equipment, net | 886 | 0.7 | 2,183 | 2.0 | (1,297 | ) | (59.4 | ) | ||||||||||||||||
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Operating income | 16,080 | 13.5 | 5,579 | 5.1 | 10,501 | 188.2 | ||||||||||||||||||
Interest expense, net | (253 | ) | (0.2 | ) | (1,096 | ) | (1.0 | ) | 843 | (76.9 | ) | |||||||||||||
Other expense | (39 | ) | — | (105 | ) | (0.1 | ) | 66 | (62.9 | ) | ||||||||||||||
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Income before provision for income taxes and earnings from investment in joint venture | 15,788 | 13.3 | 4,378 | 4.0 | 11,410 | 260.6 | ||||||||||||||||||
Provision for income taxes | 4,770 | 4.0 | 1,578 | 1.5 | 3,192 | 202.3 | ||||||||||||||||||
Earnings from investment in joint venture | 230 | 0.2 | — | — | 230 | — | ||||||||||||||||||
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Net income | $ | 11,248 | 9.5 | $ | 2,800 | 2.5 | $ | 8,448 | 301.7 | |||||||||||||||
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Adjusted EBITDA | $ | 8,016 | 6.7 | $ | 11,200 | 10.1 | $ | (3,184 | ) | (28.4 | ) | |||||||||||||
| Change From the Three Months Ended | ||||||||||||||||||||
| For the Three Months Ended December 31, | December 31, 2017 | |||||||||||||||||||
| to the Three Months Ended | ||||||||||||||||||||
| 2018 | 2017 | December 31, 2018 | ||||||||||||||||||
| Dollars | % of Revenues | Dollars | % of Revenues | $ Change | % Change | |||||||||||||||
| Revenues | $ | 154,327 | 100.0 | % | $ | 150,421 | 100.0 | % | $ | 3,906 | 2.6 | % | ||||||||
| Cost of revenues | 133,199 | 86.3 | % | 127,623 | 84.8 | % | 5,576 | 4.4 | % | |||||||||||
| Gross profit | 21,128 | 13.7 | % | 22,798 | 15.2 | % | (1,670 | ) | (7.3 | )% | ||||||||||
| General and administrative expenses | (14,431 | ) | (9.5 | )% | (12,426 | ) | (8.3 | )% | (2,005 | ) | 16.1 | % | ||||||||
| Gain on sale of equipment, net | 334 | 0.2 | % | 145 | 0.1 | % | 189 | 130.3 | % | |||||||||||
| Operating income | 7,031 | 4.5 | % | 10,517 | 7.0 | % | (3,486 | ) | (33.1 | )% | ||||||||||
| Interest expense, net | (515 | ) | (0.3 | )% | (297 | ) | (0.2 | )% | (218 | ) | 73.4 | % | ||||||||
| Other expense | (17 | ) | — | % | (21 | ) | — | % | 4 | (19.0 | )% | |||||||||
| Income before provision (benefit) for income taxes and earnings from investment in joint venture | 6,499 | 4.2 | % | 10,199 | 6.8 | % | (3,700 | ) | (36.3 | )% | ||||||||||
| Provision (benefit) for income taxes | 1,651 | 1.1 | % | (797 | ) | (0.5 | )% | 2,448 | (307.2 | )% | ||||||||||
| Earnings from investment in joint venture | 306 | 0.2 | % | — | — | % | 306 | N/A | ||||||||||||
| Net income | $ | 5,154 | 3.3 | % | $ | 10,996 | 7.3 | % | $ | (5,842 | ) | (53.1 | )% | |||||||
| Adjusted EBITDA | $ | 14,712 | 9.5 | % | $ | 16,511 | 11.0 | % | $ | (1,799 | ) | (10.9 | )% | |||||||
sustained rainfall in those areas.
The decline in production of HMA and lower utilization of equipment resulted in under-absorption of fixed costs. This decrease was partially offset by an improvement in gross profit and gross profit margin on construction projects, for which cost of revenue is primarily variable in nature.
Settlement Income. Duringcompany subsequent to the three months ended MarchDecember 31, 2018, we recorded settlement income of $14.8 million reflecting the net present value of future payments to be received in connection with the Settlement, which resolved conditions that existed at March 31, 2018. Pursuant to the Settlement, we will receive aggregate net payments of approximately $15.7 million, payable in four equal installments between January 2019 and July 2020, in exchange for releasing and waiving all current and future claims against a third party.
2017.
state income taxes.
Adjusted EBITDApartially offset by an increase in depreciation, depletion and Adjusted EBITDA Margin.Adjusted EBITDA andamortization of long-lived assets. The lower Adjusted EBITDA Margin were $8.0 million and 6.7%, respectively, for the three months ended March 31, 2018, as compared to $11.2 million and 10.1%, respectively, for the three months ended March 31, 2017. The decrease in Adjusted EBITDA and Adjusted EBITDA Margin was primarily theis a result of a lower gross profit percentage and a lower gain on sale of equipment and higher general and administrative expenses.expense as a percentage of revenue, as discussed above. See the description of Adjusted EBITDA and Adjusted EBITDA Margin, as well as a reconciliation of Adjusted EBITDA to net income, under the heading “How We Assess Performance of Our Business”.
Six Months Ended March 31, 2018 Compared to Six Months Ended March 31, 2017
The following table sets forth selected financial data
Change from Six March 31, 2017 to Ended March 31, | ||||||||||||||||||||||||
| For the Six Months Ended March 31, | ||||||||||||||||||||||||
| 2018 | 2017 | 2018 | ||||||||||||||||||||||
| Dollars | % of Revenues | Dollars | % of Revenues | $ Change | % Change | |||||||||||||||||||
Revenues | $ | 269,320 | 100.0 | $ | 232,486 | 100.0 | $ | 36,834 | 15.8 | |||||||||||||||
Cost of revenues | 232,773 | 86.4 | 199,396 | 85.8 | 33,377 | 16.7 | ||||||||||||||||||
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Gross profit | 36,547 | 13.6 | 33,090 | 14.2 | 3,457 | 10.4 | ||||||||||||||||||
General and administrative expenses | (25,784 | ) | (9.6 | ) | (21,528 | ) | (9.2 | ) | (4,256 | ) | 19.8 | |||||||||||||
Settlement income | 14,803 | 5.5 | — | — | 14,803 | — | ||||||||||||||||||
Gain on sale of equipment, net | 1,031 | 0.4 | 2,437 | 1.0 | (1,406 | ) | (57.7 | ) | ||||||||||||||||
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Operating income | 26,597 | 9.9 | 13,999 | 6.0 | 12,598 | 90.0 | ||||||||||||||||||
Interest expense, net | (550 | ) | (0.2 | ) | (2,143 | ) | (0.9 | ) | 1,593 | (74.3 | ) | |||||||||||||
Other expense | (60 | ) | — | (131 | ) | (0.1 | ) | 71 | (54.2 | ) | ||||||||||||||
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Income before provision for income taxes and earnings from investment in joint venture | 25,987 | 9.6 | 11,725 | 5.0 | 14,262 | 121.6 | ||||||||||||||||||
Provision for income taxes | 3,973 | 1.4 | 4,364 | 1.8 | (391 | ) | (9.0 | ) | ||||||||||||||||
Earnings from investment in joint venture | 230 | 0.1 | — | — | 230 | — | ||||||||||||||||||
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Net income | $ | 22,244 | 8.3 | $ | 7,361 | 3.2 | $ | 14,883 | 202.2 | |||||||||||||||
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Adjusted EBITDA | $ | 24,527 | 9.1 | $ | 25,209 | 10.8 | $ | (682 | ) | (2.7 | ) | |||||||||||||
Revenues. Due to an increase in contract backlog, we added personnel and equipment which allowed us to increase our revenues by $36.8 million, or 15.8%, to $269.3 million in the six months ended March 31, 2018 from $232.5 million for the six months ended March 31, 2017. However, this increase was approximately $4.5 million lower than expected due to extended cold weather delays during the three months ended March 31, 2018. These delayed projects remain in our contract backlog at MarchDecember 31, 2018 and are expected to be completed during the third and fourth quarters of fiscal year 2018.
Gross Profit. Gross profit for the six months ended March 31, 2018 increased $3.5 million, or 10.4%, to $36.5 million from $33.1 million for the six months ended March 31, 2017. The lower gross profit margin for the six months ended March 31, 2018 compared to the six months ended March 31, 2017 was due to the timing of price increasesrelatively low inflation in the cost of asphalt cement as well as costs related to cold weather delays. During the first quarter of fiscal year 2017, we increased our price for both internal and external HMA salesUnited States in anticipation of an impending price increase in the cost of asphalt cement, a key component in the manufacture of HMA. The anticipated price increase did not occur until the third and fourth quarter of fiscal year 2017, which benefitted gross profit by approximately $3.5 million in the six months ended March 31, 2017 as compared to the six months ended March 31, 2018. In addition, as noted above, we added personnel and equipment in fiscal 2018 due to an increase in backlog. The underutilization of this added equipment during the six months ended March 31, 2018 as a result of cold weather delays resulted in a $0.6 million increase in unabsorbed period costs compared to the six months ended March 31, 2017. We anticipate that our gross profit percentage will increase during the third and fourth quarters of fiscal year 2018 as utilization of equipmentrecent years and our revenue-generating activity increases, andability to recover increasing costs by obtaining higher prices for our period costs are allocated over a larger revenue base. These gross profit declines were offset by an increaseproducts, including sale price escalator clauses in realized margin on construction jobs during the six months ended March 31, 2018 compared to the six months ended March 31, 2017, and realized margin on the increase in revenues as described above. As a resultmost of the above, gross profit as a percentage of revenue decreased from 14.2% for the six months ended March 31, 2017 to 13.6% for the six months ended March 31, 2018.
General and Administrative Expenses. General and administrative expenses include costs related to our operational offices that are not allocated to direct contract costs and expenses related to our corporate offices. General and administrative expenses for the six months ended March 31, 2018 increased $4.3 million, or 19.8%, to $25.8 million from $21.5 million for the six months ended March 31, 2017. The increase in general and administrative expenses for the six months ended March 31, 2018 was attributable primarily to a $3.4 million increase in management personnel payroll and benefits and a $0.9 million in other general expenses to support our growth. We expect general and administrative expenses to continue to increase moderately throughout the remainder of fiscal 2018 as a result of increased regulatory and public entity reporting requirements.
Settlement Income. During the six months ended March 31, 2018, we recorded settlement income of $14.8 million reflecting the net present value of future payments to be received in connectioninfrastructure contracts. Inflation risk varies with the Settlement, which resolved conditions that existed at March 31, 2018. Pursuant tolevel of activity in our industry, the Settlement, we will receive aggregate net paymentsnumber, size and strength of approximately $15.7 million, payable in four equal installments between January 2019 and July 2020, in exchange for releasing and waiving all current and future claims against a third party.
Interest Expense, Net. Interest expense, net for the six months ended March 31, 2018 decreased $1.6 million, or 74.3%, to $0.6 million compared to $2.2 million for the six months ended March 31, 2017. The decrease in interest expense, net was due to a $6.9 million decrease in the average principal amount of outstanding debt and a $0.4 million lower amortization of deferred debt issuance costs during the six months ended March 31, 2018 as compared to the six months ended March 31, 2017. Our former CIT Credit Facility in place during the six months ended March 31, 2017 was a variable rate facility based on the three-month LIBOR rate plus 3.5%. On June 30, 2017, we refinanced all of our outstanding debt under the CIT Credit Facility with proceeds from the Compass Credit Agreement. The Compass Credit Agreement is a variable rate facility based on theone-month LIBOR rate plus 2.0%, thereby reducing our interest costs during the six months ended March 31, 2018. The Compass Credit Agreement also replaced some higher fixed rate facilities. To hedge against future changes in variable interest rates of the Compass Credit Agreement, on June 30, 2017, we entered into an amortizing $25.0 million interest rate swap agreement tied to the Term Loan. This interest rate swap agreement does not qualify for hedge accounting treatment in accordance with U.S. GAAP, thus changes in fair value are reflected within interest expense on the Consolidated Statements of Income. During the six months ended March 31, 2018, the change in the fair value of the interest rate swap resulted in a $0.4 million credit to interest expense.
Provision for Income Taxes.Our effective tax rate decreased to 15.3% for the six months ended March 31, 2018 from 37.2% for the six months ended March 31, 2017. Our lower effective tax rate for the six months ended March 31, 2018 was primarily due to the impacts of the Tax Act. The effective tax rate for the six months ended March 31, 2018 reflects a federal income tax provision based on a blended U.S. statutory tax rate of 24.5% applicable to the full fiscal year ending September 30, 2018, which is calculated based on a proration of the applicable tax rates before and after the effective date of the Tax Act during the current fiscal year. For the six months ended March 31, 2018, we recorded a $3.5 million credit to the provision for income taxes to recognize the cumulative effect on deferred income tax liabilities resulting from the enactment of the Tax Act. The effective tax rate for the six months ended March 31, 2017 reflects a federal tax rate of 35.0% plus applicable state income taxes.
Earnings From Investment in Joint Venture.During the six months ended March 31, 2018, we earned $0.2 millionpre-tax income representing our 50% interest in the earnings of a joint venture partnership entered into with a third-party in November 2017 for the sole purpose of performing a construction project for the Alabama Department of Transportation. We did not have interest in any joint venture during the six months ended March 31, 2017.
Net Income.Net income increased $14.9 million, or 202.2%, to $22.2 million for the six months ended March 31, 2018 compared to $7.4 million for the six months ended March 31, 2017. This increase in net income was primarily a result of the gain from the Settlement discussed abovecompetitors and the lower effective income tax rate, partially offset by the higher general and administrative expenses discussed above.
Adjusted EBITDA and Adjusted EBITDA Margin.Adjusted EBITDA and Adjusted EBITDA Margin were $24.5 million and 9.1%, respectively, for the six months ended March 31, 2018, as comparedavailability of products to $25.2 million and 10.8%, respectively, for the six months ended March 31, 2017. The decrease in Adjusted EBITDA and Adjusted EBITDA Margin was primarily the result of increased general and administrative expenses andsupply a lower gain on sale of equipment, partially offset by an increase in gross profit. See the description of Adjusted EBITDA and Adjusted EBITDA Margin, as well as a reconciliation of Adjusted EBITDA to net income under “How We Assess Performance of Our Business”.
local market.
| For the Six Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
Net cash provided by operating activities | $ | 28,124 | $ | 19,394 | ||||
Net cash used in investing activities | (19,879 | ) | (8,822 | ) | ||||
Net cash used in financing activities | (9,995 | ) | (38,891 | ) | ||||
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Net change in cash | $ | (1,750 | ) | $ | (28,319 | ) | ||
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| For the Three Months Ended December 31, | |||||||
| 2018 | 2017 | ||||||
| Net cash provided by operating activities, net of acquisition | $ | 1,211 | $ | 19,490 | |||
| Net cash used in investing activities | (5,070 | ) | (9,318 | ) | |||
| Net cash used in financing activities | (3,711 | ) | (7,500 | ) | |||
| Net change in cash and cash equivalents | $ | (7,570 | ) | $ | 2,672 | ||
the Tax Act.
equipment and $1.8 million in distributions received from our investment in a joint venture during the three months ended December 31, 2018, compared to no such distributions during the three months ended December 31, 2017.
Construction Partners Holdings’
Under the Compass Credit Agreement, borrowings can be designated as base rate loans or Euro-Dollar Loans. The interest rate on base rate loans fluctuates and is equal to (i) the highest of: (a) the rate of interest in effect for such day as publicly announced from time to time by the Agent as its “prime rate,” (b) the federal funds rate plus 0.50% and (c) the quotient of the London interbank offered rate for deposits in U.S. dollars as obtained from Reuter’s, Bloomberg or another commercially available source designated by the Agent two Euro-Dollar Business Days (as defined in the Compass Credit Agreement) before the first day of the applicable interest period (“LIBOR”) divided by 1.00 minus the Euro-Dollar Reserve Percentage (as defined in the Compass Credit Agreement) plus 1.0% for aone-month interest period, plus (ii) the applicable rate, which ranges from 2.0% to 2.25%. The interest rate for Euro-Dollar loans fluctuates and is equal to the sum of the applicable rate, which ranges from 2.0% to 2.25%, plus LIBOR for the interest period selected by the Agent.
At December 31, 2018 and September 30, 2018, the aggregate notional value of these interest rate swap agreements was $26.9 million and $28.7 million, respectively, and the fair value was $0.0 million and $0.3 million, respectively, which is included within other assets on our Consolidated Balance Sheets. We must pay a commitment fee of 0.35% per annum on the aggregate unused revolving commitments under the Compass Credit Agreement. We also must pay fees with respect to any letters of credit issued under the Compass Credit Agreement.
At MarchDecember 31, 2018 and September 30, 2017,2018, we were in compliance with all covenants under the Compass Credit Agreement.
Our capital expenditures are typically made during the same fiscal year in which they are approved. At December 31, 2018, our commitments for capital expenditures were not material to our financial condition or results of operations on a consolidated basis. For the full fiscal year 2019, we expect total capital expenditures to be approximately $39.0 million to $42.0 million. Our capital expenditure budget is an estimate and is subject to change. As described further below, we believe that cash flows from operations combined with existing cash on hand and amounts available under our credit facilities will be sufficient to fund our working capital needs and planned capital expenditures for at least the next twelve months.
companies.
Seasonality
The use
Risk. Risksubjecta smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, and therefore are not required to commodity price risk with respect to price changes in liquid asphalt and energy, including fossil fuels and electricityprovide the information called for aggregates and asphalt paving mix production, natural gas for HMA production and diesel fuel for distribution vehicles and production-related mobile equipment. In order to manage or reduce commodity price risk, we monitor the costs of these commodities at the time of bid and price them into our contracts accordingly. Furthermore, liquid asphalt escalator provisions in most of our public and in some of our private and commercial contracts limit our exposure to price fluctuations inby this commodity. In addition, we enter into various firm purchase commitments, with terms generally less than one year, for certain raw materials. From time to time, we also increase the prices for our products to mitigate the impact of price increases in raw materials.Interest Rate RiskWe are exposed to interest rate risk on certain of our short- and long-term debt obligations used to finance our operations and acquisitions. We have LIBOR-based floating rate borrowings under the Compass Credit Agreement, which expose us to variability in interest payments due to changes in the reference interest rates. From time to time, we use derivative instruments as hedges against the impact of interest rate changes on future earnings and cash flows. In order to hedge against changes in interest rates and to manage fluctuations in cash flows resulting from interest rate risk, on June 30, 2017, we entered into an amortizing interest rate swap agreement applicable to $25.0 million outstanding debt under the Term Loan, for which we pay a fixed rate of 2.015% and receive a credit based on the applicable LIBOR rate.At March 31, 2018 and September 30, 2017, we had a total of $47.5 million and $57.5 million of variable rate borrowings outstanding, respectively. Holding other factors constant and absent the interest rate swap agreement described above, a hypothetical 1% change in our borrowing rates would result in a $0.5 million and $0.6 million change in our annual interest expense based on our variable rate debt at March 31, 2018 and September 30, 2017, respectively.
Procedures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable, not absolute, assurance of achieving their control objectives. ProceduresSecurities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.Securities Exchange Act of 1934, as amended)Act) as of the end of the period covered by this Quarterly Report onForm-10-Q. Form 10-Q. As a result of the material weaknesses in our internal control over financial reporting described below, and previously disclosed in our IPO Prospectus, ourPresident and Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report onForm-10-Q, Form 10-Q, our disclosure controls and procedures were not effective at the reasonable assurance level.yearyears ended September 30, 2018 and 2017, our management identifieddetermined that we have material weaknesses in our internal control over financial reporting which relatedrelating to the design and operation of our information technology general controls and overall closing and financial reporting processes,controls, including our accounting for significant and unusual transactions. The nature ofWe have concluded that these material weaknesses and our remediation actions are more fully described in the IPO Prospectus. As a newly public company, neither we nor our independent registered public accounting firm are yet required to perform an evaluation of our internal control over financial reporting in accordanceare primarily due to the fact that we have historically operated as a private company with Section 404limited resources and had neither formally designed and implemented the necessary business processes and related internal controls nor employed personnel with the appropriate level of experience and technical expertise to oversee (i) our business processes and controls surrounding information technology general controls, (ii) our closing and financial reporting processes, or (iii) the Sarbanes-Oxley Act,accounting and neitherfinancial reporting requirements related to significant and unusual transactions.nor our independent registered public accounting firm have performed such an evaluation.Weimplemented and continue to implement actionsremediation measures including, but not limited to, remediate these material weaknesses, including: (i) actively seeking and onboardinghiring additional accounting and finance staff members and engaging a senior accounting officerthird party to assist us with public company reporting experience, to augment our current staff and toefforts to: (i) improve the effectiveness of our closingfinancial period close and reporting processes; (ii) comply with the accounting and financial reporting processes;requirements related to significant and (ii) we engaged a third-party to assist us with formalizingunusual transactions; (iii) identify and implement the business processes and controls surrounding information technology general controls; and (iv) formalize our business processes, accounting policies and internal controls. control documentation, strengthen supervisory reviews by our management, and evaluate the effectiveness of our internal controls in accordance with the framework established by ongoing remediation actions describedthe changes intended to remediate the material weaknesses noted above, there were no changes in our internal control over financial reporting (as defined in Rules13a-15(e) and15d-15(e) under the Act) during the three monthsfiscal quarter ended MarchDecember 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Limitations on the Effectiveness of Controls and ProceduresIn designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and our management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Proceedings.Proceedingsworkers’among other things, (i) workers' compensation claims, (ii) employment-related disputes and employment-related disputes.(iii) liability issues or breach of contract or tortious conduct in connection with the performance of services and provision of materials. We and our affiliates are also subject to government inquiries in the ordinary course of business seeking information concerning our compliance with government construction contracting requirements, the outcome of which cannot be predicted with certainty. In the opinion of our management, after consultation with legal counsel, none of the pending litigation, disputes or claims against us, if decided adversely to us, would have a material adverse effect on our financial condition, cash flows or results of operations.
FactorsAny ofFactors.risksother financial information set forth in this report, you should carefully consider the factors discussed in thisPart I, Item 1A, "Risk Factors," in our 2018 Form10-Q and our other SEC filings 10-K that could have a material and adverse effect onmaterially affect our business, financial condition or results of operations.future operating results. The risks described in our 2018 Form 10-K are not the only risks that we face. Additional risks and uncertainties not presentlycurrently known to us or that we currently considerdeem to be immaterial also may alsomaterially adversely affect us. For a discussion of our potential risksbusiness, financial condition and uncertainties, see the information in our IPO Prospectus. There have been no material changes in our risk factors from those described in our IPO Prospectus.operating results.
Proceeds. SEC. There has been no material change in the Company's planned use of the proceeds received from ProceedsUnregisteredEquity SecuritiesIn February 2018,Company granted to certain employees an aggregate of 126,000 restricted shares of our Class B common stock under the 2016 Equity Incentive Plan, a portion of which vested on the date of grant and a portion of which will vest on July 1, 2018, for a purchase price of $0.04 per share (after giving effect to the Reclassification), for an aggregate price of $5,000. Each of these issuances was made in reliance on Section 4(a)(2) and Rule 701period covered by this report that were not registered under the Securities Act. The issuances were made for compensatory purposes pursuant to a written plan or contract, a copy of the plan or contract was delivered to each purchaser. our Initial Public Offering of Class A Common Stockour registration statementthe Company’s Registration Statement on FormS-1 (No. (File No. 333-224174), (the "Form S-1") filed in connection with ourthe initial public offering of the Company's Class A common stock was declared effective by the Securities and Exchange Commission and, on May 8, 2018, we closed our initial public offering consisting of 11,250,000 shares of our Class A common stock, of which 9,000,000 shares were issued and sold by us and 2,250,000 shares were sold by the selling stockholders, in each case at a public offering price of $12.00 per share. On May 24, 2018, the underwriters of the initial public offering partially exercised their over-allotment option (the “Over-Allotment Option”) to purchase an additional 700,000 shares of our Class A common stock at the initial public offering price of $12.00 per share less the underwriting discount and commissions. Of these shares, 350,000 were sold by us for which we received approximately $3.9 million in proceeds, after deducting underwriting discounts and commissions of approximately $0.3 million. The remaining unexercised portion of the Over-Allotment Option expired on June 2, 2018. Robert W. Baird & Co. Incorporated, Raymond James & Associates and Stephens Inc. acted as the representatives of the several underwriters in our initial public offering.Following the sale of the shares in connection with the closing of our initial public offering on May 8, 2018 and the closing of the partial exercise of the Over-Allotment Option on May 29, 2018, and the expiration of the Over-Allotment Option, the offering was terminated. In our initial public offering, including the partial exercise of the Over-Allotment Option, we received approximately $104.3 million in net proceeds, after deducting underwriting discounts and commissions of approximately $7.9 million, but before total estimated offering expenses of approximately $5.8 million. Except for approximately $0.1 million ofout-of-pocket expenses which were reimbursable under our management services agreement with SunTx, no payments for offering expenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities or (iii) any of our affiliates. Of the net proceeds from our initial public offering, we used approximately $29.1 million to fund the acquisition of The Scruggs Company, which was completed on May 15, 2018. We intend to use the balance of our net proceeds from our initial public offering to provide growth capital, fund acquisitions and for general corporate purposes, which may include the repayment of debt from time to time.ourthe sale of shares of Class A common stock in the initial public offering from that described in the IPO Prospectus.
Securities.Securities
Disclosures.Disclosures (17CFR (17 C.F.R. Part 229.104) is included in Exhibit 9595.1 to this Quarterly Report on Form10-Q.
Information.Information
its behalf by the undersigned, thereunto duly ExhibitsExhibits.*Filed herewith. ** Furnished herewith. authorized. CONSTRUCTION PARTNERS, INC. Construction Partners, Inc.Date: June 4, 2018 By: /s/ Charles E. Owens Charles E. Owens President and Chief Executive Officer Date: June 4, 2018Name and Signature Title By:Date /s/ Charles E. Owens President, Chief Executive Officer and Director February 14, 2019 Charles E. Owens (Principal Executive Officer) /s/ R. Alan Palmer R. Alan Palmer Executive Vice President and Chief Financial Officer February 14, 2019 R. Alan Palmer (Principal Financial Officer) 28