UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM10-Q

(Mark One)

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

For the quarterly period ended June 30,December 31, 2018

OR

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

For the transition period fromto

Commission File Number:001-38479

Construction Partners, Inc.

(Exact Name of Registrant as Specified in its Charter)

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)

Registrant’s telephone number, including area code: (334) 673-9763
673-9763

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  ☒

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large"large accelerated filer,” “accelerated" "accelerated filer,” “smaller" "smaller reporting company," and “emerging"emerging growth company”company" in Rule12b-2 of the Exchange Act.

Large accelerated filerAccelerated filer
Non-accelerated filer☒  (Do not check if a smaller reporting company)xSmaller reporting companyx
Emerging growth companyx

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

x

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    Yes  ☐    No  

x

As of August 10, 2018,February 8, 2019, the registrant had 11,950,000 shares of Class A common stock, $0.001 par value, per share, and 39,464,619 shares of Class B common stock, $0.001 par value, per share, outstanding.


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.


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form10-Q constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including statements related to future events, business strategy, future performance, future operations, backlog, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as “seek,” “anticipate,” “plan,” “continue,” “estimate,” “expect,” “may,” “will,” “project,” “predict,” “potential,” “targeting,” “intend,” “could,” “might,” “should,” “believe”"seek," "anticipate," "plan," "continue," "estimate," "expect," "may," "will," "project," "predict," "potential," "targeting," "intend," "could," "might," "should," "believe" and similar expressions or their negative. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on management’smanagement's belief, based on currently available information, as to the outcome and timing of future events. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those expressed in such forward-looking statements. When evaluating forward-looking statements, you should consider the risk factors and other cautionary statements described under the heading “Risk Factors”"Risk Factors" in our Annual Report on Form 10-K for the IPO Prospectus.fiscal year ended September 30, 2018. We believe the expectations reflected in the forward-looking statements contained in this Quarterly Report on Form10-Q are reasonable, but no assurance can be given that these expectations will prove to be correct. Forward-looking statements should not be unduly relied upon.

Important factors that could cause actual results or events to differ materially from those expressed in forward-looking statements include, but are not limited to:

declines in public infrastructure construction and reductions in government funding, including the funding by transportation authorities and other state and local agencies;

risks related to our operating strategy;

competition for projects in our local markets;

risks associated with our capital-intensive business;

government requirements and initiatives, including those related to funding for public or infrastructure construction, land usage and environmental, health and safety matters;

unfavorable economic conditions and restrictive financing markets;

our ability to successfully identify, manage and integrate acquisitions;

our ability to obtain sufficient bonding capacity to undertake certain projects;

our ability to accurately estimate the overall risks, requirements or costs when we bid on or negotiate contracts that are ultimately awarded to us;

the cancellation of a significant number of contracts or our disqualification from bidding for new contracts;

risks related to adverse weather conditions;

our substantial indebtedness and the restrictions imposed on us by the terms thereof;

our ability to maintain favorable relationships with third parties that supply us with equipment and essential supplies;

our ability to retain key personnel and maintain satisfactory labor relations;

property damage, results of litigation and other claims and insurance coverage issues;

risks related to our information technology systems and infrastructure; and

our ability to remediate the material weaknesses in internal control over financial reporting identified in preparing our financial statements for the fiscal yearyears ended September 30, 2018 and September 30, 2017 and to subsequently maintain effective internal control over financial reporting.

These factors are not necessarily all of the important factors that could cause actual results or events to differ materially from those expressed in the forward-looking statements. Other unknown or unpredictable factors could also cause actual results or events to differ materially from those expressed in the forward-looking statements. Our future results will depend upon various other risks and uncertainties, including those described in this Quarterly Report on Form10-Q and in our IPO Prospectus.Annual Report on Form 10-K for the fiscal year ended September 30, 2018. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. Forward-looking statements speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements after the date on which any such statement is made, whether as a result of new information, future events or otherwise, except as required by law.

Table of Contents


TABLE OF CONTENTS

Page

 3

Item 1.

 3

 

Consolidated Statement of Stockholders’ Equity for nine months ended June 30, 2018 (unaudited)

5

 6

7

18

27

27

28

28

28

28

  29

Item 4.

 

  29

Item 5.

Other Information

29

Item 6.

Exhibits

30

SIGNATURES

31



PART I—I - FINANCIAL INFORMATION

Item 1. Financial Statements

Construction Partners, Inc.

Consolidated Balance Sheets


CONSTRUCTION PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

   June 30,
2018
  September 30,
2017
 
   (unaudited)    

ASSETS

   

Current assets:

   

Cash

  $75,183  $27,547 

Contracts receivable including retainage, net

   115,679   120,984 

Costs and estimated earnings in excess of billings on uncompleted contracts

   12,747   4,592 

Inventories

   25,145   17,487 

Other current assets

   14,417   4,520 
  

 

 

  

 

 

 

Total current assets

   243,171   175,130 

Property, plant and equipment, net

   177,222   115,911 

Goodwill

   34,398   30,600 

Intangible assets, net

   2,325   2,550 

Investment in joint venture

   1,066   —   

Other assets

   14,562   2,483 

Deferred income taxes, net

   1,619   1,876 
  

 

 

  

 

 

 

Total assets

  $474,363  $328,550 
  

 

 

  

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

   

Current liabilities:

   

Accounts payable

  $48,104  $52,402 

Billings in excess of costs and estimated earnings on uncompleted contracts

   39,520   32,108 

Current maturities of debt

   14,788   10,000 

Accrued expenses and other current liabilities

   23,059   20,036 
  

 

 

  

 

 

 

Total current liabilities

   125,471   114,546 
  

 

 

  

 

 

 

Long-term liabilities:

   

Long-term debt, net of current maturities

   51,786   47,136 

Deferred income taxes, net

   7,980   9,667 

Other long-term liabilities

   4,801   5,020 
  

 

 

  

 

 

 

Total long-term liabilities

   64,567   61,823 
  

 

 

  

 

 

 

Total liabilities

   190,038   176,369 
  

 

 

  

 

 

 

Commitments and contingencies

   

Stockholders’ equity

   

Preferred stock, par value $0.001; 1,000,000 shares authorized and no shares issued and outstanding

   —     —   

Class A common stock, par value $0.001; 400,000,000 shares authorized, 11,950,000 issued and outstanding at June 30, 2018, and no shares authorized, issued and outstanding at September 30, 2017

   12   —   

Class B common stock, par value $0.001; 100,000,000 shares authorized, 42,387,571 issued and 39,464,619 outstanding at June 30, 2018, and no Shares authorized, issued and outstanding at September 30, 2017

   42   —   

Common stock, $0.001 par value, no shares authorized, issued and outstanding at June 30, 2018 and 126,000,000 shares authorized, 44,987,575 issued and 41,691,541 outstanding at September 30, 2017

   —     45 

Additionalpaid-in capital

   242,493   142,385 

Treasury stock, at cost

   (15,603  (11,983

Retained earnings

   57,381   21,734 
  

 

 

  

 

 

 

Total stockholders’ equity

   284,325   152,181 
  

 

 

  

 

 

 

Total liabilities and stockholders’ equity

  $474,363  $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, net93,972
 120,291
Costs and estimated earnings in excess of billings on uncompleted contracts10,192
 9,334
Inventories28,538
 24,556
Prepaid expenses and other current assets16,414
 14,137
Total current assets240,683
 267,455
    
Property, plant and equipment, net178,972
 178,692
Goodwill32,919
 32,919
Intangible assets, net3,521
 3,735
Investment in joint venture165
 1,659
Other assets9,972
 10,270
Deferred income taxes, net1,580
 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 contracts39,471
 38,738
Current maturities of debt14,836
 14,773
Accrued expenses and other current liabilities12,118
 17,520
Total current liabilities104,645
 134,541
Long-term liabilities:   
Long-term debt, net of current maturities44,368
 48,115
Deferred income taxes, net8,890
 8,890
Other long-term liabilities5,286
 5,295
Total long-term liabilities58,544
 62,300
Total liabilities163,189
 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, 201812
 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, 201842
 42
Additional paid-in capital242,493
 242,493
Treasury stock, at cost(15,603) (15,603)
Retained earnings77,679
 72,525
Total stockholders' equity304,623
 299,469
Total liabilities and stockholders' equity$467,812
 $496,310
    
See notes are an integral part of theseto unaudited consolidated financial statements.

Construction Partners, Inc.

Consolidated Statements of Income


CONSTRUCTION PARTNERS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited in thousands, except share and per share data)

   For the three months
ended June 30,
  For the nine months
ended June 30,
 
   2018  2017  2018  2017 

Revenues

  $195,075  $148,099  $464,395  $380,585 

Cost of revenues

   165,606   124,117   398,379   323,513 
  

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit

   29,469   23,982   66,016   57,072 

General and administrative expenses

   (14,788  (12,477  (40,572  (34,005

Settlement income

   —     —     14,803   —   

Gain on sale of equipment, net

   86   238   1,117   2,675 
  

 

 

  

 

 

  

 

 

  

 

 

 

Operating income

   14,767   11,743   41,364   25,742 

Interest expense, net

   (406  (659  (956  (2,802

Loss on extinguishment of debt

   —     (1,638  —     (1,638

Other income (expense)

   15   (3  (45  (134
  

 

 

  

 

 

  

 

 

  

 

 

 

Income before provision for income taxes and earnings from investment in joint venture

   14,376   9,443   40,363   21,168 

Provision for income taxes

   1,409   3,031   5,382   7,395 

Earnings from investment in joint venture

   436   —     666   —   
  

 

 

  

 

 

  

 

 

  

 

 

 

Net income

  $13,403  $6,412  $35,647  $13,773 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net income per share attributable to common stockholders:

     

Basic

  $0.29  $0.15  $0.82  $0.33 

Diluted

  $0.29  $0.15  $0.81  $0.33 

Weighted average number of common shares outstanding:

     

Basic

   46,557,785   41,538,989   43,648,309   41,514,656 

Diluted

   46,988,359   41,566,344   43,932,546   41,541,447 

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
     
See notes are an integral part of theseto unaudited consolidated financial statements.

Construction Partners, Inc.

Consolidated Statement of Stockholders’ Equity



CONSTRUCTION PARTNERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited in thousands, except share data)

                    Additional        Total 
  Common Stock  Class A Common Stock  Class B Common Stock  Paid-in  Treasury  Retained  Stockholders’ 
  Shares  Amount  Shares  Amount  Shares  Amount  Capital  Stock  Earnings  Equity 

Balance, September 30, 2017

  44,987,575  $45   —    $—     —    $—    $142,385  $(11,983 $21,734  $152,181 

Reclassification of common stock

  (44,987,575  (45  —     —     44,987,571   45   —     —     —     —   

Conversion of Class B common stock to Class A common stock in connection with initial public offering of Class A common stock

  —     —     2,600,000   3   (2,600,000  (3  —     —     —     —   

Initial public offering of Class A common stock, net of offering costs

  —     —     9,350,000   9   —     —     98,000   —     —     98,009 

Equity-based compensation expense

  —     —     —     —     —     —     975   —     —     975 

Sale of treasury stock

  —     —     —     —     —     —     (453  458   —     5 

Cashless option exercise

  —     —     —     —     —     —     1,586   (4,078  —     (2,492

Net income

  —     —     —     —     —     —     —     —     35,647   35,647 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance, June 30, 2018

  —    $—     11,950,000  $12   42,387,571  $42  $242,493  $(15,603 $57,381  $284,325 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The accompanying

 Class A Common Stock Class B Common Stock 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Retained
Earnings
 
Total
Stockholders'
Equity
 Shares Amount Shares Amount    
September 30, 201811,950,000
 $12
 42,387,571
 $42
 $242,493
 $(15,603) $72,525
 $299,469
Net income
 
 
 
 
 
 5,154
 5,154
December 31, 201811,950,000
 $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, 201744,987,575
 $45
 $142,385
 $(11,983) $21,734
 $152,181
Net income
 
 
 
 10,996
 10,996
December 31, 201744,987,575
 $45
 $142,385
 $(11,983) $32,730
 $163,177
            

See notes are an integral part of theseto unaudited consolidated financial statements.

Construction Partners, Inc.

Consolidated Statements of Cash Flows


CONSTRUCTION PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited in thousands)

   For the nine months ended June 30, 
   2018  2017 

Cash flows from operating activities:

   

Net income

  $35,647  $13,773 

Adjustments to reconcile net income to net cash provided by operating activities:

   

Depreciation, depletion and amortization of long-lived assets

   17,929   15,709 

Amortization of deferred debt issuance costs

   60   632 

Loss on extinguishment of debt

   —     1,638 

Provision for bad debt

   435   435 

Gain on sale of equipment, net

   (1,117  (2,675

Equity-based compensation expense

   975   513 

Earnings from investment in joint venture

   (666  —   

Deferred income taxes

   (1,430  (52

Changes in operating assets and liabilities, net of acquisition:

    —   

Contracts receivable including retainage, net

   14,055   12,902 

Costs and estimated earnings in excess of billings on uncompleted contracts

   (6,128  (2,196

Inventories

   (3,335  (3,098

Other current assets

   (9,165  (4,063

Other assets

   (12,079  (1,481

Accounts payable

   (7,944  (4,033

Billings in excess of costs and estimated earnings on uncompleted contracts

   2,823   562 

Accrued expenses and other current liabilities

   (6,048  (5,448

Other long-term liabilities

   (352  (1,840
  

 

 

  

 

 

 

Net cash provided by operating activities

   23,660   21,278 
  

 

 

  

 

 

 

Cash flows from investing activities:

   

Purchases of property, plant and equipment

   (33,460  (18,786

Proceeds from sales of equipment

   2,889   3,744 

Business acquisition, net of cash acquired

   (51,319  —   

Investment in joint venture

   (400  —   
  

 

 

  

 

 

 

Net cash used in investing activities

   (82,290  (15,042
  

 

 

  

 

 

 

Cash flows from financing activities:

   

Repayments of revolving credit facility

   (5,000  (5,410

Proceeds from revolving credit facility

   —     312 

Proceeds from issuance of long-term debt, net of deferred issuance costs

   21,917   54,616 

Repayments of long-term debt

   (8,665  (58,139

Proceeds from initial public offering of Class A common stock, net of offering costs

   98,009   —   

Proceeds from sale of treasury stock

   5   497 

Common stock dividend paid

   —     (31,292
  

 

 

  

 

 

 

Net cash provided by (used in) financing activities

   106,266   (39,416
  

 

 

  

 

 

 

Net change in cash

   47,636   (33,180

Cash:

   

Beginning of period

   27,547   51,085 
  

 

 

  

 

 

 

End of period

  $75,183  $17,905 
  

 

 

  

 

 

 

Supplemental cash flow information:

   

Cash paid for interest

  $1,578  $2,688 

Cash paid for income taxes

  $12,557  $9,325 

Non-cash investing activities:

   

Property, plant and equipment financed with accounts payable

  $152  $142 

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 assets7,138
 5,675
Amortization of deferred debt issuance costs and debt discount27
 19
Provision for bad debt145
 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, net26,174
 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 assets298
 (549)
Accounts payable(25,290) (11,268)
Billings in excess of costs and estimated earnings on uncompleted contracts733
 4,599
Accrued expenses and other current liabilities(5,402) (6,214)
Other long-term liabilities(9) (5)
Net cash provided by operating activities1,211
 19,490
Cash flows from investing activities:   
Purchases of property, plant and equipment(7,406) (9,509)
Proceeds from sale of equipment536
 191
Distributions received from investment in joint venture1,800
 
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 period99,137
 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
    
See notes are an integral part of theseto unaudited consolidated financial statements.

Construction Partners, Inc.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Notes to Consolidated Financial Statements

(unaudited)

Note 1 - General

Business Description

Construction Partners, Inc. (the “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.

Company History

The Company was formed as a Delaware corporation in 2007 as a holding company for its 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. In May 2018, the Company completed an initial public offering of its Class A common stock (the “IPO”), as further described in Note 2.

Seasonality

The use and consumption of our products and services fluctuate some due to seasonality, althoughseasonality. Our products are used, and our construction operations and production facilities are located, outdoors. Therefore, seasonal changes and other weather-related conditions, in particular extended snowy, rainy or cold weather in the Company is able to performwinter, spring or fall and major weather events, such as hurricanes, tornadoes, tropical storms and heavy snows, can adversely affect our business and operations through a decline in both the use of our products and demand for our services. In addition, construction projects during all twelve monthsmaterials production and shipment levels follow activity in all of its markets.the construction industry, which typically occurs in the spring, summer and fall. Warmer and drier weather during the third and fourth quarters of itsour fiscal year (April 1 - September 30) typically result in higher activity and revenues during those quarters. The first and second quarters of the Company’sour fiscal year (October 1 - March 31) 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 the Company’s audited consolidated financial statements and related notes thereto for the fiscal year ended September 30, 2017 included in the IPO Prospectus.

Note 2 – Initial Public Offering

On 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 holders of outstanding common shares 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 shares of Class B treasury shares (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 25.2 to 1 split of the common stock as part of the Reclassification (the “Stock Split”).

On May 8, 2018, the Company completed an IPO 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 offering expenses of approximately $6.3 million. Of the $6.3 million additional offering expenses, $2.2 million are reflected as capitalized equity issuance costs included within other current assets on the Consolidated Balance Sheet at September 30, 2017. All $6.3 million of equity issuance costs were reclassified to additionalpaid-in capital during the three months ended June 30, 2018 in connection with the successful completion of the IPO . 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 stock to 42,737,571 and 39,567,537, respectively. 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 IPO partially exercised their over-allotment option to purchase an additional 700,000 shares of our Class A common stock at the IPO 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 42,387,571 and 39,217,537, respectively. The Company did not receive any proceeds from the sale of shares sold by the holders of Class B common stock.

Note 32 - Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of Construction Partners, Inc. and its wholly-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 atas 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.

Common share and per share amounts have been retroactively adjusted for all periods presented to give effect to the Stock Split described in Note 2—Initial Public Offering.

Management’s7 - Equity.

Management's Estimates

The preparation of the consolidated financial statements in conformity with 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.

A description of certain critical accounting policies of the Company is presented below. Additional critical accounting policies and the underlying judgments and uncertainties are described in the notes to the Company’sCompany's annual consolidated financial statements for the fiscal year ended September 30, 2017 included in the IPO Prospectus.

its 2018 Form 10-K.


Emerging Growth Company

Construction Partners, Inc. is an “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.

Cash and Cash Equivalents
Cash consists principally of currency on hand and demand deposits at commercial banks. Cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts of cash and are so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Cash equivalents include investments with original maturities of three months or less. The Company maintains demand accounts, money market accounts and certificates of deposit at several banks.
Contracts Receivable Including Retainage, net

Contracts receivable 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.

The carrying value of contracts receivable including retainage, net of the allowance for doubtful accounts, represents their estimated net realizable value. Management provides for uncollectible accounts through a charge to earnings and a credit to the allowance for doubtful accounts based on its assessment of the current status of individual accounts, type of service performed, and current economic conditions. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts and an adjustment of the contract receivable.

CostsContract Assets and Estimated Earnings on Uncompleted Contracts

Contract Liabilities

Billing practices for the Company’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.

The 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.

The 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.

this account are recognized, and the liability is reduced, as the Company subsequently satisfies the performance obligation under the contract.


Concentration of Risks

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of contracts receivable including retainage. In the normal course of business, the Company provides credit to its customers and does not generally require collateral. Concentrations of credit risk associated with these receivables are monitored on an ongoing basis. The Company has not historically experienced significant credit losses, due primarily to 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 June 30,December 31, 2018 or September 30, 2017.

2018.

Projects performed for various Departments of Transportation accounted for 45.6% and 43.7%37.3% of consolidated revenues for each of the three months ended June 30,December 31, 2018 and June 30, 2017, respectively, and 40.9% and 38.7% of consolidated revenues for the nine months ended June 30, 2018 and June 30, 2017, respectively.December 31, 2017. Two customers accounted for more than 10% of consolidated revenues for the periods presented below (unaudited):

   % of consolidated  % of consolidated 
   revenues  revenues 
   for the three months ended
June 30,
  for the nine months ended
June 30,
 
   2018  2017  2018  2017 

Alabama Department of Transportation

   17.0  13.6  14.8  12.8

North Carolina Department of Transportation

   14.8  16.6  13.5  13.2

Revenues and Cost Recognition

three months ended December 31, 2018 or December 31, 2017, as follows:

  % 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%
Revenues from Contracts with Customers
The Company derives all of its revenues from contracts with its customers, predominantly by performing construction projects for both public and private infrastructure projects, with an emphasis on highways, roads, bridges, airports and commercial and residential developments. These projects represent a mix of federal, state, municipal and private customers. In addition, the 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.
Revenues derived from construction projects are recognized 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 believes the Company maintains reasonable estimates based on 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.

Contract costs 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).

As more fully described

Progress toward completion is estimated using the input method, measured by the relationship of total cost incurred through the measurement date to total estimated costs required to complete the project (cost-to-cost method). The Company believes this method best depicts the transfer of goods and services to the customer because it represents satisfaction of the Company's performance obligation under the contract, which occurs as the Company incurs costs. The Company measures percentage of completion based on the performance of a single performance obligation under its construction projects. Each of the Company's construction contracts represents a single performance obligation to complete a defined construction project. This is because goods and services promised for delivery to a customer are not distinct, as the customer cannot benefit from any individual portion of the services on its own. All deliverables under a contract are part of a project defined by a customer and represent a series of integrated goods and services that have the same pattern of delivery to the customer and use the same measure of progress toward satisfaction of the performance obligation as the customer's asset is created or enhanced by the Company. The Company's obligation is not satisfied until the entire project is complete.

Revenue recognized during a reporting period is based on the estimated incremental percentage-of-completion applied to the total contract price, including adjustments for variable consideration such as liquidated damages, penalties or bonuses related to the timeliness or quality of project performance. Such adjustments are made to reflect the most likely amount of consideration management expects the Company to be entitled to at the completion of the contract, based on the best information available to the Company. The basis for total contract price is a stated amount in the Notescontract, which is generally either fixed unit price or fixed total price, as described below. The Company adjusts the estimated contract price to Consolidated Financial Statementsinclude variable consideration to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. Total contract price is adjusted to reflect expected liquidated damages assessments or other penalties in the period the Company determines they will be incurred or when the customer imposes the penalty. Total contract price is adjusted to reflect contract bonus provisions related to timeliness or quality metrics when realization is probable and amounts can be reliably determined, which is generally when they are awarded by the customer. We account for changes in the measure of progress and changes to the estimated transaction price using a cumulative catch-up adjustment.
The majority of the Company's public construction contracts are fixed unit price contracts. Under fixed unit price contracts, the Company is committed to providing materials or services required by a contract at fixed unit prices (for example, dollars per ton of asphalt placed). The Company's private customer contracts are primarily fixed total price contracts, also known as lump sum contracts, which require that the total amount of work be performed for a single price. Contract cost is recorded as incurred, and revisions in contract revenue and cost estimates are reflected in the accounting period when known. Changes in job performance, job conditions and estimated profitability, including those changes arising from contract change orders, penalty provisions and final contract settlements, may result in revisions to estimated revenues and cost and are recognized in the period in which the revisions are determined.
Change orders are modifications of an original contract that effectively change the existing provisions of the contract and become part of the single performance obligation that is partially satisfied at the date of the contract modification. This is because goods and services promised under change orders are generally not distinct from the remaining goods and services under the existing contract, due to the significant integration of services performed in the context of the contract. Accordingly, change orders are generally accounted for as a modification of the existing contract and single performance obligation. We account for the year ended September 30, 2017,modification using a cumulative catch-up adjustment. Either the Financial Accounting Standards Board issued ASUNo. 2014-09, RevenueCompany or its customers may initiate change orders, which may include changes in specifications or designs, manner of performance, facilities, equipment, materials, sites and period of completion of the work.
Revenues derived from Contracts with Customers (Topic 606)the sale of HMA and aggregates are recognized at a point in May 2014,time, which revised and consolidated previous guidance, eliminated industry-specific revenue recognition guidance and established a comprehensive principle-based approach for determining revenue recognition. This update is effective forwhen control of the Company’s fiscal year beginning October 1, 2018. Managementproduct is transferred to the customer. Generally, that point in time is when the customer accepts delivery at its facility or receives product in its own transport vehicles from one of the Company's HMA plants. Upon purchase, the Company generally provides an invoice or similar document detailing the goods transferred to the customer. The Company generally offers payment terms customary in the process of completing an evaluationindustry, which typically require payment ranging from point-of-sale to select a transition method and determine the potential impact of adoption on its consolidated financial statements.

30 days following purchase.

Income Taxes

The provision for income taxes includes federal and state income taxes. Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which the temporary differences are expected to be 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.

Sheet. The Company’s policy is to classifyCompany classifies income tax relatedtax-related interest and penalties inas interest expense and other expenses, respectively.

Earnings per Share
As described in Note 7 – Equity, Issuance Costs

Thethe Company capitalizes certain third-party feescompleted 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 25.2 to 1 split of shares of common stock (the "Stock Split") and the creation of a dual-class common stock structure. Prior to the Reclassification, all net income of the Company was attributable to the holders of shares of common stock immediately prior to the Reclassification. During the period beginning from the Reclassification through the IPO, all net income of the Company was attributable to holders of Class B common stock. Since the IPO, all net income of the Company has been attributable equally, on a per share basis, to the holders of Class A common stock and Class B common stock.


Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted average number of aggregate shares of pre-Reclassification common stock, Class A common stock and Class B common stock, as applicable for the respective periods, calculated on a post-Stock Split basis. Diluted earnings per share is calculated by dividing net income attributable to common stockholders by the weighted average number of aggregate shares of pre-Reclassification common stock, Class A common stock, Class B common stock and potential dilutive common shares determined using the treasury method, calculated on a post-Stock Split basis as applicable for the respective periods. Securities that are directly associatedanti-dilutive are not included in the calculation of diluted earnings per share.
Note 3 - Accounting Standards
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)in-process ("ASC 606"), which revises and consolidates current guidance, eliminates industry-specific revenue recognition guidance and establishes a comprehensive principle-based approach for determining revenue recognition. The core principle of the guidance is that an entity shall recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for providing those goods or services. Amendments of this update set forth a five-step revenue recognition model to be applied consistently to all contracts with customers, except those that are within the scope of other topics in the Accounting Standards Codification ("ASC"): (i) identify the contract with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The update also provides guidance regarding the recognition of costs related to obtaining and fulfilling customer contracts. This update also requires quantitative and qualitative disclosures sufficient to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including disclosures on significant judgments made when applying the guidance. The FASB subsequently amended ASC 606 on multiple occasions to, among other things, delay its effective date and clarify certain implementation guidance. equity offerings. At
The update permits adoption using either (i) a full retrospective approach, under which all years included in the financial statements are presented under the revised guidance, or (ii) a modified retrospective approach, under which financial statements are prepared under the revised guidance for the year of adoption, but not for prior years. Under the latter method, entities recognize a cumulative adjustment to the opening balance of retained earnings for contracts that still require performance by the entity at the date of adoption.
Management adopted this update for the Company's fiscal year beginning October 1, 2018, using the modified retrospective approach. The adoption of ASC 606 on October 1, 2018 did not result in a material impact that required recognition of a cumulative adjustment of the opening retained earnings balance for contracts that still required performance at September 30, 2017, $2.2 million2018. Application of capitalized equity issuance costs were recorded as prepaid expenses, included in other current assets on the Consolidated Balance Sheet. Upon the successful completion of the IPO in May 2018, the equity issuance costs balance of $6.3 million was reclassified from prepaid expenses to additionalpaid-in capital duringASC 606 for the three months ended June 30, 2018.

December 31, 2018 had the following impact on the Company's Consolidated Balance Sheet at December 31, 2018 and Consolidated Statement of Income for the three months ended December 31, 2018 (in thousands):
  As Reported 
Impact of
ASC 606
 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
The Company has 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 of

construction projects. The Company also enhanced its disclosures regarding judgments and estimates used by management in the application of ASC 606 in Note 2 - Significant Accounting Policies.
Note 4 - Business Acquisitions
The Scruggs Company
On May 15, 2018, the Company executed a stock purchase agreement (the "Stock Purchase Agreement") to complete the acquisition of 100% of the common shares and voting interests of The Scruggs Company ("Scruggs"), which complemented the Company's vertically integrated southeastern United States operations, providing new bidding areas in the expanding Georgia market (the "Scruggs Acquisition"). This acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations.
The Consolidated Statement of Income for the three months ended December 31, 2018 includes$16.3 million of revenue and $1.5 million of net income attributable to operations of Scruggs. The following presents pro forma revenues and net income for the three months ended December 31, 2017 as though the Scruggs Acquisition had occurred on October 1, 2016 (in thousands):
Pro forma revenues $173,360
Pro forma net income $10,658
   
Pro forma financial information is presented as if the operations of Scruggs had been included in the consolidated results of the Company since October 1, 2016, and gives effect to transactions that are directly attributable to the Scruggs Acquisition, including adjustments to:
(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.
Pro forma information is presented for informational purposes only and may not be indicative of revenue or net income that would have been achieved if the Scruggs Acquisition had occurred on October 1, 2016.

Note 45 - Contracts Receivable Including Retainage, Net

net

Contracts receivable including retainage, net are comprisedconsisted of the following at June 30,December 31, 2018 and September 30, 20172018 (in thousands):

   June 30, 2018   September 30, 2017 
   (unaudited)     

Contracts receivable

  $102,673   $109,538 

Retainage

   14,482    13,180 
  

 

 

   

 

 

 
   117,155    122,718 

Allowance for doubtful accounts

   (1,476   (1,734
  

 

 

   

 

 

 

Contracts receivable including retainage, net

  $115,679   $120,984 
  

 

 

   

 

 

 


December 31, 2018 September 30, 2018

(unaudited) 
Contracts receivable$78,500
 $104,541
Retainage16,715
 16,848

95,215
 121,389
Allowance for doubtful accounts(1,243) (1,098)
Contracts receivable including retainage, net$93,972
 $120,291


 
Retainage receivables have been billed, but are not due until contract completion and acceptance by the customer.


Note 56 - Costs and Estimated Earnings on Uncompleted Contracts

Costs and estimated earnings compared to billings on uncompleted contracts at June 30,December 31, 2018 and September 30, 2017 consist2018 consisted of the following (in thousands):

   June 30, 2018   September 30, 2017 
   (unaudited)     

Costs on uncompleted contracts

  $677,833   $489,661 

Estimated earnings to date on uncompleted contracts

   88,222    62,193 
  

 

 

   

 

 

 
   766,055    551,854 

Billings to date on uncompleted contracts

   (792,828   (579,370
  

 

 

   

 

 

 

Net billings in excess of costs and estimated earnings on uncompleted contracts

  $(26,773  $(27,516
  

 

 

   

 

 

 

Reconciliation


December 31, 2018 September 30, 2018

(unaudited)  
Costs on uncompleted contracts$778,571
 $743,322
Estimated earnings to date on uncompleted contracts101,007
 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)


 
Significant changes to balances of 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):
 
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
September 30, 2018$9,334
 $(38,738) $(29,404)
Changes in revenue billed, contract price or cost estimates858
 (733) 125
December 31, 2018 (unaudited)$10,192
 $(39,471) $(29,279)
At December 31, 2018, the Company’s Consolidated Balance Sheets at JuneCompany 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.
Note 7 - Equity
At December 31, 2018 and September 30, 2017 is as follows (in thousands):

   June 30, 2018   September 30, 2017 
   (unaudited)     

Costs and estimated earnings in excess of billings on uncompleted contracts

  $12,747   $4,592 

Billings in excess of costs and estimated earnings on uncompleted contracts

   (39,520   (32,108
  

 

 

   

 

 

 

Net billings in excess of costs and estimated earnings on uncompleted contracts

  $(26,773  $(27,516
  

 

 

   

 

 

 

Note 6 – Business Acquisition

On May 15, 2018, the Company executedhad 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.

Reclassification of Common Stock and Initial Public Offering
On April 23, 2018, the Company completed the Reclassification by amending and restating its certificate of incorporation to effectuate a dual class common stock purchase agreement (the “Stock Purchase Agreement”)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 completegive effect to the acquisitionStock Split.
On May 8, 2018, the Company completed its IPO, in which it sold 11,250,000 shares of 100% of theClass A common shares and voting interest of The Scruggs Company (“Scruggs”),stock at 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 (“Scruggs Acquisition”). The Scruggs Acquisition complemented the Company’s vertically integrated Southeastern U.S. operations, providing new bidding areas in the expanding Georgia market. The Company funded the purchase price with cash on hand plus an additional $22.0 million borrowed under its existing Term Loan as described in Note 9. The purchase price of $51.3 million, excluding cash acquired, was paid in cash at closing.

This acquisition was accounted for as a business combination in accordance with ASC 805,Business Combinations. The allocation$12.00 per share. Of these shares, 9,000,000 were shares of the purchase price has not yet been finalized due to the recent timing of the acquisition, and will be completed within one year of the acquisition date.

The following presents the provisional allocation of the purchase price to assets acquired and liabilities assumed, based on their estimated fair values at the acquisition date, determined in accordance with the methodology described underFair ValueMeasurements in Note 2 to the Company’s audited financial statements for the year ended September 30, 2017 (unaudited, in thousands):

Contracts receivable, including retainage

  $9,184 

Costs and estimated earnings in excess of billings on uncompleted contracts

   2,027 

Inventory

   4,323 

Other current assets(1)

   731 

Property, plant and equipment

  

Land and improvements

   7,302 

Quarry reserves

   13,986 

Asphalt plants

   6,917 

Buildings

   1,552 

Construction equipment

   17,571 

Goodwill

   3,798 

Accounts payable

   (3,646

Billings in excess of costs and estimated earnings on uncompleted contracts

   (4,589

Current maturities of long-term debt

   (388

Other current liabilities

   (1,638

Due to seller

   (4,940

Long-term debt, net of current maturities

   (738

Other liabilities

   (133
  

 

 

 
  $51,319 
  

 

 

 

(1)

Other current assets excludes cash acquired

The $3.8 million of purchase price exceeding the net fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill. Under the terms of the Stock Purchase Agreement, the selling stockholders made a Section 338(h)(10) election under the Internal Revenue Code. Accordingly, goodwill allocated to the purchase price and thestep-up to fair value of property, plant and equipment reflected in the acquisition date balance sheet are deductible to the Company for income tax purposes. Goodwill primarily represents the assembled work force and synergies expected to result from the acquisition. Management has determined that Scruggs represents a new reporting unit for purposes of assessing potential impairment of goodwill and has allocated all $3.8 million of goodwill recognized in connection with the acquisition to that new reporting unit. Scruggs represents the Company’s fifth platform operating company and functions one level below the Company’s single operating segment, along with its other platform operating companies, each representing reporting units.

The Consolidated Statements of Income for the three and nine months ended June 30, 2018 includes $11.4 million of revenue and $1.0 million of net income attributable to operations of Scruggs since the acquisition date of May 15, 2018. The Company recorded certain costs to effect the acquisition as they were incurred, which are reflected as general and administrative expenses on the Consolidated Statements of Income in the amount of $0.2 million for the three and nine months ended June 30, 2018. The following presents pro forma revenues and net income as though the Scruggs Acquisition had occurred on October 1, 2016 (unaudited, in thousands):

   For the three months ended June 30,   For the nine months ended June 30, 
   2018   2017   2018   2017 

Revenues

  $206,924   $173,663   $519,735   $450,484 

Net income

  $15,379   $8,775   $40,653   $20,582 

Pro forma financial information is presented as if the operations of Scruggs had been included in the consolidated results of the Company since October 1, 2016, and gives effect to transactions that are directly attributable to the Scruggs Acquisition, including adjustments to:

a)

Include the pro forma results of operations of Scruggs for the three and nine months ended June 30, 2018 and June 30, 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 consistently applied to the Company’s depreciation and depletion methodologies.

c)

Include interest expense under the Company’s Term Loan 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 June 30, 2018, 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 June 30, 2018.

d)

Exclude $0.2 million of acquisition-related expenses from the three and nine months ended June 30, 2018, as though such expenses were incurred prior to the pro forma acquisition date of October 1, 2016.

Pro forma information is presented for informational purposes and may not be indicative of revenue or net income that would have been achieved if the Scruggs Acquisition had occurred on October 1, 2016.

Note 7 – Settlement Agreement

On April 19, 2018, certain of the Company’s 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 the Company for a business interruption event that occurred more than five years ago, which did not directly relate to the Company’s business and which has not, and is not expected to, recur (the “Settlement”). The Company recorded apre-tax gain of $14.8 million during the nine months ended June 30, 2018 related to the Settlement, which is reflected as settlement income on the Consolidated Statements of Income. Future payments are reflected on the Consolidated Balance Sheets as other current assets and other assets in the amount of $3.9 million and $10.9 million, respectively at June 30, 2018.

Note 8 – Joint Venture

In November 2017, one of the Company’s wholly-owned subsidiaries entered into a joint venture agreement (the “JV”) with a third-party for the sole purpose of bidding on and, if awarded, performing a construction project for the Alabama Department 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 June350,000 were sold by holders of Class B common stock, which shares upon sale automatically converted into 350,000 shares of Class A common stock.

At December 31, 2018 and September 30, 2018, the Company 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 nine months ended Juneoutstanding.

At December 31, 2018 and September 30, 2018, the Company recognized $0.4 millionhad 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 $0.7 million39,464,619 were outstanding, respectively. At December 31, 2018 and September 30, 2018, the Company held 2,922,952 shares in treasury, at an average cost ofpre-tax income, respectively, representing its 50% interest in the earnings 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. The Company’s income tax impact attributable to its investment in JV is included within the provision for income taxes on its Consolidated Statements of Income.

$5.34 per share.

Note 98 - Debt

The Company maintains various credit facilities from time to time to finance acquisitions, the purchase of real estate, construction equipment, asphalt plants and other fixed assets, and for general working capital purposes. This includes, among other things, a credit agreement with Compass Bank as agent, sole lead arranger and sole bookrunner (as amended, the "Compass Credit Agreement") providing for a $72.0 million term loan (the "Compass Term Loan") and a $30.0 million revolving credit facility (the "Compass Revolving Credit Facility"). Debt at June 30,December 31, 2018 and September 30, 20172018 consisted of the following (in thousands):

                                                                
   June 30, 2018  September 30, 2017 
   (unaudited)    

Long-term debt:

   

Compass Term Loan

  $60,900  $47,500 

Compass Revolving Credit Facility

   5,000   10,000 

Other long-term debt

   1,061   —   
  

 

 

  

 

 

 

Total long-term debt

   66,961   57,500 

Deferred debt issuance costs

   (387  (364

Current maturities of long-term debt

   (14,788  (10,000
  

 

 

  

 

 

 

Long-term debt, net of current maturities

  $51,786  $47,136 
  

 

 

  

 

 

 

Current maturities of debt:

   

Current maturities of long-term debt

  $14,788  $10,000 
  

 

 

  

 

 

 

Total current maturities of debt

  $14,788  $10,000 
  

 

 

  

 

 

 

In connection with the Scruggs Acquisition described in Note 6 –Business Acquisition, the Company amended the Compass Credit Agreement and borrowed an additional $22.0 million under its existing term loan (the “Term Loan”) 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 September 30, 2017. In connection with this additional Term Loan borrowing, the Company entered into a fair value 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.

Note 10 - Equity

As described in Note 2 –Initial Public Offering, the Company completed an initial public offering of its Class A common stock and certain related transactions during the third quarter of fiscal year 2018. Holders of Class A Common Stock and Class B Common Stock have identical rights to earnings and dividends of the Company. Holders of Class A Common Stock are entitled to one vote per share, and holders of Class B Common Stock are entitled to ten votes per share.

Shares of outstanding Class B Common Stock at June 30, 2018 include 63,000 shares of unvested restricted stock, which were issued on February 23, 2018 and vest on July 1, 2018 (see Note 11 –Equity-based Compensation).

In June 2018, employees holding options under 2010Non-Plan Stock Option Agreements exercised all options to purchase 768,984 shares of Class B common stock at an exercise price of $5.70. These shares were issued from treasury shares at an average cost of approximately $3.64 per share. The transaction was executed as a cashless exercise through which the Company concurrently repurchased from the option holders the number of shares of Class B common stock required to (i) fund the exercise price for all options and (ii) meet statutory federal, state and payroll tax withholding requirements applicable to the employees associated with their exercises. The Company purchased a total of 521,902 shares of Class B common stock, at the $13.17 closing price of the Company’s Class A common stock on the date of exercise, resulting in a net increase of 247,082 shares of Class B common stock outstanding. Of the aggregate repurchase price, the Company retained $4.4 million which was recorded to additionalpaid-in capital reflecting the total exercise prices, and withheld $2.5 million which was recorded as a payroll tax liability included as other current liabilities on the Company’s Consolidated Balance Sheet at June 30, 2018.

The following presents changes to the Company’s outstanding shares of common stock, treasury shares and additionalpaid-in capital for the nine months ended June 30, 2018 (dollars in thousands):

                Treasury Shares 
   Common Shares
Outstanding
  Class A
Common
Shares
Outstanding
   Class B
Common
Shares
Outstanding
  Additional Paid-
in Capital
  Shares  Cost 

Balance, September 30, 2017

   41,691,541   —      —    $142,385   (3,296,034 $(11,983

Issuance of restricted shares from treasury

   126,000   —      —     (453  126,000   458 

Reclassification of common stock

   (41,817,541  —      41,817,537   —     —     —   

Conversion of Class B common stock to Class A common stock in connection with initial public offering of Class A common stock

   —     2,600,000    (2,600,000  —     —     —   

Initial public offering of Class A common stock, net of offering costs

   —     9,350,000    —     98,000   —     —   

Cashless option exercise

   —     —      247,082   1,586   247,082   (4,078

Equity-based compensation expense

   —     —      —     975   —     —   
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Balance, June 30, 2018 (unaudited)

   —     11,950,000    39,464,619  $242,493   (2,922,952 $(15,603
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Note 11 - Equity-based Compensation

Restricted Stock Awards

On 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 a reduction to additionalpaid-in capital of approximately $0.5 million representing the cost of treasury shares issued in excess of the purchase price paid by awardees.

Half of the shares granted vested on the award date and the remaining 50% of the shares 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 nine months ended June 30, 2018, the Company recorded compensation expense in connection with these grants in the amount of $0.4 million and $1.0 million, respectively, which is reflected as general and administrative expenses on the Company’s Consolidated Statements of Income. At June 30, 2018, there was no unrecognized compensation expense related to these awards.


December 31, September 30,
 2018 2018

(unaudited)  
Long-term debt:


Compass Term Loan$53,700

$57,300
Compass Revolving Credit Facility5,000

5,000
Other long-term debt853

964
Total long-term debt59,553

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




Note 129 - Earnings perPer Share

As described in Note 2 –Initial Public Offering,7 -Equity, the Company completed an IPO and reclassificationReclassification of common stock during the three months ended June 30, 2018. Prior to the Reclassification, all net incomethird quarter of the Company was attributable to the holders of shares of common stock immediately prior to the Reclassification. During the period beginning from the Reclassification through the IPO, all net income of the Company was attributable to holders of Class B Common Stock. Since the IPO, all net income of the Company is attributable equally, on a per share basis, to the holders of Class A and Class B Common Stock.

fiscal year ended September 30, 2018.

Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted average of aggregate shares ofpre-Reclassification common stock, Class A Common Stock and Class B Common Stock, as applicable for the respective periods, calculated on a post-split basis, during the respective periods. The calculation of basic earnings per share excludes shares of unvested restricted stock. The following table summarizes the weighted-average number of basic and diluted common shares outstanding and the calculation of basic and diluted earnings per share for the periods presented (unaudited in(in thousands, except share and per share amounts):

   For the three months ended June 30,   For the nine months ended June 30, 
   2018   2017   2018   2017 

Numerator

        

Net income attributable to common stockholders

  $13,403   $6,412   $35,647   $13,773 

Denominator

        

Weighted average number of basic common

shares outstanding

   46,557,785    41,538,989    43,648,309    41,514,656 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per basic common share attributable to common stockholders

  $0.29   $0.15   $0.82   $0.33 
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted


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 diluted51,414,619
 41,691,541
Net income per common share attributable to common shareholders, basic and diluted$0.10
 $0.26


 
There is no difference between basic and diluted earnings per share is calculated by dividing net income attributable tofor the three months ended December 31, 2018 or December 31, 2017. The Company excluded 768,984 common stockholders by the weighted-average number of common shares and potential dilutive common shares outstanding during the period, including options and shares of unvested restricted stock determined using the treasury stock method. Securities are excludedequivalents from the calculation of diluted earnings per share for any period during which the effect ofthree months ended December 31, 2017 because 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 (unaudited in thousands, except share and per share amounts):

   For the three months ended June 30,   For the nine months ended June 30, 
   2018   2017   2018   2017 

Numerator

        

Net income attributable to common stockholders

  $13,403   $6,412   $35,647   $13,773 

Denominator

        

Weighted average number of basic common shares outstanding

   46,557,785    41,538,989    43,648,309    41,514,656 

Effect of dilutive securities:

        

2016 Equity Incentive Plan options

   —      27,355    —      26,791 

2010Non-Plan Stock Options Agreement options

   387,892    —      271,163    —   

2018 Restricted Stock grants

   42,682    —      13,074    —   
  

 

 

   

 

 

   

 

 

   

 

 

 
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of diluted common shares outstanding:

   46,988,359    41,566,344    43,932,546    41,541,447 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per diluted common share attributable to common stockholders

  $0.29   $0.15   $0.81   $0.33 
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company had 768,984 common stock equivalents whichThere were no anti-dilutive securities excluded from the calculation of diluted earnings per share for the three months and nine months ended June 30, 2017 because they were anti-dilutive. There were no anti-dilutive common stock equivalents during the three months or nine months ended June 30,December 31, 2018.

Note 1310 - Provision for Income Taxes

The Company files a consolidated United States income tax return and income tax returns in various states. Management evaluated the Company's tax positions at December 31, 2018, based on appropriate provisions of applicable enacted tax laws and regulations, and believes that they are supportable based on their specific technical merits and the facts and circumstances of the respective transactions.

On December 22, 2017, the U.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.

December 31, 2017, respectively. During the three months and nine months ended June 30, 2018,December 31, 2017, the Company recorded a provisional discrete tax benefit of $0.9$3.5 million and $4.4 million, respectively, 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’sCompany completed its accounting for the income tax effects of the Tax Act during the fourth quarter of its fiscal year ended September 30, 2018.

The Company's effective tax rate for the three months ended June 30,December 31, 2018 and 2017 was 9.5%24.3% and 32.1%(7.8)%, respectively. The lower effective tax rate for the three months ended June 30,December 31, 2017 compared to the three months ended December 31, 2018 was lower than the comparable prior year period primarily due to the decrease in the federal corporate tax rate and the benefit of athe tax credit recorded during the three months ended June 30, 2018December 31, 2017 related to the enactment of the Tax Act. Similarly, the Company’s effective tax rate for the nine months ended June 30, 2018 and 2017 was 13.1% and 34.9%, respectively, due primarily to the decrease in the federal corporate tax rate and the benefit of a tax credit recorded during the nine months ended June 30, 2018 related to the enactment of the Tax Act. The effective tax rate for the three and nine months ended June 30, 2018 was also reduced by a $1.3 million permanent tax benefit resulting from the deduction of the excess fair market value of options exercised under 2010Non-Plan Stock Option Agreements over the exercise price (see
Note 10—Equity).

Note 1411 - Related Parties

On December 31, 2017, the Company sold a 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 June 30,December 31, 2018, $0.9$0.1 million and $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 June 30,December 31, 2018, $0.9$0.1 million and $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.

fiscal year 2026.

From time to time, the Company conducts business with the following related parties:
On January 30, 2015, a subsidiary of the Company entered into a master services subcontract with Austin Trucking, LLC (“("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 $4.3 million and $3.3 million during each of the three months ended June 30, 2018 and 2017, respectively, and approximately $8.6 million and $7.7 million during the nine months ended June 30, 2018 and 2017, respectively, which was included as cost of revenues on the Consolidated Statements of Income. At June 30, 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.

From time to time, a subsidiary of the Company provides construction services to various companies owned by a family member of a Senior Vice President of the Company. Company ("Construction Services").
For these services,periodic corporate events, the Company earned no revenue duringcharters a boat from Deep South Adventures, LLC, which is owned by a Senior Vice President of the three months ended June 30, 2018, approximately $1.6 million during the three months ended June 30, 2017, and approximately $1.5 million and $3.1 million during the nine months ended June 30, 2018 and 2017, respectively, which was included as revenuesCompany.
The Company rents vehicles on the Consolidated Statements of Income. At June 30, 2018 and September 30, 2017, the Company had $3.2 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").

Family members of a Senior Vice President of the Company earned no revenue during the three months ended June 30, 2018, approximately $0.2 million during the three months ended June 30, 2017, and approximately $0.2 million during each the nine months ended June 30, 2018, and 2017, which was included as revenues on the Consolidated Statementsprovide consulting services to a subsidiary of Income. At June 30, 2018 and September 30, 2017, the Company had $0.6 million and $1.0 million, respectively, due("Consulting Services").
A law firm previously owned by a family member of a Senior Vice President of the Company provided legal services to a subsidiary of the Company ("Legal Services").
A subsidiary of the Company leases office space for its Dothan, Alabama office from H&K, Ltd. ("H&K"), an entity partially owned by a Senior Vice President of the Company. The office space is leased through early 2020. Under the lease agreement, the Company pays a fixed minimum rent per month.
A subsidiary of the Company leased office space for its Montgomery, Alabama office from H&A Properties LLC ("H&A"), an entity partially owned by two Senior Vice Presidents of the Company. Under the lease agreement, the Company paid a fixed minimum rent per month. In September 2018, the subsidiary purchased this office from H&A for $0.5 million.
On June 1, 2014, the Company entered into an access agreement with Island Pond Corporate Services, LLC ("Island Pond"), which provides a location for the Company to conduct business development activities from time to time on a property owned by the Executive Chairman of the Company's Board of Directors, who is also the Managing Partner of SunTx.
A company reflected as contracts receivable including retainage, net on its Consolidated Balance Sheets.

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").


The Company is party to a management services agreement with SunTx, under which the Company pays SunTx $0.25 million per fiscal quarter as well as reimbursement ofand reimburses certain travel and other out-of-pocket expenses.
The Company paid such feesfollowing table presents revenues earned and expense reimbursements to SunTx aggregating $0.5 million and $0.3 millionexpenses incurred by the Company during the three months ended JuneDecember 31, 2018 and December 31, 2017, if and to the extent the Company engaged in transactions with the parties described above during the respective periods, and accounts receivable and accounts payable balances at December 31, 2018 and September 30, 2018, related to transactions with such parties (in thousands):
 Revenue Earned (Expense Incurred)  Accounts Receivable (Payable)
 For the Three Months Ended December 31,  December 31, September 30,
 2018 2017  2018 2018
 (unaudited) (unaudited)  (unaudited)  
Purchaser of subsidiary$
 $
  $864
 $850
Disposed entity$
 $
  $952
 $937
Austin Trucking$(3,089)
(1) 
$(2,945)
(1) 
 $(266) $(790)
Construction Services$113
 $1,291
  $2,466
 $2,863
Deep South Adventures, LLC$
(2) 
$(33)
(2) 
 $
 $
Vehicle Rentals$(289)
(2) 
$(288)
(2) 
 $
 $
Consulting Services$(67)
(2) 
$(60)
(2) 
 $
 $
Legal Services$
(2) 
$(58)
(2) 
 $
 $
H&K$(21)
(2) 
$(21)
(2) 
 $
 $
H&A$
(2) 
$(17)
(2) 
 $
 $
Island Pond$(80)
(2) 
$(80)
(2) 
 $
 $
Subcontracting Services$(193)
(1) 
$
(1) 
 $
 $(52)
SunTx$(254)
(2) 
$(340)
(2) 
 $
 $
         
(1) Cost is reflected as cost of revenues on the Company's Consolidated Statements of Income.
(2) Cost is reflected as general and administrative expenses on the Company's Consolidated Statements of Income.
         
Note 12 - Settlement Agreement
On April 19, 2018, certain of the Company's subsidiaries entered into settlement agreements with a third party, pursuant to which they will receive aggregate net payments of approximately $15.7 million. These agreements provided for the payments to be made in four equal installments between January 2019 and 2017, respectively,July 2020, in exchange for releasing and $1.1 millionwaiving all current and $1.0future claims against the third party relating to a business interruption event that occurred more than five years ago that did not directly relate to the Company's business and that has not, and is not expected to, recur (the "Settlement"). The Company recorded a pre-tax gain of $14.8 million during the nine months ended June 30, 2018 and 2017, respectively, and recognized the cost as general and administrative expenses on its Consolidated Statements of Income.

In the normal course of business, the Company maintains relationships and engages in transactions with other related parties. Transaction amounts during the three and nine months ended June 30, 2018 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 Sheets at June 30, 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 thefiscal year ended September 30, 2017 included2018 related to the Settlement. The subsidiaries received the first installment payments in the IPO Prospectus.

total amount of $3.9 million in January 2019. Future payments are reflected on the Consolidated Balance Sheet at December 31, 2018 as other current assets and other assets in the amount of $7.9 million and $7.4 million, respectively.


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

This Management’s Discussion

This discussion and Analysisanalysis 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.

Overview

We are one of the fastest growing civil infrastructure companies in the United States, specializing in the building and maintenance of transportation networks. Our operations leverage a highly skilled workforce, strategically located 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 Southeastern U.S.

Public infrastructuresoutheastern United States.

Our public projects are funded by federal, state and local governments and include projects for roads, highways, bridges, airports and other infrastructure 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.

In addition to public infrastructure projects, we provide a wide range of large sitework construction and HMA paving services to private construction customers, including commercial and residential developers and local businesses.

Recent Developments

Acquisition

On 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 $51.3 million, excluding cash acquired, 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 prior to the additional borrowing. In connection with this additional Term Loan borrowing, we entered into a fair value 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 Offering

On 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 $6.3 million. Of the $6.3 million additional estimated offering expenses, $2.2 million is reflected as capitalized equity issuance costs included within other current assets on the Consolidated Balance Sheet at September 30, 2017. All $6.3 million of equity issuance costs were reclassified to additionalpaid-in capital during the three months ended June 30, 2018 in connection with the successful completion of the IPO. 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 IPO partially exercised their over-allotment option to purchase an additional 700,000 shares of our Class A common stock at the IPO 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 Agreements

On 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. We recorded apre-tax gain of $14.8 million during the second quarter of fiscal year 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.

How We Assess Performance of Our Business

Revenues

We derive our revenues predominantly 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.

Gross Profit

Gross profit represents revenues less cost of revenues. Cost of revenues consists of all direct and indirect costs on construction contracts, including raw materials, labor, equipment costs, depreciation, lease expenses, 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.


Depreciation, Depletion and Amortization

We carry property, plant and equipment on our balance sheet at cost, net of accumulated depreciation, depletion and amortization. Depreciation on property, plant and equipment is computed on a straight-line basis over the estimated useful life of the asset. Amortization expense is the periodic expense related to leasehold improvements and intangible assets. Leasehold improvements are amortized over the lesser of the life of the underlying asset or the remaining lease term. Our intangible assets were recognized as a result of certain acquisitions and are generally amortized on a straight-line basis over the estimated useful lives of the assets. Quarry reserves are depleted in accordance with theunits-of-production method as aggregate is extracted, using the initial allocation of cost based on proven and probable reserves.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and personnel costs for our administration, finance and accounting, legal, information systems, human resources and certain managerial employees. Additional expenses include audit, consulting and professional fees, travel, insurance, office space rental costs, property taxes and other corporate and overhead expenses.

Gain on Sale of Equipment, Net

net

In the normal course of business, we sell construction equipment for various reasons, including when the cost of maintaining the asset exceeds the cost of replacing it. The gain or loss on sale of equipment reflects the difference between the carrying value at the date of disposal and the net consideration received from the sale of equipment during the period.

Interest Expense, Net

net

Interest expense, net primarily represents interest incurred on our long-term debt, such as the Compass Term Loan and the Compass Revolving Credit Facility, as well as the cost of interest swap agreements and amortization of deferred debt issuance costs. These amounts are partially offset by interest income earned on short-term investments of cash balances in excess of our current operating needs.

Other Key Performance Indicators

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA represents net income before, as applicable from time to time, (i) interest expense, net, (ii) provision (benefit) for income taxes, (iii) depreciation, depletion and amortization of long-lived assets, (iv) equity-based compensation expense loss 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.

Our calculation of Adjusted EBITDA and Adjusted EBITDA Margin may not be comparable to similarly named measures reported by other companies. Potential differences between our measure of Adjusted EBITDA 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.


The following table presents a reconciliation of net income, the most directly comparable measure calculated in accordance with GAAP, to Adjusted EBITDA, and the calculation of Adjusted EBITDA Margin for each of the periods presented (unaudited, dollars in thousands)(in thousands, except percentages):

   For the three months
ended June 30,
  For the nine months
ended June 30,
 
   2018  2017  2018  2017 

Net income

  $13,403  $6,412  $35,647  $13,773 

Interest expense, net

   406   659   956   2,802 

Provision for income taxes

   1,409   3,031   5,382   7,395 

Depreciation, depletion and amortization of long-lived assets

   6,621   5,208   17,929   15,709 

Equity-based compensation expense

   371   357   975   513 

Loss on extinguishment of debt

   —     1,638   —     1,638 

Settlement income (1)

   —     —     (14,803  —   

Management fees and expenses(2)

   468   315   1,119   999 
  

 

 

  

 

 

  

 

 

  

 

 

 

Adjusted EBITDA

  $22,678  $17,620  $47,205  $42,829 
  

 

 

  

 

 

  

 

 

  

 

 

 

Revenues

  $195,075  $148,099  $464,395  $380,585 

Adjusted EBITDA Margin

   11.6  11.9  10.2  11.3

 For the Three Months Ended December 31,
 2018 2017
Net income$5,154
 $10,996
Interest expense, net515
 297
Provision (benefit) for income taxes1,651
 (797)
Depreciation, depletion and amortization of long-lived assets7,138
 5,675
Management fees and expenses (1)
254
 340
Adjusted EBITDA$14,712
 $16,511
Revenues$154,327
 $150,421
Adjusted EBITDA Margin9.5% 11.0%
(1) 

Representspre-tax income recognized in connection with the Settlement.

(2)

Reflects fees and reimbursement of certainout-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).

Results of Operations

Three Months Ended June 30,December 31, 2018 Compared to Three Months Ended June 30,December 31, 2017

The following table sets forth selected financial data for the three months ended June 30,December 31, 2018 and June 30,December 31, 2017 (unaudited, dollars in thousands) (in thousands, except percentages):

               Change from three
months ended
 
   For the three months ended June 30,  June 30, 2017 to three
months
 
   2018  2017  ended June 30, 2018 
   Dollars  % of
Revenues
  Dollars  % of
Revenues
  $ Change  %
Change
 

Revenues

  $195,075   100.0 $148,099   100.0 $46,976   31.7

Cost of revenues

   165,606   84.9  124,117   83.8  41,489   33.4
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Gross profit

   29,469   15.1  23,982   16.2  5,487   23.0

General and administrative expenses

   (14,788  (7.5)%   (12,477  (8.5)%   (2,311  18.5

Settlement income

   —     —     —     —     —     —   

Gain on sale of equipment, net

   86   —     238   0.2  (152  (63.9)% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Operating income

   14,767   7.6  11,743   7.9  3,024   25.8

Interest expense, net

   (406  (0.2)%   (659  (0.4)%   253   (38.4)% 

Loss on extinguishment of debt

   —     —     (1,638  (1.1)%   1,638   —   

Other income (expense)

   15   —     (3  —     18   (600.0)% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Income before provision for income taxes and investment in joint venture

   14,376   7.4  9,443   6.4  4,933   52.2

Provision for income taxes

   1,409   0.7  3,031   2.1  (1,622  (53.5)% 

Earnings from investment in joint venture

   436   0.2  —     —     436   —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Net income

  $13,403   6.9 $6,412   4.3  6,991   109.0
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Adjusted EBITDA

  $22,678   11.6 $17,620   11.9 $5,058   28.7

         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 revenues133,199
 86.3 % 127,623
 84.8 % 5,576
 4.4 %
Gross profit21,128
 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, net334
 0.2 % 145
 0.1 % 189
 130.3 %
Operating income7,031
 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 venture6,499
 4.2 % 10,199
 6.8 % (3,700) (36.3)%
Provision (benefit) for income taxes1,651
 1.1 % (797) (0.5)% 2,448
 (307.2)%
Earnings from investment in joint venture306
 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)%
Revenues.Revenues duringfor the three months ended June 30,December 31, 2018 increased by $47.0$3.9 million, or 31.7%2.6%, to $195.1$154.3 million in the three months ended June 30, 2018 from $148.1$150.4 million for the three months ended June 30, 2017.    This increase reflects the continued greater availabilityDecember 31, 2017, including $16.3 million of work in our existing markets and our strong backlog, as well as $15.5 million additional revenue from two acquisitions and two greenfield expansionsrevenues attributable to Scruggs, which we completedacquired subsequent to June 30,December 31, 2017.

Revenues in many of our markets, both from contract revenue and sales of HMA and aggregates to third parties, were lower during the three months ended December 31, 2018 than the three months ended December 31, 2017 due to sustained rainfall in those areas.

Gross Profit. Gross profit for the three months ended June 30,December 31, 2018 increased $5.5decreased $1.7 million, or 23.0%7.3%, to $29.5$21.1 million from $24.0$22.8 million for the three months ended June 30,December 31, 2017. The lower gross profit increase was due to the 31.7% revenue increase in the quarter compared to the comparable prior year quarter. The declineresult of a decrease in gross profit as a percentage of revenue to 13.7% from 16.2% during15.2% for the three months ended June 30, 2017December 31, 2018 compared to 15.1% during the three months ended June 30, 2018 wasDecember 31, 2017, partially offset by the 2.6% revenue increase for those same periods. Gross profit decreased approximately $3.0 million, primarily due to a lower gross profit percentage on contracts executed during the current year quarter compared to the comparable prior year quarter and the impactdecline in production of rising asphalt cement prices on margins fromHMA for both internal and external sales, as well as lower utilization of HMA. Partequipment resulting from construction project work deferred due to sustained rainfall during November and December of the unabsorbed2018. 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 from the prior quarters was recovered during the three months ended June 30, 2018 as a result of the additional production realized.

revenue is primarily variable in nature.

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 three months ended June 30,December 31, 2018 increased $2.3$2.0 million, or 18.5%16.1%, to $14.8$14.4 million from $12.5$12.4 million for the three months ended June 30,December 31, 2017. The increase in general and administrative expenses for the three months ended June 30,December 31, 2018 compared to fiscal 2017 was attributable primarily the result of (i) a $1.2 million increase associated with Scruggs, which we acquired subsequent to December 31, 2017 and (ii) a $1.7$0.7 million increase in management personnel payrollthe costs of professional services and benefits as a result of the acquisitions, greenfield expansions and otherinsurance reflecting our growth and $0.6 million of expenses incurred during the three months ended June 30, 2018 as a result of increased regulatory and reporting requirements due to becoming a public company subsequent to which we were not subject during the three months ended June 30,December 31, 2017.


Interest Expense, Net. Interest expense, net for the three months ended June 30,December 31, 2018 decreased $0.3increased $0.2 million, or 38.4%73.4%, to $0.4$0.5 million compared to $0.7$0.3 million for the three months ended June 30,December 31, 2017. The decreaseincrease in interest expense, net wasis due primarily to a loweran increase in the average interest rate and a $0.3principal debt balance outstanding to $60.4 million lower amortization of deferred debt issuance costs duringfor the three months ended June 30,December 31, 2018 as compared tofrom $53.8 million for the three months ended June 30, 2017, partially offset by a higher average principal balance outstanding during those same periods. Our former CIT Credit Facility in place during the three months ended June 30, 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 three months ended June 30, 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 fair value interest rate swap agreement tied to the Term Loan. Similarly, we entered into an additional $11.0 million fair value interest rate swap agreement tied to the additional $22.0 million borrowed on May 15, 2018 in connection with the Scruggs Acquisition. These interest rate swap agreements do 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.December 31, 2017. During the three months ended June 30,December 31, 2018, there was no netthe change in the fair value of the interest rate swaps.

Loss on Extinguishment of Debt. Loss on extinguishment of debtswaps resulted in a $0.2 million charge to interest expense.

Provision for Income Taxes. Our effective tax rate increased to 24.3% for the three months ended June 30, 2017 was $1.6 million, which was the result of the unamortized deferred debt issuance costs related to the CIT Credit Facility and other debt refinanced at June 30, 2017.

Provision for Income Taxes.Our effective tax rate decreased to 9.5%December 31, 2018, from (7.8)% for the three months ended June 30, 2018 from 32.1% for the three months ended June 30,December 31, 2017. Our lower effective tax rate for the three months ended June 30, 2018December 31, 2017 was primarily due to the impacts of comprehensive tax legislation enacted by the U.S. government on December 22, 2017, known as the Tax Cuts and Jobs Act. The Tax Act includes broad and complex changes to the U.S. tax code, including a reduction in the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. Specifically, during the three months ended June 30, 2018, the CompanyDecember 31, 2017, we recorded a provisional discrete tax benefit of $0.9$3.5 million related to the Tax Act, primarily duerelated to adjusting its U.S.our United States deferred tax liabilities by the same amount, reflecting the reduction in the U.S.United States federal corporate income tax rate. We completed our accounting for the income tax effects of the Tax Act in subsequent periods during fiscal 2018, resulting in a discrete tax benefit of $4.6 million for the full fiscal year. This net reduction in deferred tax liabilities also included the estimated impact on the Company’sCompany's net state deferred tax assets. Accordingly, the effective tax rate for the three months ended June 30,December 31, 2017 reflects a federal income tax provision based on the blended United States statutory tax rate of 24.5%, the $3.5 million tax benefit related to the Tax Act and the effect of applicable state income taxes. The effective tax rate for the three months ended December 31, 2018 reflects a federal income tax provision based on a blended U.S.the United States statutory tax rate of 24.5%21.0% and the effect of 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. The effective tax rate for the three months ended June 30, 2018 was also reduced by a $1.3 million permanent tax benefit resulting from the deduction of the excess fair market value of options exercised under 2010state income taxes.

Non-Plan Stock Option Agreements over the exercise price.

Earnings from Investment in Joint Venture.During the three months ended June 30,December 31, 2018, we earned $0.4$0.3 million ofpre-tax income representingfrom our 50% interest in the earnings of a joint venture partnershipthat we entered into with a third-partythird party in November 2017 for the sole purpose of performing a construction project for the Alabama Department of Transportation. We did not have earnings from an interest in anya joint venture during the three months ended June 30,December 31, 2017.

Net Income.Income. Net income increased $7.0decreased $5.8 million, or 109.0%53.1%, to $13.4$5.2 million for the three months ended June 30,December 31, 2018, compared to $6.4$11.0 million for the three months ended June 30,December 31, 2017. This increasedecrease in net income was primarily a result of the $5.5 million increase(i) a reduction in gross profit, (ii) an increase in general and the decreaseadministrative expenses, (iii) an increase in interest expense and (iv) an increase in the effective tax rate to 9.5% induring the three months ended June 30,December 31, 2018 compared to 32.1% in the three months ended June 30,December 31, 2017, all as described above. This decrease was partially offset by $2.3 millionan increase in gain on sale of higher general and administrative expensesequipment, net, for those same periods. There was also a $1.6��million loss on extinguishment of debt in the three months ended June 30, 2017 resulting from the refinancing of all existing debt.

Adjusted EBITDA and Adjusted EBITDA Margin.Adjusted EBITDA and Adjusted EBITDA Margin were $22.7$14.7 million and 11.6%9.5%, respectively, for the three months ended June 30,December 31, 2018, as compared to $17.6$16.5 million and 11.9%11.0%, respectively, for the three months ended June 30,December 31, 2017. The increasedecrease in Adjusted EBITDA primarily resulted from the increase in gross profit for the three months ended June 30, 2018 compared to the three months ended June 30, 2017, partially offset by the increase in general and administrative expenses. The slight decrease in the Adjusted EBITDA Margin wasis the result of a lower gross profit percentage, which was offset by lowerand higher general and administrative expenses, partially offset by an increase in depreciation, depletion and amortization of long-lived assets. The lower Adjusted EBITDA Margin is a result of a lower gross profit percentage and a higher general and administrative expense as a percentage of revenue.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”.

Nine Months Ended June 30, 2018 Compared to Nine Months Ended June 30, 2017

The following table sets forth selected financial dataInflation and Price Changes

Inflation had an immaterial impact on our results of operations for the ninethree months ended June 30,December 31, 2018 and June 30, 2017 (unaudited, dollars in thousands):

               Change from nine
months ended
 
   For the nine months ended June 30,  June 30, 2017 to nine
months
 
   2018  2017  ended June 30, 2018 
   Dollars  % of
Revenues
  Dollars  % of
Revenues
  $ Change  %
Change
 

Revenues

  $464,395   100.0 $380,585   100.0 $83,810   22.0

Cost of revenues

   398,379   85.8  323,513   85.0  74,866   23.1
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Gross profit

   66,016   14.2  57,072   15.0  8,944   15.7

General and administrative expenses

   (40,572  (8.7)%   (34,005  (8.9)%   (6,567  19.3

Settlement income

   14,803   3.2  —     —     14,803   —   

Gain on sale of equipment, net

   1,117   0.2  2,675   0.7  (1,558  (58.2)% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Operating income

   41,364   8.9  25,742   6.8  15,622   60.7

Interest expense, net

   (956  (0.2)%   (2,802  (0.8)%   1,846   (65.9)% 

Loss on extinguishment of debt

   —     —     (1,638  (0.4)%   1,638   —   

Other income (expense)

   (45  —     (134  -  89   (66.4)% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Income before provision for income taxes and investment in joint venture

   40,363   8.7  21,168   5.6  19,195   90.7

Provision for income taxes

   5,382   1.1  7,395   2.0  (2,013  (27.2)% 

Earnings from investment in joint venture

   666   0.1  —     —     666   —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Net income

  $35,647   7.7 $13,773   3.6  21,874   158.8
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Adjusted EBITDA

  $47,205   10.2 $42,829   11.3 $4,376   10.2

Revenues. Revenuesdue to relatively low inflation in the nine months ended June 30, 2018 increasedUnited States in recent years and our ability to recover increasing costs by $83.8 million, or 22.0%, to $464.4 million from $380.6 millionobtaining higher prices for our products, including sale price escalator clauses in most of our public infrastructure contracts. Inflation risk varies with the nine months ended June 30, 2017. The increase was primarily due to a $191.0 million higher backlog at the beginninglevel of the nine months ended June 30, 2018 compared to the beginning of the nine months ended June 30, 2017, the increase in available workactivity in our existing markets,industry, the number, size and $21.6 million revenue from two acquisitions and two greenfield expansions we completed subsequent to June 30, 2017.

Gross Profit. Gross profit for the nine months ended June 30, 2018 increased $8.9 million, or 15.7%, to $66.0 million from $57.1 million for the nine months ended June 30, 2017. The higher total gross profit was the resultstrength of the 22.0% revenue increase for the nine months ended June 30, 2018 compared to the nine months ended June 30, 2017. The decrease in gross profit percentage was due to the impact of rising asphalt cement prices on margins from internal and external sales of HMA.

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 nine months ended June 30, 2018 increased $6.6 million, or 19.3%, to $40.6 million from $34.0 million for the nine months ended June 30, 2017. The increase in general and administrative expenses for the nine months ended June 30, 2018 was attributable primarily to a $5.1 million increase in management personnel payroll and benefits as a result of the acquisitions, greenfield expansions and other growth, and $0.6 million of expenses as a result of increased regulatory and reporting requirements due to becoming a public company.

Settlement Income. During the nine months ended June 30, 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. 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.

Interest Expense, Net. Interest expense, net for the nine months ended June 30, 2018 decreased $1.8 million, or 65.9%, to $1.0 million compared to $2.8 million for the nine months ended June 30, 2017. The decrease in interest expense, net was due primarily to a lower average interest rate and a $0.6 million lower amortization of deferred debt issuance costs during the nine months ended June 30, 2018 as compared to the nine months ended June 30, 2017, partially offset by a higher average outstanding principal balance during those same periods. Our former CIT Credit Facility in place during the nine months ended June 30, 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 nine months ended June 30, 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 fair value interest rate swap agreement tied to the Term Loan. Similarly, we entered into an additional $11.0 million fair value interest rate swap agreement tied to the additional $22.0 million borrowing on May 15, 2018 in connection with the Scruggs Acquisition. These interest rate swap agreements do 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 nine months ended June 30, 2018, the change in the fair value of the interest rate swaps resulted in a $0.4 million credit to interest expense.

Loss on Extinguishment of Debt.Loss on extinguishment of debt for the nine months ended June 30, 2017 was $1.6 million, which was the result of the unamortized deferred debt issuance costs related to the CIT Credit Facility and other debt refinanced at June 30, 2017.

Provision for Income Taxes.Our effective tax rate decreased to 13.1% for the nine months ended June 30, 2018 from 34.9% for the nine months ended June 30, 2017. Our lower effective tax rate for the nine months ended June 30, 2018 was primarily due to the impacts of the Tax Act. The effective tax rate for the nine months ended June 30, 2018 reflected 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 nine months ended June 30, 2018, we recorded a $4.4 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 nine months ended June 30, 2018 was also reduced by a $1.3 million permanent tax benefit resulting from the deduction of the excess fair market value of options exercised under 2010Non-Plan Stock Option Agreements over the exercise price. The effective tax rate for the nine months ended June 30, 2017 reflected a federal tax rate of 35.0% plus applicable state income taxes.

Earnings from Investment in Joint Venture.During the nine months ended June 30, 2018, we earned $0.7 million ofpre-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 an interest in any joint venture during the nine months ended June 30, 2017.

Net Income.Net income increased $21.9 million, or 158.8%, to $35.7 million for the nine months ended June 30, 2018 compared to $13.8 million for the nine months ended June 30, 2017. This increase was primarily a result of the $10.6 millionafter-tax gain from the Settlement during the nine months ended June 30, 2018 as discussed above, the $8.9 million higher gross profit, the $1.8 million lower interest expense, net, the $1.6 million lower loss on extinguishment of debtcompetitors and the lower effective income tax rateavailability of products to 13.1% in the nine months ended June 30, 2018 compared to 34.9% in the nine months ended June 30, 2017, partially offset by the $6.6 million higher general and administrative expenses during those same periods.

Adjusted EBITDA and Adjusted EBITDA Margin.Adjusted EBITDA and Adjusted EBITDA Margin were $47.2 million and 10.2%, respectively, for the nine months ended June 30, 2018, as compared to $42.8 million and 11.3%, respectively, for the nine months ended June 30, 2017. The increase in Adjusted EBITDA primarily resulted from the increase in gross profit and depreciation for the nine months ended June 30, 2018 compared to the nine months ended June 30, 2017, partially offset by the increase in general and administrative expenses and the decline in gain on sale of equipment for those same periods. The decrease in the Adjusted EBITDA Margin was the result ofsupply a lower gross profit percentage and the decline in the gain on sale of equipment, partially offset by lower general and administrative expenses as a percentage of revenue in the nine months ended June 30, 2018 compared to the nine months ended June 30, 2017. 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.

Liquidity and Capital Resources

Cash Flows Analysis

The following table sets forth our cash flows for the nine months ended June 30, 2018 and June 30, 2017 (unaudited, inperiods indicated (in thousands).

   For the nine months ended June 30, 
   2018   2017 

Net cash provided by operating activities

  $23,660   $21,278 

Net cash used in investing activities

   (82,290   (15,042

Net cash provided by (used in) financing activities

   106,266    (39,416
  

 

 

   

 

 

 

Net change in cash

  $47,636   $(33,180
  

 

 

   

 

 

 

:

 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
    

Operating Activities

Cash provided by operating activities was $23.7$1.2 million for the ninethree months ended June 30,December 31, 2018, an increasea decrease of $2.4$18.3 million compared to $21.3$19.5 million for the ninethree months ended June 30,December 31, 2017. The increase representeddecrease was primarily due to a $21.9$5.8 million increasedecrease in net income partially offset byfor the three months ended December 31, 2018 compared to the three months ended December 31, 2017 and a $19.5$16.9 million increasereduction in the changes in net operating assets and liabilities. The most significant components of changes in operating assets and liabilities, werepartially offset by a $15.7$4.4 million increase in adjustments to reconcile net income to cash flows from operating activities for those same periods. The decrease in changes in operating assets and liabilities included (i) a $14.0 million greater increasedecrease in other assetsaccounts payable due to normal fluctuations in the timing of processing transactions in our accounts payable cycle and other current assets,(ii) a $2.2 million greater decrease in net billings in excess of costs and estimated earnings on uncompleted contracts. Changes in adjustments to reconcile net income to cash flows from operating activities were primarily due to the Settlement, and a $3.9$3.5 million greaterlesser reduction in accounts payable.

net deferred income tax liabilities, due to the discrete tax benefit recognized during the three months ended December 31, 2017 reflecting the effects of the Tax Act.

Investing Activities

Cash used in investing activities was $82.3$5.1 million for the ninethree months ended June 30,December 31, 2018 compared to $15.0$9.3 million for the ninethree months ended June 30,December 31, 2017. The increase was primarily due to the Scruggs Acquisition in May 2018 anddecrease reflects a $14.7$2.1 million increasedecrease in purchases of property, plant and 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 add asphalt plants and equipment to support our growth opportunities.

no such distributions during the three months ended December 31, 2017.

Financing Activities

Cash provided byused in financing activities was $106.3$3.7 million for the ninethree months ended June 30,December 31, 2018 compared to $7.5 million of cash used in financing activities of $39.4 million during the ninethree months ended June 30, 2017. The increase reflected $98.0December 31, 2017, reflecting a $5.0 million repayment of proceeds,debt under our Compass Revolving Credit Facility, net of offering costs, froma $1.2 million lower repayment of the issuance of Class A common stock through the IPO in May 2018, a $16.9 million increase in net borrowings under long-termCompass Term Loan and other debt facilities during the ninethree months ended June 30, 2018December 31, 2017 compared to the ninethree months ended June 30, 2017, primarily due to the $22.0 million Term Loan borrowing in connection with the Scruggs Acquisition. In addition, we made a $31.3 million dividend payment during the nine months ended June 30, 2017.

December 31, 2018.

Compass Credit Agreement

On June 30, 2017, Construction Partners Holdings, Inc. ("CPHI"), our wholly owned subsidiary, entered into a credit agreementthe Compass Credit Agreement, with Compass Bank as agent (the “Agent”"Agent"), sole lead arranger and sole bookrunner, (the “Compass Credit Agreement”). The Compass Credit Agreement initially providedproviding for a $50.0 million term loan (the “Term Loan”)Compass Term Loan and a $30.0 million revolving credit facility (the “RevolvingCompass Revolving Credit Facility”). Facility.In connection with the Scruggs Acquisition, the Companywe amended the Compass Credit Agreement on May 15, 2018 (the “Compass Amendment”) and borrowed an additional $22.0 million under the Compass Term Loan to fund a portion of the purchase price. The principal amount of the Compass Term Loan, including the additional borrowing, must be paid in quarterly installments of $3.6 million beginning with the June 30, 2018 payment.million. All amounts borrowed under the Compass Credit Agreement mature on July 1, 2022.

Construction Partners Holdings’

CPHI’s obligations under the Compass Credit Agreement are guaranteed by the Company and all of Construction Partners Holdings’CPHI's direct and indirect subsidiaries and are secured by first priority security interests in substantially all of the Company’sCompany's assets.

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 June 30,December 31, 2018 and September 30, 2017,2018, the interest rate on outstanding borrowings under the Compass Term Loan and Compass Revolving Credit Facility was 3.980%4.522% and 3.235%4.242%, respectively, before giving effect to the interest rate swap discussed below.respectively. At June 30,December 31, 2018 and September 30, 2017,2018, we had availability of $25.0$14.0 million and $20.0 million, respectively, under the Compass Revolving Credit Facility, less amountsincluding reduction for outstanding under letters of credit. Letters of credit outstanding at June 30, 2018 and September 30, 2017 were $9.5 million and $8.7 million, respectively. In order to hedge against changes in interest rates, on June 30, 2017, we entered into an amortizing $25.0 million fair valuenotional interest rate swap agreement applicable to outstanding debt under the Compass Term Loan, under which we pay a fixed percentage rate of 2.015% and receive a credit based on the applicable LIBOR rate. At June 30, 2018 and September 30, 2017, the notional value of this interest rate swap agreement was $20.0 million and $23.8 million, respectively, and the fair value was $0.3 million and $(0.2) million, respectively, which is included within other liabilities on our Consolidated Balance Sheets. In connection with the amendment to the Compass AmendmentCredit Agreement and the additional borrowing on May 15, 2018, we entered into an additional $11.0 million fair valuenotional interest rate swap agreement applicable to the $22.0 million of additional debt under the Compass Term Loan. Under this additional swap agreement, we pay a fixed percentage rate of 3.01% and receive a credit based on the applicable LIBOR rate.

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.

The Compass Credit Agreement contains usual and customary negative covenants for agreements of this type, including, but not limited to, restrictions on our ability to make acquisitions, make loans or advances, make capital expenditures and investments, create or incur indebtedness, create liens, wind up or dissolve, consolidate, merge or liquidate, or sell, transfer or dispose of assets. The Compass Credit Agreement requires us to satisfy certain financial covenants, includingsuch as a minimum fixed charge coverage ratio of 1.20 to 1.00. At June 30,December 31, 2018 and September 30, 2017,2018, our fixed charge ratio was 1.541.55 to 1.00 and 1.631.51 to 1.00, respectively. The Compass Credit Agreement also requires us to maintain a consolidated leverage ratio not to exceed 2.00 to 1.00, subject to certain adjustments as further described in the Compass Credit Agreement. At June 30,December 31, 2018 and September 30, 2017,2018, our consolidated leverage ratio was 0.920.84 to 1.00 and 0.95 to 1.00, respectively. The Compass Credit Agreement includes customary events of default, including, among other things, payment default, covenant default, breach of representation or warranty, bankruptcy, cross-default, material ERISA events, certain changes of control, material money judgments and failure to maintain subsidiary guarantees. The Compass Credit Agreement prevents us from paying dividends or otherwise distributing cash to our stockholders unless, after giving effect to such dividend, we would be in compliance with the financial covenants and, at the time any such dividend is made, no default or event of default exists or would result from the payment of such dividend.

At June 30,December 31, 2018 and September 30, 2017,2018, we were in compliance with all covenants under the Compass Credit Agreement.


Capital Requirements and Sources of Liquidity

During the ninethree months ended June 30,December 31, 2018 and 2017, our capital expenditures were approximately $33.5$7.4 million and $18.8$9.5 million, respectively.

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.

Historically, we have madehad significant cash investmentsrequirements in order to organically expand our business into new geographic markets. Our cash investmentsrequirements include costs related to increased capital expenditures, purchase of materials,and production of materials and cash to fund our organic expansion.expansion into new markets. Our working capital needs are driven by the seasonality and growth of our business, with our cash requirements greaterincreasing in periods of growth. Additional cash requirements resulting from our growth include the costs of additional personnel, production and distribution facilities, enhancingenhancements to our information systems, and, in the future, our integration of any acquisitions and our compliance with laws and rules applicable to being a public company. We expect our primary uses of cash will continue to be investing in property and equipment used to provide our services and funding organic and acquisitive growth initiatives.

companies.

We have historically relied uponon cash available through credit facilities, in addition to cash on hand and from operations, to finance our working capital requirements and to support our growth. We regularly monitor potential capital sources, including equity and debt financings, in an effort to meet our planned capital expenditures and liquidity requirements. Our future success will be highly dependentdepend on our ability to access outside sources of capital.

We believe that our cash on hand, operating cash flow and available borrowings under the Compass Revolving Credit Facility arewill be sufficient to fund our operations for at least the next twelve months. However, future cash flows are subject to a number of variables, and significant additional capital expenditures will be required to conduct our operations. There can be no assurance that operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. In the event that we make one or more acquisitions and the amount of capital required is greater than the amount we have available for acquisitions at that time, we could be required to reduce the expected level of capital expenditures and/or seek additional capital. If we seek additional capital, we may do so through borrowings under the Compass Revolving Credit Facility, joint ventures, asset sales, offerings of debt or equity securities or other means. We cannot guarantee that this additional capital will be available on acceptable terms or at all. If we are unable to obtain the funds we need, we may not be able to complete acquisitions that may be favorable to us or finance the capital expenditures necessary to conduct our operations.

Seasonality

The useCommodity Price Risk

We are subject to commodity price risk with respect to price changes in liquid asphalt and consumptionenergy resources, including (i) fossil fuels and electricity for aggregates and asphalt paving mix production, (ii) natural gas for HMA production and (iii) 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 productspublic contracts, and services fluctuatein some of our private and commercial contracts, limit our exposure to price fluctuations in this commodity. In addition, we enter into various firm purchase commitments, with terms generally less than one year, for certain raw materials.
Interest Rate Risk
We are exposed to interest rate risk on certain of our short-term 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 seasonality, although we are able to perform construction projects during all twelve months in all of our markets. Our products are used, and our construction operations and production facilities are located, outdoors. Therefore, seasonal changes and other weather-related conditions, in particular extended rainy and cold weather in the springreference interest rates. From time to time, we use derivative instruments as hedges against the impact of interest rate changes on future earnings and fallcash flows. In order to hedge against changes in interest rates and major weather events, such as hurricanes, tornadoes, tropical stormsto 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 Compass Term Loan, for which we pay a fixed rate of 2.015% and heavy snows, can adversely affectreceive a credit based on the applicable LIBOR rate. In connection with the additional borrowing on May 15, 2018 related to the Scruggs Acquisition, we entered into an additional $11.0 million notional interest rate swap agreement applicable to the $22.0 million of additional debt that we incurred under the Compass Term Loan. Under this additional swap agreement, we pay a fixed percentage rate of 3.01% and receive a credit based on the applicable LIBOR rate.
At December 31, 2018, we had a total of $58.7 million of variable rate borrowings outstanding. Holding other factors constant and absent the interest rate swap agreement described above, a hypothetical 1% change in our businessborrowing rates would result in a $0.6 million change in our annual interest expense based on our variable rate debt at December 31, 2018 and operations through a decline in both the use of our productsSeptember 30, 2018.

Off-Balance Sheet Arrangements
The Company enters into operating leases for property and demand for our services. In addition, construction materials production and shipment levels follow activityequipment in the construction industry, which typically occursnormal course of business. See Note 19 - Commitments and Contingencies to our consolidated financial statements included in the spring, summer and fall. Warmer and drier weather during2018 Form 10-K for additional information. Other than the third and fourth quartersoperating leases described therein, we do not currently have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, revenue or expenses, results of our fiscal year (April 1 - September 30) typically result in higher activity and revenues during those quarters. The first and second quarters of our fiscal year (October 1 - March 31) typically have lower levels of activity dueoperations, liquidity, capital expenditures or capital resources that would be material to adverse weather conditions.

investors.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Risk.

We are subjecta 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 Risk

We 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 fair value 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. Similarly, we entered into an additional $11.0 million fair value interest rate swap agreement tied to the additional $22.0 million borrowing on May 15, 2018 in connection with the Scruggs Acquisition, for which we pay a fixed rate of 3.01% and receive a credit based on the applicable LIBOR rate.

At June 30, 2018 and September 30, 2017, we had a total of $65.9 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 $0.7 million and $0.6 million change in our annual interest expense based on our variable rate debt at June 30, 2018 and September 30, 2017, respectively.

Item.

Item 4. Controls and Procedures

Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Securities 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.

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.

Our management, under the supervision of our President and Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and15d-15(e) under the 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.

Changes in Internal Control Over Financial Reporting

In the course of preparing our consolidated financial statements for the fiscal 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.
As a result of these material weaknesses, we 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 Internal Control - Integrated Framework(2013) published by the Committee of Sponsoring Organizations of the Treadway Commission.

Other than 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 fiscal quarter ended June 30,December 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 Procedures

In 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.


PART II - OTHER INFORMATION

Other Information

Item 1. Legal Proceedings

Proceedings.

Due to the nature of our business, we are involved in routine litigation or subject to other disputes or claims related to our business activities, including, workers’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.

Item 1A. Risk Factors

Any ofFactors.

In addition to the 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.

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

Proceeds.

Unregistered Sales of UnregisteredEquity Securities

In June 2018, employees holding options under 2010Non-Plan Stock Option Agreements exercised options to purchase 768,984 shares of our Class B common stock at an exercise price of $5.70 per share. These shares were issued from treasury shares at an average cost of approximately $3.64 per share. The transaction was executed as a cashless exercise through which the Company concurrently repurchased from the option holders the number of shares of Class B common stock required to (i) fund the exercise price for all options and (ii) meet statutory federal, state and payroll tax withholding requirements applicable to the employees associated with their exercises.

The Company purchased a totaldid not sell any of 521,902 shares of Class B common stock, atits equity securities during the $13.17 closing price of the Company’s Class A common stock on the date of exercise, resulting in a net increase of 247,082 Class B common shares outstanding. 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.

Use of Proceeds from our Initial Public Offering of Class A Common Stock

On May 3, 2018, our registration statementthe Company’s Registration Statement on FormS-1 (No. (File No. 333-224174), (the "Form S-1") filed in connection with our IPO,the initial public offering of the Company's Class A common stock was declared effective by the SEC. There has been no material change in the Company's planned use of the proceeds received from our IPOthe sale of shares of Class A common stock in the initial public offering from that described in the IPO Prospectusprospectus forming part of the Form S-1 and other periodic reports previouslythat the Company has filed with the SEC.

Issuer Purchases of Equity Securities
During the quarter covered by this report, the Company did not purchase any of its equity securities that are registered under Section 12(b) of the Exchange Act.

Item 3. Defaults Upon Senior Securities

Securities.

None.

Item 4. Mine Safety Disclosures

Disclosures.

The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of RegulationS-K (17CFR (17 C.F.R. Part 229.104) is included in Exhibit 9595.1 to this Quarterly Report on Form10-Q.

Item 5. Other Information

Information.

None.


Item 6. Exhibits

Exhibits.

Exhibit

Number

 

Description

3.1

 

3.2

 

4.1

 

4.2

 

10.1

31.1*
 Loan Modification Agreement and Amendment to Loan Documents, dated May  15, 2018, by and among Construction Partners Holdings, Inc. (f/k/a Construction Partners, Inc.), Wiregrass Construction Company, Inc., Fred Smith Construction, Inc., FSC II, LLC, C.W. Roberts Contracting, Incorporated, Everett Dykes Grassing Co., Inc. and The Scruggs Company, as Borrowers, Construction Partners, Inc. (f/k/a SunTx CPI Growth Company, Inc.), as Guarantor, Compass Bank, as Agent for Lenders and as a Lender and Issuing Bank, and ServisFirst Bank, as a Lender (incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form8-K, filed on May 25, 2018 (File No. 001-38479).

31.1*

31.2*

 

32.1**

 

32.2**

 

95.1*

 

101.INS*

101*
 XBRL Instance DocumentInteractive Data Files

101.SCH*

*
 XBRL Taxonomy Extension Schema Document

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*

XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document

*

Filed herewith.

**

Furnished herewith.


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on

its behalf by the undersigned, thereunto duly authorized.

authorized, on this 14th day of February, 2019.
 CONSTRUCTION PARTNERS, INC.
 

Construction Partners, Inc.

Date: August 14, 2018 By:

/s/ Charles E. Owens

 Charles E. Owens
 

President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: August 14, 2018
Name and Signature Title By:Date
 

/s/ Charles E. OwensPresident, Chief Executive Officer and DirectorFebruary 14, 2019
Charles E. Owens(Principal Executive Officer)
/s/ R. Alan Palmer

R. Alan Palmer
 Executive Vice President and Chief Financial OfficerFebruary 14, 2019
R. Alan Palmer(Principal Financial Officer)

31



26