What changed in this filing

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Item 1. Financial Statements

2020-05-08 compared with 2020-02-07 · 197 added, 88 removed, 393 unchanged (42% of the section changed)

2 unchanged sentences

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

December 31, September 30,

(in thousands, except share data)

March 31, September 30,

Current assets:

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Other assets 1,952 2,284

Deferred income taxes 1,173 1,173

Deferred income taxes, net 1,173 1,173

Total assets $ 547,912 $ 531,769

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Operating lease liabilities, net of current portion 6,058 —

Deferred income taxes 11,480 11,480

Deferred income taxes, net 11,480 11,480

Other long-term liabilities 7,759 6,108

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Preferred stock, par value $ 0.001 ;

10,000,000 shares authorized at December 31, 2019 and September 30, 2019 and no shares issued and outstanding

10,000,000 shares authorized at March 31, 2020 and September 30, 2019 and no shares issued and outstanding

Class A common stock, par value $ 0.001 ;

400,000,000 shares authorized, 32,705,418 shares issued and outstanding at December 31, 2019, and 32,597,736 shares issued and outstanding at September 30, 2019

400,000,000 shares authorized, 32,705,418 shares issued and outstanding at March 31, 2020, and 32,597,736 shares issued and outstanding at September 30, 2019

Class B common stock, par value $ 0.001 ;

100,000,000 shares authorized, 21,999,279 shares issued and 19,076,327 outstanding at December 31, 2019, and 22,106,961 shares issued and 19,184,009 shares outstanding at September 30, 2019

100,000,000 shares authorized, 21,999,279 shares issued and 19,076,327 outstanding at March 31, 2020, and 22,106,961 shares issued and 19,184,009 shares outstanding at September 30, 2019

Additional paid-in capital 244,237 243,452

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(unaudited in thousands, except share and per share data)

For the Three Months Ended December 31,

For the Three Months Ended March 31, For the Six Months Ended March 31,

2020 2019 2020 2019

Revenues $ 168,679 $ 164,304 $ 343,993 $ 318,631

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(unaudited in thousands, except share data)

For the six months ended March 31, 2020

Class A Common Stock Class B Common Stock Additional

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December 31, 2019 32,705,418 $ 33 21,999,279 $ 22 $ 243,847 $ ( 15,603 ) $ 120,885 $ 349,184

Net income — — — — — — 1,537 1,537

Equity-based compensation expense — — — — 390 — — 390

March 31, 2020 32,705,418 $ 33 21,999,279 $ 22 $ 244,237 $ ( 15,603 ) $ 122,422 $ 351,111

For the six months ended March 31, 2019

Class A Common Stock Class B Common Stock Additional

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December 31, 2018 11,950,000 $ 12 42,387,571 $ 42 $ 242,493 $ ( 15,603 ) $ 77,679 $ 304,623

Net income — — — — — — 4,212 4,212

March 31, 2019 11,950,000 $ 12 42,387,571 $ 42 $ 242,493 $ ( 15,603 ) $ 81,891 $ 308,835

See notes to consolidated financial statements (unaudited).

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(unaudited in thousands)

For the Three Months Ended December 31,

For the Six Months Ended March 31,

Cash flows from operating activities:

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Amortization of deferred debt issuance costs and debt discount 74 55

Loss on derivative instruments 2,263 331

Provision for bad debt 305 290

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Proceeds from sale of equipment 1,419 2,585

Business acquisition, net of cash acquired ( 17,748 ) —

Business acquisitions, net of cash acquired ( 30,191 ) ( 8,854 )

Acquisition of liquid asphalt terminal assets — ( 10,848 )

Distributions received from investment in joint venture 500 1,800

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Property, plant and equipment financed with accounts payable $ 794 $ 369

Amounts payable to Seller in business combination $ 2,642 $ —

See notes to consolidated financial statements (unaudited).

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The majority of the work is performed under fixed unit price contracts and, to a lesser extent, fixed total price contracts.

The Company was formed as a Delaware corporation in 2007 as a holding company for its wholly owned subsidiary, Construction Partners Holdings, Inc., a Delaware corporation incorporated in 1999 that began operations in 2001, to execute an acquisition growth strategy in the HMA paving and construction industry.

On December 31, 2019, the Company completed an internal reorganization by merging Construction Partners Holdings, Inc.

with and into the Company, with the Company surviving the merger.

The Company is a Delaware corporation and successor by merger to Construction Partners Holdings, Inc., which incorporated in 1999 and began operations in 2001 to execute an acquisition growth strategy in the HMA paving and construction industry.

SunTx Capital Partners (“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 the Company’s inception.

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

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

The first and second quarters of our fiscal year typically have lower levels of activity due to less favorable weather conditions.

Note 2 - Significant Accounting Policies

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These interim consolidated statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), which permit reduced disclosure for interim periods.

The Consolidated Balance Sheet as of September 30, 2019 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 (“GAAP”) with respect to annual financial statements.

The Consolidated Balance Sheets as of September 30, 2019 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 (“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’s financial position, results of operations and cash flows for the dates and periods presented.

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The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the recorded amounts of assets, liabilities, 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, valuation of operating lease right-of-use 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 used in accounting for items such as recognition of revenues and cost of revenues, goodwill and other intangible assets, valuation of operating lease right-of-use assets, allowance for doubtful accounts, valuation allowances related to income taxes, accruals for potential liabilities related to lawsuits or insurance claims, the fair value of derivative instruments and the fair value of equity-based compensation awards.

Estimates are continually evaluated based on historical information and actual experience;

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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’s annual consolidated financial statements included in its 2019 Form 10-K.

Emerging Growth Company

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It is common in the Company’s industry for a small portion of either progress billings or 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 included on the Consolidated Balance Sheet as “Contracts receivable including retainage, net”.

Such amounts, defined as retainage, represent a contract asset and are included on the Consolidated Balance Sheets as “Contracts receivable including retainage, net”.

Based on the Company’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.

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The contract asset, “Costs and estimated earnings in excess of billings on uncompleted contracts,” arises when the Company recognizes revenues for services performed under its construction projects, but the Company is not yet entitled to bill the customer under the terms of the 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 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-related causes of unanticipated additional contract costs (such as claims).

Amounts billed to customers are excluded from this asset and reflected on the Consolidated Balance Sheets 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-related causes of unanticipated additional contract costs (such as claims).

Such amounts are recorded to the extent that the amount can be reasonably estimated and recovery is probable.

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The Company generally has the ability to file liens against the property if payments are not made on a timely basis.

No single customer accounted for more than 10.0% of the Company’s contracts receivable including retainage, net balance at December 31, 2019 or September 30, 2019.

Projects performed for various Departments of Transportation accounted for 31.0 % and 37.3 % of consolidated revenues for each of the three months ended December 31, 2019 and 2018.

Two customers accounted for more than 10.0% of consolidated revenues for the three months ended December 31, 2019 and 2018, as follows:

No single customer accounted for more than 10.0% of the Company’s contracts receivable including retainage, net balance at March 31, 2020 or September 30, 2019.

Projects performed for various Departments of Transportation accounted for 27.8 % and 37.2 % of consolidated revenues for the three months ended March 31, 2020 and 2019, respectively, and for 29.4 % and 37.2 % of consolidated revenues for the six months ended March 31, 2020 and 2019, respectively.

Two customers accounted for more than 10.0% of consolidated revenues during the three and six months ended March 31, 2019, as follows:

% of Consolidated Revenues

for the Three Months Ended December 31,

For the Three Months Ended March 31, For the Six Months Ended March 31,

2020 2019 2020 2019

Alabama Department of Transportation 8.8 % 12.3 % 9.8 % 11.1 %

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The following table reflects, for the periods presented, (i) revenues generated from public infrastructure construction projects and the sale of construction materials to public customers and (ii) revenues generated from private infrastructure construction projects and the sale of construction materials to private customers.

% of Consolidated Revenues For the Three Months Ended December 31,

% of Consolidated Revenues

For the Three Months Ended March 31, For the Six Months Ended March 31,

2020 2019 2020 2019

Private 39.4 % 30.7 % 39.4 % 31.4 %

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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.

Accordingly, change orders are generally accounted for as a modification of the existing contract and a single performance obligation.

We account for the modification using a cumulative catch-up adjustment.

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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 reversed or settled.

The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period in which the change is enacted.

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 as non-current on the Consolidated Balance Sheet.

Deferred tax assets and deferred tax liabilities are presented on a net basis by taxing authority and classified as non-current on the Consolidated Balance Sheets.

The Company classifies income tax-related interest and penalties as interest expense and other expenses, respectively.

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Diluted net income per common share attributable to common stockholders is the same as basic net income per share attributable to common stockholders, but includes dilutive unvested stock awards using the treasury stock method.

Derivative Instruments

The Company evaluates its contracts to determine whether the contracts are derivative instruments.

Certain contracts that meet the definition of a derivative may be exempted from derivative accounting and treated as normal purchases or normal sales if documented as such.

Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business.

The Company’s derivative instruments consist of commodity and interest rate swap contracts.

None of the Company’s derivative instruments are designated as hedges for accounting purposes under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging .

Accordingly, the Company records derivative instruments on the Consolidated Balance Sheets as either an asset or liability measured at fair value and records changes in the fair value of derivatives in current earnings in the Consolidated Statements of Income for the period in which the change occurs.

Gains and losses on derivatives are included in cash flows from operating activities.

Fair Value Measurements

The Company measures and discloses certain financial assets and liabilities at fair value.

ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Inputs used to measure fair value are classified using the following hierarchy:

Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data.

Inputs are unobservable for the asset or liability and include situations in which there is little, if any, market activity for the asset or liability.

The inputs used in the determination of fair value are based on the best information available under the circumstances and may require significant management judgment or estimation.

The Company endeavors to utilize the best available information in measuring fair value.

The Company’s financial instruments include cash and cash equivalents, contracts receivable including retainage and accounts payable reflected as current assets and current liabilities on its Consolidated Balance Sheets at March 31, 2020 and September 30, 2019.

Due to the short-term nature of these instruments, management considers their carrying value to approximate their fair value.

The Company also has term loans and a revolving credit facility, as described in Note 8 - Debt.

The carrying value of amounts outstanding under these credit facilities is reflected as long-term debt, net of current maturities and current maturities of debt on the Company’s Consolidated Balance Sheets at March 31, 2020 and September 30, 2019.

Due to the variable rate or short-term nature of these instruments, management considers their carrying value to approximate their fair value.

The Company also has derivative instruments.

The fair value of derivative instruments is based on forward and spot prices, as described in Note 17 - Fair Value Measurements.

Management applies fair value measurement guidance to its impairment analysis for tangible and intangible assets.

Reclassifications

Certain amounts in prior periods have been reclassified to conform to the current period presentation.

These reclassifications had no effect on previously reported net income.

Note 3 - Accounting Standards

Recently Adopted Accounting Pronouncements

Accounting Standards Codification (“ASC”) Topic 842

ASC Topic 842

ASC Topic 842, Leases (“Topic 842”) requires lessees to recognize operating lease right-of-use assets and operating lease liabilities on the balance sheet as described below.

Prior to adoption of Topic 842, operating leases were expensed on a straight-line basis over the lease term on the Company’s Consolidated Statements of Income, and the Company did not recognize operating lease right-of-use assets and operating lease liabilities on its Consolidated Balance Sheet.

The Company adopted Topic 842 effective October 1, 2019 using a modified retrospective transition approach with no prior-period retrospective adjustments.

As a result, on the adoption date, the Company recognized (i) a net cumulative decrease to retained earnings of $ 0.2 million, (ii) additional operating lease right-of-use assets of $ 9.1 million, (iii) current operating lease liabilities of $ 2.9 million and (iv) non-current operating lease liabilities of $ 6.4 million.

The Company elected to apply optional practical expedients that allowed the Company to forego reassessments of (i) the classification of leases existing at the date of adoption, (ii) the initial direct costs of any existing leases and (iii) whether any expired or existing contracts are, or contain, leases.

In connection with the adoption of Topic 842, the Company implemented several accounting policies relating to the identification and measurement of operating lease right-of-use assets and liabilities.

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and (iii) any initial direct costs incurred.

The present value calculation may account for options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option.

The present value calculation may account for an option to extend or terminate the lease when it is reasonably certain that the Company will exercise the option.

The Company has elected not to apply the recognition requirements to short-term leases (those with terms of 12 months or less) or leases to explore for or use minerals.

Instead, for these types of leases, the Company recognizes lease expense in the Consolidated Statements of Income on a straight-line basis over the lease term.

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (“Topic 326”), which introduces an impairment model that is based on expected losses rather than incurred losses.

Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses.

The amendments pursuant to Topic 326 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

The Company expects to adopt this guidance as required and is evaluating the potential impact of adopting this guidance on its consolidated financial statements.

Note 4 - Business Acquisitions

Florida Acquisition - October 2019

On October 1, 2019, a subsidiary of the Company acquired substantially all of the assets of an HMA manufacturing plant and paving company located in Palm City, Florida.

The acquired business is expected to benefit from geographic synergies resulting from its proximity to the Company’s preexisting operations in central Florida, including its Okeechobee, Florida HMA plant and office, which the Company acquired in February 2019.

The acquisition has been accounted for as a business combination in accordance with ASC Topic 805, Business Combinations .

The purchase price of $ 17.7 million was paid from cash on hand at closing.

The acquisition has been accounted for as a business combination in accordance with ASC Topic 805, Business Combinations (“Topic 805”).

The $ 17.7 million purchase price was paid from cash on hand at closing.

The provisional allocation of the purchase price to assets acquired and liabilities assumed, based on their estimated fair values at the acquisition date, was determined in accordance with the methodology described under Fair Value Measurements in Note 2 - Significant Accounting Policies to the Company’s audited financial statements for the fiscal year ended September 30, 2019.

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Goodwill, which is deductible for income tax purposes, primarily represents the assembled work force synergies expected to result from the acquisition.

Upon finalizing the accounting for this transaction, management expects to ascribe value to other identifiable intangible assets, including customer relationships and customer backlog, which will reduce the preliminary amount allocated to goodwill.

The results of operations since the October 1, 2019 acquisition date attributable to this acquisition are included in the consolidated financial statements since the acquisition date and were not material to the Consolidated Statements of Income for the three months ended December 31, 2019.

Upon finalizing the accounting for this transaction, management expects to ascribe value to other identifiable intangible assets, including customer relationships and customer backlog, which would reduce the preliminary amount allocated to goodwill.

Pro forma results of operations as if the acquisition had been consummated October 1, 2018 would not be material to the Consolidated Statements of Income.

The Company recorded certain costs to effect the acquisition as they were incurred, which are reflected in general and administrative expenses on the Company’s Consolidated Statements of Income in the amount of $ 0.1 million for the three months ended December 31, 2019.

Florida Acquisition - March 2020

On March 23, 2020, a subsidiary of the Company acquired two HMA manufacturing plants and certain related assets located in Pensacola and Defuniak Springs, Florida.

These acquired plants enable the Company to serve new markets in the western Florida panhandle.

The acquisition has been accounted for as a business combination in accordance with Topic 805.

The $ 9.8 million purchase price was paid in cash at closing, with an additional $ 2.6 million accrued at March 31, 2020 for plant inventory acquired as of March 23, 2020.

The provisional amounts allocated are $ 9.7 million of property, plant and equipment, $ 2.6 million of other current assets and $ 0.1 million of goodwill.

Goodwill, which is deductible for income tax purposes, primarily represents the assembled work force synergies expected to result from the acquisition.

Upon finalizing the accounting for this transaction, management expects to ascribe value to other identifiable intangible assets, including customer relationships and customer backlog, which may reduce the preliminary amount allocated to goodwill.

The results of operations since the March 23, 2020 acquisition date attributable to this acquisition are included in the consolidated financial statements since the acquisition date and were not material to the Consolidated Statements of Income for the three and six months ended March 31, 2020.

Pro forma results of operations as if the acquisition had been consummated October 1, 2018 would not be material to the Consolidated Statements of Income.

Note 5 - Contracts Receivable Including Retainage, net

Contracts receivable including retainage, net consisted of the following at December 31, 2019 and September 30, 2019 (in thousands):

December 31, 2019 September 30, 2019

Contracts receivable including retainage, net consisted of the following at March 31, 2020 and September 30, 2019 (in thousands):

March 31, 2020 September 30, 2019

Contracts receivable $ 104,686 $ 121,050

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Note 6 - Contract Assets and Liabilities

Costs and estimated earnings compared to billings on uncompleted contracts at December 31, 2019 and September 30, 2019 consisted of the following (in thousands):

December 31, 2019 September 30, 2019

Costs and estimated earnings compared to billings on uncompleted contracts at March 31, 2020 and September 30, 2019 consisted of the following (in thousands):

March 31, 2020 September 30, 2019

Costs on uncompleted contracts $ 905,840 $ 900,880

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Net billings in excess of costs and estimated earnings on uncompleted contracts $ ( 13,439 ) $ ( 19,085 )

Significant changes to balances of costs 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, 2019 to December 31, 2019 are presented below (in thousands):

Costs and Estimated Earnings in Excess of Billings on

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Changes in revenue billed, contract price or cost estimates 4,071 1,575 5,646

December 31, 2019 (unaudited) $ 14,152 $ ( 31,169 ) $ ( 17,017 )

At December 31, 2019, the Company had unsatisfied or partially unsatisfied performance obligations under construction project contracts representing approximately $ 456.5 million in aggregate transaction price.

March 31, 2020 (unaudited) $ 16,101 $ ( 29,540 ) $ ( 13,439 )

At March 31, 2020, the Company had unsatisfied or partially unsatisfied performance obligations under construction project contracts representing approximately $ 515.4 million in aggregate transaction price.

The Company expects to earn revenue as it satisfies its performance obligations under those contracts in the amount of approximately $ 322.7 million during the remainder of the fiscal year ending September 30, 2020 and $ 192.7 million thereafter.

Note 7 - Property, Plant and Equipment

Property, plant and equipment at December 31, 2019 and September 30, 2019 consisted of the following (in thousands):

December 31, 2019 September 30, 2019

Property, plant and equipment at March 31, 2020 and September 30, 2019 consisted of the following (in thousands):

March 31, 2020 September 30, 2019

Construction equipment $ 247,396 $ 214,500

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Total property, plant and equipment, net $ 240,083 $ 205,870

Depreciation and depletion expense related to property, plant and equipment was $ 9.4 million and $ 6.9 million for the three months ended December 31, 2019 and 2018, respectively.

Depreciation and depletion expense related to property, plant and equipment was $ 9.5 million and $ 7.3 million for the three months ended March 31, 2020 and 2019, respectively, and $ 18.9 million and $ 14.2 million for the six months ended March 31, 2020 and 2019, respectively.

Note 8 - Debt

The Company maintains various credit facilities from time to time to finance acquisitions, the purchase of real estate, construction equipment, plants and other fixed assets, and for general working capital purposes.

This includes, among other things, a credit agreement with BBVA USA as agent, issuing bank and a lender, and certain other lenders (as amended, the “BBVA Credit Agreement”) providing for a $ 82.0 million term loan (the “Term Loan”) and a $ 30.0 million revolving credit facility (the “Revolving Credit Facility”).

Debt at December 31, 2019 and September 30, 2019 consisted of the following (in thousands):

December 31, 2019 September 30, 2019

These include, among other things, a credit agreement with BBVA USA (“BBVA”), as agent, issuing bank and a lender, and certain other lenders (as amended, the “BBVA Credit Agreement”), which provides for a term loan with an original principal amount of $ 82.0 million (the “Term Loan”) and a $ 30.0 million revolving credit facility (the “Revolving Credit Facility”).

Debt at March 31, 2020 and September 30, 2019 consisted of the following (in thousands):

March 31, 2020 September 30, 2019

Long-term debt:

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(i) added Bank of America, N.A.

as a party in connection with the assignment by BBVA to Bank of America of certain of its lending obligations under the BBVA Credit Agreement;

(“Bank of America”) as a party in connection with the assignment by BBVA to Bank of America of certain of its lending obligations under the BBVA Credit Agreement;

(ii) increased the aggregate amount of the Term Loan commitment by the lenders by $ 10.0 million to $ 54.7 million;

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and (iv) extended the maturity date for the outstanding Term Loan advances from July 1, 2022 to October 1, 2024.

In order to hedge against the risk of changes in interest rates on this advance, on October 1, 2019, the Company entered into an interest rate swap agreement with a notional amount of $ 5.9 million, under which the Company pays a fixed percentage rate of 1.58 % and receives a credit based on the applicable LIBOR rate.

On February 27, 2020 the Company entered into an additional interest rate swap agreement with a notional amount of $ 26.3 million, under which the Company pays a fixed percentage rate of 1.24 % and receives a credit based on the applicable LIBOR rate.

In March 2020, the Company drew $ 15.0 million on the Revolving Credit Facility to fund the March 23, 2020 Florida acquisition and to provide additional liquidity (see Note 4 - Business Acquisitions).

Note 9 - Equity

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Class A common stock is not convertible into any other class of the Company’s capital stock.

Secondary Offering - Exercise of Over-Allotment Option

On October 21, 2019, in conjunction with an underwritten secondary offering of the Company’s Class A common stock, the underwriters of the offering exercised their option to purchase from the selling stockholders in such offering a total of 750,000 shares of the Company’s Class A common stock at a price of $ 14.25 per share, before selling commissions and discounts.

The Company did not receive any proceeds from the offering or the underwriters’ exercise of their over-allotment option.

Conversion of Class B Common Stock to Class A Common Stock

During the three months ended December 31, 2019, certain stockholders of the Company converted a total of 107,682 shares of Class B common stock into shares of Class A common stock on a one -for-one basis.

During the six months ended March 31, 2020, certain stockholders of the Company converted a total of 107,682 shares of Class B common stock into shares of Class A common stock on a one -for-one basis.

Following the conversions, there were 32,705,418 shares of Class A common stock and 19,076,327 shares of Class B common stock outstanding.

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The following table summarizes the weighted-average number of basic common shares outstanding and the calculation of basic earnings per share for the periods presented (in thousands, except share and per share amounts):

For the Three Months Ended December 31,

For the Three Months Ended March 31, For the Six Months Ended March 31,

2020 2019 2020 2019

Net income attributable to common shareholders $ 1,537 $ 4,212 $ 6,998 $ 9,366

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The following table summarizes the calculation of the weighted-average number of diluted common shares outstanding and the calculation of diluted earnings per share for the periods presented (in thousands, except share and per share amounts):

For the Three Months Ended December 31,

For the Three Months Ended March 31, For the Six Months Ended March 31,

2020 2019 2020 2019

Net income attributable to common stockholders $ 1,537 $ 4,212 $ 6,998 $ 9,366

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Weighted average number of diluted common shares outstanding 51,619,403 51,414,619 51,612,340 51,414,619

51,609,380 51,414,619

Net income per diluted common share attributable to common stockholders $ 0.03 $ 0.08 $ 0.14 $ 0.18

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The Company files a consolidated United States federal income tax return and income tax returns in various states.

Management evaluated the Company’s tax positions 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.

The Company’s effective income tax rate for the three months ended December 31, 2019 and 2018 was 19.5 % and 24.3 %, respectively.

The effective income tax rate for the three months ended December 31, 2019 was favorably impacted by the filing of an amended consolidated state return.

The Company recorded an amended return benefit of $ 0.4 million resulting from the utilization of net operating loss carryforwards.

Management evaluated the Company’s tax positions based on appropriate provisions of applicable 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.

The Company’s effective income tax rate for the three months ended March 31, 2020 and 2019 was 25.7 % and 26.1 %, respectively.

The Company’s effective tax rate for the six months ended March 31, 2020 and 2019 was 20.9 % and 25.1 %, respectively.

The effective income tax rate for the six months ended March 31, 2020 was favorably impacted by the filing of an amended consolidated state return.

The Company recorded an amended return benefit of $ 0.4 million resulting from the utilization of net operating loss carryforwards and related release of valuation allowance.

Note 12 - Related Parties

On December 31, 2017, the Company sold an indirect wholly owned subsidiary to an immediate family member of a Senior Vice President of the Company (“Purchaser of Subsidiary”) in consideration for a promissory note in the amount of $ 1.0 million, which approximated the net book value of the disposed entity.

At December 31, 2019, $ 0.1 million and $ 0.6 million was reflected on the Company’s Consolidated Balance Sheet within other current assets and other assets, respectively, representing the remaining balances on this note receivable.

In connection with this transaction, the Company also received a promissory note from the disposed entity (“Disposed Entity”) on December 31, 2017 in the amount of $ 1.0 million representing certain accounts payable of the disposed subsidiary that were paid by the Company.

At December 31, 2019, $ 0.1 million and $ 0.4 million was reflected on the Company’s Consolidated Balance Sheet within other current assets and other assets, respectively, representing the remaining balances on this note receivable.

On December 31, 2017, the Company sold an indirect wholly owned subsidiary (the “Disposed Entity”) to an immediate family member of a Senior Vice President of the Company (“Purchaser of Subsidiary”) in consideration for a promissory note in the amount of $ 1.0 million, which approximated the net book value of the Disposed Entity.

At March 31, 2020, $ 0.1 million and $ 0.6 million was reflected on the Company’s Consolidated Balance Sheets within other current assets and other assets, respectively, representing the remaining balances on the promissory note.

In connection with this transaction, the Company also received a promissory note from the Disposed Entity on December 31, 2017 in the amount of $ 1.0 million, representing certain accounts payable of the Disposed Entity that were paid by the Company.

At March 31, 2020, $ 0.1 million and $ 0.4 million was reflected on the Company’s Consolidated Balance

Sheets within other current assets and other assets, respectively, representing the remaining balances on the promissory note.

Remaining payments are scheduled to be made in periodic installments during fiscal year 2020 through fiscal year 2026.

12 unchanged sentences

Under the lease agreement, the Company paid a fixed minimum rent per month.

• The Company is party to a management services agreement with SunTx, under which the Company pays SunTx $ 0.25 million per fiscal quarter and reimburses certain travel and other out-of-pocket expenses.

The following table presents revenues earned and expenses incurred by the Company during the three months ended December 31, 2019 and 2018, and accounts receivable and payable balances at December 31, 2019 and September 30, 2019, related to transactions with the related parties described above (in thousands):

The following table presents revenues earned and expenses incurred by the Company during the three and six months ended March 31, 2020 and 2019, and accounts receivable and payable balances at March 31, 2020 and September 30, 2019, related to transactions with the related parties described above (in thousands):

Revenue Earned (Expense Incurred) Accounts Receivable (Payable)

For the Three Months Ended December 31, December 31, September 30,

For the Three Months Ended March 31, For the Six Months Ended March 31, March 31, September 30,

2020 2019 2020 2019 2020 2019

(unaudited) (unaudited) (unaudited)

(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)

Purchaser of Subsidiary $ — $ — $ — $ — $ 725 $ 756

3 unchanged sentences

( 448 ) ( 3,073 ) ( 2,025 ) ( 6,366 ) ( 547 ) ( 1,238 )

$ ( 316 ) $ ( 1,238 )

Construction Services 254 1,061 1,534 1,174 1,643 2,434

Island Pond (2)

Vehicles $ ( 253 ) (2)

( 80 ) ( 80 ) ( 160 ) ( 160 ) — —

( 262 ) ( 342 ) ( 514 ) ( 631 ) — —

Consulting Services (2)

SunTx $ ( 314 ) (2)

( 72 ) ( 67 ) ( 143 ) ( 134 ) — —

— ( 21 ) — ( 42 ) — —

( 357 ) ( 387 ) ( 671 ) ( 641 ) — —

(1) Cost is reflected as cost of revenues on the Company’s Consolidated Statements of Income.

4 unchanged sentences

The Company recorded a pre-tax gain of $ 14.8 million during the fiscal year ended September 30, 2018 related to the Settlement.

Future payments are reflected on the Consolidated Balance Sheet at December 31, 2019 and September 30, 2019 as other current assets in the amount of $ 7.8 million.

Future payments are reflected on the Consolidated Balance Sheets at March 31, 2020 and September 30, 2019 as other current assets in the amount of $ 3.9 million and $ 7.8 million, respectively.

Note 14 - Equity-Based Compensation

During the fiscal year ending September 30, 2019, the Company awarded a total of 292,534 restricted shares of Class A common stock to its non-employee directors under the Construction Partners, Inc.

2018 Equity Incentive Plan in lieu of any cash compensation.

2018 Equity Incentive Plan in lieu of cash compensation.

The grants are classified as equity awards.

The aggregate grant date fair value of these restricted awards was $ 3.8 million.

The grants will vest as to two-thirds of the underlying shares on January 1, 2021 and as to the remaining one-third of the underlying shares on January 1, 2022.

During the three months ended December 31, 2019, the Company recorded compensation expense in connection with these grants in the amount of $ 0.4 million, which is reflected as general and administrative expenses in the Company’s Consolidated Statements of Income.

At December 31, 2019, there was approximately $ 2.8 million of unrecognized compensation expense related to these awards.

Two-thirds of the restricted shares of Class A common stock will vest on January 1, 2021, and the remaining one-third will vest on January 1, 2022.

During the three and six months ended March 31, 2020, the Company recorded compensation expense in connection with these grants in the amount of $ 0.4 million and $ 0.8 million, respectively, which is reflected as general and administrative expenses in the Company’s Consolidated Statements of Income.

At March 31, 2020, there was approximately $ 2.4 million of unrecognized compensation expense related to these awards.

Note 15 - Leases

The Company leases certain facilities, office space, vehicles and equipment.

As of December 31, 2019, operating leases under Topic 842 were included in (i) operating lease right-of-use assets, (ii) current portion of operating lease liabilities and (iii) operating lease liabilities, net of current portion on the Company’s Consolidated Balance Sheet in the amounts of $ 8.5 million, $ 2.9 million and $ 5.8 million, respectively.

As of December 31, 2019, the Company had no lease contracts that had not yet commenced but created significant rights and obligations.

Lease expense was $ 0.9 million and $ 2.6 million during the three months ended December 31, 2019 and 2018, respectively, which included operating lease costs related to short-term leases.

During the quarter, the Company used cash in the amount of $ 11.5 million to buy out certain operating lease obligations.

As of December 31, 2019, the weighted-average remaining term of the Company’s leases was 8.2 years, and the weighted-average discount rate was 4.00 %.

As of December 31, 2019, the lease liability was equal to the present value of the remaining lease payments, discounted using the incremental borrowing rate on the Company’s secured debt using a single maturity discount rate, as such rate is not materially different from the discount rate applied to each of the leases in the portfolio.

The following table summarizes the Company’s undiscounted lease liabilities outstanding as of December 31, 2019 (in thousands):

As of March 31, 2020, operating leases under Topic 842 were included in (i) operating lease right-of-use assets, (ii) current portion of operating lease liabilities and (iii) operating lease liabilities, net of current portion on the Company’s Consolidated Balance Sheets in the amounts of $ 8.6 million, $ 2.7 million and $ 6.1 million, respectively.

As of March 31, 2020, the Company had no lease contracts that had not yet commenced but had created significant rights and obligations.

Lease expense was $ 0.9 million and $ 1.8 million during the three months and six months ended March 31, 2020, respectively, which included operating lease costs related to short-term leases.

During the three months ended December 31, 2019, the Company used cash in the amount of $ 11.5 million to buy out certain operating lease obligations.

As of March 31, 2020, the weighted-average remaining term of the Company’s leases was 8.3 years, and the weighted-average discount rate was 4.00 %.

As of March 31, 2020, the lease liability was equal to the present value of the remaining lease payments, discounted using the incremental borrowing rate on the Company’s secured debt using a single maturity discount rate, as such rate is not materially different from the discount rate applied to each of the leases in the portfolio.

The following table summarizes the Company’s undiscounted lease liabilities outstanding as of March 31, 2020 (in thousands):

Fiscal Year Amount

4 unchanged sentences

Total $ 8,780

As previously disclosed, the Company’s future minimum lease payment obligations as of September 30, 2019 were as follows:

As previously disclosed, the Company’s future minimum lease payment obligations as of September 30, 2019 were as follows (in thousands):

Fiscal Year Amount

1 unchanged sentence

Total $ 11,285

Note 16 - Investment in Derivative Instruments

The Company’s operations expose it to a variety of market risks, including the effects of changes in commodity prices.

As part of its risk management process, the Company began entering into commodity swap transactions through regulated commodity exchanges in February 2020.

The Company is exposed to interest rate risk related to its ongoing business operations.

To manage interest rate exposure, the Company has entered into derivative instruments using interest rate swaps.

The objective of entering into interest rate swaps is to eliminate the variability of cash flows associated with movements in interest rates over the life of the loans.

The following table represents the approximate amount of realized and unrealized gains (losses) and changes in fair value recognized in earnings on commodity derivative contracts for the three and six months ended March 31, 2020 and the fair value of these derivatives as of March 31, 2020 and September 30, 2019 (in thousands):

For the Three Months Ended March 31, 2020 (unaudited) For the Six Months Ended March 31, 2020 (unaudited)

Change in Change in

Income Statement Classification Realized Gain (Loss) Unrealized Gain (Loss) Total Gain (Loss) Realized Gain (Loss) Unrealized Gain (Loss) Total Gain (Loss)

Cost of revenues $ ( 21 ) $ — $ ( 21 ) $ ( 21 ) $ — $ ( 21 )

Other income (expense) — ( 797 ) ( 797 ) — ( 797 ) ( 797 )

Interest expense, net ( 24 ) ( 1,532 ) ( 1,556 ) ( 49 ) ( 1,466 ) ( 1,515 )

Total $ ( 45 ) $ ( 2,329 ) $ ( 2,374 ) $ ( 70 ) $ ( 2,263 ) $ ( 2,333 )

For the Three Months Ended March 31, 2019 (unaudited) For the Six Months Ended March 31, 2019 (unaudited)

Change in Change in

Income Statement Classification Realized Gain (Loss) Unrealized Gain (Loss) Total Gain (Loss) Realized Gain (Loss) Unrealized Gain (Loss) Total Gain (Loss)

Cost of revenues $ — $ — $ — $ — $ — $ —

Other income (expense) — — — — — —

Interest expense, net 9 ( 106 ) ( 97 ) 5 ( 331 ) ( 326 )

Total $ 9 $ ( 106 ) $ ( 97 ) $ 5 $ ( 331 ) $ ( 326 )

March 31, 2020 September 30, 2019

Balance Sheet Classification (unaudited)

Accrued expense and other current liabilities - commodity swaps $ ( 588 ) $ —

Other long-term liabilities - commodity swaps $ ( 209 ) $ —

Other long-term liabilities - interest rate swaps $ ( 1,777 ) $ ( 311 )

Net gain (loss) position $ ( 2,574 ) $ ( 311 )

Note 17 - Fair Value Measurements

The following table presents the Company’s liabilities measured at fair value on a recurring basis as of March 31, 2020 and September 30, 2019 under ASC 820 (in thousands):

March 31, 2020 September 30, 2019

Level 2 Level 2

Commodity swaps $ 797 $ —

Interest rate swaps 1,777 311

Derivative liabilities included in Level 2 include commodity and interest rate swap contracts.

The fair values of our Level 2 derivative liabilities were determined using market observable inputs including forward and spot prices for commodities and interest rate curves.

Note 18 - Purchase Commitments

As of March 31, 2020, the Company had unconditional purchase commitments for diesel fuel in the normal course of business in the aggregate amount of $ 2.6 million.

As of March 31, 2020, our purchase commitments for the remainder of fiscal year 2020 and annually thereafter were as follows (in thousands):

Fiscal Year Amount

Remainder of 2020 1,348

Total $ 2,618

Note 19 - Subsequent Events

The Company is closely monitoring the impact of the pandemic of the novel strain of coronavirus, known as COVID-19 ("COVID-19") on all aspects of its business, including how it will impact our customers, employees, suppliers, and vendors.

While the Company did not incur significant disruptions during the three months ended March 31, 2020 from COVID-19, due to the uncertainties surrounding the COVID-19 pandemic, it is unable to predict the impact that COVID-19 will have on its financial position, operating results and cash flows in future periods.

Recent financing activities

On April 30, 2020, the Company and each of its wholly owned subsidiaries entered into a Loan Modification Agreement and Amendment to Loan Documents (the “Amendment”), with BBVA and Bank of America.

Among other things, the Amendment amended the Credit Agreement to (i) provide for a Term Loan advance to the Company in the amount of $ 18.0 million, (ii) establish a minimum interest rate for the foregoing Term Loan advance and future Term Loan advances, (iii) adjust the Term Loan recourse amounts applicable to the Company and its subsidiaries, (iv) increase the amount of the quarterly principal installment payments under outstanding Term Loan advances to $ 2.5 million, and (v) set forth procedures by which the parties will select a replacement benchmark interest rate in the event that LIBOR, the current benchmark interest rate under the BBVA Credit Agreement, is no longer available or appropriate as a reference rate upon which to determine the interest rate after December 31, 2021, the date on which contributing banks will no longer be required to submit rate information from which LIBOR is calculated.

Conversion of Class B common stock to Class A common stock

Subsequent to March 31, 2020, a stockholder of the Company converted a total of 100,000 shares of the Company’s Class B common stock, on a one -for-one basis, into shares of the Company’s Class A common stock.

Following the conversion, there were 32,805,418 shares of Class A common stock and 18,976,327 shares of Class B common stock outstanding.

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

What changed 10-Q

Item 1. Financial Statements