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Item 7. Management’s Discussion and Analysis

2020-12-11 compared with 2019-12-13 · 107 added, 125 removed, 226 unchanged (51% of the section changed)

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In this discussion, we use certain non-GAAP financial measures.

Explanation of these non-GAAP financial measures and reconciliation to the most directly comparable GAAP financial measures are included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Investors should not consider non-GAAP financial measures in isolation or as substitutes for financial information presented in compliance with GAAP.

We are one of the fastest growing civil infrastructure companies in the United States, specializing in the building and maintenance of transportation networks.

An explanation of these non-GAAP financial measures and a reconciliation to the most directly comparable GAAP financial measures are included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Investors should not consider non-GAAP financial measures in isolation or as substitutes for financial information presented in compliance with GAAP.

We are a civil infrastructure company that specializes in the building and maintenance of transportation networks.

Our operations leverage a highly-skilled workforce, strategically located 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 sites in the southeastern United States.

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

Our public projects are funded by federal, state and local governments and include roads, highways, bridges, airports and other 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 United States construction market.

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

Recent Developments

We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including its impact on our customers, employees, suppliers, and vendors.

We did not incur significant disruptions from COVID-19 during the fiscal year ended September 30, 2020, as road construction has been designated a “critical infrastructure” industry and an “essential business” in each state within our footprint, which has allowed us to continue to operate without significant delays related to state and local shelter-in-place orders.

In fact, in certain states in which we operate, including Florida and Alabama, some public projects were accelerated in order to leverage construction efficiencies driven by lower vehicle traffic during the shelter-in-place orders resulting from the COVID-19 pandemic.

However, due to the uncertainties surrounding the COVID-19 pandemic, we are unable to predict the impact that COVID-19 will have on our financial position, operating results and cash flows in future periods.

We continue to monitor risks to our business arising from increasing transmission rates of COVID-19, including (i) our need to adopt enhanced safety and cleaning protocols, which have required significant time and attention from our management and workforce, (ii) employee absences, which could adversely affect our productivity and our ability to complete projects in accordance with our contractual obligations, and could require us to temporarily close our facilities or project sites, (iii) potential disruptions in our supply chains for raw materials or equipment, whether as a result of facility closures or otherwise, which could increase our labor and materials costs and impair our ability to manufacture hot-mix asphalt, and (iv) the impact of COVID-19 on our customers, which could cause these customers to cancel or delay current or prospective projects or become delinquent in their payments to us for work that we have performed.

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

In addition, we continue to monitor the impact of COVID-19 on fuel and sales tax revenues, which in turn drive funding levels for public projects in our markets.

For instance, a substantial portion of our revenues each quarter are derived from projects completed for various Departments of Transportation, including the Alabama Department of Transportation (“ALDOT”) and the North Carolina Department of Transportation (“NCDOT”), each of which has accounted for more than 10% of our consolidated revenues for various periods within the past two fiscal years, as further described under the heading “Concentration of Risks” in Note 2 – Significant Accounting Policies to the consolidated financial statements included elsewhere in this report.

In North Carolina, the NCDOT has implemented several measures in recent months to address preexisting funding pressures that were exacerbated by the effects of the COVID-19 pandemic, including suspending preliminary engineering work on potential future projects, delaying commencement of certain pending projects and reducing the number and size of projects available for bid, which resulted in decreased revenue during the last quarter of the fiscal year ended September 30, 2020.

However, recent legislative efforts and increased fuel tax receipts have facilitated the generation of cash reserves in excess of the statutory minimum (a prerequisite for future project lettings) and approvals for future bond issuances that will be used for funding projects in subsequent periods.

Management believes that this market remains poised for future growth in light of its favorable population trends and adequate structural long-term funding mechanisms.

In Alabama, the decline in gas tax revenue receipts related to reductions in fuel purchased by motorists in recent months has been largely offset by an increase in the fuel tax that became effective in late 2019.

The extent to which our operations may be impacted by the COVID-19 pandemic will depend on future developments, which are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning the severity of the pandemic and actions by government authorities to contain the outbreak or mitigate its impact.

Furthermore, the impacts of a potential worsening of economic conditions and the continued disruptions to, and volatility in, the financial markets remain unknown.

How We Assess Performance of Our Business

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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 derived from the sale of HMA, aggregates, and liquid asphalt cement are recognized when risks associated with ownership have passed to the customer.

Revenues derived from the sale of HMA, aggregates, and liquid asphalt cement are recognized when the risks associated with ownership have passed to the customer.

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, subcontract costs and other expenses at our HMA plants, aggregate mining facilities, and liquid asphalt cement terminal.

Cost of revenues consists of all direct and indirect costs associated with construction contracts, including raw materials, labor, equipment costs, depreciation, lease expenses, subcontract costs and other expenses at our HMA plants, aggregate mining facilities, and liquid asphalt cement terminal.

Our cost of revenues is directly affected by fluctuations in commodity prices, primarily liquid asphalt and diesel fuel.

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Depreciation, Depletion and Amortization

We carry property, plant and equipment on our balance sheet at cost, net of accumulated depreciation, depletion and amortization.

Property, plant and equipment are initially recorded at cost or, if acquired as a business combination, at fair value.

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

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

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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.

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.

These expenses consist primarily of salaries and personnel costs for our administration, finance and accounting, legal, information systems, human resources and certain managerial employees.

General and administrative expenses also include acquisition expenses, audit, consulting and professional fees, stock-based compensation expense, travel, insurance, office space rental costs, property taxes and other corporate and overhead expenses.

Gain on Sale of Equipment, 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.

The gain or loss on the 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

Interest expense, net primarily represents interest incurred on our long-term debt, such as the Term Loan and the Revolving Credit Facility, as well as the cost of interest swap agreements and amortization of deferred debt issuance costs.

Interest expense, net primarily represents interest incurred on our long-term debt, such as the Term Loan and the Revolving Credit Facility, as well as the changes in fair values 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 (i) interest expense, net, (ii) provision for income taxes, (iii) depreciation, depletion and amortization, (iv) equity-based compensation expense, (v) loss on extinguishment of debt and (vi) certain management fees and expenses, and excludes income recognized in connection with the Settlement described in Note 20 - Settlement Agreement to the consolidated financial statements included elsewhere in this report.

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, (v) loss on the extinguishment of debt and (vi) certain management fees and expenses.

Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of revenues for each period.

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Potential differences 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 Adjusted EBITDA to net income, the most directly comparable measure calculated in accordance with GAAP, and the calculation of Adjusted EBITDA Margin for the periods presented (in thousands, except percentages):

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 the periods presented (in thousands, except percentages):

For the Fiscal Year

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Equity-based compensation expense 1,570 957

Settlement income (1)

Management fees and expenses (1)

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Adjusted EBITDA Margin 12.5 % 11.8 %

(1) Represents pre-tax income recognized in connection with the Settlement (see Note 20 - Settlement Agreement to the consolidated financial statements included elsewhere in this report).

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

Table of Con t e n t s

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

Results of Operations — Fiscal Year Ended September 30, 2020 Compared to Fiscal Year Ended September 30, 2019

The following table sets forth selected financial data for the fiscal years ended September 30, 2019 (“fiscal 2019”) and September 30, 2018 (“fiscal 2018”):

For the Fiscal Year Ended September 30, Change from Fiscal Year

2018 to Fiscal Year 2019

The following table sets forth selected financial data for the fiscal years ended September 30, 2020 (“fiscal 2020”) and September 30, 2019 (“fiscal 2019”) (in thousands, except percentages):

For the Fiscal Year Ended September 30, Change from Fiscal

2019 to Fiscal 2020

Revenues Dollars % of

Revenues $ Change %

(in thousands, except percentages)

Revenues $ 785,679 100.0 % $ 783,238 100.0 % $ 2,441 0.3 %

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General and administrative expenses (68,597) (8.7) % (62,724) (8.0) % (5,873) 9.4 %

Settlement income — — % 14,803 2.2 % (14,803) N/A

Gain on sale of equipment, net 1,616 0.2 % 1,909 0.2 % (293) (15.3) %

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Interest expense, net (3,113) (0.4) % (1,861) (0.2) % (1,252) 67.3 %

Other income (expense) 416 — % (101) — % 517 (511.9) %

Other income 336 — % 416 — % (80) (19.2) %

Income before provision for income taxes and earnings from investment in joint venture 52,454 6.7 % 55,693 7.1 % (3,239) (5.8) %

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Earnings from investment in

joint venture 1,337 0.2 % 1,259 0.2 % 78 N/A

joint venture 603 — % 1,337 0.2 % (734) (54.9)

Net income $ 40,297 5.1 % $ 43,121 5.5 % $ (2,824) (6.5) %

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Revenues for fiscal 2020 increased $2.5 million, or 0.3%, to $785.7 million from $783.2 million for fiscal 2019.

The increase in revenues was primarily due to a $44.6 million higher backlog at the beginning of fiscal 2019 compared to the beginning of fiscal 2018, the increase in available work in our existing markets, and $51.6 million of revenue from recent acquisitions, including (i) fiscal 2019 revenue attributable to acquisitions we completed during fiscal year 2019 and (ii) revenue earned during fiscal 2019 attributable to acquisitions that were completed during fiscal 2018 until the one-year anniversary date of such acquisitions.

Revenues in markets we served on September 30, 2019 decreased by $47.1 million during fiscal 2020, primarily due to a reduction in the number of projects available for bid in certain of our markets, including North Carolina, and our resulting efforts to manage our backlog and effectively utilize our workforce in light of the uncertainties caused by the COVID-19 pandemic.

The decrease was offset by a $49.6 million increase in total revenue attributable to acquisitions that we completed during or subsequent to fiscal 2019.

Gross Profit.

Gross profit for fiscal 2020 increased $4.2 million, or 3.6%, to $122.2 million from $118.0 million for fiscal 2019.

The higher gross profit was the result of the 15.2% revenue increase and an increase in gross profit margin to 15.1% for fiscal 2019 from 14.6% for fiscal 2018, due to higher utilization of our plants and equipment, as well as the contribution of the liquid asphalt terminal.

The higher gross profit was the result of an increase in gross profit margin to 15.6% for fiscal 2020 from 15.1% for fiscal 2019, primarily due to efficient utilization of our plants and equipment, and the contribution from the liquid asphalt terminal, which we acquired during fiscal 2019 and allows us to purchase liquid asphalt at wholesale prices, thereby reducing our cost of revenues.

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 fiscal 2020 increased $5.9 million, or 9.4%, to $68.6 million from $62.7 million for fiscal 2019.

The increase in general and administrative expenses for fiscal 2019 compared to fiscal 2018 was primarily the result of (i) a $2.6 million increase in overhead expenses attributable to acquisitions that we completed during or subsequent to fiscal 2018, (ii) $0.7 million in costs related to the Secondary Offering, and (iii) an increase in the cost of professional services and insurance, reflecting our growth and increased reporting and regulatory requirements as a public company for a full fiscal year.

General and administrative expenses as a percentage of revenue declined 0.2% from fiscal 2018 to fiscal 2019.

The increase in general and administrative expenses for fiscal 2020 compared to fiscal 2019 was primarily the result of (i) a $2.9 million increase in overhead expenses attributable to acquisitions that we completed during or subsequent to fiscal 2019, (ii) a $3.1 million increase in management personnel payroll and benefits and (iii) a $0.6 million increase in stock-based compensation expense.

These increases were partially offset by decreases in other general administrative expenses of $0.7 million.

Interest Expense, Net.

Interest expense, net for fiscal 2020 increased $1.2 million, or 67.3%, to $3.1 million compared to $1.9 million for fiscal 2019.

The increase in interest expense, net reflects a $1.3 million increase in interest expense, partially offset by a $0.7 million increase in interest income.

The increase in interest expense was due to (i) an increase in the average principal debt balance outstanding for fiscal 2019 compared to fiscal 2018 as a result of borrowing for an acquisition in May 2018 and an increase in interest rates, and (ii) a $0.6 million charge to interest expense related to a change in the fair value of our interest rate swaps during fiscal 2019, compared to a $0.4 million credit during fiscal 2018.

The increase in interest income was due to the higher average cash balance during fiscal 2019, resulting from proceeds attributable to our IPO in May 2018 and an increase in interest rates earned on our deposits.

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Settlement Income.

During fiscal 2018, we recorded 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.

The increase in interest expense, net reflects a $0.3 million increase in interest expense and a decrease of $0.9 million in interest income.

The increase in interest expense was due to an increase in the average principal debt balance outstanding for fiscal 2020 compared to fiscal 2019 and a $1.4 million charge to interest expense related to a change in the fair value of our interest rate swaps during fiscal 2020, compared to a $0.6 million charge during fiscal 2019.

This increase was partially offset by a reduction in the interest rate on our debt compared to fiscal year 2019.

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

Provision for Income Taxes.

Our effective tax rate increased to 24.4% for fiscal 2019, from 17.2% for fiscal 2018.

The Tax Cuts and Jobs Act (the “Tax Act”), which was effective January 1, 2018, included broad and complex changes to the United States tax code, including a reduction in the United States federal corporate income tax rate from 35.0% to 21.0%.

As a result of this change, the Company recorded its income tax provision for fiscal 2018 based on a blended U.S.

statutory rate of 24.5%, which represents prorated applicable tax rates before and after the effective date of the Tax Act and the effect of applicable state income taxes.

The effective tax rate for fiscal 2019 reflects a federal income tax provision based on the U.S.

statutory tax rate of 21.0% and the effect of applicable state income taxes.

The effects of the higher blended U.S.

statutory tax rate of 24.5% for fiscal 2018 compared the U.S.

statutory tax rate of 21.0% for fiscal 2019 was offset by (i) a $4.6 million provisional discrete tax benefit related to the Tax Act, primarily due to an adjustment in our U.S.

deferred tax liabilities by the same amount and (ii) a $1.3 million permanent tax benefit resulting from the deduction of the excess of fair market value of options exercised during fiscal 2018 over the exercise price.

No such tax benefits were applicable to fiscal 2019.

This net reduction in deferred tax liabilities also included the estimated impact on the Company’s net state deferred tax assets.

Our effective tax rate decreased to 24.0% for fiscal 2020, from 24.4% for fiscal 2019.

Our lower effective tax rate was the result of filing an amended consolidated state return, as a result of which the Company recorded an amended return benefit of $0.4 million related to the utilization of net operating loss carryforwards and a corresponding release of a valuation allowance.

Earnings from Investment in Joint Venture.

During fiscal 2019 and 2018, we earned $1.3 million and $1.2 million of pre-tax income, respectively, from our 50% interest in the earnings of a joint venture.

We entered into the joint venture with a third party in November 2017 for the sole purpose of performing a construction project for the Alabama DOT.

During fiscal 2020 and 2019, we earned $0.6 million and $1.3 million of pre-tax income, respectively, from our 50% interest in the earnings of a joint venture that we entered into with a third party in November 2017 for the sole purpose of performing a construction project for ALDOT.

Net income decreased $2.8 million, or 6.5%, to $40.3 million for fiscal 2020 compared to $43.1 million for fiscal 2019.

This decrease in net income was a result of (i) the $10.6 million settlement income, net of tax, recognized during fiscal 2018, (ii) higher general and administrative expenses during fiscal 2019 and (iii) an increase in the effective income tax rate during fiscal 2019 compared to fiscal 2018.

The decrease was partially offset by an increase in gross profit, as described above.

This decrease in net income was primarily a result of higher general and administrative expenses and additional interest expense during fiscal 2020, and was substantially offset by higher gross profit.

General and administrative expenses for fiscal 2020 increased $5.9 million, or 9.4%, to $68.6 million from $62.7 million for fiscal 2019.

Adjusted EBITDA and Adjusted EBITDA Margin.

Adjusted EBITDA and Adjusted EBITDA Margin were $98.4 million and 12.5%, respectively, for fiscal 2020, compared to $92.3 million and 11.8%, respectively, for fiscal 2019.

The increase in Adjusted EBITDA primarily results from the increase in gross profit and depreciation for fiscal 2019 compared to fiscal 2018, partially offset by an increase in general and administrative expense and a decline in gain on sale of equipment.

The increase in the Adjusted EBITDA Margin is the result of a higher gross profit percentage and a lower general and administrative expenses as a percentage of revenue in fiscal 2019 compared to fiscal 2018, partially offset by a decline in the gain on sale of equipment.

The increase in Adjusted EBITDA primarily resulted from the increase in gross profit, depreciation, depletion and amortization of long-lived assets for fiscal 2020 compared to fiscal 2019, partially offset by an increase in general and administrative expense and interest expense, net.

The increase in the Adjusted EBITDA Margin was primarily the result of increased depreciation, depletion and amortization of long-lived assets.

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

Inflation and Price Changes

Inflation had an immaterial impact on our results of operations for the fiscal years ended September 30, 2019 and 2018 due to relatively low inflation in the United States in recent years and our ability to recover increasing costs by obtaining higher prices for our products, including sale price escalator clauses in most of our public infrastructure sector contracts.

Inflation had an immaterial impact on our results of operations for fiscal 2020 and 2019 due to relatively low inflation in the United States and our ability to recover increasing costs by obtaining higher prices for our products, including through the use of sale price escalator clauses in most of our public sector infrastructure contracts.

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

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Net change in cash and cash equivalents $ 67,697 $ (18,518)

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Operating Activities

Cash provided by operating activities, net of acquisitions, was $55.3 million for fiscal 2019, a decrease of $10.8 million compared to $66.1 million for fiscal 2018.

The decrease was primarily due to a $7.7 million decrease in net income for fiscal 2019 compared to fiscal 2018 and a $13.4 million reduction in changes in operating assets and liabilities, partially offset by a $10.2 million increase in adjustments to reconcile net income to cash flows from operating activities for those same periods.

The changes in operating assets and liabilities included (i) a $20.6 million increase in contracts receivable including retainage for fiscal 2019 compared to a $9.3 million decrease for fiscal 2018 due to higher overall revenue, (ii) a $8.8 million increase in inventory, of which $6.5 million related to our acquisition and operation of a liquid asphalt terminal and other acquisitions during fiscal 2019, (iii) a $1.0 million decrease in other current assets for fiscal 2019 compared to a $8.9 million increase for fiscal 2018, primarily due to our recognition of $7.9 million of receivables during fiscal 2018 in connection with Settlement income, (iv) an $8.0 million decrease in other assets for fiscal 2019 compared to a $7.9 million increase for fiscal 2018, primarily reflecting recognition of receivables in connection with Settlement income during fiscal 2018 and $7.2 million in payments received pursuant to the Settlement during fiscal 2019, (v) a $7.6 million decrease in net billing in excess of costs and estimated earnings on uncompleted contracts for fiscal 2019 compared to a $2.0 million increase for fiscal 2018, primarily due to the timing of performing and closing the projects, and (vi) a $2.1 increase in accrued expenses and other current liabilities for fiscal 2019 compared to a $4.8 million decrease for fiscal 2018.

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

• net income of $40.3 million, including $39.3 million of depreciation, depletion and amortization of long-lived assets;

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

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

During fiscal 2019, cash provided by operating activities, net of acquisitions, was $55.3 million primarily as a result of:

• net income of $43.1 million, including $31.2 million of depreciation, depletion and amortization of long-lived assets;

• contracts receivable including retainage, net increasing by $20.6 million as a result of higher overall revenues;

• inventory increasing by $8.8 million, of which $6.5 million related to our acquisition and operation of the liquid asphalt terminal and other acquisitions during fiscal 2019.

Investing Activitie s

Cash used in investing activities was $60.2 million for fiscal 2019 compared to $89.6 million for fiscal 2018.

The decrease reflects (i) a $37.5 million decrease in cash used in business acquisitions, net of cash acquired during fiscal 2019 compared to fiscal 2018, (ii) a $2.5 million distribution received from a joint venture investment during fiscal 2019, and (iii) a partial offset by a $10.9 million purchase of a liquid asphalt terminal during fiscal 2019.

During fiscal 2020, cash used in investing activities was $79.4 million, of which $30.2 million related to acquisitions completed in the period and $52.6 million of which was invested in property, plant and equipment, which included $11.5 million for the buyout of equipment leases, and was partially offset by $3.0 million of proceeds from the sale of equipment.

During fiscal 2019, cash used in investing activities was $60.2 million, $24.7 million of which related to acquisitions completed in the period and $42.5 million of which was invested in property, plant and equipment, which was partially offset by $4.5 million of proceeds from the sale of equipment.

Financing Activities

Cash used by financing activities was $13.6 million for fiscal 2019 compared to $95.1 million of cash provided in financing activities during fiscal 2018.

Fiscal 2018 included $98.0 million of proceeds from our IPO, net of offering costs.

BBVA Credit Agreement

We and each of our subsidiaries are parties to the BBVA Credit Agreement.

The BBVA Credit Agreement provides for the Term Loan and the Revolving Credit Facility.

During fiscal 2020, cash provided by financing activities was $41.9 million.

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

During fiscal 2019, cash used in financing activities was $13.6 million, primarily due to principal payments on long-term debt of $13.0 million during the period.

Credit Agreement

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

At September 30, 2020 and 2019, we had $92.9 million and $44.7 million, respectively, of principal outstanding under the Term Loan, $0.0 million and $5.0 million, respectively, of principal outstanding under the Revolving Credit Facility, and availability of $39.3 million and $14.4 million, respectively, under the Revolving Credit Facility, including reduction for outstanding letters of credit.

The obligations of our subsidiaries under the Term Loan and the Revolving Credit Facility are secured by a first priority security interest in substantially all of our assets and are guaranteed by the Company, as the ultimate parent company of the borrower entities.

In August 2019, the BBVA Credit Agreement was amended to, among other things, modify the interest rate and fee structure, as well as the repayment schedule and amounts.

Currently, the BBVA Credit Agreement provides for a four-tier escalating interest rate for both the Term Loan and the Revolving Credit Facility that is tied to the London Interbank Offered Rate (“LIBOR”).

The baseline rate for such borrowings is LIBOR plus 1.20%, and the rate may increase up to LIBOR plus 1.70% if the Company’s consolidated leverage ratio exceeds 2.00%.

Prior to the August 2019 amendment, the interest rate on any particular borrowing was calculated based on one of several indices set forth in the agreement, plus an applied markup of 2.0% to 2.25%.

At September 30, 2019 and 2018, the interest rate on outstanding borrowings under the Term Loan and Revolving Credit Facility was 3.244% and 4.242%, respectively.

Principal repayments under the Term Loan are made in quarterly installments in an amount equal to 2.50% of the original amount borrowed, a reduction from the 5.00% rate that we paid prior to the August 2019 amendment.

We pay a commitment fee of 0.20% per annum on the aggregate unused commitment amount under the Revolving Credit Facility, a reduction from 0.35% prior to the August 2019 amendment, as well as fees with respect to any letters of credit issued thereunder.

As of September 30, 2019, all amounts borrowed under the BBVA Credit Agreement were scheduled to mature on July 1, 2022.

The BBVA Credit Agreement contains usual and customary negative covenants for agreements of this type, including, but not limited to, restrictions on the Company’s ability to make acquisitions, make loans or advances, make capital expenditures and investments, pay dividends, create or incur indebtedness, create liens, wind up or dissolve, consolidate, merge or liquidate, or sell, transfer or dispose of assets.

The BBVA Credit Agreement also requires the Company to satisfy certain financial covenants, including a minimum fixed charge coverage ratio of 1.20-to-1.00 and a maximum consolidated leverage ratio of 2.75-to-1.00, subject to certain adjustments.

Prior to the August 2019 amendment, the maximum consolidated leverage ratio was 2.00-to-1.00.

At September 30, 2019 and 2018, our fixed charge ratio was 4.04-to-1.00 and 1.51-to-1.00, respectively, and our consolidated leverage ratio was 0.66-to-1.00 and 0.88-to-1.00, respectively.

At both September 30, 2019 and 2018, the Company was in compliance with all covenants under the BBVA Credit Agreement.

Table of Con t e n t s

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

On June 30, 2017, we entered into an interest rate swap agreement with a notional amount of $25.0 million, under which we pay a fixed percentage rate of 2.015% and receive a credit based on the applicable LIBOR rate.

On May 15, 2018, we entered into an additional $11.0 million notional interest rate swap agreement applicable to the $22.0 million amount borrowed under the Term Loan on that date, under which we pay a fixed percentage rate of 3.01% and receive a credit based on the applicable LIBOR rate.

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

The Credit Agreement requires the Company to satisfy certain financial covenants, including a minimum fixed charge coverage ratio of 1.20-to-1.00 and a maximum consolidated leverage ratio of 2.75-to-1.00, subject to certain adjustments.

At September 30, 2020 and 2019, our fixed charge coverage ratio was 2.85-to-1.00 and 4.04-to-1.00, respectively, and our consolidated leverage ratio was 1.08-to-1.00 and 0.66-to-1.00, respectively.

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

These interest rate swap agreements do not meet the criteria for hedge accounting treatment in accordance with GAAP.

At September 30, 2019 and 2018, the aggregate notional value of these interest rate swap agreements was $21.5 million and $28.7 million, respectively, and the fair value was $(0.3) million and $0.3 million, respectively, which is included within other assets or other liabilities on our Consolidated Balance Sheets.

The BBVA Credit Agreement was amended subsequent to September 30, 2019.

For more information about the amendment, see Note 22 - Subsequent Events to the consolidated financial statements included elsewhere in this report.

At September 30, 2020 and 2019, the aggregate notional value of these interest rate swap agreements was $46.5 million and $21.5 million, respectively, and the fair value was $(1.7) million and $(0.3) million, respectively, which is included within other liabilities or other assets on the Company’s Consolidated Balance Sheets.

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

Capital Requirements and Sources of Liquidity

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At September 30, 2020, our commitments for capital expenditures were not material to our financial condition or results of operations on a consolidated basis.

For fiscal 2020, we expect total capital expenditures to be $44.0 million to $47.0 million, excluding amounts paid to purchase certain equipment previously subject to operating leases during the first quarter of fiscal 2020.

For more information on these purchases, see Note 22 - Subsequent Events.

For fiscal 2021, we expect total capital expenditures to be $47.0 million to $50.0 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 the next 12 months.

Historically, we have had significant cash requirements in order to organically expand our business into new geographic markets.

Our cash requirements include costs related to increased capital expenditures, purchase of materials and production of materials and cash to fund our organic expansion into new markets.

Historically, we have required significant amounts of cash in order to make capital expenditures, purchase materials and fund our organic expansion into new markets.

Our working capital needs are driven by the seasonality and growth of our business, with our cash requirements increasing in periods of growth.

Additional cash requirements resulting from our growth include the costs of additional personnel, production and distribution facilities, enhancing our information systems and, in the future, our integration of any acquisitions and our compliance with laws and rules applicable to public companies.

We have historically relied upon cash available through credit facilities, in addition to cash 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.

Additional cash requirements resulting from our growth include the costs of additional personnel, production and distribution facilities, enhancements to our information systems, integration costs related to any acquisitions and our compliance with laws and rules applicable to public companies.

We have historically relied on cash available through credit facilities, in addition to cash from operations, to finance our working capital requirements and to support our growth.

We regularly monitor potential capital sources, including equity and debt markets, in an effort to meet our planned capital expenditures and liquidity requirements.

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

We believe that our operating cash flow and available borrowings under the Revolving Credit Facility will be sufficient to fund our operations for at least the next 12 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 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.

We believe that our operating cash flow and available borrowings under the Credit Agreement will be sufficient to fund our operations through September 30, 2021.

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

There can be no assurance that

operations and other capital resources will provide sufficient cash 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 of cash on hand 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 Credit Agreement, joint ventures, asset sales, offerings of debt or equity securities or other means.

However, the unprecedented public health and governmental efforts to contain the spread of COVID-19 have created significant uncertainty as to general economic conditions for fiscal year 2021 and beyond, and our ability to engage in any such transactions may be constrained by economic conditions and other factors outside of our control.

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

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.

Off-Balance Sheet Arrangements

We enter into operating leases for property and equipment in the normal course of business.

As of September 30, 2020, the Company had aggregate letters of credit outstanding in the amount of $10.9 million and future purchase commitments of $1.3 million for diesel fuel.

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

See Note 18 - Commitments and Contingencies to our consolidated financial statements included elsewhere in this report for additional information.

Other than the operating 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 operations, liquidity, capital expenditures or capital resources that would be material to investors.

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Critical Accounting Policies and Estimates

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These critical accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain.

Our most critical accounting policies and estimates include those involved in the recognition of revenues and provision for income tax expense.

Those critical accounting policies and estimates that require the most significant judgment are discussed further below.

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Our 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.

Revenues from these construction contracts are recognized as performance obligations are satisfied over time (formerly known as the percentage-of-completion method), measured by the relationship of total cost incurred compared to total estimated contract costs (cost-to-cost input method).

Revenues from fixed unit price and fixed total price construction contracts are recognized as performance obligations are satisfied over time (formerly known as the percentage-of-completion method), measured by the relationship of total cost incurred compared to total estimated contract costs (cost-to-cost input method).

Under this method, revenues are recognized as costs are incurred in an amount equal to cost plus the related expected profit based on the ratio of costs incurred to estimated final costs.

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Costs associated with unapproved change orders are included in the estimated cost to complete the contracts and are treated as project costs as incurred.

We recognize revenues equal to costs incurred on unapproved change orders when realization of price approval is probable.

We recognize revenues equal to costs incurred on unapproved change orders when realization of price approval is

Unapproved change orders involve the use of estimates, and it is reasonably possible that revisions to the estimated costs and recoverable amounts may be required in future reporting periods to reflect changes in estimates or final agreements with customers.

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For the majority of our contracts, upon completion and final acceptance of the services that we were contracted to perform, we receive our final payment upon completion of the necessary contract closing documents, and our obligations to the owner are complete at that point.

The accuracy of our revenues and profit recognition in a given period depends on the accuracy of our estimates of the revenues

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and costs to finish uncompleted contracts.

The accuracy of our revenues and profit recognition in a given period depends on the accuracy of our estimates of the revenues and costs to finish uncompleted contracts.

Our estimates for all of our significant contracts use a highly detailed “bottom up” approach.

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For the fiscal years ended September 30, 2020 and 2019, there were no events or changes in circumstances that would indicate a material impairment of our long-lived assets.

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Goodwill must be tested for impairment at least annually.

We performed our most recent annual impairment test of goodwill on July 1, 2019.

Our test indicated that there was no impairment of goodwill.

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

We performed our most recent annual impairment test on July 1, 2020.

Our test indicated that there was no impairment of goodwill and indefinite-lived intangible assets.

We first evaluate our market capitalization compared to the net assets of the Company overall.

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We have irrevocably elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted.

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The use and consumption of our products and services fluctuate due to seasonality.

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 winter, spring or fall and major weather events, such as hurricanes, tornadoes, tropical storms and heavy snows, can adversely affect our business and operations through a decline in both the use of our products and demand for our services.

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

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

Warmer and drier weather during 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.

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

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

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

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

Commodity Price Risk

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In addition, we enter into various firm purchase commitments, with terms generally less than one year, for certain raw materials.

We have entered into fuel swap contracts to mitigate the financial impact of fluctuations in fuel prices.

As of September 30, 2020, we had fuel swap contracts to pay fixed prices for fuel with an aggregate notional amount of 2.5 million gallons, maturing incrementally through fiscal year 2022.

The fair value of these derivative contracts was $(0.5) million and $0.0 million respectively, at September 30, 2020 and 2019.

The changes in the fair market value of these derivative contracts are recorded in cost of revenues.

These fuel swap contracts provide a fixed price for less than 50% of our estimated fuel usage for the remainder of fiscal years 2021 and 2022.

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 BBVA Credit Agreement, which expose us to variability in interest payments due to changes in the reference interest rates.

We have LIBOR-based floating rate borrowings under the Credit Agreement, which expose us to variability in interest payments due to changes in the reference interest rates.

From time to time, we use derivative instruments as hedges against the impact of interest rate changes on future earnings and cash flows.

In order to hedge against changes in interest rates and to manage fluctuations in cash flows resulting from interest rate risk, on June 30, 2017, we entered into an amortizing interest rate swap agreement applicable to $25.0 million outstanding debt under the Term Loan, for which we pay a fixed rate of 2.015% and receive a credit based on the applicable LIBOR rate.

In connection with the amendment to the BBVA Credit Agreement and the additional borrowing on May 15, 2018, we entered into an additional $11.0 million notional interest rate swap agreement applicable to the $22.0 million additional debt under the 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.

In order to hedge against changes in interest rates and to manage

fluctuations in cash flows resulting from interest rate risk, we entered into amortizing interest rate swap agreements (i) on June 30, 2017, with respect to $25.0 million of outstanding debt under the Term Loan, for which we pay a fixed rate of 2.015%, (ii) on May 15, 2018,with respect to $11.0 million of the $22.0 million of additional debt that we borrowed under the Term Loan on that date, for which we pay a fixed percentage rate of 3.01%, (iii) on October 1, 2019, with respect to $5.9 million of the $10.0 million of additional debt that we borrowed under the Term Loan on that date, for which we pay a fixed interest rate of 1.58% and (iv) on February 27, 2020, with respect to $26.3 million of additional debt that we borrowed under the Term Loan on that date, for which we pay a fixed percentage rate of 1.24% and, in each case, under which receive a credit based on the applicable LIBOR rate.

At September 30, 2020, we had a total of $92.9 million of variable rate borrowings outstanding.

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We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, and therefore are not required to provide the information called for by this Item.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis