What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2020-12-11 compared with 2019-12-13 · 287 added, 374 removed, 743 unchanged (47% of the section changed)

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Report of Independent Registered Public Accounting Firm

Audited Consolidated Financial Statements

Consolidated Balance Sheets at September 30, 2020 and September 30, 2019

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Notes to Consolidated Financial Statements

Table of Con t e n t s

Report of Independent Registered Public Accounting Firm

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and its subsidiaries (the Company) as of September 30, 2020 and 2019, the related consolidated statements of income, stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

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December 11, 2020

Table of Con t e n t s

CONSTRUCTION PARTNERS, INC.

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Property, plant and equipment, net 237,230 205,870

Operating lease right-of-use assets 7,383 —

Goodwill 46,348 38,546

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Billings in excess of costs and estimated earnings on uncompleted contracts 33,704 31,115

Current maturities of debt 7,538 14,773

Current portion of operating lease liabilities 2,046 —

Current maturities of long-term debt 13,000 7,538

Accrued expenses and other current liabilities 22,347 19,078

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Long-term debt, net of current maturities 79,053 42,458

Operating lease liabilities, net of current portion 5,554 —

Deferred income taxes, net 14,003 11,480

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Class B common stock, par value $ 0.001 ;

100,000,000 shares authorized, 22,106,961 shares issued and 19,184,009 shares outstanding at September 30, 2019, and 42,387,571 issued and 39,464,619 outstanding at September 30, 2018

100,000,000 shares authorized, 20,828,813 shares issued and 17,905,861 shares outstanding at September 30, 2020, and 22,106,961 shares issued and 19,184,009 shares outstanding at September 30, 2019

Additional paid-in capital 245,022 243,452

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See notes to consolidated financial statements.

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CONSTRUCTION PARTNERS, INC.

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General and administrative expenses ( 68,597 ) ( 62,724 )

Settlement income — 14,803

Gain on sale of equipment, net 1,616 1,909

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Interest expense, net ( 3,113 ) ( 1,861 )

Other income (expense) 416 ( 101 )

Other income 336 416

Income before provision for income taxes and earnings from investment

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See notes to consolidated financial statements.

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CONSTRUCTION PARTNERS, INC.

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(in thousands, except share data)

Common Stock Class A Common Stock Class B Common Stock Additional

Class A Common Stock Class B Common Stock Additional

Capital Treasury

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Stockholders’

Shares Amount Shares Amount Shares Amount

Shares Amount Shares Amount

Balance, September 30, 2018 11,950,000 $ 12 42,387,571 $ 42 $ 242,493 $ ( 15,603 ) $ 72,525 $ 299,469

Reclassification of common stock ( 44,987,575 ) ( 45 ) — — 44,987,571 45 — — — —

Initial public offering of Class A common stock, net of offering costs — — 9,350,000 9 — — 98,000 — — 98,009

Conversion of Class B common stock to Class A common stock 20,355,202 20 ( 20,355,202 ) ( 20 ) — — — —

Issuance of restricted shares from treasury — — — — — — ( 453 ) 458 — 5

Cashless option exercise — — — — — — 1,586 ( 4,078 ) — ( 2,492 )

Issuance of stock grant awards 292,534 — — — — — — —

Stock option exercise — — 74,592 — 3 — — 3

Equity-based compensation expense — — — — 957 — — 957

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Conversion of Class B common stock to Class A common stock 1,278,148 1 ( 1,278,148 ) ( 1 ) — — — —

Issuance of stock grant awards — — 292,534 — — — — — — —

Stock option exercise — — — — 74,592 — 3 — — 3

Equity-based compensation expense — — — — 1,570 — — 1,570

Effect of adopting ASU Topic 842 (see Note 3) — — — — — — ( 222 ) ( 222 )

Net income — — — — — — 40,297 40,297

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See notes to consolidated financial statements.

Table of Con t e n t s

CONSTRUCTION PARTNERS, INC.

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Amortization of deferred debt issuance costs 170 109

Loss on derivative instruments 1,900 565

Provision for bad debt 705 995

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Earnings from investment in joint venture ( 603 ) ( 1,337 )

Distribution of earnings from investment in joint venture 540 —

Deferred income taxes 3,310 2,997

Other non-cash adjustments ( 5 ) —

Changes in operating assets and liabilities:

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Business acquisitions, net of cash acquired ( 30,191 ) ( 13,854 )

Investment in joint venture — ( 400 )

Distributions received from investment in joint venture 361 2,500

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Cash flows from financing activities:

Repayments on revolving credit facility — ( 5,000 )

Proceeds from issuance of long-term debt, net of debt issuance costs and discount 72,299 —

Repayments of long-term debt ( 13,001 ) ( 12,361 )

Payment to seller of pre-acquisition balance due — ( 4,940 )

Principal payments of long-term debt ( 30,412 ) ( 13,001 )

Payment of treasury stock purchase obligation — ( 569 )

Proceeds from initial public offering of Class A common stock, net of offering costs — 98,009

Proceeds from sale of stock — 3

Net cash (used in) provided by financing activities ( 13,567 ) 95,061

Net cash provided by (used in) financing activities 41,887 ( 13,567 )

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

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Cash paid for income taxes $ 9,905 $ 9,119

Cash paid for operating lease liabilities $ 3,228 $ —

Non-cash items:

Operating lease right-of-use assets obtained in exchange for operating lease liabilities $ 1,516 $ —

Property, plant and equipment financed with accounts payable $ 2,761 $ 904

See notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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Construction Partners, Inc.

(the “Company”) is a leading infrastructure and road construction company operating in Alabama, Florida, Georgia, North Carolina and South Carolina through its wholly owned subsidiaries.

The Company provides site development, paving, utility and drainage systems services, as well as hot mix asphalt (“HMA”), aggregates, ready-mix concrete, and liquid asphalt cement supply.

The Company executes projects for a mix of private, municipal, state, and federal customers that are both privately and publicly funded.

The majority of the 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.

(“CPHI”), a Delaware corporation incorporated in 1999 that began operations in 2001, to execute an acquisition growth strategy in the HMA paving and construction industry.

(the “Company”) is a civil infrastructure company that specializes in the construction and maintenance of roadways across Alabama, Florida, Georgia, North Carolina and South Carolina.

Through its wholly owned subsidiaries, the Company provides a variety of products and services to both public and private infrastructure projects, with an emphasis on highways, roads, bridges, airports, and commercial and residential developments.

The Company’s primary operations consist of (i) manufacturing and distributing hot mix asphalt (“HMA”) for both internal use and sales to third parties in connection with construction projects, (ii) paving activities, including the construction of roadway base layers and application of asphalt pavement, (iii) site development, including the installation of utility and drainage systems, (iv) mining aggregates, such as sand and gravel, that are used as raw materials in the production of HMA, and (v) distributing liquid asphalt cement for both internal use and sales to third parties in connection with HMA production.

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

On December 31, 2019, Construction Partners Holdings, Inc.

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

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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The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“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, 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, business acquisition accounting estimates, 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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All inter-company balances and transactions have been eliminated in consolidation.

Common share and per share amounts have been retroactively adjusted for all periods presented to give effect to the Stock Split described in Note 12 - Equity.

Emerging Growth Company

The Company is an “emerging growth company” as defined by the Jumpstart Our Business Startups Act (the “JOBS Act”) enacted in April 2012.

The Company is an “emerging growth company” as defined by the Jumpstart Our Business Startups Act (the “JOBS Act”) enacted in 2012.

As an emerging growth company, the Company could have taken advantage of an exemption that would have allowed the Company to wait to comply with new or revised financial accounting standards until the effective date of such standards for private companies.

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Contracts Receivable Including Retainage, net

Contracts receivable are generally based on amounts billed and currently due from customers, amounts currently due but unbilled, and amounts retained by the customer pending completion of a project.

It is common in the Company’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

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are included on the Consolidated Balance Sheet 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.

Contracts receivable are generally based on amounts billed and currently due from customers, amounts currently due but unbilled, and amounts retained by customers pending completion of a project.

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 the applicable contract terms.

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.

The carrying value of contracts receivable including retainage, net of the allowance for doubtful accounts represents their estimated net realizable value.

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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 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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Projects performed for various Departments of Transportation accounted for 32.5 % and 40.4 % of consolidated revenues for the fiscal years ended September 30, 2020 and 2019, respectively.

Two customers accounted for more than 10% of consolidated revenues for the fiscal years ended September 30, 2019 and 2018, as follows:

Customers that accounted for more than 10.0% of consolidated revenues during either of those periods are presented below:

% of Consolidated

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North Carolina Department of Transportation 7.8 % 13.1 %

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The Company’s inventories are stated at the lower of cost or net realizable value and are accounted for on an average cost basis or a first-in, first-out cost basis.

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Year Ended September 30,

Private 30.7 % 28.6 %

Public 65.3 % 69.3 %

Private 34.7 % 30.7 %

Revenues derived from construction projects are recognized over time as the Company satisfies its performance obligations by transferring control of the asset created or enhanced by the project to the customer.

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Management reviews contract estimates regularly to assess revisions of estimated costs to complete a project and measurement of progress toward completion.

Revisions in estimates related to amounts recorded in prior periods resulted in the Company recording net increases in revenues of $ 3.8 million and $ 6.9 million during the fiscal years ended September 30, 2019 and 2018, respectively.

During the fiscal years ended September 30, 2020 and 2019, revisions in estimates related to amounts recorded in prior periods resulted in the Company recording net increases in revenues of $ 1.6 million and $ 3.8 million, respectively.

Management believes the Company maintains reasonable estimates based on prior experience;

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Each of the Company’s construction contracts represents a single performance obligation to complete a defined construction project.

This is because goods and services promised for delivery to a customer are not distinct, as the customer cannot benefit from any individual portion of the services on its own.

This is because goods and services promised for

delivery to a customer are not distinct, as the customer cannot benefit from any individual portion of the services on its own.

All deliverables under a contract are part of a project defined by a customer and represent a series of integrated goods and services that have the same pattern of delivery to the customer and use the same measure of progress toward satisfaction of the performance obligation as the customer’s asset is created or enhanced by the Company.

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Revenue recognized during a reporting period is based on the cost-to-cost input method applied to the total transaction price, including adjustments for variable consideration, such as liquidated damages, penalties or bonuses, related to the timeliness or quality of project performance.

The Company includes variable consideration in the estimated transaction price at the most likely amount to which the

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Company expects to be entitled or the most likely amount the Company expects to incur, in the case of liquidated damages or penalties.

The Company includes variable consideration in the estimated transaction price at the most likely amount to which the Company expects to be entitled or the most likely amount the Company expects to incur, in the case of liquidated damages or penalties.

Such amounts are included in the transaction price for which it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is resolved.

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

The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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.

Fair value is 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:

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The Company also has term loans and a revolving credit facility, as described in Note 11 - 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 September 30, 2019 and 2018.

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 September 30, 2020 and 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 commodity and interest rate swaps are based on forward and spot prices, as described in Note 22 - Fair Value Measurements.

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

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Property, Plant and Equipment

Property, plant and equipment are recorded at cost and depreciated on a straight-line basis over their estimated useful lives.

Property, plant and equipment are initially recorded at cost or, if acquired as a business combination, at fair value and depreciated on a straight-line basis over their estimated useful lives.

Leasehold improvements for operating leases are amortized over the lesser of the term of the related lease or the estimated useful lives of the improvements.

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Asset improvements are capitalized at cost and amortized over the remaining useful life of the related asset.

The useful lives of property, plant and equipment categories are as follows:

The estimated useful lives of property, plant and equipment categories are as follows:

Category Estimated Useful Life

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If the analysis warrants a change in the estimated useful life of property, plant and equipment, management will reduce the estimated useful life and depreciate, deplete or amortize the carrying value prospectively over the shorter remaining useful life.

The carrying amounts of assets sold or retired and the related accumulated depreciation are eliminated in the period of disposal, and the resulting gains and losses are included in the results of operations during the same period.

Impairment of Long-Lived Assets

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If indicators of potential impairment are present, management performs a recoverability test and, if necessary, records an impairment loss.

If the total estimated future undiscounted cash flows to be generated from the use and ultimate disposition of an asset or asset group is less than its carrying value, an impairment loss is recorded in the Company’s results of operations, measured as the amount required to reduce the carrying value to fair value.

If the total estimated future undiscounted cash flows to be generated from the use and ultimate disposition of an asset or asset group is less than its carrying value, an impairment loss is recorded in the Company’s Consolidated Statements of Income, measured as the amount required to reduce the carrying value to fair value.

Fair value is determined in accordance with the best available information based on the hierarchy described under “Fair Value Measurements” above.

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Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of net assets acquired and liabilities assumed in a business combination.

Other intangible assets consist of an indefinite-lived name license in connection with a business acquired, and finite-lived assets including a non-compete agreement, customer relationships and construction backlog, each acquired in business acquisitions.

Goodwill represents the excess of the purchase price over the fair value of net assets acquired and liabilities assumed in business combinations.

Other intangible assets consist of an indefinite-lived trade name license in connection with a business acquired, and finite-lived assets, including a non-compete agreement, customer relationships and construction backlog, each acquired in business acquisitions.

Goodwill and indefinite-lived intangible assets are not amortized, but are reviewed for impairment at least annually, or more frequently when events or changes in circumstances indicate that the carrying value may not be recoverable.

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In accordance with GAAP, the Company may assess its goodwill for impairment initially using a qualitative approach to determine whether conditions exist to indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value.

If management concludes, based on its assessment of relevant events, facts and

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circumstances, that it is more likely than not that a reporting unit’s carrying value is greater than its fair value, then a quantitative analysis will be performed to determine whether there is any impairment.

If management concludes, based on its assessment of relevant events, facts and circumstances, that it is more likely than not that a reporting unit’s carrying value is greater than its fair value, then a quantitative analysis will be performed to determine whether there is any impairment.

The Company may also elect to initially perform a quantitative analysis instead of starting with a qualitative assessment.

Because the Company has only one reporting unit, a market capitalization calculation can be performed as the first step of the quantitative assessment by comparing the book value of the Company’s stock (determined by reference to the Company’s stockholders’ equity) to the fair market value of a share of the Company’s stock.

If the fair value of the stock is greater than the calculated book value of the stock, goodwill is deemed not to be impaired, and no further testing is required.

If the fair value of the stock is greater than the book value of the stock, goodwill is deemed not to be impaired, and no further testing is required.

If the fair value is less than the calculated book value, then the Company must take a second step to determine the impairment amount, as described below.

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If the fair value of the respective reporting unit exceeds its carrying amount, goodwill is not considered to be impaired, and no further testing is required.

If the carrying amount of a reporting unit exceeds its fair value, an impairment charge is recorded to write down goodwill to its fair value and is recorded in the Company’s results of operations.

If the carrying amount of a reporting unit exceeds its fair value, an impairment charge is recorded to write down goodwill to its fair value and is recorded in the Company’s Consolidated Statements of Income.

The Company performed a quantitative assessment of goodwill using the market capitalization calculation for fiscal years 2020 and 2019 and determined that the fair value of its reporting unit exceeded its carrying value, and thus concluded that the carrying value of goodwill was not impaired at September 30, 2020 or 2019.

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Management tests indefinite-lived intangible assets for impairment by comparing their carrying value to their estimated fair value.

An impairment loss is recorded in the Company’s results of operations to the extent that the carrying value of an indefinite-lived intangible asset exceeds its fair value.

An impairment loss is recorded in the Company’s Consolidated Statements of Income to the extent that the carrying value of an indefinite-lived intangible asset exceeds its fair value.

Similar to the assessment of goodwill, events and changes in circumstances could cause management to utilize different assumptions in subsequent evaluations, which could materially impact the results of an impairment assessment.

Management concluded that the carrying value of the Company’s indefinite-lived intangible assets other than goodwill was not impaired at September 30, 2019 or September 30, 2018.

Management concluded that the carrying value of the Company’s indefinite-lived intangible assets other than goodwill was not impaired at September 30, 2020 or 2019.

Deferred Debt Issuance Costs

Costs directly associated with obtaining debt financing are deferred and amortized over the term of the related debt agreement.

Unamortized amounts related to long-term debt are reflected on the Consolidated Balance Sheet as a direct deduction from the carrying amount of the related long-term debt liability.

Unamortized amounts related to long-term debt are reflected on the Consolidated Balance Sheets as a direct deduction from the carrying amount of the related long-term debt liability.

Comprehensive Income

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Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which the temporary differences are expected to be reversed or settled.

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.

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.

We recognize the financial statement benefit of the Company’s tax positions that are at least more likely than not to be sustained upon audit based on the technical merits of the tax position.

For tax positions that are more likely than not to be sustained upon audit, management accrues the largest amount of the benefit that is more likely than not to be sustained.

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

Refer to Note 15 - Provision for Income Taxes for further information regarding our federal and state income taxes.

Equity-Based Incentive Plans

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Compensation cost for graded-vesting awards is recognized ratably over the respective vesting periods.

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Accrued Insurance Costs

The Company carries insurance policies to cover various risks, including primarily general liability, automobile liability and workers’ compensation, under which it is liable to reimburse the insurance company for a portion of each claim paid.

The Company carries insurance policies to cover various risks, primarily including general liability, automobile liability and workers’ compensation, under which it is liable to reimburse the insurance company for a portion of each claim paid.

The amount for which the Company is liable for general liability, automobile liability and workers’ compensation claims ranges from $ 100,000 to $ 500,000 per occurrence.

Management accrues for probable losses, both reported and unreported, that are reasonably estimable using actuarial methods based on historic trends modified, if necessary, by recent events.

Management accrues insurance costs for probable losses, both reported and unreported, that are reasonably estimable using actuarial methods based on historic trends modified, if necessary, by recent events.

Changes in loss assumptions caused by changes in actual experience would affect the assessment of the ultimate liability and could have an effect on the Company’s operating results and financial position up to $ 500,000 per occurrence for general liability, automobile liability and workers’ compensation claims.

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The Company operates in Alabama, Florida, Georgia, North Carolina and South Carolina through its wholly owned subsidiaries located in four southeastern states.

Each of the Company’s platform operating companies engages in essentially the same business, primarily infrastructure and road construction.

Each of the Company’s platform operating companies engages in essentially the same business, which consists primarily of infrastructure and road construction.

Management determined that the Company functions as a single operating segment, and thus reports as a single reportable segment.

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Collectively, these presidents are directly accountable to, and maintain regular contact with, the CODM as a team to discuss operating activities, financial results, forecasts, and operating plans for the Company’s single operating segment.

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

In May 2014, the FASB issued Accounting Standards Update No.

2014-09, Revenue from Contracts with Customers (Topic 606) , which added a new ASC Topic 606 (“ASC 606”).

ASC 606 revises and consolidates prior guidance, eliminates industry-specific revenue recognition guidance and establishes a comprehensive principle-based approach for determining revenue recognition.

The core principle of the guidance is that an entity must recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for providing those goods or services.

ASC 606 sets forth a five-step revenue recognition model to be applied consistently to all contracts with customers, except those that

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are within the scope of other topics in the ASC:

(i) identify the contract with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

The update also provides guidance regarding the recognition of costs related to obtaining and fulfilling customer contracts.

This update also requires quantitative and qualitative disclosures sufficient to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including disclosures on significant judgments made when applying the guidance.

The FASB subsequently amended ASC 606 on multiple occasions to, among other things, delay its effective date and clarify certain implementation guidance.

Management adopted this update for the Company’s fiscal year beginning October 1, 2018, using a modified retrospective approach.

Under this approach, the Company’s financial statements are prepared under the revised guidance for the year of adoption, but not for prior years, and the Company recognizes a cumulative adjustment to the opening balance of retained earnings for contracts that still require performance by the Company at the date of adoption.

The adoption of ASC 606 on October 1, 2018 did not result in a material impact that required recognition of a cumulative adjustment of the opening retained earnings balance for contracts that still required performance at September 30, 2018.

Application of ASC 606 for the fiscal year ended September 30, 2019 had the following impact on the Company’s Consolidated Balance Sheet at September 30, 2019 and Consolidated Statement of Income for the fiscal year ended September 30, 2019 (in thousands):

At September 30, 2019 As Reported Impact of ASC 606 Without Application of ASC 606

Costs and estimated earnings in excess of billings on uncompleted contracts $ 12,030 $ ( 599 ) $ 12,629

Inventories $ 34,291 $ 1,602 $ 32,689

Accrued expenses and other current liabilities $ 19,078 $ ( 39 ) $ 19,039

Billings in excess of costs and estimated earnings on uncompleted contracts $ 31,115 $ 1,167 $ 29,948

For the Fiscal Year Ended September 30, 2019

Revenues $ 783,238 $ ( 1,766 ) $ 785,004

Cost of revenues $ 665,285 $ ( 1,602 ) $ 666,887

Provision (benefit) for income taxes $ 13,909 $ ( 39 ) $ 13,948

Net income $ 43,121 $ ( 125 ) $ 43,246

The Company has refined its accounting policies and related internal controls affected by ASC 606.

Management’s assessment of the Company’s construction contracts under the new standard supports the recognition of revenue over time using the cost-to-cost input method (formerly known as the percentage-of-completion method of accounting), measured by the relationship of total cost incurred to total estimated contract costs, which is consistent with the Company’s historical revenue recognition practices.

As such, the Company’s construction contracts continue to be recognized over time considering the continuous transfer of control to its customers during the performance of construction projects.

The Company also enhanced its disclosures regarding judgments and estimates used by management in the application of ASC 606 in Note 2 - Significant Accounting Policies.

In January 2017, the FASB issued Accounting Standards Update (“ASU”) No.

2017-01, Business Combinations (Topic 805):

Clarifying the Definition of a Business (“ASC 805”).

The amendments of this update refine the definition of a business.

Prior to this update, guidance in ASC 805 defined a business as having an integrated set of assets along with three elements or activities:

inputs, processes, and outputs (collectively referred to as a “set”).

ASC 805 provides a framework to assist in the evaluation of whether a set is a business.

If substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business.

If that threshold is not met, the Company must perform further analysis to determine whether the set is a business.

At a minimum, the set must include an input and a substantive process that together significantly contribute to the ability to create outputs.

The Company adopted this update for the Company’s fiscal year beginning October 1, 2018 and applied the guidance to acquisitions during the fiscal year ended September 30, 2019 as described in Note 4 - Business Acquisitions and Note 8 - Property, Plant and Equipment.

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 Consolidated Balance Sheets as described below.

Prior to the 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 Sheets.

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 were, or contained, leases.

Accordingly, prior comparable periods were not restated.

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.

At the inception of a contractual arrangement, the Company determines whether a contract contains a lease by assessing whether the contract conveys to the Company the right to control the use of an identified asset in exchange for consideration over a period of time.

If so, the Company measures and records an operating lease liability equal to the present value of the future lease payments.

Because most of the Company’s leases do not provide an implicit rate, the Company’s incremental borrowing rate is used in determining the present value of lease payments.

The amount of the operating lease right-of-use asset consists of:

(i) the amount of the initial measurement of the operating lease liability;

(ii) any lease payments made at or before the commencement date, minus any lease incentives received;

and (iii) any initial direct costs incurred.

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 of Topic 842 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

The FASB has issued certain ASUs that are applicable to the Company and will be adopted in future periods.

The FASB has issued certain Accounting Standards Updates (“ASUs”) that are applicable to the Company and will be adopted in future periods.

The consolidated financial statements and related disclosures for the fiscal years ended September 30, 2020 and 2019 do not reflect the requirements of this guidance.

The following is a brief description of the recently issued ASUs and management’s current assessment regarding the methods, timing and impact of adoption of such ASUs by the Company in the future.

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In February 2016, the FASB issued ASU No.

2016-02, Leases (Topic 842) and subsequently issued related ASUs that require lessees to present right-of-use assets and lease liabilities on the balance sheet for most leases.

The ASU will be effective commencing with the Company’s fiscal quarter ending December 31, 2019.

The Company will adopt the new guidance using a modified retrospective approach, recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

The Company anticipates applying the optional package of practical expedients upon adoption.

Based on a preliminary assessment, management expects the adoption of this ASU to result in the recognition of $ 9.0 million to $ 10.0 million of right-of-use assets and lease liabilities on the Company’s Consolidated Balance Sheet, with an immaterial impact to the opening balance of retained earnings.

In August 2016, the FASB issued ASU No.

2016-15, Statement of Cash Flows (Topic 230):

Classification of Certain Cash Receipts and Cash Payments , which provides guidance on eight cash flow classification issues:

debt prepayment and debt extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle.

The amendments of this update are effective for fiscal years beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019.

Early adoption is permitted, including adoption in an interim period.

If an entity early adopts the amendments in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period.

The Company expects to adopt this guidance as required and does not expect a material impact to the Company’s consolidated financial statements.

The following is a brief description of recently issued ASUs and management’s current assessment regarding the methods, timing and impact of adoption of such ASUs by the Company in the future.

In June 2016, the FASB issued 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 does not expect such adoption to cause a material impact to the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”).

This ASU requires customers in a hosting arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project.

ASU 2018-15 is 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 does not expect such adoption to cause a material impact to the Company’s consolidated financial statements.

Note 4 - Business Acquisitions

The Scruggs Company

On May 15, 2018, the Company acquired all of the common shares and voting interests of The Scruggs Company ( “ Scruggs ” ).

The acquisition complemented the Company ’ s vertically integrated southeastern United States operations, providing new bidding areas in the expanding Georgia market.

This acquisition was accounted for as a business combination in accordance with ASC 805 .

Management completed the purchase price allocation for this acquisition during the fiscal year ended September 30, 2018.

Identifiable assets acquired and liabilities assumed were recorded at their estimated fair values based on the methodology described under “Fair Value Measurements” in Note 2 - Significant Accounting Policies.

The fair values of assets acquired and liabilities assumed, and the estimated useful lives of intangible assets acquired, were as follows (in thousands):

Contracts receivable including retainage $ 9,184

Costs and estimated earnings in excess of billings on uncompleted contracts 1,787

Inventory 4,323

Other current assets (1)

Property, plant and equipment:

Construction equipment 17,571

Quarry reserves 13,986

Land and land improvements 7,302

Buildings 1,552

Backlog intangible (2)

Customer relationship (3)

Goodwill 2,319

Accounts payable ( 3,646 )

Billings in excess of costs and estimated earnings on uncompleted contracts ( 4,589 )

Current maturities of long-term debt ( 358 )

Other current liabilities ( 1,770 )

Payable to seller ( 4,940 )

Long-term debt, net of current maturities ( 744 )

(1) Other current assets excludes cash acquired.

(2) The estimated useful life of the backlog intangible asset is 17 months.

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(3) The estimated useful life of the customer relationship intangible is 8 years.

The amount of the purchase price exceeding the net fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill.

Under the terms of the Stock Purchase Agreement, the parties made a Section 338(h)(10) election under the Internal Revenue Code.

Accordingly, goodwill, the backlog intangible and customer relationship intangible assets allocated to the purchase price and the step-up to fair value of property, plant and equipment reflected in the acquisition date balance sheet are deductible by the Company for income tax purposes.

Goodwill primarily represents the assembled work force and synergies expected to result from the acquisition.

The Consolidated Statement of Income for the fiscal year ended September 30, 2018 includes $ 35.8 million of revenue and $ 3.5 million of net income attributable to the operations of Scruggs.

The following table presents pro forma revenues and net income as though the Company had acquired Scruggs on October 1, 2017 (unaudited, in thousands):

For the Fiscal Year Ended September 30, 2018

Pro forma revenues $ 735,197

Pro forma net income 55,558

Pro forma financial information is presented as if the operations of Scruggs had been included in the consolidated results of the Company since October 1, 2017, and gives effect to transactions that are directly attributable to Scruggs, including adjustments to:

Include the pro forma results of operations of Scruggs for the fiscal year ended September 30, 2018.

Include additional depreciation and depletion expense related to the fair value of acquired property, plant and equipment and quarry reserves, as applicable, as if such assets were acquired on October 1, 2016, and the Company ’ s depreciation and depletion methodologies were consistently applied to such assets.

Include interest expense under the Term Loan, d efined in Note 11 - Debt, as if the $ 22.0 million borrowed to partially finance the purchase price was borrowed on October 1, 2016.

Interest expense calculations further assume that no principal payments were made applicable to the $ 22.0 million borrowed during the period from October 1, 2016 through September 30, 2018, and that the interest rate in effect on the date the Company made the additional $ 22.0 million borrowing on May 15, 2018 was in effect for the period from October 1, 2016 through September 30, 2018.

Pro forma information is presented for informational purposes and may not be indicative of revenue or net income that would have been achieved if the Company had acquired Scruggs on October 1, 2017.

Alabama Acquisition

Alabama Acquisition - July 2019

On July 12, 2019, a subsidiary of the Company acquired substantially all of the assets of an HMA manufacturing plant and paving company located near Gadsden, Alabama.

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The amounts allocated were not material to the Company’s Consolidated Balance Sheet.

The amounts allocated were not material to the Company’s Consolidated Balance Sheets.

The amount of the purchase price exceeding the net fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill in the amount of approximately $ 2.4 million, which is deductible for income tax purposes.

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The Company recorded certain costs to effect the acquisition as they were incurred, which are reflected as general and administrative expenses on the Consolidated Statements of Income in the amount of $ 0.1 million for the fiscal year ended September 30, 2019.

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Florida Acquisition

Florida Acquisition - February 2019

On February 28, 2019, a subsidiary of the Company acquired substantially all of the assets of an HMA and ready-mix concrete business located in Okeechobee, Florida.

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The amounts allocated were not material to the Company’s Consolidated Balance Sheet.

The amounts allocated were not material to the Company’s Consolidated Balance Sheets.

The purchase price exceeding the net fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill and other identifiable intangible assets, including customer relationships and customer backlog, in the amount of $ 3.2 million, which is deductible for income tax purposes.

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

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

Identifiable assets acquired and liabilities assumed were recorded at their estimated fair values based on the methodology described under Fair Value Measurements in Note 2 - Significant Accounting Policies.

The amounts allocated were not material to the Company’s Consolidated Balance Sheets.

The amount of the purchase price exceeding the net fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill in the amount of approximately $ 7.7 million, which is deductible for income tax purposes.

Goodwill primarily represents the assembled work force and synergies expected to result from the acquisition.

The results of operations since the October 1, 2019 acquisition date attributable to this acquisition are included in the Company's consolidated financial statements and were not material to the Consolidated Statements of Income for the fiscal year ended September, 30, 2020.

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 fiscal year ended September 30, 2020.

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.

The acquisition was 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 $ 2.7 million of cash paid for plant inventory.

The amounts allocated were not material to the Company’s Consolidated Balance Sheets.

The amount of the purchase price exceeding the net fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill in the amount of approximately $ 0.1 million, which is deductible for income tax purposes.

Goodwill primarily represents the assembled work force and synergies expected to result from the acquisition.

The results of operations since the March 23, 2020 acquisition date attributable to this acquisition are included in the Company's consolidated financial statements and were not material to the Consolidated Statements of Income for the fiscal year ended September, 30, 2020.

Pro forma results of operations as if the acquisition had been consummated October 1, 2019 would not be material to the Consolidated Statements of Income.

Combined Acquisitions Completed During the Fiscal Year Ended September 30, 2020

For acquisitions completed during the fiscal year ended September 30, 2020, we paid combined consideration of $ 30.2 million, allocated as follows:

$ 3.1 million of inventory, $ 19.3 million of property, plant and equipment and goodwill of $ 7.8 million.

The Consolidated Statement of Income for the fiscal year ended September 30, 2020 includes $ 42.9 million of revenue attributable to the operations of fiscal year 2020 acquisitions from their respective acquisition dates through September 30, 2020.

Unaudited pro forma revenues, as if the fiscal year 2020 acquisitions had been completed as of October 1, 2018, are $ 793.7 million and $ 831.8 million for the fiscal years ended September 30, 2020 and 2019, respectively.

Pro forma information is presented for informational purposes and may not be indicative of revenue that would have been achieved if the acquisitions had actually occurred on October 1, 2018.

Note 5 - Contracts Receivable Including Retainage, net

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

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Note 6 - Contract Assets and Liabilities

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At September 30, 2020, the Company had unsatisfied or partially unsatisfied performance obligations under construction project contracts representing approximately $ 469.7 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 $ 386.2 million during the fiscal year ending September 30, 2020 and approximately $ 94.9 million thereafter.

The Company expects to earn revenue as it satisfies

its performance obligations under those contracts in the amount of approximately $ 421.0 million during the fiscal year ending September 30, 2021 and approximately $ 48.7 million thereafter.

Note 7 - Other Assets

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Total prepaid expenses and other current assets $ 5,041 $ 13,144

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The settlement receivable was received in full during the fiscal year ended September 30, 2020 (See Note 20 - Settlement Agreement).

Other assets consisted of the following at September 30, 2020 and 2019 (in thousands):

September 30,

Settlement receivable $ — $ 7,224

Notes receivable $ 1,622 $ 2,124

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Total property, plant and equipment, net $ 237,230 $ 205,870

On February 28, 2019, the Company acquired a liquid asphalt terminal located in Panama City, Florida.

The purchase price of $ 10.9 million was paid from cash on hand on the acquisition date.

The Company uses the terminal to receive, store and process liquid asphalt primarily for use in its construction projects.

The transaction was accounted for as an asset acquisition in accordance with ASC 805.

Accordingly, the purchase price and direct costs of $ 0.1 million incurred to complete the transaction were allocated to asset categories based on their relative fair value at the date of acquisition.

Depreciation, depletion and amortization expense related to property, plant and equipment for the fiscal years ended September 30, 2020 and 2019 was $ 39.1 million and $ 30.1 million, respectively.

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Note 9 - Goodwill and Other Intangible Assets

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Indefinite-lived:

License Indefinite $ 2,000 $ — $ 2,000 $ 2,000 $ — $ 2,000

License Indefinite $ 2,000 N/A $ 2,000 $ 2,000 N/A $ 2,000

Definite-lived:

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1,645 ( 435 ) 1,210 1,645 ( 229 ) 1,416

Acquired construction backlog 7 - 17 months

820 ( 820 ) — 594 ( 157 ) 437

Non-compete agreements 5 years

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Accrued payroll and benefits $ 17,123 $ 15,173

Treasury stock purchase obligation — 569

Accrued insurance costs 2,662 1,761

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Total accrued expenses and other current liabilities $ 22,347 $ 19,078

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Other Long-Term Liabilities

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Note 11 - 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.

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

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

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Long-term debt, net of current maturities $ 79,053 $ 42,458

BBVA Credit Agreement

The Company and each of its subsidiaries are parties to a credit agreement with BBVA USA (formerly known as Compass Bank), as agent, issuing bank and a lender, and certain other lenders (as amended, the “BBVA Credit Agreement”).

The BBVA Credit Agreement provides for a term loan (the “Term Loan”) and a revolving credit facility (the “Revolving Credit Facility”).

The Credit Agreement provides for a term loan (the “Term Loan”) and a revolving credit facility (the “Revolving Credit Facility”).

The obligations of the Company and its subsidiaries under the Credit Agreement are secured by a first priority security interest in substantially all of the Company’s assets.

Following an amendment and restatement of the Credit Agreement in July 2020, the principal amount of Term Loan advances made prior to April 30, 2020 is repaid in quarterly installments of $ 2,050,000 , and the principal amount of Term Loan advances made on or after April 30, 2020 is repaid in quarterly installments of $ 1,200,000 , in each case beginning on September 30, 2020 and at the end of each calendar quarter thereafter.

Interest is due and payable on the last business day of each month.

In addition, the Company and its subsidiaries pay, among other fees:

(i) a quarterly unused revolver commitment fee equal to 0.20 % of the daily average amount of unused commitments under the Revolving Credit Facility during the quarter, (ii) a quarterly letter of credit fee equal to the greater of (A) $ 600 or (B) the product of either 0.70 % or 0.75 % (depending on the Company’s consolidated leverage ratio) and the aggregate average daily undrawn amounts of all letters of credit outstanding during the quarter and (iii) a letter of credit facility fee equal to 0.20 % of the face amount of each such letter of credit.

All outstanding advances under the Term Loan and the Revolving Credit Facility are due and payable in full on October 1, 2024.

The Company generally may (and must, under certain circumstances), subject to various requirements, prepay all or a portion of the outstanding balance of the advances, together with accrued interest thereon, prior to their contractual maturity.

At September 30, 2020 and 2019, there was $ 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 the borrower entities under the Term Loan and the Revolving Credit Facility are secured by a first priority security interest in substantially all of the Company’s 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 3.24 % and 4.24 %, 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 the Company paid prior to the August 2019 amendment.

The Company pays 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

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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, the Company’s fixed charge coverage ratio was 4.04 -to-1.00 and 1.51 -to-1.00, respectively, and the Company’s 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.

The Credit Agreement contains 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 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.

At September 30, 2020 and 2019,

the Company’s fixed charge coverage ratio was 2.85 -to-1.00 and 4.04 -to-1.00, respectively, and the Company’s consolidated leverage ratio was 1.08 -to-1.00 and 0.66 -to-1.00, respectively.

At both September 30, 2020 and 2019, the Company was in compliance with all covenants under the Credit Agreement.

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

On June 30, 2017, the Company entered into an interest rate swap agreement with a notional amount of $ 25.0 million, under which the Company pays a fixed percentage rate of 2.02 % and receives a credit based on the applicable LIBOR rate.

On May 15, 2018, the Company 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 the Company pays a fixed percentage rate of 3.01 % and receives a credit based on the applicable LIBOR rate.

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 liabilities or other assets on the Company’s 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.

Acquired Debt

In connection with the acquisition of Scruggs, the Company assumed $ 1.1 million of debt that had been used to finance equipment purchases and was collateralized by the purchased equipment.

These loans, included in other long-term debt in the table above, include (i) three zero-interest notes having an aggregate estimated fair value at the acquisition date of approximately $ 0.4 million (determined in accordance with the methodology described under “ Fair Value Measurements ” in Note 2 - Significant Accounting Policies) that require monthly payments and have maturity dates between February 2020 and May 2020, and (ii) approximately $ 0.7 million in other loans with fixed interest rates ranging from 4.50 % to 5.95 % that require monthly payments and have maturity dates ranging from 2019 through 2023.

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

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 on the Company’s Consolidated Balance Sheets.

The scheduled contractual repayment terms of long-term debt at September 30, 2020 were as follows:

Fiscal Year Amount

2021 $ 13,000

Total $ 92,850

Interest expense was $ 3.6 million and $ 3.3 million for the fiscal years ended September 30, 2020 and 2019, respectively.

Amortization of deferred issuance costs and debt discounts included in interest expense was $ 0.1 million for the fiscal years ended September 30, 2019 and 2018, respectively.

Amortization of deferred debt issuance costs and debt discounts included in interest expense was $ 0.2 million and $ 0.1 million for the fiscal years ended September 30, 2020 and 2019, respectively.

Note 12 - Equity

Reclassification of Common Stock and Initial Public Offering

O n April 23, 2018, the Company amended and restated its certificate of incorporation to effectuate a dual class common stock structure consisting of Class A common stock and Class B common stock.

Each share of common stock issued at that time was split into 25.2 shares (the “Stock Split”) and reclassified as Class B common stock (the “Reclassification”), resulting in 41,817,537 shares of Class B common stock outstanding and 3,170,034 shares of Class B common stock held by the Company in treasury.

All share and per share amounts have been retroactively adjusted for all periods presented to give effect to the Reclassification and Stock Split.

Shares of Class A common stock and Class B common stock are identical in all respects, except with respect to voting rights, conversion rights and transfer restrictions applicable to shares of Class B common stock.

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Shares of Class B common stock are convertible into shares of Class A common stock at any time at the option of the holder or upon any transfer, subject to certain limited exceptions.

In addition, upon the election of the holders of a majority of the then-outstanding shares

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of Class B common stock, all outstanding shares of Class B common stock will be converted into shares of Class A common stock.

In addition, upon the election of the holders of a majority of the then-outstanding shares of Class B common stock, all outstanding shares of Class B common stock will be converted into shares of Class A common stock.

Once converted into shares of Class A common stock, shares of Class B common stock will not be reissued.

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

On May 8, 2018, the Company completed its IPO, in which the Company and certain selling stockholders sold a total of 11,250,000 shares of Class A common stock at a price of $ 12.00 per share, less underwriting discounts and commissions.

Of these shares, 9,000,000 were sold by the Company and 2,250,000 were sold by holders of Class B common stock, which shares upon sale automatically converted into 2,250,000 shares of Class A common stock.

On May 24, 2018, the underwriters of the IPO partially exercised their over-allotment option to purchase an additional 700,000 shares of Class A common stock at a price of $ 12.00 per share, less underwriting discount and commissions.

Of these shares, 350,000 were sold by the Company and 350,000 were sold by holders of Class B common stock, which shares upon sale automatically converted into 350,000 shares of Class A common stock.

Conversion of Class B Common Stock to Class A Common Stock

During the fiscal year ended September 30, 2020, certain stockholders of the Company converted a total of 1,278,148 shares of Class B common stock into shares of Class A common stock on a one -for-one basis.

Following the conversions, there were 32,597,736 shares of Class A common stock and 19,184,009 shares of Class B common stock outstanding.

As of September 30, 2020, there were 33,875,884 shares of Class A common stock and 17,905,861 shares of Class B common stock outstanding.

Restricted Stock Awards and Options

During the fiscal year ended September 30, 2018, certain employees of the Company exercised non-plan options granted in 2010, resulting in the purchase of 768,984 shares of Class B common stock at a price of $ 5.70 per share.

These shares were issued from treasury shares at an average cost of $ 3.64 per share.

The transaction was executed as a net exercise.

In addition, the Company sold to certain employees a total of 126,000 restricted shares of common stock at a purchase price of $ 0.04 per share, which shares were converted to shares of Class B common stock in connection with the Reclassification.

All such shares vested during the fiscal year ended September 30, 2018.

During the fiscal year ended 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.

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In addition, an employee of the Company exercised an option to purchase 74,592 shares of Class B common stock at an exercise price of $ 0.0357 per share.

No restricted shares of Class A common stock were issued, and no options to purchase shares of Class A or Class B common stock were exercised, during the fiscal year ended September 30, 2020.

Additional information about these transactions is set forth in Note 14 - Equity-Based Compensation.

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The amendment changed the period within which the aggregate value of equity-based awards may be multiplied by two to be the calendar year in which a non-employee director is first granted equity-based awards under the Equity Incentive Plan.

Secondary Offering of Class A Common Stock

In September 2019, certain stockholders of the Company (the “Selling Stockholders”) completed an underwritten secondary offering (the “Secondary Offering”) of 5,000,000 shares of Class A common stock at a public offering price of $ 14.25 per share.

The Company did not receive any proceeds from the sale of shares by the Selling Stockholders and, pursuant to a registration rights agreement with the Selling Stockholders, incurred approximately $ 0.7 million in expenses in connection with the Secondary Offering.

Registration Rights Agreement

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The RRA Holders whose shares are registered must pay all incremental selling expenses relating to any offering, such as underwriters’ commissions and discounts, brokerage fees, underwriter marketing costs and any additional legal counsel that they may engage.

As of September 30, 2019, a total of 33,075,417 shares of the Company’s common stock were subject to the registration rights

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agreement, of which 14,225,000 shares had been previously registered but not yet sold.

As of September 30, 2020, a total of 22,235,744 shares of the Company’s common stock were subject to the Registration Rights Agreement, of which 4,848,010 shares had been previously registered but not yet sold.

The Registration Rights Agreement expires on May 4, 2023.

Secondary Offerings of Class A Common Stock

In September 2019, certain stockholders of the Company (the “Selling Stockholders”) completed an underwritten secondary offering (the “2019 Secondary Offering”) of 5,000,000 shares of Class A common stock at a public offering price of $ 14.25 per share.

In addition, the underwriters of the 2019 Secondary Offering exercised in full their option to purchase an additional 750,000 shares of Class A common stock from the Selling Stockholders.

The Company did not receive any proceeds from the sale of shares by the Selling Stockholders and, pursuant to the Registration Rights Agreement, incurred approximately $ 0.7 million in expenses in connection with the 2019 Secondary Offering.

In June 2020, the Selling Stockholders completed an underwritten secondary offering (the “2020 Secondary Offering”) of 5,750,000 shares of Class A common stock at a public offering price of $ 16.50 per share.

In addition, the underwriters of the 2020 Secondary Offering exercised in full their option to purchase an additional 862,500 shares of Class A common stock from the Selling Stockholders.

The Company did not receive any proceeds from the sale of shares by the Selling Stockholders and, pursuant to the Registration Rights Agreement, incurred approximately $ 0.2 million in expenses in connection with the 2020 Secondary Offering.

Note 13 - Earnings Per Share

As discussed in Note 12 - Equity, the Company has Class A common stock and Class B common stock.

Because the only difference between the two classes of common stock is related to voting rights, we have not presented earnings per share under the two class method, as the earnings per share are the same for both Class A common stock and Class B common stock.

Because the only differences between the two classes of common stock are related to voting rights, conversion rights and transfer restrictions applicable to shares of Class B common stock, the Company has not presented earnings per share under the two-class method, as the earnings per share are the same for both Class A common stock and Class B common stock.

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 Fiscal Year Ended September 30,

Net income attributable to common shareholders $ 43,121 $ 50,791

Net income attributable to common stockholders $ 40,297 $ 43,121

Weighted average number of common shares outstanding, basic 51,489,211 51,421,159

Net income per common share attributable to common shareholders, basic $ 0.84 $ 1.11

Net income per common share attributable to common stockholders, basic $ 0.78 $ 0.84

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):

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Effect of dilutive securities:

2010 non-plan stock option agreement options — 272,915

2019 restricted stock grants 147,723 6,061

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Restricted Stock Awards and Options

On February 23, 2018, the Company sold to certain employees a total of 126,000 restricted shares of common stock at a purchase price of $ 0.04 per share, which shares were issued from treasury shares and converted to shares of Class B common stock in connection with the Reclassification.

The Company recorded proceeds of $ 5,000 from the sale.

Half of the shares vested immediately on February 23, 2018, and the remaining half of the shares vested on July 1, 2018.

During the fiscal year ended September 30, 2018, the Company recorded compensation expense in connection with these grants in the amount of $ 1.0 million, which is reflected as general and administrative expenses on the Company’s Consolidated Statements of Income.

The Company also recorded a reduction to additional paid-in capital of approximately $ 0.5 million, representing the cost of treasury shares issued in excess of the purchase price paid by the employees.

The grant date fair value of the shares was estimated to be $ 7.78 per share.

At September 30, 2018, there was no unrecognized compensation expense related to the sale of these shares.

During the fiscal year ended 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 Equity Incentive Plan in lieu of cash compensation.

The grants are classified as equity awards.

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The aggregate grant date fair value of these restricted stock 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 fiscal year ended September 30, 2019, the Company recorded $ 0.5 million of compensation expense in connection with these grants, which is reflected as general and administrative expenses in the Company’s Consolidated Statements of Income.

During the fiscal years ended September 30, 2020 and 2019, the Company recorded $ 1.6 million and $ 0.5 million, respectively, of compensation expense in connection with these grants, which is reflected as general and administrative expenses in the Company’s Consolidated Statements of Income.

At September 30, 2020, there was approximately $ 1.7 million of unrecognized compensation expense related to these awards.

Option Exercises

In June 2018, certain employees of the Company exercised options to purchase a total of 768,984 shares of Class B common stock at a price of $ 5.70 per share.

The options were granted in 2010 pursuant to a non-plan option agreement and were classified as equity awards.

The shares were issued from the Company’s treasury at an average cost of approximately $ 3.64 per share.

The transaction was executed as a cashless exercise, through which the Company concurrently repurchased from the option holders a total of 521,902 shares of Class B common stock at a price of $ 13.17 per share (the closing price for a share of Class A common stock on the exercise date) in order to fund the exercise price for the options and satisfy the statutory federal, state and payroll tax withholding requirements applicable to the employees in connection with the exercise.

The net result was an increase of 247,082 shares of Class B common stock outstanding.

Of the aggregate repurchase price, the Company recorded the total exercise price of approximately $ 4.4 million as additional paid-in capital and withheld and submitted to applicable taxing authorities approximately $ 2.5 million in satisfaction of the employees’ tax obligations.

In August 2019, an employee of the Company exercised an option to purchase 74,592 shares of Class B common stock at a price of $ 0.0357 per share.

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The option was fully vested upon the date of grant, but, until the option agreement was subsequently amended, the option was exercisable only during the ten-day period immediately preceding a change in control of the Company.

In August 2019, the Company and the employee amended the option agreement to (i) adjust the number of underlying shares and exercise price of the option to account for the Stock Split and Reclassification;

In August 2019, the Company and the employee amended the option agreement to (i) adjust the number of underlying shares and exercise price of the option to account for the 25.2-to-1 stock split and share reclassification that occurred in April 2018;

(ii) reduce the exercise price (as adjusted) for the shares underlying the option;

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Provision for income taxes $ 12,760 $ 13,909

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Differences exist between income and expenses reported on the consolidated financial statements and those deducted for U.S.

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At September 30, 2020 and 2019, the Company had a state net operating loss carryforward of $ 15.3 million and $ 31.6 million, respectively.

The state net operating loss credit carryforwards expire in varying amounts between the fiscal years ended September 30, 2020 and September 30, 2030.

statutory federal income tax rate applicable to the Company was 21% during the fiscal year ended September 30, 2019.

On December 22, 2017, the U.S.

government enacted comprehensive tax legislation known as the Tax Cuts and Jobs Act (the “Tax Act”).

The Tax Act included broad and complex changes to the U.S.

tax code, including a reduction in the U.S.

federal corporate income tax rate from 35% to 21% effective January 1, 2018.

The Company completed its accounting for the income tax effects of the Tax Act during fiscal 2018 and recorded a discrete tax benefit of $ 4.6 million related to the Tax Act, primarily due to an adjustment in the Company’s deferred federal income tax liabilities by the same amount as a result of the reduction in the U.S.

federal corporate tax rate.

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

Accordingly, the Company recorded its income tax provision for the fiscal year ended September 30, 2018 based on a blended U.S.

federal statutory tax rate of 24.5%, which was based on a proration of the applicable tax rates before and after the effective date of the Tax Act, and the effect of applicable state income taxes.

The federal statutory rate of 21% applies for fiscal years beginning after September 30, 2018.

During the fiscal year ended September 30, 2018, the Company also realized a $ 2.3 million permanent tax

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benefit, including $ 1.4 million resulting from the deduction of the excess fair market value of options exercised by certain employees of the Company over the exercise price.

The state net operating loss credit carryforwards expire in varying amounts between the fiscal years ended September 30, 2021 and 2030.

statutory federal income tax rate applicable to the Company was 21% during the fiscal years ended September 30, 2020 and 2019.

The following table reconciles income taxes based on the U.S.

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State income taxes 1,272 1,521

Change in deferred federal income taxes due to Tax Act — ( 4,552 )

Permanent differences 330 319

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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 an interest-bearing note receivable in the amount of $ 1.0 million, which approximated the net book value of the disposed entity.

At September 30, 2019, $ 0.1 million and $ 0.7 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.

At September 30, 2020, $ 0.1 million and $ 0.5 million was

reflected on the Company’s Consolidated Balance Sheets 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 an interest-bearing note receivable 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 September 30, 2020, $ 0.1 million and $ 0.3 million was reflected on the Company’s Consolidated Balance Sheets within other current assets and other assets, respectively, representing the remaining balances on this note receivable.

Remaining principal and interest payments are scheduled to be made in periodic installments during fiscal year 2021 through fiscal year 2026.

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From time to time, the Company conducts or has conducted business with the following related parties:

• On January 30, 2015, a subsidiary of the Company entered into a master services subcontract with Austin Trucking, LLC (“Austin Trucking”), an entity owned by an immediate family member of a Senior Vice President of the Company.

Pursuant to the agreement, Austin Trucking performs subcontract work for the subsidiary of the Company, including trucking services.

• From time to time, a subsidiary of the Company provides construction services to various companies owned by family members of a Senior Vice President of the Company (“Construction Services”).

• Prior to its acquisition by the Company, a current subsidiary of the Company advanced funds to an entity owned by an immediate family member of an officer of the Company in connection with a land development project.

• Prior to its acquisition by the Company, a current subsidiary of the Company advanced funds to an entity owned by an immediate family member of a Senior Vice President of the Company in connection with a land development project.

The obligations of the borrower entity to repay the advances are guaranteed by a separate entity owned by the same family member of the officer.

Amounts outstanding under the advances do not bear interest and must be repaid in full no later than March 17, 2021

(“Land Development Project”).

• On June 1, 2014, the Company entered into an access agreement with Island Pond Corporate Services, LLC (“Island Pond”), which provides a location for the Company to conduct business development activities from time to time on a property owned by the Executive Chairman of the Company’s Board of Directors.

• The Company rents and purchases vehicles from an entity owned by a family member of a Senior Vice President of the Company (“Vehicles”).

• Family members of a Senior Vice President of the Company provide consulting services to a subsidiary of the Company (“Consulting Services”).

• A law firm previously owned by a family member of a Senior Vice President of the Company provided legal services to a subsidiary of the Company (“Legal Services”).

• A subsidiary of the Company leased office space for its Dothan, Alabama office from H&K, Ltd.

(“H&K”), an entity partially owned by a Senior Vice President of the Company.

The office space was originally leased through early 2020, but the subsidiary terminated the lease in June 2019 and paid $ 15,000 to H&K as consideration for the early termination.

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

• A subsidiary of the Company leased office space for its Montgomery, Alabama office from H&A Properties LLC (“H&A”), an entity partially owned by two Senior Vice Presidents of the Company.

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

In September 2018, the subsidiary purchased this office from H&A for $ 0.5 million.

Amounts outstanding under the advances do not bear interest and are reflected on the Company's Consolidated Balance Sheet within other assets (“Land Development Project”).

• Entities owned by immediate family members of a Senior Vice President of the Company perform subcontract work for a subsidiary of the Company, including trucking and grading services (“Subcontracting Services”).

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

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

Revenue Earned (Expense Incurred) Accounts Receivable (Payable)

• From time to time, a subsidiary of the Company provides construction services to various companies owned by family members of a Senior Vice President of the Company (“Construction Services”).

• Since June 1, 2014, the Company has been a party to an access agreement with Island Pond Corporate Services, LLC, which provides a location for the Company to conduct business development activities from time to time on a property owned by the Executive Chairman of the Company’s Board of Directors (“Island Pond”).

• The Company purchases vehicles from an entity owned by a family member of a Senior Vice President of the Company (“Vehicles - Purchases”).

• The Company rents vehicles from an entity owned by a family member of a Senior Vice President of the Company (“Vehicles - Rent Expense”).

• Family members of a Senior Vice President of the Company provide consulting services to a subsidiary of the Company (“Consulting Services”).

• 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 associated with services rendered under the management services agreement.

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

Revenue Earned (Expense Incurred) Receivable (Payable)

For the Fiscal Year Ended September 30, September 30,

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Island Pond ( 320 ) (2) ( 320 ) (2) — —

Vehicles ( 1,491 ) (2) ( 1,149 ) (2) — —

Vehicles - Purchases ( 869 ) (3) ( 441 ) (3) — —

Vehicles - Rent expense ( 677 ) (1) ( 1,050 ) (1) — —

Consulting Services ( 271 ) (2) ( 265 ) (2) — —

Legal Services — (2) ( 58 ) (2) — —

H&K ( 78 ) (2) ( 84 ) (2) — —

H&A — (2) ( 61 ) (2) — —

SunTx ( 1,403 ) (2) ( 1,252 ) (2) — —

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(2) Cost is reflected as General and administrative expenses on the Company’s Consolidated Statements of Income.

(3) Purchases reflected in Property, plant & equipment, net, on the Company's Consolidated Balance Sheets.

Note 18 - Commitments and Contingencies

Operating Leases

The Company leases office premises and equipment.

Where leases contain escalation clauses or concessions, such as rent holidays and landlord/tenant incentives or allowances, the impact of such adjustment is recognized on a straight-line basis over the minimum lease period.

Certain leases provide for renewal options and require the payment of real estate taxes or other occupancy costs, which are also subject to escalation clauses.

Operating lease expense amounted to approximately $ 9.4 million and $ 11.2 million for the fiscal years ended September 30, 2019 and 2018, respectively, which is primarily included in cost of revenues in the Consolidated Statements of Income.

Future minimum obligations under non-cancelable operating leases at September 30, 2019 were as follows (in thousands):

Fiscal Year Amount

Thereafter 58

Total $ 11,285

Subsequent to September 30, 2019, the Company paid approximately $ 10.0 million to purchase certain assets previously subject to operating leases.

Future minimum lease payments of $4.1 million related to these items are reflected in the table above.

See Note 22 - Subsequent Events.

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Litigation, Claims, and Assessments

From time to time, the Company is subject to inquiries or audits by taxing authorities arising from its operations, covering a wide range of matters that arise in the ordinary course of business, such as income taxes and other types of taxes.

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The Company is also involved in other legal and administrative proceedings arising in the ordinary course of business.

The outcomes of these inquiries and legal proceedings are not expected to have a material effect on the Company’s financial position or results of operations on an individual basis, although adverse outcomes in a significant number of such ordinary course inquiries and legal proceedings could, in the aggregate, have a material adverse effect on the Company’s financial condition and results of operations.

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

However, adverse outcomes in a significant number of such ordinary course inquiries and legal proceedings could, in the aggregate, have a material adverse effect on the Company’s financial condition and results of operations.

Letters of Credit

Under the Revolving Credit Facility, the Company has a total capacity of $ 50.0 million that may be used for a combination of cash borrowings and letter of credit issuances.

At September 30, 2019 and 2018, the Company had aggregate letters of credit outstanding in the amount of $ 10.9 million and $ 11.8 million, respectively, primarily related to certain insurance policies as described in Note 2 - Significant Accounting Policies.

At each of September 30, 2020 and 2019, the Company had aggregate letters of credit outstanding in the amount of $ 10.9 million, primarily related to certain insurance policies as described in Note 2 - Significant Accounting Policies.

Purchase Commitments

As of September 30, 2020, the Company had unconditional purchase commitments for diesel fuel in the normal course of business in the aggregate amount of $ 1.3 million.

Management does not expect any significant changes in the market value of these goods during the commitment period that would have a material adverse effect on the financial condition, results of operations and cash flows of the Company.

As of September 30, 2020, our purchase commitments annually thereafter are as follows (in thousands):

Fiscal Year Amount

Total $ 1,270

Note 19 - Joint Venture

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At September 30, 2020 and 2019, the Company’s investment in the JV was $ 0.2 million and $ 0.5 million, respectively, which is reflected as “Investment in joint venture” on the Company’s Consolidated Balance Sheets.

During the fiscal years ended September 30, 2019 and 2018, the Company recognized $ 1.3 million of pre-tax income, representing its 50 % interest in the earnings of the JV, which is reflected as “Earnings from investment in joint venture” on the Company’s Consolidated Statements of Income.

During the fiscal years ended September 30, 2020 and 2019, the Company recognized $ 0.6 million and $ 1.3 million, respectively, of pre-tax income, representing its 50 % interest in the earnings of the JV, which is reflected as “Earnings from investment in joint venture” on the Company’s Consolidated Statements of Income.

The income tax impact attributable to the Company’s investment in the JV is included within the provision for income taxes in the Company’s Consolidated Statements of Income.

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On April 19, 2018, certain of the Company’s subsidiaries entered into settlement agreements with a third party arising from an interruption event not directly related to the Company’s business that the Company does not expect to reoccur (the “Settlement”).

The Settlement provides for the Company’s subsidiaries to receive aggregate net payments of approximately $ 15.7 million in four equal installments between January 2019 and July 2020, in exchange for releasing and waiving all current and future claims against the third party.

The Settlement provided for the Company’s subsidiaries to receive aggregate net payments of approximately $ 15.7 million in four equal installments between January 2019 and July 2020, in exchange for releasing and waiving all current and future claims against the third party.

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

The subsidiaries received approximately $ 7.9 million in installment payments during the fiscal year ended September 30, 2019.

Future payments are reflected on the Company’s Consolidated Balance Sheets at September 30, 2019 as other current assets in the amount of $ 7.8 million.

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Note 21 - Condensed Financial Statements of Registrant

As of September 30, 2020, all amounts due pursuant to the Settlement have been received in full.

Note 21 - Leases

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

As of September 30, 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 $ 7.4 million, $ 2.0 million and $ 5.6 million, respectively.

As of September 30, 2020, the Company did not have any lease contracts that had not yet commenced but had created significant rights and obligations.

In October 2019, the Company used cash in the amount of $ 11.5 million to buy out certain operating lease obligations.

The components of lease expense were as follows (in thousands):

For the Fiscal Year Ended September 30, 2020

Operating lease cost $ 3,498

Short-term lease cost 13,374

Total lease expense $ 16,872

Short-term leases (those with terms of 12 months or less) are not capitalized but are expensed on a straight-line basis over the lease term.

The majority of our short-term leases relate to equipment used on construction projects.

These leases are entered into at periodic rental rates for an unspecified duration and typically have a termination for convenience provision.

Short-term lease cost includes leases with terms of one month or less.

As of September 30, 2020, the weighted-average remaining term of the Company’s leases was 8.8 years, and the weighted-average discount rate was 4.00 %.

As of September 30, 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 September 30, 2020 (in thousands):

Fiscal Year Amount

Thereafter 3,466

Total future minimum lease payments $ 9,191

imputed interest 1,591

Total $ 7,600

The Company has lease agreements associated with quarry facilities under which the Company makes royalty payments.

The payments are generally based on tons sold in a particular period;

however, certain agreements have minimum annual payments.

Royalty expense recorded in cost of revenue during the fiscal years ended September 30, 2020 and 2019 was $ 1.3 million and $ 1.7 million, respectively.

Note 22 - Fair Value Measurements

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

September 30,

Level 2 Level 2

Commodity swaps $ 503 $ —

Interest rate swaps 1,708 311

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

The fair values of our Level 2 derivative liabilities are estimated using an analysis of the expected cash flow of the contract in combination with marketable observable inputs, including forward and spot prices for commodity swaps and interest rate curves for interest rate swaps.

Note 23 - Investment in Derivative Instruments

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

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

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 fiscal years ended September 30, 2020 and 2019 and the fair value of these derivatives as of September 30, 2020 and 2019 (in thousands):

For the Fiscal Year Ended September 30,

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 $ ( 432 ) $ ( 503 ) $ ( 935 ) $ — $ — $ —

Interest expense, net ( 388 ) ( 1,397 ) ( 1,785 ) 5 ( 565 ) ( 560 )

Total $ ( 820 ) $ ( 1,900 ) $ ( 2,720 ) $ 5 $ ( 565 ) $ ( 560 )

September 30,

Balance Sheet Classification 2020 2019

Accrued expense and other current liabilities - commodity swaps $ ( 183 ) $ —

Other long-term liabilities - commodity swaps ( 320 ) —

Other long-term liabilities - interest rate swaps ( 1,708 ) ( 311 )

Net unrealized (loss) position $ ( 2,211 ) $ ( 311 )

Note 24 - COVID-19 Pandemic

The Company is closely monitoring the impact of the pandemic of the novel strain of coronavirus, known as COVID-19, on all aspects of its business, including how it has impacted and may continue to impact the Company’s customers, employees, suppliers, and vendors.

While the Company did not incur significant disruptions in its operations during the fiscal year ended September 30, 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.

Note 25 - Condensed Financial Statements of Parent Company

CONSTRUCTION PARTNERS, INC.

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Cash and cash equivalents $ 78,041 $ 63,947

Prepaid expenses and other current assets 928 745

Total current assets 78,969 64,692

Property, plant and equipment, net 2,994 2,268

Investment in subsidiaries 383,740 322,947

Due from subsidiaries 1,020 545

Deferred income taxes, net 441 16

Other assets 6 —

Total current assets 346,458 303,067

Property, plant and equipment 606 131

Total assets $ 466,150 $ 389,923

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Current liabilities:

Treasury stock purchase obligation $ — $ 569

Due to subsidiaries $ 75,044 $ 35,303

Other current liabilities 1,231 183

Accrued expenses and other current liabilities 1,969 2,934

Total current liabilities 77,013 38,237

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Due to subsidiaries 2,234 7,825

Other long-term liabilities 1,708 311

Total long-term liabilities 3,942 8,136

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Class B common stock, par value 0.001 ;

100,000,000 shares authorized, 22,106,961 shares issued and 19,184,009 shares outstanding at September 30, 2019, and 42,387,571 issued and 39,464,619 outstanding at September 30, 2018

100,000,000 shares authorized, 20,828,813 shares issued and 17,905,861 shares outstanding at September 30, 2020, and 22,106,961 shares issued and 19,184,009 shares outstanding at September 30, 2019

Additional paid-in capital 245,022 243,452

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See note to condensed financial statements of parent company.

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CONSTRUCTION PARTNERS, INC.

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CONDENSED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(in thousands, except share and per share amounts)

For the Fiscal Year Ended

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General and administrative expenses ( 2,597 ) ( 2,666 )

Interest income, net 373 72

Interest expense, net ( 1,218 ) ( 153 )

Gain on sale of equipment, net — 1

Other income — 5

Income before provision for income taxes 38,327 41,909

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See note to condensed financial statements of parent company.

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CONSTRUCTION PARTNERS, INC.

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Net income $ 40,297 $ 43,121

Adjustments to reconcile net income to net cash used in operating activities:

Amortization of deferred debt issuance costs 6 6

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

Depreciation, depletion and amortization of long-lived assets 463 179

Gain on sale of equipment — ( 1 )

Equity-based compensation expense 1,570 957

Equity in net income of subsidiaries ( 43,712 ) ( 45,679 )

Deferred income tax (benefit) expense ( 425 ) 99

Changes in operating assets and liabilities:

Other current assets 675 969

Prepaid expenses and other current assets ( 183 ) 771

Other assets ( 6 ) 257

Accrued expenses and other current liabilities ( 965 ) 1,662

Other liabilities 1,397 311

Net cash provided by (used in) operating activities 177 ( 2,143 )

Net cash (used in) provided by operating activities ( 1,564 ) 1,677

Cash flows from investing activities:

Purchases of property, plant and equipment ( 1,189 ) ( 755 )

Proceeds from sale of equipment — 1

Investment in subsidiary ( 17,303 ) ( 19,703 )

Net cash (used in) provided by investing activities ( 20,178 ) ( 34,286 )

Net cash (used in) investing activities ( 18,492 ) ( 20,457 )

Cash flows from financing activities:

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Payment of treasury stock purchase obligation — ( 569 )

Proceeds from initial public offering of Class A common stock, net of offering costs — 98,009

Proceeds from sale of stock — 3

Net cash provided by (used in) financing activities ( 1,741 ) 88,451

Net cash provided by financing activities 34,150 16,393

Net change in cash and cash equivalents 14,094 ( 2,387 )

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Note to Condensed Financial Statements of Parent Company

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.

Therefore, the condensed parent company-only financial statements above reflect the retroactive combination of these entities as if it had occurred on October 1, 2018 for comparative purposes.

The presentation change for September 30, 2019 had no effect on previously reported net income of the Company.

These condensed parent company-only financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X, as the restricted net assets of the subsidiaries of Construction Partners, Inc.

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Note 26 - Subsequent Events

Amendments to BBVA Credit Agreement

On October 1, 2019, the Company and each of its wholly owned subsidiaries entered into an amendment to the BBVA Credit Agreement that, among other things, (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;

(ii) increased the aggregate amount of the Term Loan commitment by the lenders of $ 10,000,000 , to $ 54,700,000 ;

(iii) provided for a Term Loan advance to the Company in the aggregate amount of $ 10,000,000 , with the proceeds to be used solely for the purpose of buying out certain operating lease obligations;

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

In order to hedge

Table of Con t e n t s

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 October 18, 2019, the parties further amended the BBVA Credit Agreement to correct a clerical error that had previously transposed the formulas for calculating annual maintenance fees and issuance fees for letters of credit.

As a result of this amendment, (i) the annual maintenance fee for each letter of credit is the greater of $ 600 or the applicable letter of credit fee rate of the aggregate average daily undrawn amount, and (ii) the fee for issuing each letter of credit is equal to the product obtained by multiplying the face amount of such letter of credit by 0.20 %.

Florida Acquisition

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 current operations in central Florida, including its Okeechobee, Florida operation, which the Company acquired in February 2019.

The acquisition will be accounted for as a business combination in accordance with ASC 805.

The purchase price of $ 17.3 million 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 above in Note 2 - Significant Accounting Policies.

The purchase price exceeding the preliminary net fair value of identifiable assets acquired and liabilities assumed will be recorded as goodwill in the amount of $ 6.9 million, which is deductible for income tax purposes.

Subsequent to September 30, 2020, a subsidiary of the Company acquired the operations of three asphalt and paving companies in North Carolina.

The acquired businesses collectively added eleven hot-mix asphalt plants in North Carolina, providing the Company with access to additional markets and expanding its footprint in the state.

The acquisitions will be accounted for as business combinations in accordance with ASC 805.

The aggregate purchase price of $ 57.4 million (exclusive of reimbursement to the respective sellers for inventory assets acquired) was paid from cash on hand at closing.

In each case, 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 above in Note 2 - Significant Accounting Policies.

The amount of the purchase price exceeding the preliminary net fair value of identifiable assets acquired and liabilities assumed is expected to be recorded as goodwill in the aggregate amount of $ 21.1 million, which is deductible for income tax purposes.

Goodwill primarily represents the assembled workforce and 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.

Secondary Offering — Exercise of Over-Allotment Option

On October 21, 2019, the underwriters of the Secondary Offering of the Company’s Class A common stock described above in Note 12 - Equity exercised their option to purchase from the Selling Stockholders 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 Secondary Offering or the underwriters’ exercise of their over-allotment option.

Table of Con t e n t s

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

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 8. Financial Statements and Supplementary Data