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Item 2. Management’s Discussion and Analysis

2021-02-05 compared with 2020-08-07 · 86 added, 144 removed, 126 unchanged (65% of the section changed)

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

T his discussion and analysis of our financial condition and results of operations is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition during the period covered by this report.

This discussion and analysis of our financial condition and results of operations is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition during the period covered by this report.

Historical results may not be indicative of future performance.

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Federal highway spending uses funds predominantly from the Highway Trust Fund, which derives its revenues from fuel taxes and other user fees.

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

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

Recent Developments

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

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

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

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

We have implemented a number of safety measures in response to the pandemic, including, among other things, increased focus on appropriate spacing during “toolbox” meetings and our execution of construction projects, enhanced cleaning and disinfection protocols, and added flexibility in the times, locations and manner in which we conduct our work.

Notwithstanding these additional safety measures, we did not incur significant disruptions from COVID-19 during the three months ended December 31, 2020, as road construction has been designated a “critical infrastructure” industry and an “essential business” in each state within our footprint, which has allowed us to continue to operate without significant delays related to state and local shelter-in-place orders.

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

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

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

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

In North Carolina, the NCDOT implemented several measures in recent months to address preexisting funding pressures that were exacerbated

by the effects of the COVID-19 pandemic, including suspending preliminary engineering work on potential future projects, delaying commencement of certain pending projects and reducing the number and size of projects available for bid, which resulted in decreased revenue during the three months ended June 30, 2020.

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

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

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

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

For instance, a substantial portion of our revenues each quarter are derived from projects completed for various Departments of Transportation, as further described under the heading “Concentration of Risks” in Note 2 – Significant Accounting Policies to the unaudited consolidated financial statements included elsewhere in this report.

The extent to which our operations may be impacted by the COVID-19 pandemic will depend on future developments, which are highly uncertain and cannot be accurately predicted, including the duration of the pandemic, the rate at which vaccines become available, and actions by government authorities to contain the outbreak or mitigate the impact of the pandemic.

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

Florida Acquisition

On March 23, 2020, we acquired two HMA manufacturing plants and certain related assets located in Pensacola and Defuniak Springs, Florida.

These acquired plants enable us to serve new markets in the western Florida panhandle, and we expect to be able to pursue a variety of public, private and Department of Defense projects from the new locations.

For further discussion regarding this transaction, see Note 4 - Business Acquisitions to the Consolidated Financial Statements included elsewhere in this report.

Changes in Value of Derivative Instruments

From time to time, we enter into interest rate swap agreements in order to manage risks associated with changes in interest rates on our outstanding indebtedness and commodity swap agreements in order to manage risks associated with changes in the price of certain commodities used in our business, such as fuel.

We record these derivative instruments at their fair value and record changes in the fair value of these instruments in current earnings.

During the three months ended June 30, 2020, we incurred a $0.1 million non-cash charge related to interest rate swaps and a $0.4 million non-cash benefit related to fuel swaps.

The value of these instruments was impacted by volatility in the financial and commodities markets during the quarter, primarily associated with the COVID-19 pandemic and related macroeconomic factors.

Given the current uncertainty regarding the duration, scope and magnitude of the impact that COVID-19 will have on the broader economy and how such an impact will affect the value of our derivative instruments, we could incur losses in future periods related to the value of these instruments.

North Carolina Acquisitions

During the three months ended December 31, 2020, we acquired the operations of four HMA production and paving companies in North Carolina.

The acquired businesses collectively added thirteen HMA plants in North Carolina, providing us with access to additional markets and expanding our footprint in the state.

For further discussion regarding these transactions, see Note 4 - Business Acquisitions to the unaudited consolidated financial statements included elsewhere in this report.

How We Assess Performance of Our Business

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Amortization expense is the periodic expense related to leasehold improvements and intangible assets.

Leasehold improvements are

amortized over the lesser of the life of the underlying asset or the remaining lease term.

Leasehold improvements are amortized over the lesser of the life of the underlying asset or the remaining lease term.

Our intangible assets were recognized as a result of certain acquisitions and are generally amortized on a straight-line basis over the estimated useful lives of the assets.

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General and administrative expenses include costs related to our operational offices that are not allocated to direct contract costs and expenses related to our corporate offices and consist primarily of salaries and personnel costs for our administration, finance and accounting, legal, information systems, human resources and certain managerial employees.

Additional expenses include audit, consulting and professional fees, travel, insurance, office space rental costs, property taxes and other corporate and overhead expenses.

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

Gain on Sale of Equipment, Net

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Interest Expense, Net

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

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

These amounts are partially offset by interest income earned on short-term investments of cash and cash equivalents balances in excess of our current operating needs.

Other Income (Expense)

Other income (expense) primarily represents unrealized gains (losses) on commodity derivative instruments and other miscellaneous income (expense) items.

Other income primarily represents other miscellaneous income items.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA represents net income before (i) interest expense, net, (ii) provision for income taxes, (iii) depreciation, depletion and amortization of long-lived assets, (iv) equity-based compensation expense, (v) loss on extinguishment of debt and (vi) certain management fees and expenses.

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

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

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Potential differences may include differences in capital structures, tax positions and the age and book depreciation of intangible and tangible assets.

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

For the Three Months Ended June 30, For the Nine Months Ended June 30,

2020 2019 2020 2019

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

For the Three Months Ended December 31,

Net income $ 7,871 $ 5,461

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Management fees and expenses (1)

355 316 1,026 957

Adjusted EBITDA $ 23,125 $ 17,208

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Adjusted EBITDA Margin 12.1 % 9.8 %

(1) Reflects fees and reimbursement of certain travel expenses under a management services agreement with SunTx (see Note 12 - Related Parties to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q).

(1) Reflects fees and reimbursement of certain travel expenses under a management services agreement with SunTx (see Note 12 - Related Parties to the unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q).

Results of Operations

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

The following table sets forth selected financial data for the three months ended June 30, 2020 and 2019 (in thousands, except percentages):

Three Months Ended December 31, 2020 Compared to Three Months Ended December 31, 2019

The following table sets forth selected financial data for the three months ended December 31, 2020 and December 31, 2019 (in thousands, except percentages):

Change From the Three Months Ended

For the Three Months Ended June 30, June 30, 2019

For the Three Months Ended December 31, December 31, 2019

to the Three Months Ended

2020 2019 June 30, 2020

Revenues Dollars % of

Revenues $ 217,041 100.0 % $ 227,290 100.0 % $ (10,249) (4.5) %

Cost of revenues 180,549 83.2 % 189,198 83.2 % (8,649) (4.6) %

Gross profit 36,492 16.8 % 38,092 16.8 % (1,600) (4.2) %

General and administrative expenses (16,852) (7.8) % (15,968) (7.0) % (884) 5.5 %

Gain on sale of equipment, net 390 0.2 % 58 — % 332 572.4 %

Operating income 20,030 9.2 % 22,182 9.8 % (2,152) (9.7) %

Interest expense, net (575) (0.3) % (615) (0.3) % 40 (6.5) %

Other income (expense) 645 0.4 % 190 0.1 % 455 239.5 %

Income before provision for income taxes and earnings from investment in joint venture 20,100 9.3 % 21,757 9.6 % (1,657) (7.6) %

Provision for income taxes 4,772 2.2 % 4,941 2.2 % (169) (3.4) %

Earnings from investment in joint venture 419 0.2 % 386 0.2 % 33 8.5 %

Net income $ 15,747 7.3 % $ 17,202 7.6 % $ (1,455) (8.5) %

Adjusted EBITDA $ 31,873 14.7 % $ 31,279 13.8 % $ 594 1.9 %

Revenues for the three months ended June 30, 2020 decreased $10.3 million, or 4.5%, to $217.0 million from $227.3 million for the three months ended June 30, 2019.

Revenues in markets we served on June 30, 2019 decreased by $20.0 million, primarily due to a reduction in the number of projects available for bid in certain of our markets, including North Carolina, and our resulting efforts to manage our backlog and effectively utilize our workforce in light of the uncertainties caused by the COVID-19 pandemic.

The decrease was offset by a $9.7 million increase in total revenue attributable to acquisitions that we completed subsequent to June 30, 2019.

Gross Profit.

Gross profit for the three months ended June 30, 2020 decreased $1.6 million, or 4.2%, to $36.5 million from $38.1 million for the three months ended June 30, 2019.

The decrease in gross profit was primarily the result of the 4.5% decrease in revenues for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

General and Administrative Expenses.

General and administrative expenses for the three months ended June 30, 2020 increased $0.9 million, or 5.5%, to $16.9 million from $16.0 million for the three months ended June 30, 2019.

The increase in general and administrative expenses for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was primarily the result of (i) a $0.4 million increase in management personnel payroll and benefits, (ii) a $0.7 million increase attributable to acquisitions completed subsequent to June 30, 2019 and (iii) a $0.4 million increase in stock-based compensation expense.

These increases were partially offset by decreases in other general and administrative expenses of $0.6 million.

Interest Expense, Net.

Interest expense, net was $0.6 million for the three months ended June 30, 2020 and 2019.

The impact of a higher average outstanding balance of indebtedness during the three months ended June 30, 2020 was offset by a decrease in interest rates paid on such indebtedness during the period.

Other Income (Expense).

Other income (expense) for the three months ended June 30, 2020 increased $0.4 million, to $0.6 million compared to $0.2 million for the three months ended June 30, 2019.

The increase was primarily attributable to net unrealized gains of $0.4 million on commodity derivative instruments for the three months ended June 30, 2020, as the Company entered into these contracts in February 2020.

The value of these derivative instruments was impacted by financial market volatility during the quarter ended June 30, 2020 due to COVID-19 and other macroeconomic factors.

Provision for Income Taxes.

Our effective tax rate increased to 23.3% for the three months ended June 30, 2020, from 22.3% for the three months ended June 30, 2019.

Earnings from Investment in Joint Venture.

Earnings from investment in joint venture was $0.4 million for the three months ended June 30, 2020 and 2019, which represents pre-tax income from our 50% interest in the earnings of a joint venture that we entered into with a third party in November 2017 for the sole purpose of performing a construction project for ALDOT.

Net income decreased $1.5 million, or 8.5%, to $15.7 million for the three months ended June 30, 2020, compared to $17.2 million for the three months ended June 30, 2019.

The decrease in net income was primarily a result of lower gross profit and higher general and administrative expenses, all as described above.

Adjusted EBITDA and Adjusted EBITDA Margin.

Adjusted EBITDA and Adjusted EBITDA Margin were $31.9 million and 14.7%, respectively, for the three months ended June 30, 2020, compared to $31.3 million and 13.8%, respectively, for the three months ended June 30, 2019.

The increase in Adjusted EBITDA was the result of a higher depreciation, depletion and amortization of long-lived assets, partially offset by lower gross profit and an increase in general and administrative expenses.

The higher Adjusted EBITDA Margin was a primarily a result of an increase in Adjusted EBITDA and a decrease in revenues, all described above.

See the description of Adjusted EBITDA and Adjusted EBITDA Margin, as well as a reconciliation of Adjusted EBITDA to net income, under the heading “How We Assess Performance of Our Business”.

Nine Months Ended June 30, 2020 Compared to Nine Months Ended June 30, 2019

The following table sets forth selected financial data for the nine months ended June 30, 2020 and 2019 (in thousands, except percentages):

Change From the Nine Months Ended

For the Nine Months Ended June 30, June 30, 2019

to the Nine Months Ended

2020 2019 June 30, 2020

2020 2019 December 31, 2020

Revenues Dollars % of

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Interest expense, net (468) (0.2) % (281) (0.2) % (187) 66.5 %

Other income (expense) (43) — % 296 0.1 % (339) (114.5) %

Other income 165 — % 65 — % 100 153.8 %

Income before provision for income taxes and earnings from investment in joint venture 10,540 5.5 % 6,737 3.8 % 3,803 56.4 %

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Adjusted EBITDA $ 23,125 12.1 % $ 17,208 9.8 % $ 5,917 34.4 %

Revenues for the nine months ended June 30, 2020 increased $15.1 million, or 2.8%, to $561.0 million from $545.9 million for the nine months ended June 30, 2019.

The increase included $33.8 million of revenues attributable to acquisitions completed subsequent to June 30, 2019, offset by a $18.7 million decrease in revenues in markets we served on June 30, 2019.

Revenues for the three months ended December 31, 2020 increased $15.6 million, or 8.9%, to $190.9 million from $175.3 million for the three months ended December 31, 2019.

The increase included $12.2 million of revenues attributable to acquisitions completed subsequent to December 31, 2019 and an increase of approximately $3.4 million of revenues in our existing markets from contract work and sales of HMA and aggregates to third parties.

Gross Profit.

Gross profit for the nine months ended June 30, 2020 increased $2.2 million, or 2.8%, to $81.2 million from $79.0 million for the nine months ended June 30, 2019.

The increase in gross profit was primarily the result of the increase in revenue for the nine months ended June 30, 2020 compared to nine months ended June 30, 2019.

Gross profit for the three months ended December 31, 2020 increased $6.8 million, or 28.8%, to $30.6 million from $23.8 million for the three months ended December 31, 2019.

The increase in gross profit was primarily the result of the 8.9% increase in revenue from the three months ended December 31, 2020 compared to the three months ended December 31, 2019.

Additionally, the higher gross profit was the result of an increase in gross profit margin to 16.0% for the three months ended December 31, 2020 from 13.6% for the three months ended December 31, 2019, primarily due to (i) efficient utilization of our plants and equipment, (ii) a $1.3 million increase in gross profit attributable to our liquid asphalt terminal, at which we purchase liquid asphalt at wholesale prices, thereby reducing our cost of revenues and (iii) net gains of $0.8 million on commodity derivative instruments that we entered into subsequent to December 31, 2019.

General and Administrative Expenses.

General and administrative expenses for the nine months ended June 30, 2020 increased $5.6 million, or 12.4%, to $50.8 million from $45.2 million for the nine months ended June 30, 2019.

The increase in general and administrative expenses for the nine months ended June 30, 2020 compared to the nine months ended June 30, 2019 was primarily the result of (i) a $2.5 million increase in management personnel payroll and benefits, (ii) a $2.2 million increase attributable to acquisitions completed subsequent to June 30, 2019 and (iii) a $1.2 million increase in stock-based compensation expense.

General and administrative expenses for the three months ended December 31, 2020 increased $3.0 million, or 17.4%, to $20.1 million from $17.1 million for the three months ended December 31, 2019.

The increase in general and administrative expenses for the three months ended December 31, 2020 compared to the three months ended December 31, 2019 was primarily the result of (i) a $1.5 million increase in management personnel payroll and benefits, (ii) a $0.8 million increase in overhead expenses attributable to acquisitions completed subsequent to December 31, 2019 and (iii) a $0.8 million increase in various professional fees, including acquisition related costs.

Interest Expense, Net.

Interest expense, net for the nine months ended June 30, 2020 increased $1.2 million, or 78.3%, to $2.7 million compared to $1.5 million for the nine months ended June 30, 2019.

The increase was primarily due to the unrealized loss on interest rate swap derivative instruments of $1.6 million for the nine months ended June 30, 2020 compared to $0.5 million for the nine months ended June 30, 2019.

Other Income (Expense).

Other income (expense) for the nine months ended June 30, 2020 decreased $0.4 million, to ($0.1) million compared to $0.3 million for the nine months ended June 30, 2019.

The decrease was primarily attributable to net unrealized losses of $0.4 million on commodity derivative instruments for the nine months ended June 30, 2020, as the Company entered into these contracts in February 2020.

The value of these derivative instruments was impacted by financial market volatility during the nine months ended June 30, 2020 due to COVID-19 and other macroeconomic factors.

Interest expense, net for the three months ended December 31, 2020 increased $0.2 million, or 66.5%, to $0.5 million compared to $0.3 million for the three months ended December 31, 2019.

The increase in interest expense was due to an increase in the average principal debt balance outstanding during the three months ended December 31, 2020 compared to the corresponding period in 2019.

Provision for Income Taxes.

Our effective tax rate decreased to 22.5% for the nine months ended June 30, 2020, from 23.3% for the nine months ended June 30, 2019.

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

Our effective tax rate increased to 25.4% for the three months ended December 31, 2020, from 19.5% for the three months ended December 31, 2019.

Our lower effective tax rate during the three months ended December 31, 2019 was the result of a benefit of $0.4 million related to the utilization of net operating loss carryforwards, reflected in an amended consolidated state return filed during the period.

Earnings from Investment in Joint Venture.

During the nine months ended June 30, 2020 and 2019, we earned $0.5 million and $0.9 million, respectively, of pre-tax income from our 50% interest in the earnings of a joint venture that we entered into with a third party in November 2017 for the sole purpose of performing a construction project for ALDOT.

Net income decreased $3.8 million, or 14.4%, to $22.7 million for the nine months ended June 30, 2020, compared to $26.6 million for the nine months ended June 30, 2019.

The decrease in net income was primarily a result of lower gross profit, higher general and administrative expenses and additional unrealized losses on commodity and interest rate swap derivative instruments, all as described above.

During the three months ended December 31, 2020 and 2019, we earned $11.0 thousand and $43.0 thousand, respectively, of pre-tax income from our 50% interest in the earnings of a joint venture that we entered into with a third party in November 2017 for the sole purpose of performing a construction project for the Alabama Department of Transportation.

Net income increased $2.4 million, or 44.1%, to $7.9 million for the three months ended December 31, 2020, compared to $5.5 million for the three months ended December 31, 2019.

The increase in net income was a result of an increase in gross profit, partially offset by an increase in general and administrative expenses and additional interest expense during the three months ended December 31, 2020 compared to the three months ended December 31, 2019, all as described above.

Adjusted EBITDA and Adjusted EBITDA Margin.

Adjusted EBITDA and Adjusted EBITDA Margin were $63.3 million and 11.3%, respectively, for the nine months ended June 30, 2020, compared to $60.0 million and 11.0%, respectively, for the nine months ended June 30, 2019.

The increase in Adjusted EBITDA was the result of a higher depreciation, depletion and amortization of long-lived assets, partially offset by an increase in general and administrative expenses and unrealized losses on commodity and interest rate swap derivative instruments.

The higher Adjusted EBITDA Margin was primarily a result of increased depreciation, depletion and amortization of long-lived assets during the nine months ended June 30, 2020.

Adjusted EBITDA and Adjusted EBITDA Margin were $23.1 million and 12.1%, respectively, for the three months ended December 31, 2020, compared to $17.2 million and 9.8%, respectively, for the three months ended December 31, 2019.

The increase in Adjusted EBITDA was the result of a higher gross profit and depreciation, depletion and amortization of long-lived assets, partially offset by an increase in general and administrative expenses and interest expense.

The higher Adjusted EBITDA Margin was a primarily a result of the increase in Adjusted EBITDA during the period.

See the description of Adjusted EBITDA and Adjusted EBITDA Margin, as well as a reconciliation of Adjusted EBITDA to net income, under the heading “How We Assess Performance of Our Business”.

Inflation and Price Changes

Inflation had an immaterial impact on our results of operations for three and nine months ended June 30, 2020 and 2019 due to relatively low inflation in the United States in recent years and our ability to recover increasing costs by obtaining higher prices for our products, including sale price escalator clauses in most of our public sector infrastructure contracts.

Inflation had an immaterial impact on our results of operations for the three months ended December 31, 2020 and 2019 due to relatively low inflation in the United States in recent years and our ability to recover increasing costs by obtaining higher prices for our products, including sale price escalator clauses in most of our public infrastructure sector contracts.

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

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The following table sets forth our cash flows for the periods indicated (in thousands):

For the Nine Months Ended June 30,

For the Three Months Ended December 31,

Net cash provided by operating activities, net of acquisition $ 709 $ 1,686

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Operating Activities

Cash provided by operating activities was $51.4 million for the nine months ended June 30, 2020, an increase of $33.5 million compared to $18.0 million for the nine months ended June 30, 2019.

The increase was primarily due to a $9.3 million increase in adjustments to reconcile net income to cash flows provided by operating activities and a $28.0 million increase in changes in operating assets and liabilities, partially offset by a $3.8 million decrease in net income for the nine months ended June 30, 2020 compared to the nine months ended June 30, 2019.

The $9.3 million increase in adjustments to reconcile net income to cash flows provided by operating activities was primarily due to a $6.4 million increase in depreciation, depletion and amortization of long-lived assets and a $1.5 million increase in non-cash losses on derivative instruments and $1.0 million increase of non-cash equity-based compensation expense.

The $28.0 million increase in changes in operating assets and liabilities included (i) a $21.2 million decrease in the change in contracts receivable as a result of increased contract billings due to acquisitions and growth in existing markets in the previous year, (ii) a $10.1 million decrease in the change in inventories primarily due to the liquid asphalt terminal acquired during the nine months ended June 30, 2019 and (iii) a $9.8 million increase in billings in excess of costs and estimated earnings on uncompleted contracts due to the increase in construction activity as noted above.

These changes were offset by a $14.6 million decrease in accounts payable due to the decrease in inventory purchases and normal fluctuations resulting from the timing of processing transactions in our accounts payable.

During the three months ended December 31, 2020, cash provided by operating activities, net of acquisitions, was $0.7 million, primarily as a result of:

• net income of $7.9 million, including $11.1 million of depreciation, depletion and amortization of long-lived assets;

• a decrease in contracts receivable including retainage, net, of $18.5 million due to normal fluctuations resulting from the timing of processing transactions in our accounts receivable cycle;

• a decrease in accounts payable and accrued expenses and other current liabilities of $24.7 million due to the timing of processing transactions in our accounts payable cycle;

• a net decrease in the difference between costs and estimated earnings in excess of billings on uncompleted contracts and billings in excess of costs and estimated earnings on uncompleted contracts of $7.0 million due to the timing of performing and closing projects.

During the three months ended December 31, 2019, cash provided by operating activities, net of acquisitions, was $1.7 million, primarily as a result of:

• net income of $5.5 million, including $9.4 million of depreciation, depletion and amortization of long-lived assets;

• a decrease in contracts receivable including retainage, net, of $22.0 million due to normal fluctuations resulting from the timing of processing transactions in our accounts receivable cycle;

• a decrease in accounts payable and accrued expenses and other current liabilities of $29.3 million due to the timing of processing transactions in our accounts payable cycle;

• a net decrease in the difference between costs and estimated earnings in excess of billings on uncompleted contracts and billings in excess of costs and estimated earnings on uncompleted contracts of $2.1 million due the timing of performing and closing projects.

Investing Activities

Cash used in investing activities was $69.2 million for the nine months ended June 30, 2020 compared to $46.3 million for the nine months ended June 30, 2019.

The increase reflects $17.7 million used in connection with a business acquisition in October 2019 and $12.4 million used in connection with a business acquisition in March 2020.

Business acquisitions totaled $8.9 million for the nine months ended June 30, 2019.

There was a $9.8 million increase in purchases of property, plant and equipment, which includes $11.5 million for the buyout of equipment leases during the nine months ended June 30, 2020.

These increases were offset by a $10.8 million acquisition of the liquid asphalt terminal assets during the nine months ended June 30, 2019.

During the three months ended December 31, 2020, cash used in investing activities was $94.1 million, of which $84.1 million related to acquisitions completed in the period and $10.5 million was invested in property, plant and equipment, partially offset by $0.5 million of proceeds from the sale of equipment.

During the three months ended December 31, 2019, cash used in investing activities was $40.5 million, of which $17.7 million related to acquisitions completed in the period and $23.6 million was invested in property, plant and equipment, partially offset by $0.5 million of proceeds from the sale of equipment and a $0.3 million distribution from our investment in a joint venture.

Financing Activities

Cash provided by financing activities was $15.8 million for the nine months ended June 30, 2020 compared to $11.1 million of cash used in financing activities during nine months ended June 30, 2019, reflecting a $9.8 million Term Loan advance, net of issuance cost, related to our buyout of certain lease obligations in October 2019, a $15.0 million advance under our Revolving Credit Facility primarily used to fund the March 2020 acquisition and for liquidity purposes and a $18.0 million Term Loan advance, net of issuance cost, to pay down the March 2020 $15.0 million advance under the Revolving Credit Facility.

Loan repayments increased $15.8 million on the Term Loan, Revolving Credit Facility and other debt during nine months ended June 30, 2020 compared to the nine months ended June 30, 2019, due to the repayment of principal under the Revolving Credit Facility as noted above.

BBVA Credit Agreement

During the three and nine months ended June 30, 2020, we and each of our subsidiaries were parties to the BBVA Credit Agreement, which provided for the Term Loan and the Revolving Credit Facility.

At June 30, 2020 and September 30, 2019, we had $66.1 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 $19.3 million and $14.4 million, respectively, under the Revolving Credit Facility, after reduction for outstanding letters of credit.

At June 30, 2020, the interest rate on outstanding borrowings under the Term Loan and Revolving Credit Facility ranged from 1.38% to 2.20%.

The BBVA Credit Agreement required 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 June 30, 2020 and

September 30, 2019, our fixed charge coverage ratio was 3.18-to-1.00 and 4.04-to-1.00, respectively, and our consolidated leverage ratio was 0.83-to-1.00 and 0.66-to-1.00, respectively.

During the three months ended December 31, 2020, cash used in financing activities was $3.3 million, representing the repayment of principal on long-term debt during the period.

During the three months ended December 31, 2019, cash provided by financing activities was $7.6 million.

We received $9.7 million from proceeds on long-term debt, net of debt issuance costs and discounts, which was offset by $2.1 million of repayments of principal on long-term debt.

Credit Agreement

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

At December 31, 2020 and September 30, 2020, we had $89.6 million and $92.9 million, respectively, of principal outstanding under the Term Loan, $0.0 million and $0.0 million, respectively, of principal outstanding under the Revolving Credit Facility, and availability of $38.3 million and $39.3 million, respectively, under the Revolving Credit Facility, after reduction for outstanding letters of credit.

At December 31, 2020, the interest rate on outstanding borrowings under the Term Loan ranged from 1.64% to 2.50%.

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

At December 31, 2020 and September 30, 2020, our fixed charge coverage ratio was 3.40-to-1.00 and 2.85-to-1.00, respectively, and our consolidated leverage ratio was 0.98-to-1.00 and 1.08-to-1.00, respectively.

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

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

At June 30, 2020 and September 30, 2019, the aggregate notional value of these interest rate swap agreements was $48.6 million and $21.5 million, respectively, and the fair value was $(1.9) million and $(0.3) million, respectively, which is included within other long-term liabilities on our Consolidated Balance Sheets.

Subsequent to June 30, 2020 we entered into the Amended Credit Agreement, which amended and restated the BBVA Credit Agreement in its entirety.

For more information about the Amended Credit Agreement, see the discussion under the heading “Recent Financing Developments” in Note 20 - Subsequent Events to the Consolidated Financial Statements included elsewhere in this report.

Capital Expenditures and Working Capital

During the nine months ended June 30, 2020 and 2019, our capital expenditures were $41.5 million and $31.7 million, respectively.

Our capital expenditures are typically made during the same fiscal year in which they are approved.

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

For fiscal 2020, we expect total capital expenditures to be $40.0 million to $42.0 million, not including $11.5 million for the buyout of equipment leases during the first quarter of the fiscal year.

Our capital expenditure budget is an estimate and is subject to change.

As described further below, we believe that cash flows from operations, together with existing cash on hand and amounts available under our credit facilities, will be sufficient to fund our working capital needs and planned capital expenditures for at least the next 12 months.

At December 31, 2020 and September 30, 2020, the aggregate notional value of these interest rate swap agreements was $44.5 million and $46.5 million, respectively, and the fair value was $(1.5) million and $(1.7) million, respectively, which is included within other long-term

liabilities on our Consolidated Balance Sheets.

Capital Requirements and Sources of Liquidity

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

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

During the three months ended December 31, 2020 and 2019, our capital expenditures were $10.5 million and $23.6 million, respectively.

Our capital expenditures are typically made during the same fiscal year in which they are approved.

At December 31, 2020, our commitments for capital expenditures were not material to our financial condition or results of operations on a consolidated basis.

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

Our capital expenditure budget is an estimate and is subject to change.

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

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

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

We believe that our operating cash flow, together with cash on hand and available borrowings under our credit facilities, will be sufficient to fund our operations and planned capital expenditures for at least the next 12 months.

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

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

As of June 30, 2020, we had fuel swap contracts to pay fixed prices for fuel with an aggregate notional amount of 3.3 million gallons, maturing incrementally through 2021.

The fair value of these derivative contracts was $(0.4) million at June 30, 2020.

As of December 31, 2020, we had fuel swap contracts to pay fixed prices for fuel with an aggregate notional amount of 3.7 million gallons, maturing incrementally through fiscal year 2023.

The fair value of these derivative contracts was $0.4 million at December 31, 2020.

These fuel swap contracts provide a fixed price for less than 50% of our estimated fuel usage for the remainder of fiscal years 2021 through 2023.

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

At June 30, 2020, we had a total of $17.6 million of non-hedged variable rate borrowings outstanding.

At December 31, 2020, we had a total of $16.5 million of non-hedged variable rate borrowings outstanding.

Contractual Obligations

The following table sets forth certain information about our contractual obligations as of December 31, 2020 (in thousands):

Payments Due by Fiscal Years

Total Remainder of 2021 2022 2023 2024 2025 2026 and Thereafter

Debt obligations $ 89,600 $ 9,750 $ 13,000 $ 13,000 $ 53,850 $ — $ —

Operating leases 8,698 1,514 1,291 873 782 622 3,616

Purchase commitments 912 862 50 — — — —

Total $ 99,210 $ 12,126 $ 14,341 $ 13,873 $ 54,632 $ 622 $ 3,616

Off-Balance Sheet Arrangements

As of June 30, 2020, we had no material off-balance sheet arrangements, except for purchase commitments for diesel fuel entered into in the normal course of business.

As of December 31, 2020, we had no material off-balance sheet arrangements, except for letters of credit of $11.9 million and purchase commitments for diesel fuel of $0.9 million entered into in the normal course of business.

Quantitative and Qualitative Disclosures About Market Risk.

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

Pursuant to the Instructions to paragraph (c) of Item 305 of Regulation S-K, information is not required to be disclosed under Item 305(c) of Regulation S-K for interim periods until after the first fiscal year end in which Item 305 is applicable, which for us will be interim periods after September 30, 2021.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis