What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-02-04 compared with 2021-08-06 · 112 added, 186 removed, 106 unchanged (74% of the section changed)

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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 site work 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 sitework construction and HMA paving services to private construction customers, including commercial and residential developers and local businesses.

Recent Developments

We did not incur significant disruptions from the COVID-19 pandemic during the three or nine months ended June 30, 2021.

We did not incur significant disruptions from the COVID-19 pandemic during the three months ended December 31, 2021.

However, we continue to closely monitor the impact of the pandemic on all aspects of our business, including its impact on our customers, employees, suppliers and vendors.

Among the primary risks to our business arising from the pandemic are (i) 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, (ii) 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 HMA or the ability of our subcontractors to complete their required tasks, and (iii) the impact of the COVID-19 pandemic 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.

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

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

The extent to which our operations may be impacted by the COVID-19 pandemic will depend on future developments, which are highly uncertain, including the duration of the pandemic, the emergence of different COVID-19 variants, the efficacy and adoption rates of vaccines, and actions by government authorities to contain the outbreak or mitigate the impact of the pandemic.

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

North Carolina Acquisitions

During the nine months ended June 30, 2021, we acquired the operations of four HMA production and paving companies and a grading and site work contractor 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.

Among the primary risks to our business from the pandemic are (i) 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, (ii) 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 HMA or the ability of our subcontractors to complete their required tasks, and (iii) the impact of the COVID-19 pandemic 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.

These risks materialized in varying degrees during the three months ended December 31, 2021, but none of these risks, individually or in the aggregate, have significantly impacted our operations to date.

In addition, the extent to which our operations may be impacted by the COVID-19 pandemic going forward will also depend on the duration of the pandemic, the emergence of different COVID-19 variants, the efficacy and adoption rates of vaccines, and actions by government authorities to contain the outbreak or mitigate the impact of the pandemic.

Inflationary Trends

We are subject to the effects of inflation through wage pressures, increases in the cost of raw materials used to produce HMA, and increases in other items, such as fuel, concrete and steel.

During the three months ended June 30, 2021, we began to experience an upward trend in several of these inflation-sensitive items.

We seek to recover increasing costs by obtaining higher prices for our products or by including the anticipated price increases in the cost of our bids.

Due to the relatively short-term duration of our construction contracts, we are generally able to reduce our exposure to price increases on new contracts, but we are limited in our ability to pass through increased costs for projects already in our backlog.

Going forward, continued cost inflation in these areas may require further price adjustments to maintain profit margin, and any price increases may have a negative effect on demand.

During the three months ended December 31, 2021, we continued to experience an upward trend in several inflation-sensitive inputs necessary for us to provide our products and services, including upward pressure on wages and increases in the cost of raw materials used to produce HMA and other items that are critical to our business, including fuel, concrete and steel.

In addition, we experienced some disruptions from various participants in our supply chain, including subcontractors, materials suppliers and equipment manufacturers, who provide the raw materials, equipment, vehicles, construction supplies and other services we require in order to manufacture HMA and perform our construction projects.

To date, we have been able to mitigate some of the effects of inflation, supply chain disruptions and labor constraints on our business by increasing prices for our products and including the anticipated cost increases in the construction projects we bid.

However, we are limited in our ability to pass through increased costs for projects already in our backlog and, under those circumstances, may be unable to recoup losses or diminished profit margins by passing these costs through to our customers.

South Carolina Acquisition

On October 1, 2021, we acquired King Asphalt, Inc.

The acquisition established the Company's first platform company in South Carolina and added three HMA plants in the Greenville, South Carolina metro area.

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

Florida Acquisition

On October 18, 2021, we acquired the operations of J.

Miller Construction Inc.

The acquisition further enhances the Company’s vertical integration of construction services and supplements the Company’s capabilities in the greater Pensacola, Florida market area.

For further discussion regarding this transaction, 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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Our projects represent a mix of federal, state, municipal and private customers.

We also derive revenues from the sale of HMA, aggregates, ready-mix concrete and liquid asphalt cement to customers.

Revenues derived from projects are recognized as performance obligations are satisfied over time, measured according to the relationship of total cost incurred as of a given determination date to the total estimated contract costs.

We also derive revenues from the sale of HMA, aggregates, and liquid asphalt cement to customers.

We recognize revenues derived from projects as we satisfy our performance obligations over time (formerly known as the percentage-of-completion method), measured by the relationship of total cost incurred compared to total estimated contract costs (cost-to-cost input method).

Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to estimated costs and income, and are recognized in the period in which the revisions are determined.

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

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

Gross profit represents revenues less cost of revenues.

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

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

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

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Depreciation, Depletion and Amortization

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

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

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

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

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

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

General and Administrative Expenses

General and administrative expenses include costs related to our operational offices that are not allocated to direct contract costs and expenses related to our corporate offices 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, stock-based compensation expense, travel, insurance, office space rental costs, property taxes and other corporate and overhead expenses.

General and administrative expenses include costs related to our operational offices that are not allocated to direct contract costs and expenses related to our corporate offices.

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

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

Gain on Sale of Equipment, Net

In the normal course of business, we sell construction equipment for various reasons, including when the cost of maintaining the asset exceeds the cost of replacing it.

The gain or loss on sale of equipment reflects the difference between the carrying value at the date of disposal of the equipment and the net consideration received from the sale of equipment during the period.

The gain or loss on the sale of equipment reflects the difference between the carrying value at the date of disposal and the net consideration received from the sale of equipment during the period.

Interest Expense, Net

Interest expense, net primarily represents interest incurred on our long-term debt, such as the Term Loan and the Revolving Credit Facility, as well as the 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 primarily represents other miscellaneous income items.

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

Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted Net Income

Adjusted EBITDA represents net income before, as applicable from time to time, (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 (vi) certain management fees and expenses and (vii) nonrecurring legal settlement costs and associated legal expenses unrelated to the Company's core operations.

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, accretion and amortization, (iv) equity-based compensation expense, (v) loss on the extinguishment of debt, (vi) certain management fees and expenses and (vii) nonrecurring legal settlement costs and associated legal expenses unrelated to the Company’s core operations.

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

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These metrics are supplemental measures of our operating performance that are neither required by, nor presented in accordance with, GAAP.

These measures have limitations as analytical tools and should not be considered in isolation or as an alternative to net income or any other performance measure derived in accordance with GAAP as an indicator of operating performance.

We present Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted net income (loss) because management uses these measures as key performance indicators, and we believe that securities analysts, investors and others use these measures to evaluate companies in our industry.

Our calculation of these measures may not be comparable to similarly named measures reported by other companies.

We present Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted net income because management uses these measures as key performance indicators, and we believe that securities analysts, investors and others use these measures to evaluate companies in our industry.

Our calculation of Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted net income may not be comparable to similarly named measures reported by other companies.

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 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 June 30, For the Nine Months Ended June 30,

2021 2020 2021 2020

For the Three Months Ended December 31,

Net income $ 5,511 $ 7,871

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Provision for income taxes 1,800 2,680

Depreciation, depletion and amortization of long-lived assets 12,626 10,034 36,011 29,065

Depreciation, depletion, accretion and amortization 15,903 11,094

Equity-based compensation expense 1,504 395

Management fees and expenses (1)

412 355 1,550 1,026

Settlement of legal claim and associated legal expenses (2)

134 119 4,366 216

Adjusted EBITDA $ 26,357 $ 23,491

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Adjusted EBITDA Margin 9.2 % 12.3 %

(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).

(2) Reflects $3.2 million legal settlement and associated legal expenses (see Note 19 - Legal Proceedings to the unaudited consolidated financial statements included elsewhere in this Quarterly Report).

(1) Reflects fees and reimbursement of certain out-of-pocket expenses under a management services agreement with SunTx Capital Partners, the Company’s controlling stockholder (see Note 12 - Related Parties to the unaudited consolidated financial statements included elsewhere in this report).

(2) Reflects legal expenses associated with a settlement agreement entered into in April 2021 unrelated to the Company's core operations.

The following table presents a reconciliation of net income, the most directly comparable measure calculated in accordance with GAAP, to adjusted net income for the periods presented (in thousands):

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

2021 2020 2021 2020

For the Three Months Ended December 31,

Net income $ 5,511 $ 7,871

Settlement of legal claim (1)

Legal expenses associated with settlement of legal claim 134 119 1,166 216

Settlement of legal claim and associated legal expenses (1)

Tax impact due to above reconciling items $ — $ (92)

Adjusted net income $ 5,511 $ 8,145

(1) Reflects $3.2 million legal settlement (see Note 19 - Legal Proceedings to the unaudited consolidated financial statements included elsewhere in this Quarterly Report).

(1) Reflects legal expenses associated with a settlement agreement entered into in April 2021 unrelated to the Company's core operations.

Results of Operations

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

The following table sets forth selected financial data for the three months ended June 30, 2021 and 2020 (in thousands, except percentages):

Three Months Ended December 31, 2021 Compared to Three Months Ended December 31, 2020

The following table sets forth selected financial data for the three months ended December 31, 2021 and December 31, 2020 (unaudited in thousands, except percentages):

Change From the Three Months Ended

For the Three Months Ended June 30, June 30, 2020

For the Three Months Ended December 31, December 31, 2020

to the Three Months Ended

2021 2020 June 30, 2021

2021 2020 December 31, 2021

Revenues Dollars % of

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Interest expense, net (1,264) (0.4) % (468) (0.2) % (796) 170.1 %

Other income (expense) 252 0.1 % 251 0.2 % 1 0.4 %

Other income 116 — % 165 — % (49) (29.7) %

Income before provision for income taxes and earnings from investment in joint venture 7,311 2.6 % 10,540 5.5 % (3,229) (30.6) %

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Adjusted net income $ 5,511 1.9 % $ 8,145 4.3 % $ (2,634) (32.3) %

Revenues for the three months ended June 30, 2021 increased $44.7 million, or 20.6%, to $261.7 million from $217.0 million for the three months ended June 30, 2020.

The increase included $31.4 million of revenues attributable to acquisitions completed subsequent to June 30, 2020 and an increase of approximately $13.3 million of revenues in our remaining markets from contract work and sales of HMA and aggregates to third parties.

Revenues for the three months ended December 31, 2021 increased $94.1 million, or 49.3%, to $285.0 million from $190.9 million for the three months ended December 31, 2020.

The increase included $37.8 million of revenues attributable to acquisitions completed subsequent to December 31, 2020 and an increase of approximately $56.3 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 three months ended June 30, 2021 decreased $0.3 million, or 0.7%, to $36.6 million from $36.9 million for the three months ended June 30, 2020.

The lower gross profit was primarily due to lower profit margins on the

projects we assumed in connection with (i) the North Carolina acquisitions that were completed during the first quarter of fiscal 2021 and (ii) lower utilization of the asphalt plants and equipment acquired in these acquisitions.

Gross profit for the three months ended December 31, 2021 increased $2.4 million, or 7.7%, to $33.0 million from $30.6 million for the three months ended December 31, 2020.

The increase in gross profit was primarily the result of the 49.3%

increase in revenue in the three months ended December 31, 2021 compared to the three months ended December 31, 2020.

The lower gross profit margin was due to (i) lower profit margins on the projects we assumed in connection with acquisitions completed during the three months ended December 31, 2021 and the fiscal year ended September 30, 2021, and (ii) continued lower margins due to increases in the costs of raw materials, fuel, labor and trucking, and supply chain issues.

General and Administrative Expenses.

General and administrative expenses for the three months ended June 30, 2021 increased $6.3 million, or 37.6%, to $23.2 million from $16.9 million for the three months ended June 30, 2020.

The increase in general and administrative expenses for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily the result of (i) a $1.0 million increase in equity-based compensation expense, (ii) a $2.0 million increase in management personnel payroll and benefits, (iii) a $1.0 million increase attributable to acquisitions completed subsequent to June 30, 2020, and (iv) a $1.6 million increase in various professional fees, primarily driven by business acquisitions, information technology expenses and increased accounting fees.

General and administrative expenses for the three months ended December 31, 2021 increased $4.8 million, or 24.2%, to $24.9 million from $20.1 million for the three months ended December 31, 2020.

The increase was primarily the result of (i) a $1.1 million increase in equity-based compensation expense, (ii) a $2.3 million increase attributable to general and administrative expenses associated with the businesses acquired subsequent to December 31, 2020, and (iii) a $1.2 million increase in other professional fees, primarily driven by expenses incurred in support of acquisition activities, information technology expenses and increased accounting and consulting fees.

Interest Expense, Net.

Interest expense, net for the three months ended June 30, 2021 decreased 1.2%.

The decrease was primarily due to $0.1 million of unrealized gain on interest rate swaps for the three months ended June 30, 2021 compared to unrealized loss on interest rate swaps of $0.1 million for the three months ended June 30, 2020.

Interest expense, net for the three months ended December 31, 2021 increased $0.8 million, or 170.1%, to $1.3 million compared to $0.5 million for the three months ended December 31, 2020.

The increase in interest expense was due to an increase in the average principal debt balance outstanding during the three months ended December 31, 2021 compared to the corresponding period in 2020.

Provision for Income Taxes.

Our effective tax rate increased to 33.0% for the three months ended June 30, 2021, from 23.3% for the three months ended June 30, 2020.

Our higher effective tax rate for the three months ended June 30, 2021 was due to the unfavorable impact of a non-deductible legal settlement and related legal expenses, as described in Note 19 - Legal Proceedings.

Earnings from Investment in Joint Venture.

Earnings from investment in joint venture decreased $0.4 million during the three months ended June 30, 2021 compared to the three months ended June 30, 2020, as the construction project from which these earnings were derived had a lower level of activity during the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

Net income decreased $6.4 million to $9.3 million for the three months ended June 30, 2021, compared to $15.7 million for the three months ended June 30, 2020.

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

Our effective tax rate decreased to 24.6% for the three months ended December 31, 2021, from 25.4% for the three months ended December 31, 2020.

Our lower effective tax rate during the three months ended December 31, 2021 was the result of a benefit of $0.1 million related to an amended state return filed during the period.

Net income decreased $2.4 million, or 30.0%, to $5.5 million for the three months ended December 31, 2021, compared to $7.9 million for the three months ended December 31, 2020.

The decrease in net income was a result of an increase in general and administrative expenses, partially offset by an increase in gross profit, all as described above.

Adjusted EBITDA and Adjusted EBITDA Margin.

Adjusted EBITDA and Adjusted EBITDA Margin were $29.0 million and 11.1%, respectively, for the three months ended June 30, 2021, compared to $32.0 million and 14.7%, respectively, for the three months ended June 30, 2020.

The decrease in Adjusted EBITDA was the result of lower gross profit and an increase in general and administrative expenses.

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

Adjusted EBITDA and Adjusted EBITDA Margin were $26.4 million and 9.2%, respectively, for the three months ended December 31, 2021, compared to $23.5 million and 12.3%, respectively, for the three months ended December 31, 2020.

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

The lower Adjusted EBITDA Margin was primarily a result of the increase in revenues 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”.

Adjusted Net Income.

Adjusted net income decreased $6.4 million to an adjusted net income of $9.5 million for the three months ended June 30, 2021, compared to adjusted net income of $15.9 million for the three months ended June 30, 2020.

Adjusted net income decreased $2.6 million, or 32.3%, to adjusted net income of $5.5 million for the three months ended December 31, 2021, compared to adjusted net income of $8.1 million for the three months ended December 31, 2020.

The decrease in adjusted net income was primarily a result of lower gross profit and higher general and administrative expenses, all as 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, 2021 Compared to Nine Months Ended June 30, 2020

The following table sets forth selected financial data for the nine months ended June 30, 2021 and 2020 (in thousands, except percentages):

Change From the Nine Months Ended

For the Nine Months Ended June 30, June 30, 2020

to the Nine Months Ended

2021 2020 June 30, 2021

Revenues Dollars % of

Revenues $ 631,697 100.0 % $ 561,034 100.0 % $ 70,663 12.6 %

Cost of revenues 546,414 86.5 % 480,217 85.4 % 66,197 13.8 %

Gross profit 85,283 13.5 % 80,817 14.5 % 4,466 5.5 %

General and administrative expenses (67,754) (10.7) % (50,786) (9.1) % (16,968) 33.4 %

Gain on sale of equipment, net 1,177 0.2 % 1,134 0.2 % 43 3.8 %

Operating income 18,706 3.0 % 31,165 5.6 % (12,459) (40.0) %

Interest expense, net (1,334) (0.2) % (2,690) (0.5) % 1,356 (50.4) %

Other income (expense) 661 0.1 % 360 — % 301 83.6 %

Income before provision for income taxes and earnings from investment in joint venture 18,033 2.9 % 28,835 5.1 % (10,802) (37.5) %

Provision for income taxes (5,767) (1.0) % (6,622) (1.2) % 855 (12.9) %

Earnings from investment in joint venture 10 — % 532 0.2 % (522) (98.1) %

Net income $ 12,276 1.9 % $ 22,745 4.1 % $ (10,469) (46.0) %

Adjusted EBITDA $ 63,506 10.1 % $ 63,539 11.3 % $ (33) (0.1) %

Adjusted net income $ 16,642 2.6 % $ 22,961 4.1 % $ (6,319) (27.5) %

Revenues for the nine months ended June 30, 2021 increased $70.7 million, or 12.6%, to $631.7 million from $561.0 million for the nine months ended June 30, 2020.

The increase included $58.4 million of revenues attributable to acquisitions completed subsequent to October 1, 2019 and an increase of approximately $12.3 million of revenues in our remaining markets from contract work and sales of HMA and aggregates to third parties.

Gross Profit.

Gross profit for the nine months ended June 30, 2021 increased $4.5 million, or 5.5%, to $85.3 million from $80.8 million for the nine months ended June 30, 2020.

The increase in gross profit was primarily the result of the increase in revenue for the nine months ended June 30, 2021 compared to the nine months ended June 30, 2020.

Additionally, the higher gross profit was the result of an increase in gross profit margin due to (i) efficient utilization of our plants and equipment, (ii) a $2.1 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, (iii) an increase of $2.8 million in unrealized gains on commodity derivative instruments that are included in cost of revenues, and (iv) offset by lower profit margins on the projects we assumed in connection with the North Carolina acquisitions we completed during the first quarter of fiscal 2021 and lower utilization of the asphalt plants and equipment acquired in these acquisitions.

General and Administrative Expenses.

General and administrative expenses for the nine months ended June 30, 2021 increased $17.0 million, or 33.4%, to $67.8 million from $50.8 million for the nine months ended June 30, 2020.

The increase in general and administrative expenses for the nine months ended June 30, 2021 compared to the nine months ended June 30, 2020 was primarily the result of (i) a $1.0 million increase in equity-based compensation expense, (ii) a $3.2 million legal settlement, as described in Note 19 - Legal Proceedings, and an increase of $0.9 million for legal fees associated with this settlement, (iii) a $5.5 million increase in management personnel payroll and benefits, (iv) a $2.9 million increase attributable to acquisitions completed subsequent to June 30, 2020, and (v) a $2.3 million increase in other professional fees, primarily driven by business acquisitions, information technology expenses and increased accounting fees.

Interest Expense, Net.

Interest expense, net for the nine months ended June 30, 2021 decreased $1.4 million, to $1.3 million compared to $2.7 million for the nine months ended June 30, 2020.

The decrease was primarily due to $0.8 million of unrealized gain on interest rate swaps for the nine months ended June 30, 2021, compared to an unrealized loss on interest rate swaps of $1.6 million for the nine months ended June 30, 2020.

This change was offset by an increase in interest paid due to the increase in long-term debt at June 30, 2021 compared to June 30, 2020.

Other Income (Expense).

Other income (expense) for the nine months ended June 30, 2021 increased $0.3 million, to $0.7 million compared to $0.4 million for the nine months ended June 30, 2020.

The increase was primarily attributable to rental income from property acquired in the North Carolina acquisitions completed during the first quarter of fiscal 2021.

Provision for Income Taxes.

Our effective tax rate increased to 32.0% for the nine months ended June 30, 2021, from 22.5% for the nine months ended June 30, 2020.

Earnings from Investment in Joint Venture.

Earnings from investment in joint venture decreased $0.5 million during the nine months ended June 30, 2021 compared to the nine months ended June 30, 2020, as the construction project from which these earnings were derived had a lower level of activity during the nine months ended June 30, 2021.

Net income decreased $10.5 million, or 46.0%, to $12.3 million for the nine months ended June 30, 2021, compared to $22.7 million for the nine months ended June 30, 2020.

The decrease in net income was primarily a result of higher general and administrative expenses, partially offset by an increase in gross profit and a decrease in interest expense, net, all as described above.

Adjusted EBITDA and Adjusted EBITDA Margin.

Adjusted EBITDA and Adjusted EBITDA Margin were $63.5 million and 10.1%, respectively, for the nine months ended June 30, 2021, compared to $63.5 million and 11.3%, respectively, for the nine months ended June 30, 2020.

The lower Adjusted EBITDA Margin was a result of an increase in revenues, all as 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”.

Adjusted Net Income.

Adjusted net income decreased $6.3 million to adjusted net income of $16.6 million for the nine months ended June 30, 2021, compared to adjusted net income of $23.0 million for the nine months ended June 30, 2020.

The decrease in adjusted net income was primarily a result of higher general and administrative expenses, partially offset by an increase in gross profit and decrease in interest expense, net, all as described above.

Inflation and Price Changes

Except as described above under the heading “Inflationary Trends,” inflation had an immaterial impact on our results of operations for the three and nine months ended June 30, 2021 and 2020 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.

As described above under the heading “Inflationary Trends,” during the three months ended December 31, 2021, we continued to experience an upward trend in several inflation-sensitive inputs necessary for us to provide our products and services, including upward pressure on wages and increases in the cost of raw materials used to produce HMA and other items that are critical to our business.

Inflation had an immaterial impact on our results of operations for the three months ended December 31, 2020 due to relatively low inflation in the United States during that period 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.

Liquidity and Capital Resources

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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,

Net cash provided by operating activities, net of acquisition $ 9,334 $ 51,414

For the Three Months Ended December 31,

Net cash provided by (used in) operating activities, net of acquisitions $ (577) $ 709

Net cash used in investing activities (80,274) (94,056)

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Operating Activities

During the nine months ended June 30, 2021, cash provided by operating activities, net of acquisitions, was $9.3 million, primarily as a result of:

• net income of $12.3 million, including $36.0 million of depreciation, depletion and amortization of long-lived assets, unrealized gains on derivative instruments of $3.1 million and equity-based compensation expense of $2.2 million;

• an increase in contracts receivable including retainage, net, of $33.0 million as a result of higher overall revenues due to acquisitions and growth in existing markets;

• an increase in other assets of $4.1 million primarily due to capitalized costs related to the amended Revolving Credit Facility and deposits on property, plant and equipment assets;

• an increase in inventories of $8.1 million due to increased inventories from acquisitions and normal fluctuations in our inventory cycle;

• an increase in accounts payable and accrued expenses and other current liabilities of $19.8 million due to an increase in construction activity as noted above;

During the three months ended December 31, 2021, cash used in operating activities, net of acquisitions, was $0.6 million, primarily as a result of:

• net income of $5.5 million, including $15.9 million of depreciation, depletion, accretion and amortization of long-lived assets and equity-based compensation expense of $1.5 million;

• an increase in inventories of $2.5 million due to acquisitions and normal fluctuations in our inventory cycle;

• an increase in prepaid expenses and other current assets of $3.5 million due to the timing of payments for various insurance policies and expenses;

• a decrease in accounts payable and accrued expenses and other current liabilities of $24.2 million due to the timing of processing transactions in our accounts payable cycle;

• a net increase 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 $5.8 million due to the timing of performing and closing projects.

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, accretion and amortization of long-lived assets and equity-based compensation expense of $0.4 million;

• a decrease in contracts receivable including retainage, net, of $18.5 million due to 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 nine months ended June 30, 2020, cash provided by operating activities, net of acquisitions, was $51.4 million, primarily as a result of:

• net income of $22.7 million, including $29.1 million of depreciation, depletion and amortization of long-lived assets and unrealized losses on derivative instruments of $2.0 million and equity-based compensation expense of $1.2 million;

• a decrease in contracts receivable including retainage, net, of $6.3 million due to a reduction in the number of projects available for bid in certain of our markets;

• a decrease in accounts payable and accrued expenses and other current liabilities of $10.9 million due to decreases related to inventory purchases associated with our liquid asphalt terminal.

Investing Activities

During the nine months ended June 30, 2021, cash used in investing activities was $129.5 million, $92.3 million of which related to acquisitions completed in the period and $39.6 million of which was invested in property, plant and equipment, partially offset by $2.4 million of proceeds from the sale of equipment.

During the nine months ended June 30, 2020, cash used in investing activities was $69.2 million, $30.2 million of which related to acquisitions completed in the period and $41.5 million of which was invested in property, plant and equipment, partially offset by $2.1 million of proceeds from the sale of equipment and a $0.4 million distribution from our investment in a joint venture.

During the three months ended December 31, 2021, cash used in investing activities was $80.3 million, of which $65.9 million related to acquisitions completed in the period and $15.1 million was invested in property, plant and equipment, partially offset by $0.7 million of proceeds from the sale of equipment.

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.

Financing Activities

During the nine months ended June 30, 2021, cash provided by financing activities was $106.3 million.

We received $199.1 million from proceeds on long-term debt, net of debt issuance costs and discounts, reflecting a Term Loan advance, net of issuance costs, to fund acquisitions and for liquidity purposes.

These proceeds were offset by $92.8 million of repayments of long-term debt.

During the nine months ended June 30, 2020, cash provided by financing activities was $15.8 million.

We received $42.7 million from proceeds on long-term debt, net of debt issuance costs and discounts, reflecting (i) a $15.0 million advance under our Revolving Credit Facility primarily used to fund the March 2020 acquisition of two HMA manufacturing plants in Florida and for liquidity purposes, and (ii) $27.7 million of Term Loan advances, net of issuance cost, related to our buyout of certain lease obligations in October 2019 and to pay down the March 2020 $15.0 million advance under the Revolving Credit Facility.

These proceeds were offset by $26.9 million of repayments of principal on long-term debt.

During the three months ended December 31, 2021, cash provided by financing activities was $67.5 million.

We received $70.0 million of proceeds from our Revolving Credit Facility, primarily used for acquisitions completed in the period.

This cash flow was offset by $2.5 million of principal payments on long-term debt.

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.

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 June 30, 2021 and September 30, 2020, we had $200.0 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 $213.9 million and $39.3 million, respectively, under the Revolving Credit Facility, after reduction for outstanding letters of credit.

At June 30, 2021, the interest rate on outstanding borrowings under the Term Loan was 1.35%.

The Credit Agreement requires us 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 3.00-to-1.00, subject to certain adjustments.

At June 30, 2021 and September 30, 2020, our fixed charge coverage ratio was 4.00-to-1.00 and 2.85-to-1.00, respectively, and our consolidated leverage ratio was 1.86-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, 2021 and September 30, 2020, the aggregate notional value of these interest rate swap agreements was $40.3 million and $46.5 million, respectively, and the fair value was $(1.0) million and $(1.7) million, respectively, which is included within other long-term

liabilities on our Consolidated Balance Sheets.

At December 31, 2021 and September 30, 2021, we had $195.0 million and $197.5 million, respectively, of principal outstanding under the Term Loan, $90.0 million and $20.0 million, respectively, of principal outstanding under the Revolving Credit Facility, and availability of $123.7 million and $193.7 million, respectively, under the Revolving Credit Facility, including reduction for outstanding letters of credit.

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

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 3.00-to-1.00, subject to certain adjustments.

At December 31, 2021 and September 30, 2021, our fixed charge coverage ratio was 3.14-to-1.00 and 3.29-to-1.00, respectively, and our consolidated leverage ratio was 2.49-to-1.00 and 1.99-to-1.00, respectively.

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

At December 31, 2021 and September 30, 2021, the aggregate notional value of these interest rate swap agreements was $196.3 million and $198.3 million, respectively, and the fair value was $1.5 million and $(0.8) million, respectively, which is included within other assets, other current liabilities or other long-term liabilities on the Company’s Consolidated Balance Sheets.

For more information about the Credit Amendment, see Note 8 - Debt to the unaudited consolidated financial statements included elsewhere in this report.

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.

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

Additional cash requirements resulting from our growth include the costs of additional personnel, production and distribution facilities, 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 nine months ended June 30, 2021 and 2020, our capital expenditures were $39.6 million and $41.5 million, respectively.

During the three months ended December 31, 2021 and 2020, our capital expenditures were approximately $15.1 million and $10.5 million, respectively.

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

At June 30, 2021, our commitments for capital expenditures were not material to our financial condition or results of operations on a consolidated basis.

At December 31, 2021, our commitments for capital expenditures were not material to our financial condition or results of operations on a consolidated basis.

For fiscal 2022, we expect total capital expenditures to be $60.0 million to $65.0 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.

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

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

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

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

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

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

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

We believe that our operating cash flow, 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 the COVID-19 pandemic, and significant additional capital expenditures will be required to conduct our operations.

There can be no assurance that operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures.

We believe that our operating cash flow and available borrowings under the Credit Agreement 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.

There can be no assurance that operations and other capital resources will provide sufficient cash to maintain planned or future levels of capital expenditures.

In the event that we make one or more acquisitions and the amount of capital required is greater than the amount of cash on hand we have available for acquisitions at that time, we could be required to reduce the expected level of capital expenditures and/or seek additional capital.

If we seek additional capital, we may do so through borrowings under our credit facilities, joint ventures, asset sales, offerings of debt or equity securities or other means.

Our ability to engage in any such transactions may be constrained by economic conditions and other factors outside of our control.

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

If we are unable to obtain the funds we need, we may not be able to complete acquisitions that may be favorable to us or finance the capital expenditures necessary to conduct our operations.

Commodity Price Risk

We are subject to commodity price risk with respect to price changes in liquid asphalt and energy, including fossil fuels and electricity for aggregates and asphalt paving mix production, natural gas for HMA production and diesel fuel for distribution vehicles and production-related mobile equipment.

In order to manage or reduce commodity price risk, we monitor the costs of these commodities at the time of bid and price them into our contracts accordingly.

Furthermore, liquid asphalt escalator provisions in most of our public contracts, and in some of our private and commercial contracts, limit our exposure to price fluctuations in this commodity.

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

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

As of June 30, 2021, we had fuel swap contracts to pay fixed prices for fuel with an aggregate notional amount of 2.7 million gallons, maturing incrementally through fiscal year 2023.

The fair value of these derivative contracts was $1.9 million at June 30, 2021.

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.

Interest Rate Risk

We are exposed to interest rate risk on certain of our short-term and long-term debt obligations used to finance our operations and acquisitions.

We have LIBOR-based floating rate borrowings under our credit facilities, which expose us to variability in interest

payments due to changes in the reference interest rates.

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

In order to hedge against changes in interest rates and to manage fluctuations in cash flows resulting from interest rate risk, we have entered into several amortizing interest rate swap agreements.

At June 30, 2021, the aggregate notional value of these interest rate swap agreements was $40.3 million for which we pay a fixed rate ranging from 1.24% to 3.01% and, in each case, under which receive a credit based on the applicable LIBOR rate.

At June 30, 2021, we had a total of $159.7 million of non-hedged variable rate borrowings outstanding.

If we seek additional capital, we may do so through borrowings under the Credit Agreement, joint ventures, asset sales, offerings of debt or equity securities or other means.

However, the unprecedented public health and governmental efforts to contain the spread of COVID-19 have created significant uncertainty as to general economic conditions for fiscal 2022 and beyond, and our ability to engage in any such transactions may be constrained by economic conditions and other factors outside of our control.

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

unable to obtain the funds we need, we may not be able to complete acquisitions that may be favorable to us or finance the capital expenditures necessary to conduct our operations.

Contractual Obligations

The following table sets forth certain information about our contractual obligations as of June 30, 2021 (in thousands):

The following table summarizes our significant obligations outstanding as of December 31, 2021:

Payments Due by Fiscal Year

Total Remainder of 2021 2022 2023 2024 2025 2026 and Thereafter

Total 2022 2023 2024 2025 2026 2027 and Thereafter

Debt obligations $ 285,000 $ 7,500 $ 10,000 $ 11,250 $ 15,000 $ 241,250 $ —

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Purchase commitments 3,422 1,969 1,453 — — — —

Royalty payments 2,340 234 196 189 137 124 1,460

Asset retirement obligations 2,805 — — — — — 2,805

Total $ 306,601 $ 11,372 $ 13,727 $ 13,154 $ 16,525 $ 242,755 $ 9,068

Off-Balance Sheet Arrangements

As of June 30, 2021, we had no material off-balance sheet arrangements, except for letters of credit of $11.1 million and purchase commitments for diesel fuel of $0.2 million entered into in the normal course of business.

Quantitative and Qualitative Disclosures About Market Risk.

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.

As of December 31, 2021, the Company had aggregate letters of credit outstanding in the amount of $11.3 million, future purchase commitments of $3.4 million for diesel fuel and $2.3 million of minimum royalty payments related to aggregates facilities.

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

See Note 17 - Commitments to our unaudited consolidated financial statements included elsewhere in this report for additional information.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis