Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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. Historical results may not be indicative of future performance. This discussion includes forward-looking statements that reflect our plans, estimates and beliefs. Such statements involve risks and uncertainties. Our actual results may differ materially from those contemplated by these forward-looking statements as a result of various factors, including those set forth under the headings “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.” This discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto included elsewhere in this report. In this discussion, we use certain non-GAAP financial measures. An explanation of these non-GAAP financial measures and a reconciliation to the most directly comparable GAAP financial measures are included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Investors should not consider non-GAAP financial measures in isolation or as substitutes for financial information presented in compliance with GAAP.
Overview
We are a civil infrastructure company that specializes in the building and maintenance of transportation networks. Our operations leverage a highly-skilled workforce, strategically located HMA plants, substantial construction assets and select material deposits. We provide construction products and services to both public and private infrastructure projects, with an emphasis on highways, roads, bridges, airports and commercial and residential sites throughout the Sunbelt in Alabama, Florida, Georgia, North Carolina, South Carolina, Tennessee and Texas.
Our public projects are funded by federal, state and local governments and include roads, highways, bridges, airports and other forms of infrastructure. Public transportation infrastructure projects historically have been a relatively stable portion of state and federal budgets and represent a significant share of the United States construction market. Federal funds are allocated on a state-by-state basis, and each state is required to match a portion of the federal funds that it receives. 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.
Recent Developments
Contract Backlog
At September 30, 2024, our contract backlog was $2.0 billion. Contract backlog is a financial measure that reflects the dollar value of work that the Company expects to perform in the future. We include a construction project in our contract backlog at the time it is awarded and to the extent we believe funding is probable. Our backlog consists of uncompleted work on contracts in progress and contracts for which we have executed a contract but have not commenced the work. For uncompleted work on contracts in progress, we include (i) executed change orders, (ii) pending change orders for which we expect to receive confirmation in the ordinary course of business and (iii) claims that we have made against our customers for which we have determined we have a legal basis under existing contractual arrangements and as to which we consider collection to be probable. Backlog of uncompleted work on contracts under which work was either in progress or had not yet begun was $1.5 billion at September 30, 2024. Our contract backlog also includes low bid/no contract projects, which consist of (i) public bid projects for which we were the low bidder and no contract has been executed and (ii) private work projects for which we have been notified that we are the low bidder or have been given a notice to proceed, but no contract has been executed. Low bid/no contract backlog was $0.5 billion at September 30, 2024.
2024 Fiscal Year Business Acquisitions
During the 2024 fiscal year, we completed eight acquisitions across four states, adding to or expanding our operations in Alabama, Georgia, North Carolina and South Carolina. As a result of these acquisitions, we added eleven asphalt plants and a diverse fleet of equipment and vehicles, as well as skilled construction professionals. For further discussion regarding these transactions, see Note 4 - Business Acquisitions to the consolidated financial statements included elsewhere in this report.
Lone Star Paving Acquisition
On November 1, 2024, we acquired all of the outstanding membership units of Asphalt, Inc., LLC (doing business as Lone Star Paving) (“Lone Star Paving” and the acquisition, the “Lone Star Acquisition”), a vertically integrated asphalt manufacturing and paving company headquartered in Austin, Texas, with 10 HMA plants, four aggregate facilities, and one liquid asphalt terminal supporting its operations. The aggregate consideration delivered at the closing of the Lone Star Acquisition consisted of (i) $654.2 million in cash (as adjusted pursuant to the Unit Purchase Agreement, dated as of October 20, 2024, by and among the Company, Lone Star Paving, the selling unit holders party thereto, and John J. Wheeler, in his capacity as the selling unit holders’ representative thereunder) and (ii) 3.0 million shares of our Class A common stock. In addition, we agreed to (i) pay cash to the selling unit holders in
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an amount equal to the working capital remaining in Lone Star Paving at closing, as finally determined (subject to adjustments and offsets to satisfy certain indemnification obligations and any purchase price overpayments), to be paid out in quarterly installments over four quarters following the closing, and (ii) purchase from the selling unit holders for $30.0 million in cash an entity that owns certain real property following receipt of specified operational entitlements by such entity. The cash paid at closing was funded from the proceeds of the Term Loan B (as defined below). For more information about the Lone Star Acquisition, see Note 27 - Subsequent Events to the consolidated financial statements included elsewhere in this report.
Term Loan B Credit Agreement
On November 1, 2024, we entered into a Term Loan Credit Agreement with Bank of America, N.A., as administrative agent, BofA Securities, Inc., PNC Capital Markets LLC, Regions Capital Markets, a division of Regions Bank, and TD Securities (USA) LLC, each as joint lead arranger and joint bookrunner, and certain other lenders party thereto (the “Term Loan B Credit Agreement”). The Term Loan B Credit Agreement provides for a senior secured first lien term loan facility in the aggregate principal amount of $850.0 million, which amount was fully drawn on November 1, 2024 (the “Term Loan B”). A portion of the proceeds of the Term Loan B was used to finance the cash portion of the consideration for the Lone Star Acquisition, including the repayment of certain outstanding indebtedness of Lone Star Paving and its subsidiaries at closing. The remaining loan proceeds were or will be used (i) to repay the Company’s outstanding borrowings under the revolving credit facility provided by the Term Loan A / Revolver Credit Agreement (as defined below), (ii) to pay fees and expenses incurred in connection with the foregoing debt financing transactions and Lone Star Acquisition and (iii) for working capital and other corporate purposes as permitted by the Term Loan B Credit Agreement. For more information about the Term Loan B Credit Agreement, see Note 27 - Subsequent Events to the consolidated financial statements included elsewhere in this report.
Credit Agreement Amendments
In May 2024, we and certain of our wholly owned subsidiaries entered into a Third Amendment to our Third Amended and Restated Credit Agreement (as amended from time to time, the “Term Loan A / Revolver Credit Agreement”) to, among other things, (i) increase the aggregate commitments under the revolving credit facility from $325.0 million to $400.0 million, (ii) reallocate $125.0 million of borrowings previously outstanding under the revolving credit facility to our term loan, (iii) add three new banks to our lender syndicate, (iv) provide for an additional incremental credit facility of up to $200.0 million and (v) update certain affirmative and negative covenants thereunder. Additionally, on October 30, 2024, we entered into a Fourth Amendment to the Term Loan A / Revolver Credit Agreement to, among other things, permit (i) the Lone Star Acquisition, (ii) entry into the Term Loan B Credit Agreement, and (iii) certain liens to be granted to secure the indebtedness incurred under the Term Loan B Credit Agreement on a pari passu basis with the liens securing the Company’s obligations under the Term Loan A / Revolver Credit Agreement. For further discussion regarding the Term Loan A / Revolver Credit Agreement and the foregoing amendments, see Note 11 - Debt and Note 27 - Subsequent Events to the consolidated financial statements included elsewhere in this report.
Stock Repurchase Program
In April 2024, our board of directors authorized a stock repurchase program under which up to $40 million is available to purchase shares of our outstanding Class A common stock through September 30, 2025. We utilize the stock repurchase program to minimize the dilutive impact of awards granted under our equity incentive plans and to repurchase shares opportunistically. Shares of our Class A common stock may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b5-1 plans. The stock repurchase program does not obligate us to repurchase any shares of Class A common stock, and the stock repurchase program may be modified, suspended, extended or terminated at any time by our board of directors. The actual timing, number and value of shares of Class A common stock repurchased are determined by a committee of the board of directors at its discretion and depend on a number of factors, including the market price of our Class A common stock, capital allocation alternatives, general market and economic conditions and other corporate considerations. During fiscal 2024, we repurchased a total of 173,741 shares of Class A common stock for an aggregate purchase price of $10.0 million.
Seasonality
The activity of our business fluctuates due to seasonality because our business is primarily conducted outdoors. Therefore, seasonal changes and other weather-related conditions, in particular extended snowy, rainy or cold weather and major weather events, such as hurricanes, tornadoes, tropical storms and heavy snows, can adversely affect our business and operations through a decline in both the use of our products and the demand for our services. In addition, construction materials production and shipment levels follow activity in the construction industry, which typically occurs in the spring, summer and fall. Warmer and drier weather during our third and fourth fiscal quarters typically result in higher activity and revenues during the second half of our fiscal year. Our first and second fiscal quarters typically have lower levels of activity due to adverse weather conditions. Our third fiscal quarter varies greatly with spring rains and wide temperature variations. A cool, wet spring increases drying time on projects, which can delay revenues in the third fiscal quarter, while a warm, dry spring may facilitate earlier project commencement dates.
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How We Assess Performance of Our Business
Revenues
We derive our revenues predominantly by providing construction products and services for both public and private infrastructure projects, with an emphasis on highways, roads, bridges, airports and commercial and residential sites in the southeastern United States. Our projects represent a mix of federal, state, municipal and private customers. 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 and liquid asphalt cement are recognized when the risks associated with ownership have passed to the customer.
Gross Profit
Gross profit represents revenues less cost of revenues. 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. From time to time, when appropriate, we limit our exposure to changes in commodity prices by entering into forward purchase commitments. In addition, our public infrastructure contracts often provide for price adjustments based on fluctuations in certain commodity-related product costs. These price adjustment provisions are in place for most of our public infrastructure contracts, and we seek to include similar provisions in our private contracts.
Depreciation, Depletion, Accretion 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. Amortization expense is the periodic expense related to leasehold improvements, intangible assets and liabilities. Leasehold improvements are amortized over the lesser of the life of the underlying asset or the remaining lease term. Our intangible assets and liabilities 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 and liabilities. 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. 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 Property, Plant and Equipment
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 the sale of property, plant and 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.
Gain on Facility Exchange
As part of our continued growth strategy, we may exchange or sell facilities in order to generate capital for use in connection with other strategic initiatives. The gain or loss on the exchange or sale of a facility reflects the difference between the net carrying value of the facility at the date of disposal and the consideration received from the exchange or sale 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 balances in excess of our current operating needs.
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Other Key Performance Indicators — Adjusted EBITDA and Adjusted EBITDA Margin
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) share-based compensation expense, (v) loss on the extinguishment of debt, and (vi) expenses associated with non-routine acquisitions. Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of revenues for each period. 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 our operating performance. We present Adjusted EBITDA and Adjusted EBITDA Margin 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 and Adjusted EBITDA Margin 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 Fiscal Year
Ended September 30,
2024 2023 (2)
Net income $ 68,935 $ 49,001
Interest expense, net 19,071 17,346
Provision for income taxes 23,161 16,403
Depreciation, depletion, accretion and amortization 92,920 79,100
Share-based compensation expense 15,031 10,759
Acquisition-related expenses (1)
1,455 —
Adjusted EBITDA $ 220,573 $ 172,609
Revenues $ 1,823,889 $ 1,563,548
Adjusted EBITDA Margin 12.1 % 11.0 %
(1) Reflects expenses associated with the Lone Star Acquisition, which management views as a non-routine acquisition.
(2) In periods commencing prior to September 30, 2023, we historically included within the definition of Adjusted EBITDA an adjustment for management fees and expenses related to our management services agreement with an affiliate of SunTx Capital Partners, a member of our control group. Effective October 1, 2023, the term of the management services agreement was extended to October 1, 2028. As a result of the term extension, we no longer view the management fees and expenses paid under the management services agreement as a non-recurring expense. Accordingly, periods commencing subsequent to September 30, 2023 do not include an adjustment for management fees and expenses, and we have recast comparative Adjusted EBITDA and Adjusted EBITDA Margin for the fiscal year ended September 30, 2023 to conform to the current definition.
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Results of Operations — Fiscal Year Ended September 30, 2024 Compared to Fiscal Year Ended September 30, 2023
The following table sets forth selected financial data for the fiscal years ended September 30, 2024 (“fiscal 2024”) and September 30, 2023 (“fiscal 2023”) (in thousands, except percentages). Refer to the Annual Report on Form 10-K for the fiscal year ended September 30, 2023, filed with the SEC on November 29, 2023, for a discussion of results for fiscal 2023 and a comparison of our financial results for fiscal 2023 to those for the fiscal year ended September 30, 2022.
For the Fiscal Year Ended September 30, Change from Fiscal
2023 to Fiscal 2024
2024 2023
Dollars % of
Revenues Dollars % of
Revenues $ Change %
Change
Revenues $ 1,823,889 100.0 % $ 1,563,548 100.0 % $ 260,341 16.7 %
Cost of revenues 1,565,635 85.8 % 1,367,163 87.4 % 198,472 14.5 %
Gross profit 258,254 14.2 % 196,385 12.6 % 61,869 31.5 %
General and administrative expenses (151,497) (8.3) % (126,947) (8.1) % (24,550) 19.3 %
Gain on sale of property, plant and equipment 4,483 0.2 % 7,048 0.5 % (2,565) (36.4) %
Gain on facility exchange — — % 5,389 0.3 % (5,389) (100.0) %
Operating income 111,240 6.1 % 81,875 5.3 % 29,365 35.9 %
Interest expense, net (19,071) (1.0) % (17,346) (1.1) % (1,725) 9.9 %
Other (expense) income (70) — % 875 — % (945) (108.0) %
Income before provision for income taxes and earnings from investment in joint venture 92,099 5.1 % 65,404 4.2 % 26,695 40.8 %
Provision for income taxes 23,161 1.3 % 16,403 1.0 % 6,758 41.2 %
Loss from investment in
joint venture (3) — % — — % (3) — %
Net income $ 68,935 3.8 % $ 49,001 3.1 % $ 19,934 40.7 %
Adjusted EBITDA $ 220,573 12.1 % $ 172,609 11.0 % $ 47,964 27.8 %
Revenues. Revenues for fiscal 2024 increased $260.3 million, or 16.7%, to $1.8 billion from $1.6 billion for fiscal 2023. The increase included $154.0 million of revenues attributable to acquisitions completed during or subsequent to fiscal 2023 and an increase of approximately $106.3 million of revenues in our existing markets from contract work and sales of HMA and aggregates to third parties. The 6.8% increase in revenue in our existing markets was due to strong demand in both public and private work.
Gross Profit. Gross profit for fiscal 2024 increased $61.9 million, or 31.5%, to $258.3 million from $196.4 million for fiscal 2023. The increase in gross profit was primarily the result of the 16.7% increase in revenues for fiscal 2024 compared to fiscal 2023 and a higher gross profit margin. The higher gross profit margin was due to (i) efficient utilization of our plants and equipment fleet and (ii) completion of new backlog with more favorable margins.
General and Administrative Expenses. General and administrative expenses for fiscal 2024 increased $24.6 million, or 19.3%, to $151.5 million from $126.9 million for fiscal 2023. The increase in general and administrative expenses for fiscal 2024 compared to fiscal 2023 was the result of (i) an $8.1 million increase attributable to general and administrative expenses associated with the operations of businesses acquired subsequent to September 30, 2023, (ii) a $6.6 million increase in management personnel payroll and benefits, (iii) a $4.3 million increase in share-based compensation expense, and (iv) a $5.6 million increase in other general and administrative expenses.
Gain on Sale of Property, Plant and Equipment . Gain on sale of property, plant and equipment for fiscal 2024 decreased $2.6 million, or 36.4%, to $4.5 million from $7.0 million for fiscal 2023. The decrease was primarily the result of a $1.3 million gain on the sale of an excess office building and higher disposals of equipment and components during fiscal 2023.
Gain on Facility Exchange . There was no gain on facility exchange for fiscal 2024 compared to a gain on facility exchange of $5.4 million for fiscal 2023. The gain in fiscal 2023 was the result of the disposition of a quarry in North Carolina. In connection with
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this transaction, we acquired three HMA manufacturing plants and certain related assets located in the Nashville, Tennessee metro area.
Interest Expense, Net. Interest expense, net for fiscal 2024 increased $1.7 million, or 9.9%, to $19.1 million compared to $17.3 million for fiscal 2023. The increase in interest expense, net was primarily due to an increase in the average principal debt balance outstanding.
Provision for Income Taxes. Our effective tax rate was 25.1% for fiscal 2024 and fiscal 2023.
Net Income. Net income increased $19.9 million, or 40.7%, to $68.9 million for fiscal 2024 compared to $49.0 million for fiscal 2023. The increase in net income was primarily a result of higher gross profit, partially offset by an increase in general and administrative expenses and interest expense and decreased gains from the facility exchange and sales of property, plant and equipment, all as described above.
Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA Margin were $220.6 million and 12.1%, respectively, for fiscal 2024, compared to $172.6 million and 11.0%, respectively, for fiscal 2023. The increase in Adjusted EBITDA and Adjusted EBITDA Margin resulted primarily from a $19.9 million increase in net income and a $13.8 million increase in depreciation, depletion, accretion and amortization. For a description of Adjusted EBITDA and Adjusted EBITDA Margin, as well as a reconciliation of Adjusted EBITDA to net income, see above under the heading “How We Assess Performance of Our Business — Other Key Performance Indicators — Adjusted EBITDA and Adjusted EBITDA Margin.”
Liquidity and Capital Resources
Cash Flows Analysis
The following table sets forth our cash flows for the periods indicated (in thousands):
For the Fiscal Year
Ended September 30,
2024 2023
Net cash provided by operating activities, net of acquisitions $ 209,079 $ 157,157
Net cash used in investing activities (307,585) (143,372)
Net cash (used in) provided by financing activities 126,110 (264)
Net change in cash, cash equivalents and restricted cash $ 27,604 $ 13,521
Operating Activities
During fiscal 2024, cash provided by operating activities, net of acquisitions, was $209.1 million, primarily as a result of:
• net income of $68.9 million, reflecting, among other things, $92.9 million of depreciation, depletion, accretion and amortization, deferred income taxes of $22.7 million, share-based compensation expense of $14.4 million, and gain on sale of property, plant and equipment of $4.5 million;
• an increase in contracts receivable including retainage of $6.6 million as a result of higher overall revenues due to acquisitions and growth in existing markets;
• an increase in inventories of $15.5 million due to increased inventories from acquisitions, growth in existing markets, higher inventory costs and normal fluctuations in our inventory cycle;
• an increase in prepaid expenses and other current assets of $13.0 million, primarily due to the timing of payments under our insurance policies and other expenses;
• an increase in accounts payable and accrued expenses and other current liabilities of $18.3 million due to an increase in construction activity; and
• a net increase in the difference between billings in excess of costs and estimated earnings on uncompleted contracts and costs and estimated earnings in excess of billings on uncompleted contracts of $30.4 million due to the timing of performing and closing projects.
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During fiscal 2023, cash provided by operating activities, net of acquisitions, was $157.2 million, primarily as a result of:
• net income of $49.0 million, reflecting, among other things, $79.1 million of depreciation, depletion, accretion and amortization, deferred income taxes of $11.2 million, share-based compensation expense of $10.8 million, gain on sale of property, plant and equipment of $7.0 million, and gain on facility exchange of $5.4 million;
• an increase in contracts receivable including retainage of $26.0 million as a result of higher overall revenues due to acquisitions and growth in existing markets;
• an increase in inventories of $7.3 million due to increased inventories from acquisitions, growth in existing markets, higher inventory costs and normal fluctuations in our inventory cycle;
• a decrease in prepaid expenses and other current assets of $3.7 million, primarily due to the timing of payments under our insurance policies and other expenses;
• an increase in accounts payable and accrued expenses and other current liabilities of $19.6 million due to an increase in construction activity; and
• a net increase in the difference between billings in excess of costs and estimated earnings on uncompleted contracts and costs and estimated earnings in excess of billings on uncompleted contracts of $26.7 million due to the timing of performing and closing projects.
Investing Activitie s
During fiscal 2024, cash used in investing activities was $307.6 million, of which $231.8 million related to acquisitions completed in the period, $87.9 million was invested in property, plant and equipment and $5.5 million was invested in restricted investments. These amounts were partially offset by $14.1 million of proceeds from the sale of equipment and $3.6 million of proceeds from the sale of restricted investments.
During fiscal 2023, cash used in investing activities was $143.4 million, of which $91.8 million related to acquisitions completed in the period, $97.8 million was invested in property, plant and equipment and $11.4 million was invested in restricted investments. These amounts were partially offset by $17.7 million of proceeds from the sale of equipment, $37.0 million of proceeds from the facility exchange and $2.9 million of proceeds from the sale of restricted investments.
Financing Activities
During fiscal 2024, cash provided by financing activities was $126.1 million. We received $210.2 million in proceeds from the issuance of long-term debt, net of debt issuance costs and discounts, which was partially offset by $72.8 million of principal payments on long-term debt and purchase of treasury stock of $11.3 million.
During fiscal 2023, cash used in financing activities was $0.3 million. We received $103.0 million in proceeds from the issuance of long-term debt, net of debt issuance costs and discounts, which was offset by $103.1 million of principal payments on long-term debt and the purchase of treasury stock of $0.2 million.
Term Loan A / Revolver Credit Agreement
During fiscal 2024 and fiscal 2023, we and each of our subsidiaries were parties to the Term Loan A / Revolver Credit Agreement, which provides for the Term Loan A and the Revolving Credit Facility. At September 30, 2024 and 2023, we had $392.2 million and $283.8 million, respectively, of principal outstanding under the Term Loan A, $122.9 million and $93.1 million, respectively, of principal outstanding under the Revolving Credit Facility, and availability of $268.8 million and $222.1 million, respectively, under the Revolving Credit Facility, including reduction for outstanding letters of credit. The obligations of our subsidiaries under the Term Loan A and the Revolving Credit Facility are secured by a first priority security interest in substantially all of our assets.
The Term Loan A / Revolver 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 3.50-to-1.00, subject to certain adjustments. At September 30, 2024 and 2023, our fixed charge coverage ratio was 3.15-to-1.00 and 2.56-to-1.00, respectively, and our consolidated leverage ratio was 1.81-to-1.00 and 1.72-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. At September 30, 2024 and 2023, the aggregate notional value of these interest rate swap agreements was $300.0 million, and the fair value was $11.6 million and $26.9 million, respectively, which is included within other assets on our Consolidated Balance Sheets.
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For more information about the Term Loan A / Revolver Credit Agreement, see Note 11 - Debt and Note 27 - Subsequent Events to the consolidated financial statements included elsewhere in this report.
Term Loan B Credit Agreement
On November 1, 2024, we entered into the Term Loan B Credit Agreement, which provides for a senior secured first lien term loan facility in the aggregate principal amount of $850.0 million, which amount was fully drawn on November 1, 2024. A portion of the proceeds of the Term B Loan was used to finance the cash portion of the consideration for the Lone Star Acquisition, including the repayment of certain outstanding indebtedness of Lone Star Paving and its subsidiaries at closing. The remaining loan proceeds were or will be used (i) to repay a portion of our outstanding borrowings under the revolving credit facility provided by the Term Loan A / Revolver Credit Agreement, (ii) to pay fees and expenses incurred in connection with the foregoing debt financing transactions and Lone Star Acquisition and (iii) for working capital and other corporate purposes as permitted by the Term Loan B Credit Agreement.
For more information about the Term Loan B Credit Agreement, see Note 27 - Subsequent Events to the consolidated financial statements included elsewhere in this report.
Capital Requirements and Sources of Liquidity
During fiscal 2024 and fiscal 2023, our capital expenditures were approximately $87.9 million and $97.8 million, respectively. Our capital expenditures are typically made during the same fiscal year in which they are approved. At September 30, 2024, our commitments for capital expenditures were not material to our financial condition or results of operations on a consolidated basis. For fiscal 2025, we expect total capital expenditures to be $130.0 million to $140.0 million. Our capital expenditure budget is an estimate and is subject to change.
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.
Furthermore, on April 12, 2024, we announced that our board of directors authorized a stock repurchase program under which up to $40.0 million is available to purchase shares of our outstanding Class A common stock through September 30, 2025. We intend to utilize the stock repurchase program to minimize the dilutive impact of awards granted under our equity incentive plans and to repurchase shares opportunistically. Shares of Class A common stock may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b5-1 plans. The stock repurchase program does not obligate us to repurchase any shares of Class A common stock, and the stock repurchase program may be modified, suspended, extended or terminated at any time by our board of directors. The actual timing, number and value of shares of Class A common stock repurchased will be determined by a committee of the board of directors at its discretion and will depend on a number of factors, including the market price of the Class A common stock, capital allocation alternatives, general market and economic conditions and other corporate considerations. During fiscal 2024, we repurchased a total of 173,741 shares of Class A common stock for an aggregate purchase price of $10.0 million.
We have typically relied on cash available through credit facilities, in addition to cash from operations, to finance our working capital requirements and to support our growth. We regularly monitor potential capital sources, including equity and debt markets, in an effort to meet our planned capital expenditures and liquidity requirements. Our future success will depend on our ability to access outside sources of capital.
We believe that our operating cash flow and available borrowings under the Term Loan A / Revolver Credit Agreement and the Term Loan B Credit Agreement (together, the “Credit Agreements”) 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 inflation and supply chain constraints, and significant additional capital expenditures will be required to conduct our operations. Our operations and other capital resources may not provide sufficient cash to maintain planned or future levels of capital expenditures. In the event that we make one or more acquisitions and the amount of capital required is greater than the amount of cash on hand we have available for acquisitions at that time, we could be required to reduce the expected level of capital expenditures and/or seek additional capital. If we seek additional capital, we may do so through borrowings under the Credit Agreements, joint ventures, asset sales, offerings of debt or equity securities or other means. However, our ability to engage in any such transactions may be constrained by economic conditions and other factors outside of our control. Additional capital may not 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.
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Off-Balance Sheet Arrangements
As of September 30, 2024, the Company had aggregate letters of credit outstanding in the amount of $8.3 million, future purchase commitments for diesel fuel and natural gas of $4.0 million and $0.5 million, respectively, and $2.2 million of minimum royalty payments related to mineral leases at 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 18 - Commitments and Contingencies to our consolidated financial statements included elsewhere in this report for additional information.
Contractual Obligations
The following table summarizes our significant obligations outstanding as of September 30, 2024 (in thousands).
Payments Due by Fiscal Year
Total 2025 2026 2027 2028 2029 2029 and Thereafter
Debt obligations $ 515,038 $ 26,563 $ 31,875 $ 456,600 $ — $ — $ —
Operating leases 44,892 11,067 10,702 9,954 6,186 2,366 4,617
Purchase commitments 4,457 3,193 1,264 — — — —
Royalty payments 2,243 256 192 180 145 145 1,325
Asset retirement obligations 2,477 — — — — — 2,477
Total $ 569,107 $ 41,079 $ 44,033 $ 466,734 $ 6,331 $ 2,511 $ 8,419
In addition to the items set forth in the table above, subsequent to September 30, 2024 and in connection with the Lone Star Acquisition, we entered into a conditional purchase agreement pursuant to which we agreed to purchase from the sellers of Lone Star Paving, upon the receipt of certain permits and governmental entitlements, an entity that owns certain real property located in central Texas for aggregate consideration of $30.0 million.
Critical Accounting Policies and Estimates
The discussion of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates and assumptions on an ongoing basis. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our consolidated financial statements.
Critical accounting policies are those policies that, in management’s view, are the most important in the portrayal of our financial condition and results of operations. The notes to the consolidated financial statements also include disclosure of significant accounting policies. The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on the results that we report in our consolidated financial statements. These critical accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition are discussed further below.
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Revenue Recognition
The majority of our public construction contracts are fixed unit price contracts. Under fixed unit price contracts, we are committed to providing materials or services required by a contract at fixed unit prices (for example, dollars per ton of asphalt placed). Our private customer contracts are primarily fixed total price contracts, also known as lump sum contracts, which require that the total amount of work be performed for a single price. Revenues from fixed unit price and fixed total price construction contracts are recognized as performance obligations are satisfied over time (formerly known as the percentage-of-completion method), measured by the relationship of total cost incurred compared to total estimated contract costs (cost-to-cost input method). Under this method, revenues are recognized as costs are incurred in an amount equal to cost plus the related expected profit based on the ratio of costs incurred to estimated final costs. This cost-to-cost method is used because management considers it to be the best available measure of progress on these contracts. Contract costs consist of direct costs on contracts, including labor, materials, amounts payable to subcontractors and those indirect costs related to contract performance, such as equipment costs, insurance and employee benefits. Contract cost is recorded as incurred, and revisions in contract revenues and cost estimates are reflected in the accounting period when known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability, including those changes arising from contract change orders, penalty provisions and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined.
Change orders are modifications of an original contract that effectively change the existing provisions of the contract without adding new provisions or terms. Change orders may include changes in specifications or designs, manner of performance, facilities, equipment, materials, sites and period of completion of the work. Either we or our customers may initiate change orders. We consider unapproved change orders to be contract variations for which we have a change of scope for which we believe we are contractually entitled to a higher price, but where a price change associated with the scope change has not yet been agreed upon with the customer. Costs associated with unapproved change orders are included in the estimated cost to complete the contracts and are treated as project costs as incurred. We recognize revenues equal to costs incurred on unapproved change orders when realization of price approval is probable. Unapproved change orders involve the use of estimates, and it is reasonably possible that revisions to the estimated costs and recoverable amounts may be required in future reporting periods to reflect changes in estimates or final agreements with customers. Change orders that are unapproved as to both price and scope are evaluated as claims. We consider claims to be amounts in excess of agreed contract prices that we seek to collect from our customers or others for customer-caused delays, errors in specifications and designs, contract terminations, change orders that are either in dispute or are unapproved as to both scope and price, or other causes of unanticipated additional contract costs. Claims are included in the calculation of revenues when realization is probable and amounts can be reliably determined. To support these requirements, the existence of the following items must be satisfied: (i) the contract or other evidence provides a legal basis for the claim or a legal opinion has been obtained, stating that, under the circumstances, there is a reasonable basis to support the claim; (ii) additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of deficiencies in our performance; (iii) costs associated with the claim are identifiable or otherwise determinable and are reasonable in view of the work performed; and (iv) the evidence supporting the claim is objective and verifiable, not based on management’s subjective evaluation of the situation or on unsupported representations. Revenues in excess of contract costs incurred on claims are recognized when an agreement is reached with the customer as to the value of the claim, which, in some instances, may not occur until after completion of work under the contract. Costs associated with claims are included in the estimated costs to complete the contracts and are treated as project costs when incurred.
For the majority of our contracts, we receive our final payment when projects are near completion or fully completed. The accuracy of our revenues and profit recognition in a given period depends on the accuracy of our estimates of the revenues and costs to finish uncompleted contracts. Our estimates for all of our significant contracts use a highly detailed “bottom up” approach. However, our projects can be highly complex and, in almost every case, the profit margin estimates for a contract will either increase or decrease to some extent from the amount that was originally estimated at the time of bid. Because we have a large number of projects of varying sizes and levels of complexity in process at any given time, these changes in estimates can sometimes offset each other without materially impacting our overall profitability. However, large changes in revenues or cost estimates can have a significant effect on profitability.
The accuracy of our revenue and profit recognition in a given period depends on the accuracy of our estimates of the cost to complete each project. Cost estimates for all of our projects use a detailed approach, and we believe our experience allows us to create materially reliable estimates. There are a number of factors that can contribute to changes in estimates of contract cost and profitability. The most significant of these include:
• the completeness and accuracy of the original bid;
• costs associated with scope changes;
• changes in costs of labor and/or materials;
• extended overhead and other costs due to owner, weather and other delays;
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• subcontractor performance issues;
• changes in productivity expectations;
• site conditions that differ from those assumed in the original bid;
• changes from original design on design-build projects;
• the availability and skill level of workers in the geographic location of the project;
• a change in the availability and proximity of equipment and materials;
• our ability to fully and promptly recover on affirmative claims and back charges for additional contract costs; and
• the customer’s ability to properly administer the contract.
The foregoing factors, as well as the stage of completion of contracts in process and the mix of contracts at different margins, may cause fluctuations in gross profit between periods, and these fluctuations may be significant.
Contracts Receivable, Including Retainage, Net
Contracts receivable are generally based on amounts billed to the customer and currently due in accordance with our contracts. Many of the contracts under which we perform work contain retainage provisions. Retainage refers to amounts earned by the Company but held by customers until contracts are near completion or fully completed. Retainage on active contracts is classified as a current asset regardless of the term of the contract and is generally collected within one year of the completion of a contract. At September 30, 2024 and 2023, contracts receivable included $52.7 million and $53.3 million, respectively, of retainage.
Because the majority of our construction contracts are entered into with federal, state or municipal government customers, credit risk is minimal. We confirm that funds have been appropriated by the government project owner prior to commencing work on such projects. While most of our public contracts are subject to termination at the election of the government entity, in the event of any such termination, we are entitled to receive the contract price for completed work and reimbursement of termination-related costs. Credit risk with private customers is minimized because of statutory mechanic’s liens, which give us high priority in the event of lien foreclosures following financial difficulties of private customers. We maintain an allowance for credit losses, which has historically been sufficient to cover accounts that are not collected.
Valuation of Long-Lived Assets and Goodwill
Long-lived assets, which include property, plant and equipment and acquired intangible assets, such as goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset, or an asset group, may not be recoverable. Impairment evaluations involve fair values and management estimates of useful asset lives and future cash flows. Actual useful lives and cash flows could be different from those estimated by management, and this could have a material effect on our operating results and financial position. For fiscal 2024 and fiscal 2023, there were no events or changes in circumstances that would indicate a material impairment of our long-lived assets.
Goodwill and indefinite-lived intangible assets must be tested for impairment at least annually. We performed our most recent annual impairment test on July 1, 2024. Our test indicated that there was no impairment of goodwill and indefinite-lived intangible assets. For our goodwill impairment test, we first evaluate our market capitalization compared to the net assets of the Company overall. Our final determination of valuation is impacted by a number of factors, but the key factors are the price of our common stock, recently completed transactions from both public companies and private transactions and our estimated forecast of future cash flows.
The valuation approaches contain uncertainty regarding the estimates used. Our market capitalization could be impacted because we are a controlled company, which impacts the control premium we apply to the market price of our common stock. One of the largest uncertainties relates to federal, state and local government spending, which management expects to continue to increase in the coming years. There are a number of other uncertainties with respect to our future financial performance that could impact estimated future cash flows, including those discussed under the heading “Risk Factors” elsewhere in this report. Based on our valuation approaches, we determined that our one reporting unit exceeded its carrying value, and thus concluded that the carrying value of goodwill was not impaired at July 1, 2024 or 2023. At September 30, 2024 and 2023, we had goodwill with a carrying amount of $231.7 million and $159.3 million, respectively.
For our indefinite-lived intangible asset impairment test, we performed a qualitative impairment assessment. The qualitative assessment did not identify indicators of impairment, and it was determined that is more likely than not the indefinite-lived name license fair value was more than its carrying amount. Accordingly, no further analysis was required or performed.
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Inventories
The Company’s inventories are stated at the lower of cost or net realizable value and are accounted for on an average cost basis or a first-in, first-out cost basis. The cost of inventory includes the cost of material, labor, trucking and other equipment costs associated with procuring and transporting materials to HMA plants for production and delivery to customers. Inventories consist primarily of construction stone that has been removed from aggregates facilities and processed for future sale or internal use, raw materials including asphalt cement, and aggregates and millings that the Company expects to utilize on construction projects within one year. Inventories valued on the average cost basis totaled $95.8 million and $75.5 million at September 30, 2024 and 2023, respectively. Inventories valued on the first-in, first-out cost basis totaled $10.9 million and $8.5 million at September 30, 2024 and 2023, respectively.
Income Taxes
Deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. We regularly review our deferred tax assets for recoverability and, where necessary, establish a valuation allowance. Valuation allowances are established to reduce deferred tax assets if we determine that it is more likely than not that some or all of the deferred tax assets will not be realized in future periods.
To assess this likelihood, we use historical three-year results of operations, estimates and judgments regarding our future taxable income and consider the jurisdiction in which the taxable income is generated to determine whether a valuation allowance is required. Such evidence can include our current financial position, results of operations, actual and forecasted results, the reversal of deferred tax liabilities, tax planning strategies and the current and forecasted business economics of our industry. Additionally, we record uncertain tax positions at their net recognizable amount, based on the amount that management deems is more likely than not to be sustained upon ultimate settlement with the tax authorities in jurisdictions in which we operate.
On the basis of our evaluations, at September 30, 2024 and 2023, no valuation allowance was recorded on our net deferred tax assets, and we had no material uncertain tax positions. If our estimates or assumptions regarding our current and deferred tax items are inaccurate or are modified, these changes could have potentially material impacts on our earnings.
Accrued Insurance Cost
We carry insurance policies to cover various risks, primarily including general liability, automobile liability and workers’ compensation, under which we are liable to reimburse the insurance company for a portion of each claim paid. Since October 1, 2021, Construction Partners Risk Management, Inc., a captive insurance company and wholly owned subsidiary of the Company, has retained the first $1,000,000 per claim liability for each claim paid. Also effective October 1, 2021, we became a member of a group captive insurance company that retains the next $550,000 per claim liability for each claim paid. We utilize various primary and excess insurance companies to cover the liability for claims in excess of the retained amounts. Changes in loss assumptions caused by changes in actual experience would affect the assessment of the ultimate liability and could have an effect on our operating results and financial position up to $1,000,000 per occurrence for general liability, automobile liability and workers’ compensation claims. Prior to October 1, 2021, the amount for which we were liable for general liability, automobile liability and workers’ compensation claims ranged from $100,000 to $500,000 per occurrence. Management accrues insurance costs for probable losses, both reported and unreported, that are reasonably estimable using actuarial methods based on historic trends modified, if necessary, by recent events.
We provide employee medical insurance under policies that are both fixed-premium, fully-insured policies and self-insured policies that are administered by the insurance company. Under the self-insured policies, we are liable to reimburse the insurance company for actual claims paid plus an administrative fee. We purchase separate stop-loss insurance, which limits the individual participant claim loss to amounts ranging from $100,000 to $200,000.
Share-Based Payments and Other Equity Transactions
Our equity incentive plans are administered by the Compensation Committee of our board of directors. We account for awards issued under our equity incentive plan using a fair value-based method of accounting, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is typically the vesting period.