Construction Partners, Inc. (Exact Name of Registrant as Specified in its Charter)

Transcription

1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2018 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: Construction Partners, Inc. (Exact Name of Registrant as Specified in its Charter) Delaware (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 290 Healthwest Drive, Suite 2 Dothan, Alabama (Address of principal executive offices) (Zip Code) Registrant s telephone number, including area code: (334) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

2 As of May 31, 2018, the registrant had 11,950,000 shares of Class A common stock, $0.001 par value per share, and 39,217,537 shares of Class B common stock, $0.001 par value per share, outstanding.

3 EXPLANATORY NOTE The information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the information contained in Construction Partners, Inc. s final prospectus dated May 3, 2018 (the IPO Prospectus ) filed with the Securities and Exchange Commission pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the Securities Act ), on May 4, CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Act of 1934, such as statements related to future events, business strategy, future performance, future operations, backlog, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as seek, anticipate, plan, continue, estimate, expect, may, will, project, predict, potential, targeting, intend, could, might, should, believe and similar expressions or their negative. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on management s belief, based on currently available information, as to the outcome and timing of future events. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those expressed in such forward-looking statements. When evaluating forward-looking statements, you should consider the risk factors and other cautionary statements described under the heading Risk Factors in the IPO Prospectus. We believe the expectations reflected in the forward-looking statements contained in this Quarterly Report on Form 10-Q are reasonable, but no assurance can be given that these expectations will prove to be correct. Forwardlooking statements should not be unduly relied upon. Important factors that could cause actual results or events to differ materially from those expressed in forward-looking statements include, but are not limited to: declines in public infrastructure construction and reductions in government funding, including the funding by transportation authorities and other state and local agencies; risks related to our operating strategy; competition for projects in our local markets; risks associated with our capital-intensive business; government requirements and initiatives, including those related to funding for public or infrastructure construction, land usage and environmental, health and safety matters; unfavorable economic conditions and restrictive financing markets; our ability to successfully identify, manage and integrate acquisitions; our ability to obtain sufficient bonding capacity to undertake certain projects; our ability to accurately estimate the overall risks, requirements or costs when we bid on or negotiate contracts that are ultimately awarded to us; the cancellation of a significant number of contracts or our disqualification from bidding for new contracts; risks related to adverse weather conditions; our substantial indebtedness and the restrictions imposed on us by the terms thereof; our ability to maintain favorable relationships with third parties that supply us with equipment and essential supplies; our ability to retain key personnel and maintain satisfactory labor relations; property damage, results of litigation and other claims and insurance coverage issues; risks related to our information technology systems and infrastructure; and our ability to remediate the material weaknesses in internal control over financial reporting identified in preparing our financial statements for the fiscal year ended September 30, 2017 and to subsequently maintain effective internal control over financial reporting. These factors are not necessarily all of the important factors that could cause actual results or events to differ materially from those expressed in the forwardlooking statements. Other unknown or unpredictable factors could also cause actual results or events to differ materially from those expressed in the forwardlooking statements. Our future results will depend upon various other risks and uncertainties, including those described in this Quarterly Report on Form 10-Q and in our IPO Prospectus. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. Forward-looking statements speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements after the date on which any such statement is made, whether as a result of new information, future events or otherwise, except as required by law. 1

4 Table of Contents Page PART I. FINANCIAL INFORMATION Item 1. Consolidated Balance Sheets at March 31, 2018 (unaudited) and September 30, Consolidated Statements of Income for the three and six months ended March 31, 2018 and March 31, 2017 (unaudited) 4 Consolidated Statement of Stockholders Equity for six months ended March 31, 2018 (unaudited) 5 Consolidated Statements of Cash Flows for the six months ended March 31, 2018 and March 31, 2017 (unaudited) 6 Notes to Consolidated Financial Statements (unaudited) 7 Item 2. Management s Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 24 Item 4. Controls and Procedures 24 PART II. OTHER INFORMATION Item 1. Legal Proceedings 25 Item 1A. Risk Factors 25 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25 Item 3. Defaults Upon Senior Securities 26 Item 4. Mine Safety Disclosures 26 Item 5. Other Information 26 Item 6. Exhibits 27 SIGNATURES 28 2

5 PART I FINANCIAL INFORMATION Item 1. Financial Statements Construction Partners, Inc. Consolidated Balance Sheets (in thousands, except share and per share data) March 31, 2018 September 30, 2017 (unaudited) ASSETS Current assets: Cash $ 25,797 $ 27,547 Contracts receivable including retainage, net 75, ,984 Costs and estimated earnings in excess of billings on uncompleted contracts 10,132 4,592 Inventories 19,829 17,487 Other current assets 12,610 4,520 Total current assets 144, ,130 Property, plant and equipment, net 125, ,911 Goodwill 30,600 30,600 Intangible assets, net 2,400 2,550 Investment in joint venture 630 Other assets 14,442 2,483 Deferred income taxes, net 2,235 1,876 Total assets $ 319,822 $ 328,550 LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities: Accounts payable $ 37,324 $ 52,402 Billings in excess of costs and estimated earnings on uncompleted contracts 32,107 32,108 Current maturities of debt 10,000 10,000 Accrued expenses and other current liabilities 16,789 20,036 Total current liabilities 96, ,546 Long-term liabilities: Long-term debt, net of current maturities 37,175 47,136 Deferred income taxes, net 6,556 9,667 Other long-term liabilities 4,837 5,020 Total long-term liabilities 48,568 61,823 Total liabilities 144, ,369 Commitments and contingencies Stockholders Equity Preferred stock, par value $0.001; 1,000,000 shares authorized and no shares issued and outstanding Common stock, $0.001 par value, 126,000,000 shares authorized, 44,987,574 issued and 41,817,541 and 41,691,541 outstanding at March 31, 2018 and December 31, 2017, respectively Additional paid-in capital 142, ,385 Treasury stock, at cost (11,525) (11,983) Retained earnings 43,978 21,734 Total stockholders equity 175, ,181 Total liabilities and stockholders equity $ 319,822 $ 328,550 The accompanying notes are an integral part of these consolidated financial statements. 3

6 Construction Partners, Inc. Consolidated Statements of Income (unaudited in thousands, except share and per share data) For the Three Months Ended March 31, For the Six Months Ended March 31, Revenues $ 118,899 $ 110,366 $ 269,320 $ 232,486 Cost of revenues 105,150 96, , ,396 Gross profit 13,749 14,361 36,547 33,090 General and administrative expenses (13,358) (10,965) (25,784) (21,528) Settlement income 14,803 14,803 Gain on sale of equipment, net 886 2,183 1,031 2,437 Operating income 16,080 5,579 26,597 13,999 Interest expense, net (253) (1,096) (550) (2,143) Other expense (39) (105) (60) (131) Income before provision for income taxes and earnings from investment in joint venture 15,788 4,378 25,987 11,725 Provision for income taxes 4,770 1,578 3,973 4,364 Earnings from investment in joint venture Net income $ 11,248 $ 2,800 $ 22,244 $ 7,361 Net income per share attributable to common stockholders: Basic $ 0.27 $ 0.07 $ 0.53 $ 0.18 Diluted $ 0.27 $ 0.07 $ 0.53 $ 0.18 Weighted average number of common shares outstanding: Basic 41,717,024 41,502,490 41,704,071 41,502,490 Diluted 41,910,122 41,505,180 41,874,442 41,502,490 The accompanying notes are an integral part of these consolidated financial statements. 4

7 Construction Partners, Inc. Consolidated Statement of Stockholders Equity (unaudited in thousands, except share data) Additional Total Common Stock Paid-in Treasury Retained Stockholders Shares Amount Capital Stock Earnings Equity Balance, September 30, ,987,574 $ 45 $142,385 $(11,983) $21,734 $ 152,181 Equity-based compensation expense Issuance of restricted shares from treasury (453) Net income 22,244 22,244 Balance, March 31, ,987,574 $ 45 $142,536 $(11,525) $43,978 $ 175,034 The accompanying notes are an integral part of these consolidated financial statements. 5

8 Construction Partners, Inc. Consolidated Statements of Cash Flows (unaudited, in thousands) For the Six Months Ended March 31, Cash flows from operating activities: Net income $ 22,244 $ 7,361 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization of long-lived assets 11,308 10,501 Amortization of deferred debt issuance costs Provision for bad debt Gain on sale of equipment, net (1,031) (2,437) Equity-based compensation expense Earnings from investment in joint venture (230) Deferred income taxes (3,470) 23 Changes in operating assets and liabilities: Contracts receivable including retainage, net 44,811 27,896 Costs and estimated earnings in excess of billings on uncompleted contracts (5,540) (3,078) Inventories (2,342) (2,535) Other current assets (8,090) (6,350) Other assets (11,960) (1,081) Accounts payable (15,078) (11,258) Billings in excess of costs and estimated earnings on uncompleted contracts (1) 3,455 Accrued expenses and other current liabilities (3,247) (4,426) Other long-term liabilities (183) 511 Net cash provided by operating activities 28,124 19,394 Cash flows from investing activities: Purchases of property, plant and equipment (21,966) (12,076) Proceeds from sales of equipment 2,487 3,254 Investment in joint venture (400) Net cash used in investing activities (19,879) (8,822) Cash flows from financing activities: Repayments of revolving credit facility (5,000) Proceeds from revolving credit facility 312 Repayments of long-term debt (5,000) (7,911) Proceeds from reissuance of treasury stock 5 Common stock dividend paid (31,292) Net cash used in financing activities (9,995) (38,891) Net change in cash (1,750) (28,319) Cash: Beginning of Period 27,547 51,085 End of Period $ 25,797 $ 22,766 Supplemental cash flow information: Cash paid for interest $ 970 $ 1,784 Cash paid for income taxes $ 2,707 $ 2,975 Non cash investing activities: Property, plant and equipment financed by accounts payable $ 2,347 $ 315 The accompanying notes are an integral part of these consolidated financial statements. 6

9 Note 1 General Business Description Construction Partners, Inc. Notes to Consolidated Financial Statements (unaudited) Construction Partners, Inc. (the Company ) is a leading infrastructure and road construction company operating in Alabama, Florida, Georgia, South Carolina and North Carolina through its wholly-owned subsidiaries. The Company provides site development, paving, utility and drainage systems, as well as hot mix asphalt supply. The Company executes projects for a mix of private, municipal, state, and federal customers that are both privately and publicly funded. The majority of the projects are performed under fixed unit price contracts where the ultimate contract amount is based on the fixed unit price applied to actual units of work completed on the project. To a lesser extent, the Company also performs some fixed total price contracts. The Company was formed as a Delaware corporation in 2007 as a holding company for its wholly-owned subsidiary, Construction Partners Holdings, Inc. ( Construction Partners Holdings ), a Delaware corporation incorporated in 1999 and which began operations in 2001 to execute an acquisition growth strategy in the hot mix asphalt paving and construction industry. SunTx Capital Partners ( SunTx ), a private equity firm based in Dallas, Texas, is the Company s majority investor and has owned a controlling interest in the Company s stock since its inception. On September 20, 2017, the Company changed its name from SunTx CPI Growth Company, Inc. to Construction Partners, Inc. Seasonality The use and consumption of our products and services fluctuate some due to seasonality, although we are able to perform construction projects during all twelve months in all of our markets. Warmer and drier weather during the third and fourth quarters of our fiscal year typically result in higher activity and revenues during those quarters. The first and second quarters of our fiscal year typically have lower levels of activity due to adverse weather conditions. The results of operations and cash flows for any fiscal quarter may not be indicative of future results or of the results of operations or cash flows for a full fiscal year. These interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related notes thereto for the year ended September 30, 2017 included in the IPO Prospectus. Note 2 Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of Construction Partners, Inc. and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. These interim consolidated statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ( SEC ), which permit reduced disclosure for interim periods. The Consolidated Balance Sheet as of September 30, 2017 was derived from audited financial statements for the year then ended, but does not include all necessary disclosures required by accounting principles generally accepted in the United States of America ( U.S. GAAP ) with respect to annual financial statements. In the opinion of management, the unaudited consolidated financial statements include all recurring adjustments and normal accruals necessary for a fair presentation of the Company s financial position, results of operations and cash flows for the dates and periods presented. These financial statements and accompanying notes should be read in conjunction with the Company s audited annual consolidated financial statements for the year ended September 30, 2017 and notes thereto included in the IPO Prospectus. Results for interim periods are not necessarily indicative of the results to be expected for a full fiscal year or for any future period. Common share and per share amounts have been retroactively adjusted for all periods presented to give effect to the 25.2 to 1 split of the common stock (the Stock Split ) described in Note 12 Subsequent Events. Management s Estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the recorded amounts of assets, liabilities, stockholders equity, revenues and expenses during the reporting period, and the disclosure of contingent liabilities at the date of the financial statements. Estimates are used in accounting for items such as recognition of revenues and cost of revenues, goodwill and intangible assets, allowance for doubtful accounts, valuation allowances related to income taxes, accruals for potential liabilities related to lawsuits or insurance claims, and the fair value of equity-based compensation awards. Estimates are continually evaluated based on historical information and actual experience. Actual results could differ materially from those estimates. 7

10 A description of certain critical accounting policies of the Company is presented below. Additional critical accounting policies and the underlying judgments and uncertainties are described in the notes to the Company s annual consolidated financial statements for the fiscal year ended September 30, 2017 included in the IPO Prospectus. Emerging Growth Company Construction Partners, Inc. is an emerging growth company as defined by the Jumpstart Our Business Startups Act, or JOBS Act which was enacted in April As an emerging growth company, the Company may take advantage of an exemption from being required to comply with new or revised financial accounting standards until the effective date of such standards is applicable to private companies. The JOBS Act provides that a company may elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such election to opt out is irrevocable. The Company has elected to opt out of such extended transition period, which means that when a standard is issued or revised and it has different effective dates for public and private companies, the Company is required to adopt the new or revised standard at the effective date applicable to public companies that are not emerging growth companies. Contracts Receivable Including Retainage, net Contracts receivable including retainage, net are generally based on amounts billed and currently due from customers, amounts currently due but unbilled, and amounts retained by the customer pending completion of a project. It is common in the Company s industry for a small portion of progress billings of the contract price, typically 10%, to be withheld by the customer until the Company completes a project to the satisfaction of the customer in accordance with contract terms. Such amounts are also included as contracts receivable including retainage, net. Based on the Company s experience with similar contracts in recent years, billings for such retainage balances are generally collected within one year of the completion of the project. The carrying value of contracts receivable including retainage, net of the allowance for doubtful accounts, represents their estimated net realizable value. Management provides for uncollectible accounts through a charge to earnings and a credit to the allowance for doubtful accounts based on its assessment of the current status of individual accounts, type of service performed, and current economic conditions. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts and an adjustment of the contract receivable. Costs and Estimated Earnings on Uncompleted Contracts Billing practices for the Company s contracts are governed by the contract terms of each project based on progress toward completion approved by the owner, achievement of milestones or pre-agreed schedules. Billings do not necessarily correlate with revenues recognized under the percentage-of-completion method of accounting. The Company records current assets and current liabilities to account for these differences in timing. The current asset, Costs and estimated earnings in excess of billings on uncompleted contracts, represents revenues that have been recognized in amounts which have not been billed under the terms of the contracts. Included in costs and estimated earnings in excess of billings on uncompleted contracts are amounts the Company seeks or will seek to collect from customers or others for errors, changes in contract specifications or design, contract change orders in dispute, unapproved as to scope and price, or other customer related causes of unanticipated additional contract costs (claims and unapproved change orders). Such amounts are recorded at estimated net realizable value when realization is probable and can be reasonably estimated. Claims and unapproved change orders made by the Company may involve negotiation and, in rare cases, litigation. Unapproved change orders and claims also involve the use of estimates, and revenues associated with unapproved change orders and claims are included when realization is probable and amounts can be reliably determined. The Company did not recognize any material amounts associated with claims and unapproved change orders during the periods presented. The current liability, Billings in excess of costs and estimated earnings on uncompleted contracts, represents billings to customers in excess of revenues recognized. Concentration of Risks Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of contracts receivable including retainage. In the normal course of business, the Company provides credit to its customers and does not generally require collateral. Concentrations of credit risk associated with these receivables are monitored on an ongoing basis. The Company has not historically experienced significant credit losses due primarily to management s assessment of customers credit ratings. The Company principally deals with recurring customers, state and local governments and local companies whose reputations are known to the Company. Credit checks are performed for significant new customers. Progress payments are generally required for significant projects. The Company generally has the ability to file liens against the customer s property if payments are not made on a timely basis. No customer accounted for more than 10% of the Company s contracts receivable including retainage, net balance at March 31, 2018 or September 30,

11 Projects performed for various Departments of Transportation accounted for 37.6% and 33.9% of consolidated revenues for the three months ended March 31, 2018 and March 31, 2017, respectively, and 37.4% and 35.4% of consolidated revenues for the six months ended March 31, 2018 and March 31, 2017, respectively. Two customers accounted for more than 10% of consolidated revenues for the periods presented below (unaudited): % of Consolidated Revenues for the Three Months Ended March 31, % of Consolidated Revenues for the Six Months Ended March 31, Alabama Department of Transportation 13.2% 10.7% 13.2% 12.3% North Carolina Department of Transportation 11.8% 11.1% 12.6% 11.0% Revenues and Cost Recognition Revenues from the Company s contracts are recognized on the percentage-of-completion method, measured by the relationship of total cost incurred to total estimated contract costs (cost-to-cost method). Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in favorable or unfavorable revisions to estimated costs, revenues and gross profit, and are recognized in the period in which the revisions are determined. The accuracy of revenues and cost of revenues reported on the consolidated financial statements depends on, among other things, management s estimates of total costs to complete projects. The Company maintains reasonable estimates based on management s experience; however, many factors contribute to changes in estimates of contract costs. Accordingly, estimates made with respect to uncompleted projects are subject to change as each project progresses and better estimates of contract costs become available. All contract costs are recorded as incurred and revisions to estimated total costs are reflected as soon as the obligation to perform is determined. Provisions are recognized for the full amount of estimated losses on uncompleted contracts whenever evidence indicates that the estimated total cost of a contract exceeds its estimated total revenue, regardless of the stage of completion. When the Company incurs additional costs related to work performed by subcontractors, the Company may have contractual provisions to back charge the subcontractors for those costs. A reduction to costs related to back charges is recognized when the estimated recovery is probable and the amount can be reasonably estimated. Contract costs include direct labor and material, amounts paid to subcontractors, direct overhead costs and equipment costs (primarily depreciation, fuel, maintenance and repairs). Income Taxes The provision for income taxes includes federal and state income taxes. Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management evaluates the realization of deferred tax assets and establishes a valuation allowance when it is more likely than not that all or a portion of the deferred tax assets will not be realized. Deferred tax assets and deferred tax liabilities are presented net by taxing authority and classified as non-current on the Company s Consolidated Balance Sheets. The Company s policy is to classify income tax related interest and penalties in interest expense and other expenses, respectively. Equity Issuance Costs The Company capitalizes certain third-party fees that are directly associated with in-process equity offerings. At March 31, 2018 and September 30, 2017, $4.0 million and $2.2 million, respectively, of capitalized equity issuance costs were recorded as prepaid expenses, included in other current assets on the Consolidated Balance Sheets. 9

12 Note 3 Contracts Receivable Including Retainage, Net Contracts receivable including retainage, net are comprised of the following at March 31, 2018 and September 30, 2017 (in thousands): March 31, 2018 September 30, 2017 (unaudited) Contracts receivable $ 63,688 $ 109,538 Retainage 13,528 13,180 77, ,718 Allowance for doubtful accounts (1,333) (1,734) Contracts receivable including retainage, net $ 75,883 $ 120,984 Retainage receivables have been billed, but are not due until contract completion and acceptance by the customer. Note 4 Costs and Estimated Earnings on Uncompleted Contracts Costs and estimated earnings compared to billings on uncompleted contracts at March 31, 2018 and September 30, 2017 consist of the following (in thousands): March 31, 2018 September 30, 2017 (unaudited) Costs on uncompleted contracts $ 545,216 $ 489,661 Estimated earnings to date on uncompleted contracts 68,428 62, , ,854 Billings to date on uncompleted contracts (635,619) (579,370) Net billings in excess of costs and estimated earnings on uncompleted contracts $ (21,975) $ (27,516) Reconciliation of net billings in excess of costs and estimated earnings on uncompleted contracts to amounts reflected on the Company s Consolidated Balance Sheet at March 31, 2018 and September 30, 2017 is as follows (in thousands): March 31, 2018 September 30, 2017 (unaudited) Costs and estimated earnings in excess of billings on uncompleted contracts $ 10,132 $ 4,592 Billings in excess of costs and estimated earnings on uncompleted contracts (32,107) (32,108) Net billings in excess of costs and estimated earnings on uncompleted contracts $ (21,975) $ (27,516) Note 5 Joint Venture In November 2017, one of the Company s wholly-owned subsidiaries entered into a joint venture agreement (the JV ) with a third-party for the sole purpose of bidding on and, if awarded, performing a construction project for the Alabama Department of Transportation. The Company and the third-party each own a 50% partnership interest in the JV and share revenue and expenses on a 50/50 basis. The JV is jointly managed by representatives of the Company and the third-party and all labor, material and equipment required to perform the contract is subcontracted to parties which may include both the subsidiary of the Company that is party to the JV and the third-party. The Company accounts for this joint venture as an equity method investment in accordance with U.S. GAAP. Through March 31, 2018, the Company invested approximately $0.4 million into the JV, which is reflected as investment in joint venture on the Consolidated Balance Sheet. During the three and six months ended March 31, 2018, the Company recognized $0.2 million pre-tax income representing its 50% interest in the earnings of the JV, which is reflected as earnings from investment in joint venture on the Consolidated Statements of Income and included within investment in joint venture on the Consolidated Balance Sheet. 10

13 Note 6 Debt The Company maintains various credit facilities from time to time to finance acquisitions, the purchase of real estate, construction equipment, asphalt plants and other fixed assets, and for general working capital purposes. Debt at March 31, 2018 and September 30, 2017 consisted of the following (in thousands): March 31, 2018 September 30, 2017 (unaudited) Long-term debt: Compass Term Loan $ 42,500 $ 47,500 Compass Revolving Credit Facility 5,000 10,000 Total long-term debt 47,500 57,500 Deferred debt issuance costs (325) (364) Current maturities of long-term debt (10,000) (10,000) Long-term debt, net of current maturities $ 37,175 $ 47,136 Current maturities of debt: Current maturities of long-term debt 10,000 10,000 Total current maturities of debt $ 10,000 $ 10,000 See Note 12 Subsequent Events for additional information. Note 7 Equity The following presents changes to the Company s outstanding shares of common stock and treasury shares for the six months ended March 31, 2018 (unaudited, dollars in thousands): Common Shares Treasury Shares Outstanding Shares Cost Outstanding, September 30, ,691,541 (3,296,034) $(11,983) Issuance of treasury shares 126, , Outstanding, March 31, ,817,541 (3,170,034) $(11,525) See Note 12 Subsequent Events for additional information regarding the Company s initial public offering that was completed in May Note 8 Equity-based Compensation On February 23, 2018, the Company granted to certain employees an aggregate of 126,000 restricted shares of common stock at a purchase price of $0.04 per share. The Company recorded proceeds of $5,000 from the sale of these restricted shares, which were issued from treasury shares. The Company recorded additional paid-in capital of approximately $0.5 million representing the cost of treasury shares issued in excess of the purchase price paid by awardees. Half of the shares granted vested on the award date and the remaining 50% of the shares will vest on July 1, 2018, subject to continuous employment. The grant date fair value of the shares was estimated to be $7.78 per share. During the three and six months ended March 31, 2018, the Company recorded compensation expense in connection with these grants in the amount of $0.6 million, which is reflected as general and administrative expenses on the Company s Consolidated Statements of Income. At March 31, 2018, there was approximately $0.4 million of unrecognized compensation expense related to these awards. 11

14 Note 9 Earnings per Share Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted-average number of common shares outstanding during the period. The following summarizes the weighted-average number of basic common shares outstanding and the calculation of basic earnings per share for the periods presented (in thousands, except share and per share amounts): For the Three Months Ended March 31, For the Six Months Ended March 31, Numerator Net income attributable to common stockholders $ 11,248 $ 2,800 $ 22,244 $ 7,361 Denominator Weighted average number of basic common shares outstanding 41,717,024 41,502,490 41,704,071 41,502,490 Net income per basic common share attributable to common stockholders $ 0.27 $ 0.07 $ 0.53 $ 0.18 Diluted earnings per share is calculated by dividing net income attributable to common stockholders by the weighted-average number of common shares and potential dilutive common shares outstanding during the period, determined using the treasury stock method. Securities are excluded from the calculation of diluted earnings per share for any period during which the effect of their inclusion would be anti-dilutive. The following table summarizes the calculation of the weighted-average number of diluted common shares outstanding and the calculation of diluted earnings per share for the periods presented (in thousands, except share and per share amounts): For the Three Months Ended March 31, For the Six Months Ended March 31, Numerator Net income attributable to common stockholders $ 11,248 $ 2,800 $ 22,244 $ 7,361 Denominator Weighted average number of basic common shares outstanding 41,717,024 41,502,490 41,704,071 41,502,490 Effect of dilutive securities: 2016 Equity Incentive Plan options 2, Non-Plan Stock Options Agreement options 193, ,371 Weighted average number of diluted common shares outstanding: 41,910,122 41,505,180 41,874,442 41,502,490 Net income per diluted common share attributable to common stockholders $ 0.27 $ 0.07 $ 0.53 $ 0.18 The Company had 63,000, 768,985, 63,000 and 958,035 common stock equivalents which were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2018 and 2017 and the six months ended March 31, 2018 and 2017, respectively, because they were anti-dilutive. Note 10 Provision for Income Taxes On December 22, 2017, the U.S. government enacted comprehensive tax legislation known as the Tax Cuts and Jobs Act (the Tax Act ). The Tax Act includes broad and complex changes to the U.S. tax code, including a reduction in the U.S. federal corporate tax rate from 35% to 21% effective January 1, For the fiscal year ending September 30, 2018, the Company will record its income tax provision based on a blended U.S. statutory tax rate of 24.5%, which is based on a proration of the applicable tax rates before and after the effective date of the Tax Act, and the effect of applicable state income taxes. The federal statutory rate of 21% will apply for fiscal years beginning after September 30,

15 During the six months ended March 31, 2018, the Company recorded a provisional discrete tax benefit of $3.5 million related to the Tax Act, primarily due to adjusting its U.S. deferred tax liabilities by the same amount, reflecting the reduction in the U.S. federal corporate tax rate. This net reduction in deferred tax liabilities also included the estimated impact on the Company s net state deferred tax assets. The Company s effective tax rate for the three months ended March 31, 2018 and 2017 was 29.8% and 36.0%, respectively. The effective tax rate for the three months ended March 31, 2018 was lower than the comparable prior year period primarily due to the decrease in the federal corporate tax rate. Similarly, the Company s effective tax rate for the six months ended March 31, 2018 and 2017 was 15.2% and 37.2%, respectively, due primarily to the decrease in the federal corporate tax rate and the benefit of a tax credit recorded during the six months ended March 31, 2018 related to the enactment of the Tax Act. The Company has not yet completed its accounting for the income tax effects of certain elements of the Tax Act. In regards to the reduction in the U.S. corporate tax rate, the Company is continuing to analyze the temporary differences that existed on the date of the enactment and the temporary differences originating in the current fiscal year. The Company expects to complete its analysis of the accounting guidance related to the Tax Act and its evaluation of the impacts of the Tax Act by September 30, Note 11 Related Parties On December 31, 2017, the Company sold a wholly-owned subsidiary to an immediate family member of a Senior Vice President of the Company in consideration for a note receivable in the amount of $1.0 million, which approximated the net book value of the disposed entity. At March 31, 2018, $0.9 million is reflected on the Company s Consolidated Balance Sheets representing the remaining balance on this note. In connection with this transaction, the Company also received a note receivable on December 31, 2017 in the amount of $0.9 million representing certain accounts payable of the disposed subsidiary that were paid by the Company. At March 31, 2018, $0.9 million is reflected on the Company s Consolidated Balance Sheets representing the remaining balance on this note. Principal and interest payments are scheduled to be made in periodic installments from January 2018 through December On January 30, 2015, the Company entered into a master services subcontract with Austin Trucking, LLC ( Austin Trucking ), an entity owned by an immediate family member of a Senior Vice President of the Company. Pursuant to the agreement, Austin Trucking performs subcontract work for the Company, including trucking services. For these subcontract services, the Company incurred costs of approximately $1.4 million and $1.5 million during each of the three months ended March 31, 2018 and 2017, respectively, and approximately $4.3 million and $4.4 million during the six months ended March 31, 2018 and 2017, respectively, which is included as cost of revenues on the Consolidated Statements of Income. At March 31, 2018 and September 30, 2017, the Company had $0.5 million and $1.0 million, respectively, due to Austin Trucking reflected as accounts payable on its Consolidated Balance Sheets. From time to time, the Company provides construction services to various companies owned by a family member of a Senior Vice President of the Company. For these services, the Company earned approximately $0.3 million and $0.7 million during the three months ended March 31, 2018 and 2017, respectively, and approximately $1.5 million and $1.8 million during the six months ended March 31, 2018 and 2017, respectively, which is included as revenues on the Consolidated Statements of Income. At March 31, 2018 and September 30, 2017, the Company had $4.6 million and $5.3 million, respectively, due from these companies reflected as contracts receivable including retainage, net on its Consolidated Balance Sheets. From time to time, the Company provides construction services to various companies owned by a family member of a Senior Vice President of the Company. For these services, the Company earned approximately $0.1 million during the three months ended March 31, 2018, and approximately $0.2 million during the six months ended March 31, 2018, which is included as revenues on the Consolidated Statements of Income. The Company did not earn any revenues from this company during the three and six months ended March 31, At March 31, 2018 and September 30, 2017, the Company had $0.6 million and $1.0 million, respectively, due from this company reflected as contracts receivable including retainage, net on its Consolidated Balance Sheets. The Company is party to a management services agreement with SunTx under which the Company pays SunTx $0.25 million per fiscal quarter, as well as reimbursement of certain out-of-pocket expenses. The Company paid such fees and expense reimbursements to SunTx aggregating $0.3 million and $0.4 million during the three months ended March 31, 2018 and 2017, respectively, and $0.7 million during each of the six months ended March 31, 2018 and 2017, and recognized the cost as general and administrative expenses on its Consolidated Statements of Income. In addition, the Company had $0.1 million included as other assets on its Consolidated Balance Sheet at March 31, 2018, representing reimbursements paid to SunTx for certain equity issuance costs in connection with the Company s initial public offering. 13

16 In the normal course of business, the Company maintains relationships and engages in transactions with other related parties. Transaction amounts during the three and six months ended March 31, 2018 and 2017 are not material to the Consolidated Statements of Income or to cash flows for those periods. Amounts due to or from such related parties are not material to the Company s Consolidated Balance Sheets at March 31, 2018 or September 30, The nature of these relationships and transactions are described in Note 16 to the Company s audited consolidated financial statements for the year ended September 30, 2017 included in the IPO Prospectus. Note 12 Subsequent Events Acquisition On May 15, 2018, the Company completed the acquisition of 100% of the ongoing operations of The Scruggs Company, a privately-owned infrastructure and road construction company headquartered in Hahira, Georgia, which operates three hot mix asphalt plants, three aggregate mines and one industrial plant. The acquisition complements the Company s vertically integrated Southeastern U.S. operations, providing new bidding areas in the expanding Georgia market. The purchase price of $51.1 million, excluding certain working capital adjustments, was paid in cash on the date of closing. The Company funded the purchase price with cash on hand plus an additional $22.0 million borrowed under its $50.0 million term loan (the Term Loan ) under the credit agreement with Compass Bank, as Agent, Sole Lead Arranger and Sole Bookrunner (as amended, the Compass Credit Agreement ). The additional borrowing is subject to the same terms and conditions as the Term Loan balance outstanding at March 31, In connection with this additional Term Loan borrowing, the Company entered into an interest rate swap agreement with a notional amount of $11.0 million under which it pays a fixed percentage rate of 3.01% and receives a credit based on the applicable LIBOR rate. The Company is in the process of completing the initial accounting of this acquisition as a business combination in accordance with ASC 805, Business Combinations, including the allocation of the purchase price to the fair value of identifiable assets acquired and liabilities assumed. There are no revenues or results of operations of The Scruggs Company included in the Company s Consolidated Statements of Income for the three or six months ended March 31, Pro forma adjustments and results of operations cannot yet be determined. The acquisition did not meet the significance criteria under SEC Regulation S-X Rule Reclassification and Initial Public Offering On April 23, 2018, the Company amended and restated its certificate of incorporation to effectuate a dual class common stock structure consisting of Class A common stock and Class B common stock, as a result of which each share of common stock, par value $0.001 per share, was reclassified and changed into 25.2 shares of Class B common stock so that all equity holders became the holders of 41,817,537 shares of Class B common stock (the Reclassification ). The amended and restated certificate of incorporation authorizes 400,000,000 shares of Class A common stock and 100,000,000 shares of Class B common stock. All share and per share amounts have been retroactively adjusted for all periods presented to give effect to the Stock Split. On May 8, 2018, the Company completed an initial public offering of 11,250,000 shares of Class A common stock for $12.00 per share. Of these shares, 9,000,000 were sold by the Company, for which the Company received approximately $100.4 million in proceeds, after deducting underwriting discounts and commissions of approximately $7.6 million, and prior to additional total estimated offering expenses of approximately $5.8 million. Of the $5.8 million additional estimated offering expenses, $4.0 million and $2.2 million are reflected as capitalized equity issuance costs included within other current assets on the Consolidated Balance Sheets at March 31, 2018 and September 30, 2017, respectively. The remaining 2,250,000 shares were sold by the holders of Class B common stock, which shares upon sale automatically converted into 2,250,000 shares of Class A common stock, which reduced the issued and outstanding shares of Class B common stock to 39,567,537. The Company did not receive any proceeds from the sale of shares sold by the holders of Class B common stock. On May 24, 2018 the underwriters of the initial public offering partially exercised their over-allotment option to purchase an additional 700,000 shares of our Class A common stock at the initial public offering price of $12.00 per share less the underwriting discount and commissions. Of these shares, 350,000 were sold by the Company for which the Company received approximately $3.9 million in proceeds, after deducting underwriting discounts and commissions of approximately $0.3 million. The remaining 350,000 shares were sold by the holders of Class B common stock, which shares upon sale automatically converted into 350,000 shares of Class A common stock, which reduced the issued and outstanding shares of Class B common stock to 39,217,537. The Company did not receive any proceeds from the sale of shares sold by the holders of Class B common stock. Settlement Agreements On April 19, 2018, certain of the Company s subsidiaries entered into settlement agreements with a third party, pursuant to which they will receive aggregate net payments of approximately $15.7 million, payable in four equal installments between January 2019 and July 2020, in exchange for releasing and waiving all current and future claims against the third party relating to compensation to the Company for a business interruption event that occurred more than five years ago, which did not directly relate to the Company s business and which has not, and is not expected to, recur (the Settlement ). The Company recorded a pre-tax gain of $14.8 million during the three months ended March 31, 2018 related to the Settlement, which is reflected as settlement income on the Consolidated Statements of Income. Future payments are reflected on the Consolidated Balance Sheets as other current assets and other assets in the amount of $3.9 million and $10.9 million, respectively. 14