Construction Partners, Inc (NASDAQ:ROAD) Q3 2019 Earnings Conference Call August 9, 2019 11:00 AM ET Company Participants Rick Black – Investor Relations Charles Owens – President and Chief Executive Officer Ned Fleming – Executive Chairman Alan Palmer – Chief Financial Officer Conference Call Participants Andrew Wittmann – Robert W. Baird Trey Grooms – Stephens Josh Wilson – Raymond James Brent Thielman – D.A. Davidson Operator Greetings and welcome to the Construction Partners' Third Quarter 2019 Earnings ...

[PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section details the company's unaudited financial statements and management's analysis of financial condition [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements and detailed notes for the periods ended June 30, 2019 [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) This section summarizes the company's financial position, detailing assets, liabilities, and equity Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2019 | September 30, 2018 | | :----------------------------------- | :------------ | :----------------- | | Cash and cash equivalents | $59,648 | $99,137 | | Total current assets | $259,002 | $267,455 | | Property, plant and equipment, net | $201,712 | $178,692 | | Total assets | $509,024 | $496,310 | | Total current liabilities | $131,375 | $134,541 | | Total liabilities | $182,841 | $196,841 | | Total stockholders' equity | $326,183 | $299,469 | - Total assets increased by **$12.7 million (2.6%)** from September 30, 2018, to June 30, 2019, primarily driven by an increase in property, plant and equipment, net[10](index=10&type=chunk) - Cash and cash equivalents decreased by **$39.5 million (39.8%)** from September 30, 2018, to June 30, 2019[10](index=10&type=chunk) [Consolidated Statements of Income](index=6&type=section&id=Consolidated%20Statements%20of%20Income) This section presents the company's revenues, gross profit, operating income, and net income for specified periods Consolidated Statements of Income Highlights (in thousands, except per share data) | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 9 Months Ended June 30, 2019 | 9 Months Ended June 30, 2018 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Revenues | $227,290 | $195,075 | $545,921 | $464,395 | | Gross profit | $38,092 | $29,469 | $79,021 | $66,016 | | Operating income | $22,182 | $14,767 | $34,936 | $41,364 | | Net income | $17,202 | $13,403 | $26,568 | $35,647 | | Basic EPS | $0.33 | $0.29 | $0.52 | $0.82 | | Diluted EPS | $0.33 | $0.29 | $0.52 | $0.81 | - Revenues increased by **16.5%** for the three months ended June 30, 2019, and by **17.6%** for the nine months ended June 30, 2019, compared to the respective prior year periods[13](index=13&type=chunk) - Net income increased by **28.3%** for the three months ended June 30, 2019, but decreased by **25.5%** for the nine months ended June 30, 2019, primarily due to a significant settlement income recognized in the prior nine-month period[13](index=13&type=chunk) [Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Stockholders%27%20Equity) This section details changes in stockholders' equity, including common stock, additional paid-in capital, and retained earnings Consolidated Stockholders' Equity Highlights (in thousands, except share data) | Metric | June 30, 2019 | September 30, 2018 | | :----------------------------------- | :------------ | :----------------- | | Class A Common Stock (shares) | 32,442,545 | 11,950,000 | | Class B Common Stock (shares) | 22,162,369 | 42,387,571 | | Additional Paid-in Capital | $242,639 | $242,493 | | Retained Earnings | $99,093 | $72,525 | | Total Stockholders' Equity | $326,183 | $299,469 | - Total stockholders' equity increased by **$26.7 million** from September 30, 2018, to June 30, 2019, primarily due to net income and equity-based compensation expense[15](index=15&type=chunk) - Significant changes include the conversion of **20,225,202 Class B common stock shares** to Class A common stock during the three months ended June 30, 2019[15](index=15&type=chunk) [Consolidated Statements of Cash Flows](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section outlines the company's cash flows from operating, investing, and financing activities for specified periods Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | 9 Months Ended June 30, 2019 | 9 Months Ended June 30, 2018 | | :----------------------------------- | :--------------------------- | :--------------------------- | | Net cash provided by operating activities | $17,963 | $23,660 | | Net cash used in investing activities | $(46,348) | $(82,290) | | Net cash (used in) provided by financing activities | $(11,104) | $106,266 | | Net change in cash and cash equivalents | $(39,489) | $47,636 | | Cash and cash equivalents, End of period | $59,648 | $75,183 | - Net cash provided by operating activities decreased by **$5.7 million** for the nine months ended June 30, 2019, compared to the prior year, primarily due to a decrease in net income and changes in operating assets and liabilities[17](index=17&type=chunk) - Net cash used in investing activities decreased by **$35.9 million**, mainly due to lower business acquisition costs in 2019 compared to 2018[17](index=17&type=chunk) - Net cash used in financing activities in 2019 contrasts sharply with cash provided in 2018, which included **$98.0 million** from the IPO and **$22.0 million** from term loan borrowings[17](index=17&type=chunk) [Notes to Consolidated Financial Statements (unaudited)](index=11&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements%20(unaudited)) This section provides detailed explanations of significant accounting policies and financial disclosures [Note 1 - General](index=11&type=section&id=Note%201%20-%20General) This note describes Construction Partners, Inc.'s business, operations, and the seasonal nature of its activities - Construction Partners, Inc. is a leading infrastructure and road construction company operating in Alabama, Florida, Georgia, North Carolina, and South Carolina, providing site development, paving, utility and drainage systems, and construction materials[19](index=19&type=chunk) - The company's business is seasonal, with warmer and drier weather in the third and fourth fiscal quarters typically leading to higher activity and revenues, while the first and second quarters have lower activity due to adverse weather[21](index=21&type=chunk) [Note 2 - Significant Accounting Policies](index=11&type=section&id=Note%202%20-%20Significant%20Accounting%20Policies) This note outlines the company's key accounting principles, including revenue recognition and financial statement preparation - The consolidated financial statements are prepared in conformity with GAAP, requiring management estimates for revenue recognition, goodwill, allowance for doubtful accounts, and other items[23](index=23&type=chunk) - The Company has elected to opt out of the extended transition period for complying with new or revised financial accounting standards as an 'emerging growth company,' meaning it adopts new standards at the effective date for non-emerging growth public companies[26](index=26&type=chunk) - Revenues from construction projects are recognized over time using the percentage-of-completion method (cost-to-cost), while revenues from material sales are recognized at a point in time when control transfers to the customer[36](index=36&type=chunk)[40](index=40&type=chunk)[44](index=44&type=chunk) Revenue Concentration by Customer Type | Customer Type | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 9 Months Ended June 30, 2019 | 9 Months Ended June 30, 2018 | | :-------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Private | $66,207 | $56,293 | $166,193 | $148,525 | | Public | $161,083 | $138,782 | $379,728 | $315,870 | Revenue Concentration by Department of Transportation | Department | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 9 Months Ended June 30, 2019 | 9 Months Ended June 30, 2018 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Alabama Department of Transportation | 15.4% | 17.0% | 12.9% | 14.8% | | North Carolina Department of Transportation | 13.9% | 14.8% | 13.4% | 13.5% | [Note 3 - Accounting Standards](index=18&type=section&id=Note%203%20-%20Accounting%20Standards) This note details the adoption and impact of new accounting standards, including ASC 606 and ASU No. 2017-01 - The Company adopted ASC 606 (Revenue from Contracts with Customers) on October 1, 2018, using the modified retrospective approach, which did not result in a material cumulative adjustment to retained earnings[50](index=50&type=chunk) - The adoption of ASC 606 had a minor impact on the Consolidated Balance Sheet and Statements of Income for the periods presented, with net income for the nine months ended June 30, 2019, decreasing by **$87 thousand**[51](index=51&type=chunk) - The Company adopted ASU No. 2017-01 (Business Combinations) for its fiscal year beginning October 1, 2018, refining the definition of a business for acquisitions[52](index=52&type=chunk) - ASU No. 2016-02 (Leases, Topic 842) becomes effective for the Company on October 1, 2019, requiring lessees to present right-of-use assets and lease liabilities on the balance sheet, with the impact currently being evaluated[53](index=53&type=chunk) [Note 4 - Business Acquisitions](index=19&type=section&id=Note%204%20-%20Business%20Acquisitions) This note provides details on recent business acquisitions, including the Florida HMA business and the Scruggs Company - On February 26, 2019, the Company acquired an HMA and ready-mix concrete business in Okeechobee, Florida, for **$8.9 million** in cash, expanding its geographic presence and recording **$4.0 million** in goodwill[54](index=54&type=chunk)[56](index=56&type=chunk)[57](index=57&type=chunk) - The Florida acquisition's results of operations were not material to the consolidated financial statements for the three or nine months ended June 30, 2019[58](index=58&type=chunk) - The Scruggs Company acquisition (May 15, 2018) contributed **$18.5 million** in revenue and **$2.3 million** in net income for the three months ended June 30, 2019, and **$53.2 million** in revenue and **$5.2 million** in net income for the nine months ended June 30, 2019[61](index=61&type=chunk) [Note 5 - Contracts Receivable Including Retainage, net](index=22&type=section&id=Note%205%20-%20Contracts%20Receivable%20Including%20Retainage%2C%20net) This note details the composition and changes in contracts receivable, including retainage and allowance for doubtful accounts Contracts Receivable Including Retainage, net (in thousands) | Metric | June 30, 2019 | September 30, 2018 | | :----------------------------------- | :------------ | :----------------- | | Contracts receivable | $117,046 | $104,541 | | Retainage | $19,182 | $16,848 | | Allowance for doubtful accounts | $(1,519) | $(1,098) | | Contracts receivable including retainage, net | $134,709 | $120,291 | - Contracts receivable including retainage, net, increased by **$14.4 million (12.0%)** from September 30, 2018, to June 30, 2019[63](index=63&type=chunk) [Note 6 - Costs and Estimated Earnings on Uncompleted Contracts](index=22&type=section&id=Note%206%20-%20Costs%20and%20Estimated%20Earnings%20on%20Uncompleted%20Contracts) This note presents costs, estimated earnings, and billings on uncompleted contracts, reflecting project progress Costs and Estimated Earnings on Uncompleted Contracts (in thousands) | Metric | June 30, 2019 | September 30, 2018 | | :----------------------------------- | :------------ | :----------------- | | Costs on uncompleted contracts | $913,628 | $743,322 | | Estimated earnings to date | $123,914 | $95,155 | | Billings to date | $(1,055,843) | $(867,881) | | Net billings in excess of costs and estimated earnings | $(18,301) | $(29,404) | - The Company had approximately **$522 million** in aggregate transaction price for unsatisfied or partially unsatisfied performance obligations at June 30, 2019, with **$201 million** expected to be earned in the remainder of fiscal year 2019 and **$321 million** thereafter[64](index=64&type=chunk) [Note 7 - Property, Plant and Equipment](index=23&type=section&id=Note%207%20-%20Property%2C%20Plant%20and%20Equipment) This note details the company's property, plant, and equipment, including additions, disposals, and depreciation expense Property, Plant and Equipment, net (in thousands) | Category | June 30, 2019 | September 30, 2018 | | :----------------------------------- | :------------ | :----------------- | | Construction equipment | $217,662 | $190,420 | | Asphalt plants | $82,855 | $79,563 | | Land and improvements | $34,888 | $29,624 | | Total property, plant and equipment, net | $201,712 | $178,692 | - Property, plant and equipment, net, increased by **$23.0 million (12.9%)** from September 30, 2018, to June 30, 2019[65](index=65&type=chunk) - The Company acquired a liquid asphalt terminal in Panama City, Florida, for **$10.8 million** in cash on February 28, 2019, accounted for as an asset acquisition[65](index=65&type=chunk) - Depreciation, depletion, and amortization expense increased to **$22.1 million** for the nine months ended June 30, 2019, from **$17.6 million** in the prior year[66](index=66&type=chunk) [Note 8 - Equity](index=23&type=section&id=Note%208%20-%20Equity) This note describes the company's equity structure, including common stock reclassification and restricted share awards - The Company completed an IPO and reclassification of common stock on April 23, 2018, establishing a dual-class common stock structure (Class A and Class B)[68](index=68&type=chunk) - During the three months ended June 30, 2019, **20,225,202 shares** of Class B common stock were converted to Class A common stock[73](index=73&type=chunk) - The Company awarded **267,343 restricted shares** of Class A common stock to non-employee directors during the three months ended June 30, 2019, under the Equity Incentive Plan[74](index=74&type=chunk) [Note 9 - Debt](index=25&type=section&id=Note%209%20-%20Debt) This note details the company's long-term debt, including the Compass Term Loan and Revolving Credit Facility Long-term Debt (in thousands) | Metric | June 30, 2019 | September 30, 2018 | | :----------------------------------- | :------------ | :----------------- | | Compass Term Loan | $46,500 | $57,300 | | Compass Revolving Credit Facility | $5,000 | $5,000 | | Total long-term debt | $52,161 | $63,264 | | Long-term debt, net of current maturities | $37,096 | $48,115 | - Long-term debt, net of current maturities, decreased by **$11.0 million (22.9%)** from September 30, 2018, to June 30, 2019[76](index=76&type=chunk) [Note 10 - Earnings Per Share](index=25&type=section&id=Note%2010%20-%20Earnings%20Per%20Share) This note presents the calculation of basic and diluted earnings per share, reflecting net income and share changes Basic and Diluted EPS (in thousands, except per share amounts) | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 9 Months Ended June 30, 2019 | 9 Months Ended June 30, 2018 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income attributable to common stockholders | $17,202 | $13,403 | $26,568 | $35,647 | | Basic EPS | $0.33 | $0.29 | $0.52 | $0.82 | | Diluted EPS | $0.33 | $0.29 | $0.52 | $0.81 | - Basic and diluted EPS increased for the three months ended June 30, 2019, but decreased for the nine months ended June 30, 2019, compared to the prior year, reflecting changes in net income and weighted average shares outstanding[79](index=79&type=chunk) [Note 11 - Provision for Income Taxes](index=27&type=section&id=Note%2011%20-%20Provision%20for%20Income%20Taxes) This note explains the company's provision for income taxes and the factors influencing its effective tax rate Effective Tax Rates | Period | Effective Tax Rate | | :----------------------------------- | :----------------- | | 3 Months Ended June 30, 2019 | 22.3% | | 3 Months Ended June 30, 2018 | 9.5% | | 9 Months Ended June 30, 2019 | 23.3% | | 9 Months Ended June 30, 2018 | 13.1% | - The effective tax rate increased significantly for both the three and nine months ended June 30, 2019, compared to 2018, primarily because the prior year benefited from a tax credit related to the Tax Cuts and Jobs Act[83](index=83&type=chunk)[84](index=84&type=chunk) [Note 12 - Related Parties](index=29&type=section&id=Note%2012%20-%20Related%20Parties) This note discloses transactions with related parties, including subcontracting services and management fees - The Company engages in various transactions with related parties, including subcontracting services, construction services, vehicle rentals/purchases, consulting, and management fees to SunTx[86](index=86&type=chunk) Related Party Transactions (in thousands) | Transaction Type | 3 Months Ended June 30, 2019 | 9 Months Ended June 30, 2019 | Accounts Receivable (Payable) June 30, 2019 | | :----------------------------------- | :--------------------------- | :--------------------------- | :------------------------------------------ | | Subcontracting Services (expense) | $(7,195) | $(13,561) | $(1,724) | | Construction Services (revenue) | $1,609 | $2,783 | $4,350 | | SunTx Management fees (expense) | $(316) | $(957) | $0 | [Note 13 - Settlement Agreement](index=30&type=section&id=Note%2013%20-%20Settlement%20Agreement) This note details the pre-tax gain recognized from a settlement agreement and related payment installments - The Company recognized a pre-tax gain of **$14.8 million** during the nine months ended June 30, 2018, from a settlement agreement related to a business interruption event[89](index=89&type=chunk) - The first installment of **$3.9 million** was received in January 2019, with future payments of **$7.9 million** (current) and **$3.7 million** (non-current) reflected on the balance sheet at June 30, 2019[89](index=89&type=chunk) [Note 14 - Equity-Based Compensation](index=30&type=section&id=Note%2014%20-%20Equity-Based%20Compensation) This note describes the company's equity-based compensation, including restricted share awards to non-employee directors - During the three and nine months ended June 30, 2019, the Company awarded **267,343 restricted shares** of Class A common stock to non-employee directors, with an aggregate grant date fair value of **$3.4 million**[90](index=90&type=chunk) - Compensation expense of **$0.1 million** was recorded for these grants during both the three and nine months ended June 30, 2019[91](index=91&type=chunk) [Note 15 - Subsequent Events](index=30&type=section&id=Note%2015%20-%20Subsequent%20Events) This note reports significant events occurring after the balance sheet date, including acquisitions and stock conversions - On July 12, 2019, the Company acquired an HMA manufacturing plant and paving company near Gadsden, Alabama, for **$5.0 million** in cash, expecting geographic synergies[92](index=92&type=chunk)[94](index=94&type=chunk) - The Alabama acquisition resulted in **$2.4 million** of goodwill, deductible for income tax purposes[95](index=95&type=chunk) - Subsequent to June 30, 2019, a stockholder converted **125,000 shares** of Class B common stock to Class A common stock, bringing outstanding Class A shares to **32,567,545** and Class B to **19,114,417**[96](index=96&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=32&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the Company's financial performance, condition, liquidity, and market risks [Overview](index=32&type=section&id=Overview) This section introduces Construction Partners, Inc. as a civil infrastructure company specializing in transportation networks - Construction Partners, Inc. is a fast-growing civil infrastructure company specializing in transportation networks, providing construction products and services for public and private projects in the southeastern United States[98](index=98&type=chunk) - Public projects, funded by federal, state, and local governments, represent a significant and historically stable portion of the company's work, alongside services for private commercial and residential developments[99](index=99&type=chunk)[100](index=100&type=chunk) [How We Assess Performance of Our Business](index=32&type=section&id=How%20We%20Assess%20Performance%20of%20Our%20Business) This section explains how the company evaluates its business performance, focusing on revenues, gross profit, and Adjusted EBITDA - Revenues are primarily derived from construction services (recognized over time using percentage-of-completion) and material sales (recognized at point of transfer)[101](index=101&type=chunk) - Gross profit is affected by commodity prices (liquid asphalt, diesel fuel), with public contracts often including price adjustment provisions to mitigate this risk[103](index=103&type=chunk) - Adjusted EBITDA is a key non-GAAP performance indicator, representing net income adjusted for interest, taxes, depreciation, amortization, equity-based compensation, and certain management fees, and excluding settlement income[108](index=108&type=chunk) Adjusted EBITDA Reconciliation (in thousands, except percentages) | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 9 Months Ended June 30, 2019 | 9 Months Ended June 30, 2018 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income | $17,202 | $13,403 | $26,568 | $35,647 | | Adjusted EBITDA | $31,279 | $22,678 | $59,958 | $47,205 | | Adjusted EBITDA Margin | 13.8% | 11.6% | 11.0% | 10.2% | [Results of Operations](index=35&type=section&id=Results%20of%20Operations) This section analyzes the company's financial results for the three and nine months ended June 30, 2019, compared to prior periods [Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018](index=35&type=section&id=Three%20Months%20Ended%20June%2030%2C%202019%20Compared%20to%20Three%20Months%20Ended%20June%2030%2C%202018) This section compares the company's financial performance for the three months ended June 30, 2019 and 2018 Financial Performance (3 Months Ended June 30, in thousands, except percentages) | Metric | 2019 (Dollars) | 2019 (% of Revenues) | 2018 (Dollars) | 2018 (% of Revenues) | Change ($) | Change (%) | | :----------------------------------- | :------------- | :------------------- | :------------- | :------------------- | :--------- | :--------- | | Revenues | $227,290 | 100.0% | $195,075 | 100.0% | $32,215 | 16.5% | | Gross profit | $38,092 | 16.8% | $29,469 | 15.1% | $8,623 | 29.3% | | Operating income | $22,182 | 9.8% | $14,767 | 7.6% | $7,415 | 50.2% | | Net income | $17,202 | 7.6% | $13,403 | 6.9% | $3,799 | 28.3% | | Adjusted EBITDA | $31,279 | 13.8% | $22,678 | 11.6% | $8,601 | 37.9% | - Revenue growth of **16.5%** was driven by increased demand in existing markets (**$21.3 million**) and contributions from recent acquisitions (**$10.9 million**)[113](index=113&type=chunk) - Gross profit margin improved to **16.8%** from **15.1%** due to increased HMA production and equipment utilization, leading to better fixed cost absorption[114](index=114&type=chunk) - Net income increased by **28.3%**, primarily due to higher gross profit, despite increased general and administrative expenses and a higher effective tax rate[119](index=119&type=chunk) [Nine Months Ended June 30, 2019 Compared to Nine Months Ended June 30, 2018](index=38&type=section&id=Nine%20Months%20Ended%20June%2030%2C%202019%20Compared%20to%20Nine%20Months%20Ended%20June%2030%2C%202018) This section compares the company's financial performance for the nine months ended June 30, 2019 and 2018 Financial Performance (9 Months Ended June 30, in thousands, except percentages) | Metric | 2019 (Dollars) | 2019 (% of Revenues) | 2018 (Dollars) | 2018 (% of Revenues) | Change ($) | Change (%) | | :----------------------------------- | :------------- | :------------------- | :------------- | :------------------- | :--------- | :--------- | | Revenues | $545,921 | 100.0% | $464,395 | 100.0% | $81,526 | 17.6% | | Gross profit | $79,021 | 14.5% | $66,016 | 14.2% | $13,005 | 19.7% | | Operating income | $34,936 | 6.3% | $41,364 | 8.9% | $(6,428) | (15.5)% | | Net income | $26,568 | 4.9% | $35,647 | 7.7% | $(9,079) | (25.5)% | | Adjusted EBITDA | $59,958 | 11.0% | $47,205 | 10.2% | $12,753 | 27.0% | - Revenue increased by **17.6%**, with **$34.9 million** from existing markets and **$46.6 million** from acquisitions[122](index=122&type=chunk) - Net income decreased by **25.5%** primarily due to the **$10.6 million** settlement income (net of tax) recognized in the prior year, higher G&A expenses, and an increased effective tax rate[128](index=128&type=chunk) - Adjusted EBITDA increased by **27.0%** to **$60.0 million**, driven by higher gross profit and depreciation, depletion, and amortization, partially offset by increased G&A expenses[129](index=129&type=chunk) [Inflation and Price Changes](index=40&type=section&id=Inflation%20and%20Price%20Changes) This section discusses the impact of inflation and the company's strategies for managing commodity price changes - Inflation had an immaterial impact on results for the nine months ended June 30, 2019 and 2018, due to low inflation and the Company's ability to recover increasing costs through higher prices and escalator clauses in public contracts[130](index=130&type=chunk) [Liquidity and Capital Resources](index=40&type=section&id=Liquidity%20and%20Capital%20Resources) This section examines the company's cash flows, debt, capital requirements, and sources of liquidity [Cash Flows Analysis](index=40&type=section&id=Cash%20Flows%20Analysis) This section provides a summary analysis of the company's cash flows from operating, investing, and financing activities Cash Flow Summary (9 Months Ended June 30, in thousands) | Cash Flow Type | 2019 | 2018 | | :------------- | :---------- | :---------- | | Operating | $17,963 | $23,660 | | Investing | $(46,348) | $(82,290) | | Financing | $(11,104) | $106,266 | | Net Change | $(39,489) | $47,636 | [Operating Activities](index=41&type=section&id=Operating%20Activities) This section details cash flows generated from or used in the company's primary business operations - Cash provided by operating activities decreased by **$5.7 million** to **$18.0 million** for the nine months ended June 30, 2019, primarily due to lower net income and a reduction in changes in operating assets and liabilities[132](index=132&type=chunk) - Changes in operating assets and liabilities included a **$28.9 million** increase in contracts receivable and an **$11.0 million** decrease in other assets due to settlement income recognition and payments[133](index=133&type=chunk) [Investing Activities](index=41&type=section&id=Investing%20Activities) This section details cash flows related to the acquisition and disposal of long-term assets and business acquisitions - Cash used in investing activities decreased by **$35.9 million** to **$46.3 million**, mainly due to lower business acquisition costs in 2019 (**$8.9 million**) compared to 2018 (**$51.3 million**)[134](index=134&type=chunk) - The acquisition of liquid asphalt terminal assets for **$10.9 million** and a **$2.2 million** distribution from a joint venture also impacted investing cash flows[134](index=134&type=chunk) [Financing Activities](index=41&type=section&id=Financing%20Activities) This section details cash flows related to debt, equity, and other financing transactions - Cash used in financing activities was **$11.1 million** for the nine months ended June 30, 2019, a significant change from **$106.3 million** provided in 2018, which included IPO proceeds and term loan borrowings[135](index=135&type=chunk) [Compass Credit Agreement](index=41&type=section&id=Compass%20Credit%20Agreement) This section describes the company's credit agreement, including term loan, revolving facility, and debt covenants - The Company maintains a Compass Credit Agreement with a **$72.0 million** term loan and a **$30.0 million** revolving credit facility, maturing on July 1, 2022[136](index=136&type=chunk) - At June 30, 2019, the interest rate on outstanding borrowings was **4.402%**, and the Company had **$14.4 million** available under the revolving credit facility[138](index=138&type=chunk) - The Company uses interest rate swap agreements to hedge against interest rate changes, with an aggregate notional value of **$23.3 million** at June 30, 2019[138](index=138&type=chunk) - The Company was in compliance with all debt covenants at June 30, 2019, with a fixed charge coverage ratio of **1.55 to 1.00** and a consolidated leverage ratio of **0.74 to 1.00**[139](index=139&type=chunk) [Capital Requirements and Sources of Liquidity](index=42&type=section&id=Capital%20Requirements%20and%20Sources%20of%20Liquidity) This section outlines the company's capital expenditure plans and its funding sources for operations and growth - Capital expenditures were **$31.7 million** for the nine months ended June 30, 2019, with an expectation of **$39.0 million to $42.0 million** for the full fiscal year 2019[140](index=140&type=chunk) - The Company relies on cash on hand, operating cash flow, and available credit facilities to fund operations and growth, believing these sources will be sufficient for at least the next twelve months[143](index=143&type=chunk) [Commodity Price Risk](index=42&type=section&id=Commodity%20Price%20Risk) This section discusses the company's exposure to commodity price fluctuations and its mitigation strategies - The Company is exposed to commodity price risk for liquid asphalt and energy resources, which it manages by pricing costs into contracts and utilizing escalator provisions in most public contracts[144](index=144&type=chunk) [Interest Rate Risk](index=42&type=section&id=Interest%20Rate%20Risk) This section addresses the company's exposure to interest rate changes on variable-rate debt and hedging strategies - The Company is exposed to interest rate risk on LIBOR-based floating rate borrowings under the Compass Credit Agreement and uses interest rate swap agreements to hedge against these changes[145](index=145&type=chunk) - At June 30, 2019, **$51.5 million** of variable rate borrowings were outstanding; a hypothetical **1%** change in borrowing rates would result in a **$0.5 million** change in annual interest expense, absent swap agreements[146](index=146&type=chunk) [Off-Balance Sheet Arrangements](index=43&type=section&id=Off-Balance%20Sheet%20Arrangements) This section confirms the absence of material off-balance sheet arrangements impacting financial condition - The Company enters into operating leases for property and equipment but currently has no other off-balance sheet arrangements with a material effect on its financial condition or results of operations[147](index=147&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=43&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This item states that as a smaller reporting company, the company is not required to provide market risk disclosures - As a smaller reporting company, Construction Partners, Inc. is not required to provide the information called for by this Item[148](index=148&type=chunk) [Item 4. Controls and Procedures](index=43&type=section&id=Item%204.%20Controls%20and%20Procedures) This item discusses the effectiveness of disclosure controls and procedures, noting material weaknesses in internal controls - Management concluded that disclosure controls and procedures were not effective at the reasonable assurance level as of June 30, 2019, due to material weaknesses in internal control over financial reporting[150](index=150&type=chunk) - Material weaknesses relate to the design and operation of information technology general controls and overall closing and financial reporting controls, stemming from historical operation as a private company with limited resources[151](index=151&type=chunk) - Remediation efforts include hiring additional accounting staff, engaging third-party assistance, improving financial period close processes, and formalizing business processes and internal control documentation[152](index=152&type=chunk) [PART II. OTHER INFORMATION](index=45&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section provides additional information not covered in the financial statements, including legal and risk factors [Item 1. Legal Proceedings](index=45&type=section&id=Item%201.%20Legal%20Proceedings) This item details routine litigation and government inquiries, assessing their potential impact on financial condition - The Company is subject to routine litigation and government inquiries, including workers' compensation, employment-related disputes, and liability issues[156](index=156&type=chunk) - In February 2019, the Company paid a **$115,000** fine and submitted an engineering plan in response to an ADEM consent order regarding discharges into wetlands at its Lambert, Alabama mining site[157](index=157&type=chunk) [Item 1A. Risk Factors](index=45&type=section&id=Item%201A.%20Risk%20Factors) This item refers to the comprehensive discussion of risk factors in the company's Annual Report on Form 10-K - Readers should refer to the 'Risk Factors' section in the Company's 2018 Form 10-K for a comprehensive discussion of factors that could materially affect the business, financial condition, or future operating results[158](index=158&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=45&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This item confirms no unregistered equity sales and consistent use of IPO proceeds - The Company did not sell any unregistered equity securities during the reporting period[159](index=159&type=chunk) - There has been no material change in the Company's planned use of proceeds from the Initial Public Offering of Class A common stock, which occurred in May 2018[160](index=160&type=chunk) [Item 3. Defaults Upon Senior Securities](index=45&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This item reports that the company had no defaults upon senior securities during the reporting period - The Company reported no defaults upon senior securities[162](index=162&type=chunk) [Item 4. Mine Safety Disclosures](index=45&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item indicates that mine safety disclosures are provided in Exhibit 95.1 of the Quarterly Report - Mine safety disclosures are included in Exhibit 95.1 of this Quarterly Report on Form 10-Q[163](index=163&type=chunk) [Item 5. Other Information](index=47&type=section&id=Item%205.%20Other%20Information) This item confirms that no other information is required or reported under this section - No other information is reported under this item[165](index=165&type=chunk) [Item 6. Exhibits](index=47&type=section&id=Item%206.%20Exhibits) This item lists all exhibits filed as part of the Form 10-Q, including organizational documents and certifications - The exhibits include the Amended and Restated Certificate of Incorporation and Bylaws, Form of Class A Common Stock Certificate, Registration Rights Agreement, First Amendment to the 2018 Equity Incentive Plan, various certifications, Mine Safety Disclosures, and XBRL documents[166](index=166&type=chunk) [SIGNATURES](index=48&type=section&id=SIGNATURES) This section confirms the official signing of the report by the company's President and CEO and Executive VP and CFO - The report was signed by Charles E. Owens, President and Chief Executive Officer, and R. Alan Palmer, Executive Vice President and Chief Financial Officer, on August 9, 2019[170](index=170&type=chunk)[171](index=171&type=chunk)

```markdown PART I. FINANCIAL INFORMATION [Financial Statements](index=5&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements for the quarterly period ended March 31, 2019, including balance sheets, income statements, stockholders' equity, and cash flows, along with detailed notes on accounting policies, acquisitions, revenue, and debt Consolidated Balance Sheet Highlights (unaudited) | Account | March 31, 2019 (in thousands) | September 30, 2018 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $61,911 | $99,137 | | Total current assets | $230,213 | $267,455 | | Total assets | $476,485 | $496,310 | | Total current liabilities | $112,651 | $134,541 | | Total liabilities | $167,650 | $196,841 | | Total stockholders' equity | $308,835 | $299,469 | Consolidated Statements of Income Highlights (unaudited) | Metric | Three Months Ended Mar 31, 2019 (in thousands) | Three Months Ended Mar 31, 2018 (in thousands) | Six Months Ended Mar 31, 2019 (in thousands) | Six Months Ended Mar 31, 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $164,304 | $118,899 | $318,631 | $269,320 | | Gross profit | $19,801 | $13,749 | $40,929 | $36,547 | | Operating income | $5,723 | $16,080 | $12,754 | $26,597 | | Net income | $4,212 | $11,248 | $9,366 | $22,244 | | Diluted EPS | $0.08 | $0.27 | $0.18 | $0.53 | Consolidated Statements of Cash Flows Highlights (unaudited) | Cash Flow Activity | Six Months Ended Mar 31, 2019 (in thousands) | Six Months Ended Mar 31, 2018 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $5,299 | $28,124 | | Net cash used in investing activities | ($35,119) | ($19,879) | | Net cash used in financing activities | ($7,406) | ($9,995) | | Net change in cash and cash equivalents | ($37,226) | ($1,750) | [Note 2: Significant Accounting Policies](index=11&type=section&id=Note%202%20-%20Significant%20Accounting%20Policies) The company's key accounting policies include recognizing revenue from construction contracts over time using the percentage-of-completion (cost-to-cost) method and revenue from material sales at a point in time, with the business experiencing seasonal fluctuations due to weather - The company's business is seasonal, with warmer and drier weather in the third and fourth fiscal quarters typically resulting in higher activity and revenues, while the first and second quarters generally see lower activity due to adverse weather[24](index=24&type=chunk) - Revenue from construction projects is recognized over time using the percentage-of-completion method, based on the ratio of costs incurred to total estimated costs, while revenue from the sale of HMA and aggregates is recognized at a point in time when control transfers to the customer[39](index=39&type=chunk)[41](index=41&type=chunk)[45](index=45&type=chunk) - Projects for various Departments of Transportation accounted for **37.2%** of consolidated revenues for the six months ended March 31, 2019, indicating a significant concentration of public sector customers[37](index=37&type=chunk) [Note 4: Business Acquisitions](index=18&type=section&id=Note%204%20-%20Business%20Acquisitions) In February 2019, the company acquired a hot mix asphalt and ready-mix concrete business in Florida for $8.9 million, expanding its geographic presence, with this section also detailing the financial impact of the May 2018 acquisition of The Scruggs Company - On February 28, 2019, the company acquired a business in Okeechobee, Florida for **$8.9 million** in cash, resulting in **$4.0 million** of goodwill[52](index=52&type=chunk)[53](index=53&type=chunk) - The Scruggs Company, acquired in May 2018, contributed **$34.7 million** in revenue and **$2.9 million** in net income for the six months ended March 31, 2019[57](index=57&type=chunk) [Note 9: Debt](index=23&type=section&id=Note%209%20-%20Debt) As of March 31, 2019, the company had total long-term debt of $55.9 million, primarily consisting of a $50.1 million term loan and a $5.0 million balance on its revolving credit facility, with interest rate swaps used to manage risk Debt Composition (in thousands) | Debt Component | March 31, 2019 | September 30, 2018 | | :--- | :--- | :--- | | Compass Term Loan | $50,100 | $57,300 | | Compass Revolving Credit Facility | $5,000 | $5,000 | | Other long-term debt | $758 | $964 | | **Total long-term debt** | **$55,858** | **$63,264** | [Note 13: Settlement Agreement](index=27&type=section&id=Note%2013%20-%20Settlement%20Agreement) The company recognized a pre-tax gain of $14.8 million during the six months ended March 31, 2018, from a settlement agreement related to a past business interruption event, with the total settlement of approximately $15.7 million being paid in four equal installments - A pre-tax gain of **$14.8 million** was recorded in the six months ended March 31, 2018, related to a settlement for a business interruption event[86](index=86&type=chunk) - The first installment payment of **$3.9 million** was received in January 2019, with the remaining payments scheduled through July 2020[86](index=86&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=28&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's performance, highlighting an **18.3%** revenue increase for the six-month period ended March 31, 2019, driven by the Scruggs acquisition and a higher project backlog, while net income decreased significantly due to a one-time **$14.8M** settlement income in the prior year - The company uses Adjusted EBITDA as a key non-GAAP performance indicator, with Adjusted EBITDA for the six months ended March 31, 2019, at **$28.7M** (**9.0%** margin), up from **$24.5M** (**9.1%** margin) in the prior year period[102](index=102&type=chunk)[123](index=123&type=chunk) - For the full fiscal year 2019, the company expects total capital expenditures to be approximately **$39.0 million** to **$42.0 million**[134](index=134&type=chunk) - The company is exposed to commodity price risk, particularly for liquid asphalt and diesel fuel, which is managed through pricing strategies and escalator provisions in most public contracts[94](index=94&type=chunk)[138](index=138&type=chunk) [Results of Operations](index=31&type=section&id=Results%20of%20Operations) This section provides a detailed comparison of financial results for the three and six months ended March 31, 2019 and 2018, showing revenue growth but significant net income declines primarily due to the absence of a $14.8M settlement income recorded in 2018 Three Months Ended March 31, 2019 vs 2018 (in thousands) | Metric | Q2 2019 | Q2 2018 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenues | $164,304 | $118,899 | $45,405 | 38.2% | | Gross Profit | $19,801 | $13,749 | $6,052 | 44.0% | | Net Income | $4,212 | $11,248 | ($7,036) | (62.6)% | | Adjusted EBITDA | $13,967 | $8,016 | $5,951 | 74.2% | Six Months Ended March 31, 2019 vs 2018 (in thousands) | Metric | H1 2019 | H1 2018 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenues | $318,631 | $269,320 | $49,311 | 18.3% | | Gross Profit | $40,929 | $36,547 | $4,382 | 12.0% | | Net Income | $9,366 | $22,244 | ($12,878) | (57.9)% | | Adjusted EBITDA | $28,679 | $24,527 | $4,152 | 16.9% | - The increase in revenue for the three and six-month periods was driven by contributions from the Scruggs acquisition (**$18.3M** and **$34.7M**, respectively) and more favorable working conditions in Q2 2019 compared to Q2 2018[104](index=104&type=chunk)[115](index=115&type=chunk) [Liquidity and Capital Resources](index=35&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity is primarily sourced from cash from operations and its credit facilities, with cash from operations decreasing significantly to $5.3M for the six-month period, though management believes current resources are sufficient to fund operations and planned capital expenditures - Cash provided by operating activities decreased by **$22.8 million** to **$5.3 million** for the six months ended March 31, 2019, compared to **$28.1 million** in the prior-year period[126](index=126&type=chunk) - Cash used in investing activities increased to **$35.1 million** from **$19.9 million**, primarily due to a **$10.9 million** acquisition of liquid asphalt terminal assets and an **$8.9 million** business acquisition[127](index=127&type=chunk) - The company was in compliance with all debt covenants as of March 31, 2019, with a fixed charge coverage ratio of **1.22 to 1.00** (minimum **1.20**) and a consolidated leverage ratio of **0.88 to 1.00** (maximum **2.00**)[132](index=132&type=chunk)[133](index=133&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=38&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is a smaller reporting company and is therefore not required to provide the quantitative and qualitative disclosures about market risk - As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, the company is not required to provide the information called for by this Item[142](index=142&type=chunk) [Controls and Procedures](index=38&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that due to identified material weaknesses in internal control over financial reporting, the company's disclosure controls and procedures were not effective as of March 31, 2019, with remediation efforts underway - Management identified material weaknesses in internal control over financial reporting related to the design and operation of IT general controls and overall closing and financial reporting controls[145](index=145&type=chunk) - As a result of these weaknesses, the President and Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were not effective as of the end of the period[144](index=144&type=chunk) - Remediation measures are being implemented, including hiring additional accounting staff and engaging a third party to assist with improving processes and controls[146](index=146&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=39&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in routine litigation and government inquiries common to its business, such as workers' compensation claims and contract compliance matters, with management not believing any pending matters will have a material adverse effect on its financial condition or results of operations - The company is involved in routine litigation and disputes related to its business activities, including workers' compensation, employment disputes, and liability issues[149](index=149&type=chunk) - In management's opinion, after consultation with legal counsel, no pending litigation is expected to have a material adverse effect on the company's financial condition, cash flows, or results of operations[149](index=149&type=chunk) [Risk Factors](index=39&type=section&id=Item%201A.%20Risk%20Factors) This section refers investors to the detailed risk factors discussed in the company's Annual Report on Form 10-K for the fiscal year ended September 30, 2018, for a comprehensive understanding of the risks that could materially affect the business - The report directs readers to Part I, Item 1A, "Risk Factors," in the company's 2018 Form 10-K for a discussion of factors that could materially affect the business[150](index=150&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=39&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reports that it did not sell any unregistered equity securities during the quarter and confirms there has been no material change in the planned use of proceeds from its May 2018 Initial Public Offering - The company did not sell any equity securities during the period that were not registered under the Securities Act[151](index=151&type=chunk) - There has been no material change in the planned use of proceeds from the IPO as described in the Form S-1 Registration Statement[152](index=152&type=chunk) [Defaults Upon Senior Securities](index=39&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reports no defaults upon senior securities for the period - None[154](index=154&type=chunk) [Mine Safety Disclosures](index=39&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Information regarding mine safety violations and other regulatory matters as required by the Dodd-Frank Act is included in Exhibit 95.1 to this Quarterly Report - Information concerning mine safety violations is included in Exhibit 95.1 to this Quarterly Report on Form 10-Q[155](index=155&type=chunk) [Other Information](index=39&type=section&id=Item%205.%20Other%20Information) The company reports no other information for this item - None[156](index=156&type=chunk) [Exhibits](index=40&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including the Amended and Restated Certificate of Incorporation and Bylaws, CEO and CFO certifications, mine safety disclosures, and interactive data files - The report includes a list of all exhibits filed, such as corporate governance documents (**3.1**, **3.2**), officer certifications (**31.1**, **31.2**, **32.1**, **32.2**), Mine Safety Disclosure (**95.1**), and Interactive Data Files (**101**)[157](index=157&type=chunk) ```

Financial Data and Key Metrics Changes - Revenue for Q2 2019 was $164.3 million, an increase of 38.2% compared to the same quarter last year [8] - Gross profit was $19.8 million, up 44% year-over-year [9] - Adjusted EBITDA increased to $13.9 million, a rise of 74.2% compared to the previous year [9] - Net income was $4.2 million, down from the same period last year, but adjusted for a nonrecurring settlement, it was up $3.7 million [25] - Earnings per share decreased to $0.08 from $0.27, impacted by the legal settlement last year [26] - Adjusted EBITDA margin improved to 8.5% from 6.7% year-over-year [26] Business Line Data and Key Metrics Changes - The company reported strong project opportunities across all markets, with no specific geographic market standing out [43] - The backlog grew to $584.8 million, with approximately $380 million expected to be completed during the current fiscal year [9][32] - The company continues to focus on maintenance-type projects, which are recurring and supported by increased state funding [47] Market Data and Key Metrics Changes - Alabama's recent gas tax increase is expected to generate approximately $320 million in additional annual funding for infrastructure projects [13] - The company operates in fast-growing southeastern states, benefiting from ongoing road repair projects and increased public funding [19] Company Strategy and Development Direction - The company is pursuing growth through strategic acquisitions and greenfield expansions [12] - Recent acquisitions include a liquid asphalt terminal and an asphalt production company, enhancing vertical integration and geographic presence [11] - The company aims to maximize efficiencies through scale and flexibility in operations [30] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the favorable project demand and funding environment, with a strong growth outlook for 2019 and beyond [22] - The company anticipates achieving margin improvements through the use of the new asphalt terminal [27] - The effective tax rate for 2019 is expected to be approximately 25%, compared to 17.2% in the previous fiscal year [38] Other Important Information - The company has a strong balance sheet with $61.9 million in cash and a debt-to-EBITDA ratio of 0.88 [33] - Capital expenditures for fiscal 2019 are expected to be in the range of $38 million to $42 million [35] Q&A Session Summary Question: Where were you seeing the upside in the quarter? - Management noted that all markets had favorable working conditions, contributing to performance [43] Question: What are you seeing on the private side of the business? - The company has a strong backlog in commercial private work, having intentionally lowered residential work [44] Question: Can you break down the public business? - The core business remains maintenance-type projects, with no significant changes in large project participation [47] Question: What is the outlook for labor and freight costs? - Labor costs are stable, and while trucking is tight, the company does not foresee significant issues [50] Question: How confident are you in capturing the remaining work needed for the year? - Management expressed confidence, noting that the remaining backlog is comparable to previous years [54] Question: What are the opportunities for future growth? - The company is seeing activity in potential acquisitions and greenfield expansions, remaining selective in its approach [56] Question: What was the rationale behind the conversion of Class B shares to Class A shares? - The conversion was aimed at qualifying for key indices, which is considered beneficial for the company [61] Question: What is the current state of the balance sheet and liquidity for potential transactions? - The company has substantial liquidity and could incur additional debt while maintaining a strong balance sheet [75] Question: Are there any state legislative initiatives being tracked? - All states the company operates in have passed funding increases in recent years, with built-in escalators for future growth [77]

Raymond James Institutional Investors Conference March 2019 NASDAQ: ROAD FORWARD-LOOKING STATEMENTS This presentation contains "forward‐looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 regarding Construction Partners, Inc. (the "Company" or "CPI"), its financial condition, its results of operations and the Company's current views based on information currently available. This information is, where applicable, based on estimates, assumptions and analysis that the ...

PART I. FINANCIAL INFORMATION [Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) Unaudited consolidated financial statements show a decline in net income and operating cash flow, with details on ASC 606 adoption Consolidated Balance Sheets (in thousands) | | December 31, 2018 (unaudited) | September 30, 2018 | | :--- | :--- | :--- | | **Total current assets** | $240,683 | $267,455 | | **Total assets** | $467,812 | $496,310 | | **Total current liabilities** | $104,645 | $134,541 | | **Total liabilities** | $163,189 | $196,841 | | **Total stockholders' equity** | $304,623 | $299,469 | Consolidated Statements of Income (in thousands, except per share data) | | For the Three Months Ended December 31, | | :--- | :--- | :--- | | | **2018** | **2017** | | **Revenues** | $154,327 | $150,421 | | **Gross profit** | $21,128 | $22,798 | | **Operating income** | $7,031 | $10,517 | | **Net income** | $5,154 | $10,996 | | **Basic and diluted EPS** | $0.10 | $0.26 | Consolidated Statements of Cash Flows (in thousands) | | For the Three Months Ended December 31, | | :--- | :--- | :--- | | | **2018** | **2017** | | **Net cash provided by operating activities** | $1,211 | $19,490 | | **Net cash used in investing activities** | ($5,070) | ($9,318) | | **Net cash used in financing activities** | ($3,711) | ($7,500) | | **Net change in cash and cash equivalents** | ($7,570) | $2,672 | - The company adopted the new revenue recognition standard **ASC 606** on October 1, 2018, with no material impact on opening retained earnings[48](index=48&type=chunk) - Unsatisfied performance obligations (backlog) totaled **$505.0 million** at December 31, 2018, with **$391.5 million** expected as revenue in fiscal year 2019[54](index=54&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=21&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management reports a 2.6% revenue increase from acquisition, but a 53.1% decline in net income due to lower gross profit and higher expenses Results of Operations Comparison (in thousands) | | Three Months Ended Dec 31, 2018 | Three Months Ended Dec 31, 2017 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | **Revenues** | $154,327 | $150,421 | $3,906 | 2.6% | | **Gross profit** | $21,128 | $22,798 | ($1,670) | (7.3)% | | **Operating income** | $7,031 | $10,517 | ($3,486) | (33.1)% | | **Net income** | $5,154 | $10,996 | ($5,842) | (53.1)% | | **Adjusted EBITDA** | $14,712 | $16,511 | ($1,799) | (10.9)% | - Revenue growth was driven by **$16.3 million** from the Scruggs acquisition, but organic revenue declined due to adverse weather conditions[86](index=86&type=chunk) - Gross profit decreased due to lower HMA production and equipment utilization, leading to under-absorption of fixed costs[87](index=87&type=chunk) - General and administrative expenses increased by **16.1%** to **$14.4 million**, driven by the Scruggs acquisition and public company costs[88](index=88&type=chunk) - The effective tax rate was **24.3%** compared to **(7.8)%** in the prior-year quarter, which included a **$3.5 million** tax benefit from the Tax Cuts and Jobs Act[90](index=90&type=chunk) - Total capital expenditures for fiscal year 2019 are projected to be approximately **$39.0 million to $42.0 million**[103](index=103&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=29&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, the company is not required to provide quantitative and qualitative market risk disclosures - The company, as a smaller reporting entity, is exempt from providing quantitative and qualitative market risk disclosures[111](index=111&type=chunk) [Controls and Procedures](index=29&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were ineffective due to material weaknesses in IT general controls and financial reporting processes - Management concluded that disclosure controls and procedures were not effective at the reasonable assurance level[113](index=113&type=chunk) - Material weaknesses were identified in internal control over financial reporting, including IT general controls and financial reporting processes[114](index=114&type=chunk) - Remediation measures are underway, including hiring staff, engaging third-party assistance, and formalizing processes[115](index=115&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=30&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in routine litigation, which management believes will not materially impact its financial condition or operations - The company is subject to routine litigation, disputes, and government inquiries related to its business activities[118](index=118&type=chunk) - Management believes no pending litigation will have a material adverse effect on the company's financial position[118](index=118&type=chunk) [Risk Factors](index=30&type=section&id=Item%201A.%20Risk%20Factors) This section refers readers to the company's 2018 Form 10-K for a comprehensive discussion of risk factors affecting the business - Readers are referred to the company's 2018 Form 10-K for a comprehensive discussion of risk factors[119](index=119&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=30&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company made no unregistered equity sales or repurchases, and IPO proceeds use remains materially unchanged during the quarter - No unregistered sales of equity securities occurred during the reporting period[120](index=120&type=chunk) - The planned use of IPO proceeds remains materially unchanged[121](index=121&type=chunk) - The company did not repurchase any of its equity securities during the quarter[122](index=122&type=chunk) [Defaults Upon Senior Securities](index=30&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities during the period - None[123](index=123&type=chunk) [Mine Safety Disclosures](index=30&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Mine safety disclosures, as required by the Dodd-Frank Act, are included in Exhibit 95.1 of this quarterly report - Mine safety disclosures required by the Dodd-Frank Act are included in Exhibit 95.1[124](index=124&type=chunk) [Other Information](index=30&type=section&id=Item%205.%20Other%20Information) No other information is reported for this item - None[125](index=125&type=chunk) [Exhibits](index=31&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including CEO/CFO certifications and mine safety disclosures - The report lists all filed exhibits, including corporate governance documents and CEO/CFO certifications[126](index=126&type=chunk)