Construction Partners, Inc. - Quarter Report: 2023 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

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 June 30, 2023


☐			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: 001-38479

Construction Partners, Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware						26-0758017
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

290 Healthwest Drive, Suite 2 Dothan, Alabama						36303
(Address of principal executive offices)						(Zip Code)

Registrant’s telephone number, including area code: (334) 673-9763

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock, par value $0.001 per share	ROAD	The Nasdaq Stock Market LLC
		(Nasdaq Global Select Market)

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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	☐	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 ☒

As of August 4, 2023, the registrant had 43,728,310 shares of Class A common stock, $0.001 par value, and 8,998,511 shares of Class B common stock, $0.001 par value, outstanding.

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 of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including, among other things, 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,” “outlook” and variations of such words or their negative and similar expressions. Forward-looking statements should not be read as a guarantee of future performance or results, and may 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 in this Quarterly Report on Form 10-Q and under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. We believe the expectations reflected in the forward-looking statements contained in this report are reasonable, but no assurance can be given that these expectations will prove to be correct. Forward-looking 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 inquiries, requirements and initiatives, including those related to funding for public infrastructure construction, land use, environmental, health and safety matters, and government contracting requirements and other laws and regulations;

•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;

•climate change and related laws and regulations;

•our substantial indebtedness and the restrictions imposed on us by the terms thereof;

•our ability to manage our supply chain in a manner that ensures that we are able to obtain adequate raw materials, equipment and essential supplies;

•our ability to retain key personnel and maintain satisfactory labor relations, and to manage or mitigate any labor shortages, turnover and labor cost increases;

•the impact of inflation on costs of labor, raw materials and other items that are critical to our business, including fuel, concrete and steel;

•property damage and other claims and insurance coverage issues;

•the outcome of litigation or disputes, including employment-related, workers’ compensation and breach of contract claims;

•risks related to our information technology systems and infrastructure, including cybersecurity incidents;

•our ability to maintain effective internal control over financial reporting; and

•other events outside of our control.

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 forward-looking statements. Other unknown or unpredictable factors could also cause actual results or events to differ materially from those expressed in the forward-looking 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 Annual Report on Form 10-K for the fiscal year ended September 30, 2022. 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.

Table of Contents

TABLE OF CONTENTS


PART I.	FINANCIAL INFORMATION	2
Item 1.	Financial Statements	2
	Consolidated Balance Sheets at June 30 , 2023 and September 30, 2022	2
	Consolidated Statements of Comprehensive Income for the three and nine months ended June 30 , 2023 and 2022	3
	Consolidated Statements of Stockholders' Equity for the three and nine months ended June 30 , 2023 and 2022	4
	Consolidated Statements of Cash Flows for the nine months ended June 30 , 2023 and 2022	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	35

PART II.	OTHER INFORMATION	36
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	37
Item 6.	Exhibits	37

SIGNATURES		38

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CONSTRUCTION PARTNERS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	June 30,		September 30,
	2023		2022
ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$	54,878	$	35,531
Restricted cash	71		28
Contracts receivable including retainage, net	254,972		265,207
Costs and estimated earnings in excess of billings on uncompleted contracts	33,449		29,271
Inventories	88,233		74,195
Prepaid expenses and other current assets	9,694		12,957
Total current assets	441,297		417,189

Property, plant and equipment, net	502,732		481,412
Operating lease right-of-use assets	17,484		13,985
Goodwill	157,289		129,465
Intangible assets, net	21,169		15,976
Investment in joint venture	87		87

Restricted investments	13,353		6,866
Other assets	30,428		30,541

Total assets	$	1,183,839	$	1,095,521
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	126,745	$	130,468
Billings in excess of costs and estimated earnings on uncompleted contracts	68,748		52,477
Current portion of operating lease liabilities	2,385		2,209
Current maturities of long-term debt	14,000		12,500
Accrued expenses and other current liabilities	28,935		28,484
Total current liabilities	240,813		226,138
Long-term liabilities:
Long-term debt, net of current maturities and deferred debt issuance costs	405,416		363,066
Operating lease liabilities, net of current portion	15,607		12,059
Deferred income taxes, net	25,700		26,713
Other long-term liabilities	15,203		11,666
Total long-term liabilities	461,926		413,504
Total liabilities	702,739		639,642

Stockholders’ equity:
Preferred stock, par value $0.001; 10,000,000 shares authorized and no shares issued and outstanding at June 30, 2023 and September 30, 2022	—		—
Class A common stock, par value $0.001; 400,000,000 shares authorized, 43,760,546 shares issued and 43,728,310 shares outstanding at June 30, 2023 and 41,195,730 shares issued and 41,193,024 shares outstanding at September 30, 2022	44		41
Class B common stock, par value $0.001; 100,000,000 shares authorized, 11,921,463 shares issued and 8,998,511 shares outstanding at June 30, 2023 and 14,275,867 shares issued and 11,352,915 shares outstanding at September 30, 2022	12		15
Additional paid-in capital	264,480		256,571
Treasury stock, at cost, 32,236 shares of Class A common stock at June 30, 2023 and 2,706 shares at September 30, 2022, par value $0.001	(178)		(39)
Treasury stock, at cost, 2,922,952 shares of Class B common stock at June 30, 2023 and September 30, 2022, par value $0.001	(15,603)		(15,603)
Accumulated other comprehensive income, net	16,983		17,620
Retained earnings	215,362		197,274
Total stockholders’ equity	481,100		455,879
Total liabilities and stockholders’ equity	$	1,183,839	$	1,095,521

See notes to consolidated financial statements (unaudited).

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CONSTRUCTION PARTNERS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited in thousands, except share and per share data)


	For the Three Months Ended June 30,				For the Nine Months Ended June 30,
	2023		2022		2023		2022
Revenues	$	421,893	$	380,272	$	1,088,522	$	908,621
Cost of revenues	357,821		336,022		967,674		818,910
Gross profit	64,072		44,250		120,848		89,711
General and administrative expenses	(32,231)		(26,584)		(93,945)		(76,530)
Gain on sale of property, plant and equipment	1,499		333		4,825		1,788
Gain on facility exchange	—		—		5,389		—
Operating income	33,340		17,999		37,117		14,969
Interest expense, net	(5,039)		(2,054)		(13,801)		(4,177)
Other income	493		178		925		337
Income before provision for income taxes	28,794		16,123		24,241		11,129
Provision for income taxes	7,117		3,955		6,153		2,868

Net income	21,677		12,168		18,088		8,261
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on interest rate swap contract, net	4,127		1,729		(625)		8,754
Unrealized loss on restricted investments, net	(129)		(154)		(12)		(276)
Other comprehensive income (loss)	3,998		1,575		(637)		8,478
Comprehensive income	$	25,675	$	13,743	$	17,451	$	16,739


Net income per share attributable to common stockholders:
Basic	$	0.42	$	0.23	$	0.35	$	0.16
Diluted	$	0.41	$	0.23	$	0.35	$	0.16

Weighted average number of common shares outstanding:
Basic	51,827,448		51,793,245		51,826,578		51,760,384
Diluted	52,293,846		51,888,511		52,114,438		51,928,427

See notes to consolidated financial statements (unaudited).

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CONSTRUCTION PARTNERS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(unaudited in thousands, except share data)


	For the Nine Months Ended June 30, 2023
	Class A Common Stock			Class B Common Stock			Additional Paid-in Capital		Treasury Stock Class A Common Stock		Treasury Stock Class B Common Stock		Retained Earnings		Accumulated Other Comprehensive Income (Loss), net		Total Stockholders’ Equity
	Shares	Amount		Shares	Amount
September 30, 2022	41,195,730	$	41	14,275,867	$	15	$	256,571	$	(39)	$	(15,603)	$	197,274	$	17,620	$	455,879
Net income	—	—		—	—		—		—		—		1,892		—		1,892
Equity-based compensation expense	—	—		—	—		2,480		—		—		—		—		2,480
Issuance of stock awards	180,798	—		—	—		—		—		—		—		—		—
Purchase of treasury stock	—	—		—	—		—		(139)		—		—		—		(139)
Other comprehensive loss	—	—		—	—		—		—		—		—		(1,256)		(1,256)
December 31, 2022	41,376,528	$	41	14,275,867	$	15	$	259,051	$	(178)	$	(15,603)	$	199,166	$	16,364	$	458,856
Net loss	—	—		—	—		—		—		—		(5,481)		—		(5,481)
Equity-based compensation expense	—	—		—	—		2,692		—		—		—		—		2,692

Other comprehensive loss	—	—		—	—		—		—		—		—		(3,379)		(3,379)
March 31, 2023	41,376,528	$	41	14,275,867	$	15	$	261,743	$	(178)	$	(15,603)	$	193,685	$	12,985	$	452,688
Net income	—	—		—	—		—		—		—		21,677		—		21,677
Equity-based compensation expense	—	—		—	—		2,737		—		—		—		—		2,737
Issuance of stock awards	29,614	—		—	—		—		—		—		—		—		—
Conversion of Class B common stock to Class A common stock	2,354,404	3		(2,354,404)	(3)		—		—		—		—		—		—
Other comprehensive income	—	—		—	—		—		—		—		—		3,998		3,998
June 30, 2023	43,760,546	$	44	11,921,463	$	12	$	264,480	$	(178)	$	(15,603)	$	215,362	$	16,983	$	481,100

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	For the Nine Months Ended June 30, 2022
	Class A Common Stock			Class B Common Stock			Additional Paid-in Capital		Treasury Stock Class A Common Stock		Treasury Stock Class B Common Stock		Retained Earnings		Accumulated Other Comprehensive Income (Loss), net		Total Stockholders’ Equity
	Shares	Amount		Shares	Amount
September 30, 2021	36,600,639	$	37	18,614,791	$	19	$	248,571	$	—	$	(15,603)	$	175,898	$	(23)	$	408,899
Net income	—	—		—	—		—		—		—		5,511		—		5,511
Equity-based compensation expense	—	—		—	—		1,504		—		—		—		—		1,504
Issuance of stock awards	145,921	—		—	—		—		—		—		—		—		—
Purchase of treasury stock	—	—		—	—		—		(39)		—		—		—		(39)
Other comprehensive income	—	—		—	—		—		—		—		—		1,445		1,445
Conversion of Class B common stock to Class A common stock	4,338,924	4		(4,338,924)	(4)		—		—		—		—		—		—
December 31, 2021	41,085,484	$	41	14,275,867	$	15	$	250,075	$	(39)	$	(15,603)	$	181,409	$	1,422	$	417,320
Net loss	—	—		—	—		—		—		—		(9,418)		—		(9,418)
Equity-based compensation expense	—	—		—	—		1,742		—		—		—		—		1,742
Issuance of stock awards	107,738	—		—	—		—		—		—		—		—		—
Other comprehensive income	—	—		—	—		—		—		—		—		5,458		5,458
March 31, 2022	41,193,222	$	41	14,275,867	$	15	$	251,817	$	(39)	$	(15,603)	$	171,991	$	6,880	$	415,102
Net income	—	—		—	—		—		—		—		12,168		—		12,168
Equity-based compensation expense	—	—		—	—		1,848		—		—		—		—		1,848
Issuance of stock awards	2,508	—		—	—		—		—		—		—		—		—
Other comprehensive income	—	—		—	—		—		—		—		—		1,575		1,575
June 30, 2022	41,195,730	$	41	14,275,867	$	15	$	253,665	$	(39)	$	(15,603)	$	184,159	$	8,455	$	430,693

See notes to consolidated financial statements (unaudited).

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CONSTRUCTION PARTNERS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited in thousands)


	For the Nine Months Ended June 30,
	2023		2022
Cash flows from operating activities:
Net income	$	18,088	$	8,261
Adjustments to reconcile net income to net cash, cash equivalents and restricted cash provided by (used in) operating activities:
Depreciation, depletion, accretion and amortization of long-lived assets	57,769		50,291
Amortization of deferred debt issuance costs and debt discount	225		198
Unrealized loss (gain) on derivative instruments	1,408		(2,589)
Provision for bad debt	450		(1,077)
Gain on sale of property, plant and equipment	(4,825)		(1,788)
Gain on facility exchange	(5,389)		—
Realized losses on restricted investments	10		—
Equity-based compensation expense	7,909		5,094


Deferred income tax benefit	(145)		(193)
Other non-cash adjustments	(117)		97
Changes in operating assets and liabilities, net of acquisition:
Contracts receivable including retainage	22,777		(71,865)
Costs and estimated earnings in excess of billings on uncompleted contracts	(3,580)		(9,487)
Inventories	(11,999)		(21,726)
Prepaid expenses and other current assets	3,214		(2,327)
Other assets	(283)		(2,893)
Accounts payable	(7,441)		30,025
Billings in excess of costs and estimated earnings on uncompleted contracts	14,159		13,379
Accrued expenses and other current liabilities	(1,741)		(6,946)
Other long-term liabilities	4,053		3,825
Net cash provided by (used in) operating activities, net of acquisitions	94,542		(9,721)
Cash flows from investing activities:
Purchases of property, plant and equipment	(79,046)		(52,236)
Proceeds from sale of property, plant and equipment	12,640		4,184
Proceeds from facility exchange	36,987		—
Proceeds from restricted investments	1,403		—
Business acquisitions, net of cash acquired	(82,740)		(102,893)
Purchase of restricted investments	(7,882)		(7,662)

Net cash used in investing activities	(118,638)		(158,607)
Cash flows from financing activities:

Net proceeds from revolving credit facility	38,000		142,300
Proceeds from issuance of long-term debt, net of debt issuance costs and discount	15,000		—
Repayments of long-term debt	(9,375)		(5,000)

Purchase of treasury stock	(139)		(39)



Net cash provided by financing activities	43,486		137,261
Net change in cash, cash equivalents and restricted cash	19,390		(31,067)
Cash, cash equivalents and restricted cash:
Cash, cash equivalents and restricted cash, beginning of period	35,559		57,251
Cash, cash equivalents and restricted cash, end of period	$	54,949	$	26,184

Supplemental cash flow information:
Cash paid for interest	$	14,319	$	5,727
Cash paid for income taxes	$	1,021	$	1,372
Operating lease right-of-use assets obtained in exchange for operating lease liabilities	$	5,417	$	6,209
Cash paid for operating lease liabilities	$	1,802	$	1,783
Non-cash items:
Property, plant and equipment included with accounts payable at period end	$	2,078	$	1,236



Amounts payable to seller in business combination	$	—	$	600

See notes to consolidated financial statements (unaudited).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Note 1 - General

Business Description

Construction Partners, Inc. (the “Company”) is a civil infrastructure company that specializes in the construction and maintenance of roadways across Alabama, Florida, Georgia, North Carolina, South Carolina and Tennessee. Through its wholly-owned subsidiaries, the Company provides a variety of products and services to both public and private infrastructure projects, with an emphasis on highways, roads, bridges, airports and commercial and residential developments. The Company’s primary operations consist of (i) manufacturing and distributing hot mix asphalt (“HMA”) for both internal use and sales to third parties in connection with construction projects, (ii) paving activities, including the construction of roadway base layers and application of asphalt pavement, (iii) site development, including the installation of utility and drainage systems, (iv) mining aggregates, such as sand, gravel and construction stone, that are used as raw materials in the production of HMA and for sales to third parties, and (v) distributing liquid asphalt cement for both internal use and sales to third parties in connection with HMA production.

The Company was formed as a Delaware corporation in 2007 as a holding company to facilitate an acquisition growth strategy in the HMA paving and construction industry. SunTx Capital Partners (“SunTx”), a private equity firm based in Dallas, Texas, together with its principals and their respective affiliates and family members, has owned a controlling interest in the Company’s stock since the Company’s inception.

Seasonality

The use and consumption of the Company’s products and services fluctuate due to seasonality. The Company’s products are used, and its construction operations and production facilities are located, outdoors. Therefore, seasonal changes and other weather-related conditions, in particular, extended snowy, rainy or cold weather in the winter, spring or fall and major weather events, such as hurricanes, tornadoes, tropical storms and heavy snows, can adversely affect the Company’s business and operations through a decline in both the use of the Company’s products and demand for the Company’s services. In addition, construction materials production and shipment levels follow activity in the construction industry, which typically occurs in the spring, summer and fall. The first and second quarters of the Company’s fiscal year typically have lower levels of activity due to less favorable weather conditions. Warmer and drier weather during the Company’s third and fourth fiscal quarters typically result in higher activity and revenues during those quarters.

Note 2 - Significant Accounting Policies

Basis of Presentation

These consolidated financial statements include the accounts of the Company 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 Securities and Exchange Commission (“SEC”), which permit reduced disclosure for interim periods. The Company's Consolidated Balance Sheets as of September 30, 2022 were derived from the Company's audited financial statements for the fiscal year then ended, but do not include all necessary disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) with respect to annual financial statements. In the opinion of management, these 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 consolidated financial statements and accompanying notes should be read in conjunction with the Company’s audited annual consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2022 (the “2022 Form 10-K”). Results for interim periods are not necessarily indicative of the results to be expected for a full fiscal year or for any future period.

Management’s Estimates

The preparation of the consolidated financial statements in conformity with 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 consolidated financial statements. Estimates are used in accounting for items such as recognition of revenues and cost of revenues, investments, mineral reserves, goodwill and other intangible assets, business acquisitions, valuation of operating lease right-of-use assets, allowance for doubtful accounts, valuation allowances related to income taxes, accruals for potential liabilities related to lawsuits or insurance claims, asset retirement obligations, valuation of derivative instruments and valuation of equity-based compensation awards. Estimates are continually evaluated based on historical information and actual experience; however, actual results could differ from these estimates.

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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 included in the 2022 Form 10-K.

Cash and Cash Equivalents

Cash consists principally of currency on hand and demand deposits at commercial banks. Cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts of cash and are so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Cash equivalents include investments with original maturities of three months or less. The Company maintains demand accounts, money market accounts and certificates of deposit at several banks. From time to time, account balances have exceeded the maximum available federal deposit insurance coverage limit. The Company has not experienced any losses in such accounts and regularly monitors its credit risk.

Restricted Cash

Construction Partners Risk Management, Inc. (the “Captive”), a captive insurance company and wholly-owned subsidiary of the Company, provides general liability, automobile liability and workers’ compensation insurance coverage to the Company and its subsidiaries. Restricted cash represents cash held in a fiduciary capacity by the Captive for the payment of casualty insurance claims. The Company had restricted cash of $0.1 million at June 30, 2023 and at September 30, 2022.

Restricted Investments

The Company’s restricted investments consist of debt securities, which are held in a fiduciary capacity by the Captive for the payment of casualty insurance claims. The Company determines the classification of its securities at the time of purchase and re-evaluates the determination at each balance sheet date. The Company has classified securities held by the Captive as available-for-sale. As a result, these securities are carried at their fair value. Purchases and sales of debt securities are recorded on the trade date. Interest income on debt securities is recorded when earned using an effective yield method. Unrealized gains and losses are reported as components of accumulated other comprehensive income, net. These securities have been classified as non-current assets based on their respective maturity dates and the Company’s intent to reinvest sales proceeds into new restricted investments. The Company had restricted investments of $13.4 million and $6.9 million at June 30, 2023 and September 30, 2022, respectively.

The Company evaluates its available-for-sale debt securities quarterly to determine whether there has been a decline in the fair value below the amortized cost due to credit losses or other factors. This evaluation process entails judgement by the Company, and considers factors including the issuer’s financial condition and near-term prospects, future economic conditions, interest rate changes and changes in the rating of the security. When the Company has determined that it intends to sell, or that it is more likely than not that the Company will be required to sell, a security before it recovers its amortized cost basis above fair value, the individual security is written down to fair value, with a corresponding charge to “Other income” within the Consolidated Statements of Comprehensive Income (Loss). For available-for-sale debt securities that do not meet the intent impairment criteria but for which the Company has determined that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss allowance is recorded for the credit loss, limited by the amount by which the fair value is less than the amortized cost basis. For the nine months ended June 30, 2023 and 2022, the Company had no intent impairments or credit losses.

Contracts Receivable Including Retainage, Net

Contracts receivable are generally based on amounts billed and currently due from customers, amounts currently due but unbilled, and amounts retained by customers pending completion of a project. It is common in the Company’s industry for a small portion of either progress billings or 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 the applicable contract terms. Such amounts, defined as retainage, represent a contract asset and are included on the Consolidated Balance Sheets as “Contracts receivable including retainage, net.” Billings for such retainage balances are generally collected within one year of the completion of the project.

Contracts receivable including retainage, net is stated at the amount management expects to collect from outstanding balances. 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, current economic conditions, historical losses and other information available to management. 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 to the contract receivable.

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Contract Assets and Contract Liabilities

Billing practices for the Company’s contracts are governed by the contract terms of each project based on (i) progress toward completion approved by the owner, (ii) achievement of milestones or (iii) pre-agreed schedules. Billings do not necessarily correlate with revenues recognized under the cost-to-cost input method (formerly known as the percentage-of-completion method). The Company records contract assets and contract liabilities to account for these differences in timing.

The contract asset, “Costs and estimated earnings in excess of billings on uncompleted contracts,” arises when the Company recognizes revenues for services performed under its construction projects, but the Company is not yet entitled to bill the customer under the terms of the contract. Amounts billed to customers are excluded from this asset and reflected on the Consolidated Balance Sheets as “Contracts receivable including retainage, net.” 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 (i) errors, (ii) changes in contract specifications or design, (iii) contract change orders in dispute, unapproved as to scope and price, or (iv) other customer-related causes of unanticipated additional contract costs (such as claims). Such amounts are recorded to the extent that the amount can be reasonably estimated and recovery is probable. 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 in the transaction price for which it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is resolved. The Company did not recognize any material amounts associated with claims and unapproved change orders during the periods presented.

The contract liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” represents the Company’s obligation to transfer goods or services to a customer for which the Company has been paid by the customer or for which the Company has billed the customer under the terms of the contract. Revenue for future services reflected in this account are recognized, and the liability is reduced, as the Company subsequently satisfies the performance obligation under the contract.

Costs and estimated earnings in excess of billings on uncompleted contracts and billings in excess of costs and estimated earnings on uncompleted contracts are typically resolved within one year and are not considered significant financing components.

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. The Company monitors concentrations of credit risk associated with these receivables 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 well-known local companies whose reputations are known to management. The Company performs credit checks for significant new customers and generally requires progress payments for significant projects. The Company generally has the ability to file liens against the property if payments are not made on a timely basis. No single customer accounted for more than 10% of the Company’s contracts receivable including retainage, net balance at June 30, 2023 or September 30, 2022.

Projects performed for various departments of transportation accounted for 38.6% and 43.7% of consolidated revenues for the three months ended June 30, 2023 and 2022, respectively, and for 32.0% and 37.2% of consolidated revenues for the nine months ended June 30, 2023 and 2022, respectively. Customers that accounted for more than 10% of consolidated revenues during the three and nine months ended June 30, 2023 and 2022 are presented below:


	% of Consolidated Revenues
	For the Three Months Ended June 30,		For the Nine Months Ended June 30,
	2023	2022	2023	2022
Alabama Department of Transportation	*	14.4%	*	10.9%
North Carolina Department of Transportation	11.2%	13.6%	*	10.3%
Florida Department of Transportation	11.2%	*	10.2%	10.4%

* Less than 10%

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Revenues from Contracts with Customers

The Company derives revenues from contracts with its customers, predominantly by performing construction services for both public and private infrastructure projects, with an emphasis on highways, roads, bridges, airports and commercial and residential developments. These projects are performed for a mix of federal, state, municipal and private customers. In addition, the Company generates revenues from the sale of construction materials, including HMA, aggregates, liquid asphalt and ready-mix concrete, to third-party public and private customers pursuant to contracts with those customers. The following table reflects, for the periods presented, the percentage of (i) revenues generated from public infrastructure construction projects and the sale of construction materials to public customers and (ii) revenues generated from private infrastructure construction projects and the sale of construction materials to private customers.


	% of Consolidated Revenues
	For the Three Months Ended June 30,				For the Nine Months Ended June 30,
	2023		2022		2023		2022
Private	36.8	%	36.6	%	39.0	%	38.8	%
Public	63.2	%	63.4	%	61.0	%	61.2	%

Revenues derived from construction projects are recognized over time as the Company satisfies its performance obligations by transferring control of the asset created or enhanced by the project to the customer. Recognition of revenues and cost of revenues for construction projects requires significant judgment by management, including, among other things, estimating total costs expected to be incurred to complete a project and measuring progress toward completion. Management reviews contract estimates regularly to assess revisions of estimated costs to complete a project and measurement of progress toward completion.

Management believes the Company maintains reasonable estimates based on prior 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 be able to utilize contractual provisions to back charge the subcontractors for those costs. A reduction to costs related to back charges is recognized when estimated recovery is probable and the amount can be reasonably estimated. Contract costs consist of (i) direct costs on contracts, including labor, materials, and amounts payable to subcontractors and (ii) indirect costs related to contract performance, such as insurance, employee benefits, and equipment (primarily depreciation, fuel, maintenance and repairs).

Progress toward completion is estimated using the input method, measured by the relationship of total cost incurred through the measurement date to total estimated costs required to complete the project (cost-to-cost method). The Company believes this method best depicts the transfer of goods and services to the customer because it represents satisfaction of the Company’s performance obligation under the contract, which occurs as the Company incurs costs. The Company measures percentage of completion based on the performance of a single performance obligation under its construction projects. Each of the Company’s construction contracts represents a single performance obligation to complete a defined construction project. This is because goods and services promised for delivery to a customer are not distinct, as the customer cannot benefit from any individual portion of the services on its own. All deliverables under a contract are part of a project defined by a customer and represent a series of integrated goods and services that have the same pattern of delivery to the customer and use the same measure of progress toward satisfaction of the performance obligation as the customer’s asset is created or enhanced by the Company. The Company’s obligation is not satisfied until the entire project is complete.

Revenue recognized during a reporting period is based on the cost-to-cost input method applied to the total transaction price, including adjustments for variable consideration, such as liquidated damages, penalties or bonuses, related to the timeliness or quality of project performance. The Company includes variable consideration in the estimated transaction price at the most likely amount to which the Company expects to be entitled or the most likely amount the Company expects to incur, in the case of liquidated damages or penalties. Such amounts are included in the transaction price for which it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is resolved. The Company accounts for changes to the estimated transaction price using a cumulative catch-up adjustment.

The majority of the Company’s public construction contracts are fixed unit price contracts. Under fixed unit price contracts, the Company is committed to providing materials or services required by a contract at fixed unit prices (for example, dollars per ton of asphalt placed). The Company’s private customer contracts are primarily fixed total price contracts, also known as lump sum contracts, which require that the total amount of work be performed for a single price. Contract cost is recorded as incurred, and revisions in

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contract revenue and cost estimates are reflected in the accounting period when known. Changes in job performance, job conditions and estimated profitability, including those changes arising from contract change orders, penalty provisions and final contract settlements, may result in revisions to estimated revenues and costs and are recognized in the period in which the revisions are determined.

Change orders are modifications of an original contract that effectively change the existing provisions of the contract and become part of the single performance obligation that is partially satisfied at the date of the contract modification. This is because goods and services promised under change orders are generally not distinct from the remaining goods and services under the existing contract, due to the significant integration of services performed in the context of the contract. Accordingly, change orders are generally accounted for as a modification of the existing contract and single performance obligation. The Company accounts for the modification using a cumulative catch-up adjustment. Either the Company or its customers may initiate change orders, which may include changes in specifications or designs, manner of performance, facilities, equipment, materials, sites and period of completion of the work.

Revenues derived from the sale of HMA, aggregates, ready-mix concrete, and liquid asphalt are recognized at a point in time, which is when control of the product is transferred to the customer. Generally, that point in time is when the customer accepts delivery at its facility or receives product in its own transport vehicles from one of the Company’s HMA plants or aggregates facilities. Upon purchase, the Company generally provides an invoice or similar document detailing the goods transferred to the customer. The Company generally offers payment terms customary in the industry, which typically require payment ranging from point-of-sale to 30 days following purchase.

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 reversed or settled. The effect of a change in tax rates on deferred tax assets and liabilities 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 on a net basis by taxing authority and classified as non-current on the Consolidated Balance Sheets.

Earnings per Share

Basic net income per share attributable to common stockholders is computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per common share attributable to common stockholders is the same as basic net income per share attributable to common stockholders, but includes dilutive unvested stock awards using the treasury stock method.

Fair Value Measurements

The Company measures and discloses certain financial assets and liabilities at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Inputs used to measure fair value are classified using the following hierarchy:

Level 1. Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2. Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data.

Level 3. Inputs are unobservable for the asset or liability and include situations in which there is little, if any, market activity for the asset or liability. The inputs used in the determination of fair value are based on the best information available under the circumstances and may require significant management judgment or estimation.

The Company endeavors to utilize the best available information in measuring fair value.

The Company’s financial instruments include cash and cash equivalents, restricted cash, contracts receivable including retainage, accounts payable and accrued expenses reflected as current assets and current liabilities on its Consolidated Balance Sheets at June 30, 2023 and September 30, 2022. Due to the short-term nature of these instruments, management considers their carrying value to approximate their fair value.

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The Company also has debt securities reflected as restricted investments on its Consolidated Balance Sheets at June 30, 2023 and September 30, 2022. These investments are adjusted to fair value at each balance sheet date and are considered Level 2 fair value measurements.

The Company also has a Term Loan and a Revolving Credit Facility, as each are defined and further described in Note 8 - Debt. The carrying value of amounts outstanding under these credit facilities is reflected as long-term debt, net of current maturities and deferred debt issuance cost and current maturities of long-term debt on the Company’s Consolidated Balance Sheets at June 30, 2023 and September 30, 2022. Due to the variable rate or short-term nature of these instruments, management considers their carrying value to approximate their fair value.

The Company also has derivative instruments. The fair value of commodity and interest rate swaps are based on forward and spot prices, as described in Note 16 - Fair Value Measurements.

Level 3 fair values are used to value acquired mineral reserves and leased mineral interests. The fair values of mineral reserves and leased mineral interests are determined using an excess earnings approach, which requires management to estimate future cash flows. The estimate of future cash flows is based on available historical information and forecasts determined by management, but is inherently uncertain. Key assumptions in estimating future cash flows include sales price, volumes and expected profit margins, net of capital requirements. The present value of the projected net cash flows represents the fair value assigned to mineral reserves and mineral interests. The discount rate is a significant assumption used in the valuation model and is based on the required rate of return that a hypothetical market participant would assume if purchasing the acquired business.

Management applies fair value measurement guidance to its impairment analysis for tangible and intangible assets, including goodwill.

Comprehensive Income

The Company reports comprehensive income in its Consolidated Statements of Comprehensive Income and Consolidated Statements of Stockholders’ Equity. Comprehensive income comprises two subsets: net income and other comprehensive income (“OCI”). OCI includes adjustments for changes in fair value of an interest rate swap contract derivative and available-for-sale restricted investments. For additional information about comprehensive income, see Note 19 - Other Comprehensive Income.

Note 3 - Accounting Standards

The Company did not adopt any new accounting standards or updates during the nine months ended June 30, 2023.

Note 4 - Business Acquisitions

Tennessee Acquisition - Provisional

On November 18, 2022, the Company acquired three HMA manufacturing plants and certain related assets located in the Nashville, Tennessee metro area for $9.5 million. In connection with this transaction, the Company disposed of a quarry in North Carolina, resulting in total cash proceeds of $37.0 million and a gain on the facility exchange of $5.4 million.

North Carolina Acquisition - Provisional

On December 1, 2022, the Company acquired all of the capital stock of Ferebee Corporation, an HMA manufacturing and paving company headquartered in Charlotte, North Carolina for $67.3 million. The transaction established the Company’s second platform company in North Carolina and added three HMA plants in the greater Charlotte/Rock Hill metro area.

South Carolina Acquisition - Provisional

On April 3, 2023, the Company acquired substantially all of the assets of Pickens Construction, Inc., an asphalt paving company headquartered in Anderson, South Carolina, for $5.0 million. The transaction added an HMA plant in the greater Greenville, South Carolina metro area.

Alabama Acquisition - Provisional

On May 1, 2023, the Company acquired the Huntsville, Alabama operations of Southern Site Contractors, LLC., an excavation, grading and utility contractor, for $1.1 million. The transaction enhanced the Company's vertical integration of construction services in the Huntsville, Alabama metro area.

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Combined Acquisitions During the Nine Months Ended June 30, 2023

The foregoing acquisitions were accounted for as business combinations in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“Topic 805”). As of June 30, 2023, the purchase price allocation has not yet been finalized due to the recent timing of these acquisitions, as certain information was pending on such date to finalize estimates of fair value of certain assets acquired and liabilities assumed. The Company consulted with independent third parties to assist in the valuation process. The Company expects to finalize these values as soon as practicable and no later than one year from their respective acquisition dates.

Identifiable assets acquired and liabilities assumed were recorded at their estimated fair values based on the methodology described

under Fair Value Measurements in Note 2 - Significant Accounting Policies. The amount of the purchase price exceeding the net fair

value of identifiable assets acquired and liabilities assumed was recorded as provisional goodwill in the amount of approximately

$27.0 million, which is deductible for income tax purposes. Goodwill primarily represents the assembled work force and

synergies expected to result from the acquisitions. Upon finalizing the accounting for these transactions, management

expects to ascribe value to other identifiable intangible assets, including customer relationships and customer backlog, which will

reduce the provisional amount allocated to goodwill.

Total consideration transferred for these acquisitions was $82.9 million, which was paid from available cash, proceeds from the exchange of the North Carolina facility and a draw from the Revolving Credit Facility (as defined in Note 8 - Debt). The total consideration has been provisionally allocated as follows: $10.4 million of net working capital, $39.4 million of property, plant and equipment, $6.1 million of various intangible assets and $27.0 million of goodwill.

The Consolidated Statements of Comprehensive Income include $26.4 million of revenue and $0.3 million of net income attributable to the operations of these acquisitions for the three months ended June 30, 2023 and $48.4 million of revenue and $0.6 million of net loss attributable to the operations of these acquisitions for the nine months ended June 30, 2023 from their respective acquisition dates. The Company recorded certain costs to effect the acquisitions as they were incurred, which are reflected in general and administrative expenses on the Company’s Consolidated Statements of Comprehensive Income in the amount of $0.1 million for the three months ended June 30, 2023 and $0.3 million for the nine months ended June 30, 2023.

The following presents pro forma revenues and net income as though the acquisitions had occurred on October 1, 2021 (unaudited, in thousands):


	For the Three Months Ended June 30,
	2023		2022
Pro forma revenues	$	422,438	$	407,264
Pro forma net income	$	21,779	$	12,423


	For the Nine Months Ended June 30,
	2023		2022
Pro forma revenues	$	1,107,412	$	975,910
Pro forma net income	$	18,997	$	8,324

Pro forma financial information is presented as if the operations of the acquisitions had been included in the consolidated results of the Company since October 1, 2021, and gives effect to transactions that are directly attributable to the acquisitions, including adjustments to:

(a)include the pro forma results of operations of the acquisitions for the three and nine months ended June 30, 2023 and 2022;

(b)include additional depreciation and depletion expense related to the fair value of acquired property, plant and equipment and reserves at aggregates facilities, as applicable, as if such assets were acquired on October 1, 2021 and consistently applied to the Company’s depreciation and depletion methodologies;

(c)include interest expense as if the funds borrowed to finance the purchase prices were borrowed on October 1, 2021 (interest expense calculations further assume that no principal payments were made during the period from October 1, 2021 through June 30, 2023, and that the interest rate in effect on the date the Company made the acquisitions was in effect for the period from October 1, 2021 through June 30, 2023); and

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(d)exclude $0.3 million of acquisition-related expenses from the three and nine months ended June 30, 2023, as though such expenses were incurred prior to the pro forma acquisition date of October 1, 2021.

Pro forma information is presented for informational purposes and may not be indicative of revenue or net loss that would have been recorded if these acquisitions had occurred on October 1, 2022.

Measurement Period Adjustments

During the nine months ended June 30, 2023, the Company made measurement period adjustments to previous year acquisitions, which resulted in a corresponding net increase to goodwill of $3.2 million.

Note 5 - Contracts Receivable Including Retainage, Net

Contracts receivable including retainage, net consisted of the following at June 30, 2023 and September 30, 2022 (in thousands):


	June 30, 2023		September 30, 2022
	(unaudited)
Contracts receivable	$	208,586	$	221,566
Retainage	47,285		44,253
	255,871		265,819
Allowance for doubtful accounts	(899)		(612)
Contracts receivable including retainage, net	$	254,972	$	265,207

Retainage receivables have been billed, but are not due until contract completion and acceptance by the customer.

Note 6 - Contract Assets and Liabilities

Costs and estimated earnings compared to billings on uncompleted contracts at June 30, 2023 and September 30, 2022 consisted of the following (in thousands):


	June 30, 2023		September 30, 2022
	(unaudited)
Costs on uncompleted contracts	$	1,635,361	$	1,520,510
Estimated earnings to date on uncompleted contracts	158,966		146,459
	1,794,327		1,666,969
Billings to date on uncompleted contracts	(1,829,626)		(1,690,175)
Net billings in excess of costs and estimated earnings on uncompleted contracts	$	(35,299)	$	(23,206)

Significant changes to balances of costs and estimated earnings in excess of billings (contract asset) and billings in excess of costs and estimated earnings (contract liability) on uncompleted contracts from September 30, 2022 to June 30, 2023 are presented below (in thousands):


	Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts		Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts		Net Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts
September 30, 2022	$	29,271	$	(52,477)	$	(23,206)
Changes in revenue billed, contract price or cost estimates	4,178		(16,270)		(12,093)
June 30, 2023 (unaudited)	$	33,449	$	(68,748)	$	(35,299)

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Note 7 - Property, Plant and Equipment

Property, plant and equipment at June 30, 2023 and September 30, 2022 consisted of the following (in thousands):


	June 30, 2023		September 30, 2022
	(unaudited)
Construction equipment	$	448,736	$	402,581
Plants	187,514		167,625
Mineral reserves	69,405		91,992
Land and improvements	69,892		59,454
Buildings	32,682		32,566
Furniture and fixtures	7,383		7,110
Leasehold improvements	1,268		1,230
Total property, plant and equipment, gross	816,880		762,558
Accumulated depreciation, depletion and amortization	(349,289)		(304,935)
Construction in progress	35,141		23,789
Total property, plant and equipment, net	$	502,732	$	481,412

Depreciation, depletion and amortization expense related to property, plant and equipment was $20.2 million and $17.6 million for the three months ended June 30, 2023 and 2022, respectively, and $59.9 million and $50.4 million for the nine months ended June 30, 2023 and 2022, respectively.

Note 8 - Debt

The Company maintains credit facilities to finance acquisitions, to fund the purchase of real estate, construction equipment, plants and other fixed assets and for general working capital purposes. Debt at June 30, 2023 and September 30, 2022 consisted of the following (in thousands):


	June 30, 2023		September 30, 2022
	(unaudited)
Long-term debt:
Term Loan	$	277,500	$	271,875
Revolving Credit Facility	143,100		105,100
Total long-term debt	420,600		376,975
Deferred debt issuance costs	(1,184)		(1,409)
Current maturities of long-term debt	(14,000)		(12,500)
Long-term debt, net of current maturities	$	405,416	$	363,066

Since 2017, the Company and each of its subsidiaries have been parties to a credit agreement with PNC Bank, National Association (successor in interest to BBVA USA) and certain other lenders party from time to time thereto. The credit agreement has been amended and restated on multiple occasions since its inception in order to provide for changes in the economic terms of the credit facility and developments at the Company.

On June 30, 2022, the Company and each of its subsidiaries entered into a Third Amended and Restated Credit Agreement with PNC Bank, National Association, as administrative agent and lender, PNC Capital Markets LLC, as joint lead arranger and sole bookrunner, Regions Bank and BofA Securities, Inc., each as a joint arranger, and certain other lenders (as amended and restated, the “Credit Agreement”). The Credit Agreement provides for (i) a term loan facility in an initial aggregate principal amount of $250.0 million (the “Term Loan”) the full amount of which was drawn at closing, (ii) a revolving credit facility in an initial aggregate principal amount of $325.0 million (the “Revolving Credit Facility”), and (iii) a delayed draw term loan facility in an initial aggregate principal amount of $50.0 million (the “Delayed Draw Term Loan”). Among other things, the proceeds of the Term Loan were used to refinance indebtedness of the Company and its subsidiaries under its prior credit facility.

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All outstanding advances under the Term Loan and Revolving Credit Facility are due and payable in full on June 30, 2027 (the “Maturity Date”). The Term Loan (commencing on September 30, 2022) and the Delayed Draw Term Loan (commencing on the earliest of (i) December 31, 2023, or (ii) the last day of the fiscal quarter in which the commitments under the Delayed Draw Term Loan are fully drawn or terminated, as applicable) will amortize in quarterly installments in an amount (subject, in each case, to adjustments for prior mandatory and voluntary prepayments of principal) equal to: (a) 1.25% of the original principal amount of the Term Loan (and, to the extent any Delayed Draw Term Loans are then outstanding, the original principal amount of such loans) and continuing on each of the following eleven quarter-end payment dates; (b) 1.875% of the original principal amount of the Term Loan (and, to the extent any Delayed Draw Term Loans are then outstanding, the original principal amount of such loans) on each of the next eight quarter-end payment dates; and (c) all remaining principal of the Term Loan and the Delayed Draw Term Loans are due and payable in full on the Maturity Date. The annual interest rates applicable to advances will be calculated, at the Company’s option, by using either a base rate, Daily Simple SOFR plus 0.10%, or Term SOFR plus 0.10%, and in each case, plus an applicable margin percentage that corresponds to the Company’s consolidated net leverage ratio. Subject to various requirements, the Company generally may (and, under certain circumstances, must) prepay all or a portion of the outstanding balance of the advances, together with accrued interest thereon, prior to their contractual maturity. The obligations of the Company and its subsidiaries under the Credit Agreement are secured by a first priority security interest in substantially all of the Company’s assets.

At June 30, 2023 and September 30, 2022, there was $277.5 million and $271.9 million, respectively, of principal outstanding under the Term Loan, $143.1 million and $105.1 million, respectively, of principal outstanding under the Revolving Credit Facility, and availability of $171.9 million and $208.6 million, respectively, under the Revolving Credit Facility, including a reduction for outstanding letters of credit. The Company also had $10.0 million and $25.0 million available under the Delayed Draw Term Loan at June 30, 2023 and September 30, 2022, respectively.

The Credit Agreement contains customary negative covenants for agreements of this type, including, but not limited to, restrictions on

the Company’s ability to make acquisitions, make loans or advances, make capital expenditures and investments, pay dividends, create

or incur indebtedness, create liens, wind up or dissolve, consolidate, merge or liquidate, or sell, transfer or dispose of assets. The Credit

Agreement also requires the Company to satisfy certain financial covenants, including a minimum fixed charge coverage ratio of 1.20-

to-1.00 and a maximum consolidated leverage ratio of 3.50-to-1.00, subject to certain adjustments. At June 30, 2023 and September 30, 2022, the Company’s fixed charge coverage ratio was 2.00-to-1.00 and 2.56-to-1.00, respectively, and the Company’s consolidated leverage ratio was 2.27-to-1.00 and 2.79-to-1.00, respectively. At both June 30, 2023 and September 30, 2022, the Company was in compliance with all covenants under the Credit Agreement.

From time to time, the Company has entered into interest rate swap agreements to hedge against the risk of changes in interest rates. At June 30, 2023 and September 30, 2022, the aggregate notional value of these interest rate swap agreements was $300.0 million, and the fair value was $24.5 million and $24.7 million, respectively, which is included within other assets on the Company’s Consolidated Balance Sheets.

Note 9 - Equity

Shares of Class A common stock and Class B common stock are identical, except with respect to voting rights, conversion rights and transfer restrictions applicable to shares of Class B common stock. The holders of Class A common stock are entitled to one vote per share, and the holders of Class B common stock are entitled to ten votes per share. The holders of Class A common stock and Class B common stock vote together as a single class on all matters submitted to a vote of stockholders, including the election of directors, unless otherwise required by applicable law or the Company’s certificate of incorporation or bylaws. Shares of Class B common stock are convertible into shares of Class A common stock at any time at the option of the holder or upon any transfer, subject to certain limited exceptions. In addition, upon the election of the holders of a majority of the then-outstanding shares of Class B common stock, all outstanding shares of Class B common stock will be converted into shares of Class A common stock. Once converted into shares of Class A common stock, shares of Class B common stock will not be reissued. Class A common stock is not convertible into any other class of the Company’s capital stock.

Conversion of Class B Common Stock to Class A Common Stock

During the nine months ended June 30, 2023, certain stockholders of the Company converted a total of 2,354,404 shares of Class B

common stock into shares of Class A common stock on a one-for-one basis. As of June 30, 2023, there were 43,728,310 shares of

Class A common stock and 8,998,511 shares of Class B common stock outstanding.

Treasury Stock

During the nine months ended June 30, 2023, the Company received a total of 5,267 shares of Class A common stock from employees for reimbursement of income taxes paid by the Company on behalf of these employees related to the vesting of restricted stock awards and 24,263 shares of Class A common stock through forfeitures of restricted stock awards by terminated employees.

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Restricted Stock Awards

During the nine months ended June 30, 2023, the Company awarded a total of 210,412 restricted shares of Class A common stock to certain directors, officers and employees of the Company under the Construction Partners, Inc. 2018 Equity Incentive Plan (the “Equity Incentive Plan”).

Additional information about these transactions is set forth in Note 13 - Equity-Based Compensation.

Note 10 - Earnings Per Share

As discussed in Note 9 - Equity, the Company has Class A common stock and Class B common stock. Because the only differences between the two classes of common stock are related to voting rights, conversion rights and transfer restrictions applicable to shares of Class B common stock, the Company has not presented earnings per share under the two-class method, as the earnings per share are the same for both Class A common stock and Class B common stock. The following table summarizes the weighted-average number of basic common shares outstanding and the calculation of basic earnings per share for the periods presented (unaudited in thousands, except share and per share amounts):


	For the Three Months Ended June 30,				For the Nine Months Ended June 30,
	2023		2022		2023		2022
Numerator
Net income attributable to common stockholders	$	21,677	$	12,168	$	18,088	$	8,261
Denominator
Weighted average number of common shares outstanding, basic	51,827,448		51,793,245		51,826,578		51,760,384
Net income per common share attributable to common stockholders, basic	$	0.42	$	0.23	$	0.35	$	0.16

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 (unaudited in thousands, except share and per share amounts):


	For the Three Months Ended June 30,				For the Nine Months Ended June 30,
	2023		2022		2023		2022
Numerator
Net income attributable to common stockholders	$	21,677	$	12,168	$	18,088	$	8,261
Denominator
Weighted average number of basic common shares outstanding, basic	51,827,448		51,793,245		51,826,578		51,760,384
Effect of dilutive securities:

Restricted stock grants	466,398		95,266		287,860		168,043
Weighted average number of diluted common shares outstanding	52,293,846		51,888,511		52,114,438		51,928,427
Net income per diluted common share attributable to common stockholders	$	0.41	$	0.23	$	0.35	$	0.16

Note 11 - Provision for Income Taxes

The Company files a consolidated United States federal income tax return and income tax returns in various states. Management evaluated the Company’s tax positions based on appropriate provisions of applicable tax laws and regulations and believes that they are supportable based on their specific technical merits and the facts and circumstances of the respective transactions.

The Company’s effective income tax rate for the three months ended June 30, 2023 and 2022 was 24.7% and 24.5%, respectively. The Company’s effective tax rate for the nine months ended June 30, 2023 and 2022 was 25.4% and 25.8%, respectively. The changes in the Company’s effective rates are due to differences in state tax rates at its operating subsidiaries.

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Note 12 - Related Parties

On December 31, 2017, the Company sold an indirect wholly owned subsidiary to an immediate family member of an executive officer of the Company (“Purchaser of Subsidiary”) in consideration for a note receivable in the amount of $1.0 million, which approximated the net book value of the disposed entity. At June 30, 2023, $0.1 million and $0.3 million was reflected on the Company’s Consolidated Balance Sheets within other current assets and other assets, respectively, representing the remaining balances on this note receivable. In connection with this transaction, the Company also received a note receivable from the disposed entity (“Disposed Entity”) on December 31, 2017 in the amount of $1.0 million representing certain accounts payable of the Disposed Entity that were paid by the Company. At June 30, 2023, $0.1 million and $0.2 million was reflected on the Company’s Consolidated Balance Sheets within other current assets and other assets, respectively, representing the remaining balances on this note receivable. The notes do not bear interest, and repayments are scheduled to be made in periodic installments during fiscal year 2023 through fiscal year 2026.

Prior to its acquisition by the Company, a current subsidiary of the Company advanced funds to an entity owned by an immediate family member of an officer of the Company in connection with a land development project. The obligations of the borrower entity to repay the advances were guaranteed by a separate entity owned by the same family member of the officer. Amounts outstanding under the advances did not bear interest and matured in full in March 2021. In March 2021, the subsidiary of the Company amended and restated the terms of the repayment obligation, as a result of which the officer personally assumed the remaining balance of the obligation. No new amounts were advanced to the officer by the Company or any subsidiary or affiliate thereof in connection with the transaction. Under the amended and restated terms, the officer executed a promissory note in favor of the Company’s subsidiary in the principal amount of $0.8 million. The note bears simple interest at a rate of 4.0% and requires annual minimum payments of $0.1 million inclusive of principal and accrued interest, with any remaining principal and accrued interest due and payable in full on December 31, 2027. Amounts outstanding under the note are reflected on the Company’s Consolidated Balance Sheets within other current assets and other assets (“Land Development Project”).

From time to time, the Company conducts or has conducted business with the following related parties:

•Entities owned by immediate family members of an executive officer of the Company perform subcontract work for a subsidiary of the Company, including trucking and grading services (“Subcontracting Services”).

•Since June 1, 2014, the Company has been a party to an access agreement with Island Pond Corporate Services, LLC, which provides a location for the Company to conduct business development activities from time to time on a property owned by the Executive Chairman of the Company’s Board of Directors (“Island Pond”).

•The Company is party to a management services agreement with SunTx, under which the Company pays SunTx Capital Management Corp. (“SunTx”) $0.31 million per fiscal quarter and reimburses certain travel and other out-of-pocket expenses associated with services rendered under the management services agreement.

The following table presents revenues earned and expenses incurred by the Company during the three and nine months ended June 30, 2023 and 2022, and accounts receivable and payable balances at June 30, 2023 and September 30, 2022, related to transactions with the related parties described above (in thousands):


	Expense Incurred												Accounts Receivable (Payable)
	For the Three Months Ended June 30,						For the Nine Months Ended June 30,						June 30,		September 30,
	2023			2022			2023			2022			2023		2022
	(unaudited)			(unaudited)			(unaudited)			(unaudited)			(unaudited)
Purchaser of Subsidiary	$	—		$	—		$	—		$	—		$	414	$	414
Disposed Entity	—			—			—			—			264		264
Land Development Project	—			—			—			—			628		712
Subcontracting Services	2,680		(1)	2,596		(1)	5,672		(1)	5,688		(1)	(679)		(695)

Island Pond	80		(2)	80		(2)	240		(2)	240		(2)	—		—



SunTx	383		(2)	370		(2)	1,109		(2)	1,129		(2)	—		—

(1) Cost is reflected as cost of revenues on the Company’s Consolidated Statements of Comprehensive Income.
(2) Cost is reflected as general and administrative expenses on the Company’s Consolidated Statements of Comprehensive Income.

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Note 13 - Equity-Based Compensation

The Company measures and recognizes equity-based compensation expense, net of forfeitures, over the requisite vesting periods for all equity-based payment awards made and recognizes forfeitures as they occur. Equity-based compensation is included in general and administrative expenses in the Consolidated Statements of Comprehensive Income.

Restricted Stock

During the three months ended June 30, 2023 and 2022, the Company recorded $2.2 million and $1.8 million, respectively, of compensation expense in connection with restricted stock awards. During the nine months ended June 30, 2023 and 2022, the Company recorded $6.4 million and $5.1 million, respectively, of compensation expense in connection with restricted stock awards. At June 30, 2023, there was approximately $12.1 million of unrecognized compensation expense related to restricted stock awards.

Performance Stock Units

Performance stock units (“PSUs”) are eligible to vest at the end of the performance period based on achievement of certain performance metrics established by the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”). The preliminary number of shares of common stock issuable upon vesting of PSUs can range from 0% to 150% of the number of shares subject to the award, depending on the level of achievement, as determined by the Compensation Committee. The preliminary number of vested shares may be increased or decreased by up to 15% based on a comparison of the Company’s total shareholder return over the performance period to that of the Russell 2000. The Company recognizes expense, net of estimated forfeitures, for PSUs based on the forecasted level of achievement of the applicable performance metrics, multiplied by the fair value of the total number of shares of Class A common stock underlying the PSUs that the Company anticipates will be delivered upon vesting based on such achievement.

During the three months ended June 30, 2023 and 2022, the Company recorded $0.5 million and $0.0 million, respectively, of compensation expense in connection with PSUs. During the nine months ended June 30, 2023 and 2022, the Company recorded $1.5 million and $0.0 million, respectively, of compensation expense in connection with PSUs. At June 30, 2023, there was approximately $2.6 million of unrecognized compensation expense related to PSUs.

Note 14 - Leases

The Company leases certain facilities, office space, vehicles and equipment. As of June 30, 2023, operating leases under ASC Topic 842, Leases (“Topic 842”) were included in (i) operating lease right-of use assets, (ii) current portion of operating lease liabilities and (iii) operating lease liabilities, net of current portion on the Company’s Consolidated Balance Sheets in the amounts of $17.5 million, $2.4 million and $15.6 million, respectively. As of June 30, 2023, the Company did not have any lease contracts that had not yet commenced but had created significant rights and obligations.

The components of lease expense were as follows (unaudited, in thousands):


	For the Three Months Ended June 30,
	2023		2022
Operating lease cost	$	817	$	650
Short-term lease cost	5,551		5,698
Total lease expense	$	6,368	$	6,348


	For the Nine Months Ended June 30,
	2023		2022
Operating lease cost	$	2,331	$	1,884
Short-term lease cost	16,319		13,905
Total lease expense	$	18,650	$	15,789

Short-term leases (those with terms of 12 months or less) are not capitalized but are expensed on a straight-line basis over the lease term. The majority of the Company’s short-term leases relate to equipment used on construction projects. These leases are entered into at periodic rental rates for an unspecified duration and typically have a termination for convenience provision.

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As of June 30, 2023, the weighted-average remaining term of the Company’s leases was 10.8 years, and the weighted-average discount rate was 3.47%. As of June 30, 2023, the lease liability was equal to the present value of the remaining lease payments, discounted using the incremental borrowing rate on the Company’s secured debt using a single maturity discount rate, as such rate is not materially different from the discount rate applied to each of the leases in the portfolio.

The following table summarizes the Company’s undiscounted lease liabilities outstanding as of June 30, 2023 (unaudited, in thousands):


Fiscal Year	Amount
Remainder of 2023	$	799
2024	2,793
2025	2,390
2026	2,273
2027	2,098
2028 and thereafter	11,574
Total future minimum lease payments	$	21,927
Less: imputed interest	3,935
Total	$	17,992

Note 15 - Investment in Derivative Instruments

Interest Rate Swap Contracts

The Company uses derivative instruments as part of its overall strategy to manage its exposure to market risks associated with fluctuations in interest rates. The Company regularly monitors the financial stability and credit standing of the counterparties to its derivative instruments. The Company does not enter into derivative financial instruments for speculative purposes.

The Company records all derivatives at fair value. On the date the derivative contract is entered into, the Company may designate the derivative as one of the following: (i) a hedge of a forecasted transaction or the variability of cash flows to be paid (“cash flow hedge”) or (ii) a hedge of the fair value of a recognized asset or liability (“fair value hedge”).

Changes in the fair value of a derivative that is qualified and designated as a cash flow hedge or net investment hedge are recorded in other comprehensive income (loss) in the Company’s Consolidated Statements of Comprehensive Income until they are reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.

Changes in the fair value of a derivative that is qualified and designated as a fair value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings.

If the Company does not specifically designate a derivative as one of the above, changes in the fair value of the undesignated derivative instrument are reported in current period earnings. Cash flows from designated derivative financial instruments are classified within the same category as the item being hedged in the Consolidated Statements of Cash Flows, while cash flows from undesignated derivative financial instruments are included as an investing activity.

If the Company determines that it qualifies for and will designate a derivative as a hedging instrument, the Company formally documents all relationships between hedging activities, including the risk management objective and strategy for undertaking various hedge transactions. This process includes matching all derivatives that are designated as cash flow hedges to specific forecasted transactions and linking all derivatives designated as fair value hedges to specific assets and liabilities in the Consolidated Balance Sheets.

The Company performs an initial prospective assessment of hedge effectiveness on a quantitative basis between the inception date and the earlier of the first quarterly hedge effectiveness date or the issuance of the financial statements that include the hedged transaction. On a quarterly basis, the Company assesses the effectiveness of its designated hedges in offsetting the variability in the cash flows or fair values of the hedged assets or obligations using the Hypothetical Derivative Method. The Hypothetical Derivative Method compares the change in fair value or cash flows of the hedging instrument with the change in fair value or cash flows of a hypothetical derivative that represents the hedged risk. The Company would discontinue hedge accounting prospectively when the derivative is no longer highly effective as a hedge, the underlying hedged transaction is no longer probable or the hedging instrument expires, is sold, terminated or exercised.

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Commodity Swap Contracts

The Company’s operations expose it to a variety of market risks, including the effects of changes in commodity prices. As part of its risk management process, the Company has entered into commodity swap transactions through regulated commodity exchanges. The Company does not enter into derivative financial instruments for speculative purposes. Changes in fair value of commodity swaps are recognized in earnings.

The following table represents the approximate amount of realized and unrealized gains (losses) and changes in fair value recognized in earnings on interest and commodity derivative contracts for the three and nine months ended June 30, 2023 and 2022 and the fair value of these derivatives as of June 30, 2023 and September 30, 2022 (in thousands):


	For the Three Months Ended June 30,
			2023						2022
	(unaudited)						(unaudited)
	Change in						Change in
Income Statement Classification	Realized Gain (Loss)		Unrealized Gain (Loss)		Total Gain (Loss)		Realized Gain (Loss)		Unrealized Gain (Loss)		Total Gain (Loss)
Cost of revenues	$	(970)	$	878	$	(92)	$	1,349	$	143	$	1,492
Interest expense, net	2,377		—		2,377		(121)		316		195
Total	$	1,407	$	878	$	2,285	$	1,228	$	459	$	1,687


	For the Nine Months Ended June 30,
			2023						2022
	(unaudited)						(unaudited)
	Change in						Change in
Income Statement Classification	Realized Gain (Loss)		Unrealized Gain (Loss)		Total Gain (Loss)		Realized Gain (Loss)		Unrealized Gain (Loss)		Total Gain (Loss)
Cost of revenues	$	(2,027)	$	(1,408)	$	(3,435)	$	2,206	$	921	$	3,127
Interest expense, net	5,719		—		5,719		(1,030)		1,668		638
Total	$	3,692	$	(1,408)	$	2,284	$	1,176	$	2,589	$	3,765


	June 30, 2023		September 30, 2022
Balance Sheet Classification	(unaudited)


Prepaid expenses and other current assets - commodity swaps	$	16	$	1,032
Other assets - commodity swaps	—		155
Other assets - interest rate swaps (1)	24,478		24,719
Accrued expense and other current liabilities - commodity swaps	(898)		(601)

Other long-term liabilities - commodity swaps	—		(60)

Net unrealized gain position	$	23,596	$	25,245

(1) Includes designated cash flow hedge of $24,478 and $24,719 as of June 30, 2023 and September 30, 2022, respectively.

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Note 16 - Fair Value Measurements

The following table presents the Company’s liabilities measured at fair value on a recurring basis as of June 30, 2023 and September 30, 2022 under ASC 820, Fair Value Measurements (in thousands):


	June 30, 2023		September 30, 2022
	(unaudited)
	Level 2		Level 2
Assets:
Commodity swap contracts	$	16	$	1,187
Interest rate swaps	24,478		24,719
Corporate debt securities	4,532		2,537
U.S. government securities	5,832		2,481
Municipal government securities	1,842		1,055
Agency backed securities	1,147		793
Total assets	37,847		32,772

Liabilities:
Commodity swap contracts	$	898	$	661

Total liabilities	$	898	$	661

The fair value of interest rate swap contracts is based on a model-driven valuation using the observable components (e.g., interest rates), which are observable at commonly quoted intervals for the full term of the contracts. The fair value of the Company’s commodity swap contracts is based on an analysis of the expected cash flow of the contract in combination with observable forward price inputs obtained from a third-party pricing source. The calculations are adjusted for credit risk. Therefore, the Company’s derivative assets and liabilities are classified within Level 2 of the fair value hierarchy. Derivative assets are included within “Prepaid expenses and other current assets” and “Other assets” on the Company’s Consolidated Balance Sheets. Derivative liabilities are included within “Accrued expense and other current liabilities” and “Other long-term liabilities” on the Company’s Consolidated Balance Sheets.

Note 17 - Commitments

Letters of Credit

Under the Revolving Credit Facility, the Company has a total capacity of $325.0 million that may be used for a combination of cash borrowings and letter of credit issuances. At June 30, 2023, the Company had aggregate letters of credit outstanding in the amount of $10.0 million, primarily related to certain insurance policies as described in Note 2 - Significant Accounting Policies.

Purchase Commitments

As of June 30, 2023, the Company had unconditional purchase commitments for diesel fuel and natural gas in the normal course of business in the aggregate amount of $4.4 million. Management does not expect any significant changes in the market value of these goods during the commitment period that would have a material adverse effect on the financial condition, results of operations and cash flows of the Company. As of June 30, 2023, the Company’s purchase commitments annually thereafter were as follows (unaudited, in thousands):


Fiscal Year	Amount
Remainder of 2023	$	1,259
2024	2,653
2025	484
Total	$	4,396

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Minimum Royalties

The Company has lease agreements associated with aggregates facilities under which the Company makes royalty payments. These agreements are outside the scope of Topic 842. The payments are generally based on tons sold in a particular period; however, certain agreements have minimum annual payments. The Company had commitments in the form of minimum royalties as of June 30, 2023 in the amount of $2.6 million, due as follows (unaudited, in thousands):


Fiscal Year	Amount
Remainder of 2023	$	18
2024	295
2025	256
2026	192
2027	180
Thereafter	1,615
Total	$	2,556

Royalty expense recorded in cost of revenue was $0.4 million for each of the three months ended June 30, 2023 and 2022, and $1.2 million for each of the nine months ended June 30, 2023 and 2022.

Note 18 - Restricted Investments

The following is a summary of the Company’s debt securities as of June 30, 2023 and September 30, 2022 (in thousands):


	June 30, 2023
	(unaudited)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. government securities	$	6,007	$	—	$	175	$	5,832
Corporate debt securities	4,774		—		242		4,532
Municipal government securities	1,928		—		86		1,842
Agency backed securities	1,225		—		78		1,147
Total	$	13,934	$	—	$	581	$	13,353


	September 30, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Corporate debt securities	$	2,797	$	—	$	260	$	2,537
U.S. government securities	2,622		—		141		2,481
Municipal government securities	1,151		—		96		1,055
Agency backed securities	862		—		69		793
Total	$	7,432	$	—	$	566	$	6,866

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The amortized cost and fair value of debt securities classified as available for sale by contractual maturity, as of June 30, 2023, were as follows (unaudited, in thousands):



	Amortized Cost		Fair Value
Due within one year	$	2,529	$	2,512
Due after one year through three years	4,382		4,226
Due after three years	7,023		6,615
Total	$	13,934	$	13,353

Note 19 - Other Comprehensive Income

Comprehensive income comprises two subsets: net income and OCI. The components of OCI are presented in the accompanying Consolidated Statements of Comprehensive Income and Consolidated Statements of Stockholders’ Equity, net of applicable taxes. The Company’s interest rate swap contract hedge included in other comprehensive income was entered into on July 1, 2022 with an original notional value of $300.0 million. The maturity date of this swap is June 30, 2027. The Company received a credit of $12.6 million under the “blend and extend” arrangement utilizing the fair values of the existing interest rate swap agreements at June 30, 2022.

Amounts in accumulated other comprehensive income (“AOCI”), net of tax, at June 30, 2023 and September 30, 2022, were as follows (in thousands):


AOCI	June 30, 2023 (unaudited)		September 30, 2022

Interest rate swap contract, net of blend and extend arrangement	$	23,206	$	23,761
Unrealized loss on available-for-sale securities	(581)		(566)
Less net tax effect of other comprehensive income items	(5,642)		(5,575)
Total	$	16,983	$	17,620

Changes in AOCI, net of tax, are as follows (in thousands):



AOCI
Balance at September 30, 2022	$	17,620
Net OCI changes	(637)
Balance at June 30, 2023 (unaudited)	$	16,983



AOCI
Balance at September 30, 2021	$	(23)
Net OCI changes	8,478
Balance at June 30, 2022 (unaudited)	$	8,455

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Amounts reclassified from AOCI to earnings are as follows (unaudited, in thousands):



	For the Three Months Ended June 30,
	2023		2022
Interest (benefit) expense	$	(2,377)	$	55
Realized loss on restricted investments	6		—
Expense (benefit) from income taxes	612		(14)
Total reclassifications from AOCI to earnings	$	(1,759)	$	41



	For the Nine Months Ended June 30,
	2023		2022
Interest (benefit) expense	$	(5,719)	$	691
Realized loss on restricted investments	10		—
Expense (benefit) from income taxes	1,473		(178)
Total reclassifications from AOCI to earnings	$	(4,236)	$	513

Note 20 - Subsequent Events

South Carolina Acquisition

On August 1, 2023, a subsidiary of the Company acquired an HMA plant, together with the related inventory and certain equipment, of C.R. Jackson, Inc., an asphalt paving company headquartered in Myrtle Beach, South Carolina, for $9.5 million. The transaction added an HMA plant and expanded the Company’s service market in the greater Myrtle Beach, South Carolina metro area.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This discussion and analysis of our financial condition and results of operations is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition during the period covered by this report. Historical results may not be indicative of future performance. This discussion includes forward-looking statements that reflect our plans, estimates and beliefs. Such statements involve risks and uncertainties. Our actual results may differ materially from those contemplated by these forward-looking statements as a result of various factors, including those set forth under the headings “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.” This discussion should be read in conjunction with our unaudited consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and notes thereto included in the 2022 Form 10-K. In this discussion, we use certain non-GAAP financial measures. Explanations of these non-GAAP financial measures and reconciliations to the most directly comparable GAAP financial measures are included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Investors should not consider non-GAAP financial measures in isolation or as substitutes for financial information presented in compliance with GAAP.

Overview

We are a civil infrastructure company that specializes in the building and maintenance of transportation networks. Our operations leverage a highly skilled workforce, strategically located HMA plants, substantial construction assets and select material deposits. We provide construction products and services to both public and private infrastructure projects, with an emphasis on highways, roads, bridges, airports and commercial and residential sites in the southeastern United States.

Our public projects are funded by federal, state and local governments and include projects for roads, highways, bridges, airports and other forms of infrastructure. Public transportation infrastructure projects historically have been a relatively stable portion of state and federal budgets and represent a significant share of the United States construction market. Federal funds are allocated on a state-by-state basis, and each state is required to match a portion of the federal funds that it receives. Federal highway spending uses funds predominantly from the Highway Trust Fund, which derives its revenues from fuel taxes and other user fees.

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

Contract Backlog

At June 30, 2023, our contract backlog was $1.59 billion. Contract backlog is a financial measure that generally reflects the dollar value of work that the Company expects to perform in the future. We generally include a construction project in our contract backlog at the time it is awarded and to the extent we believe funding is probable. Our backlog generally consists of uncompleted work on contracts in progress and contracts for which we have executed a contract but have not commenced the work. For uncompleted work on contracts in progress, we include (i) executed change orders, (ii) pending change orders for which we expect to receive confirmation in the ordinary course of business and (iii) claims that we have made against our customers for which we have determined we have a legal basis under existing contractual arrangements and as to which we consider collection to be probable. Backlog of uncompleted work on contracts under which work was either in progress or had not yet begun was $1.23 billion at June 30, 2023. Our contract backlog also includes low bid/no contract jobs, which consist of (i) public bid jobs for which we were the low bidder and no contract has been executed and (ii) private work jobs for which we have been notified that we are the low bidder or have been given a notice to proceed, but no contract has been executed. Low bid/no contract backlog was $0.36 billion at June 30, 2023.

Recent Developments

Acquisitions

On November 18, 2022, we acquired three HMA manufacturing plants and certain related assets located in the Nashville, Tennessee metro area for $9.5 million. In connection with this transaction, we disposed of a quarry in North Carolina, resulting in total cash proceeds of $37.0 million and a gain on the facility exchange of $5.4 million. On December 1, 2022, we acquired all of the capital stock of Ferebee Corporation, an HMA manufacturing and paving company headquartered in Charlotte, North Carolina, for $67.3 million. The transaction established our second platform company in North Carolina and added three HMA plants in the greater Charlotte/Rock Hill metro area. On April 3, 2023, we acquired substantially all the assets of Pickens Construction, Inc., an asphalt paving company headquartered in Anderson, South Carolina, for $5.0 million. The transaction added an HMA plant in the greater Greenville, South Carolina metro area. On May 1, 2023, we acquired the Huntsville, Alabama operations of Southern Site Contractors, LLC, an excavation, grading and utility contractor, for $1.1 million. The transaction enhanced our vertical integration of construction services in the greater Huntsville, Alabama metro area. For further discussion regarding these transactions, see Note 4 - Business Acquisitions to the unaudited consolidated financial statements included elsewhere in this report.

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How We Assess Performance of Our Business

Revenues

We derive our revenues predominantly by providing construction products and services for both public and private infrastructure projects, with an emphasis on highways, roads, bridges, airports and commercial and residential sites. Our projects represent a mix of federal, state, municipal and private customers. We also derive revenues from the sale of HMA, aggregates, and liquid asphalt cement to customers. We recognize revenues derived from projects as we satisfy our performance obligations over time (formerly known as the percentage-of-completion method), measured by the relationship of total cost incurred compared to total estimated contract costs (cost-to-cost input method). Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to estimated costs and income, and are recognized in the period in which the revisions are determined. Revenues derived from the sale of HMA, aggregates, and liquid asphalt cement are recognized when the risks associated with ownership have passed to the customer.

Gross Profit

Gross profit represents revenues less cost of revenues. Cost of revenues consists of all direct and indirect costs associated with construction contracts, including raw materials, labor, equipment costs, depreciation, lease expenses, subcontract costs and other expenses at our HMA plants, aggregates mining facilities, and liquid asphalt cement terminal. Our cost of revenues is directly affected by fluctuations in commodity prices, primarily liquid asphalt and diesel fuel. From time to time, when appropriate, we limit our exposure to changes in commodity prices by entering into forward purchase commitments. In addition, our public infrastructure contracts often provide for price adjustments based on fluctuations in certain commodity-related product costs. These price adjustment provisions are in place for most of our public infrastructure contracts, and we seek to include similar provisions in our private contracts.

Depreciation, Depletion, Accretion and Amortization

Property, plant and equipment are initially recorded at cost or, if acquired as a business combination, at fair value. Depreciation on property, plant and equipment is computed on a straight-line basis over the estimated useful life of the asset. Amortization expense is the periodic expense related to leasehold improvements and intangible assets. Leasehold improvements are amortized over the lesser of the life of the underlying asset or the remaining lease term. Our intangible assets were recognized as a result of certain acquisitions and are generally amortized on a straight-line basis over the estimated useful lives of the assets. Our unfavorable contract liabilities were recognized as a result of certain acquisitions and are amortized as the associated projects progress. Mineral reserves are depleted in accordance with the units-of-production method as aggregates are extracted, using the initial allocation of cost based on proven and probable reserves.

General and Administrative Expenses

General and administrative expenses include costs related to our operational offices that are not allocated to direct contract costs and expenses related to our corporate offices. These expenses consist primarily of salaries and personnel costs for our administration, finance and accounting, legal, information systems, human resources and certain managerial employees. General and administrative expenses also include acquisition expenses, audit, consulting and professional fees, stock-based compensation expense, travel, insurance, office space rental costs, property taxes and other corporate and overhead expenses.

Gain on Sale of Property, Plant and Equipment

In the normal course of business, we sell assets for various reasons, including when the cost of maintaining the asset exceeds the cost of replacing it. The gain or loss on the sale of property, plant and equipment reflects the difference between the carrying value at the date of disposal and the net consideration received from the sale during the period.

Gain on Facility Exchange

As part of our continued growth strategy, we may exchange or sell other facilities in order to generate capital for use in connection with other strategic initiatives. The gain or loss on the exchange or sale of a facility reflects the difference between the net carrying value of the facility at the date of disposal and the consideration received from the exchange or sale during the period.

Interest Expense, Net

Interest expense, net primarily represents interest incurred on our long-term debt, such as the Term Loan and the Revolving Credit Facility, and amortization of deferred debt issuance costs. These amounts are partially offset by interest income earned on short-term investments of cash balances in excess of our current operating needs.

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Other Key Performance Indicators - Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA represents net income before, as applicable from time to time, (i) interest expense, net, (ii) provision (benefit) for income taxes, (iii) depreciation, depletion, accretion and amortization, (iv) equity-based compensation expense, (v) loss on the extinguishment of debt and (vi) certain management fees and expenses. Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of revenues for each period. These metrics are supplemental measures of our operating performance that are neither required by, nor presented in accordance with, GAAP. These measures have limitations as analytical tools and should not be considered in isolation or as an alternative to net income or any other performance measure derived in accordance with GAAP as an indicator of our operating performance. We present Adjusted EBITDA and Adjusted EBITDA Margin because management uses these measures as key performance indicators, and we believe that securities analysts, investors and others use these measures to evaluate companies in our industry. Our calculation of Adjusted EBITDA and Adjusted EBITDA Margin may not be comparable to similarly named measures reported by other companies. Potential differences may include differences in capital structures, tax positions and the age and book depreciation of intangible and tangible assets.

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


	For the Three Months Ended June 30,						For the Nine Months Ended June 30,
	2023			2022			2023			2022
Net income	$	21,677		$	12,168		$	18,088		$	8,261
Interest expense, net	5,039			2,054			13,801			4,177
Provision for income taxes	7,117			3,955			6,153			2,868
Depreciation, depletion, accretion and amortization	19,536			17,244			57,769			50,291
Equity-based compensation expense	2,737			1,848			7,909			5,094
Management fees and expenses (1)	383			370			1,109			1,129

Adjusted EBITDA	$	56,489		$	37,639		$	104,829		$	71,820
Revenues	$	421,893		$	380,272		$	1,088,522		$	908,621
Adjusted EBITDA Margin	13.4		%	9.9		%	9.6		%	7.9		%

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

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Results of Operations

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

The following table sets forth selected financial data for the three months ended June 30, 2023 and 2022 (unaudited in thousands, except percentages):


									Change From the Three Months Ended
	For the Three Months Ended June 30,								June 30, 2022
									to the Three Months Ended
	2023				2022				June 30, 2023
	Dollars		% of Revenues		Dollars		% of Revenues		$ Change		% Change
Revenues	$	421,893	100.0	%	$	380,272	100.0	%	$	41,621	10.9	%
Cost of revenues	357,821		84.8	%	336,022		88.4	%	21,799		6.5	%
Gross profit	64,072		15.2	%	44,250		11.6	%	19,822		44.8	%
General and administrative expenses	(32,231)		(7.7)	%	(26,584)		(7.0)	%	(5,647)		21.2	%

Gain on sale of property, plant and equipment	1,499		0.4	%	333		0.1	%	1,166		350.2	%
Gain on facility exchange	—		—	%	—		—	%	—		—	%
Operating income	33,340		7.9	%	17,999		4.7	%	15,341		85.2	%
Interest expense, net	(5,039)		(1.2)	%	(2,054)		(0.5)	%	(2,985)		145.3	%

Other income	493		0.1	%	178		—	%	315		177.0	%
Income before provision for income taxes	28,794		6.8	%	16,123		4.2	%	12,671		78.6	%
Provision for income taxes	7,117		1.7	%	3,955		1.0	%	3,162		79.9	%

Net income	$	21,677	5.1	%	$	12,168	3.2	%	$	9,509	78.1	%
Adjusted EBITDA	$	56,489	13.4	%	$	37,639	9.9	%	$	18,850	50.1	%

Revenues. Revenues for the three months ended June 30, 2023 increased $41.6 million, or 10.9%, to $421.9 million from $380.3 million for the three months ended June 30, 2022. The increase included $41.4 million of revenues attributable to acquisitions completed subsequent to June 30, 2022.

Gross Profit. Gross profit for the three months ended June 30, 2023 increased $19.8 million, or 44.8%, to $64.1 million from $44.3 million for the three months ended June 30, 2022. The increase in gross profit was the result of a 10.9% increase in revenues for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 and a higher gross profit margin. The higher gross profit margin was due to (i) efficient utilization of our plants and equipment fleet and (ii) completion of new backlog with more favorable margins.

General and Administrative Expenses. General and administrative expenses for the three months ended June 30, 2023 increased $5.6 million, or 21.2%, to $32.2 million from $26.6 million for the three months ended June 30, 2022. The increase was the result of (i) a $0.9 million increase in equity-based compensation expense, (ii) a $2.2 million increase attributable to general and administrative expenses associated with the businesses acquired subsequent to June 30, 2022, and (iii) a $3.3 million increase in management personnel payroll and benefits, partially offset by a $0.8 million decrease in other general and adminstrative expenses.

Gain on Sale of Property, Plant and Equipment. Gain on sale of property, plant and equipment for the three months ended June 30, 2023 increased $1.2 million, or 350.2%, to $1.5 million from $0.3 million for the three months ended June 30, 2022. The increase was primarily the result of higher levels of sales of equipment and components during the three months ended June 30, 2023.

Interest Expense, Net. Interest expense, net for the three months ended June 30, 2023 increased $2.9 million, or 145.3%, to $5.0 million compared to $2.1 million for the three months ended June 30, 2022. The increase in interest expense was due to a $80.4 million increase in the average principal debt balance outstanding and higher interest rates during the three months ended June 30, 2023 compared to the corresponding period in 2022.

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Provision for Income Taxes. Our effective tax rate increased to 24.7% for the three months ended June 30, 2023, from 24.5% for the three months ended June 30, 2022. Our higher effective tax rate during the three months ended June 30, 2023 was due to differences in state tax rates at our operating subsidiaries.

Net Income. Net income increased $9.5 million to $21.7 million for the three months ended June 30, 2023, compared to $12.2 million for the three months ended June 30, 2022. The increase in net income was primarily a result of higher gross profit, partially offset by an increase in general and administrative expenses and interest expense, net, all as described above.

Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA Margin were $56.5 million and 13.4%, respectively, for the three months ended June 30, 2023, compared to $37.6 million and 9.9%, respectively, for the three months ended June 30, 2022. The increase in Adjusted EBITDA and Adjusted EBITDA Margin resulted from an increase in gross profit, gain on sale of property, plant and equipment, and depreciation, depletion, accretion and amortization, partially offset by higher general and administrative expenses, all as described above. See the description of Adjusted EBITDA and Adjusted EBITDA Margin, as well as a reconciliation of Adjusted EBITDA to net income and the calculation of Adjusted EBITDA Margin, under the heading “How We Assess Performance of Our Business” above.

Nine Months Ended June 30, 2023 Compared to Nine Months Ended June 30, 2022

The following table sets forth selected financial data for the nine months ended June 30, 2023 and 2022 (unaudited in thousands, except percentages):


									Change From the Nine Months Ended
	For the Nine Months Ended June 30,								June 30, 2022
									to the Nine Months Ended
	2023				2022				June 30, 2023
	Dollars		% of Revenues		Dollars		% of Revenues		$ Change		% Change
Revenues	$	1,088,522	100.0	%	$	908,621	100.0	%	$	179,901	19.8	%
Cost of revenues	967,674		88.9	%	818,910		90.1	%	148,764		18.2	%
Gross profit	120,848		11.1	%	89,711		9.9	%	31,137		34.7	%
General and administrative expenses	(93,945)		(8.6)	%	(76,530)		(8.5)	%	(17,415)		22.8	%

Gain on sale of property, plant and equipment	4,825		0.4	%	1,788		0.2	%	3,037		169.9	%
Gain on facility exchange	5,389		0.5	%	—		—	%	5,389		—	%
Operating income	37,117		3.4	%	14,969		1.6	%	22,148		148.0	%
Interest expense, net	(13,801)		(1.3)	%	(4,177)		(0.5)	%	(9,624)		230.4	%

Other income	925		0.1	%	337		0.1	%	588		174.5	%
Income before provision for income taxes	24,241		2.2	%	11,129		1.2	%	13,112		117.8	%
Provision for income taxes	6,153		0.6	%	2,868		0.3	%	3,285		114.5	%

Net income	$	18,088	1.6	%	$	8,261	0.9	%	$	9,827	119.0	%
Adjusted EBITDA	$	104,829	9.6	%	$	71,820	7.9	%	$	33,009	46.0	%

Revenues. Revenues for the nine months ended June 30, 2023 increased $179.9 million, or 19.8%, to $1.1 billion from $908.6 million for the nine months ended June 30, 2022. The increase included $91.0 million of revenues attributable to acquisitions completed subsequent to June 30, 2022 and $88.9 million of revenues in our existing markets from contract work and sales of HMA and aggregates to third parties. The 9.8% increase in revenues in our existing markets compared to the prior year period was due to strong demand in both public and private work.

Gross Profit. Gross profit for the nine months ended June 30, 2023 increased $31.1 million, or 34.7%, to $120.8 million from $89.7 million for the nine months ended June 30, 2022. The increase in gross profit was the result of a 19.8% increase in revenues for the nine months ended June 30, 2023 compared to the nine months ended June 30, 2022 and a higher gross profit margin. The higher gross profit margin was due to (i) efficient utilization of our plants and equipment fleet and (ii) completion of new backlog with more favorable margins.

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General and Administrative Expenses. General and administrative expenses for the nine months ended June 30, 2023 increased $17.4 million, or 22.8%, to $93.9 million from $76.5 million for the nine months ended June 30, 2022. The increase was the result of (i) a $2.8 million increase in equity-based compensation expense, (ii) a $4.9 million increase attributable to general and administrative expenses associated with the businesses acquired subsequent to June 30, 2022, and (iii) a $10.8 million increase in management personnel payroll and benefits, partially offset by a $1.1 million decrease in other general and administrative expenses.

Gain on Sale of Property, Plant and Equipment. Gain on sale of property, plant and equipment for the nine months ended June 30, 2023 increased $3.0 million, or 169.9%, to $4.8 million from $1.8 million for the nine months ended June 30, 2022. The increase was primarily the result of $1.3 million gain on the sale of an excess office building in North Carolina that was no longer needed in our operations and higher levels of equipment and components during the nine months ended June 30, 2023.

Gain on Facility Exchange. Gain on facility exchange for the nine months ended June 30, 2023 was $5.4 million compared to $0.0 million for the nine months ended June 30, 2022. The gain was the result of the disposition of a quarry in North Carolina. In connection with this transaction, the Company acquired three HMA manufacturing plants and certain related assets located in the Nashville, Tennessee metro area.

Interest Expense, Net. Interest expense, net for the nine months ended June 30, 2023 increased $9.6 million, or 230.4%, to $13.8 million compared to $4.2 million for the nine months ended June 30, 2022. The increase in interest expense was due to a $112.5 million increase in the average principal debt balance outstanding and higher interest rates during the nine months ended June 30, 2023 compared to the corresponding period in 2022.

Provision for Income Taxes. Our effective tax rate decreased to 25.4% for the nine months ended June 30, 2023, from 25.8% for the nine months ended June 30, 2022. Our lower effective tax rate during the nine months ended June 30, 2023 was due to differences in state tax rates at our operating subsidiaries.

Net Income. Net income increased $9.8 million to $18.1 million for the nine months ended June 30, 2023, compared to $8.3 million for the nine months ended June 30, 2022. The increase in net income was primarily a result of higher gross profit, gain on sale of property, plant and equipment and gain on facility exchange, partially offset by an increase in general and administrative expenses and interest expense, net, all as described above.

Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA Margin were $104.8 million and 9.6%, respectively, for the nine months ended June 30, 2023, compared to $71.8 million and 7.9%, respectively, for the nine months ended June 30, 2022. The increase in Adjusted EBITDA and Adjusted EBITDA Margin resulted from an increase in gross profit, gains on sale of property, plant and equipment, gain on facility exchange and depreciation, depletion, accretion and amortization, partially offset by higher general and administrative expenses, all as described above. See the description of Adjusted EBITDA and Adjusted EBITDA Margin, as well as a reconciliation of Adjusted EBITDA to net loss and the calculation of Adjusted EBITDA Margin, under the heading “How We Assess Performance of Our Business” above.

Liquidity and Capital Resources

Cash Flows Analysis

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


	For the Nine Months Ended June 30,
	2023		2022
Net cash provided by operating activities, net of acquisition	$	94,542	$	(9,721)
Net cash used in investing activities	(118,638)		(158,607)
Net cash provided by financing activities	43,486		137,261
Net change in cash and cash equivalents	$	19,390	$	(31,067)

Operating Activities

During the nine months ended June 30, 2023, cash provided by operating activities, net of acquisitions, was $94.5 million, primarily as a result of:

•net income of $18.1 million, including $57.8 million of depreciation, depletion, accretion and amortization of long-lived assets, unrealized losses on derivative instruments of $1.4 million, gain on sale of property, plant and equipment of $4.8 million, gain on sale of facility exchange of $5.4 million and equity-based compensation expense of $7.9 million;

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•a decrease in contracts receivable including retainage, net of $22.8 million due to normal fluctuations resulting from the timing of processing transactions in our accounts receivable cycle;

•an increase in prepaid expenses and other current assets of $3.2 million primarily due to the timing of payments under our insurance policies and other expenses;

•an increase in inventories of $12.0 million due to increased inventories from acquisitions, growth in existing markets, higher inventory costs and normal fluctuations in our inventory cycle;

•a decrease in accounts payable and accrued expenses and other current liabilities of $9.2 million due to the timing of processing transactions in our accounts payable cycle; and

•a net increase of $10.6 million in the difference between billings in excess of costs and estimated earnings on uncompleted contracts and costs and estimated earnings in excess of billings on uncompleted contracts and due to the timing of performing and closing projects.

During the nine months ended June 30, 2022, cash used by operating activities, net of acquisitions, was $9.7 million, primarily as a result of:

•net income of $8.3 million, including $50.3 million of depreciation, depletion, accretion and amortization of long-lived assets, unrealized gains on derivative instruments of $2.6 million and equity-based compensation expense of $5.1 million;

•an increase in contracts receivable including retainage, net, of $71.9 million as a result of higher overall revenues due to acquisitions and growth in existing markets;

•an increase in prepaid expenses and other current assets of $2.3 million primarily due to timing of deposits for federal and state income taxes and the timing of payments under our insurance policies;

•an increase in inventories of $21.8 million due to inventory acquired in acquisitions, higher inventory costs and normal fluctuations in our inventory cycle;

•an increase in accounts payable and accrued expenses and other current liabilities of $23.1 million due to increased construction activity; and

•a net increase of $3.9 million in the difference between costs and estimated earnings in excess of billings on uncompleted contracts and billings in excess of costs and estimated earnings on uncompleted contracts due to the timing of performing and closing projects and higher revenue from construction activities.

Investing Activities

During the nine months ended June 30, 2023, cash used in investing activities was $118.6 million, of which $82.7 million related to acquisitions completed in the period, $79.0 million was invested in property, plant and equipment and $7.9 million was invested in restricted investments by the Captive, partially offset by $12.6 million of proceeds from the sale of property, plant and equipment, $37.0 million of proceeds from the facility exchange and $1.4 million of proceeds from the sale of restricted investments.

During the nine months ended June 30, 2022, cash used in investing activities was $158.6 million, of which $102.9 million related to acquisitions completed in the period, $52.2 million was invested in property, plant and equipment and $7.7 million was invested in restricted investments by the Captive, partially offset by $4.2 million of proceeds from the sale of equipment.

Financing Activities

During the nine months ended June 30, 2023, cash provided by financing activities was $43.5 million. We received $53.0 million of proceeds from our Credit Facility, which were primarily used for acquisitions completed in the period. This cash flow was partially offset by $9.4 million of principal payments on long-term debt.

During the nine months ended June 30, 2022, cash provided by financing activities was $137.3 million. We received $142.3 million of proceeds from issuance of long-term debt, net of debt issuance costs and discounts, primarily used for acquisitions completed in the period. This increase in cash was partially offset by $5.0 million of principal payments on long-term debt.

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Credit Agreement

We and each of our subsidiaries are parties to the Credit Agreement, which provides for the Term Loan and the Revolving Credit Facility. At June 30, 2023 and September 30, 2022, there was $277.5 million and $271.9 million, respectively, of principal outstanding under the Term Loan, $143.1 million and $105.1 million, respectively, of principal outstanding under the Revolving Credit Facility, and availability of $171.9 million and $208.6 million, respectively, under the Revolving Credit Facility, including a reduction for outstanding letters of credit. The Company also had $10.0 million available under the Delayed Draw Term Loan at June 30, 2023 and September 30, 2022.

The Credit Agreement requires the Company to satisfy certain financial covenants, including a minimum fixed charge coverage ratio of 1.20-to-1.00 and a maximum consolidated leverage ratio of 3.50-to-1.00, subject to certain adjustments. At June 30, 2023 and September 30, 2022, our fixed charge coverage ratio was 2.00-to-1.00 and 2.56-to-1.00, respectively, and our consolidated leverage ratio was 2.27-to-1.00 and 2.79-to-1.00, respectively.

From time to time, the Company has entered into interest rate swap agreements to hedge against the risk of changes in interest rates. At June 30, 2023 and September 30, 2022, the aggregate notional value of the interest rate swap agreement was $300.0 million, and the fair value was $24.5 million and $24.7 million, respectively, which amounts are included within other assets on the Company’s Consolidated Balance Sheets.

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

Capital Requirements and Sources of Liquidity

During the nine months ended June 30, 2023 and 2022, our capital expenditures were approximately $79.0 million and $52.2 million, respectively. Our capital expenditures are typically made during the fiscal year in which they are approved. At June 30, 2023, our commitments for capital expenditures were not material to our financial condition or results of operations on a consolidated basis. For fiscal 2023, we expect total capital expenditures to be $85.0 million to $90.0 million. Our capital expenditure budget is an estimate and is subject to change.

Historically, we have required significant amounts of cash in order to make capital expenditures, purchase materials and fund our organic expansion into new markets. Our working capital needs are driven by the seasonality and growth of our business, with our cash requirements increasing in periods of growth. Additional cash requirements resulting from our growth include the costs of additional personnel, production and distribution facilities, enhancements to our information systems, integration costs related to any acquisitions and our compliance with laws and rules applicable to public companies.

We have historically relied on cash available through credit facilities, in addition to cash from operations, to finance our working capital requirements and to support our growth. We regularly monitor potential capital sources, including equity and debt markets, in an effort to meet our planned capital expenditures and liquidity requirements. Our future success will depend on our ability to access outside sources of capital.

We believe that our operating cash flow and available borrowings under the Credit Agreement will be sufficient to fund our operations and planned capital expenditures for at least the next 12 months. However, future cash flows are subject to a number of variables, including the potential impacts of inflation and supply chain constraints, and significant additional capital expenditures will be required to conduct our operations. There can be no assurance that operations and other capital resources will provide sufficient cash to maintain planned or future levels of capital expenditures. In the event that we make one or more acquisitions and the amount of capital required is greater than the amount of cash on hand we have available for acquisitions at that time, we could be required to reduce the expected level of capital expenditures and/or seek additional capital. If we seek additional capital, we may do so through borrowings under the Credit Agreement, joint ventures, asset sales, offerings of debt or equity securities or other means. However, our ability to engage in any such transactions may be constrained by economic conditions and other factors outside of our control. We cannot guarantee that additional capital will be available on acceptable terms or at all. If we are unable to obtain the funds we need, we may not be able to complete acquisitions that may be favorable to us or finance the capital expenditures necessary to conduct our operations.

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Contractual Obligations

The following table summarizes our significant obligations outstanding as of June 30, 2023 (unaudited, in thousands):


			Payments Due by Fiscal Year
	Total		2023		2024		2025		2026		2027		2028 and Thereafter
Debt obligations	$	420,600	$	3,125	$	14,500	$	18,125	$	21,750	$	363,100	$	—
Operating leases	21,927		799		2,793		2,390		2,273		2,098		11,574
Purchase commitments	4,396		1,259		2,653		484		—		—		—
Royalty payments	2,556		18		295		256		192		180		1,615
Asset retirement obligations	2,402		—		—		—		—		—		2,402
Total	$	451,881	$	5,201	$	20,241	$	21,255	$	24,215	$	365,378	$	15,591

Off-Balance Sheet Arrangements

As of June 30, 2023, we had aggregate letters of credit outstanding in the amount of $10.0 million, future purchase commitments of diesel fuel and natural gas of $4.3 million and $0.1 million, respectively, and $2.6 million of minimum royalty payments related to aggregates facilities. Other than the letters of credit, future purchase commitments and minimum royalty payments, we do not currently have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, changes in our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. See Note 17 - Commitments to our unaudited consolidated financial statements included elsewhere in this report for additional information.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Commodity Price Risk

We are subject to commodity price risk with respect to price changes in liquid asphalt and energy, including fossil fuels and electricity for aggregates and HMA production, natural gas for HMA production and fuel for distribution vehicles and production-related mobile equipment. In order to manage or reduce commodity price risk, we monitor the costs of these commodities at the time of bid and price them into our contracts accordingly. Furthermore, liquid asphalt escalator provisions in most of our public contracts, and in some of our private and commercial contracts, limit our exposure to price fluctuations in this commodity. In addition, we enter into various firm purchase commitments, with terms generally less than 18 months, for certain raw materials.

Our risk management activities also include the use of financial derivative instruments. We have entered into fuel swap and natural gas swap contracts to mitigate the financial impact of fluctuations in commodity prices. We do not enter into commodity swap contracts for speculative or trading purposes. These fuel and natural gas swap contracts provide a fixed price for less than 50% of our estimated fuel and natural gas usage for the remainder of fiscal year 2023 and part of fiscal year 2024.

The table below provides information about the Company’s swap contracts that are sensitive to changes in commodity prices, specifically fuel and natural gas, as of June 30, 2023 (unaudited).



	Carrying Amount		Fair Value
Fuel swap contracts (1)
Contract volumes (1,000 gallons)	1,008
Weighted average price (per gallon)	2.80
Contract amount (in thousands)	$	(531)	$	(531)

Natural gas swap contracts (1)
Contract volumes (1,000 MMBTU)	250
Weighted average price (per MMBTU)	3.88
Contract amount (in thousands)	$	(351)	$	(351)

(1) See also Note 15 - Investment in Derivative Instruments and Note 16 - Fair Value Measurements to the unaudited consolidated financial statements included elsewhere in this report.

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Interest Rate Risk

We are exposed to interest rate risk on certain of our short- and long-term debt obligations used to finance our operations and acquisitions. We have SOFR-based floating rate borrowings under the Credit Agreement, which expose us to variability in interest payments due to changes in the reference interest rates. From time to time, we use derivative instruments as hedges against the impact of interest rate changes on future earnings and cash flows. We do not enter into such derivative instruments for speculative or trading purposes. At June 30, 2023, we had a total of $420.6 million of variable rate borrowings outstanding. Holding other factors constant and absent the interest rate swap agreements described above, a hypothetical 1% change in our borrowing rates would result in a $4.2 million change in our annual interest expense based on our variable rate debt at June 30, 2023.

The following table presents the future principal payment obligations, interest payments, and fair values associated with the Company’s debt instruments assuming the Company’s actual level of variable rate debt as of June 30, 2023 (unaudited, in thousands).


													Fair
	2023		2024		2025		2026		Thereafter		Total		Value
Debt obligations
Term Loan Principal Payments	$	3,125	$	14,500	$	18,125	$	21,750	$	220,000	$	277,500	$	277,500
Revolving Credit Facility Principal Payments	—		—		—		—		143,100		143,100		143,100
Interest Payments (1)	7,361		28,842		27,796		26,369		18,777

(1) Represents projected interest payments using the Company’s June 2023 SOFR-based floating rate of 7.00% per annum.

The notional amount of the Company’s outstanding interest rate swap contract at June 30, 2023 was $300.0 million. The maturity date of this swap is June 30, 2027, and the fair value of the outstanding swap contract was $24.5 million as of June 30, 2023. See also Note 15 - Investment in Derivative Instruments and Note 16 - Fair Value Measurements to the unaudited consolidated financial statements included elsewhere in this report.

Inflation Risk

We are subject to the effects of inflation through wage pressures, increases in the cost of raw materials used to produce HMA, and increases in other items, such as fuel, concrete and steel. In recent years, inflation, supply chain and labor constraints have had a significant impact on the global economy, including the construction industry in the United States. While it is impossible to fully eliminate the impact of these factors, we seek to recover increasing costs by obtaining higher prices for our products or by including the anticipated price increases in our bids. Due to the relatively short-term duration of our construction contracts, we are generally able to reduce our exposure to price increases on new contracts, but we are limited in our ability to pass through increased costs for projects already in our backlog. Going forward, continued cost inflation in these areas may require further price adjustments to maintain profit margin, and any price increases may have a negative effect on demand.

Item 4. Controls and Procedures.

Evaluation of Disclosure Control and Procedures

Our management carried out, as of June 30, 2023, with the participation of our Chief Executive Officer and our Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2023, our disclosure controls and procedures were effective to provide reasonable assurance that material information required to be disclosed by us in reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes to our internal control over financial reporting during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - Other Information

Item 1. Legal Proceedings.

Due to the nature of our business, we are involved in routine litigation or subject to other disputes or claims related to our business activities, including, among other things, (i) workers’ compensation claims, (ii) employment-related disputes and (iii) liability issues or breach of contract or tortious conduct claims in connection with the performance of services and provision of materials. We and our affiliates are also subject to government inquiries in the ordinary course of business seeking information concerning our compliance with government construction contracting requirements and various laws and regulations, the outcome of which cannot be predicted with certainty. In the opinion of our management, after consultation with legal counsel, none of the pending inquiries, litigation, disputes or claims against us, if decided adversely to us, would have a material adverse effect on our financial condition, cash flows or results of operations. There have been no material changes to the legal proceedings disclosed in the 2022 Form 10-K.

Item 1A. Risk Factors.

In addition to the other financial information set forth in this report, you should carefully consider the factors discussed below and in Part I, Item 1A, “Risk Factors,” in the 2022 Form 10-K that could materially affect our business, financial condition or future operating results. The risks described below and in the 2022 Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and operating results.

Inflation and supply chain disruptions have resulted, and may continue to result, in increased costs, some of which we may not be able to recoup.

Inflation and supply chain disruptions have the potential to adversely affect our business, financial condition and results of operations, particularly if we are unable to pass through increased costs to our customers. During the three and nine months ended June 30, 2023, we continued to experience an upward trend in several inflation-sensitive inputs that we use to provide our products and services, including upward pressure on wages and increases in the cost of raw materials used to produce HMA and other items critical to our business, including fuel, concrete and steel. In addition, we continued to experience disruptions from various participants in our supply chains, including subcontractors, materials suppliers and equipment manufacturers, who provide the raw materials, equipment, vehicles, construction supplies and other services we require in order to manufacture HMA and perform our construction projects. While we have been able to mitigate some of the effects of inflation, supply chain disruptions and labor constraints on our business by increasing prices for our products and including the anticipated cost increases in the construction projects for which we bid, we may not be able to do so in the future. In addition, we are limited in our ability to pass through increased costs for projects already in our backlog, and if we are unable to do so, we may not recoup our losses or diminished profit margins. If inflation and supply chain disruptions continue to rise, we may be required to implement further price adjustments to maintain our profit margin, and any price increases may have a negative effect on demand.

Unfavorable developments affecting the banking and financial services industry could adversely affect our business, liquidity and financial condition, and overall results of operations.

Actual events, concerns or speculation about disruption or instability in the banking and financial services industry, such as liquidity constraints, the failure of individual institutions, or the inability of individual institutions or the banking and financial service industry generally to meet their contractual obligations, could significantly impair our access to capital, delay access to deposits or other financial assets, or cause actual loss of funds subject to cash management arrangements. Similarly, these events, concerns or speculation could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire financing on acceptable terms or at all. Additionally, our customers, critical vendors and business partners also could be adversely affected by these risks as described above, which in turn could result in their committing a breach or default under their contractual agreements with us, their insolvency or bankruptcy, or other adverse effects. Any decline in available funding or access to our cash and liquidity resources, or non-compliance of banking and financial services counterparties with their contractual commitments to us could, among other risks, have material adverse impacts on our ability to meet our operating expenses and other financial needs, could result in breaches of our financial and/or contractual obligations, and could have material adverse impacts on our business, financial condition and results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sales of Equity Securities

The Company did not sell any of its equity securities during the period covered by this report that were not registered under the Securities Act.

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Issuer Purchases of Equity Securities

During the period covered by this report, the Company did not purchase any of its equity securities that are registered under Section 12 of the Exchange Act.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 C.F.R. Part 229.104) is included in Exhibit 95.1 to this Quarterly Report on Form 10-Q.

Item 5. Other Information.

None.

Item 6. Exhibits.


Exhibit Number						Description
3.1*						Amended and Restated Certificate of Incorporation of Construction Partners, Inc., as amended through February 23, 2023
3.2						Amended and Restated By-Laws of Construction Partners, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 001-38479) filed on November 9, 2022)
4.1						Form of Class A Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-224174) filed on April 23, 2018)
10.1*						Second Amendment to Third Amended and Restated Credit Agreement, dated as of May 8, 2023, by and among Construction Partners, Inc. and each of its wholly owned subsidiaries, as borrowers, PNC Bank, National Association, as administrative agent and issuing lender, and certain other lenders party thereto
31.1*						Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
31.2*						Certification of Executive Vice President and Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
32.1**						Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.2**						Certification of Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
95.1*						Mine Safety Disclosures
101.INS*						Inline XBRL Instance Document
101.SCH*						Inline XBRL Taxonomy Extension Schema Document
101.CAL*						Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*						Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*						Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*						Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*						Filed herewith.
**						Furnished herewith.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 8th day of August, 2023.


						CONSTRUCTION PARTNERS, INC.

			By:			/s/ Fred J. Smith, III
						Fred J. Smith, III
						President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name and Signature

Title

Date

/s/ Fred J. Smith, III

President and Chief Executive Officer

August 8, 2023

Fred J. Smith, III

(Principal Executive Officer and duly authorized officer)

/s/ Gregory A. Hoffman

Senior Vice President and Chief Financial Officer

August 8, 2023

Gregory A. Hoffman

(Principal Financial Officer and duly authorized officer)