CONSTRUCTION PARTNERS, INC. This discussion and analysis of our financial condition and results of operations is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition. Historical results may not be indicative of future performance. This discussion includes forward-looking statements that reflect our plans, estimates and beliefs. Such statements involve risks and uncertainties. Our actual results may differ materially from those contemplated by these forward-looking statements as a result of various factors, including those set forth under the headings "Risk Factors" and "Cautionary Statement Regarding Forward-Looking Statements." This discussion should be read in conjunction with our 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 2019 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 southeasternUnited 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 ofthe 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 theHighway 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. Recent Developments COVID-19 We are closely monitoring the impact of the pandemic of the novel strain of coronavirus, known as COVID-19, on all aspects of our business, including its impact on our customers, employees, suppliers, and vendors. While we did not incur significant disruptions from COVID-19 during the three months endedMarch 31, 2020 , due to the uncertainties surrounding the COVID-19 pandemic, we are unable to predict the impact that COVID-19 will have on our financial position, operating results and cash flows in future periods. For instance, a significant portion of the Company's revenues each quarter are derived from projects completed for various Departments of Transportation. Due to declines in travel and consumer spending resulting from the COVID-19 pandemic, certain Departments of Transportation with whom we do business are generating less tax revenue to spend on construction projects. To date, these developments have not had a material adverse impact on our business. However, if a significant number of our customers are unable to undertake new construction projects or are forced to delay major construction due to the COVID-19 pandemic, our results of operations in future quarters could decline. The extent to which our operations may be impacted by the COVID-19 pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning the severity of the pandemic and actions by government authorities to contain the outbreak or mitigate its impact. Furthermore, the impacts of a potential worsening of economic conditions and the continued disruptions to and volatility in the financial markets remain unknown.
Florida Acquisition
OnMarch 23, 2020 , we acquired two HMA manufacturing plants and certain related assets located inPensacola andDefuniak Springs, Florida . These acquired plants enable us to serve new markets in the westernFlorida panhandle, and we expect to be able to pursue a variety of public, private andDepartment of Defense projects from the new locations. For further discussion regarding this transaction, see Note 4 - Business Acquisitions to the Consolidated Financial Statements included elsewhere in this report.
Changes in Value of Derivative Instruments
From time to time, we enter into interest rate swap agreements in order to manage risks associated with changes in interest rates on our outstanding indebtedness and commodity swap agreements in order to manage risks associated with changes in the price of certain commodities used in our business, such as fuel. We record these derivative instruments at their fair value and record changes in the fair value of these instruments in current earnings. During the three months endedMarch 31, 2020 , we incurred a$1.4 million non-cash charge related to interest rate swaps and a$0.8 million non-cash charge related to fuel swaps. The value of these instruments was 21 -------------------------------------------------------------------------------- Table of Contents materially impacted by significant volatility in the financial and commodities markets during the quarter, primarily associated with the COVID-19 pandemic and related macroeconomic factors. Given the current uncertainty regarding the duration, scope and magnitude of the impact that COVID-19 will have on the broader economy and how such an impact will affect the value of our derivative instruments, we could incur losses in future periods related to the value of these instruments. 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, ready-mix concrete and liquid asphalt cement to customers. Revenues derived from projects are recognized as performance obligations are satisfied over time, measured according to the relationship of total cost incurred as of a given determination date to the total estimated contract costs. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to estimated costs and income, and are recognized in the period in which the revisions are determined. Revenues derived from the sale of HMA, aggregates, ready-mix concrete and liquid asphalt cement are recognized when risks associated with ownership have passed to the customer. Gross Profit Gross profit represents revenues less cost of revenues. Cost of revenues consists of all direct and indirect costs of construction contracts, including raw materials, labor, equipment costs, depreciation, lease expenses, subcontract costs and other expenses at our HMA plants, aggregate mining facilities and liquid asphalt terminal. 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 and Amortization We carry property, plant and equipment on our balance sheet at cost, net of accumulated depreciation, depletion and amortization. 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. Quarry reserves are depleted in accordance with the units-of-production method as aggregate is extracted, using the initial allocation of cost based on proven and probable reserves. General and Administrative Expenses General and administrative expenses include costs related to our operational offices that are not allocated to direct contract costs and expenses related to our corporate offices and consist primarily of salaries and personnel costs for our administration, finance and accounting, legal, information systems, human resources and certain managerial employees. Additional expenses include audit, consulting and professional fees, travel, insurance, office space rental costs, property taxes and other corporate and overhead expenses. Gain on Sale of Equipment, Net In the normal course of business, we sell construction equipment for various reasons, including when the cost of maintaining the asset exceeds the cost of replacing it. The gain or loss on sale of equipment reflects the difference between the carrying value at the date of disposal and the net consideration received from the sale of equipment during the period. Interest Expense, Net Interest expense, net primarily represents interest incurred on our long-term debt, such as the Term Loan and the Revolving Credit Facility, as well as the cost of interest swap agreements and amortization of deferred debt issuance costs. These amounts are partially offset by interest income earned on short-term investments of cash balances in excess of our current operating needs. Other Income (Expense) Other income (expense) primarily represents unrealized gains (losses) on commodity derivative instruments and other miscellaneous income (expense) items. 22 -------------------------------------------------------------------------------- Table of Contents Adjusted EBITDA and Adjusted EBITDA Margin Adjusted EBITDA represents net income before (i) interest expense, net, (ii) provision for income taxes, (iii) depreciation, depletion and amortization of long-lived assets, (iv) equity-based compensation expense, (v) loss on extinguishment of debt 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 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 Adjusted EBITDA to net income, the most directly comparable measure calculated in accordance with GAAP, and the calculation of Adjusted EBITDA Margin for the periods presented (in thousands, except percentages): For the Three Months Ended March For the Six Months Ended 31, March 31, 2020 2019 2020 2019 Net income$ 1,537 $ 4,212 $ 6,998 $ 9,366 Interest expense, net 1,834 379 2,115 894 Provision for income taxes 531 1,488 1,850 3,139 Depreciation, depletion and amortization of long-lived assets 9,593 7,501 19,031 14,639 Equity-based compensation expense 390 - 785 - Management fees and expenses (1) 357 387 671 641 Adjusted EBITDA$ 14,242 $ 13,967 $ 31,450 $ 28,679 Revenues$ 168,679 $ 164,304 $ 343,993 $ 318,631 Adjusted EBITDA Margin 8.4 % 8.5 % 9.1 % 9.0 % (1)Reflects fees and reimbursement of certain travel expenses under a management services agreement with SunTx (see Note 12 - Related Parties to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q). 23 -------------------------------------------------------------------------------- Table of Contents Results of Operations Three Months EndedMarch 31, 2020 Compared to Three Months EndedMarch 31, 2019 The following table sets forth selected financial data for the three months endedMarch 31, 2020 and 2019 (in thousands, except percentages): Change From the Three Months Ended March 31, 2019 to the Three Months For the Three Months Ended March 31, Ended 2020 2019 March 31, 2020 % of % of $ % Dollars Revenues Dollars Revenues Change Change Revenues$ 168,679 100.0 %$ 164,304 100.0 %$ 4,375 2.7 % Cost of revenues 147,708 87.6 % 144,503 87.9 % 3,205 2.2 % Gross profit 20,971 12.4 % 19,801 12.1 % 1,170 5.9 % General and administrative expenses (16,821) (10.0) % (14,771) (9.0) % (2,050) 13.9
%
Gain on sale of equipment, net 435 0.3 % 693 0.4 % (258) (37.2) % Operating income 4,585 2.7 % 5,723 3.5 % (1,138) (19.9) % Interest expense, net (1,834) (1.1) % (379) (0.2) % (1,455) 383.9 % Other income (expense) (753) (0.4) % 123 - % (876) (712.2) % Income before provision for income taxes and earnings from investment in joint venture 1,998 1.2 % 5,467 3.3 % (3,469) (63.5) % Provision for income taxes 531 0.3 % 1,488 0.9 % (957) (64.3) % Earnings from investment in joint venture 70 - % 233 0.2 % (163) (70.0) % Net income$ 1,537 0.9 %$ 4,212 2.6 %$ (2,675) (63.5) % Adjusted EBITDA$ 14,242 8.4 %$ 13,967 8.5 %$ 275 2.0 % Revenues. Revenues for the three months endedMarch 31, 2020 increased$4.4 million , or 2.7%, to$168.7 million from$164.3 million for the three months endedMarch 31, 2019 . The increase included$11.6 million of revenues attributable to acquisitions completed subsequent toMarch 31, 2019 , which were offset by a$7.2 million decrease in revenues in our existing markets. Gross Profit. Gross profit for the three months endedMarch 31, 2020 increased$1.2 million , or 5.9%, to$21.0 million from$19.8 million for the three months endedMarch 31, 2019 . The increase in gross profit was primarily the result of the 2.7% increase in revenues for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 and an increase in the gross profit margin. General and Administrative Expenses. General and administrative expenses for the three months endedMarch 31, 2020 increased$2.0 million , or 13.9%, to$16.8 million from$14.8 million for the three months endedMarch 31, 2019 . The increase in general and administrative expenses for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 was primarily the result of (i) a$0.7 million increase in management personnel payroll and benefits, (ii) a$0.7 million increase attributable to acquisitions completed subsequent toMarch 31, 2019 and (iii) a$0.4 million increase in stock-based compensation expense. Interest Expense, Net. Interest expense, net for the three months endedMarch 31, 2020 increased$1.4 million , to$1.8 million compared to$0.4 million for the three months endedMarch 31, 2019 . The increase was primarily due to the unrealized loss on interest rate swap derivative instruments of$1.5 million for the three months endedMarch 31, 2020 compared to$0.1 million for the three months endedMarch 31, 2019 . Other Income (Expense). Other income (expense) for the three months endedMarch 31, 2020 decreased$0.9 million , to$(0.8) million compared to$0.1 million for the three months endedMarch 31, 2019 . The decrease was primarily attributable to net unrealized losses of$0.8 million on commodity derivative instruments for the three months endedMarch 31, 2020 , as the Company entered into these contracts inFebruary 2020 . These derivative instruments were significantly impacted by financial market volatility duringMarch 2020 due to COVID-19 and other macroeconomic factors. 24 -------------------------------------------------------------------------------- Table of Contents Earnings from Investment in Joint Venture. During the three months endedMarch 31, 2020 and 2019, we earned$0.07 million and$0.2 million , respectively, of pre-tax income from our 50% interest in the earnings of a joint venture that we entered into with a third party inNovember 2017 for the sole purpose of performing a construction project for theAlabama Department of Transportation . Net Income. Net income decreased$2.7 million , or 63.5%, to$1.5 million for the three months endedMarch 31, 2020 , compared to$4.2 million for the three months endedMarch 31, 2019 . The decrease in net income was primarily a result of total unrealized losses on commodity and interest rate swap derivative instruments of$2.3 million compared to$0.1 million for the three months endedMarch 31, 2019 , and the higher general and administrative expenses, all as described above. Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA Margin were$14.2 million and 8.4%, respectively, for the three months endedMarch 31, 2020 , compared to$14.0 million and 8.5%, respectively, for the three months endedMarch 31, 2019 . The increase in Adjusted EBITDA was the result of a higher gross profit and depreciation, depletion and amortization of long-lived assets, partially offset by an increase in general and administrative expenses and an unrealized loss of$0.8 million on commodity derivatives during the three months endedMarch 31, 2020 . The lower Adjusted EBITDA Margin was a primarily a result of an increase in general and administrative expenses and unrealized losses of$0.8 million on commodity derivatives during the three months endedMarch 31, 2020 . See the description of Adjusted EBITDA and Adjusted EBITDA Margin, as well as a reconciliation of Adjusted EBITDA to net income, under the heading "How We Assess Performance of Our Business". Six Months EndedMarch 31, 2020 Compared to Six Months EndedMarch 31, 2019 The following table sets forth selected financial data for the six months endedMarch 31, 2020 and 2019 (in thousands, except percentages): Change From the Six Months Ended March 31, 2019 to the Six Months For the Six Months Ended March 31, Ended 2020 2019 March 31, 2020 % of % of $ % Dollars Revenues Dollars Revenues Change Change Revenues$ 343,993 100.0 %$ 318,631 100.0 %$ 25,362 8.0 % Cost of revenues 299,265 87.0 % 277,702 87.2 % 21,563 7.8 % Gross profit 44,728 13.0 % 40,929 12.8 % 3,799 9.3 % General and administrative expenses (33,934) (9.8) % (29,202) (9.1) % (4,732)
16.2 %
Gain on sale of equipment, net 744 0.2 % 1,027 0.3 % (283) (27.6) % Operating income 11,538 3.4 % 12,754 4.0 % (1,216) (9.5) % Interest expense, net (2,115) (0.6) % (894) (0.3) % (1,221) 136.6 % Other income (expense) (688) (0.3) % 106 0.1 % (794) (749.1) % Income before provision for income taxes and earnings from investment in joint venture 8,735 2.5 % 11,966 3.8 % (3,231) (27.0) % Provision for income taxes 1,850 0.5 % 3,139 1.0 % (1,289) (41.1) % Earnings from investment in joint venture 113 - % 539 0.1 % (426) (79.0) % Net income $ 6,998 2.0 %$ 9,366 2.9 %$ (2,368) (25.3) % Adjusted EBITDA$ 31,450 9.1 %$ 28,679 9.0 % 2,771 9.7 % Revenues. Revenues for the six months endedMarch 31, 2020 increased$25.4 million , or 8.0%, to$344.0 million from$318.6 million for the six months endedMarch 31, 2019 . The increase included$24.7 million of revenues attributable to acquisitions completed subsequent toMarch 31, 2019 . Gross Profit. Gross profit for the six months endedMarch 31, 2020 increased$3.8 million , or 9.3%, to$44.7 million from$40.9 million for the six months endedMarch 31, 2019 . The increase in gross profit was primarily the result of the 8.0% increase in revenue for the six months endedMarch 31, 2020 compared to six months endedMarch 31, 2019 and an increase in gross profit margin. 25 -------------------------------------------------------------------------------- Table of Contents General and Administrative Expenses. General and administrative expenses for the six months endedMarch 31, 2020 increased$4.7 million , or 16.2%, to$33.9 million from$29.2 million for the six months endedMarch 31, 2019 . The increase in general and administrative expenses for the six months endedMarch 31, 2020 compared to the six months endedMarch 31, 2019 was primarily the result of (i) a$2.1 million increase in management personnel payroll and benefits, (ii) a$1.5 million increase attributable to acquisitions completed subsequent toMarch 31, 2019 and (iii) a$0.8 million increase in stock-based compensation expense. Interest Expense, Net. Interest expense, net for the six months endedMarch 31, 2020 increased$1.2 million , or 136.6%, to$2.1 million compared to$0.9 million for the six months endedMarch 31, 2019 . The increase was primarily due to the unrealized loss on interest rate swap derivative instruments of$1.5 million for the six months endedMarch 31, 2020 compared to$0.3 million for the six months endedMarch 31, 2019 . Other Income (Expense). Other income (expense) for the six months endedMarch 31, 2020 decreased$0.8 million , to$(0.7) million compared to$0.1 million for the six months endedMarch 31, 2019 . The decrease was primarily attributable to net unrealized losses of$0.8 million on commodity derivative instruments for the six months endedMarch 31, 2020 , as the Company entered into these contracts inFebruary 2020 . These derivative instruments were significantly impacted by financial market volatility duringMarch 2020 due to COVID-19 and other macroeconomic factors. Provision for Income Taxes. Our effective tax rate decreased to 20.9% for the six months endedMarch 31, 2020 , from 25.1% for the six months endedMarch 31, 2019 . Our lower effective tax rate was the result of filing an amended consolidated state return, as a result of which the Company recorded an amended return benefit of$0.4 million related to the utilization of net operating loss carryforwards and related release of valuation allowance. Earnings from Investment in Joint Venture. During the six months endedMarch 31, 2020 and 2019, we earned$0.1 million and$0.5 million , respectively, of pre-tax income from our 50% interest in the earnings of a joint venture that we entered into with a third party inNovember 2017 for the sole purpose of performing a construction project for theAlabama Department of Transportation . Net Income. Net income decreased$2.4 million , or 25.3%, to$7.0 million for the six months endedMarch 31, 2020 , compared to$9.4 million for the six months endedMarch 31, 2019 . The decrease in net income was primarily a result of total unrealized losses on commodity and interest rate swap derivative instruments of$2.3 million for the six months endedMarch 31, 2020 compared to$0.3 million for the six months endedMarch 31, 2019 , and the higher general and administrative expenses, all as described above. Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA Margin were$31.5 million and 9.1%, respectively, for the six months endedMarch 31, 2020 , compared to$28.7 million and 9.0%, respectively, for the six months endedMarch 31, 2019 . The increase in Adjusted EBITDA was the result of a higher gross profit and depreciation, depletion and amortization of long-lived assets, partially offset by an increase in general and administrative expenses and an unrealized loss on interest rate swap derivative instruments of$1.5 million for the six months endedMarch 31, 2020 compared to$0.3 million for the six months endedMarch 31, 2019 . The higher Adjusted EBITDA Margin was a primarily a result of increased depreciation, depletion and amortization of long-lived assets during the six months endedMarch 31, 2020 . See the description of Adjusted EBITDA and Adjusted EBITDA Margin, as well as a reconciliation of Adjusted EBITDA to net income, under the heading "How We Assess Performance of Our Business". Inflation and Price Changes Inflation had an immaterial impact on our results of operations for three and six months endedMarch 31, 2020 and 2019 due to relatively low inflation inthe United States in recent years and our ability to recover increasing costs by obtaining higher prices for our products, including sale price escalator clauses in most of our public sector infrastructure contracts. Inflation risk varies with the level of activity in our industry, the number, size and strength of competitors and the availability of products to supply a local market. Liquidity and Capital Resources Cash Flows Analysis The following table sets forth our cash flows for the periods indicated (in thousands): For the Six Months Ended March 31, 2020 2019
Net cash provided by operating activities, net of acquisition
$ 5,299 Net cash used in investing activities (62,784) (35,119) Net cash provided by (used in) financing activities 15,483 (7,406) Net change in cash and cash equivalents $
(26,825)
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Operating Activities
Cash provided by operating activities was $20.5 million for the six months ended
March 31, 2020 , an increase of $15.2 million compared to $5.3 million for the
six months ended March 31, 2020 . The increase was primarily due to a $7.8
million increase in adjustments to reconcile net income to cash flows provided
by operating activities and a $9.7 million increase in changes in operating
assets and liabilities, partially offset by a $2.4 million decrease in net
income for the six months ended March 31, 2020 compared to the six months ended
March 31, 2019 . The $7.8 million increase in adjustments to reconcile net income
to cash flows provided by operating activities was primarily due to a $4.4
million increase in depreciation, depletion and amortization of long-lived
assets and a $1.9 million increase in losses on derivative instruments and $0.8
million increase of equity-based compensation expense. The $9.7 million increase
in changes in operating assets and liabilities included (i) a $2.2 million
increase in contracts receivable due to normal fluctuations resulting from the
timing of processing transactions in our accounts receivable cycle, (ii) a $4.6
million increase in prepaid expenses and other current assets due to the receipt
of the settlement receivable and timing of insurance policies, (iii) a $3.5
million decrease in accounts payable due to normal fluctuations in the timing of
processing transactions in our accounts payable cycle and (iv) a $3.3 million
increase in inventories due to normal fluctuations in our inventory cycle.
Investing Activities
Cash used in investing activities was $62.8 million for the six months ended
March 31, 2020 compared to $35.1 million for the six months ended March 31,
2019 . The increase reflects $17.7 million used in connection with a business
acquisition in October 2019 and $12.4 million used in connection with a business
acquisition in March 2020 . Business acquisitions totaled $8.9 million for the
six months ended March 31, 2019 . There was a $14.7 million increase in purchases
of property, plant and equipment, which includes $11.5 million for the buyout of
equipment leases during the six months ended March 31, 2020 . These increases
were offset by a $8.9 million business acquisition and a $10.8 million
acquisition of the liquid asphalt terminal assets during the six months ended
March 31, 2019 .
Financing Activities
Cash provided by financing activities was $15.5 million for the six months ended
March 31, 2020 compared to $7.4 million of cash used in financing activities
during six months ended March 31, 2019 , reflecting a $9.8 million Term Loan
advance, net of issuance cost, related to our buyout of certain lease
obligations in October 2019 and a $15.0 million advance under our Revolving
Credit Facility primarily used to fund the March 2020 acquisition and for
liquidity purposes. Loan repayments increased $1.9 million on the Term Loan,
Revolving Credit Facility and other debt during six months ended March 31, 2020
compared to six months ended March 31, 2019 .
BBVA Credit Agreement
We and each of our subsidiaries are parties to the BBVA Credit Agreement, which
provides for the Term Loan and the Revolving Credit Facility. At March 31, 2020
and September 30, 2019 , we had $50.6 million and $44.7 million , respectively, of
principal outstanding under the Term Loan, $15.0 million and $5.0 million ,
respectively, of principal outstanding under the Revolving Credit Facility, and
availability of $4.0 million and $14.3 million , respectively, under the
Revolving Credit Facility, after reduction for outstanding letters of credit.
Our obligations under the Term Loan and the Revolving Credit Facility are
secured by a first priority security interest in substantially all of our
assets.
In August 2019 , the BBVA Credit Agreement was amended to, among other things,
modify the interest rate and fee structure, as well as the repayment schedule
and amounts. In October 2019 , the BBVA Credit Agreement was amended to add Bank
of America as a party in connection with the assignment by BBVA to Bank of
America of certain of its lending obligations under the BBVA Credit agreement
and extend the maturity date for the outstanding term loan advances from July 1,
2022 to October 1, 2024 . As of March 31, 2020 , the BBVA Credit Agreement
provided for a four-tier escalating interest rate for both the Term Loan and the
Revolving Credit Facility that is tied to LIBOR. The baseline rate for such
borrowings was LIBOR plus 1.20%, and the rate may increase up to LIBOR plus
1.70% if the Company's consolidated leverage ratio exceeds 2.00%. At March 31,
2020 and September 30, 2019 , the interest rate on outstanding borrowings under
the Term Loan and Revolving Credit Facility was 2.189% and 3.244%, respectively.
Principal repayments under the Term Loan are made in quarterly installments in
an amount equal to 2.50% of the original amount borrowed, a reduction from the
5.00% rate that we paid prior to the August 2019 amendment. We pay a commitment
fee of 0.20% per annum on the aggregate unused commitment amount under the
Revolving Credit Facility, a reduction from 0.35% prior to the August 2019
amendment, as well as fees with respect to any letters of credit issued
thereunder. As of March 31, 2020 , all amounts borrowed under the BBVA Credit
Agreement were scheduled to mature on October 1, 2024 .
On April 30, 2020 , we entered into the Amendment, which, among other things,
amends the Credit Agreement to (i) provide for a Term Loan advance to the
Company in the amount of $18.0 million , (ii) establish a minimum interest rate
for the foregoing Term Loan advance and future Term Loan advances, (iii) adjust
the Term Loan recourse amounts applicable to the Company and its subsidiaries,
(iv) increase the amount of the quarterly principal installment payments under
outstanding Term Loan advances to $2.5 million , and (v) set forth procedures by
which the parties will select a replacement benchmark interest rate in the event
that LIBOR is no longer
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available or appropriate as a reference rate upon which to determine the
interest rate after December 31, 2021 , the date on which contributing banks will
no longer be required to submit rate information from which LIBOR is calculated.
The BBVA Credit Agreement contains usual and 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 BBVA 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
2.75-to-1.00, subject to certain adjustments. At March 31, 2020 and September
30, 2019 , our fixed charge ratio was 3.17-to-1.00 and 4.04-to-1.00,
respectively, and our consolidated leverage ratio was 0.83-to-1.00 and
0.66-to-1.00, respectively. At both March 31, 2020 and September 30, 2019 , the
Company was in compliance with all covenants under the BBVA Credit Agreement.
From time to time, we have entered into interest rate swap agreements to hedge
against the risk of changes in interest rates. On February 27, 2020 , the Company
entered into an additional $26.3 million notional interest rate swap agreement
applicable to the Term Loan on that date, under which we pay a fixed percentage
rate of 1.24% and receive a credit based on the applicable LIBOR rate.
These interest rate swap agreements do not meet the criteria for hedge
accounting treatment in accordance with GAAP. At March 31, 2020 and September
30, 2019 , the aggregate notional value of these interest rate swap agreements
was $50.6 million and $21.5 million , respectively, and the fair value was $(1.8)
million and $(0.3) million , respectively, which is included within other
long-term liabilities on our Consolidated Balance Sheets.
Capital Expenditures and Working Capital
During the six months ended March 31, 2020 and 2019, our capital expenditures
were $34.5 million and $19.8 million , respectively. Our capital expenditures are
typically made during the same fiscal year in which they are approved. At March
31, 2020 , our commitments for capital expenditures were not material to our
financial condition or results of operations on a consolidated basis. For
fiscal 2020, we expect total capital expenditures to be $40.0 million to $42.0
million , not including $11.5 million for the buyout of equipment leases. Our
capital expenditure budget is an estimate and is subject to change. As described
further below, we believe that cash flows from operations combined with existing
cash on hand and amounts available under our credit facilities will be
sufficient to fund our working capital needs and planned capital expenditures
for at least the next 12 months.
Our cash requirements include costs related to capital expenditures, purchase of
materials, production of materials and organic expansion into new markets. Our
working capital needs are driven by the seasonality and growth of our business,
with our cash requirements increasing in periods of growth. Additional cash
requirements resulting from our growth include the costs of additional
personnel, production and distribution facilities, enhancements to our
information systems, expenditures related to our compliance with laws and rules
applicable to public companies and our integration of any acquired businesses.
We have historically relied upon cash available through credit facilities, in
addition to cash from operations, to finance our working capital requirements
and to support our growth. We regularly monitor potential capital sources,
including the equity and debt markets, in an effort to meet our planned capital
expenditures and liquidity requirements. 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 BBVA
Credit Agreement will be sufficient to fund our operations for at least the next
12 months. However, future cash flows are subject to a number of variables,
including the potential impacts of COVID-19, and significant additional capital
expenditures will be required to conduct our operations. There can be no
assurance that operations and other capital resources will provide cash in
sufficient amounts 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 BBVA Credit Agreement, joint
ventures, asset sales, offerings of debt or equity securities or other means.
However, the unprecedented public health and governmental efforts to contain the
spread of COVID-19 have created significant uncertainty as to general economic
conditions for the remainder of 2020 and beyond, and our ability to engage in
any such transactions may be constrained by economic conditions and other
factors outside of our control. We cannot guarantee that this additional capital
will be available on acceptable terms or at all. If we are unable to obtain the
funds we need, we may not be able to complete acquisitions that may be favorable
to us or finance the capital expenditures necessary to conduct our operations.
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Table of Contents Commodity Price Risk We are subject to commodity price risk with respect to price changes in liquid asphalt and energy, including fossil fuels and electricity for aggregates and asphalt paving mix production, natural gas for HMA production and diesel fuel for distribution vehicles and production-related mobile equipment. In order to manage or reduce commodity price risk, we monitor the costs of these commodities at the time of bid and price them into our contracts accordingly. Furthermore, liquid asphalt escalator provisions in most of our public contracts, and in some of our private and commercial contracts, limit our exposure to price fluctuations in this commodity. In addition, we enter into various firm purchase commitments, with terms generally less than one year, for certain raw materials. We have entered into fuel swap contracts to mitigate the financial impact of fluctuations in fuel prices. As ofMarch 31, 2020 , we had fuel swap contracts to pay fixed prices for fuel with an aggregate notional amount of 3.9 million gallons, maturing through 2021. The fair value of these derivative contracts was$(0.8) million atMarch 31, 2020 . These fuel swap contracts provide a fixed price for less than 50% of our estimated fuel usage for the remainder of fiscal years 2020 through 2022. Interest Rate Risk We are exposed to interest rate risk on certain of our short-term and long-term debt obligations used to finance our operations and acquisitions. We have LIBOR-based floating rate borrowings under the BBVA 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 to hedge against the impact of interest rate changes on future earnings and cash flows. In order to hedge against changes in interest rates and to manage fluctuations in cash flows resulting from interest rate risk, onJune 30, 2017 , we entered into an amortizing interest rate swap agreement applicable to$25.0 million of outstanding debt under the Term Loan, for which we pay a fixed rate of 2.015% and receive a credit based on the applicable LIBOR rate. In connection with the amendment to the BBVA Credit Agreement and the additional borrowing onMay 15, 2018 , we entered into an additional$11.0 million notional interest rate swap agreement applicable to the$22.0 million of additional debt under the Term Loan. Under this additional swap agreement, we pay a fixed percentage rate of 3.01% and receive a credit based on the applicable LIBOR rate. In connection with the amendment to the BBVA Credit Agreement and the additional borrowing onOctober 1, 2019 , we entered into an additional$5.9 million notional interest rate swap agreement applicable to the$10.0 million of additional debt under the Term Loan. Under this additional swap agreement, we pay a fixed percentage rate of 1.58% and receive a credit based on the applicable LIBOR rate. OnFebruary 27, 2020 , the Company entered into an additional$26.3 million notional interest rate swap agreement applicable to the Term Loan on that date, under which we pay a fixed percentage rate of 1.24% and receive a credit based on the applicable LIBOR rate. AtMarch 31, 2020 , we had a total of$15.0 million of non-hedged variable rate borrowings outstanding. Off-Balance Sheet Arrangements As ofMarch 31, 2020 , we have no material off balance sheet arrangements, except for purchase commitments for diesel fuel entered into in the normal course of business.
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