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 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 2020 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 site work construction and HMA paving services to private construction customers, including commercial and residential developers and local businesses. Recent Developments COVID-19 We did not incur significant disruptions from the COVID-19 pandemic during the three or nine months endedJune 30, 2021 . However, we continue to closely monitor the impact of the pandemic on all aspects of our business, including its impact on our customers, employees, suppliers and vendors. Among the primary risks to our business arising from the pandemic are (i) employee absences, which could adversely affect our productivity and our ability to complete projects in accordance with our contractual obligations, and could require us to temporarily close our facilities or project sites, (ii) potential disruptions in our supply chains for raw materials or equipment, whether as a result of facility closures or otherwise, which could increase our labor and materials costs and impair our ability to manufacture HMA or the ability of our subcontractors to complete their required tasks, and (iii) the impact of the COVID-19 pandemic on our customers, which could cause these customers to cancel or delay current or prospective projects or become delinquent in their payments to us for work that we have performed. These risks have materialized in varying degrees since the beginning of the pandemic, but none of these risks, individually or in the aggregate, have significantly impacted our operations to date. In addition, we continue to monitor the impact of the COVID-19 pandemic on fuel and sales tax revenues, which in turn drive funding levels for public projects in our markets. The extent to which our operations may be impacted by the COVID-19 pandemic will depend on future developments, which are highly uncertain, including the duration of the pandemic, the emergence of different COVID-19 variants, the efficacy and adoption rates of vaccines, and actions by government authorities to contain the outbreak or mitigate the impact of the pandemic. Due to the continued uncertainties surrounding the COVID-19 pandemic, we are unable to predict the impact that the COVID-19 pandemic will have on our financial position, operating results and cash flows in future periods. 21 -------------------------------------------------------------------------------- Table of Contents North Carolina Acquisitions During the nine months endedJune 30, 2021 , we acquired the operations of four HMA production and paving companies and a grading and site work contractor inNorth Carolina . The acquired businesses collectively added thirteen HMA plants inNorth Carolina , providing us with access to additional markets and expanding our footprint in the state. For further discussion regarding these transactions, see Note 4 - Business Acquisitions to the unaudited consolidated financial statements included elsewhere in this report. Inflationary Trends 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. During the three months endedJune 30, 2021 , we began to experience an upward trend in several of these inflation-sensitive items. We seek to recover increasing costs by obtaining higher prices for our products or by including the anticipated price increases in the cost of 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. 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, stock-based compensation expense, travel, insurance, office space rental costs, property taxes and other corporate and overhead expenses. 22 -------------------------------------------------------------------------------- Table of Contents 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 of the equipment 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 changes in fair values of interest swap agreements and amortization of deferred debt issuance costs. These amounts are partially offset by interest income earned on short-term investments of cash and cash equivalents balances in excess of our current operating needs. Other Income (Expense) Other income primarily represents other miscellaneous income items. Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted Net Income Adjusted EBITDA represents net income before, as applicable from time to time, (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 (vi) certain management fees and expenses and (vii) nonrecurring legal settlement costs and associated legal expenses unrelated to the Company's core operations. Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of revenues for each period. Adjusted net income represents net income before nonrecurring legal settlement costs and associated legal expenses unrelated to the Company's core operations. 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, Adjusted EBITDA Margin, and Adjusted net income (loss) 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 these measures may not be comparable to similarly named measures reported by other companies. Potential differences may include differences in capital structures, tax positions and the age and book depreciation of intangible and tangible assets. The following table presents a reconciliation of net income, the most directly comparable measure calculated in accordance with GAAP, to Adjusted EBITDA, and the calculation of Adjusted EBITDA Margin for the periods presented (in thousands, except percentages): For the Three Months Ended June For the Nine Months Ended June 30, 30, 2021 2020 2021 2020 Net income$ 9,340 $ 15,747 $ 12,276 $ 22,745 Interest expense, net 568 575 1,334 2,690 Provision for income taxes 4,600 4,772 5,767 6,622 Depreciation, depletion and amortization of long-lived assets 12,626 10,034 36,011 29,065 Equity-based compensation expense 1,347 390 2,202 1,175 Management fees and expenses (1) 412 355 1,550 1,026 Settlement of legal claim and associated legal expenses (2) 134 119 4,366 216 Adjusted EBITDA$ 29,027 $ 31,992 $ 63,506 $ 63,539 Revenues$ 261,656 $ 217,041 $ 631,697 $ 561,034 Adjusted EBITDA Margin 11.1 % 14.7 % 10.1 % 11.3 % (1)Reflects fees and reimbursement of certain travel expenses under a management services agreement with SunTx (see Note 12 - Related Parties to the unaudited consolidated financial statements included elsewhere in this Quarterly Report). (2)Reflects$3.2 million legal settlement and associated legal expenses (see Note 19 - Legal Proceedings to the unaudited consolidated financial statements included elsewhere in this Quarterly Report). 23 -------------------------------------------------------------------------------- Table of Contents The following table presents a reconciliation of net income, the most directly comparable measure calculated in accordance with GAAP, to adjusted net income for the periods presented (in thousands): For the Three Months Ended June For the Nine Months Ended June 30, 30, 2021 2020 2021 2020 Net income$ 9,340 $ 15,747 $ 12,276 $ 22,745 Settlement of legal claim (1) - - 3,200 - Legal expenses associated with settlement of legal claim 134 119 1,166 216 Adjusted net income$ 9,474 $ 15,866 $ 16,642 $ 22,961 (1)Reflects$3.2 million legal settlement (see Note 19 - Legal Proceedings to the unaudited consolidated financial statements included elsewhere in this Quarterly Report). Results of Operations Three Months EndedJune 30, 2021 Compared to Three Months EndedJune 30, 2020 The following table sets forth selected financial data for the three months endedJune 30, 2021 and 2020 (in thousands, except percentages): Change From the Three Months Ended June 30, 2020 For the Three Months Ended June 30, to the Three Months Ended 2021 2020 June 30, 2021 % of % of $ % Dollars Revenues Dollars Revenues Change Change Revenues$ 261,656 100.0 %$ 217,041 100.0 %$ 44,615 20.6 % Cost of revenues 225,039 86.0 % 180,155 83.0 % 44,884 24.9 % Gross profit 36,617 14.0 % 36,886 17.0 % (269) (0.7) % General and administrative expenses (23,195) (8.9) % (16,852) (7.8) % (6,343) 37.6
%
Gain on sale of equipment, net 835 0.3 % 390 0.2 % 445 114.1 % Operating income 14,257 5.4 % 20,424 9.4 % (6,167) (30.2) % Interest expense, net (568) (0.2) % (575) (0.3) % 7 (1.2) % Other income (expense) 252 0.1 % 251 0.2 % 1 0.4 % Income before provision for income taxes and earnings from investment in joint venture 13,941 5.3 % 20,100 9.3 % (6,159) (30.6) % Provision for income taxes (4,600) (1.8) % (4,772) (2.2) % 172 (3.6) % Earnings from investment in joint venture (1) 0.1 % 419 0.2 % (420) (100.2) % Net income$ 9,340 3.6 %$ 15,747 7.3 %$ (6,407) (40.7) % Adjusted EBITDA$ 29,027 11.1 %$ 31,992 14.7 %$ (2,965) (9.3) % Adjusted net income$ 9,474 3.6 %$ 15,866 7.3 %$ (6,392) (40.3) % Revenues. Revenues for the three months endedJune 30, 2021 increased$44.7 million , or 20.6%, to$261.7 million from$217.0 million for the three months endedJune 30, 2020 . The increase included$31.4 million of revenues attributable to acquisitions completed subsequent toJune 30, 2020 and an increase of approximately$13.3 million of revenues in our remaining markets from contract work and sales of HMA and aggregates to third parties. Gross Profit. Gross profit for the three months endedJune 30, 2021 decreased$0.3 million , or 0.7%, to$36.6 million from$36.9 million for the three months endedJune 30, 2020 . The lower gross profit was primarily due to lower profit margins on the 24 -------------------------------------------------------------------------------- Table of Contents projects we assumed in connection with (i) theNorth Carolina acquisitions that were completed during the first quarter of fiscal 2021 and (ii) lower utilization of the asphalt plants and equipment acquired in these acquisitions. General and Administrative Expenses. General and administrative expenses for the three months endedJune 30, 2021 increased$6.3 million , or 37.6%, to$23.2 million from$16.9 million for the three months endedJune 30, 2020 . The increase in general and administrative expenses for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 was primarily the result of (i) a$1.0 million increase in equity-based compensation expense, (ii) a$2.0 million increase in management personnel payroll and benefits, (iii) a$1.0 million increase attributable to acquisitions completed subsequent toJune 30, 2020 , and (iv) a$1.6 million increase in various professional fees, primarily driven by business acquisitions, information technology expenses and increased accounting fees. Interest Expense, Net. Interest expense, net for the three months endedJune 30, 2021 decreased 1.2%. The decrease was primarily due to$0.1 million of unrealized gain on interest rate swaps for the three months endedJune 30, 2021 compared to unrealized loss on interest rate swaps of$0.1 million for the three months endedJune 30, 2020 . Provision for Income Taxes. Our effective tax rate increased to 33.0% for the three months endedJune 30, 2021 , from 23.3% for the three months endedJune 30, 2020 . Our higher effective tax rate for the three months endedJune 30, 2021 was due to the unfavorable impact of a non-deductible legal settlement and related legal expenses, as described in Note 19 - Legal Proceedings. Earnings from Investment in Joint Venture. Earnings from investment in joint venture decreased$0.4 million during the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 , as the construction project from which these earnings were derived had a lower level of activity during the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . Net Income. Net income decreased$6.4 million to$9.3 million for the three months endedJune 30, 2021 , compared to$15.7 million for the three months endedJune 30, 2020 . The decrease in net income was primarily a result of lower gross profit and higher general and administrative expenses, all as described above. Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA Margin were$29.0 million and 11.1%, respectively, for the three months endedJune 30, 2021 , compared to$32.0 million and 14.7%, respectively, for the three months endedJune 30, 2020 . The decrease in Adjusted EBITDA was the result of lower gross profit and an increase in general and administrative expenses. The lower Adjusted EBITDA Margin was primarily a result of a decrease in Adjusted EBITDA and an increase in revenues, 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, under the heading "How We Assess Performance of Our Business". Adjusted Net Income. Adjusted net income decreased$6.4 million to an adjusted net income of$9.5 million for the three months endedJune 30, 2021 , compared to adjusted net income of$15.9 million for the three months endedJune 30, 2020 . The decrease in adjusted net income was primarily a result of lower gross profit and 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, under the heading "How We Assess Performance of Our Business". 25 -------------------------------------------------------------------------------- Table of Contents Nine Months EndedJune 30, 2021 Compared to Nine Months EndedJune 30, 2020 The following table sets forth selected financial data for the nine months endedJune 30, 2021 and 2020 (in thousands, except percentages): Change From the Nine Months Ended June 30, 2020 For the Nine Months Ended June 30, to the Nine Months Ended 2021 2020 June 30, 2021 % of % of $ % Dollars Revenues Dollars Revenues Change Change Revenues$ 631,697 100.0 %$ 561,034 100.0 %$ 70,663 12.6 % Cost of revenues 546,414 86.5 % 480,217 85.4 % 66,197 13.8 % Gross profit 85,283 13.5 % 80,817 14.5 % 4,466 5.5 % General and administrative expenses (67,754) (10.7) % (50,786) (9.1) % (16,968)
33.4 %
Gain on sale of equipment, net 1,177 0.2 % 1,134 0.2 % 43 3.8 % Operating income 18,706 3.0 % 31,165 5.6 % (12,459) (40.0) % Interest expense, net (1,334) (0.2) % (2,690) (0.5) % 1,356 (50.4) % Other income (expense) 661 0.1 % 360 - % 301 83.6 % Income before provision for income taxes and earnings from investment in joint venture 18,033 2.9 % 28,835 5.1 % (10,802) (37.5) % Provision for income taxes (5,767) (1.0) % (6,622) (1.2) % 855 (12.9) % Earnings from investment in joint venture 10 - % 532 0.2 % (522) (98.1) % Net income$ 12,276 1.9 %$ 22,745 4.1 %$ (10,469) (46.0) % Adjusted EBITDA$ 63,506 10.1 %$ 63,539 11.3 %$ (33) (0.1) % Adjusted net income$ 16,642 2.6 %$ 22,961 4.1 %$ (6,319) (27.5) % Revenues. Revenues for the nine months endedJune 30, 2021 increased$70.7 million , or 12.6%, to$631.7 million from$561.0 million for the nine months endedJune 30, 2020 . The increase included$58.4 million of revenues attributable to acquisitions completed subsequent toOctober 1, 2019 and an increase of approximately$12.3 million of revenues in our remaining markets from contract work and sales of HMA and aggregates to third parties. Gross Profit. Gross profit for the nine months endedJune 30, 2021 increased$4.5 million , or 5.5%, to$85.3 million from$80.8 million for the nine months endedJune 30, 2020 . The increase in gross profit was primarily the result of the increase in revenue for the nine months endedJune 30, 2021 compared to the nine months endedJune 30, 2020 . Additionally, the higher gross profit was the result of an increase in gross profit margin due to (i) efficient utilization of our plants and equipment, (ii) a$2.1 million increase in gross profit attributable to our liquid asphalt terminal, at which we purchase liquid asphalt at wholesale prices, thereby reducing our cost of revenues, (iii) an increase of$2.8 million in unrealized gains on commodity derivative instruments that are included in cost of revenues, and (iv) offset by lower profit margins on the projects we assumed in connection with theNorth Carolina acquisitions we completed during the first quarter of fiscal 2021 and lower utilization of the asphalt plants and equipment acquired in these acquisitions. General and Administrative Expenses. General and administrative expenses for the nine months endedJune 30, 2021 increased$17.0 million , or 33.4%, to$67.8 million from$50.8 million for the nine months endedJune 30, 2020 . The increase in general and administrative expenses for the nine months endedJune 30, 2021 compared to the nine months endedJune 30, 2020 was primarily the result of (i) a$1.0 million increase in equity-based compensation expense, (ii) a$3.2 million legal settlement, as described in Note 19 - Legal Proceedings, and an increase of$0.9 million for legal fees associated with this settlement, (iii) a$5.5 million increase in management personnel payroll and benefits, (iv) a$2.9 million increase attributable to acquisitions completed subsequent toJune 30, 2020 , and (v) a$2.3 million increase in other professional fees, primarily driven by business acquisitions, information technology expenses and increased accounting fees. 26 -------------------------------------------------------------------------------- Table of Contents Interest Expense, Net. Interest expense, net for the nine months endedJune 30, 2021 decreased$1.4 million , to$1.3 million compared to$2.7 million for the nine months endedJune 30, 2020 . The decrease was primarily due to$0.8 million of unrealized gain on interest rate swaps for the nine months endedJune 30, 2021 , compared to an unrealized loss on interest rate swaps of$1.6 million for the nine months endedJune 30, 2020 . This change was offset by an increase in interest paid due to the increase in long-term debt atJune 30, 2021 compared toJune 30, 2020 . Other Income (Expense). Other income (expense) for the nine months endedJune 30, 2021 increased$0.3 million , to$0.7 million compared to$0.4 million for the nine months endedJune 30, 2020 . The increase was primarily attributable to rental income from property acquired in theNorth Carolina acquisitions completed during the first quarter of fiscal 2021. Provision for Income Taxes. Our effective tax rate increased to 32.0% for the nine months endedJune 30, 2021 , from 22.5% for the nine months endedJune 30, 2020 . Our higher effective tax rate for the three months endedJune 30, 2021 was due to the unfavorable impact of a non-deductible legal settlement and related legal expenses, as described in Note 19 - Legal Proceedings. Earnings from Investment in Joint Venture. Earnings from investment in joint venture decreased$0.5 million during the nine months endedJune 30, 2021 compared to the nine months endedJune 30, 2020 , as the construction project from which these earnings were derived had a lower level of activity during the nine months endedJune 30, 2021 . Net Income. Net income decreased$10.5 million , or 46.0%, to$12.3 million for the nine months endedJune 30, 2021 , compared to$22.7 million for the nine months endedJune 30, 2020 . The decrease in net income was primarily a result of higher general and administrative expenses, partially offset by an increase in gross profit and a decrease in interest expense, net, all as described above. Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA Margin were$63.5 million and 10.1%, respectively, for the nine months endedJune 30, 2021 , compared to$63.5 million and 11.3%, respectively, for the nine months endedJune 30, 2020 . The lower Adjusted EBITDA Margin was a result of an increase in revenues, 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, under the heading "How We Assess Performance of Our Business". Adjusted Net Income. Adjusted net income decreased$6.3 million to adjusted net income of$16.6 million for the nine months endedJune 30, 2021 , compared to adjusted net income of$23.0 million for the nine months endedJune 30, 2020 . The decrease in adjusted net income was primarily a result of higher general and administrative expenses, partially offset by an increase in gross profit and decrease in interest expense, net, all as described above. Inflation and Price Changes Except as described above under the heading "Inflationary Trends," inflation had an immaterial impact on our results of operations for the three and nine months endedJune 30, 2021 and 2020 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 infrastructure sector 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 Nine Months Ended June 30, 2021 2020
Net cash provided by operating activities, net of acquisition
(129,530) (69,183)
Net cash provided by (used in) financing activities 106,348 15,845
Net change in cash and cash equivalents $
(13,848)
Operating Activities During the nine months endedJune 30, 2021 , cash provided by operating activities, net of acquisitions, was$9.3 million , primarily as a result of: •net income of$12.3 million , including$36.0 million of depreciation, depletion and amortization of long-lived assets, unrealized gains on derivative instruments of$3.1 million and equity-based compensation expense of$2.2 million ; 27 -------------------------------------------------------------------------------- Table of Contents •an increase in contracts receivable including retainage, net, of$33.0 million as a result of higher overall revenues due to acquisitions and growth in existing markets; •an increase in other assets of$4.1 million primarily due to capitalized costs related to the amended Revolving Credit Facility and deposits on property, plant and equipment assets;
•an increase in inventories of
•an increase in accounts payable and accrued expenses and other current
liabilities of
•a net decrease 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 of$10.0 million due to the timing of performing and closing projects.
During the nine months ended
•net income of
•a decrease in contracts receivable including retainage, net, of$6.3 million due to a reduction in the number of projects available for bid in certain of our markets; and;
•a decrease in accounts payable and accrued expenses and other current
liabilities of
Investing Activities During the nine months endedJune 30, 2021 , cash used in investing activities was$129.5 million ,$92.3 million of which related to acquisitions completed in the period and$39.6 million of which was invested in property, plant and equipment, partially offset by$2.4 million of proceeds from the sale of equipment. During the nine months endedJune 30, 2020 , cash used in investing activities was$69.2 million ,$30.2 million of which related to acquisitions completed in the period and$41.5 million of which was invested in property, plant and equipment, partially offset by$2.1 million of proceeds from the sale of equipment and a$0.4 million distribution from our investment in a joint venture. Financing Activities During the nine months endedJune 30, 2021 , cash provided by financing activities was$106.3 million . We received$199.1 million from proceeds on long-term debt, net of debt issuance costs and discounts, reflecting a Term Loan advance, net of issuance costs, to fund acquisitions and for liquidity purposes. These proceeds were offset by$92.8 million of repayments of long-term debt. During the nine months endedJune 30, 2020 , cash provided by financing activities was$15.8 million . We received$42.7 million from proceeds on long-term debt, net of debt issuance costs and discounts, reflecting (i) a$15.0 million advance under our Revolving Credit Facility primarily used to fund theMarch 2020 acquisition of two HMA manufacturing plants inFlorida and for liquidity purposes, and (ii)$27.7 million of Term Loan advances, net of issuance cost, related to our buyout of certain lease obligations inOctober 2019 and to pay down theMarch 2020 $15.0 million advance under the Revolving Credit Facility. These proceeds were offset by$26.9 million of repayments of principal on long-term debt. 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. AtJune 30, 2021 andSeptember 30, 2020 , we had$200.0 million and$92.9 million , respectively, of principal outstanding under the Term Loan,$0.0 million and$0.0 million , respectively, of principal outstanding under the Revolving Credit Facility, and availability of$213.9 million and$39.3 million , respectively, under the Revolving Credit Facility, after reduction for outstanding letters of credit. AtJune 30, 2021 , the interest rate on outstanding borrowings under the Term Loan was 1.35%. 28 -------------------------------------------------------------------------------- Table of Contents The Credit Agreement requires us to satisfy certain financial covenants, including a minimum fixed charge coverage ratio of 1.20-to-1.00 and a maximum consolidated leverage ratio of 3.00-to-1.00, subject to certain adjustments. AtJune 30, 2021 andSeptember 30, 2020 , our fixed charge coverage ratio was 4.00-to-1.00 and 2.85-to-1.00, respectively, and our consolidated leverage ratio was 1.86-to-1.00 and 1.08-to-1.00, respectively. From time to time, we have entered into interest rate swap agreements to hedge against the risk of changes in interest rates. These interest rate swap agreements do not meet the criteria for hedge accounting treatment in accordance with GAAP. AtJune 30, 2021 andSeptember 30, 2020 , the aggregate notional value of these interest rate swap agreements was$40.3 million and$46.5 million , respectively, and the fair value was$(1.0) million and$(1.7) million , respectively, which is included within other long-term liabilities on our Consolidated Balance Sheets. Capital Requirements and Sources of Liquidity 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. During the nine months endedJune 30, 2021 and 2020, our capital expenditures were$39.6 million and$41.5 million , respectively. Our capital expenditures are typically made during the same fiscal year in which they are approved. AtJune 30, 2021 , our commitments for capital expenditures were not material to our financial condition or results of operations on a consolidated basis. For fiscal 2021, we expect total capital expenditures to be$47.0 million to$52.0 million . Our capital expenditure budget is an estimate and is subject to change. 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, together with cash on hand and available borrowings under our credit facilities, 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 the COVID-19 pandemic, 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 our credit facilities, joint ventures, asset sales, offerings of debt or equity securities or other means. 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.
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 ofJune 30, 2021 , we had fuel swap contracts to pay fixed prices for fuel with an aggregate notional amount of 2.7 million gallons, maturing incrementally through fiscal year 2023. The fair value of these derivative contracts was$1.9 million atJune 30, 2021 . These fuel swap contracts provide a fixed price for less than 50% of our estimated fuel usage for the remainder of fiscal years 2021 through 2023. 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 our credit facilities, which expose us to variability in interest 29 -------------------------------------------------------------------------------- Table of Contents 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, we have entered into several amortizing interest rate swap agreements. AtJune 30, 2021 , the aggregate notional value of these interest rate swap agreements was$40.3 million for which we pay a fixed rate ranging from 1.24% to 3.01% and, in each case, under which receive a credit based on the applicable LIBOR rate. AtJune 30, 2021 , we had a total of$159.7 million of non-hedged variable rate borrowings outstanding. Contractual Obligations
The following table sets forth certain information about our contractual
obligations as of
Payments Due by Fiscal Year
Remainder of 2026 and
Total 2021 2022 2023 2024 2025 Thereafter
Debt obligations $ 200,000 $ 2,500 $ 10,000 $ 10,000 $ 11,250 $ 15,000 $ 151,250
Operating leases 8,287 511 1,489 1,092 834 663 3,698
Purchase commitments 242 192 50 - - - -
Total $ 209,363 $ 3,203 $ 11,539 $ 11,092 $ 12,918 $ 15,663 $ 154,948
Off-Balance Sheet Arrangements
As of June 30, 2021 , we had no material off-balance sheet arrangements, except
for letters of credit of $11.1 million and purchase commitments for diesel fuel
of $0.2 million entered into in the normal course of business.
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