As confidentially submitted to the Securities and Exchange Commission on December 20, 2017

This draft registration statement has not been publicly filed with the Securities and Exchange Commission and all information herein remains strictly confidential

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Construction Partners, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		1600		26-0758017
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification Number)

 

 

290 Healthwest Drive, Suite 2

Dothan, Alabama 36303

(334) 673-9763

(Address, including zip code and telephone number, including area code, of registrant’s principal executive offices)

 

 

Charles E. Owens

Chief Executive Officer and President

Construction Partners, Inc.

290 Healthwest Drive, Suite 2

Dothan, Alabama 36303

(334) 673-9763

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Garrett A. DeVries Akin Gump Strauss Hauer & Feld LLP 1700 Pacific Avenue, Suite 4100 Dallas, Texas 75201 (214) 969-2800		Christopher D. Lueking Latham & Watkins LLP 330 North Wabash Avenue, Suite 2800 Chicago, Illinois 60611 (312) 876-7700

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box.  ☐

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

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		☒   (Do not check if a smaller reporting company)		Smaller reporting company		☐
				Emerging growth company		☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☒

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered		Proposed Maximum Aggregate Offering Price(1)(2)		Amount of Registration Fee(3)
Class A Common Stock, par value $0.001 per share		$		$

(1)	Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act.

(2)	Includes the offering price of Class A common stock that may be purchased by the underwriters upon the exercise of their option to purchase additional shares.

(3)	To be paid in connection with the initial public filing of the registration statement.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

The information in this preliminary prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, Dated                     , 2018

PROSPECTUS

            Shares

 

CONSTRUCTION PARTNERS, INC.

CLASS A COMMON STOCK

This is the initial public offering of Class A common stock of Construction Partners, Inc. We are offering              shares of our Class A common stock. The selling stockholders identified in this prospectus are offering              shares of our Class A common stock. We will not receive any of the proceeds from the sale of shares of our Class A common stock by the selling stockholders.

Prior to this offering, there has been no public market for our Class A common stock. We anticipate that the initial public offering price for our Class A common stock will be between $        and $        per share. We intend to apply to list our Class A common stock on         under the symbol “        .”

Investing in our Class A common stock involves substantial risk. See “Risk Factors” on page 13.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

We are an “emerging growth company” under the U.S. federal securities laws and will be subject to reduced public company reporting requirements.

 

		Per Share					Total
Initial public offering price			$					$
Underwriting discounts and commissions(1)			$					$
Proceeds to us, before expenses			$					$
Proceeds to selling stockholders, before expenses			$					$

 

(1)	We have agreed to reimburse the underwriters for certain expenses. See “Underwriting.”

Delivery of the shares of our Class A common stock is expected to be made on or about                     , 2018.

The selling stockholders have granted the underwriters a 30-day option to purchase up to an additional              shares of our Class A common stock at the initial public offering price less underwriting discounts and commissions.

Upon the completion of this offering, we will have two classes of authorized common stock: our Class A common stock and our Class B common stock. The rights of holders of our Class A common stock and our Class B common stock will be identical, except with respect to voting rights, conversion rights and certain transfer restrictions applicable to our Class B common stock. Each share of our Class A common stock will be entitled to one vote. Each share of our Class B common stock will be entitled to             votes and is convertible into one share of our Class A common stock automatically upon transfer, subject to certain exceptions. Upon the completion of this offering, the holders of our Class A common stock will hold approximately     % of the total voting power of our outstanding common stock and approximately     % of our total equity ownership (or     % and     %, respectively, if the underwriters’ option to purchase additional shares is exercised in full), and the holders of our Class B common stock will hold approximately     % of the total voting power of our outstanding common stock and approximately     % of our total equity ownership (or     % and     %, respectively, if the underwriters’ option to purchase additional shares is exercised in full). See “Description of Our Capital Stock—Common Stock.”

Following the completion of this offering, we will be a “controlled company” within the meaning of the corporate governance rules of                      . See “Management—Director Independence and Controlled Company Exemption.”

 

Baird		Raymond James		Stephens Inc.

Imperial Capital

Prospectus dated                     , 2018

TABLE OF CONTENTS

 

			Page
Market and Industry Data			ii
Cautionary Statement Regarding Forward-Looking Statements			ii
Prospectus Summary			1
Risk Factors			13
Use of Proceeds			37
Dividend Policy			38
Capitalization			39
Dilution			41
Selected Historical Consolidated Financial Data			43
Management’s Discussion and Analysis of Financial Condition and Results of Operations			45
Business			60
Management			75
Executive Compensation			80
Certain Relationships and Related Party Transactions			88
Principal and Selling Stockholders			91
Description of Our Capital Stock			93
Shares Eligible for Future Sale			103
Material U.S. Federal Income Tax Consequences for Non-U.S. Holders			106
Underwriting			110
Legal Matters			117
Experts			117
Change in Accountants			117
Where You Can Find More Information			117
Index to Consolidated Financial Statements and Supplementary Data			F-1

 

 

You should rely only on the information contained in this prospectus. Neither we, the selling stockholders nor the underwriters have authorized any other person to provide you with any information, or to make any representations, other than as contained in this prospectus, in any amendment or supplement hereto or in any free writing prospectus prepared by us or on our behalf and delivered or made available to you. Neither we, the selling stockholders nor the underwriters take responsibility for or provide assurance as to the reliability of any information or representations that others may give you. This prospectus is an offer to sell only the shares of our Class A common stock offered hereby, and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is accurate only as of the date hereof, and we undertake no obligation to update such information, except as may be required by law.

 

i

MARKET AND INDUSTRY DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry, our market share and the markets that we serve is based on information from independent industry and research organizations, other third-party sources (including industry publications, surveys and forecasts) and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and third-party sources, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data and our knowledge of such industry and markets that we believe to be reasonable. Although we believe the data from these third-party sources is reliable, we have not independently verified any such information. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.” These and other factors could cause results to differ materially from those expressed in the estimates made by third-parties and by us.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and uncertainties, such as statements related to future events, business strategy, future performance, future operations, backlog, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as “seek,” “anticipate,” “plan,” “continue,” “estimate,” “expect,” “may,” “will,” “project,” “predict,” “potential,” “targeting,” “intend,” “could,” “might,” “should,” “believe” and similar expressions or their negative. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on management’s belief, based on currently available information, as to the outcome and timing of future events. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those expressed in such forward-looking statements. When evaluating forward-looking statements, you should consider the risk factors and other cautionary statements described in “Risk Factors.” We believe the expectations reflected in the forward-looking statements contained in this prospectus 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;

 

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competition for projects in our local markets;

 

●

risks associated with our capital-intensive business;

 

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government requirements and initiatives, including those related to funding for public or infrastructure construction, land usage and environmental, health and safety matters;

 

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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;

 

●

cancellation of a significant number of contracts or our disqualification from bidding for new contracts;

 

ii

●

risks related to adverse weather conditions;

 

●

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

 

●

our ability to maintain favorable relationships with third parties that supply us with equipment and essential supplies;

 

●

our ability to retain key personnel and maintain satisfactory labor relations;

 

●

property damage, results of litigation and other claims and insurance coverage issues;

 

●

risks related to our information technology systems and infrastructure; and

 

●

our ability to remediate the material weaknesses in internal control over financial reporting identified in preparing our financial statements included in this prospectus and to subsequently maintain effective internal control over financial reporting.

These factors are not necessarily all of the important factors that could cause actual results or events to differ materially from those expressed in 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 “Risk Factors.” 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.

 

iii

 

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12

RISK FACTORS

An investment in our Class A common stock involves a high degree of risk. You should carefully read and consider the following risks, as well as all of the other information contained in this prospectus, before making an investment decision. Our business, financial condition and results of operations could be materially and adversely affected by any of these risks. As a result, the trading price of our Class A common stock could decline, and you could lose all or part of your investment. The risks described below are not the only ones facing us. Additional risks not presently known to us or that we currently consider immaterial also may adversely affect us.

Risks Related to our Business

A significant slowdown or decline in economic conditions, particularly in the Southeastern United States, could adversely impact our results of operations.

We currently operate in Alabama, Florida, Georgia, North Carolina and South Carolina. A significant slowdown or decline in economic conditions or uncertainty regarding the economic outlook in the United States generally, or in any of these states particularly, could result in reduced demand for infrastructure projects, which could materially adversely affect our financial condition, results of operations and liquidity. Demand for infrastructure projects depends on the overall condition of the U.S. and local economies, the need for new or replacement infrastructure, the priorities placed on various projects funded by governmental entities and federal, state and local government spending levels. In particular, low tax revenues, credit rating downgrades, budget deficits and financing constraints, including timing and amount of federal funding and competing governmental priorities, could negatively impact the ability of government agencies to fund existing or new public infrastructure projects. For example, during the most recent recession, decreases in tax revenues reduced funding for infrastructure projects. In addition, any instability in the financial and credit markets could negatively impact our customers’ ability to pay us on a timely basis, or at all, for work on projects already in progress, could cause our customers to delay or cancel construction projects in our contract backlog and/or could create difficulties for customers to obtain adequate financing to fund new construction projects, including through the issuance of municipal bonds.

Our business is dependent on federal, state and local government spending for public infrastructure construction, and reductions in government funding could adversely affect our results of operations.

During fiscal 2017, we generated approximately 70% of our construction contract revenues from publicly funded construction projects at the federal, state and local levels. As a result, if publicly funded construction decreases due to reduced federal, state or local funding or otherwise, our financial condition, results of operations and liquidity could be materially adversely affected.

In January 2011, Congress repealed a 1998 transportation law that protected annual highway funding levels from amendments that could reduce such funding. This change subjected federal highway funding to annual appropriation reviews, which has increased the uncertainty of many state DOTs regarding the availability of highway project funds. This uncertainty could cause state DOTs to be reluctant to undertake large multiyear highway projects, which could, in turn, negatively affect our results of operations.

Federal highway bills provide spending authorizations that represent maximum amounts. Each year, Congress passes an appropriation act establishing the amount that can be used for particular programs. The annual funding level is generally tied to receipts of highway user taxes placed in the Highway Trust Fund (as defined in the FAST Act). Once Congress passes the annual appropriation, the federal government distributes funds to each state based on formulas or other procedures. States generally must spend these funds on the specific programs

 

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outlined in the federal legislation. In recent years, The Highway Trust Fund has faced insolvency as outlays have outpaced revenues. Annual shortfalls have been addressed primarily by short-term measures, including the transfer of funds from the General Fund (as defined in the FAST Act) into the Highway Trust Fund. As a result, we cannot be assured of the existence, timing or amount of future federal highway funding. Any reduction in federal highway funding, particularly in the amounts allocated to Alabama, Florida, Georgia, North Carolina and South Carolina, could have a material adverse effect on our results of operations.

Each state funds its infrastructure spending from specially allocated amounts collected from various taxes, typically fuel taxes and vehicle fees, as well as from voter-approved bond programs. Shortages in state tax revenues can reduce the amount spent on state infrastructure projects. Delays in state infrastructure spending can adversely affect our business. Many states have experienced state-level funding pressures caused by lower tax revenues and an inability to finance approved projects. Prior to the FAST Act, states took on a larger role in funding sustained infrastructure investment. During the past two years, many states have again taken on a significantly larger role in funding infrastructure investment, including initiating special-purpose taxes and increased fuel taxes.

While the current administration has called for an infrastructure stimulus plan, there is a lack of clarity around both the timing and the details of any such plan and the impact, if any, that it or other proposed changes in law and regulations may have on our business.

Government contracts generally are subject to a variety of governmental regulations, requirements and statutes, the violation or alleged violation of which could have a material adverse effect on our business.

Our business is substantially dependent upon infrastructure projects funded by federal, state and local governmental agencies. Our contracts with these governmental agencies are generally subject to specific procurement regulations, contract provisions and a variety of socioeconomic requirements relating to their formation, administration, performance and accounting. Further, government contracts typically provide for termination at the convenience of the customer with requirements to pay us for work performed through the date of termination. We may be subject to claims for civil or criminal fraud for actual or alleged violations of these various governmental regulations, requirements or statutes. In addition, we may also be subject to qui tam litigation brought by private individuals on behalf of the government under the Federal Civil False Claims Act, which could include claims for up to treble damages. Further, if we fail to comply with any of these various governmental regulations, requirements or statutes or if we have a substantial number of accumulated Occupational Safety and Health Administration (“OSHA”), Mine Safety and Health Administration (“MSHA”) or other workplace safety violations, our existing government contracts could be terminated. Even if we have not violated these various governmental regulations, requirements or statutes, allegations of violations or defending qui tam litigation could harm our reputation and require us to incur material costs to defend any such allegations or lawsuits, which could have a material adverse effect on our financial condition, results of operations or liquidity.

If we do not comply with certain federal or state laws, we could be suspended or debarred from government contracting, which could have a material adverse effect on our business.

Various statutes to which our operations are subject, including the Davis-Bacon Act (regulating wages and benefits), the Walsh-Healy Act (prescribing a minimum wage and regulating overtime and working conditions), Executive Order 11246 (establishing equal employment opportunity and affirmative action requirements) and the Drug-Free Workplace Act, provide for mandatory suspension and/or debarment of contractors in certain circumstances involving statutory violations. In addition, the Federal Acquisition Regulation and various state statutes provide for discretionary suspension and/or debarment in certain circumstances, including as a result of

 

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being convicted of, or being found civilly liable for, fraud or a criminal offense in connection with obtaining, attempting to obtain or performing a public contract or subcontract. The scope and duration of any suspension or debarment may vary depending upon the facts of a particular case and the statutory or regulatory grounds for debarment. Any suspension or debarment from government contracting could have a material adverse effect on our financial condition, results of operations or liquidity.

If we are unable to accurately estimate the overall risks, revenues or costs on our projects, we may incur contract losses or achieve lower than anticipated profits.

Pricing on a fixed unit price contract is based on approved quantities irrespective of our actual costs, and contracts with a fixed total price require that the work be performed for a single price irrespective of our actual costs. We only generate profits on fixed unit price and fixed total price contracts when our revenues exceed our actual costs, which requires us to accurately estimate our costs, to control actual costs and to avoid cost overruns. If our cost estimates are too low or if we do not perform the contract within our cost estimates, then cost overruns may cause us to incur a loss or cause the contract not to be as profitable as we expected. The costs incurred and profit realized, if any, on our contracts can vary, sometimes substantially, from our original projections due to a variety of factors, including, but not limited to:

 

●

the failure to include materials or work in a bid, or the failure to estimate properly the quantities or costs needed to complete a fixed total price contract;

 

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delays caused by weather conditions or otherwise failing to meet scheduled acceptance dates;

 

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contract or project modifications or conditions creating unanticipated costs that are not covered by change orders;

 

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changes in the availability, proximity and costs of materials, including liquid asphalt, cement, aggregates and other construction materials, as well as fuel and lubricants for our equipment;

 

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to the extent not covered by contractual cost escalators, variability and inability to predict the costs of purchasing diesel, liquid asphalt and cement;

 

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the availability and skill level of workers;

 

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the failure by our suppliers, subcontractors, designers, engineers or customers to perform their obligations;

 

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fraud, theft or other improper activities by our suppliers, subcontractors, designers, engineers, customers or our own personnel;

 

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mechanical problems with our machinery or equipment;

 

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citations issued by a government authority, including under OSHA or MSHA;

 

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difficulties in obtaining required government permits or approvals;

 

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changes in applicable laws and regulations;

 

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uninsured claims or demands from third parties for alleged damages arising from the design, construction or use and operation of a project of which our work is part; and

 

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public infrastructure customers seeking to impose contractual risk-shifting provisions that result in our facing increased risks.

These factors, as well as others, may cause us to incur losses, which could have a material adverse effect on our financial condition, results of operations or liquidity.

Because our industry is capital intensive and we have significant fixed and semi-fixed costs, our profitability is sensitive to changes in volume.

The property, plants and equipment needed to produce our products and provide our services can be very expensive. We must spend a substantial amount of capital to purchase and maintain such property, plants and equipment. Although we believe our current cash balance, along with our projected internal cash flows and available financing sources, will provide sufficient cash to support our currently anticipated operating and capital

 

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needs, if we are unable to generate sufficient cash to purchase and maintain the property, plants and equipment necessary to operate our business, we may be required to reduce or delay planned capital expenditures or to incur additional indebtedness. In addition, due to the level of fixed and semi-fixed costs associated with our business, particularly at our HMA production facilities, volume decreases could have a material adverse effect on our financial condition, results of operations or liquidity.

The cancellation of a significant number of contracts, our disqualification from bidding for new contracts and the unpredictable timing of new contracts could have a material adverse effect on our business.

We could be prohibited from bidding on certain government contracts if we fail to maintain qualifications required by those entities. In addition, government contracts can typically be canceled at any time with our receiving payment only for the work completed. The cancellation of an unfinished contract or our disqualification from the bidding process could result in lost revenues and cause our equipment to be idled for a significant period of time until other comparable work becomes available. Additionally, the timing of project awards is unpredictable and outside of our control. Project awards, including expansions of existing projects, often involve complex and lengthy negotiations and competitive bidding processes.

The success of our business depends, in part, on our ability to execute on our acquisition strategy, to successfully integrate acquired businesses and to retain key employees of acquired businesses.

Over the last 16 years, we have acquired and integrated 15 complementary businesses, which have contributed to a significant portion of our growth. We continue to evaluate strategic acquisition opportunities that have the potential to support and strengthen our business, including acquisitions in neighboring states, as part of our ongoing growth strategy. We expect to evaluate, negotiate and enter into possible acquisition transactions on an ongoing basis in the future. We expect to regularly make non-binding acquisition proposals, and we may enter into non-binding, confidential letters of intent from time to time in the future. We cannot predict the timing or size of any future acquisitions. To successfully acquire a significant target, we may need to raise additional equity and/or indebtedness, which could increase our leverage level. There can be no assurance that we will enter into definitive agreements with respect to any contemplated transaction or that any contemplated transaction will be completed. The investigation of acquisition candidates and the negotiation, drafting and execution of relevant agreements, disclosure documents and other instruments will require substantial management time and attention and substantial costs for accountants, attorneys and others. If we fail to complete any acquisition for any reason, including events beyond our control, the costs incurred up to that point for the proposed acquisition likely would not be recoverable.

Acquisitions typically require integration of the acquired company’s estimation, project management, finance, information technology, risk management, purchasing and fleet management functions. We may be unable to successfully integrate an acquired business into our existing business, and an acquired business may not be as profitable as we had expected or at all. Our inability to successfully integrate new businesses in a timely and orderly manner could increase costs, reduce profits or generate losses. Factors affecting the successful integration of an acquired business include, but are not limited to, the following:

 

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we may become liable for certain liabilities of an acquired business, whether or not known to us, which could include, among others, tax liabilities, product liabilities, environmental liabilities and liabilities for employment practices, and these liabilities could be significant;

 

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we may not be able to retain local managers and key employees who are important to the operations of an acquired business;

 

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substantial attention from our senior management and the management of an acquired business may be required, which could decrease the time that they have to service and attract customers;

 

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●

we may not effectively utilize new equipment that we acquire through acquisitions;

 

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the complete integration of an acquired company depends, to a certain extent, on the full implementation of our financial and management information systems, business practices and policies; and

 

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we may actively pursue a number of opportunities simultaneously and we may encounter unforeseen expenses, complications and delays, including difficulties in employing sufficient staff and maintaining operational and management oversight.

Acquisitions involve risks that the acquired business will not perform as expected and that business judgments concerning the value, strengths and weaknesses of the acquired business will prove incorrect. In addition, potential acquisition targets may be in states in which we do not currently operate, which could result in unforeseen operating difficulties and difficulties in coordinating geographically dispersed operations, personnel and facilities. In addition, if we enter into new geographic markets, we may be subject to additional and unfamiliar legal and regulatory requirements.

We cannot guarantee that we will achieve synergies and cost savings in connection with future acquisitions. Many of the businesses that we have acquired and may acquire in the future have unaudited financial statements that have been prepared by management and have not been independently reviewed or audited. We cannot guarantee that such financial statements would not be materially different if such statements were independently reviewed or audited. We cannot guarantee that we will continue to acquire businesses at valuations consistent with our prior acquisitions or that we will complete future acquisitions at all. We cannot guarantee that there will be attractive acquisition opportunities at reasonable prices, that financing will be available or that we can successfully integrate acquired businesses into our existing operations. In addition, our results of operations from these acquisitions could, in the future, result in impairment charges for any of our intangible assets, including goodwill or other long-lived assets, particularly if economic conditions worsen unexpectedly. Our inability to effectively manage the integration of our completed and future acquisitions could prevent us from realizing expected rates of return on an acquired business and could have a material and adverse effect on our financial condition, results of operations or liquidity.

We may lose business to competitors that underbid us, and we may be unable to compete favorably in our highly competitive industry.

Most of our project awards are determined through a competitive bidding process in which price is the determining factor. Because of the high cost of transporting HMA, our ability to win a project award is often influenced by the distance between a work site and our HMA plants. We compete against multiple competitors in all of the markets in which we operate, most of which are local or regional operators. Some of our competitors are larger than we are, are vertically integrated and/or have similar or greater financial resources than we do. As a result, our competitors may be able to bid at lower prices than we can due to the location of their plants or as a result of their size or vertical-integration advantages. Government funding for public infrastructure projects is limited, thus contributing to competition for the limited number of public projects available. An increase in competition may result in a decrease in new project awards to us at acceptable profit margins. In addition, in the event of a downturn in private residential and commercial construction, the competition for available public infrastructure projects could intensify, which could materially and adversely impact our financial condition, results of operations or liquidity.

We may be unable to obtain or maintain sufficient bonding capacity, which could materially adversely affect our business.

A significant number of our contracts require performance and payment bonds. Our ability to obtain performance and payment bonds primarily depends upon our capitalization, working capital, past performance, management

 

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expertise, reputation and certain external factors, including the overall capacity of the surety market. If we are unable to renew or obtain a sufficient level of bonding capacity in the future, we may be precluded from being able to bid for certain projects or successfully contract with certain customers. In addition, even if we are able to successfully renew or obtain performance or payment bonds, we may be required to post letters of credit in connection with such bonds, which could negatively affect our liquidity and results of operations.

It is standard for sureties to issue or continue bonds on a project-by-project basis, and they can decline to do so at any time or require the posting of additional collateral as a condition thereto. Events that adversely affect the insurance and bonding markets generally may result in bonding becoming more difficult to or costly to obtain in the future. If we were to experience an interruption or reduction in the availability of our bonding capacity as a result of these or any other reasons, or if bonding costs were to increase, we may be unable to compete for certain projects that require bonding, which would materially and adversely affect our financial condition, results of operations or liquidity.

Our business is seasonal and subject to adverse weather conditions, which can adversely impact our business.

Our construction operations occur outdoors. As a result, seasonal changes and adverse weather conditions can adversely affect our business operations through a decline in both the use and production of HMA, a decline in the demand for our construction services and alterations and delays in our construction schedules. Adverse weather conditions such as extended rainy and cold weather in the spring and fall can reduce demand for our products and reduce sales or render our contracting operations less efficient resulting in under-utilization of crews and equipment and lower contract profitability. Major weather events such as hurricanes, tornadoes, tropical storms and heavy snows could also adversely affect our revenues and profitability.

Construction materials production and shipment levels follow activity in the construction industry, which typically occurs in the spring, summer and fall. Warmer and drier weather during the third and fourth quarters of our fiscal year typically results in higher activity and revenues during those quarters. Our first and second fiscal quarters typically have lower levels of activity due to weather conditions. Our third fiscal quarter varies greatly with spring rains and wide temperature variations. A cool wet spring increases drying time on projects, which can delay sales in our third fiscal quarter, while a warm dry spring may enable earlier project startup.

We are dependent on information technology and our systems and infrastructure face certain risks, including cyber security risks and data leakage risks.

We are dependent on information technology systems and infrastructure that could be damaged or interrupted by a variety of factors. Any significant breach, breakdown, destruction or interruption of these systems by employees, others with authorized access to our systems or unauthorized persons has the potential to negatively affect our operations. There is also a risk that we could experience a business interruption, theft of information or reputational damage as a result of a cyberattack, such as the infiltration of a data center, or data leakage of confidential information either internally or at our third-party providers. Although we have invested in the protection of our data and information technology to reduce these risks and periodically test the security of our information systems network, there can be no assurance that our efforts will prevent breakdowns or breaches in our systems that could have a material adverse effect on our financial condition, results of operations and liquidity.

Design-build contracts subject us to the risk of design errors and omissions.

Design-build contracts are used as a method of project delivery that provides the owner with a single point of responsibility for both design and construction. We generally subcontract design responsibility to architectural and

 

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engineering firms. However, in the event of a design error or omission that causes damages, there is a risk that the subcontractor and/or its errors and omissions insurance would not be able to absorb the full amount of the liability incurred. In this case, we may be responsible for the liability, resulting in a potentially material adverse effect on our financial position, results of operations, cash flows and liquidity.

Our continued success requires us to hire, train and retain qualified personnel and subcontractors in a competitive industry.

The success of our business depends upon our ability to attract, train and retain qualified, reliable personnel, including, but not limited to, our executive officers and key management personnel. Additionally, the successful operation of our business depends upon engineers, project management personnel, other employees and qualified subcontractors who possess the necessary and required experience and expertise and who will perform their respective services at a reasonable and competitive rate. Competition for these and other experienced personnel is intense, and it may be difficult to attract and retain qualified individuals with the requisite expertise and in the timeframe demanded by our clients. In certain geographic areas, for example, we may not be able to satisfy the demand for our services because of our inability to successfully hire, train and retain qualified personnel. Also, it could be difficult to replace personnel who hold government granted eligibility that may be required to obtain certain government projects and/or who have significant government contract experience.

As some of our executives and other key personnel approach retirement age, we must provide for smooth transitions, which may require that we devote time and resources to identify and integrate new personnel into vacant leadership roles and other key positions. If we are unable to attract and retain a sufficient number of skilled personnel or effectively implement appropriate succession plans, our ability to pursue projects and our strategic plan may be adversely affected, the costs of executing both our existing and future projects may increase and our financial performance may decline.

In addition, the cost of providing our services, including the extent to which we utilize our workforce, affects our profitability. For example, the uncertainty of contract award timing can present difficulties in matching our workforce size with our contracts. If an expected contract award is delayed or not received, we could incur costs resulting from excess staff or redundancy of facilities that could have a material adverse impact on our business, financial conditions and results of operations.

We depend on third parties for equipment and supplies essential to operate our business.

We rely on third parties to sell or lease properties, plants and equipment to us and to provide us with supplies, including liquid asphalt, cement, aggregates and other construction materials (such as stone, gravel and sand), necessary for our operations. We cannot assure you that our favorable working relationships with our suppliers will continue in the future. In addition, there have historically been periods of supply shortages in our industry.

The inability to purchase or lease the properties, plants or equipment that are necessary for our operations could severely impact our business. If we lose our supply contracts and receive insufficient supplies from third parties to meet our customers’ needs, or if our suppliers experience price increases or disruptions to their business, such as labor disputes, supply shortages or distribution problems, our business, financial condition, results of operations, liquidity and cash flows could be materially and adversely affected.

 

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We consume natural gas, electricity, diesel fuel, liquid asphalt and other petroleum-based resources that are subject to potential reliability issues, supply constraints and significant price fluctuations, which could have a material adverse effect on our financial condition, results of operations and liquidity.

In our production and distribution processes, we consume significant amounts of natural gas, electricity, diesel fuel, liquid asphalt and other petroleum-based resources. The availability and pricing of these resources are subject to market forces that are beyond our control such as unavailability due to refinery turnarounds, higher prices charged for petroleum based products, and other factors. Furthermore, we are vulnerable to any reliability issues experienced by our suppliers, which also are beyond our control. Our suppliers contract separately for the purchase of such resources, and our sources of supply could be interrupted should our suppliers not be able to obtain these materials due to higher demand or other factors that interrupt their availability. Additionally, increases in the costs of fuel and other petroleum-based products utilized in our operations, particularly increases following a bid based on lower costs for such products, could result in a lower profit, or a loss, on a contract. Variability in the supply and prices of these resources could have a material adverse effect on our financial condition, results of operations and liquidity.

Our contract backlog is subject to reductions in scope and cancellations and therefore could be an unreliable indicator of our future earnings.

At September 30, 2017, our contract backlog was $549.9 million compared to $364.1 million at September 30, 2016. Our contract backlog generally consists of construction projects for which we either have an executed contract or commitment with a client or where we are the current low bid. Contract backlog does not include external sales of HMA and aggregates. Moreover, our contract backlog reflects our expected revenues from the contract, commitment or bid, which is often subject to revision over time. We cannot guarantee that the revenues projected in our contract backlog will be realized or, if realized, will be profitable. Projects reflected in our contract backlog may be affected by project cancellations, scope adjustments, time extensions or other changes. Such changes may adversely affect the revenues and profit we ultimately realize on these projects.

Failure of our subcontractors to perform as expected could have a negative impact on our results.

As described in “Business—Types of Contracts and Contract Management,” we rely on third-party subcontractors to perform some of the work on many of our contracts, but we are ultimately responsible for the successful completion of their work. Although we seek to require bonding or other forms of guarantees from all of our subcontractors, we are not always able to obtain such bonds or guarantees. In situations where we are unable to obtain a bond or guarantee, we may be responsible for the failures on the part of our subcontractors to perform as anticipated, resulting in a potentially adverse impact on our cash flows and liquidity. In addition, if the total costs of a project exceed our original estimates, we could experience reduced profits or a loss for that project, which could have an adverse impact on our financial position, results of operations, cash flows and liquidity.

The construction services industry is highly schedule driven, and our failure to meet the schedule requirements of our contracts could adversely affect our reputation and/or expose us to financial liability.

In some instances, including in the case of many of our fixed unit price contracts, we guarantee that we will complete a project by a certain date. Any failure to meet contractual schedule or completion requirements set forth in our contracts could subject us to responsibility for costs resulting from the delay, generally in the form of contractually agreed-upon liquidated damages, liability for our customer’s actual costs arising out of our delay, reduced profits or a loss on that project, damage to our reputation and a material adverse impact to our financial position, results of operations, cash flows and liquidity.

 

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Increasing restrictions on securing aggregate reserves could have a negative impact on our future results of operations.

Increasingly strict regulations and the limited nature of property containing useful aggregate reserves have made it increasingly challenging and costly to obtain aggregate reserves. Although we have been able to obtain adequate reserves to support our business in the past, our financial position, results of operations, cash flows and liquidity may be adversely affected by increasingly strict regulations.

Force majeure events, such as natural disasters and terrorists’ actions, and unexpected equipment failures could negatively impact our business, which may affect our financial condition, results of operations or cash flows.

Force majeure events, such as terrorist attacks or natural disasters, have impacted, and could continue to negatively impact, the U.S. economy and the markets in which we operate. As an example, from time to time we face unexpected severe weather conditions, evacuation of personnel and curtailment of services, increased labor and material costs or shortages, inability to deliver materials, equipment and personnel to work sites in accordance with contract schedules and loss of productivity. We seek to include language in our private client contracts that grants us certain relief from force majeure events, and we regularly review and attempt to mitigate force majeure events in both public and private client contracts. However, the extra costs incurred as a result of these events may not be reimbursed by our clients, and we remain obligated to perform our services after most extraordinary events subject to relief that may be available pursuant to a force majeure clause.

Additionally, our manufacturing processes are dependent upon critical pieces of equipment, such as our HMA plants. This equipment, on occasion, may be out of service as a result of unanticipated failures or damage during accidents. Any significant interruption in production capability may require us to make significant capital expenditures to remedy problems or damage as well as cause us to lose revenues due to lost production time.

These force majeure events may affect our operations or those of our customers or suppliers and could impact our revenues, our production capability and our ability to complete contracts in a timely manner.

Inability to obtain or maintain adequate insurance coverage could adversely affect our results of operations.

As part of our overall risk management strategy and pursuant to requirements to maintain specific coverage that are contained in our financing agreements and in a majority of our contracts, we have obtained and maintain insurance coverage.

Although we have been able to obtain reasonably priced insurance coverage to meet our requirements in the past, there is no assurance that we will be able to do so in the future. For example, catastrophic events can result in decreased coverage limits, more limited coverage, and increased premium costs or deductibles. If we are unable to obtain adequate insurance coverage, we may not be able to procure certain contracts, which could materially adversely affect our financial position, results of operations, cash flows or liquidity.

We could incur material costs and losses as a result of claims that our products do not meet regulatory requirements or contractual specifications.

We provide our customers with products designed to comply with building code or other regulatory requirements as well as any applicable contractual specifications, including, but not limited to durability, compressive strength and weight-bearing capacity. If our products do not satisfy these requirements and specifications, material claims

 

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may arise against us and our reputation could be damaged and if any such claims are for an uninsured, non-indemnified or product-related claim, resolution of such claim against us could have a material adverse effect on our financial condition, results of operations or liquidity.

Environmental, health and safety laws and regulations and any changes to, or liabilities arising under, such laws and regulations could have a material adverse effect on our financial condition, results of operations and liquidity.

As described in “Business—Environmental Regulations,” our operations are subject to stringent and complex federal, state and local laws and regulations governing the discharge of materials into the environment, health and safety aspects of our operations or otherwise relating to environmental protection. These laws and regulations may impose numerous obligations applicable to our operations, including: the acquisition of a permit or other approval before conducting regulated activities; the restriction of the types, quantities and concentration of materials that can be released into the environment; the limitation or prohibition of activities on certain lands lying within wilderness, wetlands, and other protected areas; the application of specific health and safety criteria addressing worker protection; and the imposition of substantial liabilities for pollution resulting from our operations. Numerous government authorities, such as the U.S. Environmental Protection Agency (the “EPA”) and analogous state agencies, have the power to enforce compliance with these laws and regulations and the permits issued under them. Such enforcement actions often involve difficult and costly compliance measures or corrective actions. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil or criminal penalties, natural resource damages, the imposition of investigatory or remedial obligations, and the issuance of orders limiting or prohibiting some or all of our operations. In addition, we may experience delays in obtaining, or be unable to obtain, required permits, which may delay or interrupt our operations and limit our growth and revenue.

Certain environmental laws impose strict liability (i.e., no showing of “fault” is required) or joint and several liability for costs required to remediate and restore sites where hazardous substances, hydrocarbons or solid wastes have been stored or released. We may be required to remediate contaminated properties currently or formerly owned or operated by us or third-party facilities that received waste generated by our operations regardless of whether such contamination resulted from the conduct of others or from the consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken. In connection with certain acquisitions, we could acquire, or be required to provide indemnification against, environmental liabilities that could expose us to material losses. Furthermore, the existence of contamination at properties we own, lease or operate could result in increased operational costs or restrictions on our ability to use those properties as intended, including for mining purposes.

In certain instances, citizen groups also have the ability to bring legal proceedings against us if we are not in compliance with environmental laws, or to challenge our ability to receive environmental permits that we need to operate. In addition, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety impacts of our operations. Our insurance may not cover all environmental risks and costs or may not provide sufficient coverage if an environmental claim is made against us. Moreover, public interest in the protection of the environment has increased dramatically in recent years. The trend of more expansive and stringent environmental legislation and regulations applied to our industry could continue, resulting in increased costs of doing business and consequently affecting profitability.

 

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The risks associated with climate change, as well as climate change legislation and regulations, could adversely affect our operations and financial condition.

The physical risks of climate change, such as more frequent or more extreme weather events, changes in temperature and precipitation patterns, changes to ground and surface water availability and other related phenomena, could affect some, or all, of our operations. Severe weather or other natural disasters could be destructive, which could result in increased costs, including supply chain costs.

In addition, a number of government bodies have finalized, proposed or are contemplating legislative and regulatory changes in response to growing concerns about climate change. Indeed, in recent years, federal, state and local governments have taken steps to reduce emissions of greenhouse gases (“GHGs”). The EPA has finalized a series of GHG monitoring, reporting and emissions control rules for certain large sources of GHGs, and the U.S. Congress has, from time to time, considered adopting legislation to GHG reduce emissions. Nearly half of the states have already taken measures to reduce GHG emissions, primarily through the development of GHG emission inventories and/or regional GHG cap-and-trade programs. While the Trump Administration has announced that the United States will withdraw from international commitments to reduce GHG emissions, it is not clear how this goal will be accomplished, and many state and local officials have announced their commitment to upholding such commitments.

Although it is not possible at this time to predict how future legislation or regulations to address GHG emissions would impact our business, any such laws and regulations imposing reporting obligations on, or limiting emissions of GHGs from, our equipment and operations, could require us to incur costs to reduce GHG emissions associated with our operations. Because we emit GHGs through the manufacture of HMA products and through the combustion of fossil fuels as part of our mining and road construction services, such laws and regulations could have a material adverse effect on our operating results and financial condition.

Government contracts generally have strict regulatory requirements.

During the year ended September 30, 2017, approximately 70% of our construction contract revenues were derived from contracts funded by federal, state and local government agencies and authorities. Government contracts are subject to specific procurement regulations, contract provisions and a variety of socioeconomic requirements relating to their formation, administration, performance and accounting and often include express or implied certifications of compliance. Claims for civil or criminal fraud may be brought for violations of regulations, requirements or statutes. We may also be subject to qui tam litigation brought by private individuals on behalf of the government under the Federal Civil False Claims Act, which could include claims for up to treble damages. Further, if we fail to comply with any of the regulations, requirements or statutes or if we have a substantial number of accumulated OSHA, MSHA or other workplace safety violations, our existing government contracts could be terminated and we could be suspended from government contracting or subcontracting, including federally funded projects at the state level. Should one or more of these events occur, it could have a material adverse effect on our financial position, results of operations, cash flows and liquidity.

Our operations are subject to special hazards that may cause personal injury or property damage, subjecting us to liabilities and possible losses which may not be covered by insurance.

Operating hazards inherent in our business, some of which may be outside our control, can cause personal injury and loss of life, damage to or destruction of property, plant and equipment and environmental damage. We maintain insurance coverage in amounts and against the risks we believe are consistent with industry practice, but this insurance may be inadequate or unavailable to cover all losses or liabilities we may incur in our operations. Our insurance policies are subject to varying levels of deductibles. Losses up to our deductible amounts are

 

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accrued based upon our estimates of the ultimate liability for claims incurred and an estimate of claims incurred but not reported. However, liabilities subject to insurance are difficult to estimate due to unknown factors, including the severity of an injury, the determination of our liability in proportion to other parties, the number of unreported incidents and the effectiveness of our safety programs. If we were to experience insurance claims or costs above our estimates, we may be required to use working capital to satisfy these claims rather than using working capital to maintain or expand our operations.

Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations.

On June 30, 2017, Construction Partners Holdings, Inc. (“Construction Partners Holdings”), our wholly owned subsidiary, entered into a credit agreement with Compass Bank, as Agent, Sole Lead Arranger and Sole Bookrunner (as amended, the “Compass Credit Agreement”). The Compass Credit Agreement provides for a $50.0 million term loan (the “Term Loan”) and a $30.0 million revolving credit facility (the “Revolving Credit Facility”), which, when amended on November 14, 2017, added the Company as a guarantor. A significant portion of our cash flow will be required to pay interest and principal on our outstanding indebtedness, and we may be unable to generate sufficient cash flow from operations, or have future borrowings available, to enable us to repay our indebtedness or to fund other liquidity needs. This level of indebtedness could have important consequences, including the following:

 

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we are required to use a significant percentage of our cash flow from operations for debt service and the repayment of our indebtedness, and such cash flow may not be available for other purposes;

 

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our ability to borrow money or issue equity to fund our working capital, capital expenditures, acquisitions and debt service requirements may be limited;

 

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our interest expense could increase if interest rates in general increase because a portion of our indebtedness bears interest at floating rates;

 

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our flexibility in planning for or reacting to changes in our business and future business opportunities may be limited;

 

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we may be more highly leveraged than some of our competitors, which may place us at a competitive disadvantage;

 

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we may be more vulnerable to a downturn in our business or the economy; and

 

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our ability to exploit business opportunities may be limited.

Despite our substantial indebtedness, we and our subsidiaries may still be able to incur additional debt. This could reduce our ability to satisfy our current obligations and further exacerbate the risks to our financial condition described above.

At September 30, 2017, we had $47.5 million outstanding under the Term Loan and $10.0 million outstanding under the Revolving Credit Facility. In addition, we and our subsidiaries may be able to incur significant additional indebtedness in the future, and we may do so, among other reasons, to fund acquisitions as part of our growth strategy. Although the Compass Credit Agreement contains restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and we could incur substantial additional indebtedness in compliance with these restrictions.

Repayment of our debt is dependent on cash flow generated by our subsidiaries.

We are a holding company and substantially all of our tangible assets are owned by our subsidiaries. As such, repayment of our indebtedness, to a certain degree, is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, loan, debt repayment or otherwise. Our subsidiaries may not be able, or be permitted, to make distributions or other payments to enable us to make

 

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payments in respect of our indebtedness. Each of our subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the terms of the Compass Credit Agreement limit the ability of certain of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments, these limitations are subject to important qualifications and exceptions. In the event that we do not receive distributions or other payments from our subsidiaries, we may be unable to make required payments on our indebtedness.

The Compass Credit Agreement restricts our ability and the ability of most of our subsidiaries to engage in some business and financial transactions.

The Compass Credit Agreement contains a number of covenants that limit our ability and the ability of our restricted subsidiaries to:

 

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incur additional indebtedness or guarantees;

 

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create liens on assets;

 

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change our or their fiscal year;

 

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enter into sale and leaseback transactions;

 

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enter into certain restrictive agreements;

 

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engage in mergers or consolidations;

 

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participate in partnerships and joint ventures;

 

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sell assets;

 

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incur additional liens;

 

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pay dividends or distributions and make other restricted payments;

 

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make investments, loans or advances;

 

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repay or amend terms of subordinated indebtedness;

 

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make certain acquisitions;

 

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enter into certain operating leases;

 

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enter into certain hedge transactions;

 

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amend material contracts; and

 

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engage in certain transactions with affiliates.

The Compass Credit Agreement also requires us to maintain a fixed charge coverage ratio and a consolidated leverage ratio, and contains certain customary representations and warranties, affirmative covenants and events of default (including, among others, an event of default upon a change of control). If an event of default occurs, the lenders under the Compass Credit Agreement will be entitled to take various actions, including the acceleration of amounts due thereunder and all actions permitted to be taken by a secured creditor. Our failure to comply with our obligations under the Compass Credit Agreement may result in an event of default under the Compass Credit Agreement. A default, if not cured or waived, may permit acceleration of our indebtedness. If our indebtedness is accelerated, we cannot be certain that we will have sufficient funds available to pay the accelerated indebtedness or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all.

We may need to raise additional capital in the future for working capital, capital expenditures and/or acquisitions, and we may not be able to do so on favorable terms or at all, which would impair our ability to operate our business or achieve our growth objectives.

Our ongoing ability to generate cash is important for the funding of our continuing operations, making acquisitions, investing in joint ventures and the servicing of our indebtedness. To the extent that existing cash balances and cash flow from operations, together with borrowing capacity under our existing credit facilities, are insufficient to

 

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make investments or acquisitions or provide needed working capital, we may require additional financing from other sources. Our ability to obtain such additional financing in the future will depend in part upon prevailing capital market conditions, as well as conditions in our business and our operating results, and those factors may affect our efforts to arrange additional financing on terms that are acceptable to us. Furthermore, if global economic, political or other market conditions adversely affect the financial institutions that provide credit to us, it is possible that our ability to draw upon our credit facilities may be impacted. If adequate funds are not available, or are not available on acceptable terms, we may not be able to make future investments, take advantage of acquisitions or other opportunities, or respond to competitive challenges, resulting in loss of market share, each of which could have a material adverse impact on our financial position, results of operations, cash flows and liquidity.

We may be unable to identify and contract with qualified Disadvantaged Business Enterprise contractors to perform as subcontractors.

Some of our contracts with governmental agencies contain minimum Disadvantaged Business Enterprise (“DBE”) participation clauses, which require us to maintain a requisite level of DBE participation. If we fail to obtain or maintain such requisite level of DBE participation, we could be held responsible for breach of contract. Such breach may result in the placement of restrictions on our ability to bid on future projects as well as monetary damages. To the extent we are responsible for monetary damages, the total costs of the project could exceed our original estimates, we could experience reduced profits or a loss for that project and there could be a material adverse impact to our financial position, results of operations, cash flows or liquidity.

Failure to maintain safe work sites could result in significant losses, which could materially affect our business and reputation.

Because our employees and others are often in close proximity with mechanized equipment, moving vehicles, chemical substances and dangerous manufacturing processes, and highly regulated materials, construction and maintenance sites are potentially dangerous workplaces. Therefore, safety is a primary focus of our business and is critical to our reputation and performance. Many of our clients require that we meet certain safety criteria to be eligible to bid on contracts, and some of our contract fees or profits are subject to satisfying safety criteria. Unsafe work conditions also can increase employee turnover, which increases project costs and therefore our overall operating costs. If we fail to implement safety procedures or implement ineffective safety procedures, our employees could be injured, and we could be exposed to investigations and possible litigation. Our failure to maintain adequate safety standards through our safety programs could also result in reduced profitability or the loss of projects or clients, and could have a material adverse impact on our financial position, results of operations, cash flows or liquidity.

In connection with mergers and acquisitions, we have recorded goodwill and other intangible assets that could become impaired and adversely affect our operating results. Assessing whether impairment has occurred requires us to make significant judgments and assumptions about the future, which are inherently subject to risks and uncertainties, and if actual events turn out to be materially less favorable than the judgments we make and the assumptions we use, we may be required to record impairment charges in the future.

We had $30.6 million of goodwill recorded on our balance sheet at September 30, 2017. We assess goodwill for impairment annually, or more often if required. Our assessments involve a number of estimates and assumptions that are inherently subjective, require significant judgment and regard highly uncertain matters that are subject to change. The use of different assumptions or estimates could materially affect the determination as to whether or not an impairment has occurred. In addition, if future events are less favorable than what we assumed or

 

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estimated in our impairment analysis, we may be required to record an impairment charge, which could have a material impact on our consolidated financial statements.

Our earnings are affected by the application of accounting standards and our critical accounting policies, which involve subjective judgments and estimates by our management. Our actual results could differ from the estimates and assumptions used to prepare our financial statements.

The accounting standards we use in preparing our financial statements are often complex and require that we make significant estimates and assumptions in interpreting and applying those standards. These estimates and assumptions affect the reported values of assets, liabilities, revenues and expenses, and the disclosure of contingent liabilities. We make critical estimates and assumptions involving accounting matters, including our goodwill impairment testing, percentage-of-completion revenue recognition, estimations regarding liability claims, estimated income taxes and how we account for our property, plant and equipment and inventory. These estimates and assumptions involve matters that are inherently uncertain and require our subjective and complex judgments. If we used different estimates and assumptions or used different ways to determine these estimates, our financial results could differ.

Our actual business and financial results could differ from our estimates of such results, which could have a material negative impact on our financial condition and reported results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.”

The percentage-of-completion method of accounting for contract revenues involves significant estimates that may result in material adjustments, which could result in a charge against our earnings.

We recognize contract revenues using the percentage-of-completion accounting method. Under this method, revenues are recognized as costs are incurred in an amount equal to cost plus the related expected profit based on the ratio of costs incurred to estimated final costs. Contract costs consist of direct costs on contracts, including labor, materials, amounts payable to subcontractors and those indirect costs related to contract performance, such as equipment costs, insurance and employee benefits. Contract cost is recorded as incurred, and revisions in contract revenues and cost estimates are reflected in the accounting period when known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. 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 costs and income and are recognized in the period in which the revisions are determined. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Estimated contract losses are recognized in full when determined. Total contract revenues and cost estimates are reviewed and revised at a minimum on a quarterly basis as the work progresses and as change orders are approved. Adjustments based upon the percentage-of-completion are reflected in contract revenues in the period when these estimates are revised. To the extent that these adjustments result in an increase or a reduction in or an elimination of previously reported contract profit, we recognize a credit or a charge against current earnings, as applicable. Such credits or charges could be material and could cause our results to fluctuate materially from period to period.

Accounting for our contract related revenues and costs, as well as other expenses, require management to make a variety of significant estimates and assumptions. Although we believe we have the experience and processes to enable us to formulate appropriate assumptions and produce reasonably dependable estimates, these assumptions and estimates may change significantly in the future and could result in the reversal of previously recognized revenues and profit. Such changes could have a material adverse effect on our financial position and results of operations.

 

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Risks Related to this Offering and Ownership of Our Class A Common Stock

The dual class structure of our common stock will have the effect of concentrating voting control with SunTx and its affiliates, which will limit or preclude your ability to influence corporate matters.

Our Class B common stock has              votes per share, and our Class A common stock, which is being sold in this offering, has one vote per share. Holders of our Class B common stock, including SunTx, its affiliates and certain other stockholders, will together hold approximately     % of the voting power of our outstanding common stock following the completion of this offering. Because of the      -to-one voting ratio between our Class B common stock and our Class A common stock, the holders of our Class B common stock will collectively continue to control a majority of the combined voting power of our common stock and therefore be able to control all matters submitted to our stockholders. This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future.

Future transfers of shares of our Class B common stock will generally result in those shares converting into shares of our Class A common stock, subject to limited exceptions, such as certain transfers to permitted transferees. See “Description of Our Capital Stock—Common Stock—Conversion and Restrictions on Transfer.” The conversion of shares of our Class B common stock into our Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of shares of our Class B common stock who retain their shares in the long-term. See “Description of Our Capital Stock—Common Stock—Voting Rights.”

We will incur increased costs as a result of being a public company, which may significantly affect our financial condition.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with our public company reporting requirements. We also anticipate that we will incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and the Dodd-Frank Act of 2010 and rules implemented by the Securities and Exchange Commission (the “SEC”). We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, particularly after we are no longer an “emerging growth company” (as defined in the JOBS Act). For example, as a result of becoming a publicly traded company, we are required to adopt policies regarding internal controls and disclosure controls and procedures, including the preparation of reports on internal control over financial reporting. We also expect these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

We estimate that we will incur approximately $2.5 million of incremental costs per year associated with being a publicly traded company. However, it is possible that our actual incremental costs of being a publicly traded company will be higher than we currently estimate. After we are no longer an emerging growth company, we expect to incur significant additional expenses and devote substantial management effort toward ensuring compliance with those requirements applicable to companies that are not emerging growth companies, including Section 404 of the Sarbanes-Oxley Act.

 

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For so long as we are an “emerging growth company” we will not be required to comply with certain disclosure requirements that are applicable to other public companies and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.

We are an “emerging growth company” (as defined in the JOBS Act) and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our Class A common stock less attractive because we will rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our Class A common stock price may be more volatile.

We will remain an emerging growth company until the earliest to occur of the last day of the fiscal year during which our total revenues equals or exceeds $1.07 billion, the last day of the fiscal year following the fifth anniversary of this offering, the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities and the date on which we are deemed to be a “large accelerated filer” under the Exchange Act of 1934, as amended (the “Exchange Act”).

We will be subject to certain requirements of Section 404 of the Sarbanes-Oxley Act. If we are unable to timely comply with such requirements or if the costs related to compliance are significant, our profitability, stock price, results of operations and financial condition could be materially adversely affected.

We will be required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act, which requires that we document and test our internal control over financial reporting and issue management’s assessment of our internal control over financial reporting. This section also requires that our independent registered public accounting firm opine on those internal controls upon becoming an accelerated filer, as defined in the SEC rules, or otherwise ceasing to qualify for an exemption from the requirement to provide auditors’ attestation on internal controls afforded to emerging growth companies under the JOBS Act. We are currently evaluating our existing controls against the standards adopted by the Committee of Sponsoring Organizations of the Treadway Commission. During the course of our ongoing evaluation and integration of the internal control over financial reporting, we may identify areas requiring improvement, and we may have to design enhanced processes and controls to address issues identified through this review.

We believe that the out-of-pocket costs, the diversion of management’s attention from running the day-to-day operations and operational changes caused by the need to comply with the requirements of Section 404 of the Sarbanes-Oxley Act could be significant. If the time and costs associated with such compliance exceed our current expectations and our results of operations could be adversely affected.

We cannot be certain at this time that we will be able to successfully complete the procedures, certification and attestation requirements of Section 404 of the Sarbanes-Oxley Act or that we or our auditors will not identify further material weaknesses in internal control over financial reporting. If we fail to comply with such requirements, or if at any time after becoming a public company, we or our auditors identify and report any material weaknesses, the accuracy and timeliness of the filing of our annual and quarterly reports may be materially adversely affected and could cause investors to lose confidence in our reported financial information, which could have a negative

 

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effect on the trading price of our Class A common stock. In addition, a material weakness in the effectiveness of our internal control over financial reporting could result in an increased chance of fraud and the loss of customers, reduce our ability to obtain financing, subject us to investigations by the SEC or other regulatory authorities and require additional expenditures to comply with these requirements, each of which could have a material adverse effect on our business, results of operations and financial condition.

We have identified material weaknesses in our internal control over financial reporting, and if we are unable to achieve and maintain effective internal control over financial reporting, investors could lose confidence in our financial statements and our Company which could have a material adverse effect on our business and our stock price.

In the course of preparing the financial statements that are included in this prospectus, our management has determined that we have material weaknesses in our internal control over financial reporting, which relate to the design and operation of our information technology general controls and overall closing and financial reporting processes, including our accounting for significant and unusual transactions. We have concluded that these material weaknesses in our internal control over financial reporting are due to the fact that, prior to this offering, we were a private company with limited resources and did not have the necessary business processes and related internal controls formally designed and implemented coupled with the appropriate resources with the appropriate level of experience and technical expertise to oversee our business processes and controls surrounding information technology general controls, our closing and financial reporting processes and to address the accounting and financial reporting requirements related to significant and unusual transactions.

In order to remediate these material weaknesses, we are taking the following actions: (i) we are actively seeking additional accounting and finance staff members and a senior accounting officer with public company reporting experience, to augment our current staff and to improve the effectiveness of our closing and financial reporting processes; and (ii) we have engaged a third party to assist us with formalizing our business processes, accounting policies and internal controls documentation and related internal controls and strengthening supervisory reviews by our management.

If we fail to fully remediate these material weaknesses or fail to maintain effective internal controls in the future, it could result in a material misstatement of our financial statements that would not be prevented or detected on a timely basis, which could cause investors to lose confidence in our financial information or cause our stock price to decline. Our independent registered public accounting firm has not assessed the effectiveness of our internal control over financial reporting and, under the JOBS Act, will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an emerging growth company, which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected.

There has been no public market for our Class A common stock and if the price of our Class A common stock fluctuates significantly, your investment could lose value.

Prior to this offering, there has been no public market for our Class A common stock. Although we intend to apply for listing of our Class A common stock on                 , we cannot guarantee that an active public market will develop for our Class A common stock or that our Class A common stock will trade in the public market subsequent to this offering at or above the initial public offering price. If an active public market for our Class A common stock does not develop, the trading price and liquidity of our Class A common stock will be materially and adversely affected. If there is a thin trading market or “float” for our Class A common stock, the market price for our Class A common stock may fluctuate significantly more than the stock market as a whole. Without a large float, our Class A common stock is less liquid than the securities of companies with broader public ownership and,

 

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as a result, the trading prices of our Class A common stock may be more volatile. In addition, in the absence of an active public trading market, investors may be unable to liquidate their investment in our Company. The initial offering price, which will be negotiated between us and the underwriters, may not be indicative of the trading price for our Class A common stock after this offering. In addition, the stock market is subject to significant price and volume fluctuations, and the price of our Class A common stock could fluctuate widely in response to several factors, including:

 

●

our quarterly or annual operating results;

 

●

changes in our earnings estimates;

 

●

investment recommendations by securities analysts following our business or our industry;

 

●

additions or departures of key personnel;

 

●

changes in the business, earnings estimates or market perceptions of our competitors;

 

●

our failure to achieve operating results consistent with securities analysts’ projections;

 

●

changes in industry, general market or economic conditions; and

 

●

announcements of legislative or regulatory change.

The stock market has experienced extreme price and volume fluctuations in recent years that have significantly affected the quoted prices of the securities of many companies, including companies in our industry. The changes often appear to occur without regard to specific operating performance. The price of our Class A common stock could fluctuate based upon factors that have little or nothing to do with our Company and these fluctuations could materially reduce the price for our Class A common stock.

Certain of our directors and senior management have limited experience managing public companies, which could adversely affect our financial position.

Certain members of our senior management and certain of our directors have not previously managed a publicly traded company and may be unsuccessful in doing so. The demands of managing a publicly traded company are significant, and some members of our senior management and some of our directors may not be able to meet these increased demands. Failure to effectively manage our business could adversely affect our overall financial position.

Future sales, or the perception of future sales, by us or our existing stockholders in the public market following the completion of this offering could cause the market price for our Class A common stock to decline.

After this offering, the sale of shares of our Class A common stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our Class A common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Upon the completion of this offering, we will have outstanding a total of              shares of our Class A common stock and              shares of our Class B common stock that are convertible by the holders thereof at any time into an equal number of shares of our Class A common stock. Of the outstanding shares, the              shares sold in this offering (or              shares if the underwriters’ option to purchase additional shares is exercised in full) will be freely tradable without restriction or further registration under the Securities Act, except that any shares held by our affiliates, as that term is defined under Rule 144 of the Securities Act (“Rule 144”), including our directors, executive officers and other affiliates (including affiliates of SunTx) may be sold only in compliance with the limitations described in “Shares Eligible for Future Sale.”

 

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The remaining              shares of our Class B common stock, representing     % of our total outstanding shares of our common stock following the completion of this offering, will be “restricted securities” within the meaning of Rule 144 and subject to certain restrictions on resale following the completion of this offering. Restricted securities may be sold in the public market only if they are registered under the Securities Act or are sold pursuant to an exemption from registration such as Rule 144. See “Shares Eligible for Future Sale.”

In connection with this offering, we, our directors and executive officers, the selling stockholder and substantially all holders of     % of our Class A and our Class B common stock prior to this offering have each agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of our or their common stock or securities convertible into or exchangeable for shares of such common stock during the period from the date hereof continuing through date that is 180 days after the date hereof, except with the prior written consent of the representatives of the underwriters. See “Underwriting.”

Upon the expiration of the lock-up agreements described above, the remaining              shares will be eligible for resale, of which              would be subject to volume, manner of sale and other limitations under Rule 144. In addition, pursuant to a registration rights agreement, SunTx and certain other stockholders have the right, subject to certain conditions, to require us to register the sale of their shares of our Class A common stock under the Securities Act. By exercising their registration rights and selling a large number of shares, these stockholders could cause the prevailing market price of our Class A common stock to decline. Following completion of this offering, the shares covered by registration rights would represent approximately     % of our total common stock outstanding (or     %, if the underwriters’ option to purchase additional shares is exercised in full). Registration of any of these outstanding shares of our Class A common stock would result in such shares becoming freely tradable without compliance with Rule 144 upon effectiveness of the registration statement. See “Shares Eligible for Future Sale.”

As restrictions on resale end or if these stockholders exercise their registration rights, the market price of the shares of our Class A common stock could drop significantly if the holders of these shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our Class A common stock or other securities.

In the future, we may also issue our securities in connection with investments or acquisitions. The number of shares of our Class A common stock issued in connection with an investment or acquisition could constitute a material portion of the then-outstanding shares of our Class A common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you.

The underwriters of this offering may waive or release parties to the lock-up agreements entered into in connection with this offering, which could adversely affect the price of our Class A common stock.

Our stockholders, directors and executive officers have entered into lock-up agreements with respect to their equity securities of the Company. As restrictions on resale end, the market price of our stock could decline if the holders of restricted shares sell them or are perceived by the market as intending to sell them. The underwriters, at any time and without notice, may release all or any portion of the equity securities subject to the foregoing lock-up agreements entered into in connection with this offering. If the restrictions under the lock-up agreements are waived, our Class A common stock will be available for sale into the market, which could reduce the market value for our Class A common stock.

Affiliates of SunTx control us and their interests may conflict with ours or yours in the future.

Immediately following the completion of this offering of our Class A common stock, affiliates of SunTx will beneficially own     % of our Class A common stock and     % of our Class B common stock and, consequently,

 

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    % of the combined voting power of our common stock. Each share of our Class B common stock will have              votes per share, and our Class A common stock, which is the stock being sold in this offering, will have one vote per share. As a result, affiliates of SunTx will have the ability to elect all of the members of our board of directors and thereby control our policies and operations, including the appointment of management, future issuances of our Class A common stock or other securities, the payment of dividends, if any, on our Class A common stock, the incurrence of debt by us, amendments to our amended and restated certificate of incorporation and amended and restated bylaws, and the entering into of extraordinary transactions. This concentration of voting control could deprive you of an opportunity to receive a premium for your shares of our Class A common stock as part of a sale of our Company and ultimately might affect the market price of our Class A common stock. In addition we have engaged, and expect to continue to engage, in related party transactions involving SunTx and certain companies they control. As a result, the interests of affiliates of SunTx may not in all cases be aligned with your interests. See “Certain Relationships and Related Party Transactions.”

In addition, SunTx may have an interest in pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment, even though such transactions might involve risks to you. For example, SunTx could cause us to make acquisitions that increase our indebtedness or cause us to sell revenue-generating assets. SunTx is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Our amended and restated certificate of incorporation will provide that none of SunTx, any of its affiliates or any director who is not employed by us or his or her affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. SunTx also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

So long as SunTx and its affiliates continue to beneficially own a sufficient number of shares of our Class A common stock and our Class B common stock, even if they own significantly less than 50% of the shares of our outstanding Class A common stock, they will continue to be able to effectively control our decisions. For example, if our Class B common stock amounted to 15% of our outstanding common stock, holders of our Class B common stock (including SunTx and its affiliates) would collectively control              approximately     % of the voting power of our common stock. Shares of our Class B common stock may be transferred to an unrelated third party if a majority of the shares of our Class B common stock held by SunTx and its affiliates have consented to such transfer in writing in advance.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our Class A common stock or if our operating results do not meet their expectations, the price of our Class A common stock could decline.

The trading market for our Class A common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our Company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause the price or trading volume of our Class A common stock to decline. Moreover, if one or more of the analysts who cover our Company downgrades our Class A common stock or if our operating results do not meet their expectations, the price of our Class A common stock could decline.

Purchasers in this offering will experience immediate dilution.

The initial public offering price is substantially higher than the pro forma net tangible book value per share of our outstanding common stock. As a result, you will experience immediate and substantial dilution of approximately

 

33

$        per share of our Class A common stock, representing the difference between our net tangible book value per share of our Class A common stock at September 30, 2017, after giving effect to this offering, and an assumed initial public offering price of $              (the midpoint of the range set forth on the cover of this prospectus). A $1.00 increase (decrease) in the assumed initial public offering price of $        per share of our Class A common stock (the midpoint of the range set forth on the cover of this prospectus) would increase (decrease) our net tangible book value per share of our Class A common stock after giving effect to this offering by $        million, and increase (decrease) the dilution to new investors by $        , assuming the number of shares of our Class A common stock offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offered expenses payable by us. See “Dilution.”

We may issue preferred stock with terms that could adversely affect the voting power or value of our Class A common stock.

Our amended and restated certificate of incorporation will authorize us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over our Class A common stock respecting dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our Class A common stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affect the residual value of our Class A common stock.

Provisions in our amended and restated certificate of incorporation and bylaws and Delaware law make it more difficult to effect a change in control of our Company, which could adversely affect the price of our Class A common stock.

Certain provisions in our amended and restated certificate of incorporation and bylaws and Delaware corporate law could delay or prevent a change in control of our Company, even if that change would be beneficial to our stockholders. Our amended and restated certificate of incorporation and bylaws will contain provisions that may make acquiring control of our Company difficult, including:

 

●

a dual class common stock structure, which currently provides SunTx and its affiliates and the other holders of our Class B common stock with the ability to control the outcome of matters requiring stockholder approval, so long as they continue to beneficially own a sufficient number of shares of our Class B common stock, even if they own significantly less than 50% of the shares of our outstanding common stock;

 

●

provisions regulating the ability of our stockholders to nominate directors for election or to bring matters for action at annual meetings of our stockholders;

 

●

limitations on the ability of our stockholders to call a special meeting and act by written consent;

 

●

the ability of our board of directors to adopt, amend or repeal bylaws, and the requirement that the affirmative vote of holders representing at least 66 2/3% of the voting power of all outstanding shares of capital stock be obtained for stockholders to amend our bylaws;

 

●

the requirement that the affirmative vote of holders representing at least 66 2/3% of the voting power of all outstanding shares of capital stock be obtained to remove directors;

 

●

the requirement that the affirmative vote of holders representing at least 66 2/3% of the voting power of all outstanding shares of capital stock be obtained to amend our amended and restated certificate of incorporation; and

 

●

the authorization given to our board of directors to issue and set the terms of preferred stock without the approval of our stockholders.

 

34

These provisions also could discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. As a result, these provisions could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders, which may limit the price that investors are willing to pay in the future for shares of our Class A common stock.

Our amended and restated certificate of incorporation designates courts in the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our amended and restated certificate of incorporation provides that, subject to limited exceptions, a state court located within the State of Delaware is the sole and exclusive forum for:

 

●

any derivative action or proceeding brought on our behalf;

 

●

any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders;

 

●

any action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law (the “DGCL”); or

 

●

any action asserting a claim against us that is governed by the internal affairs doctrine.

In addition, our amended and restated certificate of incorporation provides that if any action specified above (each is referred to herein as a covered proceeding), is filed in a court other than a court located within the State of Delaware (each is referred to herein as a foreign action), the claiming party will be deemed to have consented to (i) the personal jurisdiction of state and federal courts located within the State of Delaware in connection with any action brought in any such court to enforce the exclusive forum provision described above and (ii) having service of process made upon such claiming party in any such enforcement action by service upon such claiming party’s counsel in the foreign action as agent for such claiming party.

These provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the covered proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

Since we will be a “controlled company” for purposes of the corporate governance requirements of applicable stock exchange rules and the rules of the SEC, our stockholders will not have, and may never have, the protections that these corporate governance requirements are intended to provide.

After completion of this offering, SunTx and its affiliates will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the rules of and the SEC. As a result, we will not be required to comply with the provisions requiring that a majority of our directors be independent, the compensation of our executives be determined by independent directors or nominees for election to our board of directors be selected by independent directors. Because we intend to take advantage of some or all of these exemptions, our stockholders may not have the protections that these rules are intended to provide. Our status as a controlled company could cause our Class A common stock to look less attractive to certain investors or otherwise harm our trading price.

 

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We do not intend to pay cash dividends on our Class A common stock in the foreseeable future, and therefore only appreciation, if any, of the price of our Class A common stock will provide a return to our stockholders.

We currently anticipate that we will retain all future earnings, if any, to finance the growth and development of our business. We do not intend to pay cash dividends on our Class A common stock in the foreseeable future. Any future determination as to the declaration and payment of cash dividends will be at the discretion of our board of directors and will depend upon our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors deemed relevant by our board of directors. In addition, the terms of the Compass Credit Agreement restricts our ability to pay cash dividends. As a result, only appreciation of the price of our Class A common stock, which may not occur, will provide a return to our stockholders.

 

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USE OF PROCEEDS

We estimate that our net proceeds from this offering, after deducting estimated underwriting discounts and commissions and approximately $        million of estimated offering expenses payable by us, will be $        million, assuming an initial public offering price of $        per share (the midpoint of the range set forth on the cover of this prospectus). We will not receive any proceeds from the sale of shares by the selling stockholders. We intend to use these net proceeds to provide growth capital, to fund acquisitions and for general corporate purposes, which may include the repayment of debt from time to time.

At September 30, 2017, we had total borrowings of $47.5 million outstanding under the Term Loan and $10.0 million outstanding under the Revolving Credit Facility with an interest rate of 3.235% on outstanding borrowings.

A $1.00 increase or decrease in the assumed initial public offering price per share of our Class A common stock would cause our net proceeds from this offering to increase or decrease by approximately $        million, assuming the number of shares of our Class A common stock offered by us remains the same and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us.

 

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DIVIDEND POLICY

On December 21, 2016, our board of directors declared a cash dividend of approximately $31.3 million, or $19.00 per share of our common stock, to the holders of shares of record at December 15, 2016. The cash dividend was paid on January 10, 2017.

We intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate declaring or paying any cash dividends in the foreseeable future. Any future determination as to the declaration and payment of dividends will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors that our board of directors considers relevant. In addition, the terms of the Compass Credit Agreement restrict our ability to pay cash dividends to the holders of our common stock unless, after giving effect to such dividend, we would be in compliance with the financial covenants and, at the time any such dividend is made, no default or event of default exists or would result from the payment of such dividend.

 

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CAPITALIZATION

The following table sets forth our cash and capitalization at September 30, 2017:

 

●

on an actual basis;

 

●

on a pro forma basis, to reflect the Reclassification, including: (i) the filing and effectiveness of our amended and restated certificate of incorporation; (ii) the classification of all              shares of our common stock into              shares of our Class B common stock; and (iii) the authorization of our class A common stock; and

 

●

on a pro forma as adjusted basis, to give further effect to: (i) the sale of              shares of our Class A common stock by us in this offering at an assumed initial public offering price of $        per share (the midpoint of the range set forth on the cover of this prospectus) and our receipt of an estimated $        million of net proceeds from this offering after deducting estimated underwriting discounts and commissions and offering expenses payable by us; and (ii) the reclassification of                  shares of our Class B common stock to a like amount of our Class A common stock upon the sale of such shares by the selling stockholders in this offering.

You should read the following table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes thereto included elsewhere in this prospectus.

 

		At September 30, 2017
		Actual					Pro Forma					Pro Forma  As Adjusted(1)
(in thousands except per share data)		(unaudited)
Cash			$	27,547				$					$
Long-term debt (including current maturities)(2)			$	57,136				$					$
Stockholders’ equity:
Preferred Stock, par value $0.001; 1,000,000 shares authorized and no shares issued and outstanding, actual;                  shares authorized and no shares issued and outstanding, pro forma and pro forma as adjusted				—					—
Common Stock, par value $0.001; 5,000,000 shares authorized, 1,785,221 shares issued and 1,654,426 shares outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted				2					—
Class A Common Stock, par value $0.001; no shares authorized, issued and outstanding, actual and pro forma;              shares authorized and              shares issued and outstanding, pro forma as adjusted				—					—
Class B Common stock, par value $0.001; no shares authorized, issued and outstanding, actual;                  shares authorized and              shares issued and outstanding, pro forma;              shares authorized and              shares issued and outstanding, pro forma as adjusted				—
Additional paid-in capital				142,428
Treasury stock, at cost				(11,983	)
Retained earnings				21,734
Total stockholders’ equity				152,181
Total capitalization			$	236,864				$					$

 

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(1)

A $1.00 increase or decrease in the assumed initial public offering price per share of our Class A common stock would increase or decrease each of cash, additional paid-in-capital and total capitalization by approximately $        million, assuming the number of shares of our Class A common stock offered by us remains the same and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. The pro forma as adjusted information is illustrative only, and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

 

(2)

Represents borrowings outstanding under the Compass Credit Agreement. At September 30, 2017, we had total borrowings of $47.5 million outstanding under the Term Loan and $10.0 million outstanding under the Revolving Credit Facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Compass Credit Agreement.”

If the underwriters exercise their option to purchase additional shares of our Class A common stock from the selling stockholders in full, pro forma as adjusted cash, total stockholders’ equity, total capitalization, and shares of Class A and Class B common stock outstanding at September 30, 2017 would be $        million, $        million, $        million,                  and             , respectively.

 

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DILUTION

Dilution is the amount by which the offering price paid by purchasers of our Class A common stock sold in this offering will exceed the pro forma as adjusted net tangible book value per share of our common stock after the completion of this offering. Our pro forma net tangible book value at September 30, 2017 was $        million, or $        per share. Pro forma net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of outstanding shares of our Class A and Class B common stock, after giving effect to the Reclassification, pursuant to which all                  shares of our common stock will be reclassified into              shares of our Class B common stock and the authorization of our Class A common stock.

After giving effect to (i) the sale of                  shares of our Class A common stock by us in this offering at an assumed initial public offering price of $        per share (the midpoint of the range set forth on the cover of this prospectus) and our receipt of an estimated $        million of net proceeds from this offering after deducting estimated underwriting discounts and commissions and offering expenses payable by us and (ii) the reclassification of                  shares of our Class B common stock to a like amount of our Class A common stock upon the sale of such shares by the selling stockholders in this offering, our pro forma as adjusted net tangible book value at September 30, 2017, would have been $        million, or $        per share. This represents an immediate increase in net tangible book value of $        per share of our common stock to our existing stockholders and an immediate dilution of $        per share to purchasers of our Class A common stock in this offering.

The following table illustrates the per share dilution:

 

Assumed initial public offering price per share of Class A common stock								$
Pro forma net tangible book value per share at September 30, 2017			$
Increase in pro forma net tangible book value per share attributable to new investors in this offering			$
Pro forma as adjusted net tangible book value per share after this offering								$
Dilution in net tangible book value per share to new investors in this offering								$

A $1.00 increase or decrease in the assumed initial public offering price per share of our Class A common stock would increase or decrease our pro forma as adjusted net tangible book value after the completion of this offering by approximately $        , and increase or decrease the dilution to purchasers in this offering by approximately $        , assuming the number of shares of our Class A common stock offered by us remains the same and after deducting estimated underwriting discounts and commissions and offering expenses payable by us.

If the underwriters exercise their option to purchase additional shares of our Class A common stock from the selling stockholders in full, the number of shares held by purchasers of our Class A common stock in this offering will be increased to                 , or approximately     % of the total number of shares of our Class A common stock. The exercise of such option will not impact the pro forma as adjusted net tangible book value or the dilution to purchaser in this offering, because the selling stockholders will be providing such shares and we will not receive any proceeds from such sale.

The following table summarizes, at September 30, 2017, on the pro forma as adjusted basis described above, the difference between the total cash consideration paid and the average price per share paid by existing stockholders and the purchasers of our Class A common stock in this offering with respect to the number of shares of our

 

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Class A common stock purchased from us, before deducting estimated underwriting discounts and commissions and offering expenses payable by us.

 

		Shares Purchased										Total Consideration										Average Price Per Share
		Number					Percent					Amount					Percent
Existing stockholders										%			$							%			$
Purchasers of Class A common stock in this offering										%										%
Total									100.0	%			$						100.0	%			$

 

The total number of shares of our common stock reflected in the discussion and tables above is based on no shares of our Class A common stock and                  shares of our Class B common stock outstanding at September 30, 2017, and excludes:

 

●

shares of common stock issuable upon the exercise of outstanding non-plan stock options at September 30, 2017 (there were no options outstanding under the Construction Partners, Inc. 2016 Equity Incentive Plan as of September 30, 2017) with a weighted-average exercise price of $        per share, which after giving effect to the Reclassification, the shares issuable upon exercise of such stock options shall automatically become                  shares of our Class B common stock, with a weighted-average exercise price of $        per share;

 

●

shares of our Class A common stock reserved for future issuance under the Construction Partners, Inc. 2018 Equity Incentive Plan, which will become effective prior to the completion of this offering, including any reversion of shares to the available pool of shares reserved for issuance under such plan upon the expiration, forfeiture or cash settlement of awards without the actual delivery of shares of our Class A common stock.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following tables present our selected historical consolidated financial data for the periods and at the dates indicated. The statement of operations data for the years ended September 30, 2016 and 2017 and the balance sheet data at September 30, 2016 and 2017 are derived from our audited consolidated financial statements and the notes thereto included elsewhere in this prospectus.

Historical results are not necessarily indicative of the results we expect in future periods. The data presented below should be read in conjunction with, and are qualified in their entirety by reference to, “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes thereto included elsewhere in this prospectus.

 

		For the Years Ended September 30,
		2016					2017
(in thousands except share and per share data)
Statement of Income Data:
Revenues			$	542,347				$	568,212
Cost of revenues				467,464					477,241
Gross profit				74,883					90,971
General and administrative expenses				(40,428	)				(47,867	)
Gain on sale of equipment, net				2,997					3,481
Operating income				37,452					46,585
Interest expense, net				(4,662	)				(3,960	)
Loss on extinguishment of debt				—					(1,638	)
Other expense				(227	)				(205	)
Income before provision for income taxes				32,563					40,782
Provision for income taxes				10,541					14,742
Net income			$	22,022				$	26,040
Net income per share attributable to common stockholders:
Basic and diluted			$	12.90				$	15.79
Weighted average number of common shares outstanding:
Basic and diluted				1,706,711					1,648,821
Other Financial Data:
Adjusted EBITDA(1)			$	58,972				$	67,965
Revenues			$	542,347				$	568,212
Adjusted EBITDA Margin(1)				10.9	%				12.0	%
Statement of Cash Flows Data:
Net cash provided by operating activities			$	51,694				$	46,927
Net cash used in investing activities				(19,005	)				(30,686	)
Net cash used in financing activities				(20,881	)				(39,779	)

 

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		At September 30,
		2016					2017
(in thousands)
Balance Sheet Data:
Cash			$	51,085				$	27,547
Total assets				318,282					328,550
Current and non-current portions of debt, net of debt issuance cost				60,962					57,136
Total equity				156,283					152,181

 

(1)

Adjusted EBITDA represents net income before interest expense, net, provision for income taxes, depreciation, depletion and amortization, equity-based compensation expense, and loss on extinguishment of debt. 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 should not be considered 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 they are measures frequently used by securities analysts, investors and other parties to evaluate companies in our industry. These measures have limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP.

Our calculation of Adjusted EBITDA and Adjusted EBITDA Margin may not be comparable to similarly named measures reported by other companies. Potential differences between our measure of Adjusted EBITDA compared to other similar companies’ measures of Adjusted EBITDA 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 each of the periods presented.

 

		For the Years Ended September 30,
		2016					2017
(in thousands)
Net income			$	22,022				$	26,040
Interest expense, net				4,662					3,960
Provision for income taxes				10,541					14,742
Depreciation, depletion and amortization				21,530					21,072
Equity-based compensation expense				217					513
Loss on extinguishment of debt				—					1,638
Adjusted EBITDA			$	58,972				$	67,965
Revenues			$	542,347				$	568,212
Adjusted EBITDA Margin				10.9	%				12.0	%

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of 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 result of various factors, including those set forth in “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.” This discussion should be read in conjunction with “Prospectus Summary—Summary Consolidated Historical Financial Data,” “Selected Historical Consolidated Financial Data” and our audited consolidated financial statements and the notes thereto included elsewhere in this prospectus. In this discussion, we use certain non-GAAP financial measures. Explanation of these non-GAAP financial measures and reconciliation to the most directly comparable GAAP financial measures are included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations as well as “Prospectus Summary—Summary Historical Consolidated Financial Data.” Investors should not consider non-GAAP financial measures in isolation or as substitutes for financial information presented in compliance with GAAP.

Overview

We are one of the fastest growing civil infrastructure companies in the United States specializing 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.

Public infrastructure projects are funded by federal, state and local governments and include projects for roads, highways, bridges, airports and other infrastructure projects. Public transportation infrastructure projects historically have been a relatively stable portion of state and federal budgets, and represent a significant share of the U.S. 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 they receive. Federal highway spending uses funds predominantly from the Federal 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.

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 sites. Our projects represent a mix of federal, state, municipal and private customers. We also derive revenues from the sale of HMA and aggregates to customers. Revenues derived from projects are recognized on the percentage-of-completion basis, measured by the relationship of total cost incurred to total estimated contract costs (cost-to-cost method). Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to estimated costs and income, and are recognized in the period in which the revisions are determined. Revenues derived from the sale of materials are recognized when risks associated with ownership have passed to the customer.

 

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Gross Profit

Gross profit includes revenues less cost of revenues. Cost of revenues consists of all direct and indirect costs on construction contracts, including raw materials, labor, equipment costs, depreciation, lease expenses, subcontract costs and other expenses at our HMA plants and aggregate mining facilities. 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 include provisions that provide for price adjustments based on fluctuations in certain commodity related products 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. Quarry reserves are depleted as aggregate is extracted, based on the initial allocation of cost to the aggregate reserves. Our intangible assets were recognized as result of certain acquisitions and are generally amortized on a straight-line basis over the estimated useful lives of the assets.

General and Administrative Expenses

General and administrative expenses 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 current operating needs.

Other Key Performance Indicators

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA represents net income before interest expense, net, provision for income taxes, depreciation, depletion and amortization, equity-based compensation expense and loss on extinguishment of debt. Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of revenues for each period. These metrics are

 

46

supplemental measures of our operating performance that are neither required by, nor presented in accordance with, GAAP. These measures should not be considered 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 as management uses these measures as key performance indicators, and we believe they are measures frequently used by securities analysts, investors and other parties to evaluate companies in our industry. These measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP.

Our calculation of Adjusted EBITDA and Adjusted EBITDA Margin may not be comparable to similarly named measures reported by other companies. Potential differences between our measure of Adjusted EBITDA compared to other similar companies’ measures of Adjusted EBITDA 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 each of the periods presented.

 

		For the Years Ended September 30,
		2016					2017
(in thousands)
Net income			$	22,022				$	26,040
Interest expense, net				4,662					3,960
Provision for income taxes				10,541					14,742
Depreciation, depletion and amortization				21,530					21,072
Equity-based compensation expense				217					513
Loss on extinguishment of debt				—					1,638
Adjusted EBITDA			$	58,972				$	67,965
Revenues			$	542,347				$	568,212
Adjusted EBITDA Margin				10.9	%				12.0	%

 

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Results of Operations

Fiscal Year Ended September 30, 2016 Compared to Fiscal Year Ended September 30, 2017

The following table sets forth selected financial data for the fiscal years ended September 30, 2016 and 2017:

 

		For the Years Ended September 30,																				Change from Fiscal Year 2016 to Fiscal Year 2017
		2016										2017
		Dollars					% of Revenues					Dollars					% of Revenues					$ Change					% Change
(in thousands)
Revenues			$	542,347					100.0				$	568,212					100.0				$	25,865					4.8
Cost of revenues				467,464					86.2					477,241					84.0					9,777					2.1
Gross profit				74,883					13.8					90,971					16.0					16,088					21.5
General and administrative expenses				(40,428	)				(7.5	)				(47,867	)				(8.4	)				(7,439	)				18.4
Gain on sale of equipment, net				2,997					0.6					3,481					0.6					484					16.1
Operating income				37,452					6.9					46,585					8.2					9,133					24.4
Interest expense, net				(4,662	)				0.9					(3,960	)				(0.7	)				702					(15.1	)
Loss on extinguishment of debt				—					—					(1,638	)				(0.3	)				(1,638	)				—
Other expense				(227	)				—					(205	)				—					22					(9.7	)
Income before provision for income taxes				32,563					6.0					40,782					7.2					8,219					25.2
Provision for income taxes				10,541					1.9					14,742					2.6					4,201					39.9
Net income			$	22,022					4.1				$	26,040					4.6				$	4,018					18.2
Adjusted EBITDA			$	58,972					10.9				$	67,965					12.0				$	8,993					15.2

Revenues. Revenues for the year ended September 30, 2017 increased $25.9 million, or 4.8%, to $568.2 million from $542.3 million for the year ended September 30, 2016. The increase in revenues was primarily due to our strong contract backlog and an increasing opportunity to bid both public and private projects in most of our markets. Increased funding in the public sector as well as a strong economy have resulted in more project bidding opportunities, leading to an increase in projects awarded. These increases were partially offset by adverse weather conditions primarily during the third quarter of our fiscal year, which prevented us from completing work scheduled during this period. However, these projects remain in our contract backlog and are expected to be completed during future periods. As a result of these factors, our contract backlog increased from $364.1 million at September 30, 2016 to $549.9 million at September 30, 2017.

Gross Profit. Gross profit for the year ended September 30, 2017 increased $16.1 million, or 21.5%, to $91.0 from $74.9 million for the year ended September 30, 2016. The increase in gross profit was a result of increased revenues, as discussed above, coupled with an improvement in our gross profit margin, driven by improvements in our cost of revenues. As a percentage of revenues, cost of revenues decreased to 84.0% for the year ended September 30, 2017 from 86.2% for the year ended September 30, 2016. This improvement was a result of completing projects that were in process at September 30, 2016 more efficiently, thereby resulting in lower cost than reflected in our estimates at September 30, 2016. In addition, other projects in our contract backlog were executed more efficiently during the year ended September 30, 2017 than comparable projects completed during the year ended September 30, 2016 due to more timely access to project cost metrics provided by improvements in our information technology, and to additions during the year ended September 30, 2017 to our operational management teams as part of our operating improvement initiatives.

 

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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. General and administrative expenses for the year ended September 30, 2017 increased $7.4 million, or 18.4%, to $47.9 million for the year ended September 30, 2017 from $40.4 million for the year ended September 30, 2016. The increase in general and administrative expenses for the year ended September 30, 2017 is attributable to a $4.9 million increase in payroll and benefit costs associated primarily with additional management personnel to support additional organic growth and operating improvement initiatives, a $1.0 million increase in travel and professional expenses and a $0.5 million increase in expenses to enhance our information technology platforms, as well as increases in other general expenses to support our growth. We expect general and administrative expenses to continue to increase in fiscal 2018 as a result of increased regulatory and public entity reporting requirements.

Interest Expense, Net. Interest expense, net for the year ended September 30, 2017 decreased $0.7 million, or 15.1%, to $4.0 million compared to $4.7 million for the year ended September 30, 2016. The decrease in interest expense, net was due to a decrease in the average principal outstanding of $60.4 million during the year ended September 30, 2017 compared to $67.9 million during the year ended September 30, 2016, and a lower amortization of deferred debt issuance costs of $0.7 million compared to $0.9 million during the same periods. This reduction in principal was partially offset by rising interest rates on our credit facilities with variable interest rates prior to the refinancing on June 30, 2017. Our CIT Credit Facility (as defined below) in place during the year ended September 30, 2016 and the first nine months of the year ended September 30, 2017 was a variable rate facility based on the three-month LIBOR plus 3.5%. “CIT Credit Facility” refers to the credit agreement that we entered into on December 12, 2014 with a consortium of six financial institutions represented by CIT Finance LLC, which provided for a $76.0 million facility consisting of a $49.0 million term loan and capacity for additional borrowings of $27.0 million to finance future purchases of certain fixed assets. During the first nine months of the year ended September 30, 2017, increases in the three-month LIBOR compared to rates during the year ended September 30, 2016 resulted in increased interest expense incurred on outstanding balances under the CIT Credit Facility. On June 30, 2017, we refinanced all of our outstanding debt under the CIT Credit Facility with proceeds from the Compass Credit Agreement. This facility is a variable rate facility based on the one-month LIBOR plus 2.0%, thereby reducing our interest costs during the last three months of the year ended September 30, 2017. This facility also replaced some higher fixed rate facilities. To hedge against future changes in variable interest rates of the Compass Credit Agreement, we entered into an amortizing $25.0 million interest rate swap agreement tied to of the Term Loan.

Loss on Extinguishment of Debt. Loss on extinguishment of debt for the year ended September 30, 2017 was $1.6 million compared to $0 for the year ended September 30, 2016, which is the result of the unamortized deferred debt issuance costs of $1.6 million related to the CIT Credit Facility and other debt refinanced at June 30, 2017 that was expensed as a loss on extinguishment of debt.

Provision for Income Taxes. Our effective tax rate increased to 36.1% for the year ended September 30, 2017 from 32.4% for the year ended September 30, 2016. Our lower effective tax rate for the year ended September 30, 2016 was primarily due to the $2.1 million reversal of a state tax valuation allowance during the year. In addition, our taxable income for the year ended September 30, 2017 was subject to the maximum U. S. statutory income tax rate of 35.0%, compared to 34.0% for the year ended September 30, 2016.

Net Income. Net income increased $4.0 million, or 18.2%, to $26.0 million for the year ended September 30, 2017 compared to $22.0 million for the year ended September 30, 2016. This increase in net income was a result of increased gross profit, partially offset by the increase in general and administrative expenses and the higher effective income tax rate, all as described above, and a $1.6 million loss on extinguishment of debt related to the June 30, 2017 debt refinancing.

 

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Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA Margin were $68.0 million and 12.0%, respectively, for the year ended September 30, 2017, as compared to $59.0 million and 10.9%, respectively, for the year ended September 30, 2016. The increase in Adjusted EBITDA and Adjusted EBITDA Margin was the result of increased gross profit, offset by the increase in general and administrative expenses discussed above. See the description of Adjusted EBITDA and Adjusted EBITDA Margin, as well as a reconciliation of Adjusted EBITDA to net income under “How we Assess Performance of Our Business”.

Liquidity and Capital Resources

Cash Flow Analysis

The following table sets forth our cash flows for the periods indicated.

 

		For the Years Ended September  30,
		2016					2017
(in thousands)
Net cash provided by operating activities			$	51,694				$	46,927
Net cash used in investing activities				(19,005	)				(30,686	)
Net cash used in financing activities				(20,881	)				(39,779	)
Net change in cash			$	11,808				$	(23,538	)

Operating Activities

Cash provided by operating activities was $46.9 million for the year ended September 30, 2017, a decrease of $4.8 million compared to $51.7 million for the year ended September 30, 2016. The decrease was primarily due to a $10.0 million change in the income taxes paid during the year ended September 30, 2017 compared to the year ended September 30, 2016, partially offset by a $4.0 million increase in net income. This decrease in cash provided by operating activities also included other changes in operating assets and liabilities. These other changes are associated with fluctuations resulting from the timing of cycles associated with performing and closing projects. Our working capital results from both public and private sector projects. Customers in the private sector can be slower in paying and those contracts often contain retention provisions that allow the customer to withhold a percentage of the revenues earned until the completion of the project.

Investing Activities

Cash used in investing activities was $30.7 million for the year ended September 30, 2017 compared to $19.0 million for the year ended September 30, 2016. The increase was primarily due to $10.8 million being used in the acquisition of a business during the year ended September 30, 2017.

Financing Activities

Cash used in financing activities was $39.8 million for the year ended September 30, 2017 compared to $20.9 million for the year ended September 30, 2016. The increase was primarily due to the payment of a $31.3 million dividend during the year ended September 30, 2017. The increase was partially offset by a net repayment under our credit facilities of $6.1 million during the year ended September 30, 2017 compared to net repayments of $18.1 million during the year ended September 30, 2016.

 

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Compass Credit Agreement

On June 30, 2017, Construction Partners Holdings, our wholly owned subsidiary, entered into the Compass Credit Agreement with Compass Bank, as agent (the “Agent”), sole lead arranger and sole bookrunner. The Compass Credit Agreement provides for the Term Loan of $50.0 million and the Revolving Credit Facility of up to $30.0 million, which, when amended on November 14, 2017, added the Company as a guarantor. The principal amount of the Term Loan must be paid in quarterly installments of $2.5 million. All amounts borrowed under the Compass Credit Agreement are scheduled to mature on July 1, 2022.

Construction Partners Holdings’ obligations under the Compass Credit Agreement are guaranteed by the Company and all of Construction Partners Holdings’ direct and indirect subsidiaries as of and after June 30, 2017 and are secured by first priority security interests in substantially all of the Company’s assets.

Under the Compass Credit Agreement, borrowings can be designated as base rate loans or Euro-Dollar Loans. The interest rate on the base rate loans fluctuates and is equal to (i) the highest of: (a) the rate of interest in effect for such day as publicly announced from time to time by the Agent as its “prime rate,” (b) the federal funds rate plus 0.50% and (c) the quotient of the London interbank offered rate for deposits in U.S. dollars as obtained from Reuter’s, Bloomberg or another commercially available source designated by the Agent two Euro-Dollar Business Days (as defined in the Compass Credit Agreement) before the first day of the applicable interest period (“LIBOR”) divided by 1.00 minus the Euro-Dollar Reserve Percentage (as defined in the Compass Credit Agreement) plus 1.0% for a one-month interest period, plus (ii) the applicable rate, which ranges from 2.0% to 2.25%. The interest rate for Euro-Dollar loans fluctuates and is equal to the sum of the applicable rate, which ranges from 2.0% to 2.25%, plus LIBOR for the interest period selected by the Agent.

At September 30, 2017, the interest rate on outstanding borrowings under the Term Loan and Revolving Credit Facility was 3.235%. At September 30, 2017, we had availability of $20.0 million under the Revolving Credit Facility. In order to hedge against changes in interest rates, on June 30, 2017, we entered into an amortizing $25.0 million interest rate swap agreement applicable to outstanding debt under the Term Loan, under which we pay a fixed percentage rate of 2.015% and receive a credit based on the applicable LIBOR rate. At September 30, 2017, the notional value of this interest rate swap agreement was $23.75 million and the fair value was ($0.2) million, which is included within other liabilities on the Consolidated Balance Sheet.

We must pay a commitment fee of 0.35% per annum on the aggregate unused revolving commitments under the Compass Credit Agreement. We also must pay fees with respect to any letters of credit issued under the Compass Credit Agreement.

The Compass Credit Agreement contains usual and customary negative covenants for agreements of this type, including, but not limited to, restrictions on our ability to make acquisitions, make loans or advances, make capital expenditures and investments, create or incur indebtedness, create liens, wind up or dissolve, consolidate, merge or liquidate, or sell, transfer or dispose of assets. The Compass Credit Agreement also 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 2.00 to 1.00, subject to certain adjustments as further described in the Compass Credit Agreement. The Compass Credit Agreement includes customary events of default, including, among other things, payment default, covenant default, breach of representation or warranty, bankruptcy, cross-default, material ERISA events, certain changes of control, material money judgments and failure to maintain subsidiary guarantees. The Compass Credit Agreement prevents us from paying dividends or otherwise distributing cash to our stockholders unless, after giving effect to such dividend, we would be in compliance with the financial covenants and, at the time any such dividend is made, no default or event of default exists or would result from the payment of such dividend.

At September 30, 2017, we were in compliance with all covenants under the Compass Credit Agreement.

 

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Capital Requirements and Sources of Liquidity

During the years ended September 30, 2016 and 2017, our capital expenditures were approximately $24.9 million and $24.4 million, respectively.

Historically, we have had significant cash requirements in order to organically expand our business into new geographic markets. Our cash requirements include costs related to increased capital expenditures, purchase of materials and production of materials and cash to 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 greater in periods of growth. Additional cash requirements resulting from our growth include the costs of additional personnel, production and distribution facilities, enhancing our information systems and, in the future, our integration of any acquisitions and our compliance with laws and rules applicable to being a public company. Following the completion of this offering, our primary uses of cash will be investing in property and equipment used to provide our services and funding organic and acquisitive growth initiatives.

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. At September 30, 2017, we had availability of $20.0 million under the Revolving Credit Facility. We regularly monitor potential capital sources, including equity and debt financings, in an effort to meet our planned capital expenditures and liquidity requirements. Our future success will be highly dependent on our ability to access outside sources of capital.

We believe that our operating cash flow and available borrowings under the Revolving Credit Facility are sufficient to fund our operations for at least the next twelve months. However, future cash flows are subject to a number of variables, 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 we make one or more acquisitions and the amount of capital required is greater than the amount 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 Revolving Credit Facility, joint venture partnerships, asset sales, offerings of debt and equity securities or other means. 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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Contractual Obligations

The following table presents our obligations and commitments to make future payments under contracts and contingent commitments at September 30, 2017:

 

							Payments Due by Period
		Total					Less than 1 year					1 - 3 years					3 - 5 years					More than 5 years
(in thousands)
Long-term debt obligations:
Principal payment obligations			$	57,500				$	10,000				$	20,000				$	27,500				$	—
Interest expense on long-term debt(1)				5,925					1,936					2,772					1,217					—
Operating lease obligations(2)				22,237					8,876					10,997					2,364					—
Purchase obligations(3)				5,136					3,403					1,733					—					—
Other(4)				3,138					2,569					569					—					—
Total			$	90,898				$	25,243				$	34,574				$	31,081				$	—

 

(1)	Assumes the rate of 3.235% in effect on the long-term debt obligations at September 30, 2017 remains constant until maturity, and includes 0.78% applicable to the $25.0 million interest rate swap agreement.

 

(2)	Operating leases include property and equipment, with terms ranging from one to five years.

 

(3)	Includes agreements for future purchase of fuel, natural gas, liquid asphalt cement and aggregates.

 

(4)	Reflects installment payments in connection with an agreement to repurchase shares of our common stock. See Note 11 to our audited consolidated financial statements included elsewhere in this prospectus.

Critical Accounting Policies and Estimates

The discussion of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates and assumptions on an ongoing basis. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our consolidated financial statements.

Critical accounting policies are those policies that, in management’s view, are most important in the portrayal of our financial condition and results of operations. The notes to the consolidated financial statements also include disclosure of significant accounting policies. The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on the results that we report in our financial statements. These critical accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Our most critical accounting policies and estimates include those involved in the recognition of revenues and provision for income tax expense. Those critical accounting policies and estimates that require the most significant judgment are discussed further below.

 

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