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As confidentially submitted to the Securities and Exchange Commission on January 26, 2018

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

 

 

Amendment No. 1

to

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.

 

 

 


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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

 

LOGO

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 The Nasdaq Stock Market LLC under the symbol “ROAD.”

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 The Nasdaq Stock Market LLC. See “Management—Director Independence and Controlled Company Exemption.”

 

Baird   Raymond James   Stephens Inc.

Imperial Capital

Prospectus dated                     , 2018


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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.

 

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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;

 

    competition for projects in our local markets;

 

    risks associated with our capital-intensive business;

 

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

 

    unfavorable economic conditions and restrictive financing markets;

 

    our ability to successfully identify, manage and integrate acquisitions;

 

    our ability to obtain sufficient bonding capacity to undertake certain projects;

 

    our ability to accurately estimate the overall risks, requirements or costs when we bid on or negotiate contracts that are ultimately awarded to us;

 

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

 

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    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.

 

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PROSPECTUS SUMMARY

This summary highlights basic information about us and this offering contained elsewhere in this prospectus. Because it is a summary, it does not contain all the information you should consider before investing in our Class A common stock. You should read and carefully consider this entire prospectus before making an investment decision, especially the information in “Risk Factors,” “Cautionary Statement Regarding Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the accompanying notes. Except as otherwise indicated or required by the context, all references in this prospectus to the “Company,” “we,” “us” or “our” refer to Construction Partners, Inc. and its consolidated subsidiaries. All references in this prospectus to the “selling stockholders” refer to those entities identified as selling stockholders in “Principal and Selling Stockholders.”

Our Company

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 hot mix asphalt (“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. Led by industry veterans each with over 30 years of experience operating, acquiring and improving construction companies, we are well-positioned to continue to expand profitably in an industry with attractive growth prospects.

Since our inception in 2001, we have scaled into one of the largest operators in the Southeastern United States, growing from three to 26 HMA plants at September 30, 2017. We operate in a geographic area covering nearly 29,000 miles of highway infrastructure, and we produced 3.2 million tons of HMA in fiscal 2017 for use in more than 900 transportation or infrastructure projects. We maintain a high level of visibility on future infrastructure projects by analyzing the budgets and bidding patterns of state and local departments of transportation (“DOTs”) in the markets that we serve. We are therefore able to reliably forecast our bidding opportunities and properly plan for future projects. Our contract backlog at September 30, 2017 was at a record level of $549.9 million, as compared to $364.1 million at September 30, 2016.

The Southeastern United States is one of the fastest growing regions with respect to population and job growth, which drives additional federal funding to the area. The five states in which we operate (Alabama, Florida, Georgia, North Carolina and South Carolina) have experienced a combined annual population growth of 1.4% from 2000 to 2016, as compared to 0.8% for the rest of the United States, and combined annual economic growth of 2.6% from 2013 to 2016, as compared to 2.1% for the rest of the United States. Additionally, each of these states has recently passed legislation to increase transportation funding.

We have strategically entered each of the markets that we serve to capitalize on substantial public and private infrastructure opportunities in the Southeastern United States. Publicly funded projects accounted for approximately 70% of our fiscal 2017 construction contract revenues. Our public customers include federal agencies, state DOTs and local municipalities. Total public spending on transportation infrastructure in the United States was approximately $279.0 billion in 2014, of which highways and local roads accounted for approximately $165.0 billion, or 59%. We believe transportation infrastructure spending will increase as federal, state and local governments allocate funding to their aging transportation network infrastructures. At the federal level, the Fixing America’s Surface Transportation Act of 2015 (the “FAST Act”) earmarked $305.0 billion for transportation infrastructure spending through 2020. The FAST Act builds upon the Moving Ahead for Progress in the 21st



 

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Century Act (the “MAP-21 Act”), which was passed in 2012 and provided $105.0 billion of similar funding. Moreover, the current administration has proposed spending $1.0 trillion on infrastructure projects over the next ten years.

Privately funded projects accounted for approximately 30% of our fiscal 2017 construction contract revenues. 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. We compete for private construction projects primarily on the basis of the breadth of our service capabilities and our reputation for quality. Private projects also drive demand for external sales of our HMA and aggregates to smaller contractors that do not own HMA or aggregate facilities. We believe we are well-positioned to capitalize on the strong momentum in commercial and residential private construction sectors driven by population and economic expansion in the Southeastern United States.

Supported by our local market presence and knowledge, as well as scale advantages attributable to our vertical integration, geographic reach and strong financial profile, we believe we are a market leader in each of the markets that we serve. For all but the very largest projects, we compete primarily against local firms that have existing asphalt plants and paving operations relatively close to the project site. For most projects, HMA is a critical input that cannot be efficiently transported beyond a relatively short distance. By virtue of this locally driven competitive dynamic, competition in our industry is characterized by relative market share, which we define as the percentage of jobs we win in a local market compared to the jobs we bid in a local market.

Our Competitive Strengths

Leading Market Positions in Strategic Geographic Footprint. Our local market presence and knowledge contributes to our leading position in each of the markets we serve. Our 26 HMA plants are strategically located across Alabama, Florida, Georgia and North Carolina and are near interstate highways with dense road systems. In addition to the four states in which our HMA plants are located, we provide specialty paving services in South Carolina. We believe the Southeastern United States will continue to experience above-average population and economic growth and these factors will lead to additional demand for the transportation infrastructure services we provide. Moreover, this region’s temperate climate allows us to work during the majority of the year, thereby enabling us to mitigate the fixed cost of weather-idled facilities and maintain a year-round workforce.

Scale Advantages. We believe our HMA plants, equipment fleet, experienced personnel and bonding capacity provide us with scale advantages over our competitors, which are primarily small- and medium-sized businesses and are often family owned and operated. In addition, our ability to internally source HMA provides project execution and bidding advantages over some of our competitors. Our flexible crews and diverse fleet of equipment are deployed across a wide geographic footprint to perform projects of varying size and scope, which helps us maintain high asset utilization and lower fixed unit costs. Our scale also allows us to fully utilize reclaimed asphalt pavement, which lowers our HMA production costs, and allows us to receive better terms in capital asset purchases with our equipment providers. Most of the projects for which we compete require surety performance bonds as a bidding condition. Many of our competitors are limited in the projects for which they can bid because of such bidding and bonding constraints. Our track record of successful project execution and profitability, coupled with a strong balance sheet, provide us with ample bidding and bonding capacity, allowing us to bid on a large number of projects simultaneously. As such, we have never been prevented from bidding a project due to bidding and bonding requirements. The scale advantages from our leading relative market position support our growth strategy.

Customer and Revenue Diversification. We perform both new construction and maintenance infrastructure services over a wide geographic footprint for both public and private clients. Our largest customers are state



 

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DOTs. For the fiscal year ended September 30, 2017, the Alabama DOT and the North Carolina DOT accounted for 14.9% and 13.9% of our revenues, respectively. Projects performed for various Departments of Transportation accounted for 41.9% of revenues for the fiscal year ended September 30, 2017. Our 25 largest projects accounted for 22.4% of our fiscal 2017 revenues. While we have the capabilities required to undertake large infrastructure projects, a core principle of our strategy is to perform many smaller projects with varied complexity and short durations. In fiscal 2017, our average project size was $1.7 million and our projects had an average duration of approximately eight months. We believe this strategy, coupled with our disciplined bidding process, yields revenue diversification and enables us to better manage our business through market cycles.

Consistent History of Managing Construction Projects and Contract Risk. Our long and successful track record in each of the markets that we serve demonstrates an understanding of the various risks associated with transportation infrastructure projects. We serve as prime contractor on approximately 70% of our projects and as a subcontractor on the remaining 30%. When serving as prime contractor, we utilize subcontractors to perform approximately 30% of the total project. The vast majority of our projects are fixed unit price contracts, pursuant to which a portion of our revenues is tied to the volume of various project components. We combine our experience, local market knowledge and fully integrated management information systems to effectively bid, execute and manage projects. We capture project costs such as labor and equipment expenses on a daily basis. Our managers review daily project reports to determine whether actual project costs are tracking to budget.

Successful Record of Executing and Integrating Acquisitions. Among our core competencies is successfully identifying, executing and integrating acquisitions. Since 2001, we have completed 15 acquisitions, which have enabled us to expand our end-markets, service offerings and geographic reach. We derive acquisition synergies by expanding the pool of project opportunities of our acquired companies by enhancing their service offerings and bidding capacities. Our acquisition philosophy involves retaining the local management team of the acquired business, maintaining operational decisions at the local level and providing strategic insights and leadership through our senior management team. Acquisition integration primarily involves the implementation of our standardized bidding and management information systems across the functional areas of accounting and operations. These information systems provide acquired companies with the necessary tools to capture and analyze cost and to improve operating results.

Common Processes and Technology Systems. We employ a common set of operational processes and utilize sophisticated technology systems to track all of our operations. These practices and systems are important competitive advantages in several areas of our business. Our uniform estimating and job cost systems, developed for our business and improved internally, offer a critical advantage not only in the procurement of work, but also the procurement of profitable work, by providing an accurate measure of our cost for individual items in a bid. In contrast, we believe many of our competitors have not invested equivalent resources to develop systems with the same level of detail, which can make them less competitive in the bidding process and/or less profitable. We also track and analyze our competitors’ historical bids and bidding tendencies, which provides us with a critical bidding advantage. Since all of our project teams utilize the same processes and are trained to the same standards, our management tools allow us to optimize personnel and equipment usage across our project portfolio during project execution, improving asset utilization and providing significant cost savings.

Experienced Management Team and Supportive Sponsor. Our executive officers are seasoned leaders with complementary skill sets and a track record of financial success spanning over 30 years and multiple business cycles. As former executives of the North American arm of an international construction company, our Chief Executive Officer and our Chief Financial Officer built a civil infrastructure company which operated over 50 HMA plants in five states before its sale in 1999. Collectively, they have successfully completed approximately 50



 

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acquisitions in the civil infrastructure sector over the course of their careers. Our five Senior Vice Presidents possess over 150 years of combined management experience with both publicly and privately held civil infrastructure companies operating in the Southeastern United States. In addition, following this offering, funds managed by SunTx Capital Management Corp. and its affiliates (“SunTx”) will continue to own a significant economic interest in our Company. After giving effect to this offering and the Reclassification (as defined herein), SunTx will own                  shares of our Class B common stock and     % of the voting power of our outstanding common stock. The Executive Chairman of our board of directors Ned N. Fleming, III, played a key role in our founding, and we believe that we will continue to benefit from his ongoing involvement following the completion of this offering. Furthermore, we believe that our dual-class capital structure will contribute to the stability and continuity of our board of directors and senior management, allowing them to focus on creating long-term stockholder value.

Our Growth Strategy

Capitalize on Increased State and Federal Spending on U.S. Transportation Infrastructure. There is currently an $836.0 billion backlog of projects to repair deteriorating bridges and highways in the United States. According to the American Society of Civil Engineers, the roads in each of the states in which we operate received infrastructure report cards with a grade of “B-” or “C.” We expect the poor condition of the roads in the markets that we serve to provide consistent opportunities for growth. Funding for projects in these markets will come from a variety of sources. In addition to the FAST Act and other legislative proposals, each state in which we operate maintains a transportation infrastructure fund supported primarily by fuel taxes. Whether by state constitution or statute, these funds are generally protected and required to be used for transportation infrastructure purposes. We are well-positioned to take advantage of increased infrastructure spending due to our broad footprint of existing HMA production facilities designed with significant excess capacity across the Southeastern United States.

Organically Expand Our Geographic Footprint. We believe the economic climate of the Southeastern United States is more favorable than other parts of the country with commensurate population growth trends, which will lead to significant future federal, state and local infrastructure spending. We have the financial and organizational resources to add additional workforce and equipment, and we are highly experienced in developing new plant sites to expand into adjacent markets. In addition, we maintain strategic partnerships with subcontractors affording additional scalability in labor and equipment. Our financial profile and track record also facilitate significant growth in bonding capacity—a challenge that may prove difficult for smaller, privately held competitors. We continually evaluate opportunities to expand organically in the Southeastern United States.

Consistent Pursuit of Acquisitions. Over the last 16 years, our consistent organic growth has been augmented by the successful acquisition and integration of 15 complementary construction businesses, establishing us as a leading industry consolidator. Our management team has acquired businesses in a variety of economic cycles, with the number of opportunities generally increasing in cyclical downturns. Our senior management team has successfully completed approximately 50 acquisitions over the course of their careers. Our management team’s experience, industry expertise, integrity and strong relationships with industry players allow us to be considered a “buyer-of-choice” with targeted, high-quality prospective targets, most of which are family owned and operated. These advantages, together with the proceeds of this offering and the opportunity to use our equity as a component of acquisition consideration, should further enhance our acquisition prospects. We maintain an acquisition pipeline with a growing number of opportunities to expand our geographic footprint. While most opportunities in our pipeline consist of add-on acquisitions in the Southeastern United States, we also continuously evaluate platform investments that would allow expansion into neighboring states.



 

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Consistent with this strategy, on September 22, 2017, we completed an approximately $10.8 million asset acquisition of certain sand and gravel mining operations located in Etowah, Elmore and Autauga counties in Alabama. This acquisition increased our aggregate reserves and will allow us to further capitalize on vertical integration opportunities.

Continue to Capitalize on Vertical Integration Opportunities. We consume approximately 80% of the HMA we produce. In certain markets, we also mine aggregates, such as sand and gravel, used as raw materials in the production of HMA, which lowers our input costs. We believe there are additional vertical integration opportunities to enhance operational efficiency and allow us to capture additional margin throughout the value chain, including the acquisition or development of additional aggregate sites and liquid asphalt terminals.

Enhance Profitability Through Operational Improvements. We complement sophisticated business practices across our platform with fully integrated management information systems to drive operational efficiencies. With strategic oversight by our management team, operating income margins increased 310 basis points from fiscal 2015 to fiscal 2017. These margin improvements have been accomplished through profit optimization plans and leveraging information technology and financial systems to improve project execution and control costs. Moreover, we improve margins on acquired businesses as we standardize business practices across functional areas, including, but not limited to, estimation, project management, finance, information technology, risk management, purchasing and fleet management.

Strengthen and Support Human Capital. We have an experienced and skilled workforce of over 1,800 employees, which we believe is our most valuable asset. Attracting, training and retaining key personnel have been and will remain critical to our success. We will continue to focus on providing our personnel with training, personal and professional growth opportunities, performance-based incentives, stock ownership opportunities and other competitive benefits in order to strengthen and support our human capital base.

Our Industry

We operate in the large and growing highway and road construction industry, which generated approximately $165.0 billion of revenues in 2014. Federal, state and local DOT budgets drive industry performance, with the public sector generating 95% of total industry revenues in 2016. In 2015, the FAST Act was passed, providing visibility and certainty of funding and planning for state DOTs. The FAST Act earmarked $305.0 billion for transportation infrastructure spending through 2020, with highway and transit projects accounting for $205.0 billion and $48.0 billion, respectively. The current administration recently proposed spending $1.0 trillion over the next ten years on infrastructure projects, which could also drive an increase in spending on the significant backlog of national and local transportation infrastructure needs. The non-discretionary nature of highway and road construction services and materials supports highly stable and consistent industry growth.

Additionally, there are strong industry tailwinds in each of the five states in which we operate. The Alabama Transportation Rehabilitation and Improvement Program and Rural Assistance Match Program, created in 2012 and 2013, respectively, are initiatives aimed at investing $1.2 billion and $25.0 million, respectively, on the state’s transportation infrastructure. The Florida Department of Transportation received $10.8 billion of funding for the 2017 fiscal year, with $4.1 billion specifically allocated for highway construction projects. In 2015, Georgia passed House Bill 170, replacing 34 short-term funding programs and providing $1.0 billion per year for transportation needs with a focus on the state’s backlog of maintenance projects. In 2017, the North Carolina State Transportation Improvement Program increased the state’s plan from a $320.0 million two-year program to a ten-year program estimated at $1.6 billion in additional transportation revenue. Finally, in 2016, South Carolina passed Act 275, which provides $4.2 billion in transportation infrastructure funding over the next ten years, an



 

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increase of $150.0 million per year over prior funding levels, with $2.0 billion directed toward widening and improving existing interstates and $1.4 billion directed toward pavement resurfacing.

Within the highway and road construction industry, we operate in the asphalt paving materials and services segment. Asphalt paving mix is the most common roadway material used today, covering 94% of the more than 2.7 million miles of paved U.S. roadways. We believe asphalt will continue to be the pavement of choice for roads due to its cost effectiveness, durability and reusability, as well as minimized traffic disruption during paving, as compared to concrete.

Competition is constrained in our industry because participants are limited by the distance that materials can be efficiently transported, resulting in a fragmented market of over 13,300 businesses, many of which are local or regional operators. Participants in these markets range from small, privately-held companies focused on a single material, product or market to multinational corporations that offer a wide array of construction materials, products and paving and related services. In each market, our primary competitors are primarily local businesses, with an occasional large, national corporation providing competition.

Risk Factors

An investment in our Class A common stock involves a number of risks. You should carefully read and consider all of the information contained in this prospectus (including in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes thereto) before making an investment decision. These risks could adversely affect our business, financial condition and results of operations, and cause the trading price of our Class A common stock to decline. You could lose part or all of your investment. In reviewing this prospectus, you should bear in mind that past results are no guarantee of future performance. See “Cautionary Statement Regarding Forward-Looking Statements” for a discussion of forward-looking statements, and the significance of forward-looking statements in the context of this prospectus.

These risks include, but are not limited to:

 

    declines in public infrastructure construction and reductions in government funding, including the funding by transportation authorities and other state and local agencies;

 

    risks related to our operating strategy;

 

    competition for projects in our local markets;

 

    risks associated with our capital-intensive business;

 

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

 

    unfavorable economic conditions and restrictive financing markets;

 

    our ability to successfully identify, manage and integrate acquisitions;

 

    our ability to obtain sufficient bonding capacity to undertake certain projects;

 

    our ability to accurately estimate the overall risks, requirements or costs when we bid on or negotiate contracts that are ultimately awarded to us;

 

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

 

    risks related to adverse weather conditions;

 

    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;


 

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    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.

Our Sponsor

SunTx, founded in 2001, is a Dallas-based private equity firm that invests in growth-oriented middle-market manufacturing, distribution and service companies. At March 31, 2017, SunTx had approximately $1.2 billion assets under management.

Corporate History

Construction Partners, Inc. is a holding company that was incorporated as a Delaware corporation in 2007. We operate and control our business and affairs through our wholly owned subsidiaries: Wiregrass Construction Company, Inc., Fred Smith Construction, Inc., Everett Dykes Grassing Co., Inc. and C.W. Roberts Contracting, Inc. Immediately prior to the completion of this offering, we will amend and restate our certificate of incorporation to effectuate a dual class common stock structure consisting of our Class A common stock and our Class B common stock, as a result of which each share of our common stock, par value $0.001 per share, immediately prior to the completion of this offering will, automatically and without any action on the part of the holders thereof, be reclassified and changed into                  shares of our Class B Common Stock so that all of our equity holders prior to the completion of this offering will become the holders of our Class B common stock. We refer to this as the “Reclassification.” See “Description of Our Capital Stock.” The diagram below depicts our organizational structure and ownership immediately following the completion of this offering.

 

LOGO



 

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Implications of Being an Emerging Growth Company

As a company with less than $1.07 billion in annual gross revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). An emerging growth company may take advantage of specified reduced reporting requirements that are otherwise applicable generally to public companies. These provisions include:

 

    an option to present only two years of audited financial statements and related management’s discussion and analysis in the registration statement of which this prospectus is a part;

 

    an exemption from compliance with the requirement for auditor attestation of the effectiveness of our internal control over financial reporting for so long as we qualify as an emerging growth company;

 

    an exemption from compliance with any requirement that the Public Company Accounting Oversight Board may adopt regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

    an exemption from the adoption of new or revised financial accounting standards until they would apply to private companies;

 

    reduced disclosure about our executive compensation arrangements; and

 

    an exemption from the requirements to obtain a non-binding advisory vote on executive compensation or a stockholder approval of any golden parachute arrangements.

We will remain an emerging growth company until the earliest to occur of: the last day of the year in which we have $1.07 billion or more in annual gross revenue; the date we qualify as a “large accelerated filer” with at least $700.0 million of equity securities held by non-affiliates as of the last day of our most recently completed second quarter; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and the last day of the year ending after the fifth anniversary of this offering. We may choose to take advantage of some, but not all, of the available benefits under the JOBS Act. We are choosing to irrevocably “opt out” of the extended transition periods available under the JOBS Act for complying with new or revised accounting standards, but we intend to take advantage of certain of the other exemptions discussed above. Accordingly, the information contained herein may be different from the information you receive from other public companies. See “Risk Factors—Risks Related to this Offering and Ownership of Our Class A Common Stock.” 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.

Corporate Offices and Internet Address

Our principal operating offices are located at 290 Healthwest Drive, Suite 2, Dothan, Alabama 36303, and our phone number is (334) 673-9763. Our website address is www.constructionpartners.net. Information contained on our website is not incorporated by reference in, and does not constitute a part of, this prospectus.



 

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The Offering

 

Class A common stock offered by us

                 shares

 

Class A common stock offered by the selling stockholders


                shares (or                  shares if the underwriters’ option to purchase additional shares is exercised in full)

 

Class A common stock to be outstanding upon the completion of this offering


                 shares (or                  shares if the underwriters’ option to purchase additional shares is exercised in full)

 

Class B common stock to be outstanding upon the completion of this offering


                 shares (or                  shares if the underwriters’ option to purchase additional shares is exercised in full)

 

Class A and Class B common stock to be outstanding upon the completion of this offering


                 shares (or                  shares if the underwriters’ option to purchase additional shares is exercised in full)

 

Option to purchase additional shares

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

 

Use of proceeds

We estimate that our net proceeds from this offering, after deducting estimated underwriting discounts and approximately $        million of estimated offering expenses payable by us, will be approximately $        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. See “Use of Proceeds.”

 

Dual class common stock

Upon the completion of this offering, the rights of the 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. See “Description of Our Capital Stock—Common Stock.”

 

 

Upon the completion of this offering, the holders of our Class A common stock will be entitled to one vote per share and the holders of our Class B common stock will be entitled to              votes per share. The holders of our Class A common stock and our Class B common



 

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stock will vote together as a single class on all matters unless otherwise required by law. See “Description of Our Capital Stock—Common Stock—Voting Rights.”

 

  Each share of our Class B common stock may be converted into one share of our Class A common stock at the option of the holder. In addition, each share of our Class B common stock will automatically convert into one share of our Class A common stock upon any transfer, with certain exceptions. See “Description of Our Capital Stock—Common Stock—Conversion and Restrictions on Transfer.”

 

  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).

 

Dividend policy

We 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 in the foreseeable future. See “Dividend Policy.”

 

Listing symbol

We intend to apply to list our Class A common stock on The Nasdaq Stock Market LLC under the symbol “ROAD.”

 

Risk factors

You should carefully read and consider the information in “Risk Factors” on page 13 of this prospectus for a discussion of factors to carefully consider before investing in our Class A common stock.

Unless the context otherwise requires, the information in this prospectus:

 

    assumes that the shares of our Class A common stock to be sold in this offering are sold at $        per share (the midpoint of the range set forth on the cover of this prospectus);

 

    assumes that all shares of our Class A common stock offered hereby are sold;

 

    assumes no exercise by the underwriters of their option to purchase additional shares;

 

    assumes the filing and effectiveness of our amended and restated certificate of incorporation to effect the Reclassification and the adoption of our amended and restated bylaws, each of which will occur immediately prior to the completion of this offering;

 

    assumes no exercise of outstanding options; and

 

    excludes shares of our Class A common stock reserved for issuance under the 2018 Equity Incentive Plan.


 

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Summary Historical Consolidated Financial Data

The following tables present our summary historical consolidated financial data for the periods and at the dates indicated. The statement of income data for the fiscal 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 Fiscal 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 deferred 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, generally accepted accounting principles in the United States (“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 Fiscal 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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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 the fiscal year ended September 30, 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.

We derive a significant portion of our revenues from state DOTs. The loss of our ability to competitively bid for certain projects or successfully contract with state DOTs could have a material adverse effect on our business.

Our largest customers are state DOTs. During the fiscal year ended September 30, 2017, the Alabama DOT and the North Carolina DOT accounted for 14.9% and 13.9% of our revenues, respectively. Projects performed for various Departments of Transportation accounted for 41.9% of revenues for the fiscal year ended September 30, 2017. We believe that we will continue to rely on state DOTs for a substantial portion of our revenues for the foreseeable future. The loss of, or reduction of, our ability to competitively bid for, certain projects or successfully contract with a state DOT could have a material adverse effect on our financial condition, results of operation and liquidity. See Note 2 (Significant Accounting Policies), Concentration of Risks, to the consolidated financial statements for the fiscal year ended September 30, 2017 included elsewhere in this prospectus, for information relating to concentrations of revenues by type of customer and for a description of our largest customers.

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.

During the fiscal year ended September 30, 2017, approximately 70% of our construction contract revenues were derived from contracts 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 and often include express or implied certifications of compliance. 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

 

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Occupational Safety and Health Administration (“OSHA”), Mine Safety and Health Administration (“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. 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. Should one or more of these events occur, it could have a material adverse effect on our financial condition, results of operations, cash flow and 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 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;

 

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

 

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

 

    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;

 

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

 

    the availability and skill level of workers;

 

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

 

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

 

    mechanical problems with our machinery or equipment;

 

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

 

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    difficulties in obtaining required government permits or approvals;

 

    changes in applicable laws and regulations;

 

    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

 

    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 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,

 

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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:

 

    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;

 

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

 

    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;

 

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

 

    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

 

    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

 

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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 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.

 

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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 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.

 

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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.

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

 

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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.

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.

 

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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 codes 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 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.

 

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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.

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. 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 reduce GHG 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.

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 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.

 

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

Construction Partners Holdings, Inc. (“Construction Partners Holdings”), our wholly owned subsidiary, has 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”). We guarantee the obligations under the Term Loan and the Revolving Credit Facility. 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:

 

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

 

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

 

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

 

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

 

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

 

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

 

    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.

The Compass Credit Agreement restricts our ability and the ability 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 subsidiaries to:

 

    incur additional indebtedness or guarantees;

 

    create liens on assets;

 

    change our or their fiscal year;

 

    enter into sale and leaseback transactions;

 

    enter into certain restrictive agreements;

 

    engage in mergers or consolidations;

 

    participate in partnerships and joint ventures;

 

    sell assets;

 

    incur additional liens;

 

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    pay dividends or distributions and make other restricted payments;

 

    make investments, loans or advances;

 

    repay or amend terms of subordinated indebtedness;

 

    make certain acquisitions;

 

    enter into certain operating leases;

 

    enter into certain hedge transactions;

 

    amend material contracts; and

 

    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 and servicing our indebtedness. To the extent that existing cash balances and cash flow from operations, together with borrowing capacity under our Revolving Credit Facility, are insufficient to 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 Revolving Credit Facility 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.

 

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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, our 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 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.

At September 30, 2017, we had $30.6 million of goodwill recorded on our consolidated balance sheets. 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 regarding 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 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 revenue recognition, contracts receivable including retainage, valuation of long-lived assets and goodwill, income taxes, accrued insurance costs and share based payments and other equity transactions. 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.”

 

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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, requires 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.

Recently enacted U.S. tax legislation may adversely affect our business, results of operations, financial condition and cash flow.

On December 22, 2017, the President of the United States signed into law Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act, following its passage by the United States Congress. The Tax Cuts and Jobs Act will make significant changes to U.S. federal income tax laws, including changing the corporate tax rate to a flat 21% rate, introducing a capital investment deduction in certain circumstances, placing certain limitations on the interest deduction, modifying the rules regarding the usability of certain net operating losses, and making extensive changes to the U.S. international tax system. We are currently in the process of analyzing the effects of this new legislation on our business, results of operations, financial condition and cash flow. The impact of these new rules is uncertain and could be adverse.

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

 

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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.

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

 

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statements, and exemptions from the requirements of holding a non-binding 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 Securities 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 beginning with the fiscal year ended September 30, 2019. 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 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 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.

 

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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 the trading price of our Class A common stock 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 The Nasdaq Stock Market LLC, 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, 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

 

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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;

 

    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 significant 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.”

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.”

 

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In connection with this offering, we, our directors and executive officers, the selling stockholders and substantially all holders of our 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,              shares of our common stock 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 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 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 offerings or acquisitions. The number of shares of our Class A common stock issued in connection with offerings or acquisitions could constitute a material portion of the then-outstanding shares of our Class A common stock. Any issuance of additional securities in connection with offerings or acquisitions would 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.

We, our directors and executive officers, the selling stockholders and substantially all holders of our common stock have entered into lock-up agreements with respect to our and their respective shares of common stock. As restrictions on resale end, the market price of our Class A common 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 shares of common stock subject to the foregoing lock-up agreements entered into in connection with this offering. If the restrictions under the lock-up agreements are waived,              shares of 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, affiliates of SunTx will beneficially own     % of our Class B common stock, representing     % 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

 

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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 $        per share of our Class A common stock, representing the difference between our net tangible book value per share of our 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

 

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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 amended and restated 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 amended and restated 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 amended and restated 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;

 

    a classified board of directors with three year staggered terms;

 

    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 amended and restated 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.

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.

 

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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 the rules of The Nasdaq Stock Market LLC 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 The Nasdaq Stock Market LLC 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 reduce the trading price of our Class A common stock.

 

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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

     $ 209,317       $             $     
    

 

 

     

 

 

      

 

 

 
      

 

 

     

 

 

      

 

 

 

 

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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, net of deferred debt issuance costs of $0.4 million. 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 Class A common stock after the completion of this offering. The pro forma net tangible book value of our common stock 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 common share at September 30, 2017

     $                  

Increase in pro forma net tangible book value per common share attributable to new investors in this offering

     $     
    

 

 

      

Pro forma as adjusted net tangible book value per Class A common share after this offering

          $
         

 

 

 

Dilution in net tangible book value per Class A common 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 income data for the fiscal 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 Fiscal 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 Fiscal 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 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 and residential 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 HMA and aggregates are recognized when risks associated with ownership have passed to the customer.

 

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Gross Profit

Gross profit represents 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. 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. Quarry reserves are depleted in accordance with the units-of-production method as aggregate is extracted, using the initial allocation of cost based on proven and probable reserves.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and personnel costs for our administration, finance and accounting, legal, information systems, human resources and certain managerial employees. Additional expenses include audit, consulting and professional fees, travel, insurance, office space rental costs, property taxes and other corporate and overhead expenses.

Gain on Sale of Equipment, net

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

Interest Expense, net

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

Other 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

 

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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 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 Fiscal 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 Fiscal 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 fiscal year ended September 30, 2017 increased $25.9 million, or 4.8%, to $568.2 million from $542.3 million for the fiscal 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. Our contract backlog increased $185.8 million during fiscal 2017. Adverse weather conditions, primarily during the third quarter of our fiscal year, prevented us from completing approximately $15.3 million of the work scheduled during the third quarter. However, these projects remain in our contract backlog and are expected to be completed during future periods.

Gross Profit. Gross profit for the fiscal year ended September 30, 2017 increased $16.1 million, or 21.5%, to $91.0 million from $74.9 million for the fiscal 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 fiscal year ended September 30, 2017 from 86.2% for the fiscal year ended September 30, 2016. This improvement was a result of completing projects that were in process at September 30, 2016. We recorded a net increase in revenues and gross profit of $4.6 million during the fiscal year ended September 30, 2017 on contracts in progress at September 30, 2016, as compared to recording a net decrease in revenues and gross profit of $2.8 million during the fiscal year ended September 30, 2016 on contracts in progress at September 30, 2015. In addition, other projects in our contract backlog were executed more efficiently during the fiscal year ended September 30, 2017 than comparable projects completed during the fiscal 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 fiscal 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 fiscal year ended September 30, 2017 increased $7.4 million, or 18.4%, to $47.9 million for the fiscal year ended September 30, 2017 from $40.4 million for the fiscal year ended September 30, 2016. The increase in general and administrative expenses for the fiscal year ended September 30, 2017 was 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 fiscal year ended September 30, 2017 decreased $0.7 million, or 15.1%, to $4.0 million compared to $4.7 million for the fiscal 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 fiscal year ended September 30, 2017 compared to $67.9 million during the fiscal 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 fiscal year ended September 30, 2016 and the first nine months of the fiscal year ended September 30, 2017 was a variable rate facility based on the three-month LIBOR rate 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 fiscal year ended September 30, 2017, increases in the three-month LIBOR rate compared to rates during the fiscal 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. The Compass Credit Agreement is a variable rate facility based on the one-month LIBOR rate plus 2.0%, thereby reducing our interest costs during the last three months of the fiscal year ended September 30, 2017. The Compass Credit Agreement also replaced some higher fixed rate facilities. To hedge against future changes in variable interest rates of the Compass Credit Agreement, on June 30, 2017, we entered into an amortizing $25.0 million interest rate swap agreement tied to the Term Loan.

Loss on Extinguishment of Debt. Loss on extinguishment of debt for the fiscal year ended September 30, 2017 was $1.6 million compared to $0 for the fiscal year ended September 30, 2016, which was 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 fiscal year ended September 30, 2017 from 32.4% for the fiscal year ended September 30, 2016. Our lower effective tax rate for the fiscal year ended September 30, 2016 was primarily due to the $2.1 million reversal of a state tax valuation allowance during the fiscal year. In addition, our taxable income for the fiscal 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 fiscal year ended September 30, 2016.

Net Income. Net income increased $4.0 million, or 18.2%, to $26.0 million for the fiscal year ended September 30, 2017 compared to $22.0 million for the fiscal year ended September 30, 2016. This increase in net income was a

 

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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.

Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA Margin were $68.0 million and 12.0%, respectively, for the fiscal year ended September 30, 2017, as compared to $59.0 million and 10.9%, respectively, for the fiscal 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 Fiscal
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 fiscal year ended September 30, 2017, a decrease of $4.8 million compared to $51.7 million for the fiscal year ended September 30, 2016. The decrease was primarily due to a $10.0 million increase in the income taxes paid during the fiscal year ended September 30, 2017 compared to the fiscal 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 were associated with fluctuations resulting from the timing of 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 fiscal year ended September 30, 2017 compared to $19.0 million for the fiscal year ended September 30, 2016. The increase was primarily due to $10.8 million being used in the acquisition of a business during the fiscal year ended September 30, 2017.

Financing Activities

Cash used in financing activities was $39.8 million for the fiscal year ended September 30, 2017 compared to $20.9 million for the fiscal year ended September 30, 2016. The increase was primarily due to the payment of a

 

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$31.3 million dividend during the fiscal year ended September 30, 2017. The increase was partially offset by a net repayment under our credit facilities of $6.1 million during the fiscal year ended September 30, 2017 compared to net repayments of $18.1 million during the fiscal year ended September 30, 2016.

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 a $50.0 million Term Loan and a $30.0 million Revolving Credit Facility. 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 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 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 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 our consolidated balance sheets.

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 requires us to satisfy certain financial covenants, including a minimum fixed charge coverage ratio of 1.20 to 1.00. At September 30, 2017, our fixed charge ratio was 1.63 to 1.00. The Compass Credit Agreement also requires us to maintain a consolidated leverage ratio not to exceed 2.00 to 1.00, subject to certain adjustments as further described in the Compass Credit Agreement. At September 30, 2017, our consolidated leverage ratio was 0.95 to 1.00. 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

 

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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.

Capital Requirements and Sources of Liquidity

During the fiscal 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 ventures, asset sales, offerings of debt or 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 that the interest rate of 3.235% in effect on the long-term debt obligations at September 30, 2017 will remain constant until maturity, and includes an effective interest rate of 0.78% applicable to the $25.0 million interest rate swap agreement.

 

(2) Operating leases related to 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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Revenue Recognition

The majority of our construction contracts are fixed unit price contracts. From time to time, we also enter into cost plus contracts and fixed total price contracts. Under fixed unit price contracts, we are committed to providing materials or services required by a contract at fixed unit prices (for example, dollars per ton of asphalt placed). Revenues from these construction contracts are recognized 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. This cost-to-cost measure is used because management considers it to be the best available measure of progress on these contracts. 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.

Change orders are modifications of an original contract that effectively change the existing provisions of the contract without adding new provisions or terms. Change orders may include changes in specifications or designs, manner of performance, facilities, equipment, materials, sites and period of completion of the work. Either we or our customers may initiate change orders. We consider unapproved change orders to be contract variations for which we have a change of scope for which we believe we are contractually entitled to additional price, but where a price change associated with the scope change has not yet been agreed upon with the customer. Costs associated with unapproved change orders are included in the estimated cost to complete the contracts and are treated as project costs as incurred. We recognize revenues equal to costs incurred on unapproved change orders when realization of price approval is probable. Unapproved change orders involve the use of estimates, and it is reasonably possible that revisions to the estimated costs and recoverable amounts may be required in future reporting periods to reflect changes in estimates or final agreements with customers. Change orders that are unapproved as to both price and scope are evaluated as claims.

We consider claims to be amounts in excess of agreed contract prices that we seek to collect from our customers or others for customer-caused delays, errors in specifications and designs, contract terminations, change orders that are either in dispute or are unapproved as to both scope and price, or other causes of unanticipated additional contract costs. Claims are included in the calculation of revenues when realization is probable and amounts can be reliably determined. To support these requirements, the existence of the following items must be satisfied: (i) the contract or other evidence provides a legal basis for the claim or a legal opinion has been obtained, stating that under the circumstances there is a reasonable basis to support the claim; (ii) additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of deficiencies in our performance; (iii) costs associated with the claim are identifiable or otherwise determinable and are reasonable in view of the work performed; and (iv) the evidence supporting the claim is objective and verifiable, not based on management’s subjective evaluation of the situation or on unsupported representations. Revenues in excess of contract costs incurred on claims are recognized when an agreement is reached with the customer as to the value of the claim, which in some instances may not occur until after completion of work under the contract. Costs associated with claims are included in the estimated costs to complete the contracts and are treated as project costs when incurred.

Our contracts generally take four to nine months to complete. For the majority of our contracts, upon completion and final acceptance of the construction contract, we receive our final payment upon completion of the necessary

 

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contract closing documents and our obligations to the owner are final at that point. The accuracy of our revenues and profit recognition in a given period is dependent on the accuracy of our estimates of the revenues and costs to finish uncompleted contracts. Our estimates for all of our significant contracts use a highly detailed “bottom up” approach. However, our projects can be highly complex and, in almost every case, the profit margin estimates for a contract will either increase or decrease to some extent from the amount that was originally estimated at the time of bid. Because we have a large number of projects of varying levels of size and complexity in process at any given time, these changes in estimates can sometimes offset each other without materially impacting our overall profitability. However, large changes in revenues or cost estimates can have a significant effect on profitability. There are a number of factors that can contribute to changes in estimates of contract cost and profitability. The most significant of these include the completeness and accuracy of the original bid, recognition of costs associated with scope changes, extended overhead due to customer-related and weather-related delays, subcontractor and supplier performance issues and site conditions that differ from those assumed in the original bid to the extent contract remedies are unavailable. The foregoing factors, as well as the stage of completion of contracts in process and the mix of contracts at different margins, may cause fluctuations in gross profit between periods, and these fluctuations may be significant.

Contracts Receivable, Including Retainage

Contracts receivable are generally based on amounts billed to the customer and currently due in accordance with our contracts. Many of the contracts under which we perform work contain retainage provisions. Retainage refers to that portion of billings made by us, but held for payment by the customer pending satisfactory completion of the project. Retainage on active contracts is classified as a current asset regardless of the term of the contract and is generally collected within one year of the completion of a contract. At each of September 30, 2016 and September 30, 2017, contracts receivable included $13.2 million of retainage, which was being contractually withheld by customers until completion of the associated contracts.

As the majority of our construction contracts are entered into with federal, state or municipal government customers, credit risk is minimal. We confirm that funds have been appropriated by the government project owner prior to commencing work on such projects. While most public contracts are subject to termination at the election of the government entity, in the event of termination we are entitled to receive the contract price for completed work and reimbursement of termination-related costs. Credit risk with private owners is minimized because of statutory mechanics liens, which give us high priority in the event of lien foreclosures following financial difficulties of private owners. We maintain an allowance for doubtful accounts, which has historically been sufficient to cover accounts that are not collected.

Valuation of Long-Lived Assets and Goodwill

Long-lived assets, which include property, equipment and acquired intangible assets, such as goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment evaluations involve fair values and management estimates of useful asset lives and future cash flows. Actual useful lives and cash flows could be different from those estimated by management, and this could have a material effect on our operating results and financial position. For the fiscal years ended September 30, 2016 and 2017, there were no events or changes in circumstances that would indicate a material impairment of our long-lived assets.

Goodwill must be tested for impairment at least annually. We performed our most recent annual impairment test of goodwill on July 1, 2017. Our test indicated there was no impairment of goodwill. The valuation is impacted by a number of factors, but the key factors are the stock price of similar publicly traded companies, recently completed transactions from both public companies and private transactions and our estimated forecast of future cash flows.

 

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The valuation approaches contain uncertainty regarding the estimates used. One of the largest uncertainties relates to federal, state and local government spending which management expects to increase in the upcoming years. There are a number of other uncertainties with respect to our future financial performance that could impact estimated future cash flows, including those discussed in “Risk Factors” elsewhere in this prospectus. Based on our valuation approaches, we determined that for each of our reporting units with goodwill, its fair value substantially exceeded its carrying value, and thus concluded that the carrying value of goodwill was not impaired at July 1, 2016 or July 1, 2017. At September 30, 2016 and 2017, we had goodwill with a carrying amount of $30.0 million and $30.6 million, respectively.

Income Taxes

Deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. We regularly review our deferred tax assets for recoverability and, where necessary, establish a valuation allowance. Valuation allowances are established to reduce deferred tax assets if we determine that it is more likely than not that some or all of the deferred tax assets will not be realized in future periods.

To assess this likelihood, we use historical three-year accumulated losses, estimates and judgments regarding our future taxable income as well as the jurisdiction in which this taxable income is generated to determine whether a valuation allowance is required. Such evidence can include our current financial position, results of operations, actual and forecasted results, the reversal of deferred tax liabilities, tax planning strategies and the current and forecasted business economics of our industry. Additionally, we record uncertain tax positions at their net recognizable amount, based on the amount that management deems is more likely than not to be sustained upon ultimate settlement with the tax authorities in jurisdictions in which we operate.

On the basis of our evaluations, at September 30, 2016 and 2017, no valuation allowance was recorded on our net deferred tax assets, and we had no material uncertain tax positions. If our estimates or assumptions regarding our current and deferred tax items are inaccurate or are modified, these changes could have potentially material impacts on our earnings.

Accrued Insurance Cost

We carry insurance policies to cover various risks, primarily general liability, automobile liability and workers compensation, under which we are liable to reimburse the insurance company for a portion of each claim paid, up to $500,000 per occurrence. Prior to October 1, 2017, this amount was $250,000 per occurrence. We accrue for probable losses, both reported and unreported, that are reasonably estimable using actuarial methods based on historic trends modified, if necessary, by recent events. Changes in our loss assumptions caused by changes in actual experience would affect our assessment of the ultimate liability and could have an effect on our operating results and financial position up to $500,000 per occurrence for general liability, automobile liability and workers compensation claims.

We provide employee medical insurance under policies that are both fixed premium fully insured policies and self-insured policies that are administered by the insurance company. Under the self-insured policies, we are liable to reimburse the insurance company for actual claims paid plus an administrative fee. We purchase separate stop-loss insurance, which limits the individual participant claim loss to amounts ranging from $75,000 to $160,000.

Share Based Payments and Other Equity Transactions

Our equity incentive plans are administered by our Compensation Committee, which has historically set stock option exercise prices based on recent unregistered sales of our common stock.

 

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We recognize compensation expense for stock option awards based on valuation studies. Prior to the completion of this offering, there has not been an established market for shares of our common stock. While we have issued new equity to unrelated parties, and we use such facts in the determination of the fair value of our shares, we believe that the lack of a secondary market for our common stock and our limited history issuing stock to unrelated parties make it impracticable to estimate our common stock’s expected volatility. Therefore, it is not possible to reasonably estimate the grant-date fair value of our options using our own historical price data. Accordingly, we applied the provisions of FASB ASC Topic 718 in accounting for the share options under the calculated value method.

In fiscal years 2016 and 2017, the expected volatility was based on the average volatility of five companies within three different SIC industries as management believed that we fit the profile of the companies selected.

Forfeitures are estimated using historical experience and projected employee turnover. These estimates require a considerable degree of judgment and affect the amount of stock-based compensation expense we recognize. If we determine that another method to estimate expected volatility or expected term is more reasonable than our current methods, or if another method for calculating fair value is prescribed by authoritative guidance, the fair value calculated for future stock-based awards could change significantly from past awards, even if the principal terms of the awards are similar. Higher volatility and longer expected terms result in an increase to stock-based compensation determined at the date of grant. The expected dividend rate and expected risk-free interest rate are not as significant to our calculation of fair value. A hypothetical 10% increase or decrease to any of the above assumptions would have had an immaterial impact on the amount of stock-based compensation expense we recognized in each of the periods presented. However, although changes in assumptions relative to expenses related to 2010 stock options granted outside of our equity incentive plan would be considered immaterial to us, future years could result in a more significant difference if we were to grant additional stock options, the value of our common stock increases significantly or our estimated volatility is higher.

Emerging Growth Company

The JOBS Act permits an “emerging growth company” like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. Our decision to opt out of the extended transition period is irrevocable.

Internal Controls and Procedures

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of our assets are made in accordance with management’s authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Furthermore, our controls and procedures can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control, and misstatements due to error or fraud may occur and not be detected on a timely basis. In the course of

 

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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.

Notwithstanding the material weaknesses that existed at September 30, 2017, our management has concluded that the consolidated financial statements included elsewhere in this prospectus present fairly, in all material respects, our financial position, results of operation and cash flows in conformity with GAAP.

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.

Inflation

Inflation had an immaterial impact on our results of operations for the fiscal years ended September 30, 2016 and 2017 due to relatively low inflation in the United States in recent years and our ability to recover increasing costs by obtaining higher prices for our products, including sale price escalator clauses in most of our public infrastructure sector contracts. Inflation risk varies with the level of activity in our industry, the number, size and strength of competitors and the availability of products to supply a local market.

Quantitative and Qualitative Disclosure about Market Risks

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

 

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Interest Rate Risk

We are exposed to interest rate risk on certain of our short- and long-term debt obligations used to finance our operations and acquisitions. We have LIBOR-based floating rate borrowings under the Compass Credit Agreement, which expose us to variability in interest payments due to changes in the reference interest rates. From time to time, we use derivative instruments as hedges against the impact of interest rate changes on future earnings and cash flows. In order to hedge against changes in interest rates and to manage fluctuations in cash flows resulting from interest rate risk, on June 30, 2017, we entered into an amortizing interest rate swap agreement applicable to $25.0 million outstanding debt under the Term Loan, for which we pay a fixed rate of 2.015% and receive a credit based on the applicable LIBOR rate.

At September 30, 2017, we had a total of $57.5 million of variable rate borrowings outstanding. Holding other factors constant and absent the interest rate swap agreement described above, a hypothetical 1% change in our borrowing rates would result in a $0.6 million change in our annual interest expense based on our variable rate debt at September 30, 2017.

Seasonality

The use and consumption of our products and services fluctuate due to seasonality. Our products are used, and our construction operations and production facilities are located, outdoors. Therefore, seasonal changes and other weather-related conditions, in particular extended rainy and cold weather in the spring and fall and major weather events, such as hurricanes, tornadoes, tropical storms and heavy snows, can adversely affect our business and operations through a decline in both the use of our products and demand for our services. In addition, 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 result in higher activity and revenues during those quarters. The first and second quarters of our fiscal year typically have lower levels of activity due to adverse weather conditions.

 

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BUSINESS

Our Company

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. Led by industry veterans each with over 30 years of experience operating, acquiring and improving construction companies, we are well-positioned to continue to expand profitably in an industry with attractive growth prospects.

Since our inception in 2001, we have scaled into one of the largest operators in the Southeastern United States, growing from three to 26 HMA plants at September 30, 2017. We operate in a geographic area covering nearly 29,000 miles of highway infrastructure, and we produced 3.2 million tons of HMA in fiscal 2017 for use in more than 900 transportation or infrastructure projects. We maintain a high level of visibility on future infrastructure projects by analyzing the budgets and bidding patterns of state and local DOTs in the markets that we serve. We are therefore able to reliably forecast our bidding opportunities and properly plan for future projects. Our contract backlog at September 30, 2017 was at a record level of $549.9 million, as compared to $364.1 million at September 30, 2016.

The Southeastern United States is one of the fastest growing regions with respect to population and job growth, which drives additional federal funding to the area. The five states in which we operate (Alabama, Florida, Georgia, North Carolina and South Carolina) have experienced a combined annual population growth of 1.4% from 2000 to 2016, as compared to 0.8% for the rest of the United States, and combined annual economic growth of 2.6% from 2013 to 2016, as compared to 2.1% for the rest of the United States. Additionally, each of these states has recently passed legislation to increase transportation funding.

We have strategically entered each of the markets that we serve to capitalize on substantial public and private infrastructure opportunities in the Southeastern United States. Publicly funded projects accounted for approximately 70% of our fiscal 2017 construction contract revenues. Our public customers include federal agencies, state DOTs and local municipalities. Total spending on transportation infrastructure in the United States was approximately $279.0 billion in 2014, of which highways and local roads accounted for approximately $165.0 billion, or 59%. We believe transportation infrastructure spending will increase as federal, state and local governments allocate funding to their aging transportation network infrastructures. At the federal level, the FAST Act earmarked $305.0 billion for transportation infrastructure spending through 2020. The FAST Act builds upon the MAP-21 Act, which was passed in 2012 and provided $105.0 billion of similar funding. Moreover, the current administration has proposed spending $1.0 trillion on infrastructure projects over the next ten years.

Privately funded projects accounted for approximately 30% of our fiscal 2017 construction contract revenues. 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. We compete for private construction projects primarily on the basis of the breadth of our service capabilities and our reputation for quality. Private projects also drive demand for external sales of our HMA and aggregates to smaller contractors that do not own their own HMA or aggregate facilities. We believe we are well-positioned to capitalize on the strong momentum in commercial and residential private construction sectors driven by population and economic expansion in the Southeastern United States.

Supported by our local market presence and knowledge, as well as scale advantages attributable to our vertical integration, geographic reach and strong financial profile, we believe we are a market leader in each of the

 

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markets that we serve. For all but the very largest projects, we compete primarily against local firms that have existing asphalt plants and paving operations relatively close to the project site. For most projects, HMA is a critical input that cannot be efficiently transported beyond a relatively short distance. By virtue of this locally driven competitive dynamic, competition in our industry is characterized by relative market share, which we define as the percentage of jobs we win in a local market compared to the jobs we bid in a local market.

Our Competitive Strengths

Leading Market Positions in Strategic Geographic Footprint. Our local market presence and knowledge contributes to our leading position in each of the markets we serve. Our 26 HMA plants are strategically located across Alabama, Florida, Georgia and North Carolina and are near interstate highways with dense road systems. In addition to the four states in which our HMA plants are located, we provide specialty paving services in South Carolina. We believe the Southeastern United States will continue to experience above-average population and economic growth and these factors will lead to additional demand for the transportation infrastructure services we provide. Moreover, this region’s temperate climate allows us to work for the majority of the year, thereby enabling us to mitigate the fixed cost of weather-idled facilities and maintain a year-round workforce.

Scale Advantages. We believe our HMA plants, equipment fleet, experienced personnel and bonding capacity provide us with scale advantages over our competitors, which are primarily small- and medium-sized businesses and are often family owned and operated. In addition, our ability to internally source HMA provides project execution and bidding advantages over some of our competitors. Our flexible crews and diverse fleet of equipment are deployed across a wide geographic footprint to perform projects of varying size and scope, which helps us maintain high asset utilization and lower fixed unit costs. Our scale also allows us to fully utilize reclaimed asphalt pavement, which lowers our HMA production costs, and allows us to receive better terms in capital asset purchases with our equipment providers. Most of the projects for which we compete require surety performance bonds as a bidding condition. Many of our competitors are limited in the projects for which they can bid because of such bidding and bonding constraints. Our track record of successful project execution and profitability, coupled with a strong balance sheet, provide us with ample bidding and bonding capacity, allowing us to bid on a large number of projects simultaneously. As such, we have never been prevented from bidding a project due to bidding and bonding requirements. The scale advantages from our leading relative market position support our growth strategy.

Customer and Revenue Diversification. We perform both new construction and maintenance infrastructure services over a wide geographic footprint for both public and private clients. Our largest customers are state DOTs. For the fiscal year ended September 30, 2017, the Alabama DOT and the North Carolina DOT accounted for 14.9% and 13.9% of our revenues, respectively. Projects performed for various Departments of Transportation accounted for 41.9% of revenues for the fiscal year ended September 30, 2017. Our 25 largest projects accounted for 22.4%, of our fiscal 2017 revenues. While we have the capabilities required for large infrastructure projects, a core principle of our strategy is to perform many smaller projects with varied complexity and short durations. In fiscal 2017, our average project size was $1.7 million and our projects had an average duration of approximately eight months. We believe this strategy, coupled with our disciplined bidding process, yields revenue diversification and enables us to better manage our business through market cycles.

Consistent History of Managing Construction Projects and Contract Risk. Our long and successful track record in each of the markets that we serve provides us with an understanding of the various risks associated with transportation infrastructure projects. We serve as prime contractor on approximately 70% of our projects and as a subcontractor on the remaining 30%. When serving as prime contractor, we utilize subcontractors to perform approximately 30% of the total project. The vast majority of our projects are fixed unit price contracts, pursuant to which a portion of our revenues is tied to the volume of various project components. We combine our experience,

 

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local market knowledge and fully integrated management information systems to effectively bid, execute on and manage projects. We capture project costs such as labor and equipment expenses on a daily basis. Our managers review daily project reports to determine whether actual project costs are tracking to budget.

Successful Record of Executing and Integrating Acquisitions. One of our core competencies is successfully identifying, executing and integrating acquisitions. Since 2001, we have completed 15 acquisitions, which have enabled us to expand our end-markets, service offerings and geographic reach. We derive acquisition synergies by expanding the pool of project opportunities of our acquired companies through enhancing their service offerings and bidding capacities. Our acquisition philosophy involves retaining the local management team of the acquired business, maintaining operational decisions at the local level and providing strategic insights and leadership through our senior management team. Acquisition integration primarily involves the implementation of our standardized bidding and management information systems across the functional areas of accounting and operations. These management information systems provide acquired companies with the necessary tools to capture and analyze cost and to improve operating results.

Common Processes and Technology Systems. We employ a common set of operational processes and utilize leading technology systems to track all of our operations. These practices and systems are important competitive advantages in several areas of our business. Our uniform estimating and job cost systems, developed for our business and improved internally, offers a critical advantage not only in the procurement of work, but also the procurement of profitable work, by providing an accurate measure of our cost for individual items in a bid. In contrast, we believe many of our competitors have not invested equivalent resources to develop systems with the same level of detail, which can make them less competitive in the bidding process and/or less profitable. We also track and analyze our competitors’ historical bids and bidding tendencies, which provides us with a critical bidding advantage. Since all of our project teams utilize the same processes and are trained to the same standards, our management tools allow us to optimize personnel and equipment usage across our project portfolio during project execution, improving asset utilization and providing significant cost savings.

Experienced Management Team and Supportive Sponsor. Our executive officers are seasoned leaders with complementary skill sets and a track record of financial success spanning over 30 years and multiple business cycles. As the senior executives of the North American arm of an international construction company, our Chief Executive Officer and our Chief Financial Officer built a civil infrastructure company which operated over 50 HMA plants in five states before its sale in 1999. Collectively, they have successfully completed approximately 50 acquisitions in the civil infrastructure sector over the course of their careers. Our five Senior Vice Presidents possess over 150 years of combined management experience with both publicly and privately held civil infrastructure companies operating in the Southeastern United States. In addition, following this offering, SunTx will continue to own a significant economic interest in our Company. After giving effect to this offering and the Reclassification (as defined herein), SunTx will own                  shares of our Class B common stock and     % of the voting power of our outstanding common stock. The Executive Chairman of our board of directors, Ned N. Fleming, III, played a key role in our founding, and we believe that we will continue to benefit from his ongoing involvement following the completion of this offering. Furthermore, we believe that our dual-class capital structure will contribute to the stability and continuity of our board of directors and senior management, allowing them to focus on creating long-term stockholder value.

Our Growth Strategy

Capitalize on Increased State and Federal Spending on U.S. Transportation Infrastructure. There is currently an $836.0 billion backlog of projects to repair deteriorating bridges and highways in the United States. According to the American Society of Civil Engineers, the roads in each of the states in which we operate received infrastructure report cards with a grade of “B-” or “C.” We expect the poor condition of the roads in the markets

 

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that we serve to provide consistent opportunities for growth. Funding for projects in these markets will come from a variety of sources. In addition to the FAST Act and other legislative proposals, each state in which we operate maintains a transportation infrastructure fund supported primarily by fuel taxes. Whether by state constitution or statute, these funds are generally protected and required to be used for transportation infrastructure purposes. We are well-positioned to take advantage of increased infrastructure spending due to our broad footprint of existing HMA production facilities designed with significant excess capacity across the Southeastern United States.

Organically Expand Our Geographic Footprint. We believe the economic climate of the Southeastern United States is more favorable than other parts of the country with commensurate population growth trends, which will lead to significant future federal, state and local infrastructure spending. We have the financial and organizational resources to add additional workforce and equipment, and we are highly experienced in developing new plant sites, to expand into adjacent markets. In addition, we maintain strategic partnerships with subcontractors affording additional scalability in labor and equipment. Our financial profile and track record also facilitate significant growth in bonding capacity—a challenge that may prove difficult for smaller, privately held competitors. We continually evaluate opportunities to expand organically in the Southeastern United States.

Consistent Pursuit of Acquisitions. Over the last 16 years, our consistent organic growth has been augmented by the successful acquisition and integration of 15 complementary construction businesses, establishing us as a leading industry consolidator. Our management team has acquired businesses in a variety of economic cycles, with the number of opportunities generally increasing in cyclical downturns. Our senior management team has successfully completed approximately 50 acquisitions over the course of their careers. Our management team’s experience, industry expertise, integrity and strong relationships with industry players allow us to be considered a “buyer-of-choice” with targeted, high-quality prospective targets, most of which are family owned and operated. These advantages, together with the proceeds of this offering and the opportunity to use our equity as a component of acquisition consideration, should further enhance our acquisition prospects. We maintain an acquisition pipeline with a growing number of opportunities to expand our geographic footprint. While most opportunities in our pipeline consist of add-on acquisitions in the Southeastern United States, we also continuously evaluate platform investments that would allow expansion into neighboring states.

Consistent with this strategy, on September 22, 2017, we completed an approximately $10.8 million asset acquisition of certain sand and gravel mining operations located in Etowah, Elmore and Autauga counties in Alabama. This acquisition increased our aggregate reserves and will allow us to further capitalize on vertical integration opportunities.

Continue to Capitalize on Vertical Integration Opportunities. We consume approximately 80% of the HMA we produce. In certain markets, we also mine aggregates, such as sand and gravel, used as raw materials in the production of HMA, which lowers our input costs. We believe there are additional vertical integration opportunities to enhance operational efficiency and allow us to capture additional margin throughout the value chain, including the acquisition or development of additional aggregate sites and liquid asphalt terminals.

Enhance Profitability Through Operational Improvements. We complement sophisticated business practices across our platform with fully integrated management information systems to drive operational efficiencies. With strategic oversight by our management team, operating income margins increased 310 basis points from fiscal 2015 to fiscal 2017. These margin improvements are accomplished through profit optimization plans and leveraging information technology and financial systems to improve project execution and control costs. Moreover, we improve margins on acquired businesses as we standardize business practices across functional areas, including, but not limited to, estimation, project management, finance, information technology, risk management, purchasing and fleet management.

 

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Strengthen and Support Human Capital. We have an experienced and skilled workforce of over 1,800 employees, which we believe is our most valuable asset. Attracting, training and retaining key personnel have been and will remain critical to our success. We will continue to focus on providing our personnel with training, personal and professional growth opportunities, performance-based incentives, stock ownership opportunities and other competitive benefits in order to strengthen and support our human capital base.

Our Industry

We operate in the large and growing highway and road construction industry, which generated approximately $165.0 billion of revenues in 2014. Federal, state and local DOT budgets drive industry performance, with the public sector generating 95% of total industry revenues in 2016. In 2015, the FAST Act was passed, providing visibility and certainty of funding and planning for state DOTs. The FAST Act earmarked $305.0 billion for transportation infrastructure spending through 2020, with highway and transit projects accounting for $205.0 billion and $48.0 billion, respectively. The current administration recently proposed spending $1.0 trillion over the next ten years on infrastructure projects, which could also drive an increase in spending on the significant backlog of national and local transportation infrastructure needs. The non-discretionary nature of highway and road construction services and materials supports highly stable and consistent industry growth.

Additionally, there are strong industry tailwinds in each of the five states in which we operate. The Alabama Transportation Rehabilitation and Improvement Program and Rural Assistance Match Program, created in 2012 and 2013, respectively, are initiatives aimed at investing $1.2 billion and $25.0 million, respectively, on the state’s transportation infrastructure. The Florida Department of Transportation received $10.8 billion of funding for the 2017 fiscal year, with $4.1 billion specifically allocated for highway construction projects. In 2015, Georgia passed House Bill 170, replacing 34 short-term funding programs and providing $1.0 billion per year for transportation needs with a focus on the state’s backlog of maintenance projects. In 2017, the North Carolina State Transportation Improvement Program increased the state’s plan from a $320.0 million two-year program to a ten-year program estimated at $1.6 billion in additional transportation revenue. Finally, in 2016, South Carolina passed Act 275, which provides $4.2 billion in transportation infrastructure funding over the next ten years, an increase of $150.0 million per year over prior funding levels, with $2.0 billion directed toward widening and improving existing interstates and $1.4 billion directed toward pavement resurfacing.

Within the highway and road construction industry, we operate in the asphalt paving materials and services segment. Asphalt paving mix is the most common roadway material used today, covering 94% of the more than 2.7 million miles of paved U.S. roadways. We believe asphalt will continue to be the pavement of choice for roads due to its cost effectiveness, durability and reusability, as well as minimized traffic disruption during paving, as compared to concrete.

Competition is constrained in our industry because participants are limited by the distance that materials can be efficiently transported, resulting in a fragmented market of over 13,300 businesses, many of which are local or regional operators. Participants in these markets range from small, privately-held companies focused on a single material, product or market to multinational corporations that offer a wide array of construction materials, products and paving and related services. In each market, our primary competitors are primarily local businesses, with an occasional large, national corporation providing competition.

Projects and Customers

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. We provide a wide range of large sitework construction, including site development, paving, and utility and drainage

 

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systems construction, and supply the HMA required for the projects. Our projects consist of both new construction and maintenance services. Publicly and privately funded projects accounted for approximately 70% and 30% of our fiscal 2017 construction contract revenues, respectively. Our public customers include federal agencies, state DOTs and local municipalities. Our private clients include commercial and residential developers and local businesses.

Our largest customers are state DOTs. For the fiscal year ended September 30, 2017, the Alabama DOT and the North Carolina DOT accounted for 14.9% and 13.9% of our revenues, respectively. Other than these customers, no other customer accounted for more than 10% of our revenues for such period. Projects performed for various Departments of Transportation accounted for 41.9% of revenues for the fiscal year ended September 30, 2017. Our 25 largest projects accounted for 22.4% of revenues for the fiscal year ended September 30, 2017.

Though larger than our average size project of $1.7 million in fiscal 2017, the selected projects below exhibit the wide range of our service capabilities and provide insight into our most recent organic growth initiative.

Project 1—NORTH CAROLINA DOT I-95 IMPROVEMENTS

 

INSERT PICTURE   

Contract Value: $53.2 million

 

Type of Bid: Fixed Unit Price

 

Targeted Completion Date: February 2021

 

Key Highlights:

  

 

   Seven miles of widening on I-95

 

   Prime contractor

 

   306,000 tons of HMA

  

 

   Scope of project includes grading, storm water drainage, HMA paving, and construction of bridges and concrete structures

Project Highlights: This project includes grading, storm water drainage, HMA paving and construction of concrete structures, including two new bridges, along a seven mile stretch of I-95 in Johnson County, North Carolina. This project is part of an organic growth initiative to expand our operations in North Carolina. While this project will include existing workforce and equipment, we will also purchase a new HMA plant and establish a new permanent plant site in close proximity to the job site. Not only will this allow us to furnish HMA to this project, but it will also establish a new market for bidding, which we believe will organically expand our geographic footprint for additional bidding opportunities in the future.

Project 2—HUNTSVILLE MADISON COUNTY AIRPORT AUTHORITY—TAXIWAY CHARLIE (GROUP VI PHASE 4B)

 

INSERT PICTURE   

Contract Value: $15.9 million

 

Type of Bid: Fixed Unit Price

 

Targeted Completion Date: March 2018

 

Key Highlights:

  

 

   Airport taxiway construction

 

   Prime contractor

 

   3,500 linear feet of new taxiway construction

  

 

   55,000 tons of aggregate base course

 

   34,000 tons of HMA

 

   Two box culverts

Project Highlights: This project includes grading, storm water drainage, box culverts, aggregate base, HMA paving and airfield lighting for a new taxiway at the Huntsville Madison County International Airport. The Group VI series of projects are being constructed to allow the airport to accommodate Group VI aircraft, such as Boeing

 

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747-8 and Airbus A380. The scope of work, tight tolerances, very short completion timeline and close proximity of our Huntsville HMA plant combine to create a project that fits our competitive position and experience. Phase 4B is a continuation of Phase 4A, which we completed on schedule and within the budget in 2016. Having been the prime contractor for the previous phase of the project was a major advantage for us. Our project team and proven group of subcontractors were already in place and familiar with the project requirements, which provided a distinct bidding advantage.

Project 3—FLORIDA DOT—US-90 IMPROVEMENTS

 

INSERT PICTURE   

Contract Value: $3.8 million

 

Type of Bid: Fixed Unit Price

 

Targeted Completion Date: April 2018

 

Key Highlights:

  

 

   Ten miles of highway construction

 

   Prime contractor

 

   24,000 tons of HMA

  

 

   Widening, milling, HMA paving and miscellaneous subcontract work

Project Highlights: We were chosen as the prime contractor for various improvements on US-90. This project requires multiple methods of paving in order to upgrade the serviceability of US-90 in Monticello, Florida. The rural section of this project involves widening shoulders while protecting the scenic Crepe Myrtles trees lining the roadway. The urban section of this project consists of sidewalk repairs, as well as milling, minor drainage, signing, resurfacing and striping. Our Tallahassee, Florida HMA plant is in close proximity, allowing us to efficiently and economically transport materials to the job site.

Project 4—GEORGIA DOT STATE ROUTE 230 RESURFACING

 

INSERT PICTURE   

Contract Value: $2.5 million

 

Type of Bid: Fixed Unit Price

 

Targeted Completion Date: March 2018

 

Key Highlights:

  

 

   14 miles of HMA resurfacing

 

   Prime contractor

 

   28,000 tons of HMA

  

 

   Miscellaneous subcontract work

Project Highlights: This project involves the placement of an open graded crack relief interlayer of HMA followed by a layer of recycled asphaltic concrete superpave surface mix. Upon completion of the HMA construction on this project, the roadway shoulders will be rehabilitated and the roadway will receive new traffic striping. We will internally source the HMA from our plant located in Cary, Georgia, which is in close proximity to the job site. The close proximity of our HMA plant and our highly efficient paving crews provided us an advantage in the bidding process.

Contract Backlog

Our contract backlog was $364.1 million and $549.9 million at September 30, 2016 and September 30, 2017, respectively.

 

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We generally include a construction project in our contract backlog at the time it is awarded and to the extent we believe funding is probable. Backlog is not a term recognized under GAAP, but it is a common measure used in our industry. Our backlog consists of uncompleted work on contracts in progress and contracts for which we have executed a contract but have not commenced the work. For uncompleted work on contracts in progress we include (i) executed change orders, (ii) pending change orders for which we expect to receive confirmation in the ordinary course of business and (iii) claims that we have made against our customers for which we have determined we have a legal basis under existing contractual arrangements and as to which we consider collection to be probable. Our backlog also includes low bid no contract jobs which consist of (i) public bid jobs where we were the low bidder and no contract has been executed and (ii) private work jobs where we have been notified we are the low bidder or have been given a notice to proceed, but no contract has been executed. Low bid no contract backlog was $71.2 million and $92.3 million at September 30, 2016 and September 30, 2017, respectively. At September 30, 2017, we expect approximately 74% of our contract backlog will be completed within the next twelve months.

Certain customer contracts contain options that are exercisable at the discretion of our customer to award additional work to us, without requiring us to go through an additional competitive bidding process. In addition, some customer contracts also contain task orders that are signed under master contracts pursuant to which we perform work only when the customer awards specific task orders to us. Awarded contracts that include unexercised contract options and unissued task orders are included in contract backlog to the extent such options are exercised or the issuance of such task orders is probable.

Substantially all of the contracts in our contract backlog, as well as unexercised contract options and unissued task orders, may be canceled or modified at the election of the customer. Historically, we have not experienced material amounts of contract cancellations or modifications. Many projects are added to our contract backlog and completed within the same fiscal year and therefore may not be reflected in our beginning or year-end contract backlog. Contract backlog does not include external sales of HMA and aggregates. See “—Types of Contracts and Contract Management.”

Information Systems

We utilize standardized information technology systems across all areas of bidding, plant production, job management, and accounting for the purpose of enhanced procurement of work, project execution and financial controls. We provide information technology oversight and support from our corporate headquarters in Dothan, Alabama. The operational information systems we employ throughout our company are industry specific applications that in some cases have been internally or vendor modified and improved to fit our operations. Our enterprise resource planning software is integrated with our operational information systems wherever possible to deliver relevant, real-time operational data to designated personnel. The company-wide standardization of our information systems allows for the efficient integration of newly acquired companies. Accounting and operations personnel of acquired companies are trained not only by our information technology support staff, but by long-tenured employees in our organization with extensive experience using our systems. We believe our information systems provide our people with the tools to execute their individual job function and achieve our strategic initiatives.

Competition

We compete against multiple competitors in all of the markets in which we operate. Our competitors typically range from small, family-owned companies focused on a single material, product or market to multinational corporations that offer a wide array of construction materials, products and paving and related services. In each market, our primary competitors are usually local businesses, and occasionally, a large, national corporation.

 

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Based on our project management experience, financial strength, reputation for quality, aggregate materials availability, operating efficiencies and location advantages, we believe we are well-positioned to compete effectively in the markets in which we operate.

Types of Contracts and Contract Management

Types of Contracts

Our customer contracts are primarily fixed unit price contracts. Pricing on a fixed unit price contract is typically based on approved quantities. We also from time to time enter into fixed total price contracts, also known as lump sum contracts, which require that the total amount of work be performed for a single price. Another type of contract we enter into less frequently are design build contracts, which are generally performed under special fixed unit price arrangements. Our contracts generally take four to nine months to complete. During fiscal year 2017, our average contract amount was $1.7 million. For the majority of our customer contracts, upon completion and final acceptance, we receive our final payment upon completion of the necessary contract closing documents and our obligations to the owner are final at that point. On some contracts, we are required to furnish a warranty on our construction. These warranties, when required, are usually one year in length but can range up to three years according to the owners’ specifications. Historically, warranty claims have not been material to our business.

Contract Management

We identify potential contracts through a variety of sources, including: (i) subscriber services that consolidate and alert us to contracts open for bidding; (ii) posted solicitations by federal, state and local governmental entities through agency websites, disclosure of long-term infrastructure plans or advertising and other general solicitations; (iii) our business development efforts; and (iv) communications with other participants in our industry. We take into consideration several factors that can create variability in contract performance and our financial results compared to our bid assumptions and methodologies on a contract. As a result, after determining the potential contracts that are available, we decide which contracts to pursue based on a non-exclusive list of factors, which include relevant skills required by the contract, the contract size and duration, availability of our personnel and equipment, size and makeup of our current contract backlog, our competitive advantages and disadvantages, our prior experience, the contracting agency or customer, the source of contract funding, geographic location, likely competition, construction risks, gross margin opportunities, penalties or incentives and type of contract.

To ensure the successful completeness and accuracy of our original bid analysis, the bid preparation for potential projects typically involves three phases.

 

    Phase One: We review the plans and specifications of the project so that we can identify (i) the various types of work involved and related estimated materials, (ii) the contract duration and schedule, and (iii) any unique or risky aspects of the project.

 

    Phase Two: We estimate the cost and availability of labor, materials and equipment, subcontractors and the project team required to complete the contract in accordance with the plans, specifications and construction schedule. Substantially all of our estimates are made on a per unit basis for each bid item, with the typical contract containing 50 to 200 bid items.

 

    Phase Three: Management conducts a detailed review of the estimate. This review includes an analysis of assumptions regarding cost, the approach, means and methods of completing the project, assumptions regarding staffing and productivity and assumptions regarding risk. After concluding this detailed review of the cost estimate, management determines the appropriate profit margin to calculate the total bid amount. This profit amount varies according to management’s perception of the degree of difficulty of the contract, the existing competitive climate, and the size and makeup of our contract backlog. Throughout this process, we work closely with our project managers so that all issues concerning a contract, including any risks, can be better understood and addressed as appropriate.

 

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To ensure subcontracting costs used in tendering bids for construction contracts do not change, we obtain firm quotations from our subcontractors before submitting a bid. Also, to mitigate the risk of material price changes, we obtain “not to exceed” quotations from our suppliers, which, for projects of longer duration, usually contain price escalator provisions. These quotations typically include quantity guarantees that are tied to our prime contract. We have no obligation for materials or subcontract services beyond those required to complete the respective contracts that we are awarded for which quotations have been provided.

After a contract has been awarded and during the construction phase, we monitor our progress by comparing actual costs incurred and quantities completed to date with budgeted amounts and the project schedule. Monthly, we review our estimate of total forecasted revenue, cost and expected profit for each contract.

During the normal course of some projects, we or our customer may initiate modifications or changes to the original contract to reflect, among other things, changes in quantities, specifications or design, method or manner of performance, facilities, materials, site conditions and period for completion of the work.

Generally, the scope and price of these modifications are documented in a “change order” to the original contract and reviewed, approved and paid for in accordance with the normal change order provisions of the contract. Occasionally, we are asked to perform extra or change order work as directed by the customer even if the customer has not agreed in advance on the scope or price of the work to be performed. This process may result in disputes over whether the work performed is beyond the scope of the work included in the original contract plans and specifications or, even if the customer agrees that the work performed qualifies as extra work, the price that the customer is willing to pay for the extra work. These disputes may not be settled to our satisfaction. Even when the customer agrees to pay for the extra work, we may be required to fund the cost of such work for a lengthy period of time until the change order is approved and funded by the customer. In addition, any delay caused by the extra work may adversely impact the timely scheduling of other work on the contract (or on other contracts) and our ability to meet contract milestone dates. Historically, we have been successful at managing the impacts caused by change orders, and change orders have not had a material adverse effect on our business.

Most contracts with governmental agencies provide for termination at the convenience of the customer, with requirements to pay us for work performed through the date of termination. The termination of a government contract for the convenience of the owner is an extremely rare occurrence. Many of our contracts contain provisions that require us to pay liquidated damages if specified completion schedule requirements are not met. Historically, we have not been materially adversely affected by liquidated damages provisions.

We act as prime contractor on most of our construction projects. As prime contractor, we are responsible for the performance of the entire contract, including subcontract work. To manage the risk of non-performance by our subcontractors, we typically require the subcontractor to furnish a bond or other type of security to guarantee its performance and/or we retain payments in accordance with contract terms until their performance is complete. Disadvantaged business enterprise regulations require us to use our good faith efforts to subcontract a specified portion of contract work done for governmental agencies to certain types of disadvantaged contractors or suppliers.

Insurance and Bonding

We maintain general and excess liability, property, workers’ compensation and medical insurance, all in amounts consistent with industry practice.

In the ordinary course of our business, we are generally required to provide various types of surety bonds that provide an additional measure of security to the customer for our performance under certain public and private

 

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sector contracts. Our ability to obtain surety bonds depends upon our capitalization, working capital, past performance, management expertise and external factors, including the capacity of the overall surety market. Surety companies consider such factors in light of the amount of our contract backlog that we have bonded and their underwriting standards. The capacity of the surety market is subject to market-based fluctuations driven primarily by the level of surety industry losses and the degree of surety market consolidation. Some of our competitors may be limited in the projects they can bid because of bidding and bonding capacity constraints. Our track record of successful project execution and profitability, coupled with a strong balance sheet, provide us with ample bidding and bonding capacity, which allows us to bid a large number of projects simultaneously. Since our inception, we have never been prohibited from pursuing a project due to bidding and bonding requirements.

Raw Materials

We purchase raw materials, including, but not limited to, diesel fuel, liquid asphalt, other petroleum-based resources, sand and rock from numerous sources. With few exceptions, we do not enter into long-term agreements to purchase raw materials. We receive quotes from suppliers, most with a “not to exceed” price for the quoted product over the life of a project. In the HMA production process, components of a mix include virgin aggregates, such as sand and rock, liquid asphalt, and reclaimed asphalt pavement (“RAP”). We are able to internally supply RAP, a byproduct of asphalt resurfacing projects, to all of our HMA plants, and virgin aggregates in some of our market areas. The majority of our HMA plants sit in or near suppliers’ rock quarries, thereby reducing the hauling cost of material to our plant. The price and availability of raw materials may vary from year to year due to market conditions and production capacities. We do not expect a lack of availability of any raw materials over the next twelve months.

Seasonality

The activity of our business fluctuates due to seasonality because our business is primarily conducted outdoors. Therefore, seasonal changes and other weather-related conditions, in particular extended rainy and cold weather in the spring and fall and major weather events, such as hurricanes, tornadoes, tropical storms and heavy snows, can adversely affect our business and operations through a decline in both the use of our products and the demand for our services. In addition, 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 our third and fourth fiscal quarters typically result 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 the third fiscal quarter, while a warm dry spring may enable earlier project startup.

Employees

We have an experienced and skilled workforce. Attracting, training and retaining key personnel have been and will remain critical to our success. Through the use of our management information systems, on-the-job training, and educational seminars, employees are trained to understand the importance of project execution. We place additional focus on training relative to estimating, project management and project cost control. Our crews typically specialize in a specific phase of construction, such as grading or paving, with each crew member assigned to a specific task in order to maximize daily production. A core tenet of our organizational philosophy is to promote from within and offer advancement opportunities at all levels of employment to incentivize professional excellence, which helps us retain talented employees. Moreover, we proactively recruit additional talent in both conventional and creative manners to fill open positions when promoting internally is not an option.

 

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At September 30, 2017, we employed approximately 500 salaried employees and 1,350 hourly employees. The total number of hourly personnel is subject to the volume of projects in progress and is seasonal. During fiscal 2017, the number of hourly employees ranged from approximately 1,200 to 1,350 and averaged approximately 1,300. We are not subject to any collective bargaining agreements with respect to any of our employees. We believe that we have strong relationships with our employees.

Training and Safety

We place a high emphasis on the safety of the public, our customers and our employees. To that end, we conduct extensive safety training programs, which have allowed us to maintain a high safety level at our worksites. All newly-hired employees undergo an initial safety orientation, and for certain types of projects and processes, we conduct specific hazard training programs. Our project foremen and superintendents conduct on-site safety meetings, and our full-time safety inspectors make random site safety inspections and perform assessments. In addition, certain operational employees are required to complete an OSHA-approved and/or MSHA-approved safety course. Moreover, we promote a culture of safety by encouraging employees to immediately correct and report all unsafe conditions.

Environmental Regulations

Our operations are subject to stringent and complex federal, state and local laws and regulations governing the environmental, health and safety aspects of our operations or otherwise relating to environmental protection. These laws and regulations may impose numerous obligations on 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.

Such federal laws include the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act, governing solid and hazardous waste management, the Clean Air Act and the Clean Water Act, protecting air and water resources, and the Toxic Substances Control Act, governing the management of hazardous materials, in addition to analogous state laws. Numerous governmental authorities, such as 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) as well as 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 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.

 

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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 the construction industry could continue, resulting in increased costs of doing business and consequently affecting profitability.

We have incurred, and may in the future incur, significant capital and operating expenditures to comply with such laws and regulations. To the extent laws are enacted or other governmental action is taken that restricts our operations or imposes more stringent and costly operating, waste handling, disposal and cleanup requirements, our business, prospects, financial condition or results of operations could be materially adversely affected.

We regularly monitor and review our operations, procedures, and policies for compliance with our operating permits and related laws and regulations. We believe that our operations and facilities, whether owned or leased, are in substantial compliance with applicable environmental laws and regulations and that any non-compliance is not likely to have a material adverse effect on our operations or financial condition.

Industrial operations, including equipment maintenance and storage, asphalt manufacturing and processing, underground storage tank usage, and other storage and use of hazardous materials and petroleum products, have been and/or are conducted at our facilities for, in some cases, over fifty (50) years. While we have conducted our operations in substantial compliance with applicable environmental laws, we have, from time to time, identified contamination associated with these activities at several of our facilities, including at our offices and shops located in Raleigh, NC. We have incurred costs for the investigation and remediation of hazardous substances and petroleum products identified at several facilities and investigation and remediation activities are ongoing at several facilities. In addition, additional investigation would be required to rule out such contamination at our HMA plants in Clanton, AL, Fort Payne, AL, Guntersville, AL and Raleigh, NC. We may also become subject to similar liabilities in connection with prior and future acquisitions. We do not believe that liabilities associated with known or potential contamination at any of our facilities will have a material adverse effect on our operations or financial condition.

Properties

Our headquarters are located in a 7,000 square foot owned office space in Dothan, Alabama. At September 30, 2017, we operated 26 HMA plants and had 30 office locations and six quarries. We believe all of our properties are suitable for their intended use and that our facilities are adequate to conduct our operations. However, we routinely evaluate the purchase or lease of additional properties or the consolidation of our properties, as our business needs change.

 

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The following table sets forth specifics of the properties that we own or lease.

 

Property Location    Owned/Leased    Quarry    HMA Plant    Office Space

Alabama

                 

Dothan (headquarters)

   Owned                      X

Dothan

   Leased                      X

Ariton

   Owned               X        X

Montgomery

   Leased                      X

Montgomery

   Owned                      X

Montgomery

   Owned               X        X

Clanton

   Owned               X        X

Pelham

   Leased                      X

Calera

   Leased               X       

Huntsville

   Owned               X       

Huntsville

   Owned                      X

Decatur

   Owned               X        X

Lacon

   Leased               X       

Shorter

   Owned        X               X

Shorter

   Owned               X       

Shorter

   Leased        X              

Andalusia

   Leased                      X

River Falls

   Leased               X       

Guntersville

   Leased                      X

Guntersville

   Leased               X       

Scottsboro

   Owned               X       

Ft. Payne

   Leased               X       

Skyline

   Leased        X               X

Owens Cross Roads

   Leased                      X

Brantley

   Leased               X       

Headland

   Owned               X        X

Deatsville

   Owned        X               X

Gadsden

   Owned        X               X

Florida

                 

Hosford

   Owned                      X

Tallahassee

   Owned                      X

Tallahassee

   Owned               X        X

Freeport

   Owned               X        X

Freeport

   Owned        X              

Panama City

   Owned               X        X

Wildwood

   Owned               X        X

Plant City

   Owned               X        X

Georgia

                 

Cochran

   Owned                      X

Cochran

   Owned               X        X

Surrency

   Owned               X        X

Oak Park

   Leased               X       

 

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Property Location    Owned/Leased    Quarry    HMA Plant    Office Space

North Carolina

                 

Raleigh

   Owned                      X

Raleigh

   Leased                      X

Raleigh

   Leased               X       

Knightdale

   Leased               X       

Wake Forest

   Leased               X       

Holly Springs

   Leased               X       

Intellectual Property

We own Internet domains in the United States that we use in connection with our business. We do not own or license any patents.

Legal Proceedings

Due to the nature of our business, we are involved in routine litigation or subject to other disputes or claims related to our business activities, including workers’ compensation claims and employment-related disputes. In the opinion of our management, none of the pending litigation, disputes or claims against us, if decided adversely to us, would have a material adverse effect on our financial condition, cash flows or results of operations.

 

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MANAGEMENT

Directors and Executive Officers

Set forth below is the name, age, position and a brief description of the business experience of each of our directors and executive officers at January 26, 2018.

 

Name    Age    Position

Ned N. Fleming, III

       57    Executive Chairman of the Board of Directors and Director

Charles E. Owens

       67    President, Chief Executive Officer and Director

R. Alan Palmer

       65    Executive Vice President and Chief Financial Officer

M. Brett Armstrong

       56    Senior Vice President

Robert P. Flowers

       58    Senior Vice President

John L. Harper

       53    Senior Vice President

F. Julius Smith, III

       48    Senior Vice President

John A. Walker

       61    Senior Vice President

Craig Jennings

       59    Director

Mark R. Matteson

       54    Director

Michael H. McKay

       55    Director

Stefan L. Shaffer

       61    Director

Ned N. Fleming, III is one of the founders of our Company and has served as Executive Chairman of our board of directors since our inception. He has served as Managing Partner of SunTx since 2001. He also serves as Chairman of the board of directors of NationsBuilders Insurance Services, Inc., Ranger Offshore, Inc. and Big Outdoor LLC, and as a member of the board of directors of Veritex Holdings, Inc. (Nasdaq: VBTX). Mr. Fleming previously served as a member of the board of directors of DF&R Restaurants, Inc., a formerly publicly traded restaurant operator, and Spinnaker Industries, Inc., a publicly traded material manufacturing company. Prior to co-founding SunTx in 2001, Mr. Fleming served as President and Chief Operating Officer of Spinnaker Industries, Inc. until its sale in 1999. Prior to that, Mr. Fleming worked at a Dallas-based private investment firm, where he led acquisitions in the food and beverage and defense industries. Mr. Fleming received a Master of Business Administration with distinction from Harvard Business School and a Bachelor of Arts in Political Science from Stanford University. Due to his role with our Company since our inception, Mr. Fleming has significant knowledge of us and our industry, which we believe makes him well-qualified to serve as a director of our Company.

Charles E. Owens is one of the founders of our Company and has served as our President and Chief Executive Officer since its inception. He has been a member of our board of directors since 2001 and has overseen the successful acquisition and integration of 15 companies. From 1990 until its sale in 1999, Mr. Owens was President and Chief Executive Officer of Superfos Construction U.S., Inc. (“Superfos”), the North American operation of Superfos a/s, a publicly held Danish company. During his tenure at Superfos, he oversaw the successful acquisition and integration of approximately 35 companies, turning Superfos into one of the largest highway construction companies in the United States. Prior to 1990, Mr. Owens was President of Couch Construction, Inc., a subsidiary of Superfos headquartered in Dothan, Alabama. Mr. Owens received a Bachelor of Business Administration from Troy University. Due to his role with our Company since our inception, Mr. Owens has significant knowledge of us and our industry, which we believe makes him well-qualified to serve as a director of our Company.

R. Alan Palmer is one of the founders of our Company and has served as our Executive Vice President and Chief Financial Officer since 2006. Between 2001 and 2006, Mr. Palmer provided consulting services to the Company.

 

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Prior to 2000, Mr. Palmer was Vice President and Chief Financial Officer of Couch Construction, Inc. and Superfos. Mr. Palmer has been principally involved in the acquisition and integration of approximately 50 companies alongside Mr. Owens over the course of his career. Mr. Palmer is a Certified Public Accountant. Mr. Palmer received a Bachelor of Science in Accounting from Auburn University.

M. Brett Armstrong has served as our Senior Vice President since 2017 and has served as Chief Operating Officer of Wiregrass Construction Company, Inc. (“WCC”), a subsidiary of our Company acquired in 2002, since 2008 and as Vice President and Area Manager of WCC from 2000 to 2008. Mr. Armstrong has over 30 years of construction management experience. Prior to joining WCC, he was Area Manager over the Columbus, Georgia division of Ashland Paving and Construction, Inc. Prior to that, he was Area Manager over the Columbus, Georgia division of Superfos. Mr. Armstrong holds a Bachelor of Science in Civil Engineering from Auburn University.

Robert P. Flowers has served as our Senior Vice President since 2017 and has served as President of C.W. Roberts Contracting, Inc. since joining our Company in 2013. Mr. Flowers has over 30 years of construction management experience. Prior to joining our Company, he was Executive Vice President of Estimating and Construction for Barlovento, LLC, a general contractor performing civil and commercial construction throughout the United States. Prior to that, Mr. Flowers was the Georgia Platform President of Superfos.

John L. Harper has served as our Senior Vice President since 2017 and has served as President of WCC, a subsidiary of our Company acquired in 2002, since 1996. Mr. Harper has over 30 years of construction management experience. Prior to becoming President of WCC, he served as Vice President of Estimating/Project Management. An active member of several state and national highway construction organizations, Mr. Harper currently serves as the Second Vice Chairman of the National Asphalt Pavement Association. Mr. Harper received a Bachelor of Science in Finance from Auburn University.

F. Julius Smith, III has served as our Senior Vice President since 2017 and has served as President of Fred Smith Construction, Inc., a subsidiary of our Company acquired in 2011, since 2009. With over 20 years of construction management experience, Mr. Smith previously served as Chief Operating Officer of Fred Smith Construction, Inc. from 2005 to 2009. Prior to that, he held various other positions within Fred Smith Construction, Inc. and also served in the supply corp of the U.S. Navy. Mr. Smith received a Master of Business Administration and a Bachelor of Arts in History from Wake Forest University.

John A. Walker has served as our Senior Vice President since 2017 and previously served as Vice President of Business Development since joining our Company in 2009. Mr. Walker has over 30 years of experience in the construction industry. Before joining our Company, he was a Regional Vice President at Oldcastle Materials, Inc. Prior to that, he was the Alabama Platform President of Superfos. Mr. Walker is a Licensed Professional Engineer and holds a Bachelor of Science in Civil Engineering from Auburn University.

Craig Jennings has served as a member of our board of directors since 2017. Since 2001, he has been a partner and Chief Financial Officer of SunTx. He also serves as Chairman of the board of directors of Interface Security Systems Holdings, Inc. and as a member of the board of directors of Ranger Offshore, Inc. Prior to co-founding SunTx, Mr. Jennings was Vice President of Finance and Treasurer of Spinnaker Industries, Inc., a publicly traded materials manufacturing company, until its sale in 1999. Prior to that, Mr. Jennings held senior finance positions at a publicly traded oil field services company and a publicly traded food and beverage company. Prior to that, Mr. Jennings was a Senior Audit Manager with Ernst & Young LLP. Mr. Jennings received his Bachelor of Business Administration from the University of Toledo and is a Certified Public Accountant. We believe that Mr. Jenning’s investment, financial and directorship experience makes him well-qualified to serve as a director of our Company.

 

 

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Mark R. Matteson has served as a member of our board of directors since our inception and was appointed as Chairman of our Audit Committee in 2008. Since 2001, he has been a partner of SunTx. Prior to co-founding SunTx in 2001, Mr. Matteson was Vice President of Corporate Development of Spinnaker Industries, Inc., a publicly traded materials manufacturing company, until its sale in 1999. He currently serves as Chairman of the board of directors of Carolina Beverage Group and as a member of the board of directors of NationsBuilders Insurance Services, Inc. Mr. Matteson received a Master of Business Administration from Georgetown University and a Bachelor of Arts in Foreign Service and International Politics from The Pennsylvania State University. Due to his role with our Company since our inception, Mr. Matteson has significant knowledge of us and our industry, which we believe makes him well-qualified to serve as a director of our Company.

Michael H. McKay has served as a member of our board of directors since 2002 and was appointed to our Audit Committee in 2008. Mr. McKay has been an Advisory Partner at Bain & Company since 2009. He also serves as a member of the board of directors of Big Outdoor Holdings, LLC and Hubbardton Forge, LLC. Since joining Bain & Company in 1987, he helped found its Private Equity Group and has evaluated and developed strategies for hundreds of businesses. From 2004 to 2006, Mr. McKay served as Chief Investment Officer of a principal investment firm based in Washington D.C., making public and private investments, and was Managing Partner of a Boston-based hedge fund from 2006 to 2009. Mr. McKay is also a Senior Lecturer at the Brandeis International Business School, where he has served on the faculty since 2010. Mr. McKay received a Master of Business Administration from The University of Chicago Graduate School of Business, where he received the Mayer Prize as top graduating student, and a Bachelor of Arts with high distinction in Economics from Harvard University. We believe that Mr. McKay’s experience analyzing, financing and investing in public and private companies makes him well-qualified to serve as a director of our Company.

Stefan L. Shaffer has served as a member of our board of directors since 2017. Mr. Shaffer is the Managing Partner of SPP Capital Partners, a middle market investment banking and asset management firm, which he co-founded in 1989. Prior to founding SPP Capital Partners, Mr. Shaffer was a Vice President in the Private Placement Group at Bankers Trust Company from 1986 to 1989, and worked as attorney with the law firm of White & Case from 1982 to 1986. Mr. Shaffer received a Juris Doctor from Cornell University Law School and a Bachelor of Arts from Colgate University. We believe that Mr. Shaffer’s experience analyzing, financing and advising public and private companies makes him well-qualified to serve as a director of our Company.

Board of Directors

The number of members of our board of directors will be determined from time to time by resolution of our board of directors. Currently, our board of directors consists of six persons. Our amended and restated certificate of incorporation will provide that our board of directors will be divided into three classes, with the classes to be as nearly equal in number as possible, and with the directors serving three-year terms. As a result, approximately one-third of our board of directors will be elected each year.

Director Independence and Controlled Company Exemption

Because SunTx will beneficially own a majority of the voting power of our outstanding common stock following the completion of this offering, we expect to be a controlled company under the corporate governance standards of The Nasdaq Stock Market LLC. As a controlled company, we will not need to comply with the applicable rules that would otherwise require our board of directors to have a majority of independent directors and our Compensation Committee and our Nominating and Governance Committee to be independent. Notwithstanding our status as a controlled company, we will remain subject to the applicable rules that require that our Audit Committee is composed entirely of independent directors, subject to a permitted “phase-in” period within one year of listing.

 

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Following the completion of this offering, we intend to utilize some or all of the exemptions available to controlled companies. If at any time we cease to be a controlled company, we will take all action necessary to comply with the listing rules of The Nasdaq Stock Market LLC, including appointing a majority of independent directors to our board of directors and ensuring our Compensation Committee and our Nominating and Corporate Governance Committee are each composed entirely of independent directors, subject to any permitted “phase-in” periods. We will cease to qualify as a controlled company once SunTx ceases to own a majority of the voting power of our outstanding common stock.

To qualify as “independent” under the listing standards of The Nasdaq Stock Market LLC, a director must meet objective criteria set forth in the listing standards of The Nasdaq Stock Market LLC, and our board of directors must affirmatively determine that the director has no material relationship with us (either directly or as a partner, stockholder or officer of an organization that has a relationship with us) that would interfere with his or her exercise of independent judgment in carrying out his or her responsibilities as a director. The independence criteria of The Nasdaq Stock Market LLC include that the director not be our employee and not have engaged in various types of business dealings with us.

Our board of directors will review all direct or indirect business relationships between each director (including his or her immediate family members) and us, as well as each director’s relationships with charitable organizations, to assess director independence as defined in the listing standards of The Nasdaq Stock Market LLC.

Committees of our Board of Directors

We currently have an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance committee. We may have such other committees as our board of directors shall determine from time to time. Each of our committees has the composition and responsibilities described below.

Audit Committee

Rules implemented by The Nasdaq Stock Market LLC and the SEC require us to have an audit committee comprised of at least three directors, each of whom meets the independence and experience standards established by The Nasdaq Stock Market LLC and the Exchange Act, subject to transitional relief during the one-year period following the completion of this offering. Our Audit Committee consists of the following members: Messrs. Matteson, McKay and Shaffer. Our board of directors has determined that                qualifies as an “audit committee financial expert” (as defined in Item 407(d)(5) of Regulation S-K) and that Messrs. Shaffer and McKay are independent (as defined in Rule 10A-3 of the Exchange Act and under the listing standards of The Nasdaq Stock Market LLC). As required by the rules of the SEC and listing standards of The Nasdaq Stock Market LLC, our Audit Committee will consist of a majority of independent members within 90 days of the date our Class A common stock is listed on The Nasdaq Stock Market LLC and will be composed solely of independent directors within one year of such listing date.

Our Audit Committee oversees, reviews, acts on and reports on various auditing and accounting matters to our board of directors, including the selection of our independent accountants, the scope of our annual audits, fees to be paid to our independent accountants, the performance of our independent accountants and our accounting practices. In addition, our Audit Committee oversees our compliance programs relating to legal and regulatory requirements. We have a charter defining our Audit Committee’s primary duties, a copy of which will be available on our website.

 

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Compensation Committee

Our Compensation Committee consists of the following members: Messrs. Matteson, Fleming, III and McKay. Our Compensation Committee establishes salaries, incentives and other forms of compensation for our officers and other employees. Our Compensation Committee also administers our incentive compensation and benefit plans. We have a charter defining our Compensation Committee’s primary duties, a copy of which will be available on our website.

Nominating and Corporate Governance Committee

Our Nominating and Corporate Governance Committee consists of the following members: Messrs. Fleming, III, Owens and Matteson. Our Nominating and Corporate Governance Committee identifies, evaluates and recommends qualified nominees to serve on our board of directors, develops and oversees our internal corporate governance processes and maintains a management succession plan. We have a charter defining our Nominating and Corporate Governance Committee’s primary duties, a copy of which will be available on our website.

Code of Business Conduct and Ethics

Prior to the completion of this offering, our board of directors will adopt a code of business conduct and ethics applicable to our employees, directors and officers, in accordance with applicable federal securities laws and the corporate governance rules of The Nasdaq Stock Market LLC. Any waiver of this code of business conduct and ethics may be made only by our board of directors and will be promptly disclosed as required by applicable federal securities laws and the corporate governance rules of The Nasdaq Stock Market LLC.

Corporate Governance Guidelines

Prior to the completion of this offering, our board of directors will adopt corporate governance guidelines.

 

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EXECUTIVE COMPENSATION

Our Named Executive Officers are:

 

Name(1)    Principal Position

Charles E. Owens

   President and Chief Executive Officer

R. Alan Palmer

   Executive Vice President and Chief Financial Officer

F. Julius Smith, III

   Senior Vice President

 

(1) As an “emerging growth company” our “Named Executive Officers” consist of the individuals who served as our principal executive officer and our two other most highly compensated officers who served as executive officers during our last completed fiscal year.

2017 Summary Compensation Table

The following table provides information regarding the compensation of our Named Executive Officers during the fiscal year ended September 30, 2017.

 

Name and Principal Position   Year  

Salary

($)

 

Bonus

($)(1)

 

Option

Awards

($)(2)

 

All

Other

Compensation

($)(3)

 

Total

($)

Charles E. Owens

      2017       450,000       715,000             21,315       1,186,315

President and Chief Executive Officer

                       

R. Alan Palmer

      2017       307,500       360,000             23,678       691,178

Executive Vice President and Chief Financial Officer

                       

F. Julius Smith, III

      2017       395,962       565,000       412,062       28,871       1,401,895

Senior Vice President

                                                           

 

(1) The amounts in this column consist of the Named Executive Officer’s cash incentive bonus awards, which we award on a discretionary basis based on our board of directors’ determination of our Company’s performance. In addition, in the case of Mr. Smith, the amount shown includes $300,000 of cash retention payments made pursuant to his employment and non-competition agreement.

 

(2) The amount in this column represents the aggregate grant date fair value of option awards computed in accordance with FASB ASC Topic 718 and excludes the effect of estimated forfeiture. For assumptions used in determining the fair value of option awards, see Note 13 (Equity-based Compensation) to our consolidated financial statements included elsewhere in this prospectus.

 

(3) The amounts shown include the following items: (a) for Mr. Owens, the value of personal use of a Company-owned vehicle, Company-paid premiums for long-term care benefits, 401(k) plan matching contributions and Company-paid premiums for long-term disability insurance; (b) for Mr. Palmer, the value of personal use of a Company-owned vehicle, Company-paid premiums for long-term care benefits, 401(k) plan matching contributions and Company-paid premiums for long-term disability insurance; and (c) for Mr. Smith, the value of personal use of a Company-owned vehicle, 401(k) plan matching contributions and Company-paid premiums for life insurance.

 

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Employment or Other Agreements

Mr. Smith

On June 27, 2014, FSC II, LLC (“FSC”), our indirect wholly owned subsidiary, entered into an employment and non-competition agreement with Mr. Smith, pursuant to which Mr. Smith serves as President of FSC. The initial term of the agreement continues until June 30, 2019. The agreement provides for Mr. Smith to receive during the initial term an annual base salary of not less than $350,000 (which was increased to $400,000 on January 1, 2017). At the end of the initial term, the agreement automatically extends on a month-to-month basis, unless either party provides written notice of termination before the end of the month in which the agreement is to be terminated. In addition, Mr. Smith receives monthly retention payments of $25,000 until June 30, 2019, unless his employment is terminated earlier by either party. Mr. Smith may from time to time be eligible to receive a discretionary bonus as we may determine.

Mr. Smith is eligible for the benefits and holidays offered to other FSC employees. Mr. Smith is entitled to family medical coverage and dental insurance at the expense of FSC under any health or dental insurance plan maintained by FSC for its employees, and to 15 days of paid vacation each year. Mr. Smith also is entitled to an FSC-provided cellular phone and to the use of an FSC-provided automobile in his conduct of FSC business for which FSC bears the maintenance costs. For as long as FSC is making retention payments to Mr. Smith, FSC will maintain and pay for a term life insurance policy on Mr. Smith’s life in the amount of $2.0 million, for which Mr. Smith may designate the beneficiary or beneficiaries.

Equity Incentive Plans and Agreements

Non-Plan Stock Option Agreements

On March 31, 2010, we granted a non-plan stock option to Grace, Ltd., a company controlled by Mr. Owens. The option provides for the purchase of 9,475.15 shares of our common stock at an exercise price of $143.60 per share. The expiration date for the option is July 1, 2018. We intend to amend the option to extend the expiration date to July 1, 2021. The foregoing information regarding Mr. Owens’s stock option does not give effect to the Reclassification.

On March 31, 2010, we granted a non-plan stock option to Mr. Palmer. The option provides for the purchase of 15,647.15 shares of our common stock at an exercise price of $143.60 per share. The expiration date for the option is July 1, 2018. We intend to amend the option to extend the expiration date to July 1, 2021. The foregoing information regarding Mr. Palmer’s stock option does not give effect to the Reclassification.

On March 7, 2017, we granted a non-plan stock option to Mr. Smith. The option provides for the purchase of 2,960 shares of our common stock at an exercise price of $1.00 per share. The option was fully vested upon the date of grant, but is exercisable only during a change of control, as defined in the option agreement. The option expires on the earlier of (i) the termination of Mr. Smith’s services, whether as our employee, director or consultant, (ii) March 7, 2027, and (iii) the occurrence of a change of control, after which all unexercised options will be cancelled. The foregoing information regarding Mr. Smith’s stock option does not give effect to the Reclassification.

Construction Partners, Inc. 2016 Equity Incentive Plan

The Construction Partners, Inc. 2016 Equity Incentive Plan (the “2016 Plan”) was adopted by our Company, and approved by our stockholders, on August 19, 2016. The purpose of the 2016 Plan is to enable us and our related

 

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companies to obtain and retain the services of employees, consultants and directors who will contribute to our long range success and to provide incentives that are linked directly to increases in share value which will inure to the benefit of all stockholders. The 2016 Plan provides for the grant of awards of options, restricted stock and restricted stock units, performance awards, stock appreciation rights and other stock-based awards, and is administered by our Compensation Committee. Subject to adjustment in the event of any distribution, recapitalization, stock split, merger, consolidation or similar corporate event, the maximum number of shares available for delivery pursuant to awards under the 2016 Plan is 15,000 shares of our common stock. At September 30, 2017, 5,000 shares of common stock were available for issuance under the 2016 Plan. If an award under the 2016 Plan is cancelled, expires or otherwise terminates, or is forfeited or settled for cash and not in shares, the shares subject to such award will revert to, and again be available for new awards under, the 2016 Plan.

At September 30, 2017, all of the stock options issued under the 2016 Plan have been exercised, and there are no outstanding awards under the 2016 Plan.

Construction Partners, Inc. 2018 Equity Incentive Plan

Prior to the completion of this offering, we anticipate that our board of directors will adopt an amendment and restatement of the 2016 Plan and rename it the Construction Partners, Inc. 2018 Equity Incentive Plan (the “Restated Plan”) pursuant to which our employees, directors and consultants (and those of our affiliates), including our Named Executed Officers, will be eligible to receive awards. We anticipate that the Restated Plan will provide for the grant of options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards and performance awards intended to align the interests of participants with those of our stockholders. The following description of the Restated Plan is based on the form we anticipate adopting, but the Restated Plan has not yet been adopted and the provisions below remain subject to change. As a result, the following description is qualified in its entirety by reference to the Restated Plan once adopted.

Eligibility

Employees, non-employee directors and consultants of us and our affiliates will be eligible to receive awards under the Restated Plan.

Administration

The Restated Plan will be administered by our Compensation Committee (the “Administrator”) pursuant to its terms and all applicable state, federal or other rules or laws.

The Administrator will have the power to determine to whom and when awards are granted, determine the number of shares for awards, prescribe and interpret the terms and provisions of each award agreement (the terms of which may vary), accelerate the exercise terms of an award, delegate duties under the Restated Plan and execute all other responsibilities permitted or required thereunder.

Securities to be Offered

Subject to adjustment in the event of any distribution, recapitalization, stock split, merger, consolidation or similar corporate event, we anticipate that the number of shares available for delivery pursuant to awards under the Restated Plan will be equal to                  shares of our Class A common stock (the “Share Pool”). If an award under the Restated Plan is forfeited, settled for cash or expires without the actual delivery of shares, any shares subject to such award will revert to the Share Pool and again be available for new awards under the Restated Plan.

 

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Types of Awards

Options

We may grant options to eligible persons including: (1) incentive options (only to our employees or those of our subsidiary or parent corporations) which comply with Section 422 of the Internal Revenue Code of 1986 (the “Code”); and (2) nonqualified options that are not intended to be incentive options. The exercise price of each option granted under the Restated Plan will be stated in the award agreement and may vary; however, the exercise price for an option will not be less than the fair market value per share of our Class A common stock as of the date of grant (or 110% of the fair market value for incentive options granted to holders of more than 10% of the voting power of all classes of stock of us or any of our subsidiary or parent corporations), nor will the option be re-priced without the prior approval of our stockholders. The fair market value per share of our Class A common stock will be determined based on reported transactions on The Nasdaq Stock Market LLC. Options may be exercised as the Administrator determines, but not later than ten years from the date of grant. The Administrator will determine the methods and form of payment for the exercise price of an option (including, in the discretion of the Administrator, payment by promissory note or by withholding of otherwise deliverable shares) and the methods and forms in which our Class A common stock will be delivered to a participant.

Stock Appreciation Rights

A stock appreciation right is the right to receive an amount equal to the excess of the fair market value of one share of our Class A common stock on the date of exercise over the grant price of the stock appreciation right, payable in either cash or shares or any combination thereof as determined by the Administrator. The per share grant price of a stock appreciation right will be determined by the Administrator, but in no event will the grant price be less than the fair market value of our Class A common stock on the date of grant, determined as described for options above. The Administrator will have the discretion to determine other terms and conditions of a stock appreciation rights award.

Restricted Stock Awards

A restricted stock award is a grant of shares of our Class A common stock subject to a risk of forfeiture, performance conditions, restrictions on transferability and any other restrictions imposed by the Administrator in its discretion. Restrictions may lapse at such times and under such circumstances as determined by the Administrator. Except as otherwise provided under the terms of the award agreement, the holder of a restricted stock award will have rights as a stockholder, including the right to vote the shares subject to the restricted stock award or to receive dividends on the shares subject to the restricted stock award during the restriction period. The Administrator will provide, in the award agreement, whether the restricted stock will be forfeited upon certain terminations of employment. Unless otherwise determined by the Administrator, Class A common stock distributed in connection with a stock split or stock dividend, and other property distributed as a dividend, will be subject to restrictions and a risk of forfeiture to the same extent as the restricted stock award with respect to which such Class A common stock or other property has been distributed.

Restricted Stock Units

Restricted stock units are rights to receive shares of our Class A common stock, cash or a combination of both stock and cash at the end of a specified period. The Administrator may subject restricted stock units to restrictions (which may include a risk of forfeiture) to be specified in the award agreement, which restrictions may lapse at such times determined by the Administrator. Restricted stock units may be settled by delivery of our Class A common stock, cash equal to the fair market value of the specified number of shares covered by the restricted

 

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stock units or any combination thereof determined by the Administrator at the date of grant or thereafter. The participant will not be entitled to receive dividends or dividend equivalents unless the award agreement specifically provides therefor.

Performance Awards

The vesting, exercise or settlement of awards may be subject to achievement of specified objective performance goals based on one or more business criteria set forth in the Restated Plan. The Administrator may use one or more of the following criteria, which may be applied to a participant, a business unit or to us and our affiliates, in establishing performance goals for such performance awards:

 

    revenues;

 

    earnings before all or any of interest expense, taxes, depreciation and/or amortization;

 

    funds from operations;

 

    funds from operations per share;

 

    operating income;

 

    operating income per share;

 

    pre-tax or after-tax income;

 

    net cash provided by operating activities;

 

    cash available for distribution;

 

    cash available for distribution per share;

 

    working capital and components thereof;

 

    sales (net or gross) measured by product line, territory, customer or customers or other category;

 

    return on equity or average stockholders’ equity;

 

    return on assets;

 

    return on capital;

 

    enterprise value or economic value added;

 

    share price performance;

 

    improvements in our attainment of expense levels;

 

    implementation or completion of critical projects;

 

    improvement in cash-flow (before or after tax);

 

    net earnings;

 

    earnings per share;

 

    earnings from continuing operations;

 

    net worth;

 

    credit rating;

 

    levels of expense, cost or liability by category, operating unit or any other delineation;

 

    any increase or decrease of one or more of the foregoing over a specified period; or

 

    the occurrence of a Change in Control (as defined in the Restated Plan).

The Administrator may provide in any performance award for the inclusion or exclusion of the effect on reported financial results of any of the following events or occurrences: asset write-downs; litigation or claim judgments or settlements; changes in tax laws, accounting principles or other laws or provisions; reorganization or restructuring programs, including share repurchasing programs; acquisitions or divestitures; foreign currency exchange translation gains or losses; any loss from a discontinued operation as described in Accounting Standards Codification Topic 360; goodwill impairment charges; revenue or earnings attributable to a minority ownership in another entity; any amounts accrued by us or any subsidiary pursuant to management bonus plans or cash profit

 

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sharing plans and related employer payroll taxes for the fiscal year; any discretionary or matching contributions made to a savings and deferred profit-sharing plan or deferred compensation plan for the fiscal year; interest, expenses, taxes, depreciation and depletion, amortization and accretion charges; and gains and losses that are treated as extraordinary items under Accounting Standards Codification Topic 225. The level or levels of performance specified with respect to a performance goal may be established in absolute terms, as objectives relative to performance in prior periods, as an objective compared to the performance of one or more comparable companies or an index covering multiple companies on a per share basis, against our performance as a whole or against particular of our entities, segments, operating units or products, on a pre-tax or after-tax basis, in tandem with any other performance goal, or otherwise as the Administrator may determine. Performance awards granted to eligible persons who the Administrator deems to be “covered employees” under Section 162(m) of the Code will be administered in accordance with the rules and regulations issued under Section 162(m). The Administrator may also impose individual performance criteria on the awards, which, if required for compliance with Section 162(m) of the Code, will be approved by our stockholders.

Other Stock-Based Awards

The Administrator may grant other stock-based awards that are payable in, valued in whole or in part by reference to, or otherwise based on our Class A common stock, including without limitation dividend equivalent rights.

Change in Control and Other Corporate Transactions

In the event of a Change in Control (as defined in the Restated Plan) or certain other significant corporate transactions, outstanding awards will be treated as the Administrator determines in its discretion. The Administrator may arrange for continuation or assumption of awards, or substitution of equivalent awards of the surviving entity or its parent; cancel awards in exchange for cash or securities in an amount equal to the value of vested awards, or to the difference between the value of the underlying shares of our Class A common stock, and the exercise price for vested options and stock appreciation rights; or cancel outstanding awards without payment of any consideration, in which case participants will be given a reasonable period during which to exercise their awards.

Plan Amendment or Termination

Our board of directors or our Compensation Committee may amend or terminate the Restated Plan. However, stockholder approval will be required for any amendment to the extent necessary to comply with applicable law or exchange listing standards. In addition, our board of directors or our Compensation Committee may amend awards granted under the Restated Plan, but no amendment may impair the rights of a participant under any outstanding award without his or her consent. The Restated Plan will remain in effect for a period of ten years unless earlier terminated by our board of directors or our Compensation Committee.

Clawback

We anticipate that all awards under the Restated Plan will be subject to any clawback or recapture policy adopted by us, as in effect from time to time.

 

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Outstanding Equity Awards at September 30, 2017

The following table presents information regarding outstanding equity-based awards held by our Named Executive Officers at September 30, 2017. This information does not give effect to the Reclassification.

 

Name    Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable(1)
   Number of
Securities
Underlying
Options (#)
Unexercisable
   Option
Exercise
Price ($)
   Option
Expiration
Date

Charles E. Owens

       9,475.15               143.60        July 1, 2021

R. Alan Palmer

       15,647.15               143.60        July 1, 2021

F. Julius Smith, III

              2,960        1.00        (2)  

 

(1) Mr. Owens holds unexercised options indirectly through Grace, Ltd., which were granted pursuant to a Non-Plan Stock Option Agreement, dated March 31, 2010, as amended on July 1, 2011. Mr. Palmer’s unexercised options were granted pursuant to a Non-Plan Stock Option Agreement, dated March 31, 2010, as amended on July 1, 2011.

 

(2) Mr. Smith’s option was granted pursuant to an Option Agreement, dated March 7, 2017, and may be exercised only on the occurrence of a change of control. The option expires on the earlier of (i) the termination of Mr. Smith’s services, whether as our employee, director or consultant, (ii) March 7, 2027, and (iii) the occurrence of a change of control, after which all unexercised options will be cancelled.

Pension Benefits and Nonqualified Deferred Compensation; 401(K) Plan

We do not provide defined benefit pension benefits. Our Named Executive Officers are eligible to participate in the Construction Partners Holdings, Inc. 401(k) Plan (the “401(k) Plan”) on the same basis as other employees who satisfy the 401(k) Plan’s eligibility requirements. As such, our Named Executive Officers, along with other 401(k) Plan participants, are eligible for discretionary employer matching contributions and discretionary contributions. Effective January 1, 2017, all 401(k) Plan participants are eligible for employer matching contributions equal to 100% of the participant’s elective deferral contributions that are not over 3% of the participant’s compensation, plus 50% of the participant’s elective deferral contributions that are over 3% of the participant’s compensation but not over 5% of compensation.

Potential Payments upon Termination and a Change in Control

Employment Agreements

If FSC terminates Mr. Smith’s employment for any reason, with or without Cause (as defined in his employment and non-competition agreement), he will be entitled to continued payment of his retention payments of $25,000 per month until June 30, 2019. In addition, if Mr. Smith’s employment with FSC is terminated either voluntarily by Mr. Smith or by FSC for any reason except his death, FSC has the right to elect to enforce a two-year non-compete period, pursuant to which Mr. Smith will be restricted from competing with FSC in road construction, paving, grading, asphalt and any other business activity engaged in by FSC within 75 miles of the city limits of Raleigh, North Carolina. If FSC makes such election, Mr. Smith will be entitled to monthly non-compete payments equal to his then-current monthly base salary for the 24-month non-compete period.

 

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Option Agreement

As described above under “Non-Plan Stock Option Agreements,” Mr. Smith has an option to purchase 2,960 shares of our common stock at an exercise price of $1.00 per share in the event of a change of control. The foregoing information regarding Mr. Smith’s stock option does not give effect to the Reclassification.

Director Compensation

The following table provides information regarding the compensation of our non-employee directors during the fiscal year ended September 30, 2017.

 

Name   

Fees Earned or Paid in Cash

($)

  

Total

($)

Ned N. Fleming, III

             

Mark R. Matteson

             

Michael H. McKay

       60,000        60,000

David Webb(1)

             

 

(1) On November 15, 2017, Mr. Webb resigned from his position as a member of our board of directors.

Our directors who are also our employees will not receive any additional compensation for their service on our board of directors, but we believe that attracting and retaining qualified non-employee directors is critical to our future growth and governance. We are reviewing the non-employee director compensation packages provided by certain peer companies and intend to implement a non-employee director compensation program in connection with this offering.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Review and Approval of Related Party Transactions

We do not currently have a written policy regarding the review and approval of related party transactions, but intend to implement such a policy in connection with, and prior to the completion of, this offering. We anticipate that one of our Audit Committee’s functions will be to review and approve all relationships and transactions in which we and our directors, director nominees and executive officers and each of their immediate family members, as well as holders of more than 5% of any class of our capital stock and their immediate family members, have a direct or indirect material interest. We anticipate that such policy will be a written policy included as part the Audit Committee charter that will be implemented by our Audit Committee and in the code of business conduct and ethics that our board of directors will adopt prior to the completion of this offering. See “Management—Committees of our Board of Directors—Audit Committee.”

Historically, our management and board of directors have reviewed and approved related party transactions. The terms of the related party transactions and agreements disclosed in this section were determined by and among affiliated entities and, consequently, are not necessarily the result of arm’s length negotiations. Although our management and board of directors believe that the terms of the related party transactions described below are reasonable, it is possible that we could have negotiated more favorable terms for such transactions with unrelated third parties.

Our management and board of directors will continue to review and approve related party transactions until the adoption, prior to the completion of this offering, of the written policy described above.

Ongoing and Historical Transactions with Related Parties

We have engaged and continue to engage in related party transactions with certain current and former directors, members of management and beneficial holders of more than 5% of our capital stock.

Management Services Agreement

Construction Partners Holdings has a management services agreement with SunTx Capital Management Corp. (“SunTx Capital Management”), an affiliate of SunTx. Pursuant to the agreement, SunTx Capital Management provides management services to Construction Partners Holdings, including management services with respect to financing, business strategies and business development, in return for a monthly fee of $83,333, plus an amount not exceeding 2% of the total value in connection with any acquisition, disposition, debt or equity financings by Construction Partners Holdings and out-of-pocket expenses. The agreement expires on October 1, 2023 and may be terminated earlier by SunTx Capital Management upon 60 days’ prior written notice to Construction Partners Holdings. For these management services, Construction Partners Holdings paid SunTx Capital Management approximately $1.3 million during each of the fiscal years ended September 30, 2016 and 2017. In connection with this offering, we expect to terminate this agreement and pay a termination fee of approximately $6.5 million, payable in two installments.

Registration Rights Agreement

We have a registration rights agreement (the “Registration Rights Agreement”) with SunTx Fulcrum Fund, L.P., SunTx Fulcrum Dutch Investors, L.P., Squam Lake Investors IV, L.P. and certain other parties thereto. Pursuant to the Registration Rights Agreement, we are required to register under the Securities Act shares of our common stock owned by such holders (the “Registrable Securities”) upon their request under the following circumstances:

 

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Demand Registration Rights

Subject to certain restrictions, at any time after six months following the consummation of an initial public offering, holders of at least 20% of our outstanding Registrable Securities may demand that we register at least 50% of the aggregate number of Registrable Securities owned by such requesting holders. We are not obligated to file a registration statement pursuant to these demand provisions on more than two occasions on Form S-1. However, our holders are entitled to make an unlimited number of demands for registration on Form S-3; provided that we will not be obligated to file more than one registration statement on Form S-3 in response to a demand registration statement within six months after the effective date of any registration statement filed by us in response to a demand registration.

Piggy-back Registration Rights

If, at any time, we propose to register an offering of our securities, either for our account or for the account of our other holders, we must give written notice to the holders to allow each to include its shares in the registration, subject to certain marketing and other limitations.

Conditions and Limitations; Expenses

The registration rights are subject to certain conditions and limitations, including the right of the underwriters to limit the number of Registrable Securities to be included in a registration and our right to delay or withdraw registration statement under certain circumstances. We will generally pay all registration expenses in connection with our obligations under the Registration Rights Agreement. The Registration Rights Agreement also provides that we will indemnify our holders against certain liabilities which may arise under the Securities Act and terminates five years after the effective date of our initial public offering.

Other Transactions

On January 30, 2015, FSC entered into a master services subcontract with Austin Trucking, LLC (“Austin Trucking”), an entity owned by an immediate family member of Mr. Smith, our Senior Vice President. Pursuant to the agreement, Austin Trucking performs subcontract work for FSC, including trucking services. For these subcontract services, we incurred costs of approximately $11.0 million and $11.8 million during the fiscal years ended September 30, 2016 and 2017, respectively. At September 30, 2016 and September 30, 2017, we had $0.6 million and $1.0 million, respectively, due to Austin Trucking reflected in accounts payable.

From time to time, we provide construction services to various companies owned by Fred J. Smith, Jr., the father of Mr. Smith, our Senior Vice President. For these services, we earned approximately $2.0 million and $6.3 million during the fiscal years ended September 30, 2016 and 2017, respectively. At September 30, 2016 and September 30, 2017, we had $2.7 million and $5.3 million, respectively, due from these companies reflected in contracts receivable.

FSC pays a consulting fee to Fred J. Smith, Jr. FSC paid Fred J. Smith, Jr. approximately $0.2 million during each of the fiscal years ended September 30, 2016 and 2017.

FSC rents vehicles from Fred Smith Company, an entity owned by Fred J. Smith, Jr. The vehicles are rented on a month-to-month basis. FSC paid the Fred Smith Company approximately $1.4 million and $1.2 million during the fiscal years ended September 30, 2016 and 2017, respectively.

For corporate events, we charter a boat from Deep South Adventures, LLC, which is owned by Mr. Harper, our Senior Vice President. We paid Deep South Adventures, LLC approximately $0.4 million and $0.3 million during the fiscal years ended September 30, 2016 and 2017, respectively.

 

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Harper Law Firm, LLC (“Harper Law Firm”), a law firm owned by the wife of Mr. Harper, provides legal services to WCC. For this legal work, WCC paid Harper Law Firm approximately $0.3 million during each of the fiscal years ended September 30, 2016 and 2017.

On June 1, 2014, Construction Partners Holdings entered into an access agreement with Island Pond Corporate Services, LLC (“Island Pond”) regarding certain property owned by affiliates of Ned N. Fleming, III, one of our founders and the Executive Chairman of the Board of Directors as well as Managing Partner of SunTx. Pursuant to the agreement, Island Pond grants Construction Partners Holdings the non-exclusive right to use that certain land located in Baker County, Georgia for the purposes of business development. Pursuant to the terms of the agreement, Construction Partners Holdings paid Island Pond approximately $0.3 million during each of the fiscal years ended September 30, 2016 and 2017.

WCC leases office space for the Dothan, Alabama office from H&K, Ltd., an entity partly owned by Mr. Harper. Mr. Harper is the general partner of H&K, Ltd. The office space is leased through January 1, 2020. Under the lease agreement, WCC pays a fixed minimum rent of $7,000 per month. Pursuant to the terms of the lease agreement, WCC paid H&K, Ltd. approximately $0.1 million during each of the fiscal years ended September 30, 2016 and 2017.

Since 2004, WCC has employed Brandon Owens, the son of Mr. Owens, one of our founders and our President and Chief Executive Officer. Pursuant to the employment arrangement, Brandon Owens is the Vice President of Operations at WCC. Under the employment arrangement, WCC paid Brandon Owens $316,005 and $346,565 during the fiscal years ended September 30, 2016 and 2017, respectively.

Since June 2015, we have employed Nelson Fleming, the son of Mr. Fleming, III. Pursuant to the employment arrangement, Nelson Fleming serves as our Director of Acquisition and Strategy Development. In connection with his employment, we paid Nelson Fleming $73,319 and $95,558 during the fiscal years ended September 30, 2016 and 2017, respectively. Additionally, on August 22, 2016, Nelson Fleming was granted options to purchase 1,050 shares of our common stock at an exercise price per share of $85.00, which options he has exercised in full. The foregoing information regarding Nelson Fleming’s stock options does not give effect to the Reclassification.

WCC leases office space for its Montgomery, Alabama office from H&A Properties LLC, an entity owned by Mr. Harper and Mr. Armstrong, two of our Senior Vice Presidents. The office space is leased through early 2020. Under the lease agreement, WCC pays a fixed minimum rent of $5,500 per month. Pursuant to the terms of the lease agreement, WCC paid H&A Properties LLC approximately $0.1 million during each of the fiscal years ended September 30, 2016 and 2017.

 

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PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information at                 , 2018 with respect to the beneficial ownership of our Class A common stock and our Class B common stock (i) immediately prior to this offering (after giving effect to the Reclassification) and (ii) as adjusted to reflect the sale of                  shares of our Class A common stock in this offering, in each case by:

 

    the selling stockholders;

 

    each stockholder known by us to be the beneficial owner of more than 5% of the outstanding shares of our Class A common stock or our Class B common stock;

 

    each of our directors;

 

    each of our Named Executive Officers; and

 

    all of our directors and executive officers as a group.

We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated in the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of our Class A common stock or our Class B common stock that they beneficially own. Except as indicated in the footnotes below, based on the information furnished to us by or on behalf of the selling stockholders, no selling stockholder is a broker-dealer or an affiliate thereof.

Applicable percentage ownership is based on              shares of our Class A common stock and              shares of our Class B common stock outstanding at                     , 2018 (after giving effect to the Reclassification). Beneficial ownership as reported in the table below has been determined in accordance with Rule 13d-3 under the Exchange Act. In computing the number of shares beneficially owned by a person or entity and the percentage ownership of that person or entity, we deemed to be outstanding all shares of our Class A common stock and our Class B common stock subject to options held by that person or entity that are currently exercisable or that will become exercisable within 60 days of                     , 2018. Unless otherwise indicated in the footnotes below, the address of each beneficial owner listed in the table below is c/o Construction Partners, Inc., 290 Healthwest Drive, Suite 2, Dothan, Alabama 36303.

 

     Shares Beneficially Owned
Prior to this Offering
   

% of Total

Voting

Power Before

this Offering

   

Number of

Shares

Being

Offered

    Shares Beneficially
Owned After this Offering
   

% of Total

Voting

Power After

this Offering

 
    Class A     Class B         Class A     Class B    

Name of Beneficial Owner

 

Shares

   

%

   

Shares(1)

   

%

       

Shares

   

%

   

Shares

   

%

   

Selling Stockholders and other 5% Stockholders

                                                                                       

SunTx CPI Expansion Fund, L.P.

                     

SunTx Fulcrum Fund, L.P.

                     

SunTx Fulcrum Dutch Investors, L.P.

                     

Grace, Ltd.

                     

Directors and Named Executive Officers

                     

Ned N. Fleming, III

                     

Craig Jennings

                     

Mark R. Matteson

                     

Michael H. McKay

                     

Stefan L. Shaffer

                     

Charles E. Owens

                     

R. Alan Palmer

                     

F. Julius Smith, III

                     

Directors and Executive Officers as a Group (12 persons)

                                                                             

 

* Represents less than 1%.

 

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Name of Beneficial Owner

  

Number of

Additional

Shares to be Sold

if the

Underwriters’

Option is

Exercised in Full

  

Shares Beneficially

Owned After this Offering if the

Underwriters’ Option is

Exercised in Full

  

% of Total

Voting

Power After

Our Initial

Public

Offering(1)

     

Class A

  

Class B

  
     

Shares

  

%

  

Shares

  

%

  

Selling Stockholders and other 5% Stockholders

                             

SunTx CPI Expansion Fund, L.P.

                             

SunTx Fulcrum Fund, L.P.

                             

SunTx Fulcrum Dutch Investors, L.P.

                             

Grace, Ltd.

                             

Directors and Named Executive Officers

                             

Ned N. Fleming, III

                             

Craig Jennings

                             

Mark R. Matteson

                             

Michael H. McKay

                             

Stefan L. Shaffer

                             

Charles E. Owens

                             

R. Alan Palmer

                             

F. Julius Smith, III

                             

Directors and Executive Officers as a Group (12 persons)

                                                                 

 

* Represents less than 1%.

Each of the selling stockholders in this offering is deemed to be an underwriter within the meaning of Section 2(a)(11) of the Securities Act.

 

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DESCRIPTION OF OUR CAPITAL STOCK

The following is a description of the material terms of, and is qualified in its entirety by, our amended and restated certificate of incorporation and our amended and restated bylaws, each of which will become effective immediately prior to the completion of this offering. Our amended and restated certificate of incorporation and amended and restated bylaws will be approved prior to this offering by our existing stockholders. Copies of these documents will be filed with the SEC as exhibits to the registration statement of which this prospectus is a part. The description of our capital stock reflects changes to our capital structure that will occur upon the completion of this offering.

Upon the completion of this offering, our authorized capital stock will consist of                  shares of our Class A common stock, par value $0.001 per share,                  shares of our Class B common stock, par value $0.001 per share and                  shares of undesignated preferred stock, par value $0.001 per share. No shares of undesignated preferred stock will be issued or outstanding immediately after the completion of this offering. Unless our board of directors determines otherwise, we will issue all shares of our capital stock in uncertificated form.

Common Stock

Our amended and restated certificate of incorporation will provide for a dual class common stock structure consisting of our Class A common stock and our Class B common stock. Shares of our Class A common stock and our Class B common stock are identical in all respects, except with respect to voting rights, conversion rights and transfer restrictions applicable to shares of our Class B common stock, as described below.

Voting Rights

The holders of our Class A common stock will be entitled to one vote per share, and the holders of our Class B common stock will be entitled to             votes per share. The holders of our Class A common stock and our Class B common stock will vote together as a single class on all matters submitted to a vote of stockholders, including the election of directors, unless otherwise required by applicable law, our amended and restated certificate of incorporation or our amended and restated bylaws. For example, our amended and restated certificate of incorporation will provide that certain amendments thereto affecting the voting power of our Class B common stock require the affirmative vote or written consent of a majority of the holders of the then outstanding shares of our Class B common stock, voting as a separate class. Furthermore, the DGCL requires holders of our Class A common stock or our Class B common stock, as the case may be, to vote separately as a single class if we were to seek to amend our amended and restated certificate of incorporation:

 

    to increase or decrease the par value of that class; or

 

    in a manner that alters or changes the powers, preferences or special rights of that class in a manner that would adversely affect its holders.

The holders of each class of our common stock do not have cumulative voting rights in the election of directors.

Dividend Rights

Holders of our Class A common stock and our Class B common stock will be entitled to receive dividends at the same rate if, as and when declared by our board of directors, out of our legally available assets, in cash, property, shares of our common stock or other securities, after the payment of dividends required to be paid on our outstanding preferred stock, if any. See “—Dividends.”

If we pay a dividend or distribution on our Class A common stock, payable in shares of our Class A common stock, we will also be required to pay a pro rata and simultaneous dividend or distribution on our Class B common stock,

 

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payable in shares of our Class B common stock. Similarly, if we pay a dividend or distribution on our Class B common stock, payable in shares of our Class B common stock, we will also be required to make a pro rata and simultaneous dividend or distribution on our Class A common stock, payable in shares of our Class A common stock.

The Compass Credit Agreement imposes restrictions on our ability to declare a cash dividend on our common stock, unless, after giving effect to such dividend, we would be in compliance with the financial covenants therein 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Distributions in Connection with Mergers or Other Business Combinations

Upon a merger, consolidation or substantially similar transaction, holders of each class of our common stock are entitled to receive equal per share payments or distributions, except that: (i) in any transaction in which shares of our capital stock are distributed, such shares distributed to the holder of a share of our Class B common stock may have                times the voting power of any shares distributed to the holder of a share of our Class A common stock; and (ii) shares of one class of our common stock may receive disproportionate distributions or payments if such merger, consolidation or similar transaction is approved by the affirmative vote (or written consent) of the holders of a majority of the outstanding shares of our Class A common stock and our Class B common stock, each voting as a separate class.

Liquidation Rights

Upon our liquidation, dissolution or winding up or upon a sale or disposition of all or substantially all of our assets, the assets legally available for distribution to our stockholders will be distributable ratably among the holders of our Class A common stock and our Class B common stock treated as a single class, subject to the prior satisfaction of all outstanding debts and other liabilities and the preferential rights and liquidation preferences to be paid on our outstanding preferred stock, if any.

Conversion and Restrictions on Transfer

Our Class A common stock will not be convertible into any other shares of our capital stock. Shares of our Class B common stock will be convertible at any time as follows: (i) at the option of the holder thereof, a share of our Class B common stock may be converted into one share of our Class A common stock; or (ii) upon the election of the holders of a majority of the then-outstanding shares of our Class B common stock, all outstanding shares of our Class B common stock will be converted into shares of our Class A common stock. In addition, each share of our Class B common stock will convert automatically into one share of our Class A common stock upon any transfer, whether or not for value, except for certain transfers that will be described in our amended and restated certificate of incorporation, including transfers to SunTx and its affiliates, transfers that have been consented to in writing in advance by the holders of a majority of the shares of our Class B common stock then held by SunTx and its affiliates, and certain transfers to trusts or for estate planning purposes. Once converted into shares of our Class A common stock, shares of our Class B common stock will not be reissued.

Protective Provision

Our amended and restated certificate of incorporation will provide that we will not, whether by merger, consolidation or otherwise, amend, alter, repeal or waive certain provisions of our amended and restated certificate of incorporation, or adopt any provision inconsistent therewith or effect any reclassification of the shares

 

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of our Class A common stock or our Class B common stock, unless such action is first approved by the affirmative vote or written consent of the holders of a majority of the then-outstanding shares of our Class B common stock, voting as a separate class, and, to the fullest extent permitted by law, the holders of our Class A common stock will have no right to vote thereon. However, this provision is subject to any other vote required by applicable law, and under Section 242(b)(2) of the DGCL, holders of our Class A common stock would be entitled to vote as a class upon a proposed action, whether or not entitled to vote by our amended and restated certificate of incorporation, if such action would increase or decrease the par value of our Class A common stock, or alter or change the powers, preferences or special rights thereof so as to affect them adversely.

Other Matters

Our amended and restated certificate of incorporation will not entitle holders of either class of our common stock to preemptive rights. No redemption or sinking fund provisions are applicable to either class of our common stock. Neither class of our common stock may be subdivided or combined in any manner unless the other class of our common stock is subdivided or combined in the same proportion. All outstanding shares of each class of our common stock are, and the shares of our Class A common stock to be sold in this offering will be, fully paid and non-assessable.

Preferred Stock

Our amended and restated certificate of incorporation will authorize our board of directors to establish one or more series of preferred stock. Unless required by law or by any rules adopted by The Nasdaq Stock Market LLC, these authorized shares of preferred stock will be available for issuance without further action by our stockholders. Our board of directors is able to determine, with respect to any series of preferred stock, the terms and rights of such series, including:

 

    the number of shares constituting such series and the distinctive designation thereof;

 

    the dividend rate(s) on the shares of such series, the terms and conditions upon which and the periods in respect of which dividends shall be payable, whether dividends shall be cumulative, and, if so, from which date(s), and the relative rights of priority, if any, of payment of dividends on shares of such series;

 

    whether such series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms thereof;

 

    whether such series shall have conversion privileges, and, if so, the terms and conditions thereof, including provision for adjustment of the conversion rate in such events as our board of directors shall determine;

 

    whether or not the shares of such series shall be redeemable, and, if so, the terms and conditions thereof, including the date(s) upon or after which they shall be redeemable, and the amount per share payable in the event of redemption, which amount may vary under different conditions and at different redemption dates;

 

    whether such series shall have a sinking fund for the redemption or purchase of shares of such series, and, if so, the terms and amount thereof;

 

    the rights of the shares of such series in the event of our voluntary or involuntary liquidation, distribution of assets, dissolution or winding up, and the relative rights of priority, if any, of payment of shares of such series; and

 

    any other relative rights, powers and preferences, and the qualifications, limitations and restrictions thereof, of such series.

We could issue a series of preferred stock that, depending on its terms, may impede or discourage an acquisition attempt or other transaction that some, or a majority, of our stockholders might believe to be in their best interests or in which you might receive a premium over the market price for your shares of our Class A common stock. Additionally, the issuance of preferred stock may adversely affect the holders of our Class A common stock by restricting dividends on our Class A common stock, diluting the voting power of our Class A common stock or subordinating the liquidation rights of our Class A common stock. As a result of these or other factors, the issuance of preferred stock could have an adverse impact on the market price of our Class A common stock.

 

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Dividends

The DGCL permits a corporation to declare and pay dividends out of “surplus” or, if there is no “surplus,” out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. “Surplus” is defined as the excess of a corporation’s net assets over the amount determined to be a corporation’s capital by its board of directors. The capital of a corporation is typically calculated to be, and cannot be less than, the aggregate par value of all issued shares of capital stock. Net assets equals the fair value of the total assets minus total liabilities. The DGCL also provides that a dividend may not be paid out of net profits if, after the payment of such dividend, capital is less than the capital represented by the outstanding stock of all classes having a preference upon the distribution of assets.

The declaration and payment of any dividend will be subject to the discretion of our board of directors. The time and amount of any dividend will be dependent upon our financial condition, operations, cash requirements and availability, debt repayment obligations, capital expenditure needs, restrictions in our debt instruments, industry trends, the provisions of Delaware law affecting the payment of dividends to stockholders and any other factors our board of directors may consider relevant.

We currently 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. See “Dividend Policy.”

Related Party Transactions and Corporate Opportunities

Subject to the limitations of applicable law, our amended and restated certificate of incorporation, among other things, will:

 

    permit us to enter into transactions with entities in which one or more of our officers or directors are financially or otherwise interested so long as it has been approved by our board of directors;

 

    permit any of our stockholders, officers or directors to conduct business that competes with us and to make investments in any kind of property in which we may make investments; and

 

    provide that if any director or officer of one of our affiliates who is also one of our officers or directors becomes aware of a potential business opportunity, transaction or other matter, other than one expressly offered to that director or officer in writing solely in his or her capacity as our director or officer, that director or officer will have no duty to communicate or offer that opportunity to us, and will be permitted to communicate or offer that opportunity to such affiliates and that director or officer will not be deemed to have (i) acted in a manner inconsistent with his or her fiduciary or other duties to us regarding the opportunity or (ii) acted in bad faith or in a manner inconsistent with our best interests.

Anti-takeover Effects of Provisions of Delaware Law, Our Amended and Restated Certificate of Incorporation and Our Amended and Restated Bylaws

Our amended and restated certificate of incorporation and our amended and restated bylaws will, and the DGCL does, contain provisions that are intended to enhance the likelihood of continuity and stability in the composition of our board of directors. These provisions are intended to avoid costly takeover battles, reduce our vulnerability to a hostile change of control and enhance the ability of our board of directors to maximize stockholder value in connection with any unsolicited offer to acquire us. However, these provisions may have an anti-takeover effect and may delay, deter or prevent a merger or acquisition of our Company by means of a tender offer, a proxy contest or other takeover attempt that some, or a majority, of our stockholders might believe to be in their best interests, including those attempts that might result in a premium ove