Construction Partners, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Business Acquisitions

Business Acquisitions

12 Months Ended

Sep. 30, 2019

The Scruggs Company

On May 15, 2018, the Company acquired all of the common shares and voting interests of The Scruggs Company (“Scruggs”). The acquisition complemented the Company’s vertically integrated southeastern United States operations, providing new bidding areas in the expanding Georgia market. This acquisition was accounted for as a business combination in accordance with ASC 805.

Management completed the purchase price allocation for this acquisition during the fiscal year ended September 30, 2018. Identifiable assets acquired and liabilities assumed were recorded at their estimated fair values based on the methodology described under “Fair Value Measurements” in Note 2 - Significant Accounting Policies. The fair values of assets acquired and liabilities assumed, and the estimated useful lives of intangible assets acquired, were as follows (in thousands):


Contracts receivable including retainage	$	9,184
Costs and estimated earnings in excess of billings on uncompleted contracts	1,787
Inventory	4,323
Other current assets ⁽¹⁾	731
Property, plant and equipment:
Construction equipment	17,571
Quarry reserves	13,986
Land and land improvements	7,302
Plant	6,917
Buildings	1,552
Backlog intangible⁽²⁾	594
Customer relationship⁽³⁾	1,100
Goodwill	2,319
Accounts payable	(3,646)
Billings in excess of costs and estimated earnings on uncompleted contracts	(4,589)
Current maturities of long-term debt	(358)
Other current liabilities	(1,770)
Payable to seller	(4,940)
Long-term debt, net of current maturities	(744)
	$	51,319

⁽¹⁾Other current assets excludes cash acquired.

⁽²⁾ The estimated useful life of the backlog intangible asset is 17 months.

⁽³⁾ The estimated useful life of the customer relationship intangible is 8 years.

The amount of the purchase price exceeding the net fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill. Under the terms of the Stock Purchase Agreement, the parties made a Section 338(h)(10) election under the Internal Revenue Code. Accordingly, goodwill, the backlog intangible and customer relationship intangible assets allocated to the purchase price and the step-up to fair value of property, plant and equipment reflected in the acquisition date balance sheet are deductible by the Company for income tax purposes. Goodwill primarily represents the assembled work force and synergies expected to result from the acquisition.

The Consolidated Statement of Income for the fiscal year ended September 30, 2018 includes $35.8 million of revenue and $3.5 million of net income attributable to the operations of Scruggs. The following table presents pro forma revenues and net income as though the Company had acquired Scruggs on October 1, 2017 (unaudited, in thousands):


	For the Fiscal Year Ended September 30, 2018
Pro forma revenues		$	735,197
Pro forma net income		55,558

Pro forma financial information is presented as if the operations of Scruggs had been included in the consolidated results of the Company since October 1, 2017, and gives effect to transactions that are directly attributable to Scruggs, including adjustments to:

a.Include the pro forma results of operations of Scruggs for the fiscal year ended September 30, 2018.

b.Include additional depreciation and depletion expense related to the fair value of acquired property, plant and equipment and quarry reserves, as applicable, as if such assets were acquired on October 1, 2016, and the Company’s depreciation and depletion methodologies were consistently applied to such assets.

c.Include interest expense under the Term Loan, defined in Note 11 - Debt, as if the $22.0 million borrowed to partially finance the purchase price was borrowed on October 1, 2016. Interest expense calculations further assume that no principal payments were made applicable to the $22.0 million borrowed during the period from October 1, 2016 through September 30, 2018, and that the interest rate in effect on the date the Company made the additional $22.0 million borrowing on May 15, 2018 was in effect for the period from October 1, 2016 through September 30, 2018.

Pro forma information is presented for informational purposes and may not be indicative of revenue or net income that would have been achieved if the Company had acquired Scruggs on October 1, 2017.

Alabama Acquisition

On July 12, 2019, a subsidiary of the Company acquired substantially all of the assets of an HMA manufacturing plant and paving company located near Gadsden, Alabama. The acquired business is expected to benefit from synergies resulting from its proximity to the Company’s preexisting operations in northeast Alabama, including an aggregates quarry. The acquisition was accounted for as a business combination in accordance with ASC 805. The purchase price of $5.0 million was paid from cash on hand at closing.

Identifiable assets acquired and liabilities assumed were recorded at their estimated fair values based on the methodology described under “Fair Value Measurements” in Note 2 - Significant Accounting Policies. The amounts allocated were not material to the Company’s Consolidated Balance Sheet. The amount of the purchase price exceeding the net fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill in the amount of approximately $2.4 million, which is deductible for income tax purposes. Goodwill primarily represents the assembled work force and synergies expected to result from the acquisition.

The results of operations since the July 12, 2019 acquisition date attributable to this acquisition are included in the Company’s consolidated financial statements and were not material to the Consolidated Statements of Income for the fiscal year ended September 30, 2019. Pro forma results of operations as if the acquisition had been consummated on October 1, 2018 would not be material to the Consolidated Statements of Income.

The Company recorded certain costs to effect the acquisition as they were incurred, which are reflected as general and administrative expenses on the Consolidated Statements of Income in the amount of $0.1 million for the fiscal year ended September 30, 2019.

Florida Acquisition

On February 28, 2019, a subsidiary of the Company acquired substantially all of the assets of an HMA and ready-mix concrete business located in Okeechobee, Florida. This transaction enables the Company to serve new markets in south central Florida through an expanded geographic presence in the state. The acquisition was accounted for as a business combination in accordance with ASC 805. The purchase price of $8.9 million was paid from cash on hand at closing.

Identifiable assets acquired and liabilities assumed were recorded at their estimated fair values based on the methodology described under “Fair Value Measurements” in Note 2 - Significant Accounting Policies. The amounts allocated were not material to the Company’s Consolidated Balance Sheet. The purchase price exceeding the net fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill and other identifiable intangible assets, including customer relationships and customer backlog, in the amount of $3.2 million, which is deductible for income tax purposes. Goodwill primarily represents the assembled work force and synergies expected to result from the acquisition.

The results of operations since the February 28, 2019 acquisition date attributable to this acquisition are included in the consolidated financial statements since the acquisition date and were not material to the Consolidated Statements of Income for the year fiscal ended September 30, 2019. Pro forma results of operations as if the acquisition had been consummated on October 1, 2018 would not be material to the Consolidated Statements of Income.