Business Context and Reporting Period
Construction Partners, Inc. is a civil infrastructure company operating across Alabama, Florida, Georgia, North Carolina, South Carolina and Tennessee. Its activities include roadway construction and maintenance, asphalt production and paving, site development, aggregate mining and liquid asphalt distribution.
This unaudited Form 10-Q covers the three months ended December 31, 2023, the first quarter of fiscal 2024, compared with the three months ended December 31, 2022. Results are seasonally affected by winter weather, with the first and second fiscal quarters typically having lower activity.
Key Financial Metrics
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Revenue | $396.5 million | $341.8 million | +16.0% |
| Gross profit | $51.9 million | $30.5 million | +70.1% |
| Gross margin | 13.1% | 8.9% | +420 basis points |
| Operating income | $16.7 million | $6.3 million | +164.5% |
| Operating margin | 4.2% | 1.9% | +230 basis points |
| Net income | $9.8 million | $1.9 million | +420.2% |
| Diluted EPS | $0.19 | $0.04 | + $0.15 |
| Adjusted EBITDA | $40.9 million | $27.2 million | +50.2% |
| Adjusted EBITDA margin | 10.3% | 8.0% | +230 basis points |
| Cash flow from operations | $60.4 million | $28.9 million | +109.1% |
Management attributed the revenue increase to $29.6 million from acquisitions and approximately $25.1 million of growth in existing markets. The higher gross margin reflected efficient utilization of plants and equipment and completion of higher-margin backlog.
Financial Position, Debt and Liquidity
- Cash and cash equivalents were $68.7 million at December 31, 2023, compared with $48.2 million at September 30, 2023. Cash, cash equivalents and restricted cash totaled $69.7 million at quarter-end.
- Total debt principal was $443.1 million, consisting of a $280.0 million term loan and $163.1 million drawn on the revolving credit facility, compared with $376.9 million at September 30, 2023.
- Revolving facility availability was $153.6 million at December 31, 2023, including the effect of outstanding letters of credit. The filing presents a slightly different September 30 availability in MD&A than in Note 8; investors should verify the prior-period amount.
- The credit facilities mature on June 30, 2027 and are secured by substantially all company assets. The company was in compliance with all debt covenants.
- The fixed charge coverage ratio was 3.35-to-1.00 versus a 1.20-to-1.00 minimum. The consolidated leverage ratio was 1.78-to-1.00 versus a 3.50-to-1.00 maximum.
- Operating cash flow was $60.4 million, while investing cash outflows were $104.7 million, including $81.4 million for acquisitions and $26.8 million for capital expenditures. Financing activities provided $64.9 million, primarily from $90.0 million of revolver borrowings.
- Fiscal 2024 capital expenditures are expected to be approximately $90 million to $95 million. Management believes operating cash flow and available borrowings will fund operations and planned capital expenditures for at least the next 12 months, subject to acquisition activity and other variables.
Material Changes Versus the Prior Comparable Period
- Gross profit increased substantially, and gross margin expanded to 13.1% from 8.9%.
- General and administrative expense increased 21.0% to $36.0 million, driven by acquired operations, higher management personnel costs, share-based compensation and other corporate expenses.
- The prior-year period included a $5.4 million gain on a facility exchange; no comparable gain was recorded in Q1 FY2024. Q1 FY2024 included a $0.8 million gain on equipment sales.
- Interest expense declined modestly to $3.7 million from $4.0 million despite higher average debt, primarily because of increased interest income.
- Cash flow from operations more than doubled, aided by a $63.5 million decrease in contracts receivable, while inventories increased $9.9 million.
- The company completed three acquisitions for aggregate consideration of approximately $81.4 million: Hubbard Paving & Grading, certain Reeves Construction assets, and SJ&L General Contractor. The acquisitions added five asphalt plants and expanded operations in Alabama, North Carolina and South Carolina.
- Acquisition accounting remained provisional, including approximately $17.3 million of provisional goodwill, and consideration remains subject to post-closing adjustments.
Backlog, Outlook, Risks and Unusual Items
- Contract backlog was approximately $1.6 billion at December 31, 2023, including $1.3 billion of awarded work and $0.3 billion of low-bid or no-contract projects. Separately, unsatisfied or partially unsatisfied performance obligations totaled approximately $1.29 billion, with approximately $874.7 million expected to be recognized during the remainder of fiscal 2024 and $411.5 million thereafter.
- Public customers represented 59.8% of revenue, while private customers represented 40.2%. Departments of transportation accounted for 37.7% of revenue.
- On January 2, 2024, the company acquired substantially all assets of Littlefield Construction Company for $6.4 million, subject to post-closing adjustments.
- The company uses a $300.0 million interest-rate swap with a June 30, 2027 maturity. The swap’s fair value was $17.6 million at quarter-end, and other comprehensive income included a $7.1 million after-tax loss during the quarter, primarily from changes in the swap’s fair value.
- All $443.1 million of debt was variable-rate debt at quarter-end. Absent the interest-rate swaps, a hypothetical 1% change in borrowing rates would affect annual interest expense by approximately $4.4 million.
- Key risks include reductions in public infrastructure funding, acquisition integration, contract estimating and change-order disputes, weather and seasonality, inflation in labor and materials, supply-chain constraints, labor availability, substantial indebtedness, interest-rate exposure, bonding capacity, litigation, regulatory requirements and cybersecurity.
- Outstanding commitments included $8.3 million of letters of credit, $3.3 million of fuel and natural-gas purchase commitments and $2.5 million of minimum royalty payments. Management stated that pending litigation and government inquiries were routine and not expected to have a material adverse effect.
Investor Verification Points
- Verify that margin improvement is sustained as the company progresses through seasonal quarters and integrates recently acquired operations.
- Reconcile reported backlog with awarded contracts, low-bid projects and the separate performance-obligation disclosure.
- Monitor debt-funded acquisition activity, revolver utilization, covenant headroom and the June 2027 maturity profile.
- Assess whether the $90 million to $95 million fiscal 2024 capital expenditure plan is consistent with operating cash flow and available liquidity.
- Review provisional purchase-price allocations and any post-closing adjustments for the three acquisitions completed during the quarter and the Littlefield acquisition.
- Confirm the prior-period revolving-credit availability because the filing contains inconsistent September 30 figures in different sections.
- Evaluate exposure to interest rates, fuel and asphalt prices, inflation, weather and potential cost overruns on fixed-price or long-duration projects.