Construction Partners, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended June 30, 2023; filed August 8, 2023. The company is a southeastern U.S. civil infrastructure contractor and materials producer serving Alabama, Florida, Georgia, North Carolina, South Carolina and Tennessee. Operations include paving, site development, hot-mix asphalt, aggregates and liquid asphalt.
Financial Results and Key Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $421.9 million | $380.3 million | $1.089 billion | $908.6 million |
| Gross profit | $64.1 million | $44.3 million | $120.8 million | $89.7 million |
| Gross margin | 15.2% | 11.6% | 11.1% | 9.9% |
| Operating income | $33.3 million | $18.0 million | $37.1 million | $15.0 million |
| Net income | $21.7 million | $12.2 million | $18.1 million | $8.3 million |
| Diluted EPS | $0.41 | $0.23 | $0.35 | $0.16 |
| Adjusted EBITDA | $56.5 million | $37.6 million | $104.8 million | $71.8 million |
| Adjusted EBITDA margin | 13.4% | 9.9% | 9.6% | 7.9% |
Cash flow and liquidity: Nine-month operating cash flow was $94.5 million, compared with cash used of $9.7 million in the prior-year period. Investing cash use was $118.6 million, including $82.7 million for acquisitions and $79.0 million for property, plant and equipment. Financing provided $43.5 million. Cash, cash equivalents and restricted cash ended at $54.9 million, versus $26.2 million at June 30, 2022.
Debt: Total principal debt was $420.6 million at June 30, 2023, consisting of a $277.5 million term loan and $143.1 million drawn on the revolving facility. Revolver availability was $171.9 million, including the effect of letters of credit. The company also had $10.0 million available under its delayed-draw term loan. Debt matures in 2027, and all credit agreement covenants were satisfied.
Balance sheet: Total assets were $1.184 billion and stockholders’ equity was $481.1 million. Contracts receivable, net, was $255.0 million; inventories were $88.2 million. Goodwill increased to $157.3 million, primarily reflecting acquisitions.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 10.9%; nine-month revenue increased 19.8%. Acquisitions contributed $41.4 million of Q3 revenue and $91.0 million of nine-month revenue, while existing markets contributed $88.9 million of nine-month growth.
- Q3 gross profit increased 44.8%, and gross margin expanded to 15.2%. Management attributed the improvement to efficient plant and equipment utilization and completion of newer, more favorable-margin backlog.
- Q3 net income rose 78.1%; nine-month net income rose 119.0%. Operating income increased 85.2% for Q3 and 148.0% for the nine-month period.
- General and administrative expense increased 21.2% in Q3 and 22.8% year to date, driven by higher equity compensation, acquired-company expenses and management payroll and benefits.
- Net interest expense increased 145.3% in Q3 and 230.4% year to date because of higher average debt balances and interest rates.
- The nine-month results included a $5.4 million gain on a facility exchange and $4.8 million of gains on property, plant and equipment sales.
- The company completed four acquisitions during the period, including businesses or assets in Tennessee, North Carolina, South Carolina and Alabama. Purchase accounting remained provisional, including approximately $27.0 million of provisional goodwill.
- During the nine months, 2.35 million Class B shares converted into Class A shares. Shares outstanding at June 30, 2023 were 43.7 million Class A and 9.0 million Class B.
Backlog, Outlook and Management Commentary
- Contract backlog was $1.59 billion at June 30, 2023, including $1.23 billion of awarded or in-progress work and $0.36 billion of low-bid/no-contract work.
- Management expects fiscal 2023 capital expenditures of approximately $85 million to $90 million; $79.0 million had been spent during the first nine months.
- Management believes operating cash flow and available borrowing capacity will fund operations and planned capital expenditures for at least the next 12 months, while noting that acquisitions and growth may require additional capital.
- Seasonality is significant: the company generally experiences stronger activity and revenue in the third and fourth fiscal quarters because of warmer and drier weather.
- Public customers represented 63.2% of Q3 revenue and 61.0% of nine-month revenue. Departments of transportation accounted for 38.6% and 32.0%, respectively.
- On August 1, 2023, the company acquired an HMA plant and related assets in Myrtle Beach, South Carolina, for $9.5 million.
Risks, Contingencies and Unusual Items
- Inflation and supply-chain disruptions continue to affect wages, fuel, concrete, steel, asphalt and equipment. The company may be unable to pass higher costs through to customers, particularly on existing backlog.
- All debt is variable rate, although the company has a $300.0 million interest-rate swap maturing June 30, 2027. Without swaps, a hypothetical 1% change in borrowing rates would affect annual interest expense by approximately $4.2 million.
- Weather, seasonality, labor availability, raw-material supply, project cost estimation, government funding, bonding capacity, competition and acquisition integration could materially affect results.
- Contract assets and liabilities reflect timing differences between revenue recognition and billing. Net billings in excess of costs and estimated earnings increased to $35.3 million from $23.2 million at September 30, 2022.
- Commitments included $10.0 million of letters of credit, $4.4 million of fuel and natural-gas purchase commitments, $2.6 million of minimum royalties and $451.9 million of total contractual obligations.
- The company reported routine litigation, disputes and government inquiries but stated that no pending matter was expected to have a material adverse effect. No material changes to previously disclosed legal proceedings were reported.
- Disclosure controls and procedures were considered effective, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Reconcile reported growth and margin expansion against the contribution and profitability of recent acquisitions and the provisional purchase-price allocations.
- Assess whether the $1.59 billion backlog, including $0.36 billion of low-bid/no-contract work, converts to revenue at expected margins.
- Monitor leverage, interest expense, covenant headroom and revolver availability as debt-funded acquisitions and capital expenditures continue.
- Evaluate exposure to inflation, fuel and asphalt prices, labor constraints and the company’s ability to recover cost increases on existing contracts.
- Review the sustainability of cash generation after approximately $85 million to $90 million of planned fiscal-year capital expenditures and further acquisitions.
- Confirm the impact of the August 2023 Myrtle Beach acquisition and any subsequent purchase-accounting adjustments in later filings.