Construction Partners, Inc. — Q1 FY2021 Form 10-Q Summary
Business context and reporting period
Construction Partners, Inc. is a civil infrastructure company operating across Alabama, Florida, Georgia, North Carolina and South Carolina. It provides roadway construction and maintenance, paving, site development, hot-mix asphalt, aggregates and liquid asphalt products to public and private customers. The filing covers the three months ended December 31, 2020, compared with the three months ended December 31, 2019. Results are seasonal, with lower activity typically occurring in the first and second fiscal quarters.
Key financial metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $190.9 million | $175.3 million | Up 8.9% |
| Gross profit | $30.6 million | $23.8 million | Up 28.8% |
| Gross margin | 16.0% | 13.6% | Up 240 basis points |
| Operating income | $10.8 million | $7.0 million | Up 55.9% |
| Net income | $7.9 million | $5.5 million | Up 44.1% |
| Diluted EPS | $0.15 | $0.11 | Up $0.04 |
| Adjusted EBITDA | $23.1 million | $17.2 million | Up 34.4% |
| Adjusted EBITDA margin | 12.1% | 9.8% | Up 230 basis points |
| Cash flow from operations | $0.7 million | $1.7 million | Down $1.0 million |
Revenue growth included $12.2 million from acquisitions completed after December 31, 2019 and approximately $3.4 million of growth in existing markets. Gross margin benefited from efficient plant and equipment utilization, a $1.3 million improvement from the liquid asphalt terminal and $0.8 million of net commodity derivative gains.
Cash and cash equivalents were $51.7 million at December 31, 2020, compared with $148.3 million at September 30, 2020. Investing cash outflows were $94.1 million, including $84.1 million for acquisitions and $10.5 million for capital expenditures. Total debt was $89.6 million of term-loan principal, with no revolver borrowings. Revolving facility availability was $38.3 million after letters of credit.
Total assets were $604.2 million and stockholders’ equity was $393.5 million at December 31, 2020. Contracts receivable, net, were $113.1 million; contract assets were $12.1 million and contract liabilities were $30.9 million.
Material changes versus the prior comparable period
- Revenue increased 8.9%, while gross profit increased 28.8% due to stronger margins.
- General and administrative expenses increased 17.4% to $20.1 million, primarily from higher management payroll and benefits, acquisition-related overhead and professional fees.
- Interest expense increased 66.5% to $0.5 million because of higher average debt balances.
- The effective tax rate increased to 25.4% from 19.5%; the prior-year rate benefited from a $0.4 million state tax benefit related to net operating loss carryforwards.
- The Company acquired four North Carolina HMA production and paving companies for combined consideration of $84.1 million. The acquisitions added 13 HMA plants and generated $7.1 million of revenue and a $0.2 million net loss from acquisition dates through December 31, 2020.
- Goodwill increased to $77.0 million from $46.3 million, primarily reflecting the North Carolina acquisitions. Purchase-price allocations remained provisional.
- Operating cash flow declined despite higher earnings, largely because of timing-related reductions in accounts payable and accrued liabilities.
Guidance, outlook, risks and unusual items
Management expects fiscal 2021 capital expenditures of approximately $47.0 million to $50.0 million. At December 31, 2020, remaining performance obligations were approximately $516.3 million, of which approximately $415.9 million was expected to be recognized during the remainder of fiscal 2021 and $100.4 million thereafter.
Management believes operating cash flow, cash on hand and available credit facilities will fund operations and planned capital expenditures for at least the next 12 months. The Credit Agreement requires a minimum fixed-charge coverage ratio of 1.20-to-1.00 and a maximum consolidated leverage ratio of 2.75-to-1.00. Actual ratios were 3.40-to-1.00 and 0.98-to-1.00, respectively, at December 31, 2020. Term-loan borrowings mature October 1, 2024.
COVID-19 did not significantly disrupt operations during the quarter because road construction was treated as essential infrastructure in the Company’s states. However, management identified continuing risks from employee absences, enhanced safety protocols, supply-chain disruption, higher labor or materials costs, customer delays or cancellations, and reduced transportation-related funding.
Other principal risks include seasonality and adverse weather, public infrastructure funding reductions, acquisition integration, bidding and project-estimate risk, bonding capacity, commodity and interest-rate volatility, substantial indebtedness, labor availability, litigation, cybersecurity and internal-control risks. The Company reported no material changes to the risk factors in its fiscal 2020 Form 10-K and no material adverse legal proceedings.
Unusual or notable items included $0.8 million of net commodity derivative gains in cost of revenues, a $0.4 million prior-year tax benefit that affected comparability, $0.3 million of gain on equipment sales, and provisional acquisition accounting. The Company had $11.9 million of letters of credit and $0.9 million of diesel-fuel purchase commitments.
Important facts for investors to verify
- Whether the North Carolina acquisitions achieve expected profitability and synergies after provisional purchase accounting is finalized.
- Whether margin expansion persists after the benefit from commodity derivatives and liquid asphalt operations.
- Cash conversion and working-capital trends, particularly accounts payable, accrued liabilities and contract balances.
- Compliance with debt covenants and the availability of revolver capacity after acquisition spending and planned capital expenditures.
- The effect of COVID-19, weather, transportation funding and state or local budget changes on backlog conversion.
- The accuracy of cost-to-cost estimates, change-order assumptions, claims and potential loss provisions on uncompleted contracts.
- The Company’s ability to fund its $47.0 million to $50.0 million fiscal 2021 capital-expenditure plan while continuing its acquisition strategy.