Business Context and Reporting Period
Construction Partners, Inc. is a southeastern U.S. infrastructure and road construction company operating in Alabama, Florida, Georgia, North Carolina and South Carolina. It provides site development, paving, utility and drainage services and sells hot-mix asphalt, aggregates, ready-mix concrete and liquid asphalt to public and private customers.
This unaudited Form 10-Q covers the three and nine months ended June 30, 2019, the company’s fiscal third quarter and year-to-date period. Results are seasonal, with typically higher activity in the third and fourth fiscal quarters due to warmer and drier weather.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Nine Months Ended June 30, 2019 | Nine Months Ended June 30, 2018 |
|---|---|---|---|---|
| Revenue | $227.3 million | $195.1 million | $545.9 million | $464.4 million |
| Gross profit | $38.1 million | $29.5 million | $79.0 million | $66.0 million |
| Gross margin | 16.8% | 15.1% | 14.5% | 14.2% |
| Operating income | $22.2 million | $14.8 million | $34.9 million | $41.4 million |
| Net income | $17.2 million | $13.4 million | $26.6 million | $35.6 million |
| Diluted EPS | $0.33 | $0.29 | $0.52 | $0.81 |
| Adjusted EBITDA | $31.3 million | $22.7 million | $60.0 million | $47.2 million |
| Adjusted EBITDA margin | 13.8% | 11.6% | 11.0% | 10.2% |
Public customers generated $161.1 million, or approximately 71%, of quarterly revenue and $379.7 million, or approximately 70%, of year-to-date revenue. Departments of Transportation accounted for 41.8% of quarterly revenue and 39.4% of year-to-date revenue. Alabama and North Carolina Departments of Transportation each represented more than 10% of revenue.
Cash and cash equivalents were $59.6 million at June 30, 2019, compared with $99.1 million at September 30, 2018. Net cash provided by operating activities was $18.0 million for the nine-month period, versus $23.7 million in the prior-year period. Capital expenditures were $31.7 million, and investing cash outflows totaled $46.3 million, including $10.8 million for a liquid asphalt terminal and $8.9 million for a Florida acquisition.
Total debt was approximately $51.9 million, including $14.8 million of current maturities, at June 30, 2019, compared with approximately $62.9 million at September 30, 2018. The company had approximately $14.4 million of availability under its $30.0 million revolving credit facility and stated that cash, operating cash flow and available borrowings should fund operations for at least the next twelve months.
At June 30, 2019, the company reported approximately $522 million of aggregate transaction price related to unsatisfied or partially unsatisfied construction obligations, with approximately $201 million expected to be recognized during the remainder of fiscal 2019 and $321 million thereafter.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 16.5%, driven by approximately $21.3 million of growth in existing markets and $10.9 million from acquisitions.
- Year-to-date revenue increased 17.6%, including approximately $34.9 million of existing-market growth and $46.6 million attributable to acquisitions.
- Quarterly gross margin improved by 170 basis points, primarily due to increased hot-mix asphalt production and equipment utilization and better fixed-cost absorption.
- Year-to-date operating income declined 15.5% and net income declined 25.5%, primarily because the prior-year period included $14.8 million of settlement income. The company recorded no settlement income in 2019.
- Year-to-date Adjusted EBITDA increased 27.0%, and Adjusted EBITDA margin improved from 10.2% to 11.0%.
- The effective tax rate increased to 22.3% from 9.5% for the quarter and to 23.3% from 13.1% year to date, largely because the prior-year period included discrete tax benefits related to the Tax Cuts and Jobs Act and option exercises.
- Cash declined by $39.5 million year to date, reflecting capital expenditures, acquisitions and debt repayments, partially offset by operating cash flow.
Guidance, Outlook, Risks and Unusual Items
- Management expects fiscal 2019 capital expenditures of approximately $39.0 million to $42.0 million. The estimate may change.
- The company completed an $8.9 million acquisition of an HMA and ready-mix concrete business in Okeechobee, Florida, and acquired a Panama City, Florida liquid asphalt terminal for $10.8 million. A subsequent July 2019 acquisition near Gadsden, Alabama cost $5.0 million.
- The company adopted ASC 606 using the modified retrospective method. Management reported no material opening retained-earnings adjustment; the filing identifies modest effects on reported revenue, cost of revenues, assets and liabilities.
- The Compass Credit Agreement matures July 1, 2022 and is secured by substantially all company assets. The company was in compliance with its covenants at June 30, 2019, including a fixed-charge coverage ratio of 1.55 to 1.00 and a leverage ratio of 0.74 to 1.00.
- Management identifies risks from public infrastructure funding, competition, weather, commodity prices, contract-estimate errors, bonding capacity, acquisitions, labor, litigation, environmental compliance, cybersecurity and substantial indebtedness.
- Disclosure controls and procedures were not effective because material weaknesses remained in information technology general controls and closing and financial-reporting controls, including controls for significant and unusual transactions. Remediation efforts are underway.
- The Alabama Department of Environmental Management issued a consent order concerning wetland discharges at a mining site. The company paid a $115,000 fine and expects remediation costs to be immaterial; no U.S. Environmental Protection Agency assessment had been received.
- The company had no material litigation or claims expected by management to adversely affect financial condition, cash flows or results of operations, although routine claims and government inquiries remain possible.
Most Important Facts to Verify
- Whether the reported revenue growth and backlog conversion are sustained after seasonal conditions and acquisition contributions are considered.
- The magnitude and timing of required debt repayments, capital expenditures and additional acquisition spending relative to operating cash flow and revolver availability.
- Progress in remediating the material weaknesses and whether future filings identify any control deficiencies or restatements.
- Whether project-cost estimates, claims, change orders, commodity prices and weather conditions cause future margin revisions.
- The final purchase-price allocations and operating contributions from the Florida and subsequent Alabama acquisitions.
- Exposure to public customers, particularly Alabama and North Carolina transportation departments, and any changes in government infrastructure funding.