Construction Partners, Inc. — Fiscal 2019 Form 10-K Summary
Business Context and Reporting Period
Construction Partners, Inc. is a southeastern U.S. infrastructure company focused on roadway construction and maintenance, asphalt paving, site development, aggregate mining, hot-mix asphalt, ready-mix concrete and liquid asphalt distribution. Operations span Alabama, Florida, Georgia, North Carolina and South Carolina. The filing covers the fiscal year ended September 30, 2019, compared with fiscal 2018.
Publicly funded projects represented 69.3% of fiscal 2019 construction contract revenues, while private projects represented 30.7%. Departments of Transportation accounted for 40.4% of revenue; Alabama DOT and North Carolina DOT represented 13.8% and 13.1%, respectively.
Financial Performance and Key Metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Revenue | $783.2 million | $680.1 million | 15.2% increase |
| Gross profit | $118.0 million | $99.5 million | 18.5% increase |
| Gross margin | 15.1% | 14.6% | 50 basis-point increase |
| Operating income | $57.1 million | $61.4 million | 7.0% decrease |
| Net income | $43.1 million | $50.8 million | 15.1% decrease |
| Diluted EPS | $0.84 | $1.11 | Decrease |
| Adjusted EBITDA | $92.3 million | $75.5 million | 22.2% increase |
| Adjusted EBITDA margin | 11.8% | 11.1% | 70 basis-point increase |
| Cash flow from operations | $55.3 million | $66.1 million | Decrease |
| Capital expenditures | $42.5 million | $42.8 million | Approximately flat |
Revenue growth reflected a higher beginning backlog, increased work in existing markets and $51.6 million attributable to recent acquisitions. Gross margin improved primarily from higher plant and equipment utilization and the liquid asphalt terminal contribution. Net income declined because fiscal 2018 included $14.8 million of settlement income, while fiscal 2019 included higher general and administrative expense and a higher effective tax rate of 24.4%, compared with 17.2% in fiscal 2018.
Cash and cash equivalents were $80.6 million at September 30, 2019, compared with $99.1 million at September 30, 2018. Contracts receivable, including retainage, increased to $139.9 million from $120.3 million, and retainage was $19.8 million. Total assets were $531.8 million and stockholders’ equity was $343.6 million.
Debt, Liquidity and Backlog
At September 30, 2019, principal debt consisted of a $44.7 million term loan, $5.0 million drawn on a revolving credit facility and $0.6 million of other long-term debt. Revolver availability was $14.4 million, including reductions for outstanding letters of credit. The applicable borrowing rate was 3.24%, compared with 4.24% in the prior year.
The August 2019 credit amendment reduced the interest-rate spread, unused revolver and letter-of-credit fees, and quarterly term-loan principal repayments, while increasing the maximum consolidated leverage covenant from 2.00-to-1.00 to 2.75-to-1.00. The Company was in compliance with all covenants at year-end. The fixed-charge coverage ratio was 4.04-to-1.00 and the consolidated leverage ratio was 0.66-to-1.00.
Contract backlog was $531.6 million at September 30, 2019, down from $594.4 million. Approximately 82% of year-end backlog was expected to be completed within 12 months. Backlog is not a GAAP measure, excludes external sales of construction materials and remains subject to customer cancellation, scope changes and funding risk.
Material Changes and Unusual Items
- Acquired an HMA and ready-mix concrete business in Okeechobee, Florida, an HMA plant and paving company near Gadsden, Alabama, and a liquid asphalt terminal in Panama City, Florida.
- Completed a $5.0 million secondary offering by selling stockholders at $14.25 per share. The Company received no proceeds and incurred approximately $0.7 million of offering-related expenses.
- Fiscal 2018 included $14.8 million of pre-tax settlement income; approximately $7.9 million of related installment payments were received in fiscal 2019, with approximately $7.8 million remaining as a receivable at year-end.
- Adopted ASC 606 using the modified retrospective method. The adoption did not require a cumulative adjustment to opening retained earnings; the reported fiscal 2019 revenue effect was a $1.8 million reduction compared with prior guidance.
- Goodwill increased to $38.5 million from $32.9 million, primarily from acquisitions. Annual impairment testing indicated no impairment.
- A $115,000 Alabama environmental fine was paid in connection with a consent order concerning wetlands discharges at a mining site. Remedial costs were not expected to be material.
Guidance, Outlook and Principal Risks
Management expected fiscal 2020 capital expenditures of approximately $44.0 million to $47.0 million, excluding amounts paid to purchase certain equipment previously subject to operating leases. Management stated that operating cash flow, cash on hand and available credit were expected to fund operations and planned capital expenditures for at least the next 12 months.
Subsequent to year-end, the Company amended its credit agreement to add a $10.0 million term-loan advance for buying out certain operating lease obligations and extended the term-loan maturity to October 1, 2024. It also acquired a Palm City, Florida HMA and paving business for $17.3 million on October 1, 2019. The secondary offering underwriters purchased an additional 750,000 shares from selling stockholders on October 21, 2019; the Company received no proceeds.
Key risks include dependence on government infrastructure funding and state DOT customers, competitive bidding and fixed-price contract execution, adverse weather and seasonality, commodity and fuel price volatility, labor availability, bonding capacity, acquisition integration, substantial secured debt, interest-rate exposure, environmental compliance, litigation and insurance claims, cybersecurity, and the accuracy of estimates used for long-term construction contracts. SunTx and affiliates retained concentrated voting control through the dual-class share structure.
Management concluded that disclosure controls and internal control over financial reporting were effective at September 30, 2019 and stated that previously identified material weaknesses had been remediated. As an emerging growth company, the Company’s independent auditor was not required to provide an attestation report on internal control effectiveness.
Investor Verification Checklist
- Reconcile revenue growth and the 2019 margin improvement to organic activity, acquisitions, utilization and the liquid asphalt terminal contribution.
- Assess the quality and conversion of the $531.6 million backlog, including the $50.5 million low-bid/no-contract component and customer cancellation or funding provisions.
- Review contracts receivable, retainage, contract assets and liabilities, and cash conversion given the $20.6 million increase in contracts receivable during fiscal 2019.
- Confirm debt maturities, covenant compliance, revolver availability and the effect of the October 2019 financing amendment and lease buyouts.
- Evaluate exposure to Alabama DOT, North Carolina DOT and other public funding sources, as well as fixed-price contract cost-estimation risk.
- Review acquisition performance, purchase-price allocations, goodwill and the Palm City acquisition completed after year-end.
- Consider the recurring effect of acquisitions, public-company costs, related-party payments to SunTx and other affiliates, and the absence of cash dividends.