Business Context and Reporting Period
Construction Partners, Inc. filed its Form 10-Q for the fiscal quarter and six months ended March 31, 2019. The company provides infrastructure and road construction services, site development, paving, utilities, drainage, and construction materials across Alabama, Florida, Georgia, North Carolina, and South Carolina. Customers include public agencies, municipalities, private developers, and commercial customers.
Operations are seasonal, with generally lower activity in the first and second fiscal quarters because of winter and adverse weather conditions. Results for the three and six months ended March 31, 2019 are unaudited and are not necessarily indicative of full-year performance.
Financial Performance and Position
| Metric | Three Months Ended March 31, 2019 | Year-over-Year Change | Six Months Ended March 31, 2019 | Year-over-Year Change |
|---|---|---|---|---|
| Revenue | $164.3 million | +38.2% | $318.6 million | +18.3% |
| Gross profit | $19.8 million | +44.0% | $40.9 million | +12.0% |
| Gross margin | 12.1% | Up from 11.6% | 12.8% | Down from 13.6% |
| Operating income | $5.7 million | Down from $16.1 million | $12.8 million | Down from $26.6 million |
| Net income | $4.2 million | Down 62.6% | $9.4 million | Down 57.9% |
| Diluted EPS | $0.08 | Down from $0.27 | $0.18 | Down from $0.53 |
| Adjusted EBITDA | $14.0 million | +74.2% | $28.7 million | +16.9% |
| Adjusted EBITDA margin | 8.5% | Up from 6.7% | 9.0% | Down from 9.1% |
The year-over-year decline in operating income and net income primarily reflects the absence of $14.8 million of settlement income recognized in the prior-year quarter and six-month period. The prior-year settlement produced approximately $10.6 million of after-tax income.
- Public revenue was $113.9 million in the quarter and $218.6 million for the six months; private revenue was $50.4 million and $100.0 million, respectively.
- Departments of Transportation represented 37.2% of revenue in both the quarter and six-month period. Alabama and North Carolina Departments of Transportation each exceeded 10% of revenue.
- Cash and cash equivalents were $61.9 million at March 31, 2019, down from $99.1 million at September 30, 2018.
- Net cash provided by operating activities was $5.3 million, compared with $28.1 million in the prior-year six-month period.
- Capital expenditures were $19.8 million, and investing cash outflows were $35.1 million, including acquisitions.
- Total debt was approximately $55.9 million before deferred issuance costs and discount, including $14.8 million of current maturities. Long-term debt, net of current maturities, was $40.7 million.
- Available capacity under the revolving credit facility was $14.3 million at March 31, 2019.
Material Changes Versus the Prior Comparable Period
- Revenue growth benefited from the Scruggs acquisition, which contributed approximately $18.4 million of quarterly revenue and $34.7 million of six-month revenue, as well as more favorable weather and a higher beginning backlog.
- Quarterly gross margin improved because higher HMA production and equipment utilization increased fixed-cost absorption. Six-month gross margin declined because of lower margins on construction projects.
- General and administrative expense increased 10.6% in the quarter and 13.3% for the six months, driven by acquired operations, professional services, insurance, and increased public-company reporting and regulatory costs.
- The company acquired substantially all assets of an Okeechobee, Florida hot mix asphalt and ready-mix concrete business for approximately $8.9 million in cash on February 28, 2019. The provisional allocation included approximately $4.0 million of goodwill.
- The company acquired a Panama City, Florida liquid asphalt terminal for $10.8 million in cash on February 28, 2019.
- Operating cash flow declined primarily because of lower net income and less favorable changes in working capital. Inventory increased partly because of operations at the newly acquired liquid asphalt terminal.
- The company adopted ASC 606 using the modified retrospective method. Management reported no material opening retained-earnings adjustment; the standard had a limited impact on reported 2019 revenue and net income.
- Subsequent to quarter-end, certain stockholders converted 19.9 million Class B shares into Class A shares. Following the conversion, 31.8 million Class A shares and 19.6 million Class B shares were outstanding.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects fiscal 2019 capital expenditures of approximately $39 million to $42 million and believes cash on hand, operating cash flow, and available revolver capacity will fund operations and planned capital expenditures for at least the next twelve months.
- At March 31, 2019, remaining unsatisfied or partially unsatisfied construction performance obligations totaled approximately $525 million. The company expected to recognize approximately $338 million during the remainder of fiscal 2019 and $187 million thereafter.
- The Compass Credit Agreement matures July 1, 2022 and is secured by substantially all company assets. The company was in compliance with its covenants, including a minimum fixed-charge coverage ratio of 1.20 to 1.00 and a maximum consolidated leverage ratio of 2.00 to 1.00. Actual ratios were 1.22 to 1.00 and 0.88 to 1.00, respectively.
- Interest-rate exposure remains material: variable-rate borrowings totaled approximately $55.1 million, and a hypothetical 1% change in borrowing rates would affect annual interest expense by approximately $0.6 million, absent the interest-rate swaps.
- The company expects to receive approximately $11.5 million of remaining settlement payments, reflected as current and long-term assets at March 31, 2019. The first installment of approximately $3.9 million was received in January 2019; additional installments are scheduled through July 2020.
- Key risks include dependence on public infrastructure spending and transportation funding, weather, competition, commodity prices, labor and suppliers, bonding capacity, contract estimates and cancellations, acquisitions, indebtedness, litigation, regulatory compliance, and information technology.
- Management stated that disclosure controls and procedures were not effective because of previously identified material weaknesses in information technology general controls and closing and financial reporting controls, including accounting for significant and unusual transactions. Remediation efforts were ongoing.
- Routine litigation, disputes, claims, and government inquiries occur in the ordinary course. Management stated that no pending matter was expected to have a material adverse effect, although outcomes cannot be predicted with certainty.
Most Important Facts for Investors to Verify
- Whether revenue growth from acquisitions and favorable weather translates into sustainable project margins, particularly given the six-month gross-margin decline.
- Progress in remediating the material weaknesses in internal control over financial reporting.
- Cash conversion and working-capital requirements as seasonal construction activity increases.
- Compliance with debt covenants and the availability of the remaining revolver capacity after planned capital expenditures and acquisitions.
- Realization and timing of the approximately $525 million performance-obligation backlog.
- Integration and profitability of the Scruggs, Okeechobee, and liquid asphalt terminal acquisitions.
- Exposure to public-sector customers, including the concentration of revenue from state Departments of Transportation.
- Actual fiscal 2019 capital expenditures relative to management’s $39 million to $42 million estimate.