Construction Partners, Inc. — Form 10-Q Summary
Business context and reporting period
Construction Partners, Inc. is a civil infrastructure company specializing in roadway construction and maintenance, asphalt production and paving, site development, aggregates, and liquid asphalt distribution across the southeastern United States. The filing covers the three and six months ended March 31, 2022, corresponding to the company’s fiscal second quarter and first six months of fiscal 2022. Results are unaudited.
Key financial metrics
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $243.4 million, up 35.9% | $528.3 million, up 42.8% |
| Gross profit / margin | $12.5 million / 5.1% | $45.5 million / 8.6% |
| Operating income (loss) | $(11.5) million / (4.7%) | $(3.0) million / (0.6%) |
| Net income (loss) | $(9.4) million; $(0.18) per diluted share | $(3.9) million; $(0.08) per diluted share |
| Adjusted EBITDA | $7.8 million; 3.2% margin | $34.2 million; 6.5% margin |
| Cash flow from operations | Not separately presented for the quarter | $3.3 million |
At March 31, 2022, cash and cash equivalents were $29.6 million, with an additional $1.7 million of restricted cash and $6.2 million of restricted investments. Contracts receivable, including retainage, were $170.7 million, and inventories were $69.5 million.
Total debt was $328.5 million, consisting of $192.5 million under the term loan and $136.0 million under the revolving credit facility. Revolving facility availability was $77.7 million after outstanding letters of credit. The company reported a fixed charge coverage ratio of 3.24-to-1.00 against a 1.20 minimum and a consolidated leverage ratio of 2.74-to-1.00 against a 3.00 maximum.
Capital expenditures were $34.7 million during the six-month period. Management expects fiscal 2022 capital expenditures of approximately $60.0 million to $65.0 million and believes operating cash flow plus available borrowings will fund operations and planned capital expenditures for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue increased substantially, including $67.6 million from acquisitions completed after March 31, 2021 and approximately $90.7 million from growth in existing markets during the six-month period.
- Cost of revenues grew faster than revenue, increasing 50.3% for the six-month period. Gross margin declined from 13.2% to 8.6%, primarily because of lower margins on acquired projects and higher raw material, fuel, labor, trucking, and supply-chain costs.
- The company moved from six-month net income of $2.9 million to a net loss of $3.9 million. Adjusted EBITDA was broadly stable at $34.2 million versus $34.5 million, but the margin declined from 9.3% to 6.5%.
- General and administrative expense increased 12.1% for the six-month period, including higher equity-based compensation, acquisition-related expenses, professional fees, information technology costs, and accounting and consulting fees. These increases were partly offset by the absence of the prior-year legal settlement and related expenses.
- Net cash decreased by $25.9 million during the six-month period. Investing outflows increased to $140.2 million, primarily because of $102.9 million of acquisitions and $34.7 million of capital expenditures, while financing provided $111.0 million through revolving-credit borrowings.
- Total debt increased from $217.5 million at September 30, 2021 to $328.5 million at March 31, 2022, primarily reflecting acquisition financing. Goodwill increased from $85.4 million to $132.8 million.
Guidance, outlook, commentary, risks, and unusual items
- The company completed four acquisitions during the period covered by the filing, including King Asphalt in South Carolina, J. Miller Construction in Florida, Southern Asphalt in North Carolina, and GAC Contractors in Florida. Total consideration was approximately $104.7 million, with approximately $46.4 million provisionally recorded as goodwill.
- At March 31, 2022, remaining performance obligations totaled approximately $985.9 million. Management expected to recognize approximately $577.1 million during the remainder of fiscal 2022 and $408.8 million thereafter.
- Management reported continued inflation in wages, fuel, raw materials, concrete, steel, and other inputs, together with supply-chain disruptions and labor constraints. Price escalators and pricing on new bids have mitigated some effects, but the company has limited ability to recover cost increases on projects already in backlog.
- The business is seasonal, with typically lower activity in the first and second fiscal quarters because of winter and other weather conditions and higher activity in the third and fourth quarters.
- Interest-rate exposure remains material: all $328.5 million of borrowings were variable-rate debt at March 31, 2022. Absent interest-rate swaps, a hypothetical 1% change in borrowing rates would change annual interest expense by approximately $3.3 million.
- Interest-rate swaps had an aggregate notional amount of $194.2 million and a fair value of approximately $10.0 million. The resulting unrealized gain contributed $6.9 million, net of tax, to other comprehensive income during the six-month period.
- Outstanding commitments included $11.3 million of letters of credit, $7.7 million of fuel and natural-gas purchase commitments, $2.6 million of minimum royalty payments, and $13.5 million of undiscounted operating lease payments.
- Management stated that there were no material changes to previously disclosed legal proceedings or risk factors and that existing litigation, claims, and government inquiries were not expected to have a material adverse effect. Disclosure controls and procedures were assessed as effective.
Investor verification checklist
- Verify whether acquired operations can improve margins, particularly because acquired projects contributed to lower profitability in the current period.
- Monitor backlog conversion, contract estimates, change orders, claims, and the $985.9 million of remaining performance obligations.
- Assess the effect of inflation, labor shortages, supply-chain constraints, and fuel and materials pricing on future gross margins.
- Review debt covenant headroom, revolving-credit availability, variable-rate exposure, and the pace of acquisition-related borrowing.
- Reconcile cash generation with ongoing capital expenditures, acquisitions, working-capital needs, and restricted cash and investments held by the captive insurer.
- Evaluate provisional purchase-price allocations, including the $46.4 million of goodwill, as acquisition accounting is finalized.