Construction Partners, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three months ended December 31, 2018, the first quarter of fiscal 2019, compared with the three months ended December 31, 2017. Construction Partners provides road, site-development, paving, utility, drainage, hot-mix asphalt and aggregate services in Alabama, Florida, Georgia, North Carolina and South Carolina. Its customers include public agencies, private developers and other commercial customers.
The quarter includes $16.3 million of revenue and $1.5 million of net income from The Scruggs Company, acquired in May 2018. Results are seasonally affected by weather, with the first and second fiscal quarters generally experiencing lower activity.
Key Financial Metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $154.3 million | $150.4 million | Up 2.6% |
| Gross profit | $21.1 million | $22.8 million | Down 7.3% |
| Gross margin | 13.7% | 15.2% | Down 150 basis points |
| Operating income | $7.0 million | $10.5 million | Down 33.1% |
| Net income | $5.2 million | $11.0 million | Down 53.1% |
| Basic and diluted EPS | $0.10 | $0.26 | Down $0.16 |
| Adjusted EBITDA | $14.7 million | $16.5 million | Down 10.9% |
| Adjusted EBITDA margin | 9.5% | 11.0% | Down 150 basis points |
| Operating cash flow | $1.2 million | $19.5 million | Down $18.3 million |
Cash and cash equivalents were $91.6 million at December 31, 2018, compared with $99.1 million at September 30, 2018. Total assets were $467.8 million and stockholders’ equity was $304.6 million. Contracts receivable, net, declined to $94.0 million from $120.3 million, while inventories increased to $28.5 million from $24.6 million.
Debt consisted of $53.7 million under the Compass Term Loan, $5.0 million under the revolving facility and $0.9 million of other long-term debt, before deferred issuance costs, discounts and current maturities. Current maturities were $14.8 million and long-term debt, net of current maturities, was $44.4 million. Revolver availability was $14.0 million, including the effect of outstanding letters of credit.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly, primarily reflecting the Scruggs acquisition, but sustained rainfall reduced construction activity and HMA production in several markets.
- Gross profit declined because lower HMA production and equipment utilization caused under-absorption of fixed costs. Construction-project margins improved but did not offset the production-related decline.
- General and administrative expenses increased 16.1% to $14.4 million, including $1.2 million attributable to Scruggs and $0.7 million of higher professional services and insurance costs associated with growth and public-company requirements.
- Interest expense increased 73.4% to $0.5 million, primarily because average debt increased to $60.4 million from $53.8 million and the quarter included a $0.2 million interest-rate-swap charge.
- The prior-year period included a $3.5 million provisional tax benefit related to the Tax Cuts and Jobs Act. Consequently, the effective tax rate was 24.3% in Q1 FY2019 versus negative 7.8% in Q1 FY2018.
- Operating cash flow fell substantially because of lower earnings and unfavorable working-capital timing, including a larger reduction in accounts payable.
- The company adopted ASC 606 using the modified retrospective method on October 1, 2018. The adoption did not require an opening retained-earnings adjustment and reduced reported first-quarter revenue by $1.8 million and net income by $0.1 million versus amounts that would have been reported under the prior guidance.
Guidance, Outlook, Risks and Unusual Items
- Management expects fiscal 2019 capital expenditures of approximately $39 million to $42 million; $7.4 million was spent in the first quarter.
- At December 31, 2018, remaining performance obligations represented approximately $505.0 million of aggregate transaction price, of which $391.5 million was expected to be recognized during the remainder of fiscal 2019 and $113.5 million thereafter.
- Management stated that cash on hand, operating cash flow and available revolver borrowings should fund operations and planned capital expenditures for at least the next twelve months, although future cash flows and additional capital availability are not assured.
- The company was in compliance with its credit agreement covenants. The fixed-charge coverage ratio was 1.55 to 1.00 against a 1.20 minimum, and the consolidated leverage ratio was 0.84 to 1.00 against a 2.00 maximum.
- Key risks include adverse weather, reduced public infrastructure funding, project-bidding and cost-estimation risk, competition, commodity-price volatility, bonding capacity, acquisition integration, labor and supply constraints, substantial indebtedness, litigation and insurance matters, and information-technology risks.
- Management continued remediation of material weaknesses in information-technology general controls and closing and financial-reporting controls, including controls over significant and unusual transactions. Disclosure controls and procedures were therefore not effective as of December 31, 2018.
- The company expects to receive approximately $15.7 million under a prior settlement agreement. The first $3.9 million installment was received in January 2019; remaining payments are reflected as other current and long-term assets.
Important Facts for Investors to Verify
- Whether weather-related delays and lower HMA utilization persist and continue to pressure gross margins and operating cash flow.
- The conversion and timing of the $505.0 million remaining performance obligations into revenue and cash collections.
- Debt amortization requirements, revolver availability, interest-rate exposure and continued compliance with credit covenants.
- Progress in remediating the disclosed material weaknesses and whether future filings conclude that disclosure and internal controls are effective.
- The integration and profitability contribution of Scruggs and the company’s ability to execute its $39 million to $42 million capital-expenditure plan.
- The timing and collectability of the remaining settlement installments and any impact from related-party transactions.