Business Context and Reporting Period
Construction Partners, Inc. is a civil infrastructure company serving Alabama, Florida, Georgia, North Carolina, South Carolina and Tennessee. Its activities include roadway construction and maintenance, asphalt production and paving, site development, aggregate mining and liquid asphalt distribution. This Form 10-Q covers the three and six months ended March 31, 2023, the company’s fiscal second quarter, and was filed May 9, 2023.
Operations are seasonal, with typically lower activity in the first and second fiscal quarters because of weather conditions. Public customers represented 57.9% of quarterly revenue and 59.6% of year-to-date revenue.
Financial Performance and Key Metrics
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $324.9 million, up 33.5% | $666.6 million, up 26.2% |
| Gross profit | $26.3 million; 8.1% margin | $56.8 million; 8.5% margin |
| Operating income (loss) | $(2.6) million | $3.8 million |
| Net income (loss) | $(5.5) million; $(0.11) per diluted share | $(3.6) million; $(0.07) per diluted share |
| Adjusted EBITDA | $20.8 million; 6.4% margin | $48.3 million; 7.3% margin |
| Operating cash flow | Not separately reported for the quarter | $45.7 million |
Quarterly revenue growth included $40.0 million from acquisitions and $41.5 million from existing markets. Year-to-date growth included $72.2 million from acquisitions and $66.1 million from existing markets. Quarterly gross margin improved from 5.1% to 8.1%, while the year-to-date margin declined modestly from 8.6% to 8.5%.
As of March 31, 2023, cash and cash equivalents were $30.5 million, compared with $35.5 million at September 30, 2022. Total assets were $1.14 billion and stockholders’ equity was $452.7 million.
Total debt principal was $423.7 million, consisting of $280.6 million under the Term Loan and $143.1 million under the Revolving Credit Facility. Revolver availability was $171.9 million, including the effect of outstanding letters of credit, and $10.0 million remained available under the Delayed Draw Term Loan. The company was in compliance with its debt covenants; its fixed charge coverage ratio was 1.47-to-1.00 and its consolidated leverage ratio was 2.92-to-1.00.
Year-to-date investing cash outflows were $97.2 million, including $60.4 million of capital expenditures and $77.8 million for acquisitions. Financing cash inflows were $46.6 million. Cash, cash equivalents and restricted cash decreased by $4.9 million during the six months.
Material Changes Versus the Prior Comparable Period
- Revenue increased 33.5% in the quarter and 26.2% year to date, supported by acquisitions and strong public and private demand.
- Quarterly gross profit more than doubled, driven by better utilization of plants and equipment, lower diesel and liquid asphalt costs, and completion of higher-margin backlog.
- Year-to-date gross margin was slightly lower because inflation and supply-chain constraints pressured older backlog completed primarily in the first fiscal quarter.
- General and administrative expense rose 28.0% for the quarter and 23.6% year to date, reflecting higher payroll and benefits, acquisition-related overhead and equity compensation.
- Net losses narrowed from $9.4 million to $5.5 million for the quarter and from $3.9 million to $3.6 million year to date.
- Net interest expense increased substantially to $4.8 million for the quarter and $8.8 million year to date because of higher debt balances and interest rates.
- Adjusted EBITDA increased 165.3% for the quarter and 41.4% year to date.
- Debt increased by approximately $46.8 million from September 30, 2022, primarily to support acquisitions and capital investment.
Outlook, Commentary, Risks and Unusual Items
Contract backlog was $1.52 billion at March 31, 2023, including $1.25 billion of awarded work in progress or not yet started and $0.27 billion of low-bid or no-contract work. The filing does not provide specific revenue or earnings guidance. Management expects fiscal 2023 capital expenditures of approximately $85 million to $90 million and believes operating cash flow and available borrowings will fund operations and planned capital expenditures for at least the next 12 months.
Management reported continued wage and raw-material inflation, including fuel, concrete and steel, along with intermittent supply-chain disruption and labor constraints. The company has mitigated some effects through pricing and bid assumptions, but older backlog may not permit full cost recovery. Demand may also be affected by future price increases.
On November 18, 2022, the company acquired Nashville-area HMA plants and related assets for $9.5 million and exchanged a North Carolina quarry, generating $37.0 million of proceeds and a $5.4 million gain. On December 1, 2022, it acquired Ferebee Corporation for $68.3 million. The purchase accounting remains provisional, including approximately $32.2 million of provisional goodwill.
Subsequent to quarter-end, the company acquired Pickens Construction for $4.8 million on April 3, 2023 and certain Huntsville, Alabama operations of Southern Site Contractors for $1.1 million on May 1, 2023. The SunTx management services agreement was extended to October 1, 2028, and a new CFO employment agreement provides for a minimum annual salary of $400,000.
Interest-rate exposure remains significant: all $423.7 million of borrowings were variable-rate debt at quarter-end, although the company had a $300.0 million interest-rate swap with a fair value of $18.9 million. A hypothetical 1% change in borrowing rates, excluding swaps, would affect annual interest expense by approximately $4.2 million.
Other risks include public infrastructure funding and project competition, acquisition integration, bonding capacity, contract-estimate risk, weather, government regulation, indebtedness and covenant restrictions, labor availability, commodity prices, litigation, insurance claims, cybersecurity and banking-sector instability. Management stated that no pending legal proceedings were expected to have a material adverse effect.
Important Facts for Investors to Verify
- Whether backlog converts to revenue and profit at expected margins, particularly the $0.27 billion of low-bid or no-contract backlog.
- Whether inflation, labor costs and supply-chain constraints continue to pressure margins on existing backlog.
- The final purchase-price allocations for the Tennessee and North Carolina acquisitions and any resulting changes to goodwill or intangible assets.
- Debt reduction, covenant headroom and the effect of higher rates despite the interest-rate swap.
- Whether planned fiscal 2023 capital expenditures remain within the $85 million to $90 million estimate and can be funded without materially increasing leverage.
- The integration and contribution of the post-quarter-end South Carolina and Alabama acquisitions.
- The effect of seasonality, adverse weather and public-sector funding on second-half operating results.