Business Context and Reporting Period
Construction Partners, Inc. is a civil infrastructure company focused on roadway construction and maintenance, hot-mix asphalt production, paving, site development, aggregates mining and liquid asphalt distribution across Alabama, Florida, Georgia, North Carolina and South Carolina. This Form 10-K covers the fiscal year ended September 30, 2022; the filing does not present a separate fourth-quarter financial summary.
Approximately 60.9% of fiscal 2022 construction contract revenue came from public projects and 39.1% from private projects. Departments of transportation represented 36.8% of revenue, with Alabama DOT and North Carolina DOT contributing 10.0% and 11.2%, respectively.
Financial Performance and Position
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Revenue | $1,301.7 million | $910.7 million | +42.9% |
| Gross profit | $139.3 million | $119.9 million | +16.1% |
| Gross margin | 10.7% | 13.2% | Down 250 basis points |
| Operating income | $35.4 million | $30.1 million | +17.6% |
| Net income | $21.4 million | $20.2 million | +5.9% |
| Net margin | 1.6% | 2.2% | Down 60 basis points |
| Adjusted EBITDA | $111.2 million | $90.6 million | +22.7% |
| Adjusted EBITDA margin | 8.5% | 9.9% | Down 140 basis points |
| Adjusted net income | $21.4 million | $24.0 million | Down 10.8% |
Revenue growth included $170.4 million from acquisitions and approximately $220.6 million from existing markets. Higher raw-material, fuel, labor and trucking costs, together with supply-chain disruptions and project delays, reduced gross margin. General and administrative expense increased 17.1% to $107.6 million, including higher equity compensation, acquisition-related overhead, professional fees and information technology costs. Net interest expense increased 220.3% to $7.7 million, primarily because of higher average debt and interest rates.
Operating cash flow, net of acquisitions, declined to $16.5 million from $48.5 million, principally because contracts receivable increased by $97.1 million and inventories increased by $17.5 million. Investing cash outflow was $197.3 million, including $128.6 million for acquisitions and $68.9 million for capital expenditures. Financing cash inflow was $159.1 million. Cash and cash equivalents declined to $35.5 million from $57.3 million.
At September 30, 2022, total debt principal was $377.0 million, consisting of $271.9 million under the Term Loan and $105.1 million under the Revolving Credit Facility. Revolver availability was $208.6 million, including the effect of outstanding letters of credit. The company reported a fixed-charge coverage ratio of 2.56-to-1.00 versus a 1.20 minimum and a consolidated leverage ratio of 2.79-to-1.00 versus a 3.50 maximum. The company was in compliance with its debt covenants.
Contract backlog increased to $1,410.8 million from $966.2 million, consisting of $1,027.8 million of awarded or in-progress work and $383.0 million of low-bid/no-contract work. Approximately 76% of backlog was expected to be completed within 12 months. Backlog excludes external sales of HMA, aggregates and liquid asphalt cement and may be canceled or modified by customers.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially due to five acquisitions and strong public and private demand in existing markets.
- Gross profit increased, but gross margin contracted because inflation and supply-chain constraints grew faster than the company’s ability to recover costs on existing backlog.
- Adjusted EBITDA increased, while Adjusted EBITDA margin declined.
- Net income rose modestly, but adjusted net income declined because fiscal 2021 included a nonrecurring legal settlement adjustment and fiscal 2022 included higher interest and overhead costs.
- Debt increased materially following the June 2022 refinancing and acquisition activity; leverage rose from 1.99-to-1.00 to 2.79-to-1.00.
- Five acquisitions expanded operations into South Carolina, additional Florida markets and the Wilmington, North Carolina market. Acquisitions contributed $120.8 million of fiscal 2022 revenue and $0.9 million of net income from their respective acquisition dates.
- Goodwill increased to $129.5 million from $85.4 million. The company reported no goodwill or indefinite-lived intangible-asset impairment.
- A captive insurance subsidiary commenced operations on October 1, 2021, retaining the first $1.0 million per claim, with additional group-captive retention of the next $550,000.
Guidance, Outlook, Risks and Unusual Items
Management expects fiscal 2023 capital expenditures of approximately $75.0 million to $80.0 million and believes operating cash flow plus available credit capacity will fund operations and planned capital expenditures for at least the next 12 months. The filing does not provide revenue or earnings guidance.
Management expects continued infrastructure demand supported by the Infrastructure Investment and Jobs Act and other public funding programs, but cautions that the timing, scale and allocation of projects remain uncertain. The company also expects continued exposure to wage, fuel, asphalt, concrete, steel, trucking and other input-cost inflation. Cost escalation provisions in many public contracts provide some protection, but projects already in backlog may not allow full recovery of cost increases.
- Fixed-price and fixed-unit-price contracts expose the company to cost overruns, inaccurate estimates, weather delays, labor shortages, subcontractor failures, supply disruptions and unfavorable site conditions.
- Business is seasonal and vulnerable to hurricanes, tornadoes, heavy rain, cold weather and other climate-related events.
- Public funding and state DOT awards are significant revenue drivers; reductions, delays or disqualification from bidding could materially affect results.
- Debt bears floating-rate exposure. A hypothetical 1% change in borrowing rates would affect annual interest expense by approximately $3.8 million before considering interest-rate swaps.
- The company’s revolving and term debt is secured by substantially all assets and subject to restrictive covenants, including limits on acquisitions, investments, dividends and additional debt.
- Legal, environmental, insurance, workers’ compensation, safety, bonding, cybersecurity and regulatory risks remain material, although management said no individual pending matter was expected to have a material adverse effect.
- The company uses significant estimates for revenue recognition under the cost-to-cost method. Revenue recognition on uncompleted contracts was identified as the auditor’s critical audit matter.
- Subsequent to year-end, the company acquired three HMA plants in the Nashville market and received net cash consideration of $28.0 million in related transactions, subject to post-closing adjustments.
- On November 18, 2022, the credit agreement was amended to permit up to $10.0 million of annual net cash proceeds from certain asset dispositions without mandatory debt prepayment, subject to specified conditions.
Most Important Facts to Verify
- Verify the sustainability of the 42.9% revenue growth and the extent attributable to acquisitions versus organic growth.
- Monitor whether gross margin and Adjusted EBITDA margin recover as pricing, cost escalation and supply-chain conditions evolve.
- Reconcile operating cash flow with earnings and track collections of the $265.2 million of contracts receivable, including $44.3 million of retainage.
- Assess debt repayment capacity, floating-rate exposure, covenant headroom and the $208.6 million of revolver availability.
- Evaluate whether the $1,410.8 million backlog converts to profitable revenue, particularly the $383.0 million of low-bid/no-contract backlog.
- Review integration progress and final purchase-price allocations for the 2022 acquisitions, including provisional goodwill and the acquired businesses excluded from the 2022 internal-control assessment.
- Confirm fiscal 2023 capital expenditures, acquisition spending and liquidity needs against the company’s stated $75.0 million to $80.0 million capital budget.
- Consider customer concentration, public infrastructure funding, weather exposure, labor availability, commodity costs and the company’s controlled-company dual-class share structure.