Construction Partners, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended June 30, 2021; filed August 6, 2021. Construction Partners is a civil infrastructure company providing roadway construction, paving, site development, asphalt and aggregate products across Alabama, Florida, Georgia, North Carolina and South Carolina.
Financial Performance and Position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $261.7 million, up 20.6% | $631.7 million, up 12.6% |
| Gross profit / margin | $36.6 million / 14.0% | $85.3 million / 13.5% |
| Operating income / margin | $14.3 million / 5.4% | $18.7 million / 3.0% |
| Net income / margin | $9.3 million / 3.6% | $12.3 million / 1.9% |
| Diluted EPS | $0.18 | $0.24 |
| Adjusted EBITDA / margin | $29.0 million / 11.1% | $63.5 million / 10.1% |
| Operating cash flow | Not separately provided | $9.3 million |
- Cash and cash equivalents were $134.5 million at June 30, 2021, compared with $148.3 million at September 30, 2020.
- Total debt was $200.0 million of principal, consisting of a $200.0 million term loan; no revolving credit facility borrowings were outstanding. Revolver availability was $213.9 million after letters of credit.
- Property, plant and equipment increased to $296.7 million from $237.2 million, while goodwill increased to $78.4 million from $46.3 million.
- Accounts receivable, including retainage, increased to $164.3 million from $131.8 million. Contract assets were $15.8 million and contract liabilities were $31.6 million at June 30, 2021.
- Capital expenditures were $39.6 million in the first nine months; fiscal 2021 capital expenditures were expected to total $47.0 million to $52.0 million.
Material Changes Versus Prior Comparable Period
- Quarterly revenue increased $44.6 million, primarily from $31.4 million of revenue contributed by acquisitions and higher activity in existing markets. Nine-month revenue included $58.4 million from acquisitions completed after October 1, 2019.
- Quarterly gross profit declined slightly despite higher revenue, as acquired North Carolina projects had lower margins and acquired asphalt plants and equipment had lower utilization.
- General and administrative expense increased 37.6% for the quarter and 33.4% for the nine months, driven by higher personnel costs, acquisition-related expenses, professional fees and equity-based compensation.
- Net income declined 40.7% for the quarter and 46.0% for the nine months. Operating income declined 30.2% and 40.0%, respectively.
- Adjusted EBITDA was essentially unchanged for the nine-month period at $63.5 million, but the margin declined to 10.1% from 11.3%.
- Operating cash flow fell to $9.3 million from $51.4 million, primarily because of increased receivables, inventories and other assets. Investing cash use increased to $129.5 million, including $92.3 million for acquisitions.
- The company entered into a new $200.0 million term loan and $225.0 million revolving facility on June 24, 2021, refinancing its prior credit facility and supporting acquisitions and liquidity.
Outlook, Risks and Unusual Items
- Management stated that cash from operations, cash on hand and available credit were expected to fund operations and planned capital expenditures for at least the next 12 months, subject to acquisition needs, COVID-19 effects and other uncertainties.
- At June 30, 2021, remaining performance obligations were approximately $627.5 million, with approximately $282.3 million expected to be recognized during the remainder of fiscal 2021.
- Inflationary pressure emerged in wages, raw materials, fuel, concrete and steel. The company has limited ability to pass cost increases through to projects already in backlog, although many public contracts include price-adjustment provisions.
- The company reported no significant COVID-19 disruption during the period but identified risks involving employee absences, supply-chain interruptions, customer delays or cancellations, and public-project funding.
- The company paid $3.2 million to settle claims by a former stockholder and incurred related legal expenses. The settlement and related expenses were nondeductible, increasing the effective tax rate to 33.0% for the quarter and 32.0% for the nine-month period.
- Subsequent to quarter-end, the company acquired Alabama and North Carolina operations for a combined purchase price of $112.9 million, paid from cash on hand. The acquisitions added HMA plants, aggregate facilities and equipment.
- Key risks include public infrastructure funding, competition, weather, project-estimate accuracy, acquisition integration, bonding capacity, commodity prices, labor, litigation, cybersecurity, substantial indebtedness and compliance with debt covenants.
- Debt covenants included a minimum fixed-charge coverage ratio of 1.20-to-1.00 and maximum consolidated leverage ratio of 3.00-to-1.00. Reported ratios were 4.00-to-1.00 and 1.86-to-1.00, respectively, at June 30, 2021.
Important Facts for Investors to Verify
- Whether acquired North Carolina operations achieve targeted utilization and margins, given their initial negative contribution and lower project profitability.
- Whether revenue growth converts into operating cash flow as receivables, inventories and contract balances continue to increase.
- The effect of additional post-quarter-end acquisitions on cash, leverage, goodwill and integration costs.
- Exposure to inflation in fuel, asphalt, labor and other materials, including the extent of contractual price protections.
- Compliance with debt covenants and the impact of variable-rate borrowings; $159.7 million of borrowings were non-hedged variable-rate debt at June 30, 2021.
- Timing and collectability of the $164.3 million receivables balance and the $627.5 million remaining performance obligation balance.
- The sustainability of reported earnings after excluding the legal settlement, derivative gains, acquisition effects and elevated equity-based compensation.