Construction Partners, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended June 30, 2022. The filing was submitted August 5, 2022. Results are unaudited and should be read with the fiscal 2021 Form 10-K.
Business context
Construction Partners is a civil infrastructure company operating in Alabama, Florida, Georgia, North Carolina and South Carolina. It provides roadway construction and maintenance, paving, site development, hot-mix asphalt, aggregates and liquid asphalt products to public and private customers. Public customers generated 63.4% of second-quarter revenue and 61.2% of nine-month revenue.
Operations are seasonal, with stronger activity typically occurring during the warmer and drier third and fourth fiscal quarters. The company completed four acquisitions after June 30, 2021, expanding its footprint and capabilities in the Southeast.
Financial performance and key metrics
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Nine months ended June 30, 2022 | Nine months ended June 30, 2021 |
|---|---|---|---|---|
| Revenue | $380.3 million | $261.7 million | $908.6 million | $631.7 million |
| Revenue growth | 45.3% | — | 43.8% | — |
| Gross profit | $44.3 million | $36.6 million | $89.7 million | $85.3 million |
| Gross margin | 11.6% | 14.0% | 9.9% | 13.5% |
| Operating income | $18.0 million | $14.3 million | $15.0 million | $18.7 million |
| Net income | $12.2 million | $9.3 million | $8.3 million | $12.3 million |
| Diluted EPS | $0.23 | $0.18 | $0.16 | $0.24 |
| Adjusted EBITDA | $37.6 million | $29.0 million | $71.8 million | $63.5 million |
| Adjusted EBITDA margin | 9.9% | 11.1% | 7.9% | 10.1% |
Second-quarter revenue growth included $53.1 million from acquisitions and approximately $65.5 million of growth in existing markets. Nine-month revenue growth included approximately $120.7 million from acquisitions and $156.2 million from existing markets.
At June 30, 2022, cash and cash equivalents were $26.1 million, compared with $57.3 million at September 30, 2021. Total assets were $1.02 billion, including $240.0 million of contracts receivable and $454.0 million of net property, plant and equipment. Contracted but unsatisfied performance obligations totaled approximately $958.9 million, of which $326.8 million was expected to be recognized during the remainder of fiscal 2022.
Cash flow, debt and liquidity
- Operating cash flow was negative $9.7 million for the nine months ended June 30, 2022, compared with $9.3 million of operating cash flow in the prior-year period. The decline primarily reflected increases in receivables, inventories and contract assets.
- Investing cash outflow was $158.6 million, including $102.9 million for acquisitions, $52.2 million for property, plant and equipment and $7.7 million for restricted investments.
- Financing cash flow was $137.3 million, including $142.3 million of net long-term debt issuance and $5.0 million of principal repayments.
- Total principal debt was $355.1 million at June 30, 2022, consisting of a $250.0 million term loan and $105.1 million drawn under the revolving credit facility. The company had $208.6 million of revolving availability, including the effect of outstanding letters of credit, plus $50.0 million of delayed-draw term loan availability.
- The June 30, 2022 credit agreement matures June 30, 2027, is secured by substantially all company assets and includes 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 2.20-to-1.00 and 2.99-to-1.00, respectively.
- Fiscal 2022 capital expenditures were expected to total $60.0 million to $65.0 million. Management stated that operating cash flow and available borrowings should fund operations and planned capital expenditures for at least the next 12 months, subject to business and market conditions.
Material changes versus the prior comparable period
- Revenue increased substantially, but gross margins declined due to lower margins on acquired projects and higher raw-material, fuel, labor and trucking costs, along with supply-chain disruptions.
- Second-quarter net income increased 30.3%, but nine-month net income declined 32.7% because higher general and administrative expenses and interest expense more than offset gross-profit growth.
- Adjusted EBITDA increased in both periods, but margins declined from 11.1% to 9.9% for the quarter and from 10.1% to 7.9% for the nine-month period.
- Debt increased from $217.5 million at September 30, 2021 to $355.1 million at June 30, 2022, primarily supporting acquisitions and growth.
- Contracts receivable increased to $240.0 million from $158.2 million, while inventory increased to $77.4 million from $53.8 million.
- Four acquisitions contributed $40.5 million of second-quarter revenue and $70.3 million of nine-month revenue from their respective acquisition dates. Their purchase accounting remained provisional, including approximately $38.2 million of provisional goodwill.
Guidance, outlook, risks and unusual items
- Management did not provide a formal revenue or earnings forecast in the filing. It provided a fiscal 2022 capital-expenditure expectation of $60.0 million to $65.0 million.
- Inflation continued to affect wages, fuel, concrete, steel, raw materials and other operating inputs. The company has attempted to offset costs through pricing, bid assumptions and escalation provisions, but has limited ability to pass through cost increases on existing backlog.
- The company entered into a $300.0 million notional interest-rate swap on July 1, 2022, with a fixed rate of 1.85% through June 30, 2027. It received a $12.6 million credit under a blend-and-extend arrangement.
- On August 1, 2022, the company acquired Southern Asphalt, Inc. in Conway, South Carolina, funded with $25.2 million of delayed-draw term-loan borrowings. Final consideration remained subject to post-closing adjustments.
- At June 30, 2022, the company had $11.3 million of letters of credit, $8.4 million of fuel and natural-gas purchase commitments and $2.7 million of minimum royalty commitments.
- Key risks include public infrastructure funding, acquisition integration, project-estimate accuracy, bonding capacity, weather, inflation, supply-chain and labor constraints, commodity prices, interest rates, substantial indebtedness, litigation, regulatory compliance and cybersecurity.
- Management reported no material changes to previously disclosed legal proceedings or risk factors. Routine litigation, claims and government inquiries remain possible, but management did not expect pending matters to have a material adverse effect.
Important facts for investors to verify
- Whether gross-margin pressure from acquired projects, inflation and supply-chain constraints persists or improves.
- Whether operating cash flow converts positive as receivable, inventory and contract-asset balances normalize.
- Compliance with the 3.00-to-1.00 maximum leverage covenant, particularly after the August 2022 acquisition and additional borrowing.
- Final purchase accounting, goodwill and expected earnings contribution from recent and subsequent acquisitions.
- Actual fiscal 2022 capital expenditures versus the $60.0 million–$65.0 million estimate and the company’s remaining liquidity.
- Effectiveness and accounting treatment of the July 2022 interest-rate swap, as well as exposure to variable-rate debt.
- Revenue concentration with departments of transportation, which represented 37.2% of nine-month revenue and included Alabama, North Carolina and Florida transportation departments as individually significant customers.