Construction Partners, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Construction Partners, Inc. (Nasdaq: ROAD) is a civil infrastructure company operating in Alabama, Florida, Georgia, North Carolina and South Carolina. Its activities include roadway construction and maintenance, hot mix asphalt production, paving, site development, aggregate mining and liquid asphalt distribution. The filing covers the quarter and six months ended March 31, 2021, the company’s fiscal second quarter. Results are unaudited and seasonal, with activity generally higher in the third and fourth fiscal quarters.
Financial Performance and Position
- Quarterly revenue: $179.1 million, up 6.2% from $168.7 million.
- Quarterly gross profit: $18.1 million, down 10.4%; gross margin declined to 10.1% from 12.0%.
- Quarterly operating loss: $6.4 million, compared with operating income of $3.8 million; operating margin was negative 3.6% versus positive 2.2%.
- Quarterly net loss: $4.9 million, or $0.10 per diluted share, compared with net income of $1.5 million, or $0.03 per diluted share.
- Six-month revenue: $370.0 million, up 7.6% from $344.0 million.
- Six-month gross profit: $48.7 million, up 10.8%; gross margin improved to 13.2% from 12.8%.
- Six-month net income: $2.9 million, or $0.06 per diluted share, down 58.0% from $7.0 million, or $0.14 per share.
- Adjusted EBITDA: $11.0 million for the quarter and $34.5 million for the six months, compared with $14.3 million and $31.5 million, respectively. Adjusted EBITDA margin was 6.1% for the quarter and 9.3% year-to-date, versus 8.5% and 9.2%.
- Cash flow: Operating cash flow was $2.4 million for the six months, down from $20.6 million. Investing cash outflow was $110.5 million, including $84.5 million for acquisitions and $26.9 million for capital expenditures.
- Liquidity: Cash and cash equivalents were $33.7 million at March 31, 2021, down from $148.3 million at September 30, 2020. Revolver availability was $38.6 million after letters of credit.
- Debt: Term Loan principal was $86.4 million, with $13.0 million classified as current debt. No revolver borrowings were outstanding. The company’s fixed-charge coverage ratio was 2.93x versus a 1.20x minimum, and its consolidated leverage ratio was 1.00x versus a 2.75x maximum.
- Backlog and remaining performance obligations: Approximately $558.6 million of aggregate transaction price remained under unsatisfied or partially unsatisfied contracts, including an expected $378.2 million of revenue during the remainder of fiscal 2021.
Material Changes Versus the Prior Comparable Period
- Revenue growth was primarily acquisition-driven. The North Carolina acquisitions contributed $14.9 million of quarterly revenue and $27.1 million of six-month revenue.
- Quarterly profitability weakened because of lower margins on acquired projects and a $3.1 million loss from underutilized asphalt plants and equipment caused by project delays and adverse weather.
- General and administrative expense increased 45.5% for the quarter and 31.3% for the six months, driven by a $3.2 million legal settlement, related legal fees, higher management payroll and benefits, and acquisition-related costs.
- The company acquired four North Carolina HMA production and paving businesses for $84.5 million, adding 13 HMA plants. The acquired operations generated a $3.0 million quarterly net loss and a $3.2 million six-month net loss from their acquisition dates.
- Interest expense declined materially because of gains on interest-rate swaps and lower debt balances.
- Cash declined by $114.6 million during the six months, primarily because acquisition spending and capital expenditures substantially exceeded operating cash flow.
- A March 2021 secondary offering sold 2.0 million shares of Class A common stock by existing stockholders at $31.25 per share. The company received no proceeds but incurred approximately $0.2 million of related expenses.
Guidance, Outlook, Risks and Unusual Items
- Management expects fiscal 2021 capital expenditures of approximately $47.0 million to $52.0 million.
- Management believes operating cash flow, cash on hand and available credit will fund operations and planned capital expenditures for at least the next 12 months, but notes that acquisitions, pandemic impacts and other factors could require additional financing or reduced capital expenditures.
- COVID-19 did not significantly disrupt operations during the reported periods, but risks remain from employee absences, supply-chain interruptions, customer project delays or cancellations, collections and reduced public infrastructure funding.
- Weather-related project delays affected quarterly results. The business is exposed to seasonal conditions, including cold, rain, snow, hurricanes and other severe weather.
- The company uses fuel and interest-rate swaps. At March 31, 2021, fuel swaps had a fair value asset of approximately $1.3 million, and interest-rate swaps had a fair value liability of approximately $1.1 million.
- Subsequent to quarter-end, the company entered into a $3.2 million settlement with a former stockholder. The amount was accrued as of March 31, 2021 and included in general and administrative expense.
- Other key risks include public infrastructure funding levels, competitive bidding, acquisition integration, contract-estimate risk, bonding capacity, substantial indebtedness, commodity prices, labor, litigation, cybersecurity and regulatory compliance.
- Management stated that disclosure controls were effective as of March 31, 2021 and that no material changes to internal control over financial reporting occurred during the quarter.
Important Facts for Investors to Verify
- Whether margins on the North Carolina acquisitions improve as projects mature and operations are integrated.
- Whether weather-related project delays and underutilization continue to pressure quarterly gross margins.
- The pace of conversion of the $558.6 million performance-obligation balance into revenue and cash collections.
- Cash generation after the acquisition program, planned $47.0 million–$52.0 million of fiscal 2021 capital expenditures and scheduled debt repayments.
- Compliance with credit-agreement covenants and the availability of the revolving facility after letters of credit.
- Potential further effects of COVID-19, public-sector funding changes, fuel and asphalt prices, interest rates and supply-chain conditions.
- The final purchase-price allocation for the North Carolina acquisitions, including identifiable intangible assets and any changes to goodwill.
- The financial and legal implications of the $3.2 million stockholder settlement and other routine claims or government inquiries.