Construction Partners, Inc. — Fiscal 2020 Form 10-K Summary
Business context and reporting period
Construction Partners, Inc. is a civil infrastructure company operating across Alabama, Florida, Georgia, North Carolina and South Carolina. Its vertically integrated operations include hot-mix asphalt production and sales, paving, site development, aggregate mining and liquid asphalt distribution. The filing covers the fiscal year ended September 30, 2020, with comparisons to fiscal 2019; it is an annual 10-K rather than a quarterly filing.
- Approximately 65.3% of fiscal 2020 construction contract revenues were from public projects and 34.7% from private projects.
- Alabama DOT and North Carolina DOT represented 11.6% and 7.8% of revenue, respectively; all DOT projects represented 32.5%.
- Two Florida acquisitions added three HMA plants during fiscal 2020. Subsequent to year-end, the Company acquired three North Carolina asphalt and paving businesses for $57.4 million, adding 11 HMA plants.
- Year-end contract backlog was $608.1 million, up from $531.6 million, with approximately 90% expected to be completed within 12 months. Backlog included $138.4 million of low-bid/no-contract work.
Financial performance and condition
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Revenue | $785.7 million | $783.2 million | Up 0.3% |
| Gross profit | $122.2 million | $118.0 million | Up 3.6% |
| Gross margin | 15.6% | 15.1% | Up 50 bps |
| Operating income | $55.2 million | $57.1 million | Down 3.3% |
| Net income | $40.3 million | $43.1 million | Down 6.5% |
| Diluted EPS | $0.78 | $0.84 | Down $0.06 |
| Adjusted EBITDA | $98.4 million | $92.3 million | Up 6.6% |
| Adjusted EBITDA margin | 12.5% | 11.8% | Up 70 bps |
| Cash flow from operations | $105.2 million | $55.3 million | Up $49.9 million |
| Capital expenditures | $52.6 million | $42.5 million | Up $10.1 million |
- Revenue from legacy markets declined $47.1 million, substantially offset by $49.6 million from acquisitions completed during or after fiscal 2019.
- Gross margin improved primarily from efficient plant and equipment utilization and benefits from the liquid asphalt terminal acquired in fiscal 2019.
- General and administrative expense increased 9.4% to $68.6 million, driven by acquisition-related overhead, higher management payroll and benefits, and stock-based compensation.
- Net interest expense increased 67.3% to $3.1 million, including higher average debt and unfavorable changes in interest-rate swap fair values.
- Cash and cash equivalents increased to $148.3 million from $80.6 million. Total assets were $628.1 million and stockholders’ equity was $385.2 million at September 30, 2020.
- Contracts receivable including retainage declined to $131.8 million from $139.9 million; year-end retainage was $21.0 million.
Debt, liquidity and capital resources
- At September 30, 2020, principal debt consisted of a $92.9 million term loan; there were no borrowings under the revolving facility.
- Revolving facility capacity was $50.0 million, with $39.3 million available after letters of credit. Outstanding letters of credit totaled $10.9 million.
- Debt maturities were $13.0 million annually in fiscal 2021 through 2023 and $53.9 million in fiscal 2024; all remaining advances mature October 1, 2024.
- The Company was in compliance with its covenants. The fixed-charge coverage ratio was 2.85x versus a 1.20x minimum, and consolidated leverage was 1.08x versus a 2.75x maximum.
- Management expected fiscal 2021 capital expenditures of $47.0 million to $50.0 million and believed operating cash flow plus available borrowings would fund operations through September 30, 2021, subject to COVID-19 and other uncertainties.
- The Company does not anticipate paying cash dividends in the foreseeable future; the Credit Agreement also restricts dividends.
Material changes versus fiscal 2019
- Revenue was essentially flat despite weaker activity in certain existing markets, particularly North Carolina, because acquisitions offset the decline.
- Profitability trends differed by measure: gross profit and Adjusted EBITDA improved, while operating income and net income declined because of higher corporate costs, interest expense and lower joint-venture earnings.
- Operating cash flow nearly doubled, supported by lower contract receivables and a $7.7 million settlement-related receipt.
- Debt increased materially following the July 2020 amended and restated credit agreement and acquisition and capital spending activity.
- The Company adopted ASC Topic 842, recognizing operating lease right-of-use assets of $7.4 million and operating lease liabilities of $7.6 million at year-end; prior periods were not restated.
- Goodwill increased to $46.3 million from $38.5 million, primarily from acquisitions. Annual impairment testing indicated no goodwill or indefinite-lived intangible asset impairment.
Guidance, outlook, risks and unusual items
- The filing did not provide formal revenue or earnings guidance. It provided fiscal 2021 capital expenditure expectations of $47.0 million to $50.0 million.
- COVID-19 did not significantly disrupt fiscal 2020 operations because road construction was treated as essential infrastructure. However, management could not predict future effects on demand, project timing, labor availability, supply chains, customer collections or public infrastructure funding.
- North Carolina DOT funding pressures, exacerbated by COVID-19, reduced fourth-quarter revenue and delayed or reduced certain projects, although management cited improving fuel-tax receipts, bond approvals and favorable population trends.
- Key operating risks include dependence on government infrastructure funding and state DOTs, competitive bidding and fixed-price contract exposure, cost overruns, weather and seasonality, commodity prices, bonding capacity, labor availability, acquisitions and integration, environmental compliance, cybersecurity, insurance claims and litigation.
- Construction contracts are generally fixed unit price or fixed total price, and revenue recognition depends on estimates of total costs, project progress, change orders, claims and completion obligations.
- The Company reported a pending arbitration claim relating to approximately $1.5 million of allegedly unpaid dividends and unspecified additional damages. Management believed it had meritorious defenses and did not expect pending matters to have a material adverse effect.
- Fiscal 2020 included $2.7 million of total derivative losses, including $1.9 million related to interest-rate swaps and $0.9 million related to commodity swaps.
- SunTx Capital Partners controlled approximately 76.9% of combined voting power at December 9, 2020 through the dual-class share structure. The Company is a controlled company and an emerging growth company, and its independent auditor was not required to attest to internal control effectiveness.
Important facts for investors to verify
- Whether the subsequent $57.4 million North Carolina acquisitions generate the expected revenue, margins and operating synergies, and the final purchase-price allocation.
- Whether public infrastructure funding, particularly in North Carolina and Alabama, supports backlog conversion and fiscal 2021 revenue.
- Backlog quality: the proportion supported by executed contracts versus low bids, and the effect of cancellations, scope changes and unapproved change orders.
- Debt repayment capacity, covenant headroom, floating-rate exposure, swap liabilities and the October 2024 maturity.
- Whether higher general and administrative costs moderate future EBITDA conversion and net-income growth.
- Exposure to weather, fuel, liquid asphalt, labor and equipment costs under fixed-price contracts.
- The outcome and potential financial exposure of the pending arbitration, environmental matters, insurance claims and routine litigation.
- The effects of COVID-19 on DOT funding, customer payment timing, project awards and supply-chain continuity.