Construction Partners, Inc. — Fiscal 2020 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended March 31, 2020; comparative periods ended March 31, 2019. The company provides road and civil infrastructure construction, paving, site development, utilities, drainage, aggregates, HMA, ready-mix concrete and liquid asphalt services in Alabama, Florida, Georgia, North Carolina and South Carolina.
Financial Performance and Position
| Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Change |
|---|---|---|---|
| Revenue | $168.7 million | $164.3 million | Up 2.7% |
| Gross profit | $21.0 million | $19.8 million | Up 5.9% |
| Gross margin | 12.4% | 12.1% | Up 30 basis points |
| Operating income | $4.6 million | $5.7 million | Down 19.9% |
| Net income | $1.5 million | $4.2 million | Down 63.5% |
| Adjusted EBITDA | $14.2 million | $14.0 million | Up 2.0% |
| Adjusted EBITDA margin | 8.4% | 8.5% | Down 10 basis points |
| Diluted EPS | $0.03 | $0.08 | Down $0.05 |
| Metric | Six months ended March 31, 2020 | Six months ended March 31, 2019 | Change |
|---|---|---|---|
| Revenue | $344.0 million | $318.6 million | Up 8.0% |
| Gross profit | $44.7 million | $40.9 million | Up 9.3% |
| Gross margin | 13.0% | 12.8% | Up 20 basis points |
| Operating income | $11.5 million | $12.8 million | Down 9.5% |
| Net income | $7.0 million | $9.4 million | Down 25.3% |
| Adjusted EBITDA | $31.5 million | $28.7 million | Up 9.7% |
| Adjusted EBITDA margin | 9.1% | 9.0% | Up 10 basis points |
| Diluted EPS | $0.14 | $0.18 | Down $0.04 |
Cash flow and liquidity: Six-month operating cash flow was $20.5 million, compared with $5.3 million in the prior-year period. Investing cash outflow was $62.8 million, including $30.2 million for acquisitions and $34.5 million of property, plant and equipment purchases. Financing activities provided $15.5 million, including a $15.0 million revolving-credit draw. Cash declined to $53.8 million at March 31, 2020 from $80.6 million at September 30, 2019.
Debt: Total debt before deferred issuance costs and discounts was $66.0 million at March 31, 2020, compared with $50.3 million at September 30, 2019. The company had $50.6 million outstanding under its term loan and $15.0 million under its revolving facility, with approximately $4.0 million of revolver availability after letters of credit. The company was in compliance with its debt covenants.
Balance sheet: Total assets were $547.9 million and stockholders’ equity was $351.1 million at March 31, 2020. Contracts receivable, including retainage, were $122.9 million, while net billings in excess of costs and estimated earnings on uncompleted contracts were $13.4 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected $24.7 million of six-month revenue from acquisitions completed after March 31, 2019. In the second quarter, acquisition-related revenue of $11.6 million was partly offset by a $7.2 million decline in existing markets.
- Gross margins improved modestly, but general and administrative expenses increased 13.9% in the quarter and 16.2% year to date, driven by higher management payroll and benefits, acquisition-related costs and stock-based compensation.
- Net income was reduced by $2.3 million of unrealized losses on commodity and interest-rate derivatives in the quarter and year to date, compared with $0.1 million and $0.3 million, respectively, in the prior-year periods. These losses were largely non-cash.
- The effective tax rate for the six-month period declined to 20.9% from 25.1%, including a $0.4 million benefit from an amended state tax return and utilization of net operating loss carryforwards.
- The company adopted ASC Topic 842 on October 1, 2019, recognizing $8.6 million of operating lease right-of-use assets and $8.8 million of operating lease liabilities at March 31, 2020.
- The company acquired an HMA plant and paving business in Palm City, Florida, for $17.7 million in October 2019 and two HMA plants in western Florida for $9.8 million in March 2020, plus $2.6 million accrued for acquired inventory.
Outlook, Risks and Unusual Items
At March 31, 2020, remaining performance obligations represented approximately $515.4 million of aggregate transaction price, of which approximately $322.7 million was expected to be recognized during the remainder of fiscal 2020 and $192.7 million thereafter.
Management expected fiscal 2020 capital expenditures of $40.0 million to $42.0 million, excluding the $11.5 million equipment-lease buyout. Management stated that operating cash flow, cash on hand and available credit were expected to fund operations and planned capital expenditures for at least the next 12 months, but noted substantial uncertainty related to COVID-19 and future access to capital.
The company reported no significant COVID-19 disruption through March 31, 2020, but warned that the pandemic could delay or cancel public and private projects, reduce transportation-related tax revenue and infrastructure spending, disrupt employees and supply chains, increase costs, impair collections and restrict financing access.
On April 30, 2020, the company amended its credit agreement to provide an additional $18.0 million term-loan advance, increase quarterly principal installments to $2.5 million and establish provisions for replacing LIBOR after December 31, 2021. LIBOR replacement and higher borrowing costs are identified risks.
Other exposures include seasonality and adverse weather, fixed-price contract estimating risk, commodity prices, acquisition integration, bonding capacity, substantial indebtedness, government funding, litigation, labor availability and cybersecurity. Diesel-fuel purchase commitments totaled $2.6 million at March 31, 2020.
Important Facts for Investors to Verify
- Whether COVID-19 caused subsequent project delays, cancellations, collection issues or reductions in transportation-agency funding.
- The company’s post-quarter liquidity after the $18.0 million term-loan advance and the revised quarterly repayment requirement.
- Performance of the Florida acquisitions and whether provisional goodwill allocations are revised when purchase accounting is finalized.
- Future fair-value changes and cash effects from commodity and interest-rate derivatives.
- Actual fiscal 2020 capital expenditures versus the $40.0 million–$42.0 million estimate, excluding the lease buyout.
- Progress toward converting the $515.4 million performance-obligation balance into revenue and cash collections.
- Compliance with the minimum fixed-charge coverage ratio of 1.20-to-1.00 and maximum consolidated leverage ratio of 2.75-to-1.00.
- The effect of LIBOR replacement on borrowing rates, debt covenants and liquidity.