Construction Partners, Inc. 2018 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2018. The filing is an annual report, not a standalone fourth-quarter filing; quarterly results are not separately provided in the supplied text.
Business context and key developments
Construction Partners operates vertically integrated infrastructure and road construction businesses in Alabama, Florida, Georgia, North Carolina and South Carolina. Operations include aggregate mining, hot mix asphalt production and distribution, site development, utility and drainage installation, paving and roadway maintenance. Approximately 67% of fiscal 2018 construction contract revenue came from publicly funded projects and 33% from private projects.
- Completed its initial public offering in May 2018, raising approximately $98.0 million net of offering costs.
- Completed the $51.3 million acquisition of The Scruggs Company in Georgia, funded with $29.3 million of cash and $22.0 million of incremental term debt.
- Recorded a $14.8 million pre-tax gain from a settlement, with approximately $15.7 million of net payments due in installments from January 2019 through July 2020.
- Contract backlog increased to $594.4 million at September 30, 2018, from $549.9 million at September 30, 2017; approximately 80% was expected to be completed within 12 months.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $680.1 million | $568.2 million | Up 19.7% |
| Gross profit | $99.5 million | $91.0 million | Up 9.4% |
| Gross margin | 14.6% | 16.0% | Down 140 basis points |
| Operating income | $61.4 million | $46.6 million | Up 31.9% |
| Net income | $50.8 million | $26.0 million | Up 95.0% |
| Net margin | 7.5% | 4.6% | Up 290 basis points |
| Adjusted EBITDA | $75.5 million | $69.3 million | Up 9.0% |
| Adjusted EBITDA margin | 11.1% | 12.2% | Down 110 basis points |
| Operating cash flow | $66.1 million | $46.9 million | Up $19.2 million |
| Capital expenditures | $42.8 million | $24.4 million | Up $18.4 million |
| Cash and cash equivalents | $99.1 million | $27.5 million | Up $71.6 million |
Net income benefited materially from the settlement gain, a lower effective tax rate, lower interest expense, the absence of the prior-year debt extinguishment loss and $1.3 million of earnings from a new joint venture. The fiscal 2018 effective tax rate was 17.2%, compared with 36.1% in fiscal 2017, including a $4.6 million discrete benefit related primarily to the Tax Cuts and Jobs Act.
At September 30, 2018, total debt was approximately $63.3 million, including $57.3 million outstanding under the term loan, $5.0 million under the revolving facility and $1.0 million of acquired equipment debt. Revolving facility availability was $14.0 million after outstanding letters of credit. Debt matures in July 2022 under the Compass Credit Agreement, with scheduled fiscal 2019 maturities of $14.8 million. The company was in compliance with its financial covenants, including a 1.20-to-1.00 minimum fixed-charge coverage ratio and a 2.00-to-1.00 maximum consolidated leverage ratio.
Management stated that operating cash flow, cash on hand and available borrowing capacity should be sufficient for working capital and planned capital expenditures for at least the next 12 months. Fiscal 2019 capital expenditures were estimated at approximately $39.0 million to $42.0 million.
Material changes versus the prior comparable period
- Revenue growth reflected a larger beginning backlog, increased work in existing markets and $51.4 million of revenue from acquisitions and greenfield expansions.
- Gross margin declined because rising asphalt cement prices pressured internal and external hot mix asphalt margins.
- General and administrative expense increased 15.5% to $55.3 million, primarily due to acquisition-related growth, higher management payroll and benefits, and increased public-company regulatory and reporting costs.
- Interest expense declined 67.9% to $1.3 million, while the prior-year $1.6 million loss on debt extinguishment did not recur.
- Investing cash usage increased to $89.6 million, driven by the Scruggs acquisition and higher capital expenditures.
- Financing cash flow was $95.1 million, principally reflecting IPO proceeds, compared with $39.8 million of cash usage in fiscal 2017, which included a $31.3 million special dividend.
- The company transitioned to a dual-class structure. Class B shares carry ten votes per share, and affiliates of SunTx controlled approximately 86.2% of combined voting power at December 10, 2018.
Outlook, risks and unusual items
- Management expected continued infrastructure spending in its southeastern markets and anticipated that government spending would increase, but provided no formal revenue or earnings guidance in the filing.
- Major risks include dependence on federal, state and local infrastructure funding; customer concentration with state Departments of Transportation; competitive bidding; project cost-estimation risk; adverse weather and seasonality; fuel and asphalt price volatility; labor availability; bonding capacity; acquisition integration; and contract cancellations or modifications.
- Approximately 42.9% of fiscal 2018 revenue came from projects for Departments of Transportation. Alabama DOT and North Carolina DOT represented 15.1% and 13.3% of revenue, respectively.
- The company uses percentage-of-completion accounting, requiring estimates of total contract costs and profitability. Changes in estimates, claims, change orders, delays or project conditions could materially affect reported earnings.
- Management identified material weaknesses in information technology general controls and closing and financial reporting controls, including controls over significant and unusual transactions. Disclosure controls were therefore considered ineffective at September 30, 2018. Remediation efforts included additional accounting personnel, third-party assistance and enhanced process documentation and review.
- The company does not expect to pay cash dividends in the foreseeable future, and its credit agreement restricts distributions.
- Routine litigation, environmental matters and government inquiries arise in the ordinary course. Management did not believe pending matters would have a material adverse effect, but outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Separate fourth-quarter revenue, earnings, margins and cash flow are not clearly provided in the filing text; verify any Q4-specific figures from quarterly filings or earnings materials.
- Reconcile reported net income and margins excluding the $14.8 million settlement gain and the $4.6 million Tax Act benefit.
- Assess whether backlog conversion, project estimates and public-sector funding support the expected revenue outlook, recognizing that backlog may be canceled or modified.
- Monitor gross-margin pressure from asphalt, fuel and other commodity costs and the company’s ability to recover those costs through contract provisions.
- Review debt amortization, revolving availability, covenant headroom and the impact of floating interest rates.
- Track remediation of the identified material weaknesses and the company’s preparation for increased internal-control requirements beginning in fiscal 2019.
- Consider SunTx’s concentrated voting control, related-party transactions and the absence of expected cash dividends.