Business Context and Reporting Period
Construction Partners, Inc. is a civil infrastructure company operating in Alabama, Florida, Georgia, North Carolina, South Carolina and Tennessee. Its activities include asphalt production and paving, site development, aggregate mining and liquid asphalt distribution for public and private projects. The filing is a Form 10-K for the fiscal year ended September 30, 2023; the source does not provide separate fourth-quarter results.
- Public projects and sales to public customers represented 63.0% of fiscal 2023 revenue; private projects and sales represented 37.0%.
- All state Department of Transportation projects represented 36.2% of revenue. Florida DOT and North Carolina DOT represented 10.7% and 10.5%, respectively.
- The Company operated 67 HMA plants, 13 aggregate facilities and two liquid asphalt terminals at September 30, 2023.
Financial Performance and Liquidity
| Metric | Fiscal 2023 | Fiscal 2022 | Change |
|---|---|---|---|
| Revenue | $1,563.5 million | $1,301.7 million | Up 20.1% |
| Gross profit | $196.4 million | $139.3 million | Up 41.0% |
| Gross margin | 12.6% | 10.7% | Up 190 basis points |
| Operating income | $81.9 million | $35.4 million | Up 131.2% |
| Net income | $49.0 million | $21.4 million | Up 129.2% |
| Diluted EPS | $0.94 | $0.41 | Up $0.53 |
| Adjusted EBITDA | $174.1 million | $111.2 million | Up 56.6% |
| Adjusted EBITDA margin | 11.1% | 8.5% | Up 260 basis points |
| Net cash from operating activities | $157.2 million | $16.5 million | Up $140.7 million |
Management attributed the margin improvement primarily to efficient utilization of plants and equipment and completion of new backlog with more favorable margins. General and administrative expense increased 18.0% to $126.9 million, including higher acquisition-related costs, personnel costs and equity-based compensation. Interest expense more than doubled to $17.3 million because of higher average debt balances and interest rates.
- Cash, cash equivalents and restricted cash totaled $49.1 million at September 30, 2023, compared with $35.6 million at September 30, 2022.
- Capital expenditures were $97.8 million, compared with $68.9 million in fiscal 2022.
- Cash used in investing activities was $143.4 million, including $91.8 million for acquisitions and $97.8 million for property, plant and equipment, partly offset by $37.0 million of facility-exchange proceeds.
- Total debt principal was $376.9 million, comprising $283.8 million of term loans and $93.1 million drawn under the revolving facility. Revolving availability was approximately $222.1 million, including the effect of outstanding letters of credit.
- The Company reported a fixed-charge coverage ratio of 2.56-to-1.00 and a consolidated leverage ratio of 1.72-to-1.00, versus a maximum permitted leverage ratio of 3.50-to-1.00. The Company was in compliance with its debt covenants.
- A hypothetical 1% change in borrowing rates would affect annual interest expense by approximately $3.8 million before considering interest-rate swaps.
Material Changes Versus the Prior Comparable Period
- Revenue growth included $148.5 million attributable to acquisitions and approximately $113.4 million of growth in existing markets. Existing-market revenue increased approximately 8.7%.
- Five acquisitions across four states added eight asphalt plants and related equipment and personnel. Total consideration was approximately $92.0 million, generating $29.6 million of goodwill.
- The Company exchanged a North Carolina quarry for three HMA plants and related assets in the Nashville, Tennessee area. The transaction generated $37.0 million of cash proceeds and a $5.4 million gain.
- Contract backlog increased to $1.6 billion from $1.4 billion. Approximately 73% of the September 30, 2023 backlog was expected to be completed within 12 months.
- Backlog of awarded work in progress or not yet started increased to $1.3 billion from $1.0 billion, while low-bid/no-contract backlog declined to $0.3 billion from $0.4 billion.
- Contracts receivable, including retainage, increased to $303.7 million from $265.2 million; retainage increased to $53.3 million from $44.3 million.
- Goodwill increased to $159.3 million from $129.5 million. Management reported no goodwill or indefinite-lived intangible asset impairment.
- Class B shares converted into 2.4 million Class A shares during fiscal 2023. Class B shares retain ten votes per share, and the SunTx Group continued to control a majority of voting power.
Guidance, Outlook, Commentary and Risks
- Management expects fiscal 2024 capital expenditures of approximately $90.0 million to $95.0 million and believes operating cash flow plus available borrowings will fund operations and planned capital expenditures for at least the next 12 months.
- At September 30, 2023, unsatisfied or partially unsatisfied construction performance obligations totaled approximately $1.28 billion. The Company expected to recognize approximately $933.6 million during fiscal 2024 and $341.5 million thereafter.
- Management cited continued support from federal, state and local infrastructure spending, including programs associated with the Infrastructure Investment and Jobs Act and the Inflation Reduction Act, but noted that project timing and appropriations remain uncertain.
- Inflation continued to affect wages, liquid asphalt, aggregates, fuel, concrete and steel. The Company has generally mitigated these pressures through pricing and bid assumptions, but has limited ability to pass through cost increases on existing backlog.
- The business is seasonal and weather-sensitive. Rain, cold, snow, hurricanes, tornadoes and other severe weather can reduce activity, delay projects and lower equipment and crew utilization.
- Key risks include dependence on public infrastructure funding and state DOTs, competitive bidding, cost-estimation errors on fixed-price contracts, labor shortages, supply-chain disruptions, bonding capacity, commodity-price volatility, customer cancellations and project delays.
- Debt is secured by substantially all Company assets and bears variable-rate exposure. The Credit Agreement restricts acquisitions, additional debt, capital expenditures, dividends and other corporate actions.
- The Company is subject to routine litigation, governmental inquiries, environmental liabilities, insurance claims and reclamation obligations. Management does not expect currently pending matters to have a material individual impact, but aggregate adverse outcomes could be material.
- Revenue recognition on uncompleted construction contracts is a critical audit matter because it depends on estimates of total contract costs and progress toward completion. RSM US LLP issued unqualified opinions on the financial statements and internal control over financial reporting; Ferebee Corporation was excluded from the fiscal 2023 internal-control assessment and is expected to be included in fiscal 2024.
- Subsequent to year-end, the Company acquired one HMA plant in South Carolina for $2.9 million and three HMA plants and related construction operations in North Carolina and South Carolina for $16.0 million, subject to post-closing adjustments.
Important Facts for Investors to Verify
- Reconcile backlog conversion, including the $1.28 billion of remaining performance obligations, to future revenue and expected project margins.
- Assess the sustainability of the 12.6% gross margin and 11.1% Adjusted EBITDA margin after incorporating inflation, labor costs and lower-margin or legacy backlog.
- Review debt maturities, variable-rate exposure, swap terms and the large scheduled debt payment of approximately $320.6 million in fiscal 2027.
- Evaluate acquisition integration, goodwill growth and the effect of subsequent acquisitions on leverage, cash flow and operating controls.
- Monitor customer concentration, particularly state DOT funding, appropriations, bidding eligibility and potential project cancellations.
- Review the assumptions underlying cost-to-cost revenue recognition, contract estimates, retainage collection and claims or change orders.
- Consider the controlled-company structure, SunTx’s voting control, related-party payments and the absence of expected cash dividends.