Construction Partners, Inc. — Fiscal 2022 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Construction Partners, Inc. is a civil infrastructure company specializing in roadway construction and maintenance, hot-mix asphalt production, paving, site development, aggregates mining and liquid asphalt distribution across Alabama, Florida, Georgia, North Carolina and South Carolina. This unaudited Form 10-Q covers the three months ended December 31, 2021, compared with the three months ended December 31, 2020.
Key Financial Metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $285.0 million | $190.9 million | +49.3% |
| Gross profit | $33.0 million | $30.6 million | +7.7% |
| Gross margin | 11.6% | 16.0% | Down 440 bps |
| Operating income | $8.5 million | $10.8 million | -22.0% |
| Net income | $5.5 million | $7.9 million | -30.0% |
| Diluted EPS | $0.11 | $0.15 | Down |
| Adjusted EBITDA | $26.4 million | $23.5 million | +12.2% |
| Adjusted EBITDA margin | 9.2% | 12.3% | Down 310 bps |
| Cash flow from operations | $(0.6) million | $0.7 million | Down $1.3 million |
Revenue growth included $37.8 million from acquisitions completed after December 31, 2020 and approximately $56.3 million from existing markets. Public customers represented 61.0% of revenue, compared with 59.4% in the prior-year quarter. Departments of transportation represented 33.5% of revenue; Alabama and Florida transportation departments each represented approximately 10%.
Cash, cash equivalents and restricted cash totaled $43.9 million at December 31, 2021, including $8.3 million of restricted cash. Total assets were $872.6 million and stockholders’ equity was $417.3 million. Property, plant and equipment, net, was $429.0 million.
Total debt was $285.0 million, consisting of $195.0 million under the term loan and $90.0 million under the revolving credit facility. Revolving facility availability was $123.7 million after letters of credit. The company reported a fixed charge coverage ratio of 3.14-to-1.00 against a 1.20 minimum and a consolidated leverage ratio of 2.49-to-1.00 against a 3.00 maximum.
Material Changes Versus the Prior Comparable Period
- Revenue increased sharply, but cost of revenues grew faster than revenue, rising 57.2% to $252.0 million.
- Margins declined because of lower-margin acquired projects and higher raw material, fuel, labor and trucking costs, together with supply-chain constraints.
- General and administrative expense increased 24.2% to $24.9 million, including higher equity compensation, acquired-company expenses and acquisition-related professional fees.
- Interest expense increased 170.1% to $1.3 million as average debt balances increased.
- Adjusted EBITDA increased, but the margin declined to 9.2% from 12.3%.
- Operating cash flow declined to a modest use of $0.6 million, primarily reflecting working-capital timing, including lower accounts payable and accrued liabilities.
- Investing cash use was $80.3 million, including $65.9 million for acquisitions and $15.1 million of capital expenditures. Financing cash inflow was $67.5 million, primarily from $70.0 million of revolver borrowings.
Outlook, Management Commentary, Risks and Unusual Items
Management expects fiscal 2022 capital expenditures of approximately $60.0 million to $65.0 million and believes operating cash flow plus available credit capacity will fund operations and planned capital expenditures for at least the next 12 months. At December 31, 2021, remaining performance obligations were approximately $801.0 million, with approximately $618.4 million expected to be recognized during the remainder of fiscal 2022 and $182.6 million thereafter.
On October 1, 2021, the company acquired King Asphalt, Inc., establishing its first South Carolina platform and adding three HMA plants. On October 18, 2021, it acquired substantially all assets of J. Miller Construction Inc., expanding grading and site-work capabilities in the Pensacola, Florida market. The acquisitions contributed $14.6 million of revenue and $0.3 million of net loss during the quarter from their respective acquisition dates. Purchase accounting remained provisional, including approximately $35.6 million of goodwill.
Inflation and supply-chain disruption remain significant risks. The company reported higher wages and costs for fuel, raw materials, concrete and steel, as well as labor and equipment constraints. Price escalation provisions and pricing on new bids have mitigated some effects, but costs on existing backlog may not be fully recoverable.
COVID-19 did not significantly disrupt operations during the quarter, but potential employee absences, supply interruptions, project delays, customer cancellations and payment problems remain risks. The business is seasonal, with typically lower activity in the first and second fiscal quarters because of weather.
Additional risks include public infrastructure funding reductions, competition, acquisition integration, bonding capacity, contract-estimate errors, adverse weather, substantial indebtedness, interest-rate and commodity-price volatility, labor shortages, litigation, cybersecurity and regulatory compliance. The company reported no material changes to the risk factors in its fiscal 2021 Form 10-K and no pending legal matter expected to have a material adverse effect.
Interest-rate swaps had an aggregate notional value of approximately $196.3 million at quarter-end. A hypothetical 1% change in borrowing rates, absent swaps, would change annual interest expense by approximately $2.9 million. Letters of credit totaled $11.3 million; diesel purchase commitments totaled $3.4 million; and minimum royalty commitments totaled $2.3 million.
Important Facts for Investors to Verify
- Whether acquired projects and operations can improve margins as integration progresses and provisional purchase accounting is finalized.
- Whether inflation, labor shortages and supply-chain constraints continue to compress gross and Adjusted EBITDA margins.
- Whether operating cash flow improves from the quarter’s working-capital outflow and supports the planned $60.0 million to $65.0 million capital-spending program.
- Debt paydown, revolver usage, covenant compliance and exposure to variable interest rates through the June 2026 maturity.
- The quality, timing and profitability of the $801.0 million remaining performance obligation balance, including contract estimates, claims and change orders.
- Progress toward integrating King Asphalt and J. Miller Construction and the eventual allocation of provisional goodwill to identifiable intangible assets.
- Exposure to public infrastructure funding, transportation-department concentration, weather, COVID-19 developments and commodity-price volatility.
- The company’s non-GAAP Adjusted EBITDA and Adjusted net income reconciliations, which should not be viewed as substitutes for GAAP results.