Construction Partners, Inc. FY2021 Form 10-K Summary
Business context and reporting period
Construction Partners, Inc. is a civil infrastructure company operating in Alabama, Florida, Georgia, North Carolina and South Carolina. Its activities include asphalt production and paving, site development, aggregates mining and liquid asphalt distribution for public and private infrastructure projects. This filing is a Form 10-K for the fiscal year ended September 30, 2021, rather than a standalone quarterly filing; the company’s fourth fiscal quarter is included in the annual results.
- Public infrastructure projects and related material sales represented 61.3% of revenue; private projects represented 38.7%.
- Department of Transportation projects represented 33.7% of revenue. Alabama DOT and North Carolina DOT represented 10.8% and 10.3%, respectively.
- The company completed eight acquisitions during fiscal 2021, adding 18 HMA plants and five aggregates facilities in North Carolina and Alabama.
Financial performance and key metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $910.7 million | $785.7 million | Up 15.9% |
| Gross profit | $119.9 million | $122.2 million | Down 1.9% |
| Gross margin | 13.2% | 15.6% | Down 240 basis points |
| Operating income | $30.1 million | $55.2 million | Down 45.5% |
| Net income | $20.2 million | $40.3 million | Down 49.9% |
| Net income margin | 2.2% | 5.1% | Down 290 basis points |
| Adjusted EBITDA | $90.6 million | $98.9 million | Down 8.4% |
| Adjusted EBITDA margin | 9.9% | 12.6% | Down 270 basis points |
| Adjusted net income | $24.0 million | $40.6 million | Down 41.0% |
| Diluted EPS | $0.39 | $0.78 | Down 50.0% |
- Operating cash flow, net of acquisitions, was $48.5 million versus $105.2 million in fiscal 2020.
- Investing cash outflow was $263.4 million, including $210.7 million for acquisitions and $56.3 million for capital expenditures.
- Financing cash inflow was $123.8 million, primarily reflecting new debt proceeds partially offset by principal repayments.
- Cash and cash equivalents declined to $57.3 million from $148.3 million.
- At September 30, 2021, contracts receivable including retainage was $158.2 million, including $27.6 million of retainage.
- Total assets were $806.6 million and stockholders’ equity was $408.9 million at year-end.
- Contract backlog increased to $966.2 million from $608.1 million. Approximately 82% was expected to be completed within 12 months; $240.7 million consisted of low-bid or no-contract work.
Debt, liquidity and capital requirements
- The June 2021 amended credit agreement provides for a $200.0 million term loan and a $225.0 million revolving credit facility.
- At September 30, 2021, principal outstanding was $197.5 million on the term loan and $20.0 million on the revolver, for total debt of $217.5 million. Revolver availability was $193.7 million, including the effect of outstanding letters of credit.
- The company was in compliance with its financial covenants. Fixed charge coverage was 3.29-to-1.00 versus a 1.20-to-1.00 minimum, and consolidated leverage was 1.99-to-1.00 versus a 3.00-to-1.00 maximum.
- Debt is secured by substantially all company assets and is due in full in June 2026. Scheduled fiscal 2022 principal payments are $10.0 million.
- Management expects fiscal 2022 capital expenditures of $60.0 million to $65.0 million and believes operating cash flow plus available borrowings will fund operations through September 30, 2022, subject to business and market conditions.
- Outstanding letters of credit were $11.3 million. Other commitments included $2.4 million of minimum aggregate royalties and $8.1 million of undiscounted operating lease payments.
Material changes versus the prior comparable period
- Revenue growth was driven by $87.0 million from acquisitions and approximately $38.0 million from organic growth and third-party material sales.
- Profitability deteriorated despite higher revenue. Fourth-quarter margins were affected by weather delays, labor and trucking constraints, supply chain disruption, lower-margin acquired projects and underutilization of acquired plants and equipment.
- General and administrative expense increased 33.9% to $91.9 million, including higher management payroll, acquisition-related costs, equity compensation, professional fees and a legal settlement.
- The company paid $3.2 million to settle claims by a former stockholder and incurred associated legal expenses. The settlement was partly nondeductible, contributing to an increase in the effective tax rate to 29.3% from 24.0%.
- Goodwill increased to $85.4 million from $46.3 million, principally from fiscal 2021 acquisitions. No goodwill impairment was recorded.
- Debt increased materially to support acquisitions and other corporate purposes, while cash declined because acquisition and capital spending exceeded operating cash generation.
Guidance, outlook, commentary and risks
- Management expects fiscal 2022 capital expenditures of $60.0 million to $65.0 million; no revenue or earnings guidance was provided in the filing.
- Management views the November 2021 Infrastructure Investment and Jobs Act, which provides additional federal infrastructure funding, as a potential industry tailwind, but the timing, nature and scale of projects remain uncertain.
- Inflation affected wages, fuel, asphalt, concrete and steel costs. The company can generally price inflation into new bids, but has limited ability to recover cost increases on projects already in backlog.
- COVID-19 did not significantly disrupt fiscal 2021 operations, but future effects remain uncertain, including employee absences, vaccination requirements, supply chain disruption, customer delays and labor turnover.
- Key risks include dependence on public infrastructure funding and state DOTs, fixed-price contract cost overruns, adverse weather, labor shortages, supply chain constraints, commodity prices, bonding capacity, acquisition integration, environmental liabilities, cybersecurity, litigation and interest-rate exposure.
- The company uses interest-rate swaps with an aggregate notional value of $198.3 million and fuel swaps covering less than 50% of estimated fuel usage for the remainder of fiscal 2022 and part of fiscal 2023.
- Subsequent to year-end, the company acquired businesses in South Carolina and Florida for an aggregate purchase price of $67.0 million, funded with the revolving credit facility, and formed a captive insurance subsidiary.
- The company does not expect to pay cash dividends in the foreseeable future. The dual-class structure gives Class B holders ten votes per share; SunTx and its affiliates retain voting control.
Investor verification priorities
- Verify whether backlog converts into revenue and cash at expected margins, particularly the $240.7 million of low-bid or no-contract backlog.
- Assess the sustainability of margins after weather, labor, trucking, inflation and supply chain pressures, including performance of newly acquired operations.
- Reconcile acquisition spending, subsequent acquisitions and capital expenditures with debt balances, revolver availability and covenant headroom.
- Review contract estimates, unapproved change orders, claims, retainage and the $725.5 million of unsatisfied performance obligations because revenue recognition depends on estimated costs to complete.
- Evaluate exposure to public funding, DOT customer concentration, federal infrastructure funding implementation and potential project delays or cancellations.
- Monitor integration risks, provisional acquisition accounting, goodwill of $85.4 million and the possibility of future impairment.
- Review the legal settlement, related-party transactions with SunTx and affiliates, environmental obligations, insurance reserves and the company’s controlled-company governance structure.
RSM US LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of September 30, 2021.