Construction Partners, Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
Construction Partners, Inc. is a southeastern U.S. civil infrastructure and road construction company operating in Alabama, Florida, Georgia, North Carolina and South Carolina. It provides paving, site development, utility and drainage services, and sells hot-mix asphalt, aggregates, ready-mix concrete and liquid asphalt. The filing covers the three and nine months ended June 30, 2020, compared with the corresponding 2019 periods.
Public infrastructure represented 69.1% of second-quarter revenue and 63.9% of nine-month revenue. The Alabama and North Carolina Departments of Transportation each represented more than 10% of revenue during at least one comparable period.
Financial performance and key metrics
| Metric | Three months ended June 30, 2020 | Year-over-year change | Nine months ended June 30, 2020 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $217.0 million | Down 4.5% | $561.0 million | Up 2.8% |
| Gross profit | $36.5 million; 16.8% margin | Down 4.2%; margin unchanged | $81.2 million; 14.5% margin | Up 2.8%; margin unchanged |
| Operating income | $20.0 million; 9.2% margin | Down 9.7% | $31.6 million; 5.6% margin | Down 9.6% |
| Net income | $15.7 million; 7.3% margin | Down 8.5% | $22.7 million; 4.1% margin | Down 14.4% |
| Diluted EPS | $0.30 | Down from $0.33 | $0.44 | Down from $0.52 |
| Adjusted EBITDA | $31.9 million; 14.7% margin | Up from 13.8% margin | $63.3 million; 11.3% margin | Up from 11.0% margin |
Second-quarter revenue declined primarily because existing-market revenue fell $20.0 million, partly offset by $9.7 million from acquisitions. Nine-month revenue benefited from $33.8 million of acquisition-related revenue, offset by an $18.7 million decline in existing markets. General and administrative expense increased 5.5% in the quarter and 12.4% year to date, driven by personnel costs, acquisitions and stock-based compensation.
Operating cash flow was $51.4 million for the nine months, compared with $18.0 million in 2019. Capital expenditures were $41.5 million, business acquisitions used $30.2 million, and net cash used in investing activities was $69.2 million. Cash declined $1.9 million from the beginning of the fiscal year to $78.7 million at June 30, 2020.
Financial position, debt and liquidity
- Total assets were $573.8 million and stockholders’ equity was $367.2 million at June 30, 2020.
- Total debt was $66.0 million, including $10.2 million of current maturities, compared with $50.0 million at September 30, 2019. The company had no revolving credit balance at quarter end and reported $19.3 million of revolver availability after letters of credit.
- Operating lease liabilities totaled $8.1 million, following adoption of ASC Topic 842.
- The company reported a fixed-charge coverage ratio of 3.18-to-1.00 versus a 1.20 minimum, and a consolidated leverage ratio of 0.83-to-1.00 versus a 2.75 maximum under the quarter-end credit agreement.
- Management stated that operating cash flow, cash on hand and available borrowings should fund operations, working capital and planned capital expenditures for at least the next 12 months, while noting uncertainty related to COVID-19 and future capital needs.
Material changes versus the prior comparable period
- Revenue and net income declined in the second quarter, although adjusted EBITDA increased due mainly to higher depreciation and amortization add-backs.
- Nine-month revenue and gross profit increased, but operating income and net income declined because of higher corporate costs, interest expense and derivative losses.
- Interest expense increased to $2.7 million year to date from $1.5 million, primarily because of a $1.6 million unrealized loss on interest-rate swaps.
- Operating cash flow improved substantially, helped by collections and working-capital changes.
- 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 Florida for $9.8 million plus $2.6 million of inventory in March 2020. The acquisitions were not material to reported earnings through June 30.
- In June 2020, selling stockholders completed a secondary offering of 6.6125 million Class A shares at $16.50 per share, including the underwriters’ exercised option. The company received no proceeds and incurred approximately $0.2 million of expenses.
Guidance, outlook, risks and unusual items
- Management expected fiscal 2020 capital expenditures of $40.0 million to $42.0 million, excluding the $11.5 million equipment-lease buyout completed earlier in the fiscal year.
- At June 30, 2020, remaining or partially unsatisfied construction performance obligations totaled approximately $496.0 million. The company expected to recognize $214.7 million during the remainder of fiscal 2020 and $281.3 million thereafter.
- COVID-19 did not cause significant operational disruption through the quarter because road construction was treated as essential infrastructure. However, management identified risks from employee absences, supply-chain interruptions, customer delays or cancellations, payment delinquencies and lower public funding.
- North Carolina transportation activity was affected by project delays and reduced bidding opportunities, although management cited improving funding conditions and longer-term growth prospects.
- Derivative volatility produced a $2.5 million net loss for the first nine months, including losses on interest-rate and commodity swaps. Future losses remain possible.
- The company uses LIBOR-based borrowings and identified the phase-out or replacement of LIBOR as a risk to borrowing costs and liquidity.
- Subsequent to quarter end, on July 30, 2020, the company amended and restated its credit agreement. Revolving commitments increased from $30.0 million to $50.0 million, term-loan commitments increased by $30.0 million, and the additional term-loan amount was funded on the amendment date. Outstanding advances mature October 1, 2024 and remain secured by substantially all borrower assets.
- Routine litigation, government inquiries and contractual disputes were disclosed, but management stated that no pending matter was expected to have a material adverse effect.
Investor verification points
- Verify the sustainability of revenue and backlog conversion given the decline in existing-market revenue and dependence on state transportation agencies.
- Review the amended credit agreement, leverage and fixed-charge covenants, interest-rate exposure and the effect of the additional $30.0 million term borrowing.
- Assess whether COVID-19 affects project awards, labor availability, supply costs, customer collections and public infrastructure funding.
- Reconcile adjusted EBITDA to GAAP net income and distinguish operating performance from non-cash derivative gains and losses.
- Monitor acquisition integration, provisional purchase-price allocations and the company’s ability to fund planned capital expenditures and additional acquisitions.
- Evaluate exposure to LIBOR replacement, commodity prices, weather, bonding capacity, contract-estimate changes and customer concentration.