Concrete Pumping Holdings, Inc. — Q3 FY2019 Form 10-Q
Reporting period: Three months ended July 31, 2019; balance sheet as of July 31, 2019. Amounts are U.S. dollars. The December 6, 2018 business combination created a new accounting basis, so successor and predecessor periods are not fully comparable. The filing also presents combined successor/predecessor nine-month figures as a non-GAAP aid to comparison.
Business context and reporting period
The company provides concrete-pumping services in the U.S. and U.K. and concrete-waste containment and cleanup services through Eco-Pan. In May 2019 it acquired Texas-based Capital Pumping for $129.2 million; it acquired Atlas Concrete Pumping in April 2019 for $3.4 million. The December 2018 business combination substantially changed the balance sheet and resulted in fair-value step-ups to acquired assets.
Financial results and liquidity
| Metric | Q3 FY2019 | Comparable period / context |
|---|---|---|
| Revenue | $78.7 million | $66.6 million in Q3 FY2018; up 18.0% |
| Gross profit / margin | $39.0 million / 49.6% | $30.2 million / 45.3%; margin increased 4.3 percentage points |
| Operating income | $10.7 million | $12.0 million in Q3 FY2018 |
| Net income | $2.8 million | $4.8 million in Q3 FY2018; diluted EPS was $0.05 versus $0.34 |
| Adjusted EBITDA | $30.6 million | $22.3 million in Q3 FY2018; up 37.0% (non-GAAP) |
| Cash and liquidity | $4.5 million cash; $21.8 million available ABL borrowing capacity | Total available liquidity reported as $26.3 million |
| Debt | $407.3 million term loans and $31.3 million revolving borrowings | Company disclosed total indebtedness of $439.2 million; debt covenants were met |
| Assets / liabilities | $865.4 million / $524.6 million | Assets were $370.1 million at October 31, 2018; acquisition accounting and acquisitions drove much of the increase |
For the combined nine months ended July 31, 2019, revenue was $199.0 million, up 13.2% from $175.9 million. Combined net loss was $33.1 million, compared with net income of $27.0 million in the prior-year nine months; combined Adjusted EBITDA was $65.9 million, up 15.9% from $56.9 million. The filing cautions that the combined results are non-GAAP and that purchase-accounting changes limit comparability.
Net cash provided by operating activities was $1.4 million for the successor period from December 6, 2018 through July 31, 2019. Investing activities used $370.6 million, primarily for the business combination, Capital and Atlas acquisitions, and equipment purchases. Financing activities provided $376.9 million. The filing presents predecessor-period cash flows separately; it does not provide a single directly comparable nine-month cash-flow total.
Material changes and management commentary
- Q3 revenue growth was driven principally by Capital, which contributed approximately $12.3 million of the year-over-year U.S. pumping revenue increase. U.S. concrete-pumping revenue rose 28.9%; U.K. revenue fell 10.0% as reported, largely due to the stronger U.S. dollar, and Eco-Pan revenue increased 5.6%.
- Q3 gross margin improved on Capital’s contribution, more favorable fuel prices and procurement costs, partly offset by higher depreciation from purchase-accounting step-ups. Combined nine-month gross margin was 43.5%, down 0.5 percentage points year over year.
- Q3 net income was lower despite higher revenue. Management attributed pressure principally to higher amortization, depreciation, interest and stock-based compensation associated with the business combination and new awards. Combined nine-month results also included $15.6 million of transaction costs and $16.4 million of debt-extinguishment costs.
- The company borrowed an additional $60.0 million under its term loan in May to help fund the Capital acquisition. Term-loan pricing is LIBOR plus a 6.00% margin (or base rate plus 5.00%); borrowings are generally secured by company assets. The $60.0 million ABL facility had $21.8 million available at quarter end.
- Management said existing cash, operating cash flow and ABL capacity should be sufficient for working capital and capital expenditures over the next 12 months, while noting future needs depend on growth, acquisitions and economic conditions. It described construction momentum as positive in most U.S. markets and expected activity to remain sustained through the rest of the fiscal year; U.K. year-to-date revenue excluding foreign exchange effects increased 8.4%.
- Sales are seasonal, generally lower in winter and spring and higher in the fourth fiscal quarter. West Coast operations experienced unfavorable weather in the first two fiscal quarters.
Risks, contingencies and unusual items
- Substantial indebtedness creates exposure to higher floating-rate interest costs and could constrain cash available for operations, investment and acquisitions. The company reported covenant compliance at July 31, 2019.
- Management concluded disclosure controls were ineffective because of material weaknesses involving public-company accounting and reporting processes, staffing and complex transactions, financial close systems, and U.K. IT administrator access. Remediation efforts were underway, including adding experienced finance personnel and implementing controls.
- A share-price decline triggered goodwill testing. No impairment was recorded, but estimated fair value exceeded carrying value by only approximately 4% for U.S. Concrete Pumping, 2% for U.K. Concrete Pumping and 4% for Eco-Pan.
- Purchase accounting and acquisition-related estimates are significant. The company recorded a $3.4 million out-of-period reduction in a sales-tax accrual, with related goodwill and liability changes; management said the adjustment was not material to previously issued statements.
- Ordinary-course legal disputes were not expected by management to have a material financial-statement impact. The company had $1.5 million of outstanding letters of credit and self-insured claims accruals, including incurred-but-unreported insurance and health claims.
- No formal numerical financial guidance was provided. The filing identifies adoption of revenue-recognition and lease accounting standards as pending and under evaluation.
Important facts for investors to verify
- How Capital’s contribution, integration and Texas market performance develop, and whether reported growth persists without acquisition effects.
- Debt service, floating-rate exposure, ABL availability and covenant headroom, given the company’s leverage and relatively modest cash balance.
- Cash conversion and capital spending needs; operating cash flow for the successor period was modest relative to acquisition and equipment outlays.
- Whether the small goodwill fair-value cushions remain adequate if operating performance, market conditions or share price weaken.
- Progress in remediating the disclosed material weaknesses and the effect of acquisition accounting, amortization and unusual costs on reported earnings.
- The effect of foreign-exchange movements and seasonal/weather conditions on U.K. and West Coast operations.