Construction Partners, Inc. — Fiscal 2023 First Quarter 10-Q
Reporting period: Three months ended December 31, 2022, compared with the three months ended December 31, 2021. Construction Partners is a civil infrastructure company operating across Alabama, Florida, Georgia, North Carolina, South Carolina and Tennessee, with activities including roadway construction, paving, site development, hot-mix asphalt, aggregates and liquid asphalt.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue | $341.8 million | $285.0 million | 19.9% increase |
| Gross profit | $30.5 million | $33.0 million | 7.5% decrease |
| Gross margin | 8.9% | 11.6% | Down 270 basis points |
| Operating income | $6.3 million | $8.5 million | 25.2% decrease |
| Net income | $1.9 million | $5.5 million | 65.7% decrease |
| Diluted EPS | $0.04 | $0.11 | Decrease |
| Adjusted EBITDA | $27.6 million | $26.4 million | 4.7% increase |
| Adjusted EBITDA margin | 8.1% | 9.2% | Down 110 basis points |
Revenue growth included $32.1 million from acquisitions completed after December 31, 2021 and $24.7 million of growth in existing markets. Cost of revenues increased 23.5%, exceeding revenue growth, primarily because of higher raw material, fuel, labor and trucking costs and supply-chain disruptions that contributed to project delays and use of alternative suppliers. General and administrative expense increased 19.2% to $29.7 million, including higher equity compensation, acquired-company expenses, payroll, professional fees and acquisition-related costs.
A $5.4 million gain on a facility exchange partially offset operating pressure. Net interest expense increased 213.3% to $4.0 million because of higher average debt balances and interest rates. The effective tax rate decreased to 21.2% from 24.6%.
Cash flow, balance sheet and liquidity
- Cash provided by operating activities was $28.9 million, compared with cash used of $0.6 million in the prior-year quarter. The improvement primarily reflected a $47.1 million decrease in contracts receivable, partly offset by lower accounts payable and accrued liabilities.
- Cash used in investing activities was $70.7 million, including $77.2 million for acquisitions and $31.7 million of capital expenditures. Proceeds included $36.4 million from the facility exchange.
- Cash provided by financing activities was $49.7 million, including $53.0 million of revolver borrowings and $3.1 million of debt repayments.
- Cash, cash equivalents and restricted cash totaled $43.5 million at December 31, 2022, compared with $35.6 million at September 30, 2022.
- Total debt principal was $426.9 million, consisting of $268.8 million under the Term Loan and $158.1 million under the Revolving Credit Facility. Revolver availability was $156.9 million, including the effect of outstanding letters of credit, and $25.0 million remained available under the delayed-draw term loan.
- The credit facilities mature June 30, 2027 and are secured by substantially all company assets. The company was in compliance with all covenants, with a fixed-charge coverage ratio of 1.87x versus a 1.20x minimum and a consolidated leverage ratio of 2.96x versus a 3.50x maximum.
- At December 31, 2022, the company had $230.3 million of contracts receivable, $32.4 million of costs and estimated earnings in excess of billings, and $57.1 million of billings in excess of costs and estimated earnings.
Material changes and transactions
- On November 18, 2022, the company acquired three Nashville-area HMA plants and related assets for $8.4 million and disposed of a North Carolina quarry, receiving $36.4 million of cash proceeds and recognizing a $5.4 million gain.
- On December 1, 2022, the company acquired Ferebee Corporation, a Charlotte-based HMA manufacturing and paving company, for $68.8 million. The acquisition added three HMA plants and established the company’s second North Carolina platform.
- The combined acquisitions required $77.2 million of consideration and were accounted for provisionally, including approximately $32.3 million of provisional goodwill. The purchase-price allocations had not been finalized at quarter-end.
- Acquired businesses contributed $4.2 million of revenue and $0.2 million of net loss from their respective acquisition dates through December 31, 2022.
- Backlog-related unsatisfied performance obligations totaled approximately $1.2 billion at quarter-end. Management expected to recognize approximately $791.1 million during the remainder of fiscal 2023 and $368.4 million thereafter.
Outlook, commentary and risks
Management expects fiscal 2023 capital expenditures of approximately $85.0 million to $90.0 million and believes operating cash flow and available credit will fund operations and planned capital expenditures for at least the next 12 months. The filing does not provide revenue or earnings guidance.
The business is seasonal, with the first and second fiscal quarters generally experiencing lower activity because of winter weather; warmer and drier conditions typically support higher activity in the third and fourth quarters. Management reported continued inflation in wages, fuel, raw materials, concrete and steel, along with supply-chain and labor constraints. The company has raised prices and included anticipated cost increases in new bids, but has limited ability to recover higher costs on existing backlog.
The company had $300.0 million of interest-rate swap notional value at quarter-end, with a fair value of $23.4 million. Absent the swaps, a hypothetical 1% change in borrowing rates would affect annual interest expense by approximately $4.3 million based on outstanding variable-rate debt.
Other disclosed risks include public infrastructure funding reductions, competition, acquisition integration, bonding capacity, contract-estimate risk, adverse weather, climate-related regulation, substantial indebtedness, supply-chain interruptions, labor shortages, litigation, insurance claims, cybersecurity and internal-control matters. Management stated that no pending legal proceedings were expected to have a material adverse effect.
- Outstanding letters of credit: $10.0 million.
- Fuel and natural-gas purchase commitments: $5.9 million.
- Minimum aggregate royalties: $2.7 million.
- Commodity swaps covered less than 50% of estimated fuel and natural-gas usage for the remainder of fiscal 2023 and part of fiscal 2024.
- Disclosure controls and procedures were deemed effective, with no material changes to internal control over financial reporting.
Most important facts for investors to verify
- Whether inflation, labor constraints and supply-chain disruptions continue to compress gross and Adjusted EBITDA margins.
- Progress in integrating the Ferebee and Nashville acquisitions and the final purchase-price allocations, including any changes to provisional goodwill.
- Debt growth, variable-rate exposure, revolver availability and compliance with the 3.50x leverage covenant.
- Whether planned fiscal 2023 capital expenditures of $85.0 million to $90.0 million can be funded while supporting acquisitions and seasonal working-capital needs.
- Conversion of the approximately $1.2 billion performance-obligation balance into revenue and cash, including potential contract-cost or change-order revisions.
- Exposure to public-sector funding, weather, commodity prices, construction claims, bonding requirements and customer concentration.