Construction Partners, Inc. — Fiscal 2020 First-Quarter Form 10-Q Summary
Reporting period: Three months ended December 31, 2019, compared with the three months ended December 31, 2018. The company operates road and infrastructure construction, paving, site development, utility, drainage, HMA, aggregates, ready-mix concrete and liquid asphalt businesses across Alabama, Florida, Georgia, North Carolina and South Carolina. Results are seasonally weaker in the first and second fiscal quarters because of weather and lower construction activity.
Financial Performance and Position
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $175.3 million | $154.3 million | 13.6% increase |
| Gross profit | $23.8 million | $21.1 million | 12.4% increase |
| Gross margin | 13.6% | 13.7% | 10 basis-point decrease |
| Operating income | $7.0 million | $7.0 million | 1.1% decrease |
| Operating margin | 4.0% | 4.6% | 60 basis-point decrease |
| Net income | $5.5 million | $5.2 million | 6.0% increase |
| Net margin | 3.1% | 3.3% | 20 basis-point decrease |
| Adjusted EBITDA | $17.2 million | $14.7 million | 17.0% increase |
| Adjusted EBITDA margin | 9.8% | 9.5% | 30 basis-point increase |
| Diluted EPS | $0.11 | $0.10 | Increase |
Revenue mix: Public customers represented 60.6% of revenue, down from 67.9%; private customers represented 39.4%, up from 32.1%. Departments of Transportation accounted for 31.0% of revenue, compared with 37.3% in the prior-year quarter.
Cash flow and liquidity: Operating cash flow was $1.5 million versus $1.2 million. Investing cash outflow increased to $40.4 million from $5.1 million, primarily due to $17.7 million for an acquisition and $23.6 million of capital expenditures. Financing cash flow was $7.6 million, including a $9.8 million net term-loan advance. Cash declined to $49.4 million from $80.6 million at September 30, 2019.
Balance sheet and debt: Total assets were $524.5 million and stockholders’ equity was $349.2 million at December 31, 2019. Total debt, including current maturities and before deferred issuance costs and discount, was approximately $58.1 million, compared with $50.3 million at September 30, 2019. The company had $13.6 million of availability under its $30.0 million revolving credit facility after letters of credit. The company was in compliance with all debt covenants.
Contract backlog: Remaining unsatisfied or partially unsatisfied performance obligations totaled approximately $456.5 million at December 31, 2019. Management expected to recognize approximately $327.2 million during the remainder of fiscal 2020 and $129.3 million thereafter.
Material Changes Versus the Prior Comparable Period
- Revenue growth included $13.1 million from acquisitions completed after December 31, 2018 and approximately $7.9 million from existing markets.
- General and administrative expenses increased 18.6% to $17.1 million, driven by higher management payroll and benefits, acquisition-related expenses and $0.4 million of stock compensation expense.
- Operating income was broadly unchanged despite revenue growth because general and administrative costs increased faster than gross profit.
- Net income benefited from lower interest expense and a lower effective tax rate, partially offset by higher corporate expenses and lower joint-venture earnings.
- The effective tax rate declined to 19.5% from 24.3%, including a $0.4 million benefit from an amended state tax return and utilization of net operating loss carryforwards.
- The company acquired substantially all assets of an HMA manufacturing plant and paving company in Palm City, Florida, for $17.7 million on October 1, 2019. The acquisition was not material to quarterly income, and its purchase-price allocation remained provisional.
- The company adopted ASC Topic 842, recognizing operating lease right-of-use assets of $8.5 million and operating lease liabilities totaling $8.7 million at December 31, 2019. Retained earnings declined by approximately $0.2 million at adoption.
- The company used $11.5 million to buy out certain equipment lease obligations and financed the transaction with a term-loan advance.
Guidance, Outlook, Risks and Unusual Items
- Management expected fiscal 2020 capital expenditures of $44.0 million to $47.0 million, excluding the $11.5 million equipment-lease buyout.
- Management stated that operating cash flow, cash on hand and available revolver capacity should fund operations, working capital and planned capital expenditures for at least the next 12 months, while noting that future cash flows and access to capital are not assured.
- The business is exposed to adverse weather, seasonality, commodity prices, project-estimation risk, government funding and contracting requirements, competition, bonding capacity, labor availability, acquisition integration, litigation, cybersecurity and internal-control risks.
- Liquid asphalt and fuel costs are key commodity exposures. Many public contracts include price-adjustment provisions, but the company remains exposed to changes in energy and material costs.
- The company had $31.3 million of unhedged variable-rate borrowings at December 31, 2019. A hypothetical 1% change in borrowing rates would change annual interest expense by approximately $0.3 million.
- The company reported no material off-balance-sheet arrangements and stated that routine litigation, disputes and government inquiries were not expected to have a material adverse effect.
- A $15.7 million settlement receivable remained payable in installments through July 2020; $7.8 million was recorded as other current assets at December 31, 2019.
- Adjusted EBITDA is a non-GAAP measure and may not be comparable with similarly named measures reported by other companies.
Facts an Investor Should Verify
- Whether revenue growth and backlog conversion offset the faster growth in general and administrative expenses.
- The final purchase-price allocation and acquired operating contribution from the Palm City acquisition.
- Actual fiscal 2020 capital expenditures, acquisition spending and resulting leverage and liquidity.
- Cash conversion, particularly the effects of receivables, contract assets, payables and seasonal working-capital requirements.
- Compliance with the BBVA Credit Agreement’s 1.20-to-1.00 minimum fixed-charge coverage ratio and 2.75-to-1.00 maximum leverage ratio.
- Exposure to weather, fuel and asphalt prices, public infrastructure funding, project claims, contract estimates and interest-rate changes.
- The effect of the amended state tax return benefit and whether the lower effective tax rate is sustainable.
- The company’s ability to maintain bonding capacity and fund planned growth while preserving adequate cash and revolver availability.