struction Partners(US:ROAD)2019-05-14 15:42markdown PART I. FINANCIAL INFORMATION [Financial Statements](index=5&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements for the quarterly period ended March 31, 2019, including balance sheets, income statements, stockholders' equity, and cash flows, along with detailed notes on accounting policies, acquisitions, revenue, and debt Consolidated Balance Sheet Highlights (unaudited) | Account | March 31, 2019 (in thousands) | September 30, 2018 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $61,911 | $99,137 | | Total current assets | $230,213 | $267,455 | | Total assets | $476,485 | $496,310 | | Total current liabilities | $112,651 | $134,541 | | Total liabilities | $167,650 | $196,841 | | Total stockholders' equity | $308,835 | $299,469 | Consolidated Statements of Income Highlights (unaudited) | Metric | Three Months Ended Mar 31, 2019 (in thousands) | Three Months Ended Mar 31, 2018 (in thousands) | Six Months Ended Mar 31, 2019 (in thousands) | Six Months Ended Mar 31, 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $164,304 | $118,899 | $318,631 | $269,320 | | Gross profit | $19,801 | $13,749 | $40,929 | $36,547 | | Operating income | $5,723 | $16,080 | $12,754 | $26,597 | | Net income | $4,212 | $11,248 | $9,366 | $22,244 | | Diluted EPS | $0.08 | $0.27 | $0.18 | $0.53 | Consolidated Statements of Cash Flows Highlights (unaudited) | Cash Flow Activity | Six Months Ended Mar 31, 2019 (in thousands) | Six Months Ended Mar 31, 2018 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $5,299 | $28,124 | | Net cash used in investing activities | ($35,119) | ($19,879) | | Net cash used in financing activities | ($7,406) | ($9,995) | | Net change in cash and cash equivalents | ($37,226) | ($1,750) | [Note 2: Significant Accounting Policies](index=11&type=section&id=Note%202%20-%20Significant%20Accounting%20Policies) The company's key accounting policies include recognizing revenue from construction contracts over time using the percentage-of-completion (cost-to-cost) method and revenue from material sales at a point in time, with the business experiencing seasonal fluctuations due to weather - The company's business is seasonal, with warmer and drier weather in the third and fourth fiscal quarters typically resulting in higher activity and revenues, while the first and second quarters generally see lower activity due to adverse weather[24](index=24&type=chunk) - Revenue from construction projects is recognized over time using the percentage-of-completion method, based on the ratio of costs incurred to total estimated costs, while revenue from the sale of HMA and aggregates is recognized at a point in time when control transfers to the customer[39](index=39&type=chunk)[41](index=41&type=chunk)[45](index=45&type=chunk) - Projects for various Departments of Transportation accounted for **37.2%** of consolidated revenues for the six months ended March 31, 2019, indicating a significant concentration of public sector customers[37](index=37&type=chunk) [Note 4: Business Acquisitions](index=18&type=section&id=Note%204%20-%20Business%20Acquisitions) In February 2019, the company acquired a hot mix asphalt and ready-mix concrete business in Florida for $8.9 million, expanding its geographic presence, with this section also detailing the financial impact of the May 2018 acquisition of The Scruggs Company - On February 28, 2019, the company acquired a business in Okeechobee, Florida for **$8.9 million** in cash, resulting in **$4.0 million** of goodwill[52](index=52&type=chunk)[53](index=53&type=chunk) - The Scruggs Company, acquired in May 2018, contributed **$34.7 million** in revenue and **$2.9 million** in net income for the six months ended March 31, 2019[57](index=57&type=chunk) [Note 9: Debt](index=23&type=section&id=Note%209%20-%20Debt) As of March 31, 2019, the company had total long-term debt of $55.9 million, primarily consisting of a $50.1 million term loan and a $5.0 million balance on its revolving credit facility, with interest rate swaps used to manage risk Debt Composition (in thousands) | Debt Component | March 31, 2019 | September 30, 2018 | | :--- | :--- | :--- | | Compass Term Loan | $50,100 | $57,300 | | Compass Revolving Credit Facility | $5,000 | $5,000 | | Other long-term debt | $758 | $964 | | **Total long-term debt** | **$55,858** | **$63,264** | [Note 13: Settlement Agreement](index=27&type=section&id=Note%2013%20-%20Settlement%20Agreement) The company recognized a pre-tax gain of $14.8 million during the six months ended March 31, 2018, from a settlement agreement related to a past business interruption event, with the total settlement of approximately $15.7 million being paid in four equal installments - A pre-tax gain of **$14.8 million** was recorded in the six months ended March 31, 2018, related to a settlement for a business interruption event[86](index=86&type=chunk) - The first installment payment of **$3.9 million** was received in January 2019, with the remaining payments scheduled through July 2020[86](index=86&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=28&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's performance, highlighting an **18.3%** revenue increase for the six-month period ended March 31, 2019, driven by the Scruggs acquisition and a higher project backlog, while net income decreased significantly due to a one-time **$14.8M** settlement income in the prior year - The company uses Adjusted EBITDA as a key non-GAAP performance indicator, with Adjusted EBITDA for the six months ended March 31, 2019, at **$28.7M** (**9.0%** margin), up from **$24.5M** (**9.1%** margin) in the prior year period[102](index=102&type=chunk)[123](index=123&type=chunk) - For the full fiscal year 2019, the company expects total capital expenditures to be approximately **$39.0 million** to **$42.0 million**[134](index=134&type=chunk) - The company is exposed to commodity price risk, particularly for liquid asphalt and diesel fuel, which is managed through pricing strategies and escalator provisions in most public contracts[94](index=94&type=chunk)[138](index=138&type=chunk) [Results of Operations](index=31&type=section&id=Results%20of%20Operations) This section provides a detailed comparison of financial results for the three and six months ended March 31, 2019 and 2018, showing revenue growth but significant net income declines primarily due to the absence of a $14.8M settlement income recorded in 2018 Three Months Ended March 31, 2019 vs 2018 (in thousands) | Metric | Q2 2019 | Q2 2018 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenues | $164,304 | $118,899 | $45,405 | 38.2% | | Gross Profit | $19,801 | $13,749 | $6,052 | 44.0% | | Net Income | $4,212 | $11,248 | ($7,036) | (62.6)% | | Adjusted EBITDA | $13,967 | $8,016 | $5,951 | 74.2% | Six Months Ended March 31, 2019 vs 2018 (in thousands) | Metric | H1 2019 | H1 2018 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenues | $318,631 | $269,320 | $49,311 | 18.3% | | Gross Profit | $40,929 | $36,547 | $4,382 | 12.0% | | Net Income | $9,366 | $22,244 | ($12,878) | (57.9)% | | Adjusted EBITDA | $28,679 | $24,527 | $4,152 | 16.9% | - The increase in revenue for the three and six-month periods was driven by contributions from the Scruggs acquisition (**$18.3M** and **$34.7M**, respectively) and more favorable working conditions in Q2 2019 compared to Q2 2018[104](index=104&type=chunk)[115](index=115&type=chunk) [Liquidity and Capital Resources](index=35&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity is primarily sourced from cash from operations and its credit facilities, with cash from operations decreasing significantly to $5.3M for the six-month period, though management believes current resources are sufficient to fund operations and planned capital expenditures - Cash provided by operating activities decreased by **$22.8 million** to **$5.3 million** for the six months ended March 31, 2019, compared to **$28.1 million** in the prior-year period[126](index=126&type=chunk) - Cash used in investing activities increased to **$35.1 million** from **$19.9 million**, primarily due to a **$10.9 million** acquisition of liquid asphalt terminal assets and an **$8.9 million** business acquisition[127](index=127&type=chunk) - The company was in compliance with all debt covenants as of March 31, 2019, with a fixed charge coverage ratio of **1.22 to 1.00** (minimum **1.20**) and a consolidated leverage ratio of **0.88 to 1.00** (maximum **2.00**)[132](index=132&type=chunk)[133](index=133&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=38&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is a smaller reporting company and is therefore not required to provide the quantitative and qualitative disclosures about market risk - As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, the company is not required to provide the information called for by this Item[142](index=142&type=chunk) [Controls and Procedures](index=38&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that due to identified material weaknesses in internal control over financial reporting, the company's disclosure controls and procedures were not effective as of March 31, 2019, with remediation efforts underway - Management identified material weaknesses in internal control over financial reporting related to the design and operation of IT general controls and overall closing and financial reporting controls[145](index=145&type=chunk) - As a result of these weaknesses, the President and Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were not effective as of the end of the period[144](index=144&type=chunk) - Remediation measures are being implemented, including hiring additional accounting staff and engaging a third party to assist with improving processes and controls[146](index=146&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=39&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in routine litigation and government inquiries common to its business, such as workers' compensation claims and contract compliance matters, with management not believing any pending matters will have a material adverse effect on its financial condition or results of operations - The company is involved in routine litigation and disputes related to its business activities, including workers' compensation, employment disputes, and liability issues[149](index=149&type=chunk) - In management's opinion, after consultation with legal counsel, no pending litigation is expected to have a material adverse effect on the company's financial condition, cash flows, or results of operations[149](index=149&type=chunk) [Risk Factors](index=39&type=section&id=Item%201A.%20Risk%20Factors) This section refers investors to the detailed risk factors discussed in the company's Annual Report on Form 10-K for the fiscal year ended September 30, 2018, for a comprehensive understanding of the risks that could materially affect the business - The report directs readers to Part I, Item 1A, "Risk Factors," in the company's 2018 Form 10-K for a discussion of factors that could materially affect the business[150](index=150&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=39&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reports that it did not sell any unregistered equity securities during the quarter and confirms there has been no material change in the planned use of proceeds from its May 2018 Initial Public Offering - The company did not sell any equity securities during the period that were not registered under the Securities Act[151](index=151&type=chunk) - There has been no material change in the planned use of proceeds from the IPO as described in the Form S-1 Registration Statement[152](index=152&type=chunk) [Defaults Upon Senior Securities](index=39&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reports no defaults upon senior securities for the period - None[154](index=154&type=chunk) [Mine Safety Disclosures](index=39&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Information regarding mine safety violations and other regulatory matters as required by the Dodd-Frank Act is included in Exhibit 95.1 to this Quarterly Report - Information concerning mine safety violations is included in Exhibit 95.1 to this Quarterly Report on Form 10-Q[155](index=155&type=chunk) [Other Information](index=39&type=section&id=Item%205.%20Other%20Information) The company reports no other information for this item - None[156](index=156&type=chunk) [Exhibits](index=40&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including the Amended and Restated Certificate of Incorporation and Bylaws, CEO and CFO certifications, mine safety disclosures, and interactive data files - The report includes a list of all exhibits filed, such as corporate governance documents (**3.1**, **3.2**), officer certifications (**31.1**, **31.2**, **32.1**, **32.2**), Mine Safety Disclosure (**95.1**), and Interactive Data Files (**101**)[157](index=157&type=chunk)