struction Partners(US:ROAD)2022-11-22 14:49PART I Item 1. Business Construction Partners, Inc. is a vertically integrated civil infrastructure company specializing in roadway construction and maintenance in the southeastern U.S., expanding through acquisitions and growing its backlog - The company operates as a civil infrastructure firm with a vertical integration strategy, focusing on manufacturing hot mix asphalt (HMA), paving, site development, aggregate mining, and liquid asphalt distribution across five southeastern states16 - During fiscal year 2022, the company executed a significant growth strategy through multiple acquisitions, establishing a new platform in South Carolina and expanding its presence in Florida and North Carolina, also securing a new, larger credit facility to support its operations and growth20 - As of September 30, 2022, the company employed 1,035 salaried and 2,755 hourly employees, with hourly employees averaging 2,444 during fiscal year 2022 due to seasonal fluctuations50 FY 2022 Revenue Breakdown and Customer Concentration | Category | Percentage/Value | | :--- | :--- | | Revenue by Funding Source | | | Publicly Funded Projects | 60.9% | | Privately Funded Projects | 39.1% | | Major Customers (% of Revenue) | | | Alabama DOT | 10.0% | | North Carolina DOT | 11.2% | | All DOTs Combined | 36.8% | Contract Backlog Growth | Date | Backlog Amount (in millions) | % Change YoY | | :--- | :--- | :--- | | Sep 30, 2022 | $1,410.8 | 46.0% | | Sep 30, 2021 | $966.2 | N/A | Item 1A. Risk Factors The company faces business, financial, and stock ownership risks, including reliance on government spending, acquisition integration, substantial debt, and concentrated voting power - A significant portion of the company's revenue (60.9% in FY2022) is derived from publicly funded projects, making it vulnerable to reductions in federal, state, and local government spending57 - The company has significant customer concentration, with the Alabama DOT and North Carolina DOT accounting for 10.0% and 11.2% of revenues, respectively, in fiscal 202260 - The company's acquisition strategy involves risks related to successful integration, potential for unknown liabilities, and the possibility that acquired businesses may not perform as expected6667 - The dual-class stock structure concentrates voting control with SunTx and its affiliates, as Class B stock (10 votes per share) represented approximately 73.3% of the total voting power as of November 21, 2022, limiting Class A stockholders' influence113117 - The company's substantial indebtedness under its Credit Agreement requires significant cash flow for debt service and imposes restrictive covenants that limit its ability to engage in certain business and financial transactions101103 Item 1B. Unresolved Staff Comments The company has no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments127 Item 2. Properties As of September 30, 2022, the company operates 60 HMA plants, 14 aggregates facilities, and one liquid asphalt terminal across five southeastern states, with a mix of owned and leased properties HMA Plants and Aggregates Facilities by State (as of Sep 30, 2022) | Location | HMA Plants (Owned) | HMA Plants (Leased) | Aggregates Facilities (Owned) | Aggregates Facilities (Leased) | | :--- | :--- | :--- | :--- | :--- | | Alabama | 10 | 8 | 6 | 3 | | Florida | 10 | 1 | 1 | 0 | | Georgia | 5 | 1 | 1 | 2 | | North Carolina | 10 | 10 | 1 | 0 | | South Carolina | 3 | 2 | 0 | 0 | Item 3. Legal Proceedings The company is involved in routine litigation and government inquiries, with no expected material adverse effect on its financial condition or operations - The company is subject to routine litigation and government inquiries but does not expect any pending matters to have a material adverse effect on its financial condition or results of operations131132 Item 4. Mine Safety Disclosures Mine safety disclosures, as required by the Dodd-Frank Act, are provided in Exhibit 95.1 of this report - Required mine safety disclosures are included in Exhibit 95.1 to this Form 10-K133 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Class A common stock trades on Nasdaq, Class B does not, and the company does not foresee paying cash dividends, preferring to retain earnings for growth - Class A common stock is listed on the Nasdaq Global Select Market (ROAD); there is no public trading market for Class B common stock137 - The company does not intend to pay cash dividends in the foreseeable future and plans to retain earnings for business operation and expansion, with the Credit Agreement also restricting dividend payments140 Stockholder Information (as of Nov 21, 2022) | Stock Class | Shares Outstanding | Record Holders | | :--- | :--- | :--- | | Class A | 41,338,192 | 143 | | Class B | 11,352,915 | 26 | Item 6. [Reserved] This item is intentionally left blank - Item 6 is reserved and contains no information146 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2022 revenues grew significantly from acquisitions and organic growth, but margins compressed due to cost inflation, impacting liquidity with increased debt Results of Operations Fiscal 2022 revenues increased significantly, but gross margin declined due to cost inflation, while net income and Adjusted EBITDA saw modest growth - The $391.0 million revenue increase was composed of $170.4 million from acquisitions and $220.6 million from organic growth in existing markets, reflecting strong demand for both public and private work165 - Gross profit margin decreased due to rising costs of raw materials, fuel, labor, and trucking, as well as project delays from supply chain disruptions166 Fiscal 2022 vs. 2021 Performance | Metric | FY 2022 | FY 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $1,301.7M | $910.7M | +$391.0M | +42.9% | | Gross Profit | $139.3M | $119.9M | +$19.4M | +16.1% | | Gross Margin | 10.7% | 13.2% | N/A | -2.5 p.p. | | Operating Income | $35.4M | $30.1M | +$5.3M | +17.6% | | Net Income | $21.4M | $20.2M | +$1.2M | +5.9% | | Adjusted EBITDA | $111.2M | $90.6M | +$20.6M | +22.7% | | Adjusted EBITDA Margin | 8.5% | 9.9% | N/A | -1.4 p.p. | Liquidity and Capital Resources Operating cash flow decreased in FY2022, while significant debt was incurred to fund acquisitions, with the company maintaining compliance with covenants and projecting substantial capital expenditures for FY2023 - On June 30, 2022, the company entered into a new Credit Agreement providing a $250.0 million Term Loan, a $325.0 million Revolving Credit Facility, and a $50.0 million Delayed Draw Term Loan152359 - As of September 30, 2022, the company was in compliance with its financial covenants, with a fixed charge coverage ratio of 2.56-to-1.00 (minimum 1.20) and a consolidated leverage ratio of 2.79-to-1.00 (maximum 3.50)180362 - The company projects total capital expenditures for fiscal 2023 to be between $75.0 million and $80.0 million183 Cash Flow Summary (in thousands) | Activity | FY 2022 | FY 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $16,498 | $48,500 | | Net cash used in investing activities | ($197,326) | ($263,412) | | Net cash provided by financing activities | $159,136 | $123,847 | | Net change in cash | ($21,692) | ($91,065) | Critical Accounting Policies and Estimates Critical accounting policies involve significant estimates for revenue recognition on long-term contracts, valuation of long-lived assets and goodwill, income taxes, and insurance accruals - Revenue from long-term construction contracts is recognized over time using the cost-to-cost input method, which requires significant management judgment in estimating total costs to complete a project192 - Goodwill and other long-lived assets are tested for impairment annually or when triggering events occur, with the July 1, 2022 test indicating no impairment as the company's single reporting unit's fair value substantially exceeded its carrying value199200201 - The company accrues for insurance costs covering general liability, auto liability, and workers' compensation for probable losses, with its captive insurance subsidiary retaining the first $1,000,000 per claim since October 1, 2021206 Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company faces commodity price, interest rate, and inflation risks, mitigating some through contract clauses and derivative instruments, but inflation remains a concern for fixed-price contracts - The company is exposed to commodity price risk for liquid asphalt and energy, mitigating this through price escalator provisions in most public contracts and by using fuel and natural gas swap contracts209210 - The company has significant interest rate risk with $377.0 million of variable-rate debt outstanding at September 30, 2022, where a hypothetical 1% change in borrowing rates would alter annual interest expense by $3.8 million, absent hedges213 - Inflation poses a risk by increasing costs for wages, fuel, and materials, and while the company tries to pass these costs to customers in new bids, it has limited ability to do so for projects already in its backlog, potentially reducing profit margins217 Item 8. Financial Statements and Supplementary Data This section includes audited consolidated financial statements and the independent auditor's unqualified opinion, highlighting revenue recognition for long-term contracts as a critical audit matter - The independent registered public accounting firm, RSM US LLP, issued an unqualified opinion on the consolidated financial statements as of September 30, 2022 and 2021221 - The auditor identified "Revenue Recognition – Revenue Recognized Over Time Under Uncompleted Long-Term Construction Contracts" as a critical audit matter due to the significant management judgment required in estimating total costs to complete projects225226227 - The auditor's report on internal control over financial reporting expressed an unqualified opinion on its effectiveness as of September 30, 2022, but excluded the recently acquired King Asphalt, Inc. and Southern Asphalt, Inc. from the scope of the audit232234 Notes to Consolidated Financial Statements The notes detail accounting policies, customer concentration, five FY2022 acquisitions totaling $129.7 million, a significant increase in debt to $377.0 million, and equity-based compensation expenses - During fiscal year 2022, the company completed five business acquisitions for a total cash consideration of $129.7 million, resulting in $45.3 million of goodwill322323324328331334 - As of September 30, 2022, total long-term debt was $377.0 million, a significant increase from $217.5 million at the end of fiscal 2021, primarily to fund acquisitions and operations358 - The company had unsatisfied performance obligations (backlog) of approximately $1,027.8 million at September 30, 2022, with $783.5 million expected to be recognized as revenue in fiscal 2023346 Revenue Concentration by Customer Type | Customer Type | % of Consolidated Revenues (FY 2022) | | :--- | :--- | | Public | 60.9% | | Private | 39.1% | Major DOT Customer Revenue Concentration | Customer | % of Consolidated Revenues (FY 2022) | | :--- | :--- | | Alabama DOT | 10.0% | | North Carolina DOT | 11.2% | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles or financial disclosure - None reported432 Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of September 30, 2022, excluding recent acquisitions from the internal control assessment - Management concluded that disclosure controls and procedures were effective as of September 30, 2022433 - Management concluded that internal control over financial reporting was effective as of September 30, 2022, with the assessment excluding the acquisitions of King Asphalt, Inc. and Southern Asphalt, Inc., which together represented 7% of total assets (excluding goodwill) and 6% of revenue for fiscal 2022435436 Item 9B. Other Information No other information is reported for this item - None439 PART III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement442 Item 11. Executive Compensation Information on executive compensation is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement443 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement444 Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement445 Item 14. Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement446 PART IV Item 15. Exhibits, Financial Statement Schedules This section lists all documents filed as part of the Form 10-K, including financial statements and an exhibit index of agreements and certifications - This section includes the consolidated financial statements, parent-only financial statements, and an index of all exhibits filed with the report449450