Arcosa, Inc. — FY 2020 Form 10-K
Business context and reporting period
Arcosa is a North American infrastructure-products company operating in Construction Products (aggregates, specialty materials, trench shoring), Engineered Structures (utility, wind, traffic, telecom structures and tanks), and Transportation Products (inland barges and steel components). This is the annual report for the fiscal year ended December 31, 2020, not a standalone fourth-quarter report; the supplied filing does not provide a clear set of Q4-only financial results. Comparisons below are with FY 2019.
Financial and operating results
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Revenue | $1,935.6 million | $1,736.9 million |
| Operating profit | $151.8 million | $152.9 million |
| Net income | $106.6 million | $113.3 million |
| Diluted EPS | $2.18 | $2.32 |
| Operating cash flow | $259.9 million | $358.8 million |
| Capital expenditures | $82.1 million | $85.4 million |
Revenue rose 11.4%, while operating profit was nearly flat and net income declined 5.9%. Derived consolidated operating margin was approximately 7.8% versus 8.8%; net margin was approximately 5.5% versus 6.5%. SG&A increased 24.3% to $223.1 million, or 11.5% of revenue versus 10.3%. The effective tax rate was 22.9% versus 22.8%.
Segment revenue and operating profit: Construction Products revenue was $593.6 million (+35.0%) and operating profit $74.7 million (+41.7%), mainly reflecting Cherry. Engineered Structures revenue was $877.7 million (+4.9%) and operating profit $80.2 million (-20.4%), affected by a wind-tower facility idling and utility-structure operating challenges. Transportation Products revenue was $466.5 million (+0.2%) and operating profit $54.6 million (+16.7%); improved barge efficiency and more hopper deliveries offset weaker steel-components activity.
Cash and cash equivalents were $95.8 million at year-end, down from $240.4 million. Total debt was $254.5 million, including $100.0 million outstanding on a $500.0 million revolving facility and a $149.1 million term-loan balance. Revolver availability was $371.4 million after letters of credit. The company reported compliance with debt covenants. The $150 million term loan was obtained in connection with the Cherry acquisition. The credit agreement includes minimum interest coverage and maximum leverage requirements.
Material changes and notable items
- FY 2020 acquisitions had total purchase price of $474.7 million and net cash paid of $455.7 million. Major transactions included Cherry ($296.8 million) and Strata Materials ($87.0 million), expanding natural and recycled aggregates; additional acquisitions added traffic, telecom, concrete-pole and aggregates businesses.
- Operating cash flow decreased by $98.9 million, chiefly reflecting less favorable working-capital movements, including receivables. Investing cash use rose to $528.2 million, largely due to acquisitions. Financing provided $123.7 million; year-end cash declined by $144.6 million.
- Firm-order backlog fell year over year: utility, wind and related structures to $334.0 million from $596.8 million; storage tanks to $15.6 million from $36.2 million; inland barges to $175.5 million from $346.9 million. Most or all is expected to be delivered in 2021, except a portion of tank backlog expected in 2022.
- The company recorded $7.1 million of impairment charges in 2020, including $5.0 million in Transportation Products and $0.8 million in Construction Products. No goodwill impairment was recorded; goodwill was $794.0 million, approximately 30% of total assets.
- Arcosa renamed its Energy Equipment segment Engineered Structures at year-end; the underlying businesses did not change.
Outlook, risks and contingencies
Management gave no consolidated numerical earnings or revenue guidance. It described construction demand as better than initially anticipated during the pandemic, with Texas construction relatively resilient, but specialty materials and shoring remained below pre-pandemic levels. Utility-structure order activity was described as strong; wind-tower production was expected to be lower in 2021 as the industry transitions from production tax credit support. Barge demand remained challenged, with liquid-barge inquiries very low and steel-price increases weighing on hopper demand. The company reduced capacity at its three barge plants and was evaluating further cost reductions if demand did not improve.
Management reported $4.0–$5.0 million of incremental COVID-19 costs in 2020 and no material asset impairments attributed to the pandemic at filing. It warned that the February 2021 winter storm disrupted more than a week of production across a significant part of its footprint and could continue to affect supply, particularly steel. Other principal risks include economic and cyclical demand, customer concentration (GE represented 15.3% of FY 2020 revenue), steel-price and supply volatility, wind tax-credit changes, acquisition integration, Mexico and cross-border exposure, and environmental and regulatory obligations.
Environmental reserves were $1.2 million. Accruals for other claims and lawsuits were also $1.2 million; management estimated reasonably possible losses of $0.3–$0.4 million for those matters. A product-warranty dispute with Thomas & Betts was on appeal after the lower court dismissed the claims; the company stated that a possible loss was not reasonably estimable and recorded no accrual for that case. The auditor issued an unqualified opinion on the financial statements and internal controls, but its control assessment excluded businesses acquired in 2020. Goodwill valuation and acquisition accounting were identified as critical audit matters.
Most important facts for investors to verify
- Whether acquired-business contributions and integration costs translate into durable organic growth and improved profitability.
- How backlog conversion and new orders develop in utility structures, wind towers and barges, given sharp year-over-year backlog declines.
- Whether cash generation recovers after the acquisition-driven cash outflow and the working-capital drag.
- How steel inflation, the wind tax-credit transition, pandemic effects and the 2021 winter-storm disruption affect margins and deliveries.
- Debt, covenant headroom, environmental exposures, and the status and potential outcome of the Thomas & Betts appeal.