Arcosa, Inc. — Second-Quarter 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Arcosa operates Construction Products, Energy Equipment, and Transportation Products businesses. It became independent of Trinity Industries in November 2018; 2018 comparative results are combined carve-out financials and may not reflect standalone costs.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $434.1 million | $353.0 million | $845.0 million | $707.4 million |
| Operating profit | $42.3 million | $30.6 million | $79.6 million | $61.8 million |
| Net income | $31.8 million | $22.6 million | $59.5 million | $44.8 million |
| Diluted EPS | $0.65 | $0.46 | $1.21 | $0.92 |
| Operating margin | 9.7% | 8.7% | 9.4% | 8.7% |
Q2 gross margin was approximately 20.4%, versus 19.8% a year earlier. Q2 revenue rose 23.0%, operating profit 38.2%, and net income 40.7%. For the first half, revenue increased 19.5% and operating profit 28.8%. The first-half effective tax rate was 22.1%, compared with 24.8% in 2018.
Cash flow and balance sheet: First-half operating cash flow was $141.2 million, versus $105.3 million; capital expenditures were $38.9 million, versus $20.4 million. Investing activities used $59.5 million and financing activities used $97.8 million, including $80.0 million of revolver repayments, $8.0 million of share repurchases, and $5.0 million of dividends. Cash declined to $83.3 million from $99.4 million at year-end. June 30 debt was $107.8 million ($100.0 million revolver borrowings and $7.8 million finance leases), down from $185.5 million; net debt was approximately $24.5 million. The $400 million revolver had $253.8 million available, including the effect of letters of credit, and the company was in covenant compliance. Current assets were $622.9 million and current liabilities $203.1 million.
Material changes and operating drivers
- Construction Products: Q2 revenue rose 37.8%, primarily due to the ACG Materials acquisition, partly offset by weather-related declines in legacy businesses. Operating profit was essentially flat at $17.5 million; margin fell to 15.1% from 21.0%. First-half operating profit declined 4.0% to $28.8 million.
- Energy Equipment: Q2 revenue increased 14.5% and operating profit rose to $25.0 million from $8.2 million. Higher wind-tower volume and utility-structure pricing contributed; the comparison also benefited from the absence of losses at businesses divested in 2018. First-half operating profit included a $2.9 million bad-debt recovery from one customer.
- Transportation Products: Q2 revenue grew 26.0%, largely on higher barge deliveries, while operating profit was nearly unchanged at $12.6 million. Start-up costs for reopening a previously idled barge facility weighed on results; the facility began delivering barges in July. First-half steel-component deliveries were lower.
- Corporate costs increased, partly reflecting standalone public-company costs and replacement of services previously provided by Trinity. Selling, engineering, and administrative expenses as a share of revenue improved to 10.6% in Q2 from 11.2%.
Outlook, risks, and unusual items
- Management estimated 2019 capital expenditures of $70–$80 million, including $60–$65 million for maintenance and $10–$15 million for growth, and full-year corporate costs of approximately $50 million. The filing provides no full-year revenue or earnings guidance.
- Backlog at June 30 was $517.6 million for Energy Equipment wind towers and utility structures, down from $780.1 million a year earlier; $349.7 million for inland barges, up from $198.4 million; and $45.3 million for other Energy Equipment products. Management cited uncertainty in future wind-tower orders as the market transitions from production tax credit incentives.
- Arcosa acquired inland barge-component and construction-aggregates businesses in June for a total purchase price of $29.8 million. The ACG Materials purchase-price allocation remained preliminary; adjustments, particularly to depletable land and deferred taxes, could be material to that allocation.
- Risks include cyclical end markets, weather impacts on construction, steel and other input costs, customer credit and order timing, and regulatory, environmental, and litigation matters. Possible losses on claims were estimated at $1.2–$10.8 million; recorded accruals were $4.8 million, including $1.0 million for environmental matters. Management said additional liability was not expected to be material, while noting environmental estimates are inherently uncertain.
Important facts for investors to verify
- Whether ACG integration and legacy construction demand support margins after acquisition-related revenue growth.
- Wind-tower order trends and conversion of the lower year-over-year backlog, given the production tax credit transition.
- Whether barge backlog converts to deliveries and whether the reopened facility’s start-up costs abate.
- Cash generation, planned capital spending, acquisition spending, and remaining revolver capacity as working capital and investment needs evolve.
- Final ACG purchase-price allocation and any material changes to acquired asset or tax valuations.
- The standalone cost base: the 2018 comparison includes Trinity allocations, and ACG was excluded from management’s internal-control assessment described in the filing.