Arcosa, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Arcosa became an independent public company on November 1, 2018. The comparable 2018 results are combined, pre-separation figures that include allocated Trinity costs and may not reflect standalone costs.
Financial performance and liquidity
- Revenue: $410.9 million, up 15.9% from $354.4 million.
- Operating profit: $37.3 million, up 19.6% from $31.2 million. Operating margin was 9.1%, compared with 8.8%.
- Net income and EPS: Net income was $27.7 million versus $22.2 million; diluted EPS was $0.56 versus $0.45. Net margin was 6.7%, compared with 6.3%. The effective tax rate fell to 22.2% from 26.5%.
- Cash flow: Operating cash flow was $125.0 million versus $89.6 million, substantially supported by an $85.2 million decrease in receivables. Capital expenditures were $18.0 million. Cash increased $18.6 million to $118.0 million.
- Debt and liquidity: Total debt was $105.1 million at quarter-end, down from $185.5 million at December 31, 2018, following debt repayments. The $400 million revolving facility had $100 million drawn, $47.5 million of letters of credit, and $252.5 million available. Arcosa reported covenant compliance. Current assets were $617.8 million and current liabilities $245.8 million.
- Other: A $0.05-per-share quarterly dividend was declared. The company repurchased 269,574 shares for $8.0 million under its buyback program.
Segment results and changes
- Construction Products: Revenue rose 51.0% to $106.0 million, primarily reflecting the December 2018 ACG acquisition. Operating profit declined 8.9% to $11.3 million; margin fell to 10.7% from 17.7%, with legacy-business pricing and mix pressures and higher acquired-business costs.
- Energy Equipment: Revenue increased 6.5% to $209.1 million and operating profit rose 61.1% to $28.2 million. Higher wind-tower volumes and utility-structure pricing, lower costs after 2018 divestitures, and a $2.9 million recovery of a customer bad debt contributed to the profit increase.
- Transportation Products: Revenue increased 9.2% to $97.5 million, primarily on higher barge deliveries. Operating profit decreased 7.8% to $8.3 million, reflecting lower steel-component deliveries and barge-facility restart costs. A flood also affected barge production.
- Corporate overhead increased to $10.5 million from $7.7 million, primarily due to standalone-company costs. Selling, engineering, and administrative expenses were 9.9% of revenue versus 10.6%.
Outlook, risks, and contingencies
- Management expected 2019 capital expenditures of $70–$80 million, including $60–$65 million for maintenance and $10–$15 million for growth. Estimated additional standalone costs for 2019 were $10–$15 million. The filing does not provide full-year earnings guidance.
- Backlog at March 31 was $549.2 million for wind towers and utility structures, down from $809.7 million a year earlier; $383.9 million for inland barges, up from $124.5 million. Expected 2019 delivery shares were 58%, 95% for other Energy Equipment obligations, and 67% for barges, respectively. Management noted uncertainty in future wind-tower orders following the phase-out of the Production Tax Credit.
- Management cautioned that results are seasonal and the Energy Equipment and Transportation Products businesses are cyclical. Risks discussed include demand, weather and natural disasters, raw-material costs, customer credit, interest rates, regulation, litigation, and environmental matters.
- Contingency-related accruals totaled $5.0 million, including $1.1 million for environmental matters; the stated reasonably possible loss range was $1.3–$11.3 million. The company reported no legal proceedings in the designated filing item.
- A $100 million interest-rate swap fixes the LIBOR component on the first $100 million of facility borrowings at 2.71%; its quarter-end fair-value liability was $2.4 million. Management reported no material change in market risks.
Important facts for investors to verify
- How sustainable are the Energy Equipment profit improvement and the $2.9 million bad-debt recovery?
- Can Arcosa convert its segment backlogs into deliveries and margins, particularly given lower wind backlog, the Production Tax Credit phase-out, and the barge-facility restart and flood impacts?
- How will ACG integration, standalone costs, and planned capital spending affect future margins and cash generation?
- How much of Q1 operating cash flow reflects recurring earnings versus timing of receivables and other working-capital changes?
- Review the preliminary ACG purchase-price allocation and the $1.3–$11.3 million reasonably possible contingency-loss range.