Business context and reporting period
Arcosa, Inc. filed this Form 10-Q for the quarter and nine months ended September 30, 2018. The company’s construction products, energy equipment, and transportation products businesses were part of Trinity Industries until the November 1, 2018 spin-off. Accordingly, the historical combined statements reflect Trinity-based allocations and may not represent Arcosa’s costs or results as an independent company.
Financial results and position
Third quarter: Revenue was $378.6 million, up 3.5% year over year; operating profit was $6.4 million versus $33.6 million; and net income was $3.2 million versus $20.6 million. Operating margin was approximately 1.7% versus 9.2%; net margin was approximately 0.8% versus 5.6%. Results included a $23.2 million pre-tax impairment charge.
Nine months: Revenue was $1,086.0 million, down 2.6%; operating profit was $68.2 million, down 37.2%; and net income was $48.0 million versus $66.1 million. Operating margin was approximately 6.3% versus 9.7%; net margin was approximately 4.4% versus 5.9%.
Cash flow and liquidity: Nine-month operating cash flow was $118.5 million versus $134.3 million. Capital expenditures were $33.0 million; acquisition spending was $25.0 million; and cash ended at $10.4 million. At September 30, current assets were $449.8 million and current liabilities $170.1 million. Reported debt was approximately $0.4 million, including current and long-term portions. The filing reports no borrowings on Trinity’s revolving facility at quarter-end; Arcosa’s own facility was established after quarter-end.
Segments: Third-quarter revenue and operating profit were $72.6 million and $15.3 million for Construction Products; $198.4 million and a $13.2 million operating loss for Energy Equipment; and $108.5 million and $13.5 million for Transportation Products. Nine-month segment operating profit was $45.3 million, $12.5 million, and $35.2 million, respectively.
Material changes and management commentary
- Construction Products revenue rose 4.6% in the quarter and 16.4% year to date, primarily on higher volumes and acquisitions. Transportation Products revenue rose 34.8% in the quarter, reflecting more barge deliveries, and 6.3% year to date, reflecting more steel component deliveries.
- Energy Equipment revenue fell 8.7% in the quarter and 12.0% year to date, primarily from planned lower wind-tower volumes. The third-quarter impairment related to businesses classified as held for sale; those divestitures were completed October 31 and November 5, with immaterial net proceeds. The businesses had about $20 million of nine-month revenue and an operating loss.
- Revenue standard adoption increased third-quarter revenue and operating profit by $8.3 million and $2.6 million, respectively, but reduced nine-month revenue and operating profit by $6.4 million and $1.0 million. Comparatives were not restated.
- Wind tower and utility structure backlog was $700.3 million, down from $972.0 million a year earlier; inland barge backlog was $210.4 million, up from $126.0 million. Management described energy and transportation markets as cyclical and construction products as seasonal.
Outlook, transactions, and risks
- Arcosa estimated incremental costs of $10 million to $15 million in fiscal 2019 to operate as an independent public company. No full-year earnings or revenue guidance is provided in the filing.
- After quarter-end, Trinity contributed $200 million cash to Arcosa in connection with the spin-off. Arcosa entered into a $400 million unsecured revolving credit facility maturing in 2023; at November 1 it had no loans outstanding and approximately $19.9 million of letters of credit. The facility includes a minimum interest-coverage covenant of 2.50:1 and a maximum leverage covenant of 3.00:1, with specified acquisition-related flexibility. The filing states Arcosa was in compliance as of September 30.
- On November 14, Arcosa agreed to acquire ACG Materials for approximately $315 million, expected to be funded with cash and revolver borrowings. Closing was expected in fourth-quarter 2018 or first-quarter 2019, subject to customary conditions and regulatory review.
- Management cited risks including cyclicality, customer order timing and creditworthiness, raw-material costs, weather and operational disruptions, litigation, environmental and regulatory matters, and risks related to the spin-off and realization of expected benefits.
- Legal and environmental/workplace claims: reasonably possible losses were estimated at $1.3 million to $11.5 million; accrued contingencies totaled $5.2 million, including $1.1 million for environmental and workplace matters. Management believed additional liability would not be material, while noting estimates are uncertain.
Most important facts for investors to verify
- Whether the $23.2 million impairment and planned Energy Equipment volume reductions continued to affect subsequent results.
- Backlog conversion, particularly the lower wind tower and utility structure backlog, and delivery timing through 2020.
- Actual standalone costs compared with management’s $10 million to $15 million fiscal 2019 estimate.
- ACG Materials acquisition closing, financing, integration, and resulting leverage against credit-facility covenants.
- How post-spin-off cash flows, debt, and operating results compare with the Trinity-allocated historical statements.