Arcosa, Inc. — Q2 2022 Form 10-Q
Business and period: Arcosa provides infrastructure-related products and solutions across Construction Products, Engineered Structures, and Transportation Products. This unaudited filing covers the three and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. Amounts are in millions except per-share data.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $602.8 | $515.1 | $1,138.6 | $955.5 |
| Operating profit | $57.2 | $31.3 | $91.9 | $54.2 |
| Net income | $39.0 | $20.8 | $59.2 | $36.7 |
| Diluted EPS | $0.79 | $0.43 | $1.21 | $0.75 |
| Operating margin | 9.5% | 6.1% | 8.1% | 5.7% |
| Net margin | 6.5% | 4.0% | 5.2% | 3.8% |
Q2 revenue grew 17.0% and operating profit increased 82.7%; six-month revenue grew 19.2% and operating profit increased 69.6%. Growth and profit improvement reflected higher pricing and volumes, with segment results also affected by acquisitions, steel costs, and other inflation. Q2 interest expense was $7.7 versus $6.6; the six-month expense was $14.9 versus $8.7. The effective tax rate was 20.6% for Q2 and 21.8% year to date, compared with 16.8% and 19.0% in 2021.
Segment highlights: Q2 revenue and operating profit were Construction Products $245.9 and $28.1; Engineered Structures $268.6 and $41.5; and Transportation Products $88.3 and $3.5. Construction Products benefited from aggregate pricing and volume, including acquired businesses. Engineered Structures’ profit reflected improved margins and a $1.6 gain on a facility sale, partly offset by the absence of a $7.7 one-time wind-tower customer-dispute resolution recorded in Q2 2021. Transportation Products improved mainly on increased steel-component deliveries.
Cash, debt, and liquidity
- Operating cash flow: $111.2 for the first half, versus $51.1 in 2021. Working capital was a $30.4 cash use, principally reflecting higher receivables and inventories, partially offset by increased payables.
- Investing and financing: investing cash use was $98.7, including $75.0 for acquisitions and $52.9 of capital expenditures. Financing cash use was $6.0; the company borrowed $80.0 and repaid $56.3 of debt, repurchased $15.0 of shares, and paid $5.0 in dividends.
- Cash: balance-sheet cash and equivalents were $77.0 at June 30, compared with $72.9 at year-end. Cash-flow ending cash was $79.4, including $2.4 classified within assets held for sale.
- Debt: total debt was $713.0 net of unamortized issuance costs ($718.8 before those costs), versus $679.5 net at December 31, 2021. This includes $155.0 outstanding on the revolving facility, a $142.5 term loan, $400.0 of senior notes, and finance leases.
- Available borrowing: $316.5 remained available under the $500.0 revolving facility after $155.0 of borrowings and approximately $28.5 of letters of credit. The company reported compliance with its financial covenants. Revolver and term-loan rates are variable; a swap fixes the LIBOR component on the first $100.0 of borrowings at 2.71% through 2023.
Material changes, outlook, and risks
- In May, Arcosa acquired recycled-aggregates producer RAMCO for $75.4, funded with revolver borrowings. Purchase accounting remains preliminary and may be adjusted.
- Arcosa agreed to sell its storage-tanks business for $275.0 in cash, with closing expected in the second half of 2022 subject to regulatory approvals and customary conditions. At June 30, $116.9 of assets and $44.7 of liabilities were classified as held for sale. The business generated Q2 operating profit of $13.9 and first-half operating profit of $24.2.
- Backlog at June 30 included $410.1 for utility, wind, and related structures; $20.2 for storage tanks; and $131.8 for inland barges. Management expected 83% of the first category, all storage-tank backlog, and 50% of barge backlog to be delivered during the remainder of 2022.
- Management cited resilient construction demand and strong utility-structure order activity, while noting inflation in fuel, labor, and steel and possible demand effects from higher interest rates. Near-term wind expectations were uncertain amid steel prices and uncertainty over production tax-credit support. Barge orders remained low, although backlog extended into 2023; management cited an improving outlook for railcar-related steel components.
- Management estimated 2022 capital expenditures of $120–$140, including $70–$90 maintenance spending, and corporate costs of about $14–$15 per quarter for the rest of 2022 excluding non-recurring items. Full-year acquisition and divestiture expenses were estimated at $10.5–$11.5. The filing does not provide formal consolidated earnings or revenue guidance.
- Management said existing cash, available credit, and operating cash flow should cover foreseeable operating and capital needs. Key risks include cyclical end markets, weather, inflation and raw-material availability, interest rates, customer demand and order timing, COVID-19-related disruption, and execution of acquisitions and the pending divestiture. Litigation and environmental accruals totaled $0.9; the company said additional exposure was not expected to be material, while noting future proceedings and remediation estimates are uncertain.
Key facts for investors to verify
- Whether the $275.0 storage-tanks sale closes as expected, its final proceeds and terms, and the effect of removing the business from future results.
- Final RAMCO purchase-price allocation and the acquired business’s contribution to growth, earnings, and cash flow.
- Whether pricing continues to offset higher steel, fuel, labor, and other costs, and how demand and backlog convert to revenue and profit.
- Debt, variable-rate exposure, covenant headroom, and liquidity after acquisition, capital spending, and any further shareholder returns.
- Delivery timing and realization of the reported backlog, particularly in wind structures and inland barges.