Arcosa, Inc. — Q3 2023 Form 10-Q
Business context and period: Arcosa provides infrastructure-related products and solutions across Construction Products, Engineered Structures, and Transportation Products, primarily in North America. This unaudited filing covers the three and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods.
Financial performance and position
- Revenue: Q3 revenue was $591.7 million, down 2.0% year over year; nine-month revenue was $1,725.7 million, down 1.0%. Lower Engineered Structures revenue following the storage-tank business sale offset growth in the other segments.
- Profit and margins: Q3 operating profit was $48.4 million versus $49.0 million; net income was $35.5 million versus $32.0 million, and diluted EPS was $0.72 versus $0.66. Nine-month operating profit was $174.5 million versus $140.9 million; net income was $132.1 million versus $91.2 million, and diluted EPS was $2.70 versus $1.87. Operating margin was approximately 8.2% for Q3 and 10.1% for the nine months, compared with approximately 8.1% and 8.1% in 2022, respectively.
- Segment results: Q3 Construction Products revenue and operating profit were $262.1 million and $30.3 million; Transportation Products were $107.1 million and $14.1 million. Engineered Structures revenue was $222.5 million and operating profit $18.7 million; prior-year results included the sold storage-tank business. For the nine months, Construction Products operating profit rose to $114.2 million from $72.4 million and Transportation Products to $35.8 million from $7.2 million; Engineered Structures operating profit fell to $70.3 million from $106.9 million.
- Cash flow and investment: Nine-month operating cash flow was $198.8 million, up from $182.6 million. Capital expenditures were $144.8 million versus $85.9 million; operating cash flow less capital expenditures was $54.0 million. Investing activities used $131.5 million. Cash ended at $155.3 million, down from $160.4 million at year-end 2022.
- Liquidity and debt: At September 30, cash was $155.3 million and current liabilities were $405.1 million. Total debt, including current debt and finance leases net of issuance costs, was $510.2 million, versus $550.6 million at December 31, 2022. Arcosa had $100 million drawn on its $600 million revolving facility and approximately $478 million available after letters of credit. It was in compliance with its financial covenants.
- Other metrics: The effective tax rate was 17.4% for Q3 and 17.1% year to date, versus 21.2% and 21.6% in 2022. Dividends declared were $0.05 per share for Q3. Stockholders’ equity was $2,315.3 million at September 30, 2023.
Material changes and notable items
- Construction Products revenue grew 7.3% in Q3, supported by pricing and shoring activity. Transportation Products revenue grew 29.5%, with higher barge and steel-component volumes and improved margins.
- Engineered Structures’ Q3 revenue declined 19.7% and operating profit declined 49.6%, chiefly reflecting the storage-tank divestiture. Excluding that business, management cited lower utility-structure margins and reduced wind-tower volumes, partly offset by tax credits.
- Nine-month results included $22.6 million of gains from sales of depleted land, a $5.0 million reduction in an acquisition holdback obligation recorded as lower cost of revenues, and a $6.4 million additional gain related to the prior storage-tank sale. These items contributed to reported profit growth.
- Arcosa recognized $7.6 million of Advanced Manufacturing Production (AMP) tax credits in Q3 and $19.7 million year to date, recorded as a reduction to cost of revenues. The credits relate to wind towers and remain subject to additional regulatory guidance.
- In August, Arcosa amended its credit agreement, increased revolving capacity from $500 million to $600 million, extended maturity to August 2028, and repaid the remaining term loan using revolver borrowings. Its $400 million senior notes carry a 4.375% coupon and mature in April 2029. The $100 million interest-rate swap expired in October 2023.
Outlook, risks, and contingencies
- Management described Construction Products demand as healthy overall, supported by infrastructure spending and private non-residential activity, while higher rates and housing affordability are weighing on single-family residential demand. It noted possible economic slowdown and continued attention to inflationary costs.
- Engineered Structures had $1,450.8 million of utility, wind, and related-structures backlog at quarter-end, versus $370.4 million a year earlier. Management expects a transition year in wind towers in 2023 and a multi-year volume rebound beginning in 2024; a new New Mexico facility is expected to begin production in mid-2024. The backlog is scheduled for delivery through 2028.
- Inland-barge backlog was $240.4 million, up 87% year over year, with deliveries extending into 2024. Management cited an aging fleet and strong inquiries, while noting the impact of steel prices on orders.
- Full-year 2023 capital expenditures were expected to be approximately $200–$210 million. Management stated existing cash, available liquidity, and operating cash flow should fund foreseeable operating needs and necessary capital expenditures.
- Risks include cyclicality, seasonality and weather, customer order timing, steel and other input costs, interest rates, economic conditions, and whether Arcosa realizes expected IRA benefits. The filing reported approximately $1.1 million of reasonably possible losses on claims and lawsuits and $1.5 million accrued for contingencies; management did not expect additional liability to be material. No material change in risk factors was reported.
Important facts for investors to verify
- Whether the large engineered-structures and barge backlogs convert to deliveries and cash flow on the stated schedules.
- How much future earnings depend on AMP tax credits, and how additional IRA guidance may affect their availability or accounting.
- Whether the strong nine-month profit growth persists after accounting for asset-sale gains, the holdback benefit, and other unusual items.
- Execution of the planned capital program, including the New Mexico wind-tower facility, and resulting liquidity and debt needs.
- Exposure to variable-rate borrowing following the October 2023 expiration of the interest-rate swap; the filing does not provide a clear quantified estimate of the resulting interest-cost sensitivity.