Arcosa, Inc. — Second-Quarter 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Arcosa provides infrastructure-related products and solutions across construction, energy, and transportation markets. Amounts below are in millions, except per-share data.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $498.5 | $434.1 | $986.7 | $845.0 |
| Operating profit | $47.8 | $42.3 | $92.9 | $79.6 |
| Net income | $33.3 | $31.8 | $64.9 | $59.5 |
| Diluted EPS | $0.68 | $0.65 | $1.33 | $1.21 |
| Operating margin | 9.6% | 9.7% | 9.4% | 9.4% |
- Revenue increased 14.8% in Q2 and 16.8% in the first half; operating profit rose 13.0% and 16.7%, respectively. Net income growth was more modest, partly reflecting higher interest expense and tax rates.
- Q2 SG&A was $53.9, or 10.8% of revenue, versus $46.1, or 10.6%, a year earlier. First-half SG&A was $105.7, or 10.7%, versus $86.9, or 10.3%.
- Operating cash flow was $120.3 for the first half, down from $141.2. Investing cash outflow was $350.5, including $313.9 net cash paid for acquisitions and $43.6 of capital expenditures. Financing provided $138.2.
- Cash was $148.4 at June 30, versus $240.4 at year-end 2019. Debt was $256.6, compared with $107.3 at year-end; cash less debt was approximately negative $108.2, versus net cash of approximately $133.1 at year-end.
- The $500 revolving facility had $100.0 drawn and approximately $26.0 in letters of credit, leaving $374.0 available. Arcosa reported compliance with its financial covenants. Current assets were $705.9 and current liabilities $285.9.
- Quarterly dividend declared was $0.05 per share. The company repurchased no shares under its program in Q2; first-half repurchases were $2.0.
Segment results and material changes
- Construction Products: Q2 revenue rose 28.2% to $148.2 and operating profit rose 38.9% to $24.3. First-half revenue increased 34.3% to $297.6 and operating profit 42.7% to $41.1. Cherry acquisition revenue was a major contributor; shoring demand weakened, while natural aggregates were stronger in certain markets.
- Energy Equipment: Q2 revenue increased 9.1% to $222.8, but operating profit declined 16.4% to $20.9; first-half revenue rose 7.9% to $446.0, while operating profit fell 13.9% to $45.8. Wind tower pricing pressure weighed on profit. Utility structures volumes supported revenue.
- Transportation Products: Q2 revenue increased 11.2% to $128.2 and operating profit increased 26.2% to $15.9. First-half revenue rose 15.2% to $245.2 and operating profit 44.5% to $30.2, mainly on higher barge deliveries and improved barge efficiencies. Steel components remained weak.
- Arcosa acquired Cherry for a purchase price of $296.8 in January, along with smaller Energy Equipment businesses. Cherry’s preliminary purchase-price allocation included $125.6 of goodwill; valuation work remained incomplete and certain estimates could change materially. A further $27.7 telecommunications-structures acquisition closed in July, after quarter-end.
- Backlog at June 30 was $352.2 for wind towers and utility structures, $15.5 for other Energy Equipment products, and $258.7 for inland barges. Comparable June 2019 amounts were $517.6, $45.3, and $349.7, respectively.
Outlook, risks and contingencies
- Management said the pandemic’s duration and effects remained uncertain. Plants continued operating as critical infrastructure; estimated incremental COVID-19 health and safety costs were $1.5–$2.0 for the first half. Potential impacts include weaker demand and customer capital spending, supply-chain or staffing disruption, delayed customer payments, and facility closures.
- Construction demand was better than anticipated in Q2, but the outlook remained uncertain. Energy Equipment had production visibility from backlog, although storage-tank inquiries slowed. Barge backlog supported 2020 visibility, but inquiries had weakened; steel-components demand was also declining.
- Management expected 2020 capital expenditures of $75–$85, including approximately $65 of maintenance spending, and corporate costs of $45–$50. No full-year revenue or earnings guidance is provided in the filing.
- Management believed existing cash, available credit, and operating cash flow would fund foreseeable requirements, while noting the fast-changing COVID-19 environment. Approximately $15 of federal and state tax payments were deferred into July under pandemic-related relief provisions.
- The company recorded an $8.6 liability for an interest-rate swap, reflected in accumulated other comprehensive loss. A breach-of-contract lawsuit concerning alleged utility-structure warranty claims remained pending; management said loss was not then probable and could not be reasonably estimated. Total recorded accruals for disclosed claims, including environmental matters, were $2.5.
Important facts for investors to verify
- How much reported growth and future performance depend on Cherry and other acquisitions, including final purchase-price allocations and integration results.
- Whether weaker Energy Equipment pricing, shoring demand, barge inquiries, and steel-components demand persist, and how backlog converts to revenue and cash.
- COVID-19 effects on customer demand, operations, supply chains, collections, and the company’s liquidity and covenant headroom.
- Whether projected 2020 capital spending and corporate costs remain on plan, and whether operating cash flow can support investment, debt service, and dividends.
- Developments in the T&B/ABB litigation and other environmental, warranty, and legal exposures; the filing does not provide a reasonably estimable loss for the lawsuit.