Arcosa, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; balance sheet compared with December 31, 2019. Arcosa supplies infrastructure-related products and solutions in construction, energy, and transportation markets.
Financial performance
- Q3 revenue: $490.0 million, up 10.1% from $445.0 million. Nine-month revenue: $1,476.7 million, up 14.5% from $1,290.0 million.
- Q3 operating profit: $42.1 million versus $42.8 million; nine-month operating profit: $135.0 million versus $122.4 million. Consolidated operating margin was approximately 8.6% in Q3 versus 9.6% a year earlier, and 9.1% for the nine months versus 9.5%.
- Net income: $31.2 million in Q3 versus $32.7 million; $96.1 million for the nine months versus $92.2 million. Diluted EPS was $0.64 and $1.97, respectively, versus $0.67 and $1.89.
- Cash flow: Nine-month operating cash flow was $226.7 million versus $219.0 million. Capital expenditures were $56.9 million; acquisition spending was $361.7 million. Cash declined $51.4 million to $189.0 million.
- Liquidity and debt: Current assets were $740.6 million and current liabilities $312.2 million at September 30. Debt was $254.6 million, up from $107.3 million at year-end, including $100.0 million drawn on the revolver and a $150.0 million term loan. The $500.0 million revolver had $373.9 million available after outstanding loans and letters of credit. Arcosa was compliant with financial covenants.
- Costs and taxes: Q3 SG&A increased to $57.6 million from $45.5 million; nine-month SG&A was $163.3 million versus $132.4 million. The effective tax rate was 22.6% for Q3 and 24.6% for the nine months, versus 22.0% and 22.1%.
Material changes and segment trends
- Construction Products: Q3 revenue rose 26.7% to $146.9 million and operating profit rose 26.1% to $20.8 million, primarily reflecting the Cherry aggregates acquisition and stronger aggregates volumes. Nine-month revenue increased 31.7% and operating profit 36.6%.
- Energy Equipment: Q3 revenue increased 5.9% to $222.6 million, but operating profit fell 22.2% to $20.7 million; margin declined to 9.3% from 12.7%. Lower efficiencies in wind towers and COVID-related utility-structure challenges weighed on profit. Nine-month operating profit fell 16.7%.
- Transportation Products: Q3 revenue was essentially flat at $120.7 million, while operating profit increased 57.1% to $17.6 million, driven by barge efficiencies and higher hopper deliveries. Nine-month revenue rose 9.7% and operating profit 48.9%; lower steel-component deliveries and pricing partly offset barge growth.
- Cherry, acquired in January for a purchase price of $296.8 million, contributed $41.7 million of Q3 revenue and $6.9 million of operating profit, and $130.4 million and $20.7 million, respectively, for the nine months. Other 2020 acquisitions included traffic, telecom, concrete-pole, and aggregates businesses. Arcosa acquired Strata Materials for $87.0 million in October, after quarter-end.
- Backlog declined year over year: wind towers and utility structures were $429.3 million versus $563.6 million; inland barges were $177.5 million versus $363.8 million. Arcosa subsequently received approximately $32 million of barge orders for 2021 delivery.
Outlook, risks, and notable items
- Management said construction demand had been more resilient than anticipated, though specialty materials and shoring remained below pre-pandemic levels. Energy Equipment backlog supported production visibility through year-end, with improved 2021 visibility; utility-structure inquiries remained robust. Barge demand and inquiries were affected by the economic slowdown, and Arcosa was reducing capacity for anticipated lower 2021 production. Steel-components demand also remained weak.
- Management expected approximately $80 million of 2020 capital expenditures, including about $65 million for maintenance and $15 million for growth, and approximately $55 million of full-year corporate costs, including Q3 legal costs and acquisition-related expenses. It stated current cash, liquidity, and operating cash flow should cover foreseeable needs; no earnings guidance was provided.
- COVID-19 impacts remained uncertain, including possible changes in demand, customer capital spending and payment, supply-chain availability, staffing, and operating restrictions. Arcosa estimated $3.0–$4.0 million of incremental COVID-related costs for the nine months and reported no material asset impairments observed to date.
- Q3 SG&A included a non-recurring $2.5 million increase in legal expenses; acquisition transaction and integration costs also increased. The company paid approximately $15 million of previously deferred income taxes during Q3 and had deferred $6.2 million of payroll-related taxes at September 30.
- A $7.9 million interest-rate-hedge liability was recorded in accumulated other comprehensive loss. The T&B warranty-related lawsuit was dismissed in July, but the plaintiff appealed in August; Arcosa said a possible loss was not reasonably estimable and recorded no accrual. Total contingency accruals, including environmental matters, were $2.4 million.
Investor verification points
- Assess how much reported growth and earnings reflect Cherry and other acquisitions versus underlying demand, and review the final Cherry purchase-price allocation.
- Track Energy Equipment margins and operating efficiency, and compare backlog conversion and new orders with the year-earlier period.
- Monitor barge demand, 2021 capacity adjustments, steel-components weakness, and the effect of COVID-19 on customer activity and cash collection.
- Review debt, revolver availability, covenant compliance, capital spending, and the status of the interest-rate hedge.
- Follow the T&B appeal, environmental obligations, and the completion and funding of the post-quarter Strata Materials acquisition.