Arcosa, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with the three months ended March 31, 2019 unless otherwise noted. Arcosa supplies infrastructure-related products for construction, energy, and transportation markets. Amounts are in millions except per-share data.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $488.2 | $410.9 | +18.8% |
| Operating profit | $45.1 | $37.3 | +20.9% |
| Operating margin | 9.2% | 9.1% | +0.1 percentage point |
| Income before taxes | $42.0 | $35.6 | — |
| Net income | $31.6 | $27.7 | +14.1% |
| Diluted EPS | $0.65 | $0.56 | — |
| Operating cash flow | $41.5 | $125.0 | Down $83.5 |
| Capital expenditures | $21.1 | $18.0 | — |
Revenue growth reflected Cherry’s contribution, higher Energy Equipment volumes, and increased barge deliveries. Operating profit improved, while higher interest expense ($3.3 versus $1.9) and a higher effective tax rate (24.8% versus 22.2%) tempered net-income growth. SG&A was 10.6% of revenue, compared with 9.9%.
Segment results: Construction Products revenue was $149.4 and operating profit $16.8, with growth primarily from Cherry. Energy Equipment revenue was $223.2 and operating profit $24.9; profit declined from $28.2, partly because the prior-year period included a $2.9 bad-debt recovery. Transportation Products revenue was $117.0 and operating profit $14.3, up from $8.3, largely on higher hopper and tank barge deliveries.
Cash and cash equivalents were $200.7 at March 31, 2020, down from $240.4 at year-end. Current assets were $772.0 and current liabilities $279.0. Total debt was $356.9, versus $107.3 at December 31, 2019; cash less debt was approximately $156.2. The $500.0 revolving facility had $200.0 drawn and approximately $26.0 of letters of credit, leaving $274.0 available. The company reported compliance with debt covenants. Operating cash flow was lower mainly because working-capital changes used $22.8 of cash, compared with a $71.6 source in the prior-year quarter; 2019 receivables collections were a significant comparative factor. Investing cash outflow included $309.4 for acquisitions.
Material changes and notable items
- Arcosa acquired Cherry Industries on January 6, 2020, for a purchase price of $296.8; net cash paid during the quarter was $284.1. Cherry contributed approximately $43.8 of revenue and $5.7 of operating profit from acquisition through quarter-end. Purchase accounting remained preliminary.
- The company also acquired a traffic-structures business in March for $25.3. Goodwill increased to $752.7 from $621.9, primarily because of acquisitions.
- On January 2, Arcosa amended its credit agreement, increasing the revolver to $500.0 and adding a $150.0 term loan, both maturing in January 2025. It drew an additional $100.0 on the revolver as a precaution amid COVID-19 uncertainty.
- Energy Equipment included a $1.3 facility asset impairment. Other comprehensive loss was $4.3, mainly reflecting derivative and currency translation losses.
Outlook, risks, and contingencies
- Management said its facilities continued operating as critical-infrastructure businesses, but it could not predict the pandemic’s overall effects. Risks cited include weaker demand and customer capital spending, supply-chain disruption, workforce or facility interruptions, delayed customer payments, and restrictions affecting cross-border operations.
- Market commentary was mixed: construction aggregates demand remained healthy, though trench-shoring orders softened in March; utility-structure activity remained robust, while storage-tank orders slowed; barge customers remained committed to backlog, while steel-component demand weakened.
- Backlog at March 31 was $475.6 for wind towers and utility structures, $29.0 for other Energy Equipment products, and $348.3 for inland barges. Compared with March 31, 2019, wind/utility backlog and barge backlog were lower. Most listed backlog was expected to be delivered in 2020. Wind-tower orders also face uncertainty related to scheduled expiration and phaseout of production tax credits.
- 2020 capital expenditures were forecast at $75–$85, including approximately $65 of maintenance spending and $10–$20 of growth spending. Estimated 2020 corporate costs were $45–$50. No consolidated revenue or earnings guidance was provided in the filing.
- Management believed existing cash, available liquidity, and operating cash flow would cover foreseeable operating and capital needs, while noting that pandemic-related uncertainty was evolving.
- Possible losses on ordinary claims and lawsuits were estimated at $0.8–$3.4; recorded accruals, including environmental matters, totaled $3.2. A separate Thomas & Betts/ABB warranty-related lawsuit had no accrual because management said a probable loss had not been established and a possible loss was not reasonably estimable.
Important facts for investors to verify
- Cherry’s eventual purchase-price allocation, integration, and contribution to results; reported acquisition-period results cover only the period after closing.
- Subsequent COVID-19 effects on demand, production, customer collections, and liquidity; Q1 results may not indicate full-year performance.
- Backlog conversion, especially wind/utility and barge deliveries, and the effects of changing market conditions and wind tax-credit timing.
- Debt levels, borrowing costs, covenant headroom, and liquidity after the precautionary revolver draw.
- Potential outcomes and cash exposure from the T&B/ABB litigation and other environmental or product-related claims.