Arcosa, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Arcosa operates in Construction Products, Energy Equipment, and Transportation Products. It became an independent public company on November 1, 2018; 2018 comparative results are combined carve-out results and may not reflect standalone costs.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $445.0 million | $378.6 million | $1,290.0 million | $1,086.0 million |
| Operating profit | $42.8 million | $6.4 million | $122.4 million | $68.2 million |
| Operating margin | 9.6% | 1.7% | 9.5% | 6.3% |
| Net income | $32.7 million | $3.2 million | $92.2 million | $48.0 million |
| Diluted EPS | $0.67 | $0.07 | $1.89 | $0.98 |
Revenue growth was driven principally by the ACG Materials acquisition, higher Energy Equipment volumes and pricing, and increased tank barge deliveries. Q3 and nine-month operating profit rose 568.8% and 79.5%, respectively; comparisons benefit significantly from the $23.2 million impairment charge recorded in Q3 2018 for businesses later divested. The 2019 effective tax rates were 22.0% for Q3 and 22.1% year to date, versus 51.5% and 27.5% in 2018.
- Segment trends: Q3 revenue was $115.9 million in Construction Products (+59.6%), $210.2 million in Energy Equipment (+5.9%), and $120.6 million in Transportation Products (+11.2%). Operating profit was $16.5 million, $26.6 million, and $11.2 million, respectively. Construction Products’ margin declined to 14.2% from 21.1%, reflecting ACG-related product mix; Transportation Products’ margin fell to 9.3% from 12.4%, including lower steel-component pricing.
- Cash flow: Nine-month operating cash flow was $219.0 million, versus $118.5 million. Investing cash outflow was $87.4 million, including $61.0 million of capital expenditures and $31.1 million for acquisitions. Financing cash outflow was $103.5 million, including $81.0 million in debt repayments, $11.0 million of share repurchases, and $7.4 million of dividends. Cash increased $28.1 million to $127.5 million.
- Balance sheet and liquidity: At September 30, cash was $127.5 million; total debt was $107.5 million, including $100.0 million drawn on the revolver and $7.5 million of finance leases. The $400 million revolving facility had $261.3 million available after $38.7 million of letters of credit; Arcosa was in compliance with its financial covenants. Total assets were $2,218.0 million and stockholders’ equity was $1,765.6 million.
- Capital returns: Arcosa declared a $0.05-per-share quarterly dividend. The $50 million repurchase authorization had $36.0 million remaining at quarter-end.
Changes, outlook, and risks
- Construction Products growth reflects ACG, acquired in December 2018, as well as legacy business volumes. ACG purchase accounting remains preliminary; adjustments, particularly to depletable land and deferred taxes, could be material to the allocation.
- Energy Equipment benefited from higher wind tower and utility-structure volumes/pricing and the absence of losses and impairment associated with divested businesses. Wind tower and utility-structure backlog was $563.6 million, down from $700.3 million a year earlier. Management noted uncertainty in future orders as production tax credit incentives phase out.
- Transportation Products’ inland barge backlog increased to $363.8 million from $210.4 million a year earlier. A reopened barge facility began deliveries in Q3, with $3.3 million of year-to-date startup costs. Management said weaker North American railcar demand could persist into 2020 absent a recovery in industry backlog.
- Management estimated 2019 capital expenditures of $80–$85 million, including about $60 million maintenance spending and $20–$25 million growth spending, and full-year corporate costs of approximately $50 million. No consolidated earnings or revenue guidance is stated in the supplied filing text.
- General risks include cyclical end markets, weather-related construction demand, raw-material availability and costs, customer order timing, and market and pricing changes. The filing reports no material change in risk factors from the 2018 Form 10-K.
- Arcosa is defending a breach-of-contract and warranty-related lawsuit brought by Thomas & Betts/ABB. The company said a loss was not considered probable and could not be reasonably estimated; no accrual was recorded. Across other claims, reasonably possible losses were estimated at $1.1–$12.3 million, with $4.8 million accrued, including $0.9 million for environmental matters.
Important facts for investors to verify
- How much of reported growth and margin improvement reflects acquisitions, the 2018 impairment/divestitures, and underlying comparable operations.
- Whether the lower Energy Equipment backlog and production tax credit transition affect future wind-related orders, pricing, and margins.
- Whether rail-component weakness and barge-facility startup costs affect Transportation Products profitability and cash generation.
- Final ACG purchase-price allocation, integration performance, and the adequacy of controls coverage; management’s controls assessment excluded ACG.
- Progress and potential exposure in the ABB litigation, alongside the company’s disclosed contingency estimates.
- Delivery timing and conversion to cash of the disclosed backlog, and execution of capital-spending and corporate-cost estimates.