Arcosa, Inc. annual report, FY2019

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Arcosa, Inc. — FY 2019 Form 10-K

Reporting period: Year ended December 31, 2019. This is an annual filing, not a standalone Q4 filing; it also reports unaudited fourth-quarter results. Arcosa supplies infrastructure-related products across construction, energy equipment, and transportation markets. The company became independent from Trinity Industries on November 1, 2018, so pre-separation results include allocated parent-company costs and may not be directly comparable to standalone results.

Financial performance and position

  • Revenue: $1,736.9 million, up 18.9% from $1,460.4 million in 2018. Construction Products revenue rose 50.4% to $439.7 million, largely reflecting the ACG acquisition; Energy Equipment rose 7.2% to $836.6 million; Transportation Products rose 19.0% to $465.7 million.
  • Profit: Operating profit was $152.9 million, up 61.1% from $94.9 million. Operating margin was 8.8%, compared with 6.5% in 2018. Net income was $113.3 million versus $75.7 million; diluted EPS was $2.32 versus $1.54. Net margin was approximately 6.5%, compared with 5.2%. The effective tax rate increased to 22.8% from 20.3%.
  • Segment operating margins: Construction Products 12.0% (2018: 17.2%); Energy Equipment 12.0% (3.7%); Transportation Products 10.0% (12.4%).
  • Fourth quarter: Revenue was $446.9 million, operating profit $30.5 million, and net income $21.1 million; diluted EPS was $0.43.
  • Cash flow: Operating cash flow was $358.8 million, compared with $118.5 million in 2018. Capital expenditures were $85.4 million; operating cash flow less capital expenditures was $273.4 million. Cash increased $141.0 million to $240.4 million. Management attributed much of the cash-flow increase to earnings and working-capital movements, including lower receivables and higher advance billings.
  • Debt and liquidity: Year-end debt was $107.3 million, including $100.0 million drawn on the revolver and $7.3 million of finance leases; cash exceeded debt by $133.1 million. The $400 million revolver had $257.5 million available at year-end, after $42.5 million of letters of credit. Current assets were $757.2 million and current liabilities $284.0 million. The company reported compliance with its credit covenants.
  • Capital returns: Dividends declared were $0.20 per share. The company repurchased 361,442 shares for $11.0 million during 2019.

Material changes versus 2018

  • Revenue growth reflected a full-year contribution from ACG Materials, acquired in December 2018, higher wind-tower volumes and utility-structure pricing, and higher tank-barge volumes. These factors limit direct comparability with 2018.
  • Operating profit improved significantly in Energy Equipment, including the absence of the prior-year $23.2 million impairment charge on businesses subsequently divested, along with higher volumes and pricing. Construction Products revenue grew, but its margin contracted with the acquired business mix and lower legacy aggregate selling prices. Transportation operating profit declined despite higher revenue, due to lower steel-component volumes and pricing and barge-facility start-up costs.
  • SG&A rose 16.6% to $179.5 million, reflecting acquired costs and higher standalone public-company costs; as a share of revenue it decreased to 10.3% from 10.5%.
  • Operating cash flow rose, while investing cash outflow narrowed to $109.4 million from $364.5 million, principally because acquisition spending was lower than in 2018. Capital expenditures increased to $85.4 million from $44.8 million.

Outlook, commentary, risks, and unusual items

  • Outlook and backlog: The filing provides no numerical company-wide earnings or revenue guidance. At December 31, 2019, backlog was $596.8 million for wind towers and utility structures, $36.2 million for other Energy Equipment products, and $346.9 million for inland barges. Management expected 86% of the wind-tower and utility-structure backlog and all other listed backlog to be delivered in 2020; the remainder of the former was expected in 2021.
  • Market commentary: Management said North American new railcar demand had softened and expected the steel-components decline to continue into 2020 unless industry backlog recovered. Wind-tower orders face uncertainty as renewable-energy production tax credit eligibility transitions and phases down. Construction activity is seasonal and exposed to weather and project timing.
  • Acquisition and financing after year-end: On January 6, 2020, Arcosa acquired Cherry Industries for approximately $298 million, expanding its Houston-area natural and recycled aggregates presence. The purchase was funded with cash and advances under a new $150 million five-year term loan. On January 2, the company amended its credit agreement, increasing the revolver to $500 million and adding the term loan; the term loan was advanced in connection with the acquisition.
  • Concentration and operating risks: GE accounted for 18.2% of 2019 consolidated revenue. Key risks include cyclical end markets, steel and other input costs, customer concentration, Mexico operations and trade policy, weather and supply-chain interruptions, and environmental, safety, warranty, and litigation exposures.
  • Contingencies: The company reported $3.6 million of accruals for claims and contingencies, including $1.4 million for environmental matters; the stated range of reasonably possible losses was $1.1 million to $4.6 million. A breach-of-contract suit by Thomas & Betts concerning utility-structure warranty responsibility remained pending; Arcosa recorded no accrual because it said a loss was not probable and a possible loss was not reasonably estimable.
  • Other notable matters: A $100 million interest-rate swap hedged the first $100 million of revolver borrowings; its year-end fair-value liability was $4.3 million. Goodwill was $621.9 million, or 27% of assets; the 2019 impairment test found no impairment. The auditor’s critical audit matter was goodwill valuation. The financial-statement and internal-control audit opinions were unqualified, and the auditor and management reported effective internal control over financial reporting.

Investor verification checklist

  1. Separate organic growth from acquired growth, particularly ACG’s contribution, and assess the effect of product mix and pricing on Construction Products margins.
  2. Evaluate whether 2019 operating cash flow is repeatable: working-capital changes provided a net $132.6 million source of cash.
  3. Review Cherry’s integration, purchase accounting, financing impact, and performance in the concentrated Houston market.
  4. Monitor Energy Equipment backlog conversion, GE concentration, wind tax-credit changes, and steel-components demand in 2020.
  5. Track debt and covenant headroom after the amended credit facilities and acquisition, along with interest-rate exposure and the swap.
  6. Follow the T&B litigation and environmental matters, and assess the sensitivity of goodwill valuations to forecast assumptions.