Arcosa, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; unaudited. Arcosa supplies infrastructure-related products and solutions across Construction Products, Engineered Structures, and Transportation Products in North America.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $559.1 million | $490.0 million | $1,514.6 million | $1,476.7 million |
| Operating profit | $37.5 million | $42.1 million | $91.7 million | $135.0 million |
| Net income | $23.7 million | $31.2 million | $60.4 million | $96.1 million |
| Diluted EPS | $0.49 | $0.64 | $1.23 | $1.97 |
| Operating margin | 6.7% | 8.6% | 6.1% | 9.1% |
Revenue rose 14.1% in Q3 and 2.6% year to date, but operating profit fell 10.9% and 32.1%, respectively. Higher revenue and operating costs reflected acquisitions, volumes, and pricing; lower profit primarily reflected sharply weaker Transportation Products results and acquisition-related costs. Interest expense rose to $7.3 million in Q3 from $2.3 million and to $16.0 million year to date from $8.4 million, following increased borrowing and the 2021 notes issuance.
- Cash flow: Nine-month operating cash flow was $76.8 million, down from $226.7 million. Working capital used $86.7 million, principally due to higher receivables and inventories. Investing cash outflow was $569.3 million, including $523.4 million for acquisitions and $60.8 million of capital expenditures. Financing provided $462.8 million.
- Liquidity and debt: Cash was $66.1 million at September 30, 2021, down from $95.8 million at year-end 2020. Total debt was $755.8 million, versus $254.5 million at year-end. The company had $271.8 million available on its $500 million revolving facility after borrowings and letters of credit; it reported compliance with financial covenants.
- Balance sheet: Current assets were $810.9 million and current liabilities $389.4 million. Goodwill was $932.6 million, up from $794.0 million, primarily due to acquisitions.
- Shareholder returns: The quarterly dividend was $0.05 per share. Arcosa repurchased $9.4 million of shares in the first nine months, with $40.6 million remaining under its $50 million authorization.
Segments and changes versus prior period
- Construction Products: Q3 revenue increased 54.8% to $227.4 million and operating profit increased 28.8% to $26.8 million. Nine-month revenue rose 31.6% to $585.1 million, while profit declined 2.3% to $60.5 million. Acquisitions, especially StonePoint, and stronger legacy aggregates demand drove growth; integration costs, acquired inventory fair-value step-ups, weather, and inflation weighed on profit.
- Engineered Structures: Q3 revenue rose 12.4% to $250.1 million and operating profit rose 14.0% to $23.6 million. Nine-month revenue increased 4.6% and profit 5.6%. Utility structures and storage tanks improved, partly offset by lower wind tower volumes. Results included a $7.7 million one-time revenue item from resolution of a 2019 customer dispute and a $3.9 million gain on sale of a non-operating facility.
- Transportation Products: Q3 revenue declined 32.4% to $81.6 million and operating profit fell 91.5% to $1.5 million. Nine-month revenue decreased 37.1% to $230.0 million and profit fell 85.6% to $6.9 million. Reduced barge demand and lower capacity utilization were the main pressures; steel components showed some signs of recovery.
Arcosa acquired StonePoint for $374.8 million in April and Southwest Rock for $149.9 million in August, expanding its aggregates business. StonePoint contributed $83.3 million of revenue and an operating loss of $3.7 million from acquisition through September. Purchase price allocations remained preliminary. In November, the company sold certain acquired asphalt-operation assets for approximately $19 million; the income-statement effect was not expected to be significant.
Outlook, risks, and contingencies
- Management said Construction Products demand had improved, while acknowledging ongoing uncertainty. Engineered Structures backlog was $486.7 million across utility, wind, and related structures and storage tanks, providing production visibility into 2022. Barge backlog was $130.2 million, about 63% below its level at the onset of the pandemic.
- Management expected 2021 capital expenditures of $90–$100 million, including about $65 million for maintenance and $25–$35 million for growth. Fourth-quarter corporate costs were estimated at $13–$14 million, excluding approximately $2 million of acquisition and integration costs. Management expected existing cash, available liquidity, and operating cash flow to fund requirements for the foreseeable future; no earnings guidance was provided.
- Arcosa planned to idle its Clinton, Illinois wind tower facility in Q4 due to expected lower 2022 volumes, and to complete the idling of its Madisonville, Louisiana barge facility as it adjusted capacity to demand. Near-term wind demand faced uncertainty around Production Tax Credit support and high steel prices; elevated steel and other input costs, COVID-related disruptions, weather, cyclicality, and customer demand were also risks.
- COVID-19 remained an uncertain risk to demand, supply chains, staffing, customer payments, and operations. The company estimated incremental COVID-related health and safety costs below $1 million per quarter and reported no material asset impairments observed to date.
- At September 30, ordinary claims had $1.3 million of accruals, including $1.0 million for environmental matters; reasonably possible losses for other such matters were estimated at $0.5–$0.8 million. A product-warranty contract lawsuit was revived on appeal and remanded for further proceedings. Arcosa said a loss was not considered probable and could not be reasonably estimated, so no accrual was recorded.
Key facts for investors to verify
- Whether acquisition-driven revenue growth converts into sustainable operating profit and cash flow, particularly as working capital absorbs cash.
- Integration performance and final purchase price allocations for StonePoint and Southwest Rock, including acquired asset valuations and related depreciation, depletion, and amortization.
- Transportation Products demand, backlog, plant utilization, and the cost and timing of planned capacity reductions.
- Debt levels, variable-rate borrowing exposure, covenant headroom, and available revolver liquidity following the acquisitions.
- Developments in the remanded warranty litigation and any change to the company’s loss assessment or disclosure.