UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| (Mark One) | |||||
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2023
| OR | |||||
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from _________ to _________ .
Commission File Number 1-38494
(Exact name of registrant as specified in its charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
(972 ) 942-6500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
At April 14, 2023, the number of shares of common stock outstanding was 48,436,941 .
ARCOSA, INC.
FORM 10-Q
TABLE OF CONTENTS
| Caption | Page | ||||
2
PART I
Item 1. Financial Statements
Arcosa, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (in millions) | |||||||||||
| Revenues | $ | $ | |||||||||
| Operating costs: | |||||||||||
| Cost of revenues | |||||||||||
| Selling, general, and administrative expenses | |||||||||||
| Gain on disposition of property, plant, equipment, and other assets | ( | ( | |||||||||
| Gain on sale of storage tanks business | ( | ||||||||||
| Total operating profit | |||||||||||
| Interest expense | |||||||||||
| Other, net (income) expense | ( | ||||||||||
| Income before income taxes | |||||||||||
| Provision for income taxes | |||||||||||
| Net income | $ | $ | |||||||||
| Net income per common share: | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
| Weighted average number of shares outstanding: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
| Dividends declared per common share | $ | $ | |||||||||
See accompanying Notes to Consolidated Financial Statements.
3
Arcosa, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(unaudited)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (in millions) | |||||||||||
| Net income | $ | $ | |||||||||
| Other comprehensive income (loss): | |||||||||||
| Derivative financial instruments: | |||||||||||
Unrealized gains (losses) arising during the period, net of tax expense (benefit) of $ | |||||||||||
Reclassification adjustments for (gains) losses included in net income, net of tax expense (benefit) of $ | ( | ||||||||||
| Currency translation adjustment: | |||||||||||
Unrealized gains (losses) arising during the period, net of tax expense (benefit) of $ | |||||||||||
| ( | |||||||||||
| Comprehensive income | $ | $ | |||||||||
See accompanying Notes to Consolidated Financial Statements.
4
Arcosa, Inc. and Subsidiaries
Consolidated Balance Sheets
| March 31, 2023 | December 31, 2022 | ||||||||||
| (in millions) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Receivables, net of allowance | |||||||||||
| Inventories: | |||||||||||
| Raw materials and supplies | |||||||||||
| Work in process | |||||||||||
| Finished goods | |||||||||||
| Other | |||||||||||
| Total current assets | |||||||||||
| Property, plant, and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Intangibles, net | |||||||||||
| Deferred income taxes | |||||||||||
| Other assets | |||||||||||
| $ | $ | ||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Advance billings | |||||||||||
| Current portion of long-term debt | |||||||||||
| Total current liabilities | |||||||||||
| Debt | |||||||||||
| Deferred income taxes | |||||||||||
| Other liabilities | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock – | |||||||||||
| Capital in excess of par value | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Treasury stock | ( | ||||||||||
| $ | $ | ||||||||||
See accompanying Notes to Consolidated Financial Statements.
5
Arcosa, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (in millions) | |||||||||||
| Operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation, depletion, and amortization | |||||||||||
| Stock-based compensation expense | |||||||||||
| Provision for deferred income taxes | |||||||||||
| Gains on disposition of property, plant, equipment, and other assets | ( | ( | |||||||||
| Gain on sale of storage tanks business | ( | ||||||||||
| (Increase) decrease in other assets | ( | ||||||||||
| Increase (decrease) in other liabilities | ( | ( | |||||||||
| Other | |||||||||||
| Changes in current assets and liabilities: | |||||||||||
| (Increase) decrease in receivables | ( | ( | |||||||||
| (Increase) decrease in inventories | ( | ( | |||||||||
| (Increase) decrease in other current assets | |||||||||||
| Increase (decrease) in accounts payable | |||||||||||
| Increase (decrease) in advance billings | |||||||||||
| Increase (decrease) in accrued liabilities | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Investing activities: | |||||||||||
| Proceeds from disposition of property, plant, equipment, and other assets | |||||||||||
| Proceeds from sale of storage tanks business | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Acquisitions, net of cash acquired | ( | ||||||||||
| Net cash required by investing activities | ( | ( | |||||||||
| Financing activities: | |||||||||||
| Payments to retire debt | ( | ( | |||||||||
| Dividends paid to common stockholders | ( | ( | |||||||||
| Purchase of shares to satisfy employee tax on vested stock | ( | ( | |||||||||
| Net cash required by financing activities | ( | ( | |||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
See accompanying Notes to Consolidated Financial Statements.
6
Arcosa, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(unaudited)
| Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | $ | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| (in millions, except par value) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2021 | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends on common stock | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Restricted shares, net | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2022 | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Cash dividends on common stock | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Restricted shares, net | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
7
Arcosa, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Overview and Summary of Significant Accounting Policies
Basis of Presentation
Arcosa, Inc. and its consolidated subsidiaries (“Arcosa,” the “Company,” “we,” or “our”), headquartered in Dallas, Texas, is a provider of infrastructure-related products and solutions with leading brands serving construction, engineered structures, and transportation markets in North America. Arcosa is a Delaware corporation and was incorporated in 2018 as an independent, publicly-traded company, listed on the New York Stock Exchange.
The accompanying Consolidated Financial Statements are unaudited and have been prepared from the books and records of Arcosa, Inc. and its consolidated subsidiaries. All normal and recurring adjustments necessary for a fair presentation of the financial position of the Company and the results of operations, comprehensive income/loss, and cash flows have been made in conformity with accounting principles generally accepted in the U.S. (“GAAP”). All significant intercompany accounts and transactions have been eliminated. Because of seasonal and other factors, the financial condition and results of operations for the three months ended March 31, 2023 may not be indicative of Arcosa's expected business, financial condition, and results of operations for the year ending December 31, 2023.
These interim financial statements and notes are condensed as permitted by the instructions to Form 10-Q and should be read in conjunction with the audited Consolidated Financial Statements of the Company included in its Annual Report on Form 10-K for the year ended December 31, 2022.
Revenue Recognition
Revenue is measured based on the allocation of the transaction price in a contract to satisfied performance obligations. The transaction price does not include any amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. The following is a description of principal activities from which the Company generates its revenue, separated by reportable segments. Payments for our products and services are generally due within normal commercial terms. For a further discussion regarding the Company’s reportable segments, see Note 4 Segment Information.
Construction Products
The Construction Products segment recognizes substantially all revenue when the customer has accepted the product and legal title of the product has passed to the customer.
Engineered Structures
Within the Engineered Structures segment, revenue is recognized for our wind tower and certain utility structure businesses over time as the products are manufactured using an input approach based on the costs incurred relative to the total estimated costs of production. We recognize revenue over time for these products as they are highly customized to the needs of an individual customer resulting in no alternative use to the Company if not purchased by the customer after the contract is executed. In addition, we have the right to bill the customer for our work performed to date plus at least a reasonable profit margin for work performed. As of March 31, 2023, we had a contract asset of $78.0 million related to these contracts, compared to $77.5 million as of December 31, 2022, which is included in receivables, net of allowance, within the Consolidated Balance Sheets. The increase in the contract asset is due to timing of deliveries. For all other products, revenue is recognized when the customer has accepted the product and legal title of the product has passed to the customer.
Transportation Products
The Transportation Products segment recognizes revenue when the customer has accepted the product and legal title of the product has passed to the customer.
8
Unsatisfied Performance Obligations
The following table includes estimated revenue expected to be recognized in future periods related to performance obligations that are unsatisfied or partially satisfied as of March 31, 2023 and the percentage of the outstanding performance obligations as of March 31, 2023 expected to be delivered during the remainder of 2023:
| Unsatisfied performance obligations as of March 31, 2023 | |||||||||||
| Total Amount | Percent expected to be delivered in 2023 | ||||||||||
| (in millions) | |||||||||||
| Engineered Structures: | |||||||||||
| Utility, wind, and related structures | $ | % | |||||||||
| Transportation Products: | |||||||||||
| Inland barges | $ | % | |||||||||
Income Taxes
The liability method is used to account for income taxes. Deferred income taxes represent the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation allowances reduce deferred tax assets to an amount that will more likely than not be realized.
The Company regularly evaluates the likelihood of realization of tax benefits derived from positions it has taken in various federal and state filings after consideration of all relevant facts, circumstances, and available information. For those tax positions that are deemed more likely than not to be sustained, the Company recognizes the benefit it believes is cumulatively greater than 50% likely to be realized. To the extent the Company were to prevail in matters for which accruals have been established or be required to pay amounts in excess of recorded reserves, the effective tax rate in a given financial statement period could be materially impacted.
9
Recent Accounting Pronouncements
Recently adopted accounting pronouncements
Effective as of January 1, 2023, the Company adopted Accounting Standards Update No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”, (“ASU 2021-08”), which requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The adoption of this guidance did not have a material effect on the Company's Consolidated Financial Statements.
Recently issued accounting pronouncements not adopted as of March 31, 2023
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2020-04, “Reference Rate Reform”, (“ASU 2020-04”), which provides optional guidance for contract modifications, hedging accounting, and other transactions associated with the transition from reference rates that are expected to be discontinued. ASU 2020-04 is effective for all entities upon issuance through December 31, 2024 as amended by ASU 2022-06. We continue to evaluate the impact of adoption, but do not expect the guidance to have a material impact on our Consolidated Financial Statements.
Reclassifications
Certain prior year balances have been reclassified in the Consolidated Financial Statements to conform with the 2023 presentation.
Note 2. Acquisitions and Divestitures
2023 Acquisitions
In February 2023, we completed the acquisition of certain assets and liabilities of a Phoenix, Arizona based recycled aggregates business in our Construction Products segment. The purchase price of the acquisition was not significant.
In March 2023, we completed the stock acquisition of a Houston, Texas based shoring, trench, and excavation products business in our Construction Products segment. The purchase price of the acquisition was not significant.
2022 Acquisitions
In May 2022, we completed the stock acquisition of Recycled Aggregate Materials Company, Inc. ("RAMCO"), a leading producer of recycled aggregates in the Los Angeles metropolitan area, which is included in our Construction Products segment, for a total purchase price of $77.4 million. The acquisition was funded with $80.0 million of borrowings under our revolving credit facility. The acquisition was recorded as a business combination based on a preliminary valuation of the assets acquired and liabilities assumed at their acquisition date fair value using unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities ("Level 3" inputs). The final valuation resulted in the recognition of, among others, $54.2 million of permits with an initial weighted average useful life of 20 years, $6.4 million of property, plant, and equipment, and $13.4 million of goodwill in our Construction Products segment. The remaining assets and liabilities were not significant in relation to assets and liabilities at the consolidated or segment level.
10
Divestitures
There were no
In October 2022, the Company completed the sale of its storage tank business for $275 million. Net cash proceeds received at closing were approximately $271.6 million, after transaction closing costs. The storage tanks business, historically reported within the Engineered Structures segment, is a leading manufacturer of steel pressure tanks for the storage and transportation of propane, ammonia, and other gases serving the residential, commercial, energy, and agricultural markets with operations in the U.S. and Mexico. Revenues and operating profit for the storage tanks business were $59.9 million and $10.3 million, respectively, for the three months ended March 31, 2022. An additional gain of $6.4 million was recognized during the three months ended March 31, 2023, primarily due to the resolution of certain contingencies from the sale.
Note 3. Fair Value Accounting
Assets and liabilities measured at fair value on a recurring basis are summarized below:
| Fair Value Measurement as of March 31, 2023 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
Interest rate hedge(1) | $ | $ | $ | $ | |||||||||||||||||||
| Total assets | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
Contingent consideration(2) | $ | $ | $ | $ | |||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | |||||||||||||||||||
| Fair Value Measurement as of December 31, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
Interest rate hedge(1) | |||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
Contingent consideration(2) | |||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | |||||||||||||||||||
(1) Included in other assets on the Consolidated Balance Sheets.
(2) Current portion included in accrued liabilities and non-current portion included in other liabilities on the Consolidated Balance Sheets .
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for that asset or liability in an orderly transaction between market participants on the measurement date. An entity is required to establish a fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair values are listed below:
Level 1 – This level is defined as quoted prices in active markets for identical assets or liabilities. The Company’s cash equivalents are instruments of the U.S. Treasury or highly-rated money market mutual funds.
Level 2 – This level is defined as observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Interest rate hedges are valued at exit prices obtained from each counterparty. See Note 7 Debt.
11
Note 4. Segment Information
The Company reports operating results in three principal business segments:
Construction Products. The Construction Products segment primarily produces and sells natural and recycled aggregates, specialty materials, and construction site support equipment, including trench shields and shoring products.
Engineered Structures. The Engineered Structures segment primarily manufactures and sells steel structures for infrastructure businesses, including utility structures for electricity transmission and distribution, structural wind towers, traffic structures, and telecommunication structures. These products share similar manufacturing competencies and steel sourcing requirements and can be manufactured across our North American footprint. The segment also manufactures concrete utility structures. Historically, the segment also manufactured storage and distribution tanks. In October 2022, the Company completed the divestiture of its storage tanks business. See Note 2 Acquisitions and Divestitures.
Transportation Products. The Transportation Products segment primarily manufactures and sells inland barges, fiberglass barge covers, winches, marine hardware, and steel components for railcars and other transportation and industrial equipment.
The financial information for these segments is shown in the tables below. We operate principally in North America.
| Three Months Ended March 31, | |||||||||||||||||||||||
| Revenues | Operating Profit (Loss) | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Aggregates and specialty materials | $ | $ | |||||||||||||||||||||
| Construction site support | |||||||||||||||||||||||
| Construction Products | $ | $ | |||||||||||||||||||||
| Utility, wind, and related structures | |||||||||||||||||||||||
| Storage tanks | |||||||||||||||||||||||
| Engineered Structures | |||||||||||||||||||||||
| Inland barges | |||||||||||||||||||||||
| Steel components | |||||||||||||||||||||||
| Transportation Products | |||||||||||||||||||||||
| Segment Totals before Eliminations and Corporate | |||||||||||||||||||||||
| Corporate | ( | ( | |||||||||||||||||||||
| Consolidated Total | $ | $ | $ | $ | |||||||||||||||||||
12
Note 5. Property, Plant, and Equipment
The following table summarizes the components of property, plant, and equipment as of March 31, 2023 and December 31, 2022.
| March 31, 2023 | December 31, 2022 | ||||||||||
| (in millions) | |||||||||||
| Land | $ | $ | |||||||||
| Mineral reserves | |||||||||||
| Buildings and improvements | |||||||||||
| Machinery and other | |||||||||||
| Construction in progress | |||||||||||
| Less accumulated depreciation and depletion | ( | ( | |||||||||
| $ | $ | ||||||||||
Note 6. Goodwill and Other Intangible Assets
Goodwill
| March 31, 2023 | December 31, 2022 | ||||||||||
| (in millions) | |||||||||||
| Construction Products | $ | $ | |||||||||
| Engineered Structures | |||||||||||
| Transportation Products | |||||||||||
| $ | $ | ||||||||||
The increase in Construction Products goodwill during the three months ended March 31, 2023 was due to acquisitions completed during the quarter and measurement period adjustments from the acquisition of RAMCO. See Note 2 Acquisitions and Divestitures.
Intangible Assets
Intangibles, net consisted of the following:
| March 31, 2023 | December 31, 2022 | |||||||||||||
| (in millions) | ||||||||||||||
| Intangibles with indefinite lives - Trademarks | $ | $ | ||||||||||||
| Intangibles with definite lives: | ||||||||||||||
| Customer relationships | ||||||||||||||
| Permits | ||||||||||||||
| Other | ||||||||||||||
| Less accumulated amortization | ( | ( | ||||||||||||
| Intangible assets, net | $ | $ | ||||||||||||
13
Note 7. Debt
The following table summarizes the components of debt as of March 31, 2023 and December 31, 2022:
| March 31, 2023 | December 31, 2022 | ||||||||||
| (in millions) | |||||||||||
| Term loan | $ | $ | |||||||||
| Senior notes | |||||||||||
| Finance leases (see Note 8 Leases) | |||||||||||
| Less: unamortized debt issuance costs | ( | ( | |||||||||
| Total debt | $ | $ | |||||||||
Revolving Credit Facility and Term Loan
On November 1, 2018, the Company entered into a $400.0 million unsecured revolving credit facility that was scheduled to mature in November 2023. On January 2, 2020, the Company entered into an Amended and Restated Credit Agreement to increase the revolving credit facility to $500.0 million and add a term loan facility of $150.0 million, in each case with a maturity date of January 2, 2025. The entire term loan was advanced on January 2, 2020. As of March 31, 2023, the term loan had a remaining balance of $136.8 million.
As of March 31, 2023, we had no outstanding loans borrowed under the revolving credit facility, and there were approximately $25.3 million of letters of credit issued, leaving $474.7 million available. Of the outstanding letters of credit as of March 31, 2023, $24.5 million are expected to expire in 2023, with the remainder in 2024. The majority of our letters of credit obligations support the Company’s various insurance programs and generally renew by their terms each year.
The interest rates under the revolving credit facility and term loan are variable based on LIBOR or an alternate base rate plus a margin. A commitment fee accrues on the average daily unused portion of the revolving facility. The margin for borrowing and commitment fee rate are determined based on the Company’s leverage as measured by a consolidated total indebtedness to consolidated EBITDA ratio. The margin for borrowing ranges from 1.25 % to 2.00 % and was set at LIBOR plus 1.50 % as of March 31, 2023. The commitment fee rate ranges from 0.20 % to 0.35 % and was set at 0.25 % at March 31, 2023.
The Company's revolving credit and term loan facilities require the maintenance of certain ratios related to leverage and interest coverage. As of March 31, 2023, we were in compliance with all such financial covenants. Borrowings under the credit agreement are guaranteed by certain wholly-owned subsidiaries of the Company.
The carrying value of borrowings under our revolving credit and term loan facilities approximate fair value because the interest rate adjusts to the market interest rate (Level 3 input). See Note 3 Fair Value Accounting.
As of March 31, 2023, the Company had $0.8 million of unamortized debt issuance costs related to the revolving credit facility, which are included in other assets on the Consolidated Balance Sheet.
Senior Notes
On April 6, 2021, the Company issued $400.0 million aggregate principal amount of 4.375 % senior notes (the “Notes”) that mature in April 2029. Interest on the Notes is payable semiannually in April and October. The Notes are senior unsecured obligations of the Company and are guaranteed on a senior unsecured basis by each of the Company’s domestic subsidiaries that is a guarantor under our revolving credit and term loan facilities. The terms of the indenture governing the Notes, among other things, limit the ability of the Company and each of its subsidiaries to create liens on assets, enter into sale and leaseback transactions, and consolidate, merge or transfer all or substantially all of its assets and the assets of its subsidiaries. The terms of the indenture also limit the ability of the Company’s non-guarantor subsidiaries to incur certain types of debt.
At any time prior to April 15, 2024, the Company may redeem all or a portion of the Notes at a redemption price equal to 100% of the principal amount of the Notes redeemed, plus an applicable make-whole premium and accrued and unpaid interest to the redemption date. On and after April 15, 2024, the Company may redeem all or a portion of the Notes at redemption prices set forth in the indenture, plus accrued and unpaid interest to the redemption date. If a Change of Control Triggering Event (as defined in the indenture) occurs, the Company must offer to repurchase the Notes at a price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest to the date of repurchase.
14
The estimated fair value of the Notes as of March 31, 2023 was $362.3 million based on a quoted market price in a market with little activity (Level 2 input).
In connection with the issuance of the Notes, the Company paid $6.6 million of debt issuance costs.
The remaining principal payments under existing debt agreements as of March 31, 2023 are as follows:
| 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | ||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Term loan | |||||||||||||||||||||||||||||||||||
| Senior notes | |||||||||||||||||||||||||||||||||||
Interest rate hedges
In December 2018, the Company entered into an interest rate swap instrument, effective as of January 2, 2019 and expiring in October 2023, to reduce the effect of changes in the variable interest rates associated with borrowings under the Amended and Restated Credit Agreement. The instrument carried an initial notional amount of $100 million, thereby hedging the first $100 million of borrowings. The instrument effectively fixes the LIBOR component of borrowings at a monthly rate of 2.71 %. As of March 31, 2023, the Company has recorded an asset of $1.5 million for the fair value of the instrument, all of which is recorded in accumulated other comprehensive loss. See Note 3 Fair Value Accounting.
Note 8. Leases
We have various leases primarily for office space and certain equipment. At inception, we determine if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. For leases that contain options to purchase, terminate, or extend, such options are included in the lease term when it is reasonably certain that the option will be exercised. Some of our lease arrangements contain lease components and non-lease components which are accounted for as a single lease component as we have elected the practical expedient to group lease and non-lease components for all leases.
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on information available at commencement date in determining the present value of lease payments.
Future minimum lease payments for operating and finance lease obligations as of March 31, 2023 consisted of the following:
| Operating Leases | Finance Leases | ||||||||||
| (in millions) | |||||||||||
| 2023 (remaining) | $ | $ | |||||||||
| 2024 | |||||||||||
| 2025 | |||||||||||
| 2026 | |||||||||||
| 2027 | |||||||||||
| Thereafter | |||||||||||
| Total undiscounted future minimum lease obligations | |||||||||||
| Less imputed interest | ( | ( | |||||||||
| Present value of net minimum lease obligations | $ | $ | |||||||||
15
The following table summarizes our operating and finance leases and their classification within the Consolidated Balance Sheet.
| March 31, 2023 | December 31, 2022 | ||||||||||
| (in millions) | |||||||||||
| Assets | |||||||||||
Operating - | $ | $ | |||||||||
Finance - | |||||||||||
| Total lease assets | |||||||||||
| Liabilities | |||||||||||
| Current | |||||||||||
Operating - | |||||||||||
Finance - | |||||||||||
| Non-current | |||||||||||
Operating - | |||||||||||
Finance - | |||||||||||
| Total lease liabilities | $ | $ | |||||||||
Note 9. Other, Net
Other, net (income) expense consists of the following items:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (in millions) | |||||||||||
| Interest income | $ | ( | $ | ( | |||||||
| Foreign currency exchange transactions | ( | ||||||||||
| Other | ( | ||||||||||
| Other, net (income) expense | $ | ( | $ | ||||||||
Note 10. Income Taxes
For interim income tax reporting, we estimate our annual effective tax rate and apply it to our year to date ordinary income (loss). Tax jurisdictions with a projected or year to date loss for which a tax benefit cannot be realized are excluded. The tax effects of unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are reported in the interim period in which they occur. We have open tax years from 2015 to 2022 with various significant tax jurisdictions.
On August 16, 2022, the Inflation Reduction Act of 2022 ("IRA") was enacted to reduce inflation and promote clean energy in the United States. Among other things, the IRA introduces a 15% alternative minimum tax for corporations with a three-year taxable year average annual adjusted financial statement income in excess of $1 billion and imposes a 1% excise tax on the fair market value of stock repurchases made by covered corporations after December 31, 2022. The Company has evaluated these new provisions and has concluded there is no impact for the three months ended March 31, 2023.
The IRA also provides for certain manufacturing, production, and investment tax credit incentives, including new Advanced Manufacturing Production ("AMP") tax credits for companies that domestically manufacture and sell clean energy equipment, including wind towers. For the three months ended March 31, 2023, the Company has recognized $4.3 million in AMP tax credits for wind towers produced and sold in 2023 which are included as a reduction to cost of sales on the Consolidated Statement of Operations due to the refundable nature of the credits. The credits are included in Receivables, net of allowance, on the Consolidated Balance Sheet.
16
Note 11. Employee Retirement Plans
Total employee retirement plan expense, which includes related administrative expenses, is as follows:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (in millions) | |||||||||||
| Defined contribution plans | $ | $ | |||||||||
| Multiemployer plan | |||||||||||
| $ | $ | ||||||||||
The Company contributes to a multiemployer defined benefit plan under the terms of a collective-bargaining agreement that covers certain union-represented employees at one of the facilities of Meyer Utility Structures, a subsidiary of Arcosa. The Company contributed $0.4 1.5 million.
Note 12. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss for the three months ended March 31, 2023 and 2022 are as follows:
| Currency translation adjustments | Unrealized loss on derivative financial instruments | Accumulated other comprehensive loss | ||||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Balances at December 31, 2021 | $ | ( | $ | ( | $ | ( | ||||||||||||||
| Other comprehensive income (loss), net of tax, before reclassifications | ||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax expense (benefit) of $ | ||||||||||||||||||||
| Other comprehensive income (loss) | ||||||||||||||||||||
| Balances at March 31, 2022 | $ | ( | $ | ( | $ | ( | ||||||||||||||
| Balances at December 31, 2022 | $ | ( | $ | $ | ( | |||||||||||||||
| Other comprehensive income (loss), net of tax, before reclassifications | ||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax expense (benefit) of $ | ( | ( | ||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | ||||||||||||||||||
| Balances at March 31, 2023 | $ | ( | $ | $ | ( | |||||||||||||||
17
Note 13. Stock-Based Compensation
Note 14. Earnings Per Common Share
Basic earnings per common share is computed by dividing net income remaining after allocation to participating unvested restricted shares, which includes unvested restricted shares of Arcosa stock held by employees of our former parent, Trinity Industries, Inc., by the weighted average number of basic common shares outstanding for the period. Except when the effect would be antidilutive, the calculation of diluted earnings per common share includes the weighted average net impact of nonparticipating unvested restricted shares. Total weighted average restricted shares were 1.3 million and 1.6 million shares for the three months ended March 31, 2023 and 2022, respectively.
The computation of basic and diluted earnings per share follows.
| Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||||
| Income (Loss) | Average Shares | EPS | Income (Loss) | Average Shares | EPS | ||||||||||||||||||||||||||||||
| (in millions, except per share amounts) | |||||||||||||||||||||||||||||||||||
| Net income | $ | $ | |||||||||||||||||||||||||||||||||
| Unvested restricted share participation | ( | ( | |||||||||||||||||||||||||||||||||
| Net income per common share – basic | $ | $ | |||||||||||||||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||||||||||||||
| Nonparticipating unvested restricted shares | |||||||||||||||||||||||||||||||||||
| Net income per common share – diluted | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Note 15. Contingencies
The Company is involved in claims and lawsuits incidental to our business arising from various matters including commercial disputes, alleged product defect and/or warranty claims, intellectual property matters, personal injury claims, environmental issues, employment and/or workplace-related matters, and various governmental regulations. At March 31, 2023, the range of reasonably possible losses for such matters, taking into consideration our rights in indemnity and recourse to third parties is $1.0 million to $2.4 million.
The Company evaluates its exposure to such claims and suits periodically and establishes accruals for these contingencies when probable losses can be reasonably estimated. At March 31, 2023, total accruals of $3.3 million are included in accrued liabilities in the accompanying Consolidated Balance Sheet. The Company believes any additional liability from such claims and suits would not be material to its financial position or results of operations.
Arcosa is subject to remedial orders and federal, state, local, and foreign laws and regulations relating to the environment. The Company has reserved $0.7 million as of March 31, 2023, included in our total accruals of $3.3 million discussed above, to cover our probable and estimable liabilities with respect to the investigations, assessments, and remedial responses to such matters, taking into account currently available information and our contractual rights to indemnification and recourse to third parties.
Estimates of liability arising from future proceedings, assessments, or remediation are inherently imprecise. Accordingly, there can be no assurance that we will not become involved in future litigation or other proceedings, including those related to the environment or, if we are found to be responsible or liable in any such litigation or proceeding, that such costs would not be material to the Company.
18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. Our MD&A is presented in the following sections:
•Company Overview
•Potential Impact of COVID-19 on our Business
•Market Outlook
•Executive Overview
•Results of Operations
•Liquidity and Capital Resources
•Recent Accounting Pronouncements
•Forward-Looking Statements
Our MD&A should be read in conjunction with the Consolidated Financial Statements of Arcosa, Inc. and its consolidated subsidiaries (“Arcosa,” “Company,” “we,” or “our”) and related Notes in Part I, Item 1 of this Quarterly Report on Form 10-Q and the Consolidated and Combined Financial Statements and related Notes in Item 8, “Financial Statements and Supplementary Data”, of our Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Annual Report on Form 10-K”).
Company Overview
Arcosa, headquartered in Dallas, Texas, is a provider of infrastructure-related products and solutions with leading brands serving construction, engineered structures, and transportation markets in North America. Arcosa is a Delaware corporation and was incorporated in 2018 as an independent, publicly-traded company, listed on the New York Stock Exchange.
Potential Impact of COVID-19 on our Business
Our highest priority is the health and safety of our employees and communities. We are committed to safety across our operations. Our businesses support critical infrastructure sectors and our plants have continued to operate throughout the COVID-19 pandemic. If one or more of Arcosa’s facilities become subject to governmental ordered closure, voluntary temporary closure, closure from a COVID-19 outbreak within the facility, or other COVID-19 related reason the business, liquidity and financial condition, and results of operations for Arcosa could be adversely affected. The extent to which the COVID-19 pandemic impacts our business, liquidity and financial condition, and results of operations will depend on numerous evolving factors that we may not be able to accurately predict, including the impact of new COVID-19 variants and the response to any potential reoccurrence. We strive to continuously improve our procedures, processes, and management systems regarding employee health and safety, and we do not anticipate that any enhanced health and safety protocols will have a material impact on the productivity of our plants.
The preparation of the Company's Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. At this time, we have not observed any material impairments of our assets or a significant change in the fair value of assets due to the COVID-19 pandemic. However, due to the factors discussed above, we are unable to determine or predict the overall impact the COVID-19 pandemic may have on our business, results of operations, liquidity, or capital resources.
Market Outlook
•Within our Construction Products segment, the demand environment remains healthy overall when seasonal weather conditions have been normal, supported by increased infrastructure spending and private non-residential activity. The outlook for single-family residential housing continues to be impacted by higher interest rates and home affordability, which has negatively impacted volumes. We have been successful in managing inflationary cost pressures through proactive price increases and are monitoring potential impacts on overall demand as leading economic indicators indicate an increased probability of an economic slowdown in 2023.
19
•Within our Engineered Structures segment, our backlog as of March 31, 2023 provides good production visibility for the remainder of 2023. Our customers remain committed to taking delivery of these orders. In utility structures, order and inquiry activity continues to be healthy, as customers remain focused on grid hardening and reliability initiatives. The passage of the Inflation Reduction Act ("IRA") on August 16, 2022, which included a long-term extension of the Production Tax Credit (“PTC”) for new wind farm projects and introduced new Advanced Manufacturing Production ("AMP") tax credits for companies that domestically manufacture and sell clean energy equipment in the U.S., is a significant catalyst for our wind towers business. As demonstrated by more than $1.1 billion of new orders we have received since the passage of the IRA for delivery through 2028, our wind tower business is at the beginning stages of a market recovery. A large portion of these orders will support wind energy expansion projects in the Southwest. As a result, we plan to open a new plant in New Mexico, with production at this facility expected to begin in mid-2024. We anticipate 2023 will be a transition year as new wind projects ramp up and expect a strong multi-year rebound in volumes beginning in 2024.
•Within our Transportation Products segment, our backlog for inland barges as of March 31, 2023 of $279 million is at its highest level since the first quarter of 2020. Our customers remain committed to taking delivery of these orders. Barge order levels fell sharply at the onset of the pandemic and ensuing high steel prices further negatively impacted demand. In 2022, we reduced capacity in our two active barge operating plants and completed the idling of our Louisiana facility in the fourth quarter of 2021 to further reduce our cost structure. While high steel prices have impacted order levels, the underlying fundamentals for a dry barge replacement cycle remain in place. The fleet continues to age, new builds have not kept pace with scrapping, and utilization rates are high. As a result, order inquiries have been strong and we received orders of $122 million in the first quarter of 2023, which extends our backlog into 2024. Demand for steel components, which was softening pre-COVID-19 due to a weakening North American rail transportation market, is increasing relative to 2020 and 2021 cyclical lows as the near-term outlook for the new railcar market indicates a stable level of replacement demand.
Executive Overview
Financial Operations and Highlights
•Revenues for the three months ended March 31, 2023 increased by 2.5% to $549.2 million due to higher revenues in Construction Products and Transportation Products partially offset by lower revenues in Engineered Structures due to the sale of our storage tanks business on October 3, 2022.
•Operating profit for the three months ended March 31, 2023 totaled $75.1 million, an increase of $40.4 million year-over-year. Excluding $29.0 million of asset sale gains recognized in the current quarter, operating profit increased 32.9% due to higher operating profit in Construction Products and Transportation Products, partially offset by lower operating profit in Engineered Structures due to the sale of our storage tanks business.
•Selling, general, and administrative expenses were flat for the three months ended March 31, 2023 compared to the same period in the prior year, as increased compensation costs were offset by the elimination of costs from our storage tanks business. As a percentage of revenues, selling, general, and administrative expenses was 11.4% for the three months ended March 31, 2023 compared to 11.7% for the same period in 2022.
•The effective tax rate for the three months ended March 31, 2023 was 20.3% compared to 24.1% for the same period in 2022. See Note 10 Income Taxes of the Consolidated Financial Statements.
•Net income for the three months ended March 31, 2023 was $55.7 million compared to $20.2 million for the same period in 2022.
Our Engineered Structures and Transportation Products segments operate in cyclical industries. Additionally, results in our Construction Products segment are affected by weather and seasonal fluctuations with the second and third quarters historically being the quarters with the highest revenues.
20
Unsatisfied Performance Obligations (Backlog)
As of March 31, 2023, December 31, 2022, and March 31, 2022, our unsatisfied performance obligations, or backlog, were as follows:
| March 31, 2023 | December 31, 2022 | March 31, 2022 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Engineered Structures: | |||||||||||||||||
| Utility, wind, and related structures | $ | 1,531.4 | $ | 671.3 | $ | 421.0 | |||||||||||
| Transportation Products: | |||||||||||||||||
| Inland barges | $ | 279.0 | $ | 225.1 | $ | 150.6 | |||||||||||
Approximately 29% of the unsatisfied performance obligations for utility, wind, and related structures in our Engineered Structures segment are expected to be delivered during 2023, 22% are expected to be delivered during 2024 with the remainder expected to be delivered through 2028. Approximately 68% of the unsatisfied performance obligations for inland barges in our Transportation Products segment are expected to be delivered during 2023 with the remainder expected to be delivered during 2024.
Results of Operations
Overall Summary
Revenues
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | Percent Change | |||||||||||||||
| (in millions) | |||||||||||||||||
| Construction Products | $ | 236.1 | $ | 211.5 | 11.6 | % | |||||||||||
| Engineered Structures | 207.7 | 250.5 | (17.1) | ||||||||||||||
| Transportation Products | 105.4 | 73.8 | 42.8 | ||||||||||||||
| Consolidated Total | $ | 549.2 | $ | 535.8 | 2.5 | ||||||||||||
Three Months Ended March 31, 2023 versus Three Months Ended March 31, 2022
•Revenues increased by 2.5%.
•Revenues from Construction Products increased primarily due to higher pricing across our aggregates and specialty material businesses.
•Revenues from Engineered Structures decreased due to the sale of our storage tanks business. Revenues from utility, wind, and related structures increased primarily due to increased volumes in our utility structures business.
•Revenues from Transportation Products increased primarily due to higher deliveries in both inland barge and steel components.
21
Operating Costs
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | Percent Change | |||||||||||||||
| (in millions) | |||||||||||||||||
| Construction Products | $ | 186.6 | $ | 194.8 | (4.2) | % | |||||||||||
| Engineered Structures | 177.8 | 222.2 | (20.0) | ||||||||||||||
| Transportation Products | 95.3 | 71.1 | 34.0 | ||||||||||||||
| Segment Totals before Corporate Expenses | 459.7 | 488.1 | (5.8) | ||||||||||||||
| Corporate | 14.4 | 13.0 | 10.8 | ||||||||||||||
| Consolidated Total | $ | 474.1 | $ | 501.1 | (5.4) | ||||||||||||
Depreciation, depletion, and amortization(1) | $ | 38.8 | $ | 37.8 | 2.6 | ||||||||||||
(1) Depreciation, depletion, and amortization are components of operating costs.
Three Months Ended March 31, 2023 versus Three Months Ended March 31, 2022
•Operating costs decreased by 5.4%. Netted against operating costs in the current quarter included $29.0 million of asset sale gains, primarily consisting of $21.8 million from the sale of depleted land in Construction Products and $6.4 million of additional gain recognized on the sale of the storage tanks divestiture. Excluding these gains, operating costs were about flat.
•Cost of revenues for Construction Products increased primarily due to inflationary-related cost increases, including diesel, cement, and process fuels.
•Cost of revenues for Engineered Structures decreased largely due to the elimination of costs from our storage tanks business.
•Cost of revenues for Transportation Products increased primarily due to higher volumes in inland barge and steel components.
•Depreciation, depletion, and amortization increased as a result of recent acquisitions and organic growth investments.
•Selling, general, and administrative expenses were essentially flat, as increased compensation costs were offset by the elimination of costs from our storage tanks business. As a percentage of revenues, selling, general, and administrative expenses decreased to 11.4% for the three months ended March 31, 2023, compared to 11.7% for the same period in 2022.
Operating Profit (Loss)
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | Percent Change | |||||||||||||||
| (in millions) | |||||||||||||||||
| Construction Products | $ | 49.5 | $ | 16.7 | 196.4 | % | |||||||||||
| Engineered Structures | 29.9 | 28.3 | 5.7 | ||||||||||||||
| Transportation Products | 10.1 | 2.7 | 274.1 | ||||||||||||||
| Segment Totals before Corporate Expenses | 89.5 | 47.7 | 87.6 | ||||||||||||||
| Corporate | (14.4) | (13.0) | 10.8 | ||||||||||||||
| Consolidated Total | $ | 75.1 | $ | 34.7 | 116.4 | ||||||||||||
Three Months Ended March 31, 2023 versus Three Months Ended March 31, 2022
•Operating profit increased by 116.4%.
•Operating profit in Construction Products increased due to the land sale gain as well as higher pricing.
•Excluding the impact of the storage tanks business in both periods, operating profit in Engineered Structures increased due to higher volumes in utility structures and recognition of the AMP tax credits in wind towers.
•Operating profit in Transportation Products increased driven by higher volumes and improved margins in both inland barge and steel components.
For further discussion of revenues, costs, and the operating results of individual segments, see Segment Discussion below.
22
Other Income and Expense
Other, net (income) expense consists of the following items:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (in millions) | |||||||||||
| Interest income | $ | (1.2) | $ | (0.1) | |||||||
| Foreign currency exchange transactions | (0.5) | 1.0 | |||||||||
| Other | (0.2) | — | |||||||||
| Other, net (income) expense | $ | (1.9) | $ | 0.9 | |||||||
Income Taxes
The provision for income taxes results in effective tax rates that differ from the statutory rates. The Company's effective tax rate for the three months ended March 31, 2023 was 20.3% compared to 24.1% for the same period in 2022. The decrease in the tax rate for the three months ended March 31, 2023 is primarily due to AMP tax credits and reduced foreign taxes, partially offset by increased state income taxes.
Our effective tax rate reflects the Company's estimate for its state income tax expense, excess tax benefits related to equity compensation, and the impact of foreign tax benefits. See Note 10 of the Notes to Consolidated Financial Statements for further discussion of income taxes.
On August 16, 2022, the IRA was enacted to reduce inflation and promote clean energy in the United States. Among other things, the IRA introduces a 15% alternative minimum tax for corporations with a three-year taxable year average annual adjusted financial statement income in excess of $1 billion and imposes a 1% excise tax on the fair market value of stock repurchases made by covered corporations after December 31, 2022. The IRA also provides for certain manufacturing, production, and investment tax credit incentives, including new AMP tax credits for companies that domestically manufacture and sell clean energy equipment, including wind towers. Certain provisions of the IRA, including the AMP tax credits for wind towers, remain subject to the issuance of additional guidance and clarification. We have considered the applicable current IRA tax law changes in our tax provision for the three months ended March 31, 2023, and continue to evaluate the impact of these tax law changes on future periods.
Segment Discussion
Construction Products
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | Percent | |||||||||||||||
| ($ in millions) | Change | ||||||||||||||||
| Revenues: | |||||||||||||||||
| Aggregates and specialty materials | $ | 211.0 | $ | 187.9 | 12.3 | % | |||||||||||
| Construction site support | 25.1 | 23.6 | 6.4 | ||||||||||||||
| Total revenues | 236.1 | 211.5 | 11.6 | ||||||||||||||
| Operating costs: | |||||||||||||||||
| Cost of revenues | 182.9 | 169.9 | 7.7 | ||||||||||||||
| Selling, general, and administrative expenses | 26.3 | 26.0 | 1.2 | ||||||||||||||
| Gain on disposition of property, plant, equipment, and other assets | (22.6) | (1.1) | |||||||||||||||
| Operating profit | $ | 49.5 | $ | 16.7 | 196.4 | ||||||||||||
Depreciation, depletion, and amortization(1) | $ | 26.9 | $ | 24.6 | 9.3 | ||||||||||||
(1) Depreciation, depletion, and amortization are components of operating profit.
23
Three Months Ended March 31, 2023 versus Three Months Ended March 31, 2022
•Revenues increased 11.6% primarily driven by strong pricing gains across our product lines in our aggregates and specialty materials businesses, partially offset by overall lower volumes. Revenues from our trench shoring business increased 6.4% driven by higher volumes and the acquisition of a small, Houston-based shoring, trench, and excavation products business in the quarter.
•Cost of revenues increased 7.7% primarily due to inflationary-related cost increases, including diesel, cement, and process fuels. As a percent of revenues, cost of revenues decreased to 77.5% in the current period compared to 80.3% in the prior period.
•Selling, general, and administrative costs were substantially unchanged. Selling, general, and administrative costs decreased as a percentage of revenues to 11.1% compared to 12.3% in the prior period.
•Operating profit increased significantly, partially due to the gain recognized on the disposition of depleted land. Excluding this gain, operating profit increased 72.4% driven by increased pricing, despite lower volumes.
•Depreciation, depletion, and amortization expense increased primarily due to recent acquisitions and organic growth investments.
Engineered Structures
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | Percent | |||||||||||||||
| ($ in millions) | Change | ||||||||||||||||
| Revenues: | |||||||||||||||||
| Utility, wind, and related structures | $ | 207.7 | $ | 190.6 | 9.0 | % | |||||||||||
| Storage tanks | — | 59.9 | (100.0) | ||||||||||||||
| Total revenues | 207.7 | 250.5 | (17.1) | ||||||||||||||
| Operating costs: | |||||||||||||||||
| Cost of revenues | 168.4 | 204.2 | (17.5) | ||||||||||||||
| Selling, general, and administrative expenses | 15.8 | 18.1 | (12.7) | ||||||||||||||
| Gain on sale of storage tank business | (6.4) | — | |||||||||||||||
| Gain on disposition of property, plant, equipment, and other assets | — | (0.1) | |||||||||||||||
| Operating profit | $ | 29.9 | $ | 28.3 | 5.7 | ||||||||||||
Depreciation and amortization(1) | $ | 6.6 | $ | 8.0 | (17.5) | ||||||||||||
(1) Depreciation and amortization are components of operating profit.
Three Months Ended March 31, 2023 versus Three Months Ended March 31, 2022
•Revenues decreased 17.1% due to the decline in revenue from our storage tanks business, which was sold in October 2022. Revenue from utility, wind, and related structures increased 9.0% primarily due to increased volumes in our utility structures business.
•Cost of revenues decreased 17.5% due to the elimination of costs from our storage tanks business. Cost of revenues from utility, wind, and related structures increased in line with the increase in revenue, partially offset by AMP tax credits recognized in our wind towers business.
•Selling, general, and administrative costs decreased due to the elimination of costs from our storage tanks business. Selling, general, and administrative costs from utility, wind, and related structures increased primarily due to increased compensation costs.
•The storage tanks business contributed $6.4 million in operating profit related to the additional gain on sale recorded in the first quarter compared to $10.3 million of operating profit in the prior year, resulting in a $3.9 million decrease year-over-year related to the divestiture. Excluding the impact from the divestiture in both periods, operating profit increased primarily due to higher volumes in our utility structures business and $3.2 million of net benefit recognized from AMP tax credits in our wind towers business.
24
•Operating profit increased due to the gain recognized on the sale of our storage tanks business. Excluding this gain, operating profit decreased due to the elimination of our storage tanks business, which contributed $10.3 million to operating profit in the prior year. Operating profit from utility, wind, and related structures increased due to higher revenues in our utility structures business and $3.2 million of net benefit recognized from AMP tax credits in our wind towers business.
Unsatisfied Performance Obligations (Backlog)
As of March 31, 2023, the backlog for utility, wind, and related structures was $1,531.4 million, compared to $671.3 million and $421.0 million as of December 31, 2022 and March 31, 2022, respectively. Approximately 29% of these unsatisfied performance obligations are expected to be delivered during the year ending December 31, 2023, approximately 22% during the year ended December 31, 2024, with the remainder expected to be delivered through 2028.
Transportation Products
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | Percent | |||||||||||||||
| ($ in millions) | Change | ||||||||||||||||
| Revenues: | |||||||||||||||||
| Inland barges | $ | 68.1 | $ | 47.0 | 44.9 | % | |||||||||||
| Steel components | 37.3 | 26.8 | 39.2 | ||||||||||||||
| Total revenues | 105.4 | 73.8 | 42.8 | ||||||||||||||
| Operating costs: | |||||||||||||||||
| Cost of revenues | 89.3 | 65.6 | 36.1 | ||||||||||||||
| Selling, general, and administrative expenses | 6.0 | 5.5 | 9.1 | ||||||||||||||
| Operating profit | $ | 10.1 | $ | 2.7 | 274.1 | ||||||||||||
Depreciation and amortization (1) | $ | 4.0 | $ | 3.9 | 2.6 | ||||||||||||
(1) Depreciation and amortization are components of operating profit.
Three Months Ended March 31, 2023 versus Three Months Ended March 31, 2022
•Revenues increased 42.8% driven by an increase in deliveries of inland barges and steel components.
•Cost of revenues increased 36.1% due to higher volumes of inland barges and steel components.
•Selling, general, and administrative costs increased 9.1% but decreased as a percentage of revenues to 5.7% compared to 7.5% in the prior period.
•Operating profit increased significantly, outpacing the increase in revenues, driven by improved operating leverage associated with the increased volumes and improved margins across both businesses.
Unsatisfied Performance Obligations (Backlog)
As of March 31, 2023, the backlog for inland barges was $279.0 million, compared to $225.1 million and $150.6 million as of December 31, 2022 and March 31, 2022, respectively. Approximately 68% of unsatisfied performance obligations for inland barges are expected to be delivered during the year ending December 31, 2023 with the remainder expected to be delivered in 2024.
25
Corporate
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | Percent | |||||||||||||||
| (in millions) | Change | ||||||||||||||||
| Corporate overhead costs | $ | 14.4 | $ | 13.0 | 10.8 | % | |||||||||||
Three Months Ended March 31, 2023 versus Three Months Ended March 31, 2022
•Corporate overhead costs increased 10.8% primarily due to increased compensation-related expenses. The increase was partially offset by lower acquisition and divestiture-related expenses of $0.6 million, compared to $0.9 million for the same period in 2022.
Liquidity and Capital Resources
Arcosa’s primary liquidity requirement consists of funding our business operations, including capital expenditures, working capital investment, and disciplined acquisitions. Our primary sources of liquidity include cash flow from operations, our existing cash balance, availability under the revolving credit facility, and, as necessary, the issuance of additional long-term debt or equity. To the extent we have available liquidity, we may also consider undertaking new capital investment projects, executing additional strategic acquisitions, returning capital to stockholders, or funding other general corporate purposes.
Cash Flows
The following table summarizes our cash flows from operating, investing, and financing activities for the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (in millions) | |||||||||||
| Total cash provided by (required by): | |||||||||||
| Operating activities | $ | 27.3 | $ | 24.5 | |||||||
| Investing activities | (34.1) | (5.3) | |||||||||
| Financing activities | (4.4) | (3.5) | |||||||||
| Net increase (decrease) in cash and cash equivalents | $ | (11.2) | $ | 15.7 | |||||||
Operating Activities. Net cash provided by operating activities for the three months ended March 31, 2023 was $27.3 million compared to $24.5 million for the three months ended March 31, 2022.
•The changes in current assets and liabilities resulted in a net use of cash of $55.4 million for the three months ended March 31, 2023 compared to a net use of cash of $38.1 million for the three months ended March 31, 2022. The current year activity was primarily driven by increased receivables and inventories due to increased volumes and higher steel prices, partially offset by increases in accounts payable and advanced billings.
Investing Activities. Net cash required by investing activities for the three months ended March 31, 2023 was $34.1 million compared to $5.3 million for the three months ended March 31, 2022.
•Capital expenditures for the three months ended March 31, 2023 were $44.4 million compared to $25.9 million for the same period last year. Full-year capital expenditures are expected to be approximately $185 to $210 million in 2023.
•Proceeds from the sale of property, plant, and equipment and other assets totaled $23.9 million for the three months ended March 31, 2023, compared to $20.6 million for the same period in 2022.
•Cash paid for acquisitions, net of cash acquired, was $15.6 million for the three months ended March 31, 2023 compared to no activity for the same period in 2022. Proceeds from the sale of the storage tanks business were $2.0 million during the three months ended March 31, 2023 and related to the resolution of certain contingencies from the sale that closed in October 2022. There was no divestiture activity for the three months ended March 31, 2022.
Financing Activities. Net cash required by financing activities during the three months ended March 31, 2023 was $4.4 million compared to net cash required by financing activities of $3.5 million for the same period in 2022.
26
Other Investing and Financing Activities
Revolving Credit Facility and Senior Notes
On January 2, 2020, the Company entered into an Amended and Restated Credit Agreement to increase the revolving credit facility to $500.0 million and added a term loan facility of $150.0 million, in each case with a maturity date of January 2, 2025. The entire term loan was advanced on January 2, 2020. As of March 31, 2023, the term loan had a remaining balance of $136.8 million.
As of March 31, 2023, we had no outstanding loans borrowed under the revolving credit facility and there were approximately $25.3 million of letters of credit issued, leaving $474.7 million available for borrowing. Of the outstanding letters of credit as of March 31, 2023, $24.5 million are expected to expire in 2023, with the remainder in 2024. The majority of our letters of credit obligations support the Company’s various insurance programs and generally renew by their terms each year.
The interest rates under the revolving credit facility and term loan are variable based on LIBOR or an alternate base rate plus a margin. A commitment fee accrues on the average daily unused portion of the revolving facility. The margin for borrowing and commitment fee rate are determined based on Arcosa’s leverage as measured by a consolidated total indebtedness to consolidated EBITDA ratio. The margin for borrowing ranges from 1.25% to 2.00% and was set at LIBOR plus 1.50% as of March 31, 2023. The commitment fee rate ranges from 0.20% to 0.35% and was set at 0.25% as of March 31, 2023.
The Company's revolving credit and term loan facilities require the maintenance of certain ratios related to leverage and interest coverage. As of March 31, 2023, we were in compliance with all such financial covenants. Borrowings under the credit agreement are guaranteed by certain wholly-owned subsidiaries of the Company.
On April 6, 2021, the Company issued $400.0 million aggregate principal amount of 4.375% senior notes (the “Notes”) that mature in April 2029. Interest on the Notes is payable semiannually in April and October of each year. The Notes are senior unsecured obligations of the Company and are guaranteed on a senior unsecured basis by each of the Company’s domestic subsidiaries that is a guarantor under our revolving credit and term loan facilities.
We believe, based on our current business plans, that our existing cash, available liquidity, and cash flow from operations will be sufficient to fund necessary capital expenditures and operating cash requirements for the foreseeable future.
Dividends and Repurchase Program
In March 2023, the Company declared a quarterly cash dividend of $0.05 per share that was paid on April 28, 2023.
In December 2022, the Company’s Board of Directors authorized a new $50 million share repurchase program effective January 1, 2023 through December 31, 2024 to replace a program of the same amount that expired on December 31, 2022. For the three months ended March 31, 2023, the Company did not repurchase any shares, leaving the full amount of the $50.0 million authorization available as of March 31, 2023. See Note 1 of the Notes to the Consolidated Financial Statements.
Derivative Instruments
In December 2018, the Company entered into an interest rate swap instrument, effective as of January 2, 2019 and expiring in October 2023, to reduce the effect of changes in the variable interest rates associated with borrowings under the Amended and Restated Credit Agreement. The instrument carried an initial notional amount of $100.0 million, thereby hedging the first $100.0 million of borrowings. The instrument effectively fixes the LIBOR component of the borrowings at a monthly rate of 2.71%. As of March 31, 2023, the Company has recorded an asset of $1.5 million for the fair value of the instrument, all of which is recorded in accumulated other comprehensive income. See Note 3 and Note 7 of the Notes to the Consolidated Financial Statements.
Recent Accounting Pronouncements
See Note 1 of the Notes to the Consolidated Financial Statements for information about recent accounting pronouncements.
27
Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements contained herein that are not historical facts are forward-looking statements and involve risks and uncertainties. These forward-looking statements include expectations, beliefs, plans, objectives, future financial performances, estimates, projections, goals, and forecasts. Arcosa uses the words “anticipates,” “assumes,” “believes,” “estimates,” “expects,” “intends,” “forecasts,” “may,” “will,” “should,” “plans,” and similar expressions to identify these forward-looking statements. Potential factors, which could cause our actual results of operations to differ materially from those in the forward-looking statements include, among others:
•the impact of the COVID-19 pandemic on our sales, operations, supply chain, employees, and financial condition;
•market conditions and customer demand for our business products and services;
•the cyclical nature of the industries in which we compete;
•variations in weather in areas where our construction products are sold, used, or installed;
•naturally occurring events and other events and disasters causing disruption to our manufacturing, product deliveries, and production capacity, thereby giving rise to an increase in expenses, loss of revenue, and property losses;
•competition and other competitive factors;
•our ability to identify, consummate, or integrate acquisitions of new businesses or products, or divest any business;
•the timing of introduction of new products;
•the timing and delivery of customer orders or a breach of customer contracts;
•the credit worthiness of customers and their access to capital;
•product price changes;
•changes in mix of products sold;
•the costs incurred to align manufacturing capacity with demand and the extent of its utilization;
•the operating leverage and efficiencies that can be achieved by our manufacturing businesses;
•availability and costs of steel, component parts, supplies, and other raw materials;
•changing technologies;
•surcharges and other fees added to fixed pricing agreements for steel, component parts, supplies and other raw materials;
•increased costs due to increased inflation;
•interest rates and capital costs;
•counter-party risks for financial instruments;
•long-term funding of our operations;
•taxes;
•the stability of the governments and political and business conditions in certain foreign countries, particularly Mexico;
•changes in import and export quotas and regulations;
•business conditions in emerging economies;
•costs and results of litigation;
•changes in accounting standards or inaccurate estimates or assumptions in the application of accounting policies;
•legal, regulatory, and environmental issues, including compliance of our products with mandated specifications, standards, or testing criteria and obligations to remove and replace our products following installation or to recall our products and install different products manufactured by us or our competitors;
•actions by the executive and legislative branches of the U.S. government relative to federal government budgeting, taxation policies, government expenditures, U.S. borrowing/debt ceiling limits, and trade policies, including tariffs, and border closures;
•the inability to sufficiently protect our intellectual property rights;
•our ability to mitigate against cybersecurity incidents, including ransomware, malware, phishing emails, and other electronic security threats;
•the improper use of social and other digital media to disseminate false, misleading, and/or unreliable or inaccurate information about the Company or demonstrate actions that negatively reflect on the Company;
•if the Company's ESG efforts are not favorably received by stockholders;
•if the Company does not realize some or all of the benefits expected from certain provisions of the IRA, including the AMP tax credits for wind towers, which remain subject to the issuance of additional guidance and clarification;
28
•if the distribution of shares of Arcosa resulting from the separation of Arcosa from Trinity Industries, Inc. in November 2018 (the “Separation”), together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, the Company's stockholders at the time of the distribution and the Company could be subject to significant tax liability; and
•if the Separation does not comply with state fraudulent conveyance laws and legal dividend requirements.
Any forward-looking statement speaks only as of the date on which such statement is made. Arcosa undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made. For a discussion of risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see Item 1A, “Risk Factors” in our 2022 Annual Report on Form 10-K and future Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There has been no material change in our market risks since December 31, 2022 as set forth in our 2022 Annual Report on Form 10-K. See Note 9 of the Notes to Consolidated Financial Statements for the impact of foreign exchange rate fluctuations for the three months ended March 31, 2023.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure that it is able to collect and record the information it is required to disclose in the reports it files with the Securities and Exchange Commission (“SEC”), and to process, summarize, and disclose this information within the time periods specified in the rules of the SEC. The Company’s Chief Executive and Chief Financial Officers are responsible for establishing and maintaining these procedures and, as required by the rules of the SEC, evaluating their effectiveness. Based on their evaluation of the Company’s disclosure controls and procedures that took place as of the end of the period covered by this report, the Chief Executive and Chief Financial Officers believe that these procedures are effective to 1) ensure that the Company is able to collect, process, and disclose the information it is required to disclose in the reports it files with the SEC within the required time periods and 2) accumulate and communicate this information to the Company’s management, including its Chief Executive and Chief Financial Officers, to allow timely decisions regarding this disclosure.
Changes in Internal Control over Financial Reporting
During the period covered by this report, there have been no changes in the Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
29
PART II
Item 1. Legal Proceedings
See Note 15 of the Consolidated Financial Statements regarding legal proceedings.
Item 1A. Risk Factors
There have been no material changes in the Company's risk factors from those set forth in our 2022 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
This table provides information with respect to purchases by the Company of shares of its common stock during the quarter ended March 31, 2023:
| Period | Number of Shares Purchased (1) | Average Price Paid per Share (1) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2) | ||||||||||||||||||||||
| January 1, 2023 through January 31, 2023 | 750 | $ | 57.55 | — | $ | 50,000,000 | ||||||||||||||||||||
| February 1, 2023 through February 28, 2023 | 613 | $ | 58.11 | — | $ | 50,000,000 | ||||||||||||||||||||
| March 1, 2023 through March 31, 2023 | — | $ | — | — | $ | 50,000,000 | ||||||||||||||||||||
| Total | 1,363 | $ | 57.80 | — | $ | 50,000,000 | ||||||||||||||||||||
(1) These columns include the following transactions during the three months ended March 31, 2023: (i) the surrender to the Company of 1,363 shares of common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees and (ii) the purchase of no shares of common stock on the open market as part of the stock repurchase program.
(2) In December 2022, the Company’s Board of Directors authorized a new $50 million share repurchase program effective January 1, 2023 through December 31, 2024 to replace a program of the same amount that expired on December 31, 2022.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this Form 10-Q.
Item 5. Other Information
None.
30
Item 6. Exhibits
| NO. | DESCRIPTION | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 4.1 | ||||||||
| 4.2 | ||||||||
| 10.1 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 95 | ||||||||
| 101.INS | Inline XBRL Instance Document (filed electronically herewith). | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document (filed electronically herewith). | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed electronically herewith). | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document (filed electronically herewith). | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document (filed electronically herewith). | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document (filed electronically herewith). | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Arcosa, Inc. | ||||||||
| (Registrant) | ||||||||
| April 28, 2023 | By: | /s/ Gail M. Peck | ||||||
| Gail M. Peck | ||||||||
| Chief Financial Officer | ||||||||
32