Arcosa, Inc. and Subsidiaries
Arcosa, Inc. and Subsidiaries
Note 1. Overview and Summary of Significant Accounting Policies
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 and combined financial statements of the Company included in its Annual Report on Form 10-K for the year ended December 31, 2018.
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.
Within the Energy Equipment Group, revenue is recognized for our wind tower, certain utility structure, and certain storage tank product lines 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, and 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 June 30, 2019,2020, we had a contract asset of $54.3$23.9 million related to these contracts, compared to $44.0$50.8 million at December 31, 2018,2019, which is included in receivables, net of allowance, onwithin the Consolidated Balance Sheet.Sheets. 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.
The Transportation Products Group recognizes revenue when the customer has accepted the product and legal title of the product has passed to the customer.
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 June 30, 20192020 and the percentage of the outstanding performance obligations as of June 30, 20192020 expected to be delivered during the remainder of 2019:2020:
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.
The Company considers all highly liquid debt instruments to be cash and cash equivalents if purchased with a maturity of three months or less. Financial instruments that potentially subject the Company to a concentration of credit risk are primarily cash investments and receivables. The Company currently places its cash investments primarily in bank deposits and highly-rated money market funds, and its investment policy limits the amount of credit exposure to any one commercial issuer. We seek to limit concentrations of credit risk with respect to receivables with control procedures that monitor the credit worthiness of customers, together with the large number of customers in the Company's customer base and their dispersion across different industries and geographic areas. As receivables are generally unsecured, the Company maintains an allowance for doubtful accounts based upon the expected collectibility of all receivables.credit losses. Receivable balances determined to be uncollectible are charged against the allowance. To accelerate the conversion to cash, the Company may sell a portion of its trade receivables to a third party. The Company has no continuing involvement or recourse related to these receivables once they are sold, and the impact of these transactions recognized in the Company's Consolidated Statements of Operations for the three and six months ended June 30, 20192020 was not significant. The carrying values of cash, receivables, and accounts payable are considered to be representative of their respective fair values.
The Company may, from time to time, use derivative instruments to mitigate the impact of changes in interest rates, commodity prices, or changes in foreign currency exchange rates. For derivative instruments designated as hedges, the Company formally documents the relationship between the derivative instrument and the hedged item, as well as the risk management objective and strategy for the use of the derivative instrument. This documentation includes linking the derivative to specific assets or liabilities on the balance sheet, commitments, or forecasted transactions. At the time a derivative instrument is entered into, and at least quarterly thereafter, the Company assesses whether the derivative instrument is effective in offsetting the changes in fair value or cash flows of the hedged item. Any change in the fair value of the hedged instrument is recorded in accumulated other comprehensive loss (“AOCL”) as a separate component of stockholders' equity and reclassified into earnings in the period during which the hedged transaction affects earnings. The Company monitors its derivative positions and the credit ratings of its counterparties and does not anticipate losses due to counterparties' non-performance.
Effective as of January 1, 2019, the Company adopted Accounting Standards Update No. 2016-02, “Leases”, (“ASU 2016-02”) which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The Company elected to use the optional transition method that allows the Company to apply the provisions of the standard at the effective date without adjusting the comparative prior periods. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard which allowed us to carry forward the historical lease classification. The cumulative effect of adopting the standard on the opening balance of retained earnings was not significant.
The primary impact of adopting the standard was the recognition of a right-of-use asset and corresponding lease liability for our operating leases included in other assets and other liabilities, respectively, on the Consolidated Balance Sheet. See Note 8 Leases for further discussion.
The Company has implemented processes and a lease accounting system to ensure adequate internal controls were in place to assess our contracts and enable proper accounting and reporting of financial information upon adoption.
In June 2019, we completed the acquisition of certain assets and liabilities of an inland barge components business within our Transportation Products Group. We also completed the acquisition of certain assets and liabilities of a construction aggregates business in our Construction Products Group. The total purchase price for the businesses acquired was $29.8$27.6 million, a portion of which includes estimated royalties to be paid to the seller of the construction aggregates business over the next 10 years. The acquisitions were recorded as business combinations based on preliminary valuations ofwith the assets acquired and liabilities assumed recorded at their acquisition date fair value using level three inputs, defined as unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets.inputs. The valuation resulted in the recognition of $12.1$10.4 million of goodwill in our Transportation Products Group and no$1.6 million of goodwill in our Construction Products Group. Such assets and liabilities were not significant in relation to assets and liabilities at the consolidated or segment level.
Note 3. Fair Value Accounting
(1) Included in other liabilities 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.
Level 3 – This level is defined as unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Contingent consideration relates to estimated future payments owed to the sellers of businesses previously acquired. We estimate the fair value of the contingent consideration using a discounted cash flow model. The fair value is sensitive to changes in the forecast of sales and changes in discount rates and is reassessed quarterly based on assumptions used in our latest projections.
Note 4. Segment Information
The Company reports operating results in three3 principal business segments:
Construction Products. The Construction Products segment produces and sells construction aggregates including natural aggregates and specialty materials and manufactures and sells construction site support equipment including trench shields and shoring products and services for infrastructure-related projects.
Energy Equipment. The Energy Equipment segment manufactures and sells products for energy-related businesses, including structural wind towers, steel utility structures for electricity transmission and distribution, traffic structures, telecommunication structures, and storage and distribution tanks.
Transportation Products. The Transportation Products segment manufactures and sells products for the inland waterway and rail transportation industries including barges, and barge-related products, axles, and steel components for railcars and other transportation and industrial equipment.couplers.
The financial information for these segments is shown in the tables below. We operate principally in North America.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | |
| Revenues | | | | Operating Profit (Loss) | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) | | | | | | |
Construction aggregates | $ | 132.1 | | | $ | 93.2 | | | | | |
Other | 16.1 | | | 22.4 | | | | | |
Construction Products Group | 148.2 | | | 115.6 | | | $ | 24.3 | | | $ | 17.5 | |
| | | | | | | |
Wind towers and utility structures | 176.9 | | | 151.0 | | | | | |
Other | 45.9 | | | 53.3 | | | | | |
Energy Equipment Group | 222.8 | | | 204.3 | | | 20.9 | | | 25.0 | |
| | | | | | | |
Inland barges | 107.0 | | | 66.1 | | | | | |
Steel components | 21.2 | | | 49.2 | | | | | |
Transportation Products Group | 128.2 | | | 115.3 | | | 15.9 | | | 12.6 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Segment Totals before Eliminations and Corporate | 499.2 | | | 435.2 | | | 61.1 | | | 55.1 | |
Corporate | — | | | — | | | (13.3) | | | (12.8) | |
Eliminations | (0.7) | | | (1.1) | | | — | | | — | |
Consolidated Total | $ | 498.5 | | | $ | 434.1 | | | $ | 47.8 | | | $ | 42.3 | |
| | | | | | | |
| Six Months Ended June 30, | | | | | | |
| Revenues | | | | Operating Profit (Loss) | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) | | | | | | |
Construction aggregates | $ | 264.2 | | | $ | 181.6 | | | | | |
Other | 33.4 | | | 40.0 | | | | | |
Construction Products Group | 297.6 | | | 221.6 | | | $ | 41.1 | | | $ | 28.8 | |
| | | | | | | |
Wind towers and utility structures | 353.3 | | | 309.6 | | | | | |
Other | 92.7 | | | 103.8 | | | | | |
Energy Equipment Group | 446.0 | | | 413.4 | | | 45.8 | | | 53.2 | |
| | | | | | | |
Inland barges | 196.0 | | | 115.5 | | | | | |
Steel components | 49.2 | | | 97.3 | | | | | |
Transportation Products Group | 245.2 | | | 212.8 | | | 30.2 | | | 20.9 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Segment Totals before Eliminations and Corporate | 988.8 | | | 847.8 | | | 117.1 | | | 102.9 | |
Corporate | — | | | — | | | (24.2) | | | (23.3) | |
Eliminations | (2.1) | | | (2.8) | | | — | | | — | |
Consolidated Total | $ | 986.7 | | | $ | 845.0 | | | $ | 92.9 | | | $ | 79.6 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| Revenues | | Operating Profit (Loss) |
| 2019 | | 2018 | | 2019 | | 2018 |
| (in millions) |
Construction aggregates | $ | 93.2 |
| | $ | 61.1 |
| | | | |
Other | 22.4 |
| | 22.8 |
| | | | |
Construction Products Group | 115.6 |
| | 83.9 |
| | $ | 17.5 |
| | $ | 17.6 |
|
| | | | | | | |
Wind towers and utility structures | 151.0 |
| | 133.0 |
| | | | |
Other | 53.3 |
| | 45.4 |
| | | | |
Energy Equipment Group | 204.3 |
| | 178.4 |
| | 25.0 |
| | 8.2 |
|
| | | | | | | |
Inland barges | 66.1 |
| | 42.9 |
| | | | |
Steel components | 49.2 |
| | 48.6 |
| | | | |
Transportation Products Group | 115.3 |
| | 91.5 |
| | 12.6 |
| | 12.7 |
|
| | | | | | | |
Segment Totals before Eliminations and Corporate | 435.2 |
| | 353.8 |
| | 55.1 |
| | 38.5 |
|
Corporate | — |
| | — |
| | (12.8 | ) | | (7.9 | ) |
Eliminations | (1.1 | ) | | (0.8 | ) | | — |
| | — |
|
Consolidated and Combined Total | $ | 434.1 |
| | $ | 353.0 |
| | $ | 42.3 |
| | $ | 30.6 |
|
| | | | | | | |
| Six Months Ended June 30, |
| Revenues | | Operating Profit (Loss) |
| 2019 | | 2018 | | 2019 | | 2018 |
| (in millions) |
Construction aggregates | $ | 181.6 |
| | $ | 113.7 |
| | | | |
Other | 40.0 |
| | 40.4 |
| | | | |
Construction Products Group | 221.6 |
| | 154.1 |
| | $ | 28.8 |
| | $ | 30.0 |
|
| | | | | | | |
Wind towers and utility structures | 309.6 |
| | 280.5 |
| | | | |
Other | 103.8 |
| | 94.2 |
| | | | |
Energy Equipment Group | 413.4 |
| | 374.7 |
| | 53.2 |
| | 25.7 |
|
| | | | | | | |
Inland barges | 115.5 |
| | 73.7 |
| | | | |
Steel components | 97.3 |
| | 107.1 |
| | | | |
Transportation Products Group | 212.8 |
| | 180.8 |
| | 20.9 |
| | 21.7 |
|
| | | | | | | |
Segment Totals before Eliminations and Corporate | 847.8 |
| | 709.6 |
| | 102.9 |
| | 77.4 |
|
Corporate | — |
| | — |
| | (23.3 | ) | | (15.6 | ) |
Eliminations | (2.8 | ) | | (2.2 | ) | | — |
| | — |
|
Consolidated and Combined Total | $ | 845.0 |
| | $ | 707.4 |
| | $ | 79.6 |
| | $ | 61.8 |
|
Note 5. Property, Plant, and Equipment
The following table summarizes the components of property, plant, and equipment as of June 30, 20192020 and December 31, 2018.2019. | | | June 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 |
| (in millions) | | (in millions) | |
Land(1) | $ | 332.5 |
| | $ | 316.5 |
| Land(1) | $ | 369.4 | | | $ | 331.4 | |
Buildings and improvements | 273.6 |
| | 267.5 |
| Buildings and improvements | 299.0 | | | 280.5 | |
Machinery and other | 736.4 |
| | 715.9 |
| Machinery and other | 822.7 | | | 755.7 | |
Construction in progress | 34.7 |
| | 28.8 |
| Construction in progress | 35.9 | | | 38.6 | |
| 1,377.2 |
| | 1,328.7 |
| | 1,527.0 | | | 1,406.2 | |
Less accumulated depreciation and depletion | (562.9 | ) | | (525.7 | ) | Less accumulated depreciation and depletion | (634.3) | | | (590.0) | |
| $ | 814.3 |
| | $ | 803.0 |
| | $ | 892.7 | | | $ | 816.2 | |
(1) Includes depletable land of $209.3$231.7 million as of June 30, 20192020 and $201.9$211.0 million as of December 31, 2018.2019.
Note 6. Goodwill
Goodwill by segment is as follows:
| | | | | | | | June 30, 2020 | | December 31, 2019 |
| June 30, 2019 | | December 31, 2018 | |
| (in millions) | | (in millions) | |
Construction Products Group | $ | 175.8 |
| | $ | 171.7 |
| Construction Products Group | $ | 293.9 | | | $ | 166.2 | |
Energy Equipment Group | 416.9 |
| | 416.9 |
| Energy Equipment Group | 427.1 | | | 416.9 | |
Transportation Products Group | 38.7 |
| | 26.6 |
| Transportation Products Group | 37.0 | | | 38.8 | |
| $ | 631.4 |
| | $ | 615.2 |
| | $ | 758.0 | | | $ | 621.9 | |
The increase in the Construction Products Group goodwill during the six months ended June 30, 20192020 is primarily due to the acquisition of Cherry. The increase in the Energy Equipment Group goodwill during the six months ended June 30, 2020 is due to recently completed acquisitions. The decrease in Transportation Products Group is due to a refinement of the purchase price allocation for ACG. The increase in the Transportation Products Group goodwill during the six months ended June 30, 2019 is due to anof a recent acquisition. See Note 2 Acquisitions and Divestitures.
Note 7. Debt
The following table summarizes the components of debt as of June 30, 20192020 and December 31, 2018:2019:
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
| (in millions) | | |
Revolving credit facility | $ | 100.0 | | | $ | 100.0 | |
Term loan | 150.0 | | | — | |
Finance leases | 6.9 | | | 7.3 | |
| 256.9 | | | 107.3 | |
Less: unamortized debt issuance costs | (0.3) | | | — | |
Total debt | $ | 256.6 | | | $ | 107.3 | |
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| (in millions) |
Revolving credit facility | $ | 100.0 |
| | $ | 180.0 |
|
Finance leases | 7.8 |
| | 5.5 |
|
Total debt | $ | 107.8 |
| | $ | 185.5 |
|
On November 1, 2018, the Company entered into a $400.0 million unsecured revolving credit facility that matureswas 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 added a term loan facility of $150.0 million, in each case with a maturity date of January 2, 2025.
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 that isfor borrowing and commitment fee rate are determined based on Arcosa’s leverage as measured by a consolidated total indebtedness to consolidated EBITDA ratio, which is currentlyratio. The margin for borrowing ranges from 1.25% to 2.00% and was set at LIBOR plus 1.25%. A1.50% as of June 30, 2020. The commitment fee accrues onrate ranges from 0.20% to 0.35% and was set at 0.25% as of June 30, 2020.
In March 2020, as a precautionary measure, the average daily unused portion of theCompany borrowed $100.0 million under its revolving credit facility atto increase our cash position and preserve financial flexibility considering the current rate of 0.20%uncertainty resulting from the COVID-19 pandemic. The Company subsequently repaid the $100.0 million during the three months ended June 30, 2020.
As of June 30, 2019,2020, we had $100.0 million of outstanding loans borrowed under the facility, and $46.2there were approximately $26.0 million of letters of credit issued, under the facility, leaving $253.8$374.0 million available. Of the outstanding letters of credit as of June 30, 2019, $29.12020, $25.4 million are expected to expire in 2019,2020, with the remainder in 2020.2021. The majority of our letterletters of credit obligations support the Company’s various insurance programs and warranty claims and generally renew by their terms each year.
The entire term loan was advanced on January 2, 2020 in connection with the closing of the acquisition of Cherry. See Note 2 Acquisitions and Divestitures.
The Company's revolving credit facility requiresand term loan facilities require the maintenance of certain ratios related to leverage and interest coverage. As of June 30, 2019,2020, we were in compliance with all such financial covenants. Borrowings under the credit facilityagreement are guaranteed by certain wholly-owned subsidiaries of the Company.
The carrying value of borrowings under our revolving credit facility approximatesand 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 June 30, 2019,2020, the Company had $1.3$1.9 million of unamortized debt issuance costs related to the revolving credit facility, which are included in other assets on the Consolidated Balance Sheet.
The remaining principal payments under our revolving credit facilityexisting debt agreements as of June 30, 20192020 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter |
| (in millions) |
Revolving credit facility | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 100.0 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter |
| (in millions) | | | | | | | | | | |
Revolving credit facility | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 100.0 | |
Term loan | 0.9 | | | 4.7 | | | 7.5 | | | 8.5 | | | 8.4 | | | 120.0 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Interest rate hedges
In December 2018, the Company entered into an interest rate swap instrument, effective as of January 2, 2019 and expiring in 2023, to reduce the effect of changes in the variable interest rates associated with borrowings under the revolving credit facility. The instrument carried an initial notional amount of $100.0$100 million, thereby hedging the first $100.0$100 million of borrowings under the credit facility. The instrument effectively fixes the LIBOR component of the credit facility borrowings at a monthly rate of 2.71%. As of June 30, 2019,2020, the Company has recorded a liability of $4.6$8.6 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 the Company'sour 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.
Operating Leases
The following table presents information about the amount, timing, and uncertainty of cash flows arising from the Company's operating leases as of June 30, 2019.2020.
| | | | | | | | |
| June 30, 2020 | | | |
| (in millions) | | | |
Maturity of Lease Liabilities | | | | |
2020 (remaining) | $ | 3.1 | | | | |
2021 | 4.2 | | | | |
2022 | 2.8 | | | | |
2023 | 2.1 | | | | |
2024 | 1.8 | | | | |
Thereafter | 7.3 | | | | |
Total undiscounted operating lease payments | 21.3 | | | | |
Less imputed interest | (3.3) | | | | |
Present value of operating lease liabilities | $ | 18.0 | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
|
| | | |
| June 30, 2019 |
| (in millions) |
Maturity of Lease Liabilities | |
2019 (remaining) | $ | 3.7 |
|
2020 | 6.1 |
|
2021 | 3.8 |
|
2022 | 2.4 |
|
2023 | 1.9 |
|
Thereafter | 7.6 |
|
Total undiscounted operating lease payments | 25.5 |
|
Less imputed interest | (3.7 | ) |
Present value of operating lease liabilities | $ | 21.8 |
|
| |
Balance Sheet Classification | |
Other assets | $ | 18.4 |
|
| |
Accrued liabilities | $ | 6.1 |
|
Other liabilities | 15.7 |
|
Total operating lease liabilities | $ | 21.8 |
|
| |
Other Information | |
Weighted average remaining lease term | 5.8 years |
|
Weighted average discount rate | 4.8 | % |
Operating lease costs were $2.0 million and $4.0 million during the three and six months ended June 30, 2019, respectively. Costs related to variable lease rates or leases with terms less than twelve months were not significant. | | | | | | | | | | | |
Balance Sheet Classification | June 30, 2020 | | December 31, 2019 |
| (in millions) | | |
Other assets | $ | 14.5 | | | $ | 15.6 | |
| | | |
Accrued liabilities | $ | 4.7 | | | $ | 5.5 | |
Other liabilities | 13.3 | | | 13.5 | |
Total operating lease liabilities | $ | 18.0 | | | $ | 19.0 | |
Cash paid for amounts included in the measurement of operating lease liabilities was $1.8 million and $3.8 million during the three and six months ended June 30, 2019, respectively, and is included in operating cash flows. The additional right-of-use assets recognized as non-cash asset additions that resulted from new operating lease liabilities during the three and six months ended June 30, 2019 were not significant.
Finance Leases
Finance leases are included in property, plant, and equipment, net and debt on the consolidated balance sheets. The associated amortization expense and interest expense are included in depreciation and interest expense, respectively, on the consolidated income statements. These leases are not material to the consolidated financial statements as of June 30, 2019.2020.
Note 9. Other, Net
Other, net (income) expense consists of the following items:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) | | | | | | |
Interest income | $ | (0.1) | | | $ | (0.4) | | | $ | (0.3) | | | $ | (0.7) | |
Foreign currency exchange transactions | 0.2 | | | 0.5 | | | 0.2 | | | 1.0 | |
Other | (0.2) | | | (0.2) | | | (0.2) | | | (0.6) | |
Other, net (income) expense | $ | (0.1) | | | $ | (0.1) | | | $ | (0.3) | | | $ | (0.3) | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (in millions) |
Interest income | $ | (0.4 | ) | | $ | — |
| | $ | (0.7 | ) | | $ | — |
|
Foreign currency exchange transactions | 0.5 |
| | 1.2 |
| | 1.0 |
| | 2.2 |
|
Other | (0.2 | ) | | — |
| | (0.6 | ) | | — |
|
Other, net (income) expense | $ | (0.1 | ) | | $ | 1.2 |
| | $ | (0.3 | ) | | $ | 2.2 |
|
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 20132014 to 20182019 with various significant tax jurisdictions.
For the three and six months ended June 30, 2020, the effective tax rate of 26.2% and 25.5%, respectively, was higher than the U.S. federal statutory rate of 21.0% due primarily to state taxes, tax effects of foreign currency translation, and nondeductible compensation expenses in the U.S. and Mexico. For the three and six months ended June 30, 2019, the effective tax rate of 22.1% and 22.1%, respectively, was higher than the U.S. federal statutory tax rate of 21.0% due primarily to state taxes partially offset by foreign tax benefits and excess tax benefits related to equity compensation. For
In response to the three and six months ended June 30, 2018, the effective tax rate of 23.1% and 24.8%, respectively, was higher thanCOVID-19 pandemic, on March 27, 2020 the U.S. Congress passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which includes certain tax relief and benefits that may impact the Company. In light of the recent nature of these developments, the Company is currently evaluating the impact of the various provisions of the CARES Act on its income tax provision. Approximately $15 million of federal statutoryand state income tax ratepayments were deferred from the first half of 21.0% due primarily tothe year into July 2020, following passage of the CARES Act and similar state taxes and foreign taxes partially offset by excess tax benefits related to equity compensation.provisions.
Note 11. Employee Retirement Plans
Total employee retirement plan expense, which includes related administrative expenses, was $2.6 million and $5.3 million for the three and six months ended June 30, 2019, respectively. Total employee retirement plan expense was $2.6 million and $5.1 million for the three and six months ended June 30, 2018, respectively. Prior to the Separation, these costs were funded through intercompany transactions with Trinity.is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) | | | | | | |
Defined contribution plans | $ | 2.7 | | | $ | 2.2 | | | $ | 5.3 | | | $ | 4.4 | |
Multiemployer plan | 0.5 | | | 0.4 | | | 0.9 | | | 0.9 | |
| $ | 3.2 | | | $ | 2.6 | | | $ | 6.2 | | | $ | 5.3 | |
The Company participates incontributes to a multiemployer defined benefit plan under the terms of a collective-bargaining agreement that covers certain union-represented employees.employees at one of the facilities of Meyer Utility Structures, LLC, a subsidiary of Arcosa. The Company contributed $0.4 million and $0.8 million to the multiemployer plan for the three and six months ended June 30, 2020, respectively. The Company contributed $0.4 million and $0.9 million to the multiemployer plan for the three and six months ended June 30, 2019, respectively. The Company contributed $0.5 million and $1.1 million to the multiemployer plan for the three and six months ended June 30, 2018, respectively. Total contributions to the multiemployer plan for 20192020 are expected to be approximately $1.9$1.7 million.
In connection with the acquisition of ACG Materials in December 2018, the Company assumed the assets and liabilities related to a defined benefit pension plan. Employer contributions under this plan for 20192020 are not expected to be significant.
Note 12. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss for the six months ended June 30, 20192020 and 20182019 are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Currency translation adjustments | | Unrealized loss on derivative financial instruments | | Accumulated Other Comprehensive Loss |
| | (in millions) | | | | |
Balances at December 31, 2018 | | $ | (16.8) | | | $ | (0.9) | | | $ | (17.7) | |
Other comprehensive income (loss), net of tax, before reclassifications | | 0.4 | | | (2.8) | | | (2.4) | |
Amounts reclassified from accumulated other comprehensive loss, net of tax expense (benefit) of $0.0, $0.0, and $0.0 | | — | | | 0.1 | | | 0.1 | |
Other comprehensive income (loss) | | 0.4 | | | (2.7) | | | (2.3) | |
Balances at June 30, 2019 | | $ | (16.4) | | | $ | (3.6) | | | $ | (20.0) | |
| | | | | | |
Balances at December 31, 2019 | | $ | (16.3) | | | $ | (3.4) | | | $ | (19.7) | |
Other comprehensive income (loss), net of tax, before reclassifications | | (0.7) | | | (3.9) | | | (4.6) | |
Amounts reclassified from accumulated other comprehensive loss, net of tax expense (benefit) of $0.0, ($0.2) and ($0.2) | | — | | | 0.6 | | | 0.6 | |
Other comprehensive income (loss) | | (0.7) | | | (3.3) | | | (4.0) | |
Balances at June 30, 2020 | | $ | (17.0) | | | $ | (6.7) | | | $ | (23.7) | |
|
| | | | | | | | | | | | |
| | Currency translation adjustments | | Unrealized loss on derivative financial instruments | | Accumulated Other Comprehensive Loss |
| | (in millions) |
Balances at December 31, 2017 | | $ | (19.8 | ) | | $ | — |
| | $ | (19.8 | ) |
Other comprehensive income (loss), net of tax, before reclassifications | | 0.5 |
| | — |
| | 0.5 |
|
Amounts reclassified from accumulated other comprehensive loss, net of tax benefit of $0.0, $0.0, and $0.0 | | — |
| | — |
| | — |
|
Other comprehensive income (loss) | | 0.5 |
| | — |
| | 0.5 |
|
Balances at June 30, 2018 | | $ | (19.3 | ) | | $ | — |
| | $ | (19.3 | ) |
| | | | | | |
Balances at December 31, 2018 | | $ | (16.8 | ) | | $ | (0.9 | ) | | $ | (17.7 | ) |
Other comprehensive income (loss), net of tax, before reclassifications | | 0.4 |
| | (2.8 | ) | | (2.4 | ) |
Amounts reclassified from accumulated other comprehensive loss, net of tax benefit of $0.0, $0.0 and $0.0 | | — |
| | 0.1 |
| | 0.1 |
|
Other comprehensive income (loss) | | 0.4 |
| | (2.7 | ) | | (2.3 | ) |
Balances at June 30, 2019 | | $ | (16.4 | ) | | $ | (3.6 | ) | | $ | (20.0 | ) |
Note 13. Stock-Based Compensation
Stock-based compensation totaled approximately $5.1 million and $8.8 million for the three and six months ended June 30, 2020, respectively. Stock-based compensation totaled approximately $3.7 million and $7.1 million for the three and six months ended June 30, 2019, respectively. Stock-based compensation totaled approximately $2.6 million and $4.8 million for the three and six months ended June 30, 2018, respectively.
For periods prior to the Separation, Arcosa's Combined Financial Statements reflect compensation expense for stock-based plans associated with the portion
Note 14. Earnings Per Common Share
Basic earnings per common share is computed by dividing net income remaining after allocation to unvested restricted shares, which includes unvested restricted shares of Arcosa stock held by employees of the Former Parent, 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. For periods prior to the Separation, the denominator for basic and diluted net income per share was calculated using the 48.8Total weighted average restricted shares were 1.6 million shares of common stock outstanding immediately followingfor the Separation.three and six months ended June 30, 2020, respectively. Total weighted average restricted shares were 1.7 million shares for the three and six months ended June 30, 2019, respectively. There were no weighted average restricted shares prior to the Separation.
The computation of basic and diluted earnings per share follows.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | | | | | Three Months Ended June 30, 2019 | | | | |
| Income (Loss) | | Average Shares | | EPS | | Income (Loss) | | Average Shares | | EPS |
| (in millions, except per share amounts) | | | | | | | | | | |
Net income | $ | 33.3 | | | | | | | $ | 31.8 | | | | | |
Unvested restricted share participation | (0.3) | | | | | | | (0.3) | | | | | |
Net income per common share – basic | 33.0 | | | 47.9 | | | $ | 0.69 | | | 31.5 | | | 47.8 | | | $ | 0.66 | |
Effect of dilutive securities: | | | | | | | | | | | |
Nonparticipating unvested restricted shares | — | | | 0.5 | | | | | — | | | 0.5 | | | |
Net income per common share – diluted | $ | 33.0 | | | 48.4 | | | $ | 0.68 | | | $ | 31.5 | | | 48.3 | | | $ | 0.65 | |
| | | | | | | | | | | |
| Six Months Ended June 30, 2020 | | | | | | Six Months Ended June 30, 2019 | | | | |
| Income (Loss) | | Average Shares | | EPS | | Income (Loss) | | Average Shares | | EPS |
| (in millions, except per share amounts) | | | | | | | | | | |
Net income | $ | 64.9 | | | | | | | $ | 59.5 | | | | | |
Unvested restricted share participation | (0.5) | | | | | | | (0.7) | | | | | |
Net income per common share – basic | 64.4 | | | 47.9 | | | $ | 1.34 | | | 58.8 | | | 47.9 | | | $ | 1.23 | |
Effect of dilutive securities: | | | | | | | | | | | |
Nonparticipating unvested restricted shares | — | | | 0.5 | | | | | — | | | 0.5 | | | |
Net income per common share – diluted | $ | 64.4 | | | 48.4 | | | $ | 1.33 | | | $ | 58.8 | | | 48.4 | | | $ | 1.21 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2018 |
| Income (Loss) | | Average Shares | | EPS | | Income (Loss) | | Average Shares | | EPS |
| (in millions, except per share amounts) |
Net income | $ | 31.8 |
| | | | | | $ | 22.6 |
| | | | |
Unvested restricted share participation | (0.3 | ) | | | | | | — |
| | | | |
Net income – basic | 31.5 |
| | 47.8 |
| | $ | 0.66 |
| | 22.6 |
| | 48.8 |
| | $ | 0.46 |
|
Effect of dilutive securities: | | | | | | | | | | | |
Nonparticipating unvested restricted shares | — |
| | 0.5 |
| | | | — |
| | — |
| | |
Net income – diluted | $ | 31.5 |
| | 48.3 |
| | $ | 0.65 |
| | $ | 22.6 |
| | 48.8 |
| | $ | 0.46 |
|
| | | | | | | | | | | |
| Six Months Ended June 30, 2019 | | Six Months Ended June 30, 2018 |
| Income (Loss) | | Average Shares | | EPS | | Income (Loss) | | Average Shares | | EPS |
| (in millions, except per share amounts) |
Net income | $ | 59.5 |
| | | | | | $ | 44.8 |
| | | | |
Unvested restricted share participation | (0.7 | ) | | | | | | — |
| | | | |
Net income – basic | 58.8 |
| | 47.9 |
| | $ | 1.23 |
| | 44.8 |
| | 48.8 |
| | $ | 0.92 |
|
Effect of dilutive securities: | | | | | | | | | | | |
Nonparticipating unvested restricted shares | — |
| | 0.5 |
| | | | — |
| | — |
| | |
Net income – diluted | $ | 58.8 |
| | 48.4 |
| | $ | 1.21 |
| | $ | 44.8 |
| | 48.8 |
| | $ | 0.92 |
|
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. The Company evaluates its exposure to such claims and suits periodically and establishes accruals for these contingencies when a range of loss can be reasonably estimated. TheAt June 30, 2020, the range of reasonably possible losses for such matters, taking into consideration our rights in indemnity and recourse to third parties is $1.2$0.8 million to $10.8$1.6 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 June 30, 2019,2020, total accruals of $4.8$2.5 million, including environmental matters described below, 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 $1.0$1.3 million as of June 30, 2019,2020, included in our total accruals of $4.8$2.5 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. However, estimates
On July 22, 2019, the Company was served with a breach of contract lawsuit filed by Thomas & Betts Corporation (“T&B”) against the Company and its wholly-owned subsidiary, Trinity Meyer Utility Structures, LLC, now known as Meyer Utility Structures, LLC (“Meyer”), in the Supreme Court of the State of New York, New York County. T&B’s claims relate to responsibility for alleged product warranty claims pursuant to the terms of the Asset Purchase Agreement, dated June 24, 2014, entered into by and between T&B and Meyer with respect to Meyer’s purchase of certain assets of T&B’s utility structure business. The Company and Meyer subsequently removed the litigation to federal court. The case is currently pending under Case No. 1:19-cv-07829-PAE; Thomas & Betts Corporation, now known as, ABB Installation Products, Inc., Plaintiff, v. Trinity Meyer Utility Structures, LLC, formerly known as McKinley 2014 Acquisition, LLC, and Arcosa, Inc., Defendants; In the United States District Court for the Southern District of New York. The Company and Meyer have filed a motion to dismiss T&B’s claims, and an Answer and Counterclaims against T&B. We intend to vigorously defend ourselves in this matter. Based on the facts and circumstances currently known to the Company, (i) we cannot determine that a loss is probable at this time, and therefore no accrual has been included in the accompanying consolidated financial statements; and (ii) a possible loss is not reasonably estimable.
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 involving 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.
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 management'sa 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:
•Separation from TrinityCompany Overview
•BasisPotential Impact of Historical PresentationCOVID-19 On Our Business
•Executive SummaryOverview
•Results of Operations
•Liquidity and Capital Resources
•Recent Accounting Pronouncements
•Forward-Looking Statements
Our MD&A should be read in conjunction with the Consolidated and Combined Financial Statements of Arcosa, Inc. and subsidiaries (“Arcosa,” “Company,” “we,” and “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, 20182019 (“20182019 Annual Report on Form 10-K”).
Separation from Trinity
Company Overview
Arcosa, headquartered in Dallas, Texas, is a provider of infrastructure-related products and solutions with leading brands serving construction, energy, and transportation markets in North America. Arcosa is a Delaware corporation and was incorporated in 2018 in connection with the separation of Arcosa from Trinity Industries, Inc. (“Trinity” or “Former Parent”) on November 1, 2018 as an independent, publicly-traded company, listed on the New York Stock Exchange (the “Separation”). At
Potential Impact of COVID-19 On Our Business
Our highest priority is the timehealth and safety of the Separation, Arcosa consisted of certain of Trinity’s former construction products, energy equipment,our employees and transportation products businesses. The Separation was effectuated through a pro rata dividend distribution on November 1, 2018 of all of the then-outstanding shares of common stock of Arcosacommunities. Our businesses support critical infrastructure sectors, pursuant to the holdersDepartment of common stock of Trinity as of October 17, 2018,Homeland Security’s Cybersecurity and Infrastructure Security Agency standards.Our plants have continued to operate throughout the record date for the distribution. Trinity stockholders received one share of Arcosa common stock for every three shares of Trinity common stock heldCOVID-19 crisis. However, as of the record date.date of this filing, uncertainty exists concerning the potential magnitude of the impact and duration of the COVID-19 pandemic. The transaction was structuredfollowing possible events related to the COVID-19 pandemic may potentially adversely impact our business, financial condition, or results of operations: customer demand for our products and services may decrease; reductions in our customers' capex spending; our supply chain may have disruption preventing us from obtaining the necessary materials and equipment to manufacture our products and provide services; our employees’ ability to continue to work may be tax-freeimpacted because of COVID-19 related illness or local, state, or federal orders requiring them to both Trinitystay at home; the effect of governmental regulations imposed in response to the COVID-19 pandemic may result in shutdowns of our operations; limitations on the ability of our customers to conduct their business and Arcosa stockholderspurchase our products and services; disruptions to our customers’ supply chains or purchasing patterns; and limitations on the ability of our customers to pay us on a timely basis.
We believe that, based on the various standards published to date, our employees are part of the Essential Critical Infrastructure Workforce, and the work they perform is critical, essential, and life-sustaining. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders.
In addition to the extensive health and safety protocols already in place across our plants, we estimate that we incurred $1.5-2.0 million of incremental costs related to COVID-19 during the six months ended June 30, 2020 for U.S. federal income tax purposes.
Basispersonal protective equipment, health screenings, deep cleaning services, and facilities re-configurations. We do not anticipate that the enhanced health and safety protocols will have a material impact on the productivity of Historical Presentationour plants.
The accompanying Consolidated and Combined Financial Statements present our historical financial position, resultspreparation of operations, comprehensive income/loss, and cash flows in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The combined financial statements for periods prior to the Separation were derived from Trinity’sCompany's consolidated financial statements requires management to make estimates and accounting recordsassumptions that affect the reported amounts of assets and prepared in accordance with GAAP for the preparationliabilities and disclosure of carved-out combined financial statements. Throughcontingent assets and liabilities at the date of the Separation, all revenues and costsfinancial 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 will have on our business, results of operations, liquidity or capital resources.
Market Outlook
•Within our Construction Products Group, we experienced better than anticipated construction demand in the second quarter following the outbreak of the COVID-19 pandemic as construction activity in Texas remained resilient and liabilities directlyother states reopened for business.However, we did experience a softening of demand for our shoring products that continued throughout the second quarter.The outlook for public and private construction demand remains uncertain as the path to sustained economic recovery is unclear, and the associated impacts on states’ fiscal health and budgetary constraints, unemployment, and consumer confidence are difficult to measure.
•Within our Energy Equipment Group, our backlog as of June 30, 2020 provides strong production visibility for 2020 and our customers remain committed to taking delivery of these orders. In utility structures, order and inquiry activity continues to be robust, as customers remain focused on grid hardening and reliability initiatives. We continue to work with Arcosawind tower customers on new orders, and the one-year extension of the Production Tax Credit ("PTC") enacted in May 2020 provides our customers an additional year to complete qualifying renewable energy projects that must otherwise have been includedplaced in service in 2020 or 2021. Order and inquiry activity in the combined financial statements. Priorstorage tank business has slowed since the beginning of the COVID-19 crisis, as certain customers have begun to defer new tank installations.
•Within our Transportation Products Group, our backlog for inland barges as of June 30, 2020 provides strong production visibility for 2020 and our customers remain committed to taking delivery of these orders. As anticipated, barge order and inquiry levels during the Separation,second quarter were below the combined financial statements also included allocations of certain selling, engineering,last several quarters, as barge utilization declined from the COVID-19 related economic slowdown.The underlying fundamentals for a dry barge replacement cycle remains in place, and administrative expenses provided by Trinity to Arcosawe experienced an increase in order inquiry activity in July 2020 but at levels below pre-pandemic. Lower demand for refined products including gasoline and allocations of related assets, liabilities,jet fuel, low oil prices, and the Former Parent’s net investment, as applicable. The allocations were determined on a reasonable basis; however,uncertain macro-environment have negatively impacted order inquiries for liquid barges. We will continue to evaluate our footprint and capacity to improve our flexibility and allow time for the amounts are not necessarily representativefundamentals of the amounts that would have been reflectedbarge business to overcome short-term, COVID-related weakness in the financial statements had the Company been an entity that operated independently of Trinity during the applicable periods. Related party allocations prior to the Separation, including the methodmarket. Demand for such allocation, are described further in Note 1, “Overview and Summary of Significant Accounting Policies” to the Consolidated and Combined Financial Statements. Following the Separation, the consolidated financial statements include the accounts of Arcosa and those of our wholly-owned subsidiaries and no longer include any allocations from Trinity.
Trinitysteel components continues to provide some general and administrative functions on a transitional basisdecline as the outlook for a fee following the Separation.North American rail transportation market, which was softening pre-COVID-19, remains uncertain.
Executive Summary Overview
Financial Operations and Operational Highlights
The Company's revenues•Revenues for the three and six months ended June 30, 20192020 increased 23.0%14.8% and 19.5%16.8% to $434.1$498.5 million and $845.0$986.7 million, respectively, compared to the same periods in 2018. 2019, primarily due to the impact of the Cherry acquisition in our Construction Products Group, higher hopper and tank barge deliveries in our Transportation Products Group, and higher unit volumes in our Energy Equipment Group.
•Operating profit for the three and six months ended June 30, 20192020 totaled $42.3$47.8 million and $79.6$92.9 million, respectively, representing an increase of 38.2%$5.5 million and 28.8%,$13.3 million, respectively, from the same periods in 2018. Revenues2019, primarily driven by the impact of the Cherry acquisition in our Construction Products Group increased for the three and six months ended June 30, 2019 compared to the same periods last year primarily due to increased volumes from the December 2018 acquisition of ACG Materials (“ACG”), partially offset by weather-driven volume declineshigher hopper and tank barge deliveries in our legacy businesses. Operating profit for the group decreased primarily due to the decrease in revenues in the legacy businesses. The Energy Equipment Group recorded higher revenues and operating profit for the three and six months ended June 30, 2019 primarily due to higher unit volume in its wind towers and higher pricing levels in its utility structures business partially offset by the loss of revenues from businesses divested in 2018. Revenues from the Transportation Products Group increased for the three and six months ended June 30, 2019 when compared to the same periods last year primarily resulting from higher barge deliveries. Operating profit for the group decreased slightly during the same periods partially due to start-up costs incurred related to the re-opening of a previously idled barge facility.Group.
•Selling, engineering,general, and administrative expenses increased by 17.0%16.9% and 12.9%21.6%, respectively, for the three and six months ended June 30, 20192020 when compared to the prior year periods largely due to additional costs from the acquired ACGCherry business.
The Company's effective tax rate As a percentage of revenue, selling, general, and administrative expenses increased slightly to 10.8% and 10.7% for each of the three and six months ended June 30, 2019 was 22.1%,2020, respectively, compared to 23.1%10.6% and 24.8%10.3%, respectively, for the same periods in 2018. 2019.
•The decreaseeffective tax rate for the three and six months ended June 30, 2020 was 26.2% and 25.5%, respectively, compared to 22.1% and 22.1% for the same periods in 2019. The increase in the tax rate for the three and six months ended June 30, 20192020 is primarily due to increased state taxes, tax effects of foreign tax benefits as well as increased valuation allowancescurrency translation, and nondeductible compensation expenses in the prior periods that are not includedU.S. and Mexico in the current periods.period. See Note 10 “Income Taxes”Income Taxes of the Consolidated and Combined Financial Statements.
•Net income for the three and six months ended June 30, 20192020 was $33.3 million and $64.9 million, respectively, compared to $31.8 million and $59.5 million, respectively, compared with $22.6 million and $44.8 million, respectively, for the same periods in 2018.2019.
Our Energy Equipment and Transportation Products Groups operate in cyclical industries. Additionally, results in our Construction Products Group are affected by weather and seasonal fluctuations with the second and third quarters historically being the quarters with the highest revenues.
Unsatisfied Performance Obligations (Backlog)
As of June 30, 20192020 and 20182019 our unsatisfied performance obligations, or backlog, were as follows:
| | | June 30, 2019 | | June 30, 2018 | | June 30, 2020 | | June 30, 2019 |
| (in millions) | | (in millions) | |
Energy Equipment Group: | | | | Energy Equipment Group: | |
Wind towers and utility structures | $ | 517.6 |
| | $ | 780.1 |
| Wind towers and utility structures | $ | 352.2 | | | $ | 517.6 | |
Other | 45.3 |
| | 53.2 |
| Other | 15.5 | | | 45.3 | |
| | | | |
Transportation Products Group: | | | | Transportation Products Group: | |
Inland barges | $ | 349.7 |
| | $ | 198.4 |
| Inland barges | $ | 258.7 | | | $ | 349.7 | |
Approximately 52%74% of unsatisfied performance obligations for our wind towers and utility structures in our Energy Equipment Group are expected to be delivered during the year ending December 31, 2019,2020, with substantially all of the remainder expected to be delivered in 2020. Approximately 80%during 2021. All of the unsatisfied performance obligations for our other business lines in our Energy Equipment Group are expected to be delivered during the year ending December 31, 2019, with the remainder expected to be delivered in 2020. Approximately 54%73% of unsatisfied performance obligations for inland barges in our Transportation Products Group are expected to be delivered during the year ending December 31, 20192020, with the remainder expected to be delivered in 2020.2021.
Results of Operations
Overall Summary
Revenues
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | |
| 2020 | | 2019 | | Percent Change | | 2020 | | 2019 | | Percent Change |
| (in millions) | | | | | | (in millions) | | | | |
Construction Products Group | $ | 148.2 | | | $ | 115.6 | | | 28.2 | % | | $ | 297.6 | | | $ | 221.6 | | | 34.3 | % |
Energy Equipment Group | 222.8 | | | 204.3 | | | 9.1 | | | 446.0 | | | 413.4 | | | 7.9 | |
Transportation Products Group | 128.2 | | | 115.3 | | | 11.2 | | | 245.2 | | | 212.8 | | | 15.2 | |
| | | | | | | | | | | |
Segment Totals before Eliminations | 499.2 | | | 435.2 | | | 14.7 | | | 988.8 | | | 847.8 | | | 16.6 | |
Eliminations | (0.7) | | | (1.1) | | | | | (2.1) | | | (2.8) | | | |
Consolidated Total | $ | 498.5 | | | $ | 434.1 | | | 14.8 | | | $ | 986.7 | | | $ | 845.0 | | | 16.8 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | Percent Change | | 2019 | | 2018 | | Percent Change |
| (in millions) | | | (in millions) | |
Construction Products Group | $ | 115.6 |
| | $ | 83.9 |
| | 37.8 | % | | $ | 221.6 |
| | $ | 154.1 |
| | 43.8 | % |
Energy Equipment Group | 204.3 |
| | 178.4 |
| | 14.5 |
| | 413.4 |
| | 374.7 |
| | 10.3 |
|
Transportation Products Group | 115.3 |
| | 91.5 |
| | 26.0 |
| | 212.8 |
| | 180.8 |
| | 17.7 |
|
Segment Totals before Eliminations and Corporate Expenses | 435.2 |
| | 353.8 |
| | 23.0 |
| | 847.8 |
| | 709.6 |
| | 19.5 |
|
Eliminations | (1.1 | ) | | (0.8 | ) | |
| | (2.8 | ) | | (2.2 | ) | | |
Consolidated and Combined Total | $ | 434.1 |
| | $ | 353.0 |
| | 23.0 |
| | $ | 845.0 |
| | $ | 707.4 |
| | 19.5 |
|
2020 versus 2019Our revenues•Revenues for the three and six months ended June 30, 20192020 increased by 23.0%14.8% and 19.5%16.8%, respectively, from the prior year periods with all segments contributing to the increase.
•Revenues from our Construction Products Group increased primarily due to the impact of the ACG acquisitionCherry acquisition.
•Revenues from our Energy Equipment Group increased primarily due to higher volumes in our Construction Products Group, higher barge deliveries inutility structures.
•Revenues from our Transportation Products Group increased primarily due to higher hopper and higher unit volumestank barge deliveries partially offset by decreased deliveries and prices in our Energy Equipment Group.lower contractual pricing for steel components.
Operating Costs
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | |
| 2020 | | 2019 | | Percent Change | | 2020 | | 2019 | | Percent Change |
| (in millions) | | | | | | (in millions) | | | | |
Construction Products Group | $ | 123.9 | | | $ | 98.1 | | | 26.3 | % | | $ | 256.5 | | | $ | 192.8 | | | 33.0 | % |
Energy Equipment Group | 201.9 | | | 179.3 | | | 12.6 | | | 400.2 | | | 360.2 | | | 11.1 | |
Transportation Products Group | 112.3 | | | 102.7 | | | 9.3 | | | 215.0 | | | 191.9 | | | 12.0 | |
| | | | | | | | | | | |
Segment Totals before Eliminations and Corporate Expenses | 438.1 | | | 380.1 | | | 15.3 | | | 871.7 | | | 744.9 | | | 17.0 | |
Corporate | 13.3 | | | 12.8 | | | 3.9 | | | 24.2 | | | 23.3 | | | 3.9 | |
Eliminations | (0.7) | | | (1.1) | | | | | (2.1) | | | (2.8) | | | |
Consolidated Total | $ | 450.7 | | | $ | 391.8 | | | 15.0 | | | $ | 893.8 | | | $ | 765.4 | | | 16.8 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | Percent Change | | 2019 | | 2018 | | Percent Change |
| (in millions) | | | (in millions) | |
Construction Products Group | $ | 98.1 |
| | $ | 66.3 |
| | 48.0 | % | | $ | 192.8 |
| | $ | 124.1 |
| | 55.4 | % |
Energy Equipment Group | 179.3 |
| | 170.2 |
| | 5.3 |
| | 360.2 |
| | 349.0 |
| | 3.2 |
|
Transportation Products Group | 102.7 |
| | 78.8 |
| | 30.3 |
| | 191.9 |
| | 159.1 |
| | 20.6 |
|
Segment Totals before Eliminations and Corporate Expenses | 380.1 |
| | 315.3 |
| | 20.6 |
| | 744.9 |
| | 632.2 |
| | 17.8 |
|
Corporate | 12.8 |
| | 7.9 |
| | 62.0 |
| | 23.3 |
| | 15.6 |
| | 49.4 |
|
Eliminations | (1.1 | ) | | (0.8 | ) | | 37.5 |
| | (2.8 | ) | | (2.2 | ) | | 27.3 |
|
Consolidated and Combined Total | $ | 391.8 |
| | $ | 322.4 |
| | 21.5 |
| | $ | 765.4 |
| | $ | 645.6 |
| | 18.6 |
|
2020 versus 2019•Operating costs for the three and six months ended June 30, 20192020 increased by 21.5%15.0% and 18.6%16.8%, respectively, over the same periods in 2018. The increases inrespectively.
•Cost of revenues for our Construction Products Group wereincreased primarily due to higher volumes from the acquired ACGCherry business. Operating costs
•Cost of revenues for the Energy Equipment Group wereincreased primarily due to higher volumes in wind towers and utility structures.
•Cost of revenues for the Transportation Products Group increased primarily due to higher hopper and tank barge deliveries partially offset by decreased volumes in steel components.
•Selling, general, and administrative expenses, including Corporate expenses, increased by 16.9% and 21.6% for the three and six months ended June 30, 2019 compared to the same periods of 2018,2020, respectively, largely due to higher unit volumes. Operatingadditional costs from the acquired Cherry business. Also, for the Transportation Products Groupsix months ended June 30, 2020, selling, general, and administrative expenses increased due to a $2.9 million recovery of bad debt recorded in the prior year related to a single customer in our utility structures business. As a percentage of revenue, selling, general, and administrative expenses were higher10.8% and 10.7% for the three and six months ended June 30, 2019 due2020, respectively, compared to higher barge deliveries10.6% and start-up costs incurred related to10.3% for the re-opening of a previously idled barge facility.same periods in 2019.
Selling, engineering, and administrative expenses, including Corporate expenses, increased by 17.0% and 12.9%Operating Profit (Loss)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | |
| 2020 | | 2019 | | Percent Change | | 2020 | | 2019 | | Percent Change |
| (in millions) | | | | | | (in millions) | | | | |
Construction Products Group | $ | 24.3 | | | $ | 17.5 | | | 38.9 | % | | $ | 41.1 | | | $ | 28.8 | | | 42.7 | % |
Energy Equipment Group | 20.9 | | | 25.0 | | | (16.4) | | | 45.8 | | | 53.2 | | | (13.9) | |
Transportation Products Group | 15.9 | | | 12.6 | | | 26.2 | | | 30.2 | | | 20.9 | | | 44.5 | |
| | | | | | | | | | | |
Segment Totals before Corporate Expenses | 61.1 | | | 55.1 | | | 10.9 | | | 117.1 | | | 102.9 | | | 13.8 | |
Corporate | (13.3) | | | (12.8) | | | 3.9 | | | (24.2) | | | (23.3) | | | 3.9 | |
| | | | | | | | | | | |
Consolidated Total | $ | 47.8 | | | $ | 42.3 | | | 13.0 | | | $ | 92.9 | | | $ | 79.6 | | | 16.7 | |
2020 versus 2019
•Operating profit for the three and six months ended June 30, 2019, respectively, largely due to additional costs from the acquired ACG business. As a percentage of revenue, selling, engineering, and administrative expenses were 10.6% and 10.3% for the three and six months ended June 30, 2019, respectively, as compared to 11.2% and 10.9% for the same periods in 2018.
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | Percent Change | | 2019 | | 2018 | | Percent Change |
| (in millions) | | | (in millions) | |
Construction Products Group | $ | 17.5 |
| | $ | 17.6 |
| | (0.6 | )% | | $ | 28.8 |
| | $ | 30.0 |
| | (4.0 | )% |
Energy Equipment Group | 25.0 |
| | 8.2 |
| | 204.9 |
| | 53.2 |
| | 25.7 |
| | 107.0 |
|
Transportation Products Group | 12.6 |
| | 12.7 |
| | (0.8 | ) | | 20.9 |
| | 21.7 |
| | (3.7 | ) |
Segment Totals before Corporate Expenses | 55.1 |
| | 38.5 |
| | 43.1 |
| | 102.9 |
| | 77.4 |
| | 32.9 |
|
Corporate | (12.8 | ) | | (7.9 | ) | | 62.0 |
| | (23.3 | ) | | (15.6 | ) | | 49.4 |
|
Consolidated and Combined Total | $ | 42.3 |
| | $ | 30.6 |
| | 38.2 |
| | $ | 79.6 |
| | $ | 61.8 |
| | 28.8 |
|
Operating profit for the three months ended June 30, 20192020 increased by 38.2% when compared to the same period in 2018. 13.0% and 16.7%, respectively.
•Operating profit in theour Construction Products Group was flat for the three months ended June 30, 2019 when comparedincreased primarily due to the prior year period due to higher volumes fromimpact of the acquired ACG business, partially offset by the decrease in revenues in the legacy businesses due to weather-driven volume declines. Cherry business.
•Operating profit in our Energy Equipment Group increased for the three months ended June 30, 2019 compared to the prior year perioddecreased primarily due to higher unit volume anddecreased pricing in our wind towers andproduct line. For the six months ended June 30, 2020, operating profit also decreased due to a $2.9 million recovery of bad debt recorded in the prior year related to a single customer in our utility structures business and the elimination of operating losses from businesses divested in 2018. business.
•Operating profit in our Transportation Products Group was flat for the three months ended June 30, 2019 compared to the prior year periodincreased primarily due to higher hopper and tank barge deliveries, partially offset by decreased deliveries and lower contractual pricing for steel components and start-up costs incurred toward the re-opening of a previously idled barge facility.components.
Operating profit for the six months ended June 30, 2019 increased by 28.8% when compared to the same period in 2018. Operating profit in the Construction Products Group decreased for the six months ended June 30, 2019 when compared to the prior year period primarily due to the decrease in revenues in the legacy businesses as a result of lower volumes and pricing. Operating profit in our Energy Equipment Group increased for the six months ended June 30, 2019 compared to the prior year period primarily due to higher unit volume and pricing in our wind towers and utility structures business, the elimination of operating losses from businesses divested in 2018, and a recovery of bad debt from a single customer. Operating profit in our Transportation Products Group decreased slightly for the six months ended June 30, 2019 compared to the prior year period primarily due to lower steel component deliveries and start-up costs incurred toward the re-opening of a previously idled barge facility, largely offset by higher barge deliveries.
For a further discussion of revenues, costs, and the operating results of individual segments, see Segment Discussion below.
Other Income and Expense
Other, net (income) expense consists of the following items:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) | | | | | | |
Interest income | $ | (0.1) | | | $ | (0.4) | | | $ | (0.3) | | | $ | (0.7) | |
Foreign currency exchange transactions | 0.2 | | | 0.5 | | | 0.2 | | | 1.0 | |
Other | (0.2) | | | (0.2) | | | (0.2) | | | (0.6) | |
Other, net (income) expense | $ | (0.1) | | | $ | (0.1) | | | $ | (0.3) | | | $ | (0.3) | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (in millions) |
Interest income | $ | (0.4 | ) | | $ | — |
| | $ | (0.7 | ) | | $ | — |
|
Foreign currency exchange transactions | 0.5 |
| | 1.2 |
| | 1.0 |
| | 2.2 |
|
Other | (0.2 | ) | | — |
| | (0.6 | ) | | — |
|
Other, net | $ | (0.1 | ) | | $ | 1.2 |
| | $ | (0.3 | ) | | $ | 2.2 |
|
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 and six months ended June 30, 20192020 was 22.1%26.2% and 22.1%25.5%, respectively, compared to 23.1% and 24.8%22.1% for the same periods in 2018.2019. The increase in the tax rate for the three and six months ended June 30, 2020 is primarily due to increased state taxes, tax effects of foreign currency translation, and nondeductible compensation expenses in the U.S. and Mexico.
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 "Income Taxes" of the Notes to Consolidated and Combined Financial Statements for a further discussion of income taxes.
In response to the COVID-19 pandemic, on March 27, 2020 the U.S. Congress passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which includes certain tax relief and benefits that may impact the Company. In light of the recent nature of these developments, the Company is currently evaluating the impact of the various provisions of the CARES Act on its income tax provision. Approximately $15 million of federal and state income tax payments were deferred from the first half of the year into July 2020, following passage of the CARES Act and similar state provisions.
Segment Discussion
Construction Products Group
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | |
| 2020 | | 2019 | | Percent | | 2020 | | 2019 | | Percent |
| ($ in millions) | | | | Change | | ($ in millions) | | | | Change |
Revenues: | | | | | | | | | | | |
Construction aggregates | $ | 132.1 | | | $ | 93.2 | | | 41.7 | % | | $ | 264.2 | | | $ | 181.6 | | | 45.5 | % |
Other | 16.1 | | | 22.4 | | | (28.1) | | | 33.4 | | | 40.0 | | | (16.5) | |
Total revenues | 148.2 | | | 115.6 | | | 28.2 | | | 297.6 | | | 221.6 | | | 34.3 | |
| | | | | | | | | | | |
Operating costs: | | | | | | | | | | | |
Cost of revenues | 107.1 | | | 86.7 | | | 23.5 | | | 222.1 | | | 169.0 | | | 31.4 | |
Selling, general, and administrative expenses | 16.8 | | | 11.4 | | | 47.4 | | | 34.4 | | | 23.8 | | | 44.5 | |
Operating profit | $ | 24.3 | | | $ | 17.5 | | | 38.9 | | | $ | 41.1 | | | $ | 28.8 | | | 42.7 | |
Operating profit margin | 16.4 | % | | 15.1 | % | | | | 13.8 | % | | 13.0 | % | | |
| | | | | | | | | | | |
Depreciation, depletion, and amortization(1) | $ | 13.9 | | | $ | 9.0 | | | 54.4 | | | $ | 27.7 | | | $ | 17.8 | | | 55.6 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | Percent | | 2019 | | 2018 | | Percent |
| ($ in millions) | | Change | | ($ in millions) | | Change |
Revenues: | | | | | | | | | | | |
Construction aggregates | $ | 93.2 |
| | $ | 61.1 |
| | 52.5 | % | | $ | 181.6 |
| | $ | 113.7 |
| | 59.7 | % |
Other | 22.4 |
| | 22.8 |
| | (1.8 | ) | | 40.0 |
| | 40.4 |
| | (1.0 | ) |
Total revenues | 115.6 |
| | 83.9 |
| | 37.8 |
| | 221.6 |
| | 154.1 |
| | 43.8 |
|
| | | | | | | | | | | |
Operating costs: | | | | | | | | | | | |
Cost of revenues | 86.7 |
| | 59.2 |
| | 46.5 |
| | 169.0 |
| | 110.0 |
| | 53.6 |
|
Selling, engineering, and administrative costs | 11.4 |
| | 7.1 |
| | 60.6 |
| | 23.8 |
| | 14.1 |
| | 68.8 |
|
Operating profit | $ | 17.5 |
| | $ | 17.6 |
| | (0.6 | ) | | $ | 28.8 |
| | $ | 30.0 |
| | (4.0 | ) |
Operating profit margin | 15.1 | % | | 21.0 | % | | | | 13.0 | % | | 19.5 | % | | |
| | | | | | | | | | | |
Depreciation, depletion, and amortization(1) | $ | 9.0 |
| | $ | 5.1 |
| | 76.5 |
| | $ | 17.8 |
| | $ | 10.2 |
| | 74.5 |
|
(1)Depreciation, depletion, and amortization are components of operating profit.
Three Months Ended June 30, 2020 versus Three Months Ended June 30, 2019
•Revenues increased by 28.2% primarily driven by the acquisition of Cherry, which increased segment revenues by approximately 40%. The increase was partially offset by a decrease of 28.1% in revenues in our trench shoring business as a result of lower volumes as customers reduced capital expenditures during the COVID-19 crisis. In our legacy construction aggregates businesses, natural aggregates revenues were higher due to a robust increase in volume, partially offset by weakness in our plants serving oil and costgas markets.Our specialty materials businesses reported lower revenues primarily due to reduced volumes in our lightweight aggregates business attributed to COVID-19 related construction delays.
•Cost of revenues increased by 37.8% and 46.5%, respectively, for23.5% due to higher volumes from the three months ended June 30, 2019, when compared to the same period in 2018. The acquisitionacquired Cherry business. As a percent of ACG resulted in an increase of approximately 45% in revenues, for the three months ended June 30, 2019 compared to the same period in 2018, partially offset by weather-driven volume declines in our legacy businesses. The increase in cost of revenues during the three months ended June 30, 2019decreased to 72.3% compared to the same period75.0% in the prior year wasperiod due to operating efficiencies, lower fuel costs, and reduced maintenance expenses in the legacy businesses.
•Selling, general, and administrative costs increased as a percentage of revenues due to additional costs from the acquired Cherry business. Selling, general, and administrative costs in the legacy businesses were lower than the previous period.
•Operating profit increased by 38.9%, outpacing the increase in revenues.
•Depreciation, depletion, and amortization expense increased primarily due to the acquired Cherry business.
Six Months Ended June 30, 2020 versus Six Months Ended June 30, 2019
•Revenues increased 34.3% primarily driven by the acquisition of Cherry, which increased segment revenues by approximately 40%. The increase was partially offset by a decrease of 16.5% in revenues in our trench shoring business as a result of lower volumes as customers reduced capital expenditures during the ACG acquisition. COVID-19 crisis. In our legacy construction aggregates businesses, reduced volumes in plants serving oil and gas markets were partially offset by increased natural aggregates volumes serving other markets.
•Cost of revenues increased 31.4% primarily due to higher volumes from the acquired Cherry business. As a percent of revenues, cost of revenues decreased to 74.6% compared to 76.3% in the prior period due to operating efficiencies, lower fuel costs, and reduced maintenance expenses in the legacy businesses.
•Selling, engineering,general, and administrative costs increased by 60.6% for the three months ended June 30, 2019, compared to the same period in 2018,44.5% primarily due to additional costs from the acquired ACGCherry business.
Revenues and cost of revenues increased by 43.8% and 53.6%, respectively, for the six months ended June 30, 2019, when compared to the same period in 2018. The acquisition of ACG resulted in an increase of approximately 50% in revenues for the six months ended June 30, 2019 compared to the same period in 2018, partially offset by weather-driven volume declines in our legacy businesses. The increase in cost of revenues during the six months ended June 30, 2019 compared to the same period in the prior year was primarily driven by the increased revenues as a result of the ACG acquisition. Selling, engineering,general, and administrative costs in the legacy businesses were lower than the previous period.
•Operating profit increased by 68.8% for42.7%, outpacing the six months ended June 30, 2019, compared to the same periodincrease in 2018,revenues.
•Depreciation, depletion, and amortization expense increased primarily due to additional costs from the acquired ACGCherry business.
Energy Equipment Group
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | |
| 2020 | | 2019 | | Percent | | 2020 | | 2019 | | Percent |
| ($ in millions) | | | | Change | | ($ in millions) | | | | Change |
Revenues: | | | | | | | | | | | |
Wind towers and utility structures | $ | 176.9 | | | $ | 151.0 | | | 17.2 | % | | $ | 353.3 | | | $ | 309.6 | | | 14.1 | % |
Other | 45.9 | | | 53.3 | | | (13.9) | | | 92.7 | | | 103.8 | | | (10.7) | |
Total revenues | 222.8 | | | 204.3 | | | 9.1 | | | 446.0 | | | 413.4 | | | 7.9 | |
| | | | | | | | | | | |
Operating costs: | | | | | | | | | | | |
Cost of revenues | 183.7 | | | 163.0 | | | 12.7 | | | 364.7 | | | 331.6 | | | 10.0 | |
Selling, general, and administrative expenses | 18.2 | | | 16.3 | | | 11.7 | | | 35.5 | | | 28.6 | | | 24.1 | |
| | | | | | | | | | | |
Operating profit | $ | 20.9 | | | $ | 25.0 | | | (16.4) | | | $ | 45.8 | | | $ | 53.2 | | | (13.9) | |
Operating profit margin | 9.4 | % | | 12.2 | % | | | | 10.3 | % | | 12.9 | % | | |
| | | | | | | | | | | |
Depreciation and amortization(1) | $ | 8.1 | | | $ | 7.3 | | | 11.0 | | | $ | 15.5 | | | $ | 14.3 | | | 8.4 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | Percent | | 2019 | | 2018 | | Percent |
| ($ in millions) | | Change | | ($ in millions) | | Change |
Revenues: | | | | | | | | | | | |
Wind towers and utility structures | $ | 151.0 |
| | $ | 133.0 |
| | 13.5 | % | | $ | 309.6 |
| | $ | 280.5 |
| | 10.4 | % |
Other | 53.3 |
| | 45.4 |
| | 17.4 |
| | 103.8 |
| | 94.2 |
| | 10.2 |
|
Total revenues | 204.3 |
| | 178.4 |
| | 14.5 |
| | 413.4 |
| | 374.7 |
| | 10.3 |
|
| | | | | | | | | | | |
Operating costs: | | | | | | | | | | | |
Cost of revenues | 163.0 |
| | 151.5 |
| | 7.6 |
| | 331.6 |
| | 313.0 |
| | 5.9 |
|
Selling, engineering, and administrative costs | 16.3 |
| | 18.7 |
| | (12.8 | ) | | 28.6 |
| | 36.0 |
| | (20.6 | ) |
Operating profit | $ | 25.0 |
| | $ | 8.2 |
| | 204.9 |
| | $ | 53.2 |
| | $ | 25.7 |
| | 107.0 |
|
Operating profit margin | 12.2 | % | | 4.6 | % | | | | 12.9 | % | | 6.9 | % | | |
| | | | | | | | | | | |
Depreciation and amortization(1) | $ | 7.3 |
| | $ | 7.4 |
| | (1.4 | ) | | $ | 14.3 |
| | $ | 15.2 |
| | (5.9 | ) |
(1)Depreciation and amortization are components of operating profit.
Three Months Ended June 30, 2020 versus Three Months Ended June 30, 2019
•Revenues increased by 14.5% for the three months ended June 30, 2019 when compared to the same period9.1% driven by primarily by higher volumes in 2018. Revenuesutility structures and sales from our acquired traffic structures business. This was partially offset by lower steel prices in utility structures and lower volumes and pricing in our other product line.
•Cost of revenues increased by 12.7% driven by higher overall volumes in wind towers and utility structures partially offset by lower volumes in other product lineslines.
•Selling, general, and administrative costs increased by 13.5%,11.7% primarily due to additional costs from acquired businesses in March and June 2020.
•Operating profit decreased by 16.4% primarily due to decreased pricing in our wind tower business.
Six Months Ended June 30, 2020 versus Six Months Ended June 30, 2019
•Revenues increased by 7.9% driven primarily by a higher unit volumevolumes in wind towers and higher pricing levels in utility structures. Revenues from other product lines increased by 17.4% as higher storage tank pricing levels werestructures, partially offset by the reductionlower steel prices in revenues from businesses divestedutility structures and lower pricing in 2018. wind towers and other product lines.
•Cost of revenues increased by 7.6% for the three months ended June 30, 2019 compared to 2018,10.0% driven primarily by higher overall volumes offset partially by the reduction in costs from businesses divested in 2018.
Revenues increased by 10.3% for the six months ended June 30, 2019 when compared to the same period in 2018. Revenues from our wind towers and utility structures product lines increased by 10.4%, driven primarily by a higher unit volume in wind towers and higher pricing levels in utility structures. Revenues from other product lines increased by 10.2% as higher storage tank pricing levels were partially offset by the reductionlower volumes in revenues from businesses divested in 2018. Cost of revenues increased by 5.9% for the six months ended June 30, 2019 compared to 2018, driven primarily by higher overall volumes offset partially by the reduction in costs from businesses divested in 2018.other product lines.
•Selling, engineering,general, and administrative costs decreasedincreased by 12.8% and 20.6% for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018,24.1% primarily due to the reduction of costs from businesses divested in 2018. For the six months ended June 30, 2019, selling, engineering, and administrative costs also decreased due to a $2.9 million recovery of bad debt recorded in the prior year related to a single customer in our utility structures business.business and additional costs from acquired businesses.
The•Operating profit decreased by 13.9% primarily due to decreased pricing in our wind towers business and the recovery of bad debt recorded in the prior year.
Unsatisfied Performance Obligations (Backlog)
As of June 30, 2020, the backlog for wind towers and utility structures was $352.2 million compared to $517.6 million and $780.1 million atas of June 30, 2019 and 2018, respectively.2019. Approximately 52%74% of unsatisfied performance obligations for wind towers and utility structures are expected to be delivered during the year ending December 31, 20192020 with substantially all of the remainder expected to be delivered in 2020.during 2021. Future wind tower orders are subject to uncertainty followingas PTC eligibility for new wind farm projects is scheduled to expire at the phase-outend of 2020 and the level of credit phases out after 2024. In May 2020, to alleviate potential supply chain disruptions associated with COVID-19, the Internal Revenue Service approved a one-year extension of the Production Tax Credit.PTC to complete qualifying renewable energy projects that must otherwise have been placed in service in 2020 or 2021. Pricing of orders and individual order quantities during the three months ended June 30, 2019 are reflective ofreflect a market transitioning from production tax creditPTC incentives. As of June 30, 2019,2020, the backlog for our other business lines in our Energy Equipment Group was $45.3$15.5 million, of which 80%100% is expected to be delivered during the year ending December 31, 2019, with the remainder to be delivered during 2020.
Transportation Products Group
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | |
| 2020 | | 2019 | | Percent | | 2020 | | 2019 | | Percent |
| ($ in millions) | | | | Change | | ($ in millions) | | | | Change |
Revenues: | | | | | | | | | | | |
Inland barges | $ | 107.0 | | | $ | 66.1 | | | 61.9 | % | | $ | 196.0 | | | $ | 115.5 | | | 69.7 | % |
Steel components | 21.2 | | | 49.2 | | | (56.9) | | | 49.2 | | | 97.3 | | | (49.4) | |
Total revenues | 128.2 | | | 115.3 | | | 11.2 | | | 245.2 | | | 212.8 | | | 15.2 | |
| | | | | | | | | | | |
Operating costs: | | | | | | | | | | | |
Cost of revenues | 106.7 | | | 97.0 | | | 10.0 | | | 203.4 | | | 180.7 | | | 12.6 | |
Selling, general, and administrative expenses | 5.6 | | | 5.7 | | | (1.8) | | | 11.6 | | | 11.2 | | | 3.6 | |
| | | | | | | | | | | |
Operating profit | $ | 15.9 | | | $ | 12.6 | | | 26.2 | | | $ | 30.2 | | | $ | 20.9 | | | 44.5 | |
Operating profit margin | 12.4 | % | | 10.9 | % | | | | 12.3 | % | | 9.8 | % | | |
| | | | | | | | | | | |
Depreciation and amortization (1) | $ | 4.7 | | | $ | 3.9 | | | 20.5 | | | $ | 9.1 | | | $ | 7.7 | | | 18.2 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | Percent | | 2019 | | 2018 | | Percent |
| ($ in millions) | | Change | | ($ in millions) | | Change |
Revenues: | | | | | | | | | | | |
Inland barges | $ | 66.1 |
| | $ | 42.9 |
| | 54.1 | % | | $ | 115.5 |
| | $ | 73.7 |
| | 56.7 | % |
Steel components | 49.2 |
| | 48.6 |
| | 1.2 |
| | 97.3 |
| | 107.1 |
| | (9.2 | ) |
Total revenues | 115.3 |
| | 91.5 |
| | 26.0 |
| | 212.8 |
| | 180.8 |
| | 17.7 |
|
| | | | | | | | | | | |
Operating costs: | | | | | | | | | | | |
Cost of revenues | 97.0 |
| | 73.1 |
| | 32.7 |
| | 180.7 |
| | 147.8 |
| | 22.3 |
|
Selling, engineering, and administrative costs | 5.7 |
| | 5.7 |
| | — |
| | 11.2 |
| | 11.3 |
| | (0.9 | ) |
Operating profit | $ | 12.6 |
| | $ | 12.7 |
| | (0.8 | ) | | $ | 20.9 |
| | $ | 21.7 |
| | (3.7 | ) |
Operating profit margin | 10.9 | % | | 13.9 | % | | | | 9.8 | % | | 12.0 | % | | |
| | | | | | | | | | | |
Depreciation and amortization (1) | $ | 3.9 |
| | $ | 3.3 |
| | 18.2 |
| | $ | 7.7 |
| | $ | 7.5 |
| | 2.7 |
|
(1) Depreciation and amortization are components of operating profit.
Three Months Ended June 30, 2020 versus Three Months Ended June 30, 2019
•Revenues increased by 11.2% primarily from higher hopper and costtank barge deliveries, partially offset by decreased deliveries and lower contractual pricing for steel components.
•Cost of revenues increased for the three months ended June 30, 201910.0% driven by 26.0%higher hopper and 32.7%, respectively, compared to the same period in 2018 primarily from highertank barge deliveries. Revenues for steel components was roughly flat due to higher deliveries, which was mostlyvolumes, partially offset by lower contractual pricing.steel component volumes. Cost of revenues also increaseddecreased by $1.3 million for the three months ended June 30, 2019 due to start-up costs incurred towardsin 2019 toward the re-opening of a previously idled barge manufacturing facility, which began delivering barges in Julyplant. As a percent of 2019.
Revenues andrevenues, cost of revenues decreased to 83.2% compared to 84.1% in the prior year period primarily due to improved operating efficiencies in our barge business.
•Selling, general, and administrative costs decreased slightly.
•Operating profit increased forby 26.2%, outpacing the six months endedincrease in revenues.
Six Months Ended June 30, 2020 versus Six Months Ended June 30, 2019
•Revenues increased by 17.7% and 22.3%, respectively, compared to the same period in 201815.2% primarily from higher hopper and tank barge deliveries, partially offset by decreased deliveries and lower contractual pricing for steel components.
•Cost of revenues increased 12.6% driven by higher hopper and tank barge volumes, partially offset by lower steel component deliveries.volumes. Cost of revenues also increaseddecreased by $3.1 million for the six months ended June 30, 2019 due to start-up costs incurred towardsin 2019 toward the re-opening of a previously idled barge manufacturing facility.plant. As a percent of revenues, cost of revenues decreased to 83.0% compared to 84.9% in the prior year period primarily due to improved operating efficiencies in our barge business.
•Selling, engineering,general, and administrative costs were substantially unchanged forincreased slightly.
•Operating profit increased by 44.5%, outpacing the three and six months ended June 30, 2019 compared to the same periodsincrease in 2018.revenues.
Unsatisfied Performance Obligations (Backlog)
As of June 30, 2019,2020, the backlog for the Transportation Products Group was $349.7$258.7 million compared to $198.4$349.7 million as of June 30, 2018.2019. Approximately 54%73% of unsatisfied performance obligations for inland barges are expected to be delivered during the year ending December 31, 20192020 with the remainder expected to be delivered in 2020.2021.
Corporate
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | |
| 2020 | | 2019 | | Percent | | 2020 | | 2019 | | Percent |
| (in millions) | | | | Change | | (in millions) | | | | Change |
Corporate overhead costs | $ | 13.3 | | | $ | 12.8 | | | 3.9 | % | | $ | 24.2 | | | $ | 23.3 | | | 3.9 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | Percent | | 2019 | | 2018 | | Percent |
| (in millions) | | Change | | (in millions) | | Change |
Corporate overhead costs | $ | 12.8 |
| | $ | 7.9 |
| | 62.0 | % | | $ | 23.3 |
| | $ | 15.6 |
| | 49.4 | % |
For periods prior to the Separation, corporate2020 versus 2019
•Corporate overhead costs consisted of costs not previously allocated to Trinity's business units and have been allocated to Arcosa based on an analysis of each cost function and the relative benefits received by Arcosaincreased 3.9% for each of the periods using methods management believes are consistent and reasonable. See Note 1, “Overview and Summary of Significant Accounting Policies” of the Notes to the Consolidated and Combined Financial Statements for further information.
Forboth the three and six months ended June 30, 2019, the increase in2020 primarily related to higher acquisition-related transaction and integration costs of $0.7 million and $1.6 million, respectively. Excluding these costs, corporate overhead costs compared to 2018 was primarily due to incremental standalone costs related towere lower than the replacement of services and fees previously provided or incurred by Trinity as well as other standalone public company costs. comparative periods.
•We estimate full-year corporate costs will be approximately $50.0between $45 million and $50 million in fiscal year 2019.2020.
Liquidity and Capital Resources
Arcosa’s primary liquidity requirements are primarily to fundrequirement consists of funding our business operations, including capital expenditures, working capital investment, and disciplined acquisitions. Our primary sources of liquidity areinclude cash flowsflow from operations, our existing cash balance, and, as necessary, borrowingsavailability under the revolving credit facility, and, as necessary, the issuance of additional long-term debt or equity. To the extent we generate discretionary cash flow,have available liquidity, we may also consider using this additional cash flow to undertakeundertaking new capital investment projects, executeexecuting additional strategic acquisitions, returnreturning capital to stockholders, or forfunding other general corporate purposes.
Cash Flows
The following table summarizes our cash flows from operating, investing, and financing activities for the six months ended June 30, 20192020 and 2018:2019:
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 |
| (in millions) | | |
Total cash provided by (required by): | | | |
Operating activities | $ | 120.3 | | | $ | 141.2 | |
Investing activities | (350.5) | | | (59.5) | |
Financing activities | 138.2 | | | (97.8) | |
Net increase (decrease) in cash and cash equivalents | $ | (92.0) | | | $ | (16.1) | |
|
| | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
| (in millions) |
Total cash provided by (required by): | | | |
Operating activities | $ | 141.2 |
| | $ | 105.3 |
|
Investing activities | (59.5 | ) | | (44.3 | ) |
Financing activities | (97.8 | ) | | (57.2 | ) |
Net (decrease) increase in cash and cash equivalents | $ | (16.1 | ) | | $ | 3.8 |
|
Operating Activities. Net cash provided by operating activities for the six months ended June 30, 20192020 was $141.2$120.3 million compared to $105.3$141.2 million for the six months ended June 30, 2018.2019.
Receivables at•The decrease in net cash provided by operating activities was primarily driven by changes in current assets and liabilities.
•The changes in current assets and liabilities resulted in a net use of cash of $6.9 million for the six months ended June 30, 2019 decreased2020 compared to a net source of cash of $26.0 million for the six months ended June 30, 2019. This decrease was primarily driven by $65.3 million or 22.4% since December 31, 2018 primarily due to lower tradea significant reduction in receivables infor our Energy Equipment and Transportation Products Groups. Raw materials inventory at June 30, 2019 increased by $17.2 million or 13.4% since December 31, 2018. WorkGroup in process inventory increased by $12.4 million or 37.2% and finished goods inventory increased by $8.9 million or 9.8% since December 31, 2018 primarily in our Transportation Products Group. Accounts payable decreased by $13.5 million, while accrued liabilities increased by $2.1 million from December 31, 2018. We continually review reserves related to collectibilitythe prior year as well as a decrease in advanced billings in the adequacy of lower of cost or net realizable value with regard to accounts receivable and inventory.current year.
Investing Activities. Net cash required by investing activities for the six months ended June 30, 20192020 was $59.5$350.5 million compared to $44.3$59.5 million for the six months ended June 30, 2018. 2019.
•Capital expenditures for the six months ended June 30, 20192020 were $38.9$43.6 million compared to $20.4$38.9 million for the same period last year. Full-year capital expenditures are expected to range between $70$75 million and $80$85 million in 2019.2020. We expect maintenance capital expenditures to be in the range of $60 million toapproximately $65 million and the capital expenditures related to additional growth to be in the range of $10 million and $15$20 million in 2019. 2020.
•Proceeds from the sale of property, plant, and equipment and other assets totaled $2.2$7.0 million for the six months ended June 30, 2019,2020, compared to $1.1$2.2 million for the same period in 2018. 2019.
•Cash paid for acquisitions, net of cash acquired, was $22.8$313.9 million for the six months ended June 30, 20192020 compared to $25.0$22.8 million for the same period in 2018.2019. There was no divestiture activity for the six months ended June 30, 20192020 and 2018.2019.
Financing Activities. Net cash requiredprovided by financing activities during the six months ended June 30, 20192020 was $97.8$138.2 million compared to $57.2net cash required by financing activities of $97.8 million for the same period in 2018. 2019.
•Current year to date activity was primarily related to proceeds from the $80.0issuance of the $150 million repayments of advancesterm loan, as the $100.0 million precautionary advance under the Company's revolving credit facility while priorwas borrowed and repaid during the
period. Prior year to date activity was primarily related to net transfers to Former Parent totaling $54.0 million.repayments of advances of $80 million under the revolving credit facility.
Other Investing and Financing Activities
Revolving Credit Facility
On November 1, 2018,January 2, 2020, the Company entered into a $400.0 million unsecuredan Amended and Restated Credit Agreement to increase the revolving credit facility that maturesto $500.0 million and added a term loan facility of $150.0 million, in November 2023. each case with a maturity date of January 2, 2025.
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 that isfor borrowing and commitment fee rate are determined based on Arcosa’s leverage as measured by a consolidated total indebtedness to consolidated EBITDA ratio, which is currentlyratio. The margin for borrowing ranges from 1.25% to 2.00% and was set at LIBOR plus 1.25%. A1.50% as of June 30, 2020. The commitment fee accrues onrate ranges from 0.20% to 0.35% and was set at 0.25% as of June 30, 2020.
In March 2020, as a precautionary measure, the average daily unused portion of theCompany borrowed $100.0 million under its revolving facility at the current rate of 0.20%. Borrowings under the credit facility are guaranteed by certain wholly-owned subsidiaries ofto increase our cash position and preserve financial flexibility considering the Company.
uncertainty resulting from the COVID-19 pandemic. The Company subsequently repaid the $100.0 million during the three months ended June 30, 2020. As of June 30, 2019,2020, we had $100.0 million of outstanding loans borrowed and $46.2$26.0 million of letters of credit issued under the facility, leaving $253.8$374.0 million available.
The entire term loan was advanced on January 2, 2020 in connection with the closing of the acquisition of Cherry.
The Company's revolving credit facility requiresand term loan facilities require the maintenance of certain ratios related to leverage and interest coverage. As of June 30, 2019,2020, we were in compliance with all such financial covenants. Borrowings under the credit agreement are guaranteed by certain wholly-owned subsidiaries of the Company.
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. The Company further believes that its financial resources will allow it to manage the anticipated impact of COVID-19 on the Company's business operations for the foreseeable future. The macroeconomic uncertainties posed by COVID-19 are evolving rapidly. Consequently, the Company will continue to evaluate its financial position in light of future developments, particularly those relating to COVID-19.
Dividends and Repurchase Program
In May 2019,2020, the Company declared a quarterly cash dividend of $0.05 per share to be paid inon July 2019.31, 2020.
In December 2018, the Company’s Board of Directors authorized a $50 million share repurchase program effective December 5, 2018 through December 31, 2020. Under the program, the Company repurchased 269,57456,836 shares at a cost of $8.0$2.0 million during the six months ended June 30, 2019, leaving2020. As of June 30, 2020, the Company had a remaining authorization of $39.0 million.$34.0 million under the program. See Note 1 “Overview and Summary of Significant Accounting Policies”the Notes to the Consolidated and Combined 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 2023, to reduce the effect of changes in the variable interest rates associated with borrowings under the revolving credit facility. The instrument carried an initial notional amount of $100.0 million, thereby hedging the first $100.0 million of borrowings under the credit facility. The instrument effectively fixes the LIBOR component of the credit facility borrowings at a monthly rate of 2.71%. As of June 30, 2019,2020, the Company has recorded a liability of $4.6$8.6 million for the fair value of the instrument, all of which is recorded in accumulated other comprehensive loss. See Note 3 “Fair Value Accounting” and Note 7 “Debt”of the Notes to the Consolidated and Combined Financial Statements.
Off-Balance Sheet Arrangements
As of June 30, 2019,2020, we had letters of credit issued under our revolving credit facility in an aggregate principal amount of $46.2$26.0 million. Of the outstanding letters of credit as of June 30, 2019, $29.12020, $25.4 million are expected to expire in 2019,2020, with the remainder in 2020.2021. The majority of our letters of credit obligations support the Company’s various insurance programs and warranty claims and generally renew by their terms each year. See Note 7 “Debt”of the Notes to the Consolidated and Combined Financial Statements.
Recent Accounting Pronouncements
See Note 1 “Overview and Summary of Significant Accounting Policies” of the Notes to the Consolidated and Combined Financial Statements for information about recent accounting pronouncements.
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.statements and involve risks and uncertainties. These forward-looking statements include expectations, beliefs, plans, objectives, future financial performances, estimates, projections, goals, and forecasts. TheArcosa uses the words “anticipates,” “assumes,” “believes,” “estimates,” “expects,” “intends,” “forecasts,” “may,” “will,” “should”“should,” and similar expressions generallyto identify these forward-looking statements. Forward-looking statements involve risks and uncertainties thatPotential factors, which could cause our actual results of operations to differ materially from those in the forward-looking statements including,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 Arcosa'sour business products and services;
•the cyclical nature of the industries in which Arcosa competes;we compete;
•variations in weather in areas where Arcosaour 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, including the Cherry acquisition;
•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 Arcosa'sour manufacturing businesses;
•availability and costs of steel, component parts, supplies, and other raw materials;
competition and other competitive factors;
•changing technologies;
•surcharges and other fees added to fixed pricing agreements for steel, component parts, supplies and other raw materials;
•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 Arcosa'sour products with mandated specifications, standards, or testing criteria and obligations to remove and replace Arcosa'sour products following installation or to recall our products and install different products manufactured by Arcosaus 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 use of social or digital media to disseminate false, misleading and/or unreliable or inaccurate information;
•the inability to sufficiently protect our intellectual property rights;
•if Arcosathe Company does not realize some or all of the benefits expected to result from the spin-off,Separation, or if such benefits are delayed;
Arcosa's•the Company's ongoing businesses may be adversely affected and subject to certain risks and consequences as a result of the spin-off transaction;Separation;
•if the distribution of shares of Arcosa resulting from 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 spin-off transactionSeparation does not comply with state and federal fraudulent conveyance laws and legal dividend requirements.
Any forward-looking statement speaks only as of the date on which such statement is made. We undertakeArcosa undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, except as required by applicable federal securities laws. Factorsmade. For a discussion of risks and uncertainties that could cause actual results or events to differ materially from those anticipated includecontained in the matters described under the section entitledforward-looking statements, see Item 1A, “Risk Factors” in our 20182019 Annual Report on Form 10-K.10-K and this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There has been no material change in our market risks since December 31, 20182019 as set forth in our 20182019 Annual Report on Form 10-K. See Note 9 “Other, Net” of the Notes to Consolidated and Combined Financial Statements for the impact of foreign exchange rate fluctuations for the three and six months ended June 30, 2019.2020.
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.
As permitted by the SEC Staff interpretive guidance for recently acquired businesses, management's assessment and conclusion on the effectiveness of the Company's disclosure controls and procedures as of June 30, 20192020 excludes an assessment of the internal control over financial reporting of the ACGCherry business acquired in December 2018.January 2020. The ACGCherry business represents approximately 18%14% of consolidated total assets and approximately 9% of consolidated revenues as of and for the six months ended June 30, 2019.2020.
PART II
Item 1.Legal Proceedings
None.On July 22, 2019, the Company was served with a breach of contract lawsuit filed by Thomas & Betts Corporation (“T&B”) against the Company and its wholly-owned subsidiary, Trinity Meyer Utility Structures, LLC, now known as Meyer Utility Structures, LLC (“Meyer”), in the Supreme Court of the State of New York, New York County. T&B’s claims relate to responsibility for alleged product warranty claims pursuant to the terms of the Asset Purchase Agreement, dated June 24, 2014, entered into by and between T&B and Meyer with respect to Meyer’s purchase of certain assets of T&B’s utility structure business. The Company and Meyer subsequently removed the litigation to federal court. The case is currently pending under Case No. 1:19-cv-07829-PAE; Thomas & Betts Corporation, now known as, ABB Installation Products, Inc., Plaintiff, v. Trinity Meyer Utility Structures, LLC, formerly known as McKinley 2014 Acquisition, LLC, and Arcosa, Inc., Defendants; In the United States District Court for the Southern District of New York. The Company and Meyer have filed a motion to dismiss T&B’s claims, and an Answer and Counterclaims against T&B. We intend to vigorously defend ourselves in this matter.
Item 1A.Risk Factors
There have been no material changes in the Company's risk factors from those set forth in our 20182019 Annual Report on Form 10-K.10-K, except as follows:
Arcosa’s business, financial condition and results of operations may be adversely affected by the recent global COVID-19 outbreak and other similar outbreaks.
Arcosa’s business, financial condition and results of operations may be adversely affected if a pandemic or outbreak of an infectious disease occurs. For example, the current outbreak of COVID-19 has disrupted global trade, commerce, financial and credit markets, and daily life throughout the world.Our highest priority is the health and safety of our employees, and our facilities follow the highest standards to safeguard our employees' health and safety. The United States Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency currently identifies our employees as an Essential Critical Infrastructure Workforce. We have similar designations from the state governments where our manufacturing facilities are located. This essential critical classification currently allows Arcosa’s physical operations to continue. We continue to monitor our operations and the impact of government orders and recommendations. Arcosa maintains facilities throughout the United States, most of which have been or are currently subject to stay-at-home, shelter-in-place, or other restrictive orders under state and local ordinances, with some employees having to work remotely if possible. While some of our employees can work remotely, most of Arcosa’s manufacturing operations requires our employees to physically work in our manufacturing facilities. If federal, state, or local authorities determine that Arcosa’s operations are non-essential or non-critical, or if one or more of Arcosa’s facilities become subject to governmental ordered closure, voluntary temporary closure, or closure from a COVID-19 outbreak within the facility, the business, financial condition, and results of operations for the affected segment or for Arcosa as a whole could be materially affected.
In addition, certain of Arcosa’s workers and operations are located in areas where travel and curfew restrictions have been imposed, such as Mexico. Disruptions to Arcosa’s cross-border business transactions and activities caused by COVID-19 could materially affect Arcosa’s business and results of operations.
The extent to which the COVID-19 pandemic impacts our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of the pandemic; governmental, business, and individuals’ actions that have been and continue to be taken in response to the pandemic; the impact of the pandemic on economic activity, including the length of any related recession, and actions taken in response; the effect on our customers and customer demand for our products and services; our ability to sell and provide our products and services, including as a result of travel restrictions and people working from home; if members of our management and other key personnel in critical functions across Arcosa are unable to perform their duties or have limited availability; the ability of our customers to pay for our products and services; any disruption in our supply chain; the ability to procure the required personal protectiveequipment for our employees; our ability to continue operations in compliance with COVID-19 related regulations; and any closures of our and our customers’ facilities; cybersecurity and IT infrastructure risks from the increase in our employees' remote working; the impact of the COVID-19 pandemic on the health and safety of our employees; the impact of the COVID-19 pandemic on the demand for commodities, including oil, served by our products and services; and the pace of recovery when the COVID-19 pandemic subsides, as well as, the response to a potential reoccurrence. In addition, the negative impact on the economy could cause customers to postpone projects, cancel or delay orders, or file bankruptcy. Any of these events could cause or contribute to the risks and uncertainties enumerated in our Annual Report on Form 10-K and could materially adversely affect our business, financial condition, results of operations and/or stock price.
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 June 30, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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) |
April 1, 2020 through April 30, 2020 | | 43 | | | $ | 37.70 | | | — | | | $ | 34,030,774 | |
May 1, 2020 through May 31, 2020 | | 102,563 | | | $ | 32.31 | | | — | | | $ | 34,030,774 | |
June 1, 2020 through June 30, 2020 | | 212 | | | $ | 37.76 | | | — | | | $ | 34,030,774 | |
Total | | 102,818 | | | $ | 32.32 | | | — | | | $ | 34,030,774 | |
|
| | | | | | | | | | | | | | |
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) |
April 1, 2019 through April 30, 2019 | | 151 |
| | $ | 30.72 |
| | — |
| | $ | 39,023,255 |
|
May 1, 2019 through May 31, 2019 | | 106,086 |
| | $ | 36.16 |
| | — |
| | $ | 39,023,255 |
|
June 1, 2019 through June 30, 2019 | | 270 |
| | $ | 36.09 |
| | — |
| | $ | 39,023,255 |
|
Total | | 106,507 |
| | $ | 36.15 |
| | — |
| | $ | 39,023,255 |
|
| |
(1)
| These columns include the surrender to the Company of 106,507 shares of common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock and restricted stock units issued to employees. |
| |
(2)
| In December 2018, the Company’s Board of Directors authorized a new $50.0 million share repurchase program that expires December 31, 2020. |
(1) These columns include the surrender to the Company of 102,818 shares of common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees. (2) In December 2018, the Company’s Board of Directors authorized a $50 million share repurchase program that expires December 31, 2020.
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.
Item 6. Exhibits
|
| | | | | | | |
NO. | | DESCRIPTION |
3.1 | | |
3.2 | | |
10.1 | | |
10.210.1.1 | | |
10.310.1.2 | | |
10.410.1.3 | | |
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). |
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. | By | /s/ Scott C. Beasley |
Registrant | | |
| | Scott C. Beasley |
| | Chief Financial Officer |
| | August 2, 2019July 31, 2020 |