Washington, D.C. 20549
For the transition period from _________ to _________ .
Arcosa, Inc.
Arcosa, Inc. and Subsidiaries
See accompanying notesNotes to combined financial statements.Consolidated Financial Statements.
Arcosa, Inc. and Subsidiaries
Combined StatementConsolidated Statements of ParentStockholders' Equity
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Common
Stock | | Capital in
Excess of
Par Value | | Retained
Earnings | | Accumulated
Other
Comprehensive
Loss | | Treasury
Stock | | Total
Stockholders’
Equity |
| | | Shares | | $0.01 Par Value | | | | | Shares | | Amount | |
| | | (in millions, except par value) |
| Balances at June 30, 2019 | | | | 48.4 | | | $ | 0.5 | | | $ | 1,679.8 | | | $ | 74.0 | | | $ | (20.0) | | | 0 | | | $ | 0 | | | $ | 1,734.3 | |
| Net income | | | | — | | | — | | | — | | | 32.7 | | | — | | | — | | | — | | | 32.7 | |
| Other comprehensive loss | | | | — | | | — | | | — | | | — | | | (0.6) | | | — | | | — | | | (0.6) | |
| Cash dividends on common stock | | | | — | | | — | | | — | | | (2.4) | | | — | | | — | | | — | | | (2.4) | |
| Restricted shares, net | | | | 0 | | | — | | | 4.3 | | | — | | | — | | | 0 | | | (0.2) | | | 4.1 | |
| Shares repurchased | | | | — | | | — | | | — | | | — | | | — | | | (0.1) | | | (3.0) | | | (3.0) | |
| | | | | | | | | | | | | | | | | | |
| Other | | | | — | | | — | | | 0.5 | | | — | | | — | | | — | | | — | | | 0.5 | |
| Balances at September 30, 2019 | | | | 48.4 | | | $ | 0.5 | | | $ | 1,684.6 | | | $ | 104.3 | | | $ | (20.6) | | | (0.1) | | | $ | (3.2) | | | $ | 1,765.6 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Balances at June 30, 2020 | | | | 48.3 | | | $ | 0.5 | | | $ | 1,689.4 | | | $ | 182.9 | | | $ | (23.7) | | | 0 | | | $ | 0 | | | $ | 1,849.1 | |
| Net income | | | | — | | | — | | | — | | | 31.2 | | | — | | | — | | | — | | | 31.2 | |
| Other comprehensive income | | | | — | | | — | | | — | | | — | | | 0.7 | | | — | | | — | | | 0.7 | |
| Cash dividends on common stock | | | | — | | | — | | | — | | | (2.4) | | | — | | | — | | | — | | | (2.4) | |
| Restricted shares, net | | | | 0 | | | — | | | 6.4 | | | — | | | — | | | 0 | | | (1.4) | | | 5.0 | |
| Shares repurchased | | | | — | | | — | | | — | | | — | | | — | | | 0 | | | (2.0) | | | (2.0) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Balances at September 30, 2020 | | | | 48.3 | | | $ | 0.5 | | | $ | 1,695.8 | | | $ | 211.7 | | | $ | (23.0) | | | 0 | | | $ | (3.4) | | | $ | 1,881.6 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Balances at December 31, 2018 | | | | 48.8 | | | $ | 0.5 | | | $ | 1,685.7 | | | $ | 19.5 | | | $ | (17.7) | | | (0.1) | | | $ | (3.5) | | | $ | 1,684.5 | |
| Net income | | | | — | | | — | | | — | | | 92.2 | | | — | | | — | | | — | | | 92.2 | |
| Other comprehensive loss | | | | — | | | — | | | — | | | — | | | (2.9) | | | — | | | — | | | (2.9) | |
| Cash dividends on common stock | | | | — | | | — | | | — | | | (7.4) | | | — | | | — | | | — | | | (7.4) | |
| Restricted shares, net | | | | 0.2 | | | — | | | 12.1 | | | — | | | — | | | (0.2) | | | (5.1) | | | 7.0 | |
| Shares repurchased | | | | — | | | — | | | — | | | — | | | — | | | (0.4) | | | (11.0) | | | (11.0) | |
| Retirement of treasury stock | | | | (0.6) | | | — | | | (16.4) | | | — | | | — | | | 0.6 | | | 16.4 | | | 0 | |
| Other | | | | — | | | — | | | 3.2 | | | — | | | — | | | — | | | — | | | 3.2 | |
| Balances at September 30, 2019 | | | | 48.4 | | | $ | 0.5 | | | $ | 1,684.6 | | | $ | 104.3 | | | $ | (20.6) | | | (0.1) | | | $ | (3.2) | | | $ | 1,765.6 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Balances at December 31, 2019 | | | | 48.3 | | | $ | 0.5 | | | $ | 1,686.7 | | | $ | 122.9�� | | | $ | (19.7) | | | 0 | | | $ | 0 | | | $ | 1,790.4 | |
| Net income | | | | — | | | — | | | — | | | 96.1 | | | — | | | — | | | — | | | 96.1 | |
| Other comprehensive loss | | | | — | | | — | | | — | | | — | | | (3.3) | | | — | | | — | | | (3.3) | |
| Cash dividends on common stock | | | | — | | | — | | | — | | | (7.3) | | | — | | | — | | | — | | | (7.3) | |
| Restricted shares, net | | | | 0.2 | | | — | | | 16.9 | | | — | | | — | | | (0.1) | | | (6.4) | | | 10.5 | |
| Shares repurchased | | | | — | | | — | | | — | | | — | | | — | | | (0.1) | | | (4.0) | | | (4.0) | |
| Retirement of treasury stock | | | | (0.2) | | | — | | | (7.0) | | | — | | | — | | | 0.2 | | | 7.0 | | | 0 | |
| Other | | | | — | | | — | | | (0.8) | | | — | | | — | | | — | | | — | | | (0.8) | |
| Balances at September 30, 2020 | | | | 48.3 | | | $ | 0.5 | | | $ | 1,695.8 | | | $ | 211.7 | | | $ | (23.0) | | | 0 | | | $ | (3.4) | | | $ | 1,881.6 | |
|
| | | | | | | | | | | | |
| | | Net Parent Investment | | Accumulated Other Comprehensive Loss | | Total Parent Equity |
| | | | |
| | | (in millions) |
| Balances at December 31, 2017 | | $ | 1,427.7 |
| | $ | (19.8 | ) | | $ | 1,407.9 |
|
| Cumulative effect of adopting accounting standards (see Note 1) | | (4.0 | ) | | — |
| | (4.0 | ) |
| Net income | | 48.0 |
| | — |
| | 48.0 |
|
| Other comprehensive income (loss) | | — |
| | 0.4 |
| | 0.4 |
|
| Net transfers from parent and affiliates | | (56.7 | ) | | — |
| | (56.7 | ) |
| Restricted shares, net | | 7.5 |
| | — |
| | 7.5 |
|
| Balances at September 30, 2018 | | $ | 1,422.5 |
| | $ | (19.4 | ) | | $ | 1,403.1 |
|
See accompanying notesNotes to combined financial statements.Consolidated Financial Statements.
Arcosa, Inc. and Subsidiaries
Notes to CombinedConsolidated Financial Statements
(Unaudited)(unaudited)
Note 1. Overview and Summary of Significant Accounting Policies
Basis of Presentation
On December 12, 2017,Arcosa, Inc. and its consolidated subsidiaries (“Arcosa,” the “Company,” “we,” or “our”), headquartered in Dallas, Texas, is a provider of infrastructure-related products and solutions with leading brands serving construction, 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. (together with its subsidiaries, "Trinity") announced its intention to separate its infrastructure-related businesses, which include its construction products, energy equipment, and transportation products businesses, from the rest of Trinity by means of a spin-off. On September 25, 2018, Trinity’s Board of Directors formally approved the separation of its infrastructure-related businesses from Trinity through a distribution of all of the common stock of Arcosa, Inc. (Arcosa, Inc. and its subsidiaries, "Arcosa"(“Trinity” or "Company") held by Trinity to Trinity stockholders. Amendment No. 6 to Arcosa's Registration Statement on Form 10 filed with the Securities and Exchange Commission ("SEC"“Former Parent”) on September 27, 2018, ("Form 10"), was declared effective by the SEC on October 1, 2018. On November 1, 2018 Trinity stockholders received one share of Arcosa common stock for every three shares of Trinity common stock held as of 5:00 p.m. localan independent, publicly-traded company, listed on the New York City time on October 17, 2018, the record date for the distribution. Stock Exchange (the “Separation”).
The transaction was structured to be tax-free to both Trinity and Arcosa stockholders for U.S. federal income tax purposes.
Throughout the period covered by the Combinedaccompanying Consolidated Financial Statements Arcosa operated as part of Trinity. Consequently, standalone financial statements have not been historically prepared for Arcosa. The accompanying Combined Financial Statementsare unaudited and have been prepared from Trinity's historical accountingthe books and records and are presented on a standalone basis as if the operations had been conducted independently from Trinity. Accordingly, Trinity's net investment in Arcosa's operations (Parent Equity) is shown in lieu of stockholders' equity in the accompanying Combined Financial Statements, which include the historical operations, assets, and liabilities of the legal entities that are considered to comprise Arcosa. The historical results of operations, financial position, and cash flows of Arcosa, represented in the Combined Financial Statements may neither be indicative of what they would have been had Arcosa actually been a separate standalone entity during such periods nor necessarily indicative of Arcosa's future results of operations, financial position,Inc. and cash flows.
its consolidated subsidiaries. All normal and recurring adjustments necessary for a fair presentation of the financial position of the Company as of September 30, 2018, and the results of operations, comprehensive income/loss, and cash flows for the three and nine months ended September 30, 2018 and 2017, have been made in conformity with accounting principles generally accepted accounting principles.in the U.S. (“GAAP”). All significant intercompany accounts and transactions have been eliminated. Because of seasonal and other factors, including the unknown potential duration, spread, severity, and impact of the COVID-19 pandemic, Arcosa's business, financial condition, and results of operations for the three and nine months ended September 30, 20182020 may not be indicative of Arcosa's expected business, financial condition, and results of operations for the year ending December 31, 2018. 2020.
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 combined financial statementsConsolidated and Combined Financial Statements of the Company included in its Annual Report on Form 1010-K for the year ended December 31, 2017.2019.
Relationship with Parent and Related EntitiesStockholders' Equity
Arcosa has been managed and operated inIn December 2018, the normal courseCompany’s Board of business with other business units of Trinity. The accompanying Combined Financial Statements include sales and purchase transactions with Trinity and its subsidiaries in addition to certain shared costs which have been allocated to Arcosa and reflected as expenses in the combined statements of comprehensive income. Transactions and allocations between Trinity and Arcosa are reflected in equity in the combined balance sheets as Net Parent Investment and in the combined statements of cash flows asDirectors (the “Board”) authorized a financing activity in Net transfers from/(to) parent and affiliates. All transactions and allocations between Trinity and Arcosa have been deemed paid between the parties, in cash, in the period in which the transaction or allocation was recorded in the Combined Financial Statements. Disbursements and cash receipts are made$50 million share repurchase program effective December 5, 2018 through centralized accounts payable and cash collection systems, respectively, which are operated by Trinity. As cash is disbursed and received by Trinity, it is accounted for by Arcosa through the Net Parent Investment account. Allocations of current income taxes receivable or payable are deemed to have been remitted to Arcosa or Trinity, respectively, in cash, in the period to which the receivable or payable applies.
Corporate Costs/Allocations
The Combined Financial Statements include an allocation of costs related to certain corporate functions incurred by Trinity for services that are provided to or on behalf of Arcosa. Corporate costs have been allocated to Arcosa using methods management believes are consistent and reasonable. Such cost allocations to Arcosa consist of (1) shared service charges and (2) corporate overhead costs. Shared service charges consist of monthly charges to each Trinity business unit for certain corporate functions such as information technology, human resources, and legal based on usage rates and activity units. Corporate overhead costs consist of costs not previously allocated to Trinity's business units and were allocated to Arcosa based on an analysis of each cost function and the relative benefits received by Arcosa for each of the periods. Corporate overhead costs allocated to Arcosa totaled $9.1 million and $10.6 million forDecember 31, 2020. For the three months ended September 30, 2018 and 2017, respectively, and $24.7 million and $28.0 million for the nine months ended September 30, 20182020, the Company repurchased 45,446 and 2017,102,282 shares at a cost of $2.0 million and $4.0 million, respectively. Corporate overhead costs are included in selling, engineering, and administrative expenses inAs of September 30, 2020, the accompanying combined statementsCompany had a remaining authorization of comprehensive income. Also see Note 3 “Segment Information”.
The Combined Financial Statements of Arcosa may not include all of$32.0 million under the actual expenses that would have been incurred had we operated as a standalone company during the periods presented and may not reflect our combined results of operations, financial position, and cash flows had we operated as a standalone company during the periods presented. Actual costs that would have been incurred if we had operated as a standalone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. We also may incur additional costs associated with being a standalone, independent, publicly-traded company that were not included in the expense allocations and, therefore, would result in additional costs that are not reflected in our historical results of operations, financial position, and cash flows.
Transactions with other Trinity Businesses
Transactions with other Trinity businesses for purchases or sales of products and services are as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (in millions) |
| Sales by Arcosa to Trinity businesses | $ | 43.8 |
| | $ | 38.7 |
| | $ | 119.9 |
| | $ | 102.9 |
|
| Purchases by Arcosa from Trinity businesses | $ | 10.7 |
| | $ | 9.2 |
| | $ | 35.5 |
| | $ | 37.5 |
|
Revenue Recognition
Revenue is measured based on the allocation of the transaction price in a contract to satisfied performance obligations. The transaction price does not include any amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. The following is a description of principal activities from which the Company generates its revenue, separated by reportable segments. Payments for our products and services are generally due within normal commercial terms. For a further discussion regarding the Company’s reportable segments, see Note 3 "Segment Information".4 Segment Information.
Construction Products Group
The Construction Products Group recognizes substantially all revenue when the customer has accepted the product and legal title of the product has passed to the customer.
Energy Equipment Group
Within the Energy Equipment Group, revenue is recognized for our wind tower, and 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 September 30, 2020, we had a contract asset of $40.0 million related to these contracts, compared to $50.8 million at December 31, 2019, which is included in receivables, net of allowance, within the Consolidated Balance 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.
Transportation Products Group
The Transportation Products Group recognizes revenue when the customer has accepted the product and legal title of the product has passed to the customer.
Unsatisfied Performance Obligations
The following table includes estimated revenue expected to be recognized in future periods related to performance obligations that are unsatisfied or partially satisfied as of September 30, 20182020 and the percentage of the outstanding performance obligations as of September 30, 20182020 expected to be delivered during the remainder of 2018:2020:
| | | | Unsatisfied performance obligations at September 30, 2018 | | Unsatisfied performance obligations at September 30, 2020 | |
| | Total Amount | | Percent expected to be delivered in 2018 | | Total
Amount | | Percent expected to be delivered in 2020 | |
| | (in millions) | | | | (in millions) | | | |
| Energy Equipment Group: | | | | Energy Equipment Group: | | |
| Wind towers and utility structures | $ | 700.3 |
| | 23 | % | Wind towers and utility structures | $ | 429.3 | | | 32 | % | |
| Other | $ | 83.5 |
| | 37 | % | Other | $ | 13.3 | | | 77 | % | |
| | | | | | |
| Transportation Products Group: | | | | Transportation Products Group: | | |
| Inland barges | $ | 210.4 |
| | 21 | % | Inland barges | $ | 177.5 | | | 45 | % | |
The remainder of the unsatisfied performance obligations for wind towers and utility structures and inland barges are expected to be delivered through 2020. Substantially all other unsatisfied performance obligations beyond 20182020 are expected to be delivered during 2019.2021. Subsequent to September 30, 2020, we received additional orders of approximately $32 million for inland barges expected to be delivered in 2021.
Income Taxes
Income taxes as presented herein attribute current and deferred income taxes of Trinity to Arcosa's Combined Financial Statements in a manner that is systematic, rational, and consistent with the asset and liability method prescribed by the Accounting Standards Codification Topic 740 - Income Taxes ("ASC 740"). Accordingly, Arcosa's income tax provision has been prepared following the separate return method. The separate return method applies ASC 740 to the combined financial statements of each member of the consolidated group as if the group member were a separate taxpayer and a standalone enterprise. As a result, actual tax transactions included in the consolidated financial statements of Trinity may not be included in the separate Combined Financial Statements of Arcosa. Similarly, the tax treatment of certain items reflected in the Combined Financial Statements of Arcosa may not be reflected in the consolidated financial statements and tax returns of Trinity; items such as net operating losses, credit carryforwards, and valuation allowances may exist in the Combined Financial Statements, however, they may or may not exist in Trinity's consolidated financial statements. Allocations of current income taxes receivable or payable are deemed to have been remitted to Arcosa or Trinity, respectively, in cash, in the period to which the receivable or payable applies and are accounted for by Arcosa through the Net Parent Investment account.
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.
Financial Instruments
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. ConcentrationsThe Company places its cash investments 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 are limited due towith control procedures that monitor the creditworthinesscredit 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 in the Company's Consolidated Statements of Operations for the three and nine months ended September 30, 2020 was not significant. The carrying values of cash, and cash equivalents, receivables, and accounts payable are considered to be representative of their respective fair values.
Other Comprehensive Income (Loss)Derivative Instruments
Other comprehensive income (loss) consistsThe 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 translation adjustments.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.
Recent Accounting Pronouncements
Recently adopted accounting pronouncements
Effective as of January 1, 2018,2019, the Company adopted Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers," ("2016-02, “Leases”, (“ASU 2014-09") which provides common revenue recognition guidance for U.S. generally accepted accounting principles. Under ASU 2014-09, an entity recognizes revenue when it transfers promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or services. It also requires additional detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The Company applied ASU 2014-09 to all contracts that were not complete as of January 1, 2018 using the modified retrospective method of adoption, resulting in a reduction to Net Parent Investment of $4.0 million, net of tax, as of January 1, 2018 related to the cumulative effect of applying this standard. Therefore, the comparative information for the three and nine months ended September 30, 2017 has not been adjusted and continues to be reported under ASC Topic 605.
The primary impact of adopting the standard is a change in the timing of revenue recognition for our wind towers and certain utility structures product lines within our Energy Equipment Group. Previously, the Company recognized revenue when the product was delivered. Under ASU 2014-09, revenue is recognized over time as the products are manufactured. Revenue recognition policies in our other business segments remain substantially unchanged.
The following tables summarize the impact of adopting ASU 2014-09 on the Company’s Combined Financial Statements as of September 30, 2018 and for the three and nine months then ended:
|
| | | | | | | | | | | |
| | As Reported | | Adjustments | | Balance without adjustment for adoption of ASU 2014-09 |
| | (in millions) |
| Combined Statement of Comprehensive Income | | | | | |
| For the three months ended September 30, 2018: | | | | | |
| Revenues | $ | 378.6 |
| | $ | (8.3 | ) | | $ | 370.3 |
|
| Cost of revenues | 308.9 |
| | (5.7 | ) | | 303.2 |
|
| Operating profit | 6.4 |
| | (2.6 | ) | | 3.8 |
|
| Income before income taxes | 6.6 |
| | (2.6 | ) | | 4.0 |
|
| Provision for income taxes | 3.4 |
| | (0.6 | ) | | 2.8 |
|
| Net income | 3.2 |
| | (2.0 | ) | | 1.2 |
|
| | | | | | |
| For the nine months ended September 30, 2018: | | | | | |
| Revenues | $ | 1,086.0 |
| | $ | 6.4 |
| | $ | 1,092.4 |
|
| Cost of revenues | 877.5 |
| | 5.4 |
| | 882.9 |
|
| Operating profit | 68.2 |
| | 1.0 |
| | 69.2 |
|
| Income before income taxes | 66.2 |
| | 1.0 |
| | 67.2 |
|
| Provision for income taxes | 18.2 |
| | 0.2 |
| | 18.4 |
|
| Net income | 48.0 |
| | 0.8 |
| | 48.8 |
|
| | | | | | |
| Combined Balance Sheet | | | | | |
| Receivables, net of allowance | $ | 174.7 |
| | $ | (16.1 | ) | | $ | 158.6 |
|
| Inventories: | | | | | |
| Raw materials and supplies | 126.4 |
| | — |
| | 126.4 |
|
| Work in process | 33.8 |
| | 17.1 |
| | 50.9 |
|
| Finished goods | 74.5 |
| | 5.4 |
| | 79.9 |
|
| | | | | | |
| Accrued liabilities | 109.1 |
| | (0.1 | ) | | 109.0 |
|
| Deferred income taxes | 16.8 |
| | 1.5 |
| | 18.3 |
|
| Net parent investment | 1,422.5 |
| | 5.0 |
| | 1,427.5 |
|
| | | | | | |
| Combined Statement of Cash Flows | | | | | |
| For the nine months ended September 30, 2018: | | | | | |
| Operating activities: | | | | | |
| Net income | $ | 48.0 |
| | $ | 0.8 |
| | $ | 48.8 |
|
| Provision for deferred income taxes | 7.1 |
| | 0.2 |
| | 7.3 |
|
| (Increase) decrease in receivables | 10.9 |
| | 8.3 |
| | 19.2 |
|
| (Increase) decrease in inventories | (31.6 | ) | | 5.4 |
| | (26.2 | ) |
| Increase (decrease) in accrued liabilities | (13.8 | ) | | (14.7 | ) | | (28.5 | ) |
| Net cash provided by operating activities | 118.5 |
| | — |
| | 118.5 |
|
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, "Leases", ("ASU 2016-02"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.
Effective as of January 1, 2020, the Company adopted Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses”, (“ASU 2016-022016-13”), which amends the existing accounting guidance for recognizing credit losses on financial assets and certain other instruments not measured at fair value through net income, including financial assets measured at amortized cost, such as trade receivables and contract assets. ASU 2016-13 replaces the existing incurred loss impairment model with an expected credit loss model that requires consideration of a broader range of information to estimate expected credit losses over the lifetime of the asset. The adoption of this guidance did not have a material effect on the Company’s Consolidated Financial Statements.
Recently issued accounting pronouncements not adopted as of September 30, 2020
In December 2019, the FASB issued Accounting Standards Updated No. 2019-12, “Simplifying the Accounting for Income Taxes”, (“ASU 2019-12”), which simplifies the accounting for income taxes by removing certain exceptions to the general principles for income taxes. ASU 2019-12 will become effective for public companies during interim and annual reporting periods beginning after December 15, 2018,2020, with early adoption permitted. The Company plans to adopt ASU 2016-02 effective January 1, 2019. We are finalizing our assessmentcurrently evaluating the impact of the effects of the new standard, including its effectsadoption on our CombinedConsolidated Financial Statements.
In February 2018,March 2020, the FASB issued Accounting Standards Update No. 2018-02, “Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”,2020-04, “Reference Rate Reform” (“ASU 2018-02”2020-04”) which gives entitiesprovides optional guidance for contract modifications, hedging accounting, and other transactions associated with the optiontransition from reference rates that are expected to reclassify from Accumulated Other Comprehensive Loss ("AOCL") to retained earnings the stranded tax effects resulting from the Tax Cuts and Jobs Act (the"Act") enacted on December 22, 2017.be discontinued. ASU 2018-02 will become2020-04 is effective for public companies during interim and annual reporting periods beginning afterall entities upon issuance through December 15, 2018,31, 2022. We are still evaluating the impact of adoption, but do not expect the guidance to have a material impact on our Consolidated Financial Statements.
Reclassifications
Certain prior year balances have been reclassified in the Consolidated Financial Statements to conform with early adoption permitted. The Company elected to adopt ASU 2018-02 as of January 1, 2018 resulting in a reclassification adjustment from AOCL for the nine months ended September 30, 2018 which was not significant.2020 presentation.
Note 2. Acquisitions and Divestitures
2020 Acquisitions
In March 2018,On January 6, 2020, we completed the stock acquisition of certain assetsCherry Industries, Inc. and affiliated entities (“Cherry”), a leading producer of an inland barge businessnatural and recycled aggregates in the Houston, Texas market which is included in our Construction Products Group. The purchase price of $296.8 million was funded with a purchase pricecombination of cash on-hand, advances under a new $150.0 million five-year term loan, and future payments to the seller for a net cash paid of $25.0 million.$284.1 million during the nine months ended September 30, 2020. See Note 7 Debt for additional information on our credit facility. Non-recurring transaction and integration costs incurred related to the Cherry acquisition were approximately $0.7 million and $2.3 million during the three and nine months ended September 30, 2020, respectively, and approximately $0.5 million during the year ended December 31, 2019. The acquisition was recorded as a business combination based on preliminary valuations of the assets acquired assets and liabilities assumed 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. We expect to complete our purchase price allocation as soon as reasonably possible not to exceed one year from the acquisition date. Adjustments to the preliminary purchase price allocation could be material to the purchase price allocation, particularly with respect to our preliminary estimates of mineral reserves, intangibles, and deferred income taxes. The following table represents our preliminary purchase price allocation as of September 30, 2020:
| | | | | |
| September 30, 2020 |
| (in millions) |
| Accounts receivable | $ | 30.5 | |
| Inventories | 11.8 | |
| Property, plant, and equipment | 58.8 | |
| Mineral reserves | 21.7 | |
| Goodwill | 127.9 | |
| Customer relationships | 60.1 | |
| Permits | 25.5 | |
| Other assets | 4.3 | |
| Accounts payable | (7.5) | |
| Accrued liabilities | (5.4) | |
| Deferred taxes | (28.5) | |
| Other liabilities | (2.4) | |
| Total net assets acquired | $ | 296.8 | |
The goodwill acquired, none of which is tax deductible, primarily relates to Cherry's market position and existing workforce. The customer relationship intangibles and permits were assigned weighted average useful lives of 14.9 years and 19.8 years, respectively. Revenues and operating profit included in the Consolidated Statement of Operations from the date of the acquisition were approximately $41.7 million and $6.9 million, respectively, during the three months ended September 30, 2020 and approximately $130.4 million and $20.7 million, respectively, during the nine months ended September 30, 2020.
The following table represents the unaudited pro-forma consolidated operating results of the Company as if the Cherry acquisition had been completed on January 1, 2019. The unaudited pro-forma information makes certain adjustments to depreciation, depletion, and amortization expense to reflect the fair value recognized in the purchase price allocation, removes one-time transaction related costs, and aligns the Company's debt financing with that as of the acquisition date. The unaudited pro-forma information should not be considered indicative of the results that would have occurred if the acquisition had been completed on January 1, 2019, nor is such unaudited pro-forma information necessarily indicative of future results.
| | | | | | | | | | | | | |
| | | Nine Months Ended
September 30, 2020 | | Year Ended
December 31, 2019 |
| | | (in millions) |
| Revenues | | | $ | 1,476.7 | | | $ | 1,916.9 | |
| Income before income taxes | | | $ | 131.6 | | | $ | 163.8 | |
In March 2020, we completed the acquisition of certain assets or liabilities.and liabilities of a traffic structures business in our Energy Equipment Group for a total purchase price of $25.5 million. The acquisition was recorded as a business combination based on preliminary valuations of the assets acquired and liabilities assumed at their acquisition date fair value using level three inputs. The valuation resulted in the recognition of $9.7$9.0 million of goodwill in our TransportationEnergy Equipment Group. Such assets and liabilities were not significant in relation to assets and liabilities at the consolidated or segment level.
In June 2020, we completed the acquisition of certain assets and liabilities of a concrete poles business in our Energy Equipment Group. The purchase price of the acquisition was not significant.
In July 2020, we completed the acquisition of certain assets and liabilities of a telecommunication structures business in our Energy Equipment Group for a total purchase price of $27.7 million. The acquisition was recorded as a business combination based on preliminary valuations of the assets acquired and liabilities assumed at their acquisition date fair value using level three inputs. The valuation resulted in the recognition of $4.4 million of goodwill in our Energy Equipment Group. Such assets and liabilities were not significant in relation to assets and liabilities at the consolidated or segment level.
In August 2020, we completed the acquisition of certain assets and liabilities of a natural aggregates business in our Construction Products Group for a total purchase price of $25.5 million. The acquisition was recorded as a business combination based on preliminary valuations of the assets acquired and liabilities assumed at their acquisition date fair value using level three inputs. The valuation resulted in the recognition of $8.8 million of goodwill in our Construction Products Group. Such assets and liabilities were not significant in relation to assets and liabilities at the combinedconsolidated or segment level.
In May 2017,October 2020, we completed the stock acquisition of Strata Materials, LLC, a leading provider of natural and recycled aggregates in the Dallas-Fort Worth, Texas area, which will be included in our Construction Products Group for a total purchase price of $87.0 million. The acquisition will be recorded as a business combination and was funded with available cash on-hand.
2019 Acquisitions
In June 2019, we completed the acquisition of the netcertain assets and liabilities of a lightweight aggregatesan inland barge components business and, in July 2017, wewithin our Transportation Products Group. We also completed the acquisition of the netcertain assets and liabilities of a trench shoring products business. Bothnatural aggregates business in our Construction Products Group. The total purchase price for the businesses acquired was $27.6 million, a portion of which includes estimated royalties to be paid to the seller of the natural aggregates business over the next 10 years. The acquisitions were recorded as business combinations with the assets acquired and liabilities assumed recorded at their acquisition date fair value using level three inputs. The valuation resulted in the recognition of $10.4 million of goodwill in our Transportation Products Group and $1.6 million of goodwill in our Construction Products Group. Such acquired assets and liabilities were not significant in relation to assets and liabilities at the combinedconsolidated or segment level.
Definitive Agreement to Acquire ACG Materials
On November 14, 2018, the Company entered into a definitive agreement with an affiliateIn August 2019, we completed acquisitions of H.I.G. Capital, LLC to acquire the ACG Materials business for approximately $315 million. The Company expects to fund the purchase price with a combination of cash on-hand and advances under its $400 million five-year credit facility. The transaction, which has been approved by the Company’s Board of Directors, is subject to customary closing conditions and regulatory provisions under the Hart-Scott-Rodino Act. The transaction is expected to close in the fourth quarter of 2018 or first quarter of 2019.
Divestitures
During the third quarter of 2018, the Company’s management team committed to plans to divest certain businesses whose revenues are included in the other component of the Energy Equipment Group. On October 31, 2018 and November 5, 2018, the Company completed the divestiture of these businesses, which accounted for approximately $20 million of revenues and had an operating loss for the nine months ended September 30, 2018. The net proceeds from these divestitures were not significant.
Accordingly, as of September 30, 2018, assets of $13.5 million and liabilities of $10.3 million related to these businesses have been allocated to the disposal group and are classified as held for sale in our Combined Balance Sheet. These amounts are included in Other current assets and Accrued liabilities, respectively.
As of September 30, 2018, the assets and liabilities of the divestedtwo natural aggregates businesses in our Construction Products Group for a total purchase price of $9.4 million. The acquisitions were recorded as business combinations with the assets acquired and liabilities assumed recorded at their acquisition date fair value less expected costs to sell in accordance with Accounting Standards Codification Topic 360 - Property, Plant, and Equipment. Our fair value estimates consist ofusing level three inputs and were based on our discussions withinputs. The valuation resulted in the buyersrecognition of these businesses. As a result, we recorded a pre-tax impairment charge$1.1 million of $23.2 million during the three months ended September 30, 2018 associated with the write-down of the net assets of these businesses to their estimated fair values.
We have concluded that the divestiture of these businesses does not represent a strategic shift that would result in a material effect on our operations and financial results; therefore, these disposals have not been reflected as discontinued operationsgoodwill in our Combined Financial Statements.Construction Products Group. Such assets and liabilities were not significant in relation to assets and liabilities at the consolidated or segment level.
Divestitures
There was no other0 divestiture activity for the three and nine months ended September 30, 20182020 and 2017.2019.
Note 3. Fair Value Accounting
Assets and liabilities measured at fair value on a recurring basis are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurement as of September 30, 2020 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| (in millions) |
| Assets: | | | | | | | |
| Cash equivalents | $ | 119.1 | | | $ | 0 | | | $ | 0 | | | $ | 119.1 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total assets | $ | 119.1 | | | $ | 0 | | | $ | 0 | | | $ | 119.1 | |
| | | | | | | |
| Liabilities: | | | | | | | |
Interest rate hedge(1) | $ | 0 | | | $ | 7.9 | | | $ | 0 | | | $ | 7.9 | |
Contingent consideration(2) | 0 | | | 0 | | | 9.8 | | | 9.8 | |
| Total liabilities | $ | 0 | | | $ | 7.9 | | | $ | 9.8 | | | $ | 17.7 | |
| | | | | | | |
| | Fair Value Measurement as of December 31, 2019 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| (in millions) |
| Assets: | | | | | | | |
| Cash equivalents | $ | 155.3 | | | $ | 0 | | | $ | 0 | | | $ | 155.3 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total assets | $ | 155.3 | | | $ | 0 | | | $ | 0 | | | $ | 155.3 | |
| | | | | | | |
| Liabilities: | | | | | | | |
Interest rate hedge(1) | $ | 0 | | | $ | 4.3 | | | $ | 0 | | | $ | 4.3 | |
Contingent consideration(2) | 0 | | | 0 | | | 6.4 | | | 6.4 | |
| Total liabilities | $ | 0 | | | $ | 4.3 | | | $ | 6.4 | | | $ | 10.7 | |
(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 3.4. 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 and recycled aggregates and specialty materials, and manufactures and sells trench shields and shoring products and services for infrastructure-related projects.
Energy Equipment. The Energy Equipment segment manufactures and sells productsengineered structures primarily for energy-relatedinfrastructure businesses, including structural wind towers for power generation, steel utility structures for electricity transmission and distribution, traffic structures, and telecommunication structures. These products share similar manufacturing competencies and steel sourcing requirements, and can be manufactured across our North American footprint. The segment also manufactures storage and distribution containers.tanks.
Transportation Products. The Transportation Products segment manufactures and sells products for the inland waterway and rail transportation industries including barges, barge-related products, axles, and couplers.
These segments represent the level at which Arcosa's chief operating decision maker ("CODM") reviews the financial performance of the Company and makes operating decisions. The financial information for these segments is shown in the tables below. We operate principally in North America.
Three Months EndedSeptember 30, 2018 | | | | | | | | | | | | Three Months Ended September 30, |
| | Revenues | | Operating Profit (Loss) | | Revenues | | Operating Profit (Loss) |
| | External | | Intersegment | | Total | | | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) | | (in millions) |
| Construction aggregates | | | | | $ | 52.9 |
| | | Construction aggregates | $ | 128.8 | | | $ | 96.9 | | |
| Other | | | | | 19.7 |
| | | Other | 18.1 | | | 19.0 | | |
| Construction Products Group | $ | 72.6 |
| | $ | — |
| | 72.6 |
| | $ | 15.3 |
| Construction Products Group | 146.9 | | | 115.9 | | | $ | 20.8 | | | $ | 16.5 | |
| | | | | | | | | |
| Wind towers and utility structures | | | | | 147.0 |
| | | Wind towers and utility structures | 181.5 | | | 159.8 | | |
| Other | | | | | 51.4 |
| | | Other | 41.1 | | | 50.4 | | |
| Energy Equipment Group | 197.5 |
| | 0.9 |
| | 198.4 |
| | (13.2 | ) | Energy Equipment Group | 222.6 | | | 210.2 | | | 20.7 | | | 26.6 | |
| | | | | | | | | |
| Inland barges | | | | | 49.3 |
| | | Inland barges | 99.4 | | | 77.5 | | |
| Steel components | | | | | 59.2 |
| | | Steel components | 21.3 | | | 43.1 | | |
| Transportation Products Group | 108.5 |
| | — |
| | 108.5 |
| | 13.5 |
| Transportation Products Group | 120.7 | | | 120.6 | | | 17.6 | | | 11.2 | |
| | | | | | | | | |
| All Other | — |
| | — |
| | — |
| | (0.1 | ) | |
| | | | | | | | | | |
| Segment Totals before Eliminations and Corporate | 378.6 |
| | 0.9 |
| | 379.5 |
| | 15.5 |
| Segment Totals before Eliminations and Corporate | 490.2 | | | 446.7 | | | 59.1 | | | 54.3 | |
| Corporate | — |
| | — |
| | — |
| | (9.1 | ) | Corporate | 0 | | | 0 | | | (17.0) | | | (11.5) | |
| Eliminations | — |
| | (0.9 | ) | | (0.9 | ) | | — |
| Eliminations | (0.2) | | | (1.7) | | | 0 | | | 0 | |
| Combined Total | $ | 378.6 |
| | $ | — |
| | $ | 378.6 |
| | $ | 6.4 |
| |
| Consolidated Total | | Consolidated Total | $ | 490.0 | | | $ | 445.0 | | | $ | 42.1 | | | $ | 42.8 | |
| | | | | Nine Months Ended September 30, |
| | | Revenues | | Operating Profit (Loss) |
| | | | 2020 | | 2019 | | 2020 | | 2019 |
| | | | (in millions) |
| Construction aggregates | | Construction aggregates | $ | 393.0 | | | $ | 278.5 | | |
| Other | | Other | 51.5 | | | 59.0 | | |
| Construction Products Group | | Construction Products Group | 444.5 | | | 337.5 | | | $ | 61.9 | | | $ | 45.3 | |
| | Wind towers and utility structures | | Wind towers and utility structures | 534.8 | | | 469.4 | | |
| Other | | Other | 133.8 | | | 154.2 | | |
| Energy Equipment Group | | Energy Equipment Group | 668.6 | | | 623.6 | | | 66.5 | | | 79.8 | |
| | Inland barges | | Inland barges | 295.4 | | | 193.0 | | |
| Steel components | | Steel components | 70.5 | | | 140.4 | | |
| Transportation Products Group | | Transportation Products Group | 365.9 | | | 333.4 | | | 47.8 | | | 32.1 | |
| | | Segment Totals before Eliminations and Corporate | | Segment Totals before Eliminations and Corporate | 1,479.0 | | | 1,294.5 | | | 176.2 | | | 157.2 | |
| Corporate | | Corporate | 0 | | | 0 | | | (41.2) | | | (34.8) | |
| Eliminations | | Eliminations | (2.3) | | | (4.5) | | | 0 | | | 0 | |
| Consolidated Total | | Consolidated Total | $ | 1,476.7 | | | $ | 1,290.0 | | | $ | 135.0 | | | $ | 122.4 | |
14
Three Months EndedSeptember 30, 2017 |
| | | | | | | | | | | | | | | |
| | Revenues | | Operating Profit (Loss) |
| | External | | Intersegment | | Total | |
| | (in millions) |
| Construction aggregates | | | | | $ | 53.3 |
| | |
| Other | | | | | 16.1 |
| | |
| Construction Products Group | $ | 69.4 |
| | $ | — |
| | 69.4 |
| | $ | 13.6 |
|
| | | | | | | | |
| Wind towers and utility structures | | | | | 167.1 |
| | |
| Other | | | | | 50.2 |
| | |
| Energy Equipment Group | 216.0 |
| | 1.3 |
| | 217.3 |
| | 20.8 |
|
| | | | | | | | |
| Inland barges | | | | | 28.1 |
| | |
| Steel components | | | | | 52.4 |
| | |
| Transportation Products Group | 80.5 |
| | — |
| | 80.5 |
| | 9.8 |
|
| | | | | | | | |
| All Other | — |
| | — |
| | — |
| | — |
|
| | | | | | | | |
| Segment Totals before Eliminations and Corporate | 365.9 |
| | 1.3 |
| | 367.2 |
| | 44.2 |
|
| Corporate | — |
| | — |
| | — |
| | (10.6 | ) |
| Eliminations | — |
| | (1.3 | ) | | (1.3 | ) | | — |
|
| Combined Total | $ | 365.9 |
| | $ | — |
| | $ | 365.9 |
| | $ | 33.6 |
|
Nine Months EndedSeptember 30, 2018 |
| | | | | | | | | | | | | | | |
| | Revenues | | Operating Profit (Loss) |
| | External | | Intersegment | | Total | |
| | (in millions) |
| Construction aggregates | | | | | $ | 166.6 |
| | |
| Other | | | | | 60.1 |
| | |
| Construction Products Group | $ | 226.7 |
| | $ | — |
| | 226.7 |
| | $ | 45.3 |
|
| | | | | | | | |
| Wind towers and utility structures | | | | | 427.5 |
| | |
| Other | | | | | 145.6 |
| | |
| Energy Equipment Group | 570.0 |
| | 3.1 |
| | 573.1 |
| | 12.5 |
|
| | | | | | | | |
| Inland barges | | | | | 123.0 |
| | |
| Steel components | | | | | 166.3 |
| | |
| Transportation Products Group | 289.3 |
| | — |
| | 289.3 |
| | 35.2 |
|
| | | | | | | | |
| All Other | — |
| | — |
| | — |
| | (0.1 | ) |
| | | | | | | | |
| Segment Totals before Eliminations and Corporate | 1,086.0 |
| | 3.1 |
| | 1,089.1 |
| | 92.9 |
|
| Corporate | — |
| | — |
| | — |
| | (24.7 | ) |
| Eliminations | — |
| | (3.1 | ) | | (3.1 | ) | | — |
|
| Combined Total | $ | 1,086.0 |
| | $ | — |
| | $ | 1,086.0 |
| | $ | 68.2 |
|
Nine Months EndedSeptember 30, 2017 |
| | | | | | | | | | | | | | | |
| | Revenues | | Operating Profit (Loss) |
| | External | | Intersegment | | Total | |
| | (in millions) |
| Construction aggregates | | | | | $ | 155.1 |
| | |
| Other | | | | | 39.7 |
| | |
| Construction Products Group | $ | 194.8 |
| | $ | — |
| | 194.8 |
| | $ | 42.5 |
|
| | | | | | | | |
| Wind towers and utility structures | | | | | 514.4 |
| | |
| Other | | | | | 136.9 |
| | |
| Energy Equipment Group | 648.0 |
| | 3.3 |
| | 651.3 |
| | 63.2 |
|
| | | | | | | | |
| Inland barges | | | | | 124.3 |
| | |
| Steel components | | | | | 147.8 |
| | |
| Transportation Products Group | 272.1 |
| | — |
| | 272.1 |
| | 30.9 |
|
| | | | | | | | |
| All Other | — |
| | — |
| | — |
| | — |
|
| | | | | | | | |
| Segment Totals before Eliminations and Corporate | 1,114.9 |
| | 3.3 |
| | 1,118.2 |
| | 136.6 |
|
| Corporate | — |
| | — |
| | — |
| | (28.0 | ) |
| Eliminations | — |
| | (3.3 | ) | | (3.3 | ) | | — |
|
| Combined Total | $ | 1,114.9 |
| | $ | — |
| | $ | 1,114.9 |
| | $ | 108.6 |
|
Note 4.5. Property, Plant, and Equipment
The following table summarizes the components of property, plant, and equipment as of September 30, 20182020 and December 31, 2017.2019. | | | | | | | | September 30,
2020 | | December 31,
2019 |
| | September 30,
2018 | | December 31,
2017 | | (in millions) |
| | (in millions) | |
| Land | $ | 94.8 |
| | $ | 97.7 |
| |
Land(1) | | Land(1) | $ | 370.6 | | | $ | 331.4 | |
| Buildings and improvements | 256.0 |
| | 265.8 |
| Buildings and improvements | 300.1 | | | 280.5 | |
| Machinery and other | 694.8 |
| | 676.9 |
| Machinery and other | 842.5 | | | 755.7 | |
| Construction in progress | 32.6 |
| | 24.3 |
| Construction in progress | 38.8 | | | 38.6 | |
| | 1,078.2 |
| | 1,064.7 |
| | 1,552.0 | | | 1,406.2 | |
| Less accumulated depreciation | (507.7 | ) | | (481.6 | ) | |
| Less accumulated depreciation and depletion | | Less accumulated depreciation and depletion | (657.2) | | | (590.0) | |
| | $ | 570.5 |
| | $ | 583.1 |
| | $ | 894.8 | | | $ | 816.2 | |
(1) Includes depletable land of $231.0 million as of September 30, 2020 and $211.0 million as of December 31, 2019.
Note 5.6. Goodwill
Goodwill by segment is as follows:
| | | | | | | | September 30,
2020 | | December 31,
2019 |
| | September 30,
2018 | | December 31,
2017 | |
| | (in millions) | | (in millions) |
| Construction Products Group | $ | 60.3 |
| | $ | 60.3 |
| Construction Products Group | $ | 307.6 | | | $ | 166.2 | |
| Energy Equipment Group | 416.9 |
| | 416.9 |
| Energy Equipment Group | 431.4 | | | 416.9 | |
| Transportation Products Group | 26.8 |
| | 17.1 |
| Transportation Products Group | 37.0 | | | 38.8 | |
| | $ | 504.0 |
| | $ | 494.3 |
| | $ | 776.0 | | | $ | 621.9 | |
The increase in the Construction Products Group goodwill during the nine months ended September 30, 2020 is primarily due to the acquisition of Cherry. The increase in the Energy Equipment Group goodwill during the nine months ended September 30, 2020 is due to recently completed acquisitions. The decrease in Transportation Products Group goodwill during the nine months ended September 30, 20182020 is due to ana refinement of the purchase price allocation of a recent acquisition. See Note 2 "AcquisitionsAcquisitions and Divestitures".Divestitures.
Note 6. Guarantees7. Debt
The following table summarizes the components of debt as of September 30, 2020 and December 31, 2019:
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| | (in millions) |
| Revolving credit facility | $ | 100.0 | | | $ | 100.0 | |
| Term loan | 150.0 | | | 0 | |
| Finance leases | 4.9 | | | 7.3 | |
| 254.9 | | | 107.3 | |
| Less: unamortized debt issuance costs | (0.3) | | | 0 | |
| Total debt | $ | 254.6 | | | $ | 107.3 | |
On November 1, 2018, the Company entered into a $400.0 million unsecured revolving credit facility that was scheduled to mature in November 2023. On January 2, 2020, the Company entered into an Amended and Restated Credit Agreement to increase the revolving credit facility to $500.0 million and 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 for borrowing and commitment fee rate are determined based on Arcosa’s leverage as measured by a consolidated total indebtedness to consolidated EBITDA ratio. The margin for borrowing ranges from 1.25% to 2.00% and was set at LIBOR plus 1.25% as of September 30, 2020. The commitment fee rate ranges from 0.20% to 0.35% and was set at 0.20% as of September 30, 2020.
In March 2020, as a precautionary measure, the Company borrowed $100.0 million under its revolving credit facility to increase our cash position and preserve financial flexibility considering the 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 September 30, 2020, we had $100.0 million of outstanding loans borrowed under the facility, and there were approximately $26.1 million of letters of credit issued, leaving $373.9 million available. Of the outstanding letters of credit as of September 30, 2020, all are expected to expire in 2021. The majority of our letters of credit obligations support the Company’s various insurance programs 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 and term loan facilities require the maintenance of certain ratios related to leverage and interest coverage. As of September 30, 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.
The carrying value of borrowings under our revolving credit and term loan facilities approximate fair value because the interest rate adjusts to the market interest rate (Level 3 input). See Note 3 Fair Value Accounting.
As of September 30, 2018, Trinity's $600.02020, the Company had $1.8 million unsecured corporateof unamortized debt issuance costs related to the revolving credit facility, which maturesare included in other assets on the Consolidated Balance Sheet.
The remaining principal payments under existing debt agreements as of September 30, 2020 (the "Trinity Revolving Credit Facility")are as wellfollows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter |
| | (in millions) |
| Revolving credit facility | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 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 its $400.0 million of 4.55% senior note due 2024 (the "Trinity Senior Notes") are fullyJanuary 2, 2019 and unconditionally and jointly and severally guaranteed by certain subsidiariesexpiring in 2023, to reduce the effect of changes in the Company: Trinity Marine Products, Inc.; Trinity Meyer Utility Structures LLC; and Trinity Structural Towers, Inc. (the "Arcosa Guarantors"). The Trinity Revolving Credit Facility and the Trinity Senior Notes are also guaranteed by certain subsidiaries of Trinity. There have been novariable interest rates associated with borrowings under the Trinity Revolving Credit Facility. Nonerevolving credit facility. The instrument carried an initial notional amount of $100 million, thereby hedging the first $100 million of borrowings under the credit facility. The instrument effectively fixes the LIBOR component of the Arcosa Guarantors have been required to make any payments undercredit facility borrowings at a monthly rate of 2.71%. As of September 30, 2020, the guarantees. The guarantees byCompany has recorded a liability of $7.9 million for the Arcosa Guarantorsfair value of the Trinity Senior Notes were automatically terminatedinstrument, all of which is recorded in accumulated other comprehensive loss. See Note 3 Fair Value Accounting.
Note 8. Leases
We have various leases primarily for office space and certain equipment. At inception, we determine if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. For leases that contain options to purchase, terminate, or extend, such options are included in the lease term when it is reasonably certain that the option will be exercised. Some of our lease arrangements contain lease components and non-lease components which are accounted for as a single lease component as we have elected the practical expedient to group lease and non-lease components for all leases.
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on information available at commencement date in determining the present value of lease payments.
Operating Leases
The following table presents information about the Company's operating leases as of November 1, 2018,September 30, 2020.
| | | | | | | | |
| September 30, 2020 | | | |
| (in millions) |
| Maturity of Lease Liabilities | | | | |
| 2020 (remaining) | $ | 1.7 | | | | |
| 2021 | 5.6 | | | | |
| 2022 | 3.4 | | | | |
| 2023 | 2.5 | | | | |
| 2024 | 2.2 | | | | |
| Thereafter | 7.5 | | | | |
| Total undiscounted operating lease payments | 22.9 | | | | |
| Less imputed interest | (2.8) | | | | |
| Present value of operating lease liabilities | $ | 20.1 | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | | | | | | | | |
| Balance Sheet Classification | September 30,
2020 | | December 31,
2019 |
| (in millions) |
| Other assets | $ | 16.4 | | | $ | 15.6 | |
| | | |
| Accrued liabilities | 5.4 | | | 5.5 | |
| Other liabilities | 14.7 | | | 13.5 | |
| Total operating lease liabilities | $ | 20.1 | | | $ | 19.0 | |
Finance Leases
Finance leases are included in property, plant, and equipment, net and debt on the effective dateConsolidated Balance Sheets. The associated amortization expense and interest expense are included in depreciation and interest expense, respectively, on the Consolidated Statements of Operations. These leases are not material to the spin-off transaction, in connection with the removalConsolidated Financial Statements as of the Arcosa Guarantors as guarantors under the Trinity Revolving Credit Facility in accordance with its terms. See Note 12 "Subsequent Events" for information regarding Arcosa's revolving credit facility.September 30, 2020.
Note 7.9. Other, Net
Other, net (income) expense consists of the following items:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) |
| Interest income | $ | (0.1) | | | $ | (0.3) | | | $ | (0.4) | | | $ | (1.0) | |
| Foreign currency exchange transactions | (0.3) | | | (0.3) | | | (0.1) | | | 0.7 | |
| Other | (0.1) | | | (0.1) | | | (0.3) | | | (0.7) | |
| Other, net (income) expense | $ | (0.5) | | | $ | (0.7) | | | $ | (0.8) | | | $ | (1.0) | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (in millions) |
| Foreign currency exchange transactions | $ | — |
| | $ | (0.5 | ) | | $ | 2.2 |
| | $ | 0.3 |
|
| Other | (0.2 | ) | | 0.3 |
| | (0.2 | ) | | (0.3 | ) |
| Other, net (income) expense | $ | (0.2 | ) | | $ | (0.2 | ) | | $ | 2.0 |
| | $ | — |
|
Note 8.10. Income Taxes
The provision forFor interim income taxes results intax reporting, we estimate our annual effective tax rates that differ from the statutory rates. The following is a reconciliation between the statutory U.S. federal income 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 Company’s effective incomeinterim period in which they occur. We have open tax rate on income before income taxes:years from 2014 to 2019 with various significant tax jurisdictions.
|
| | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| Statutory rate | 21.0 | % | | 35.0 | % | | 21.0 | % | | 35.0 | % |
| State taxes | 2.3 |
| | 1.9 |
| | 2.3 |
| | 1.9 |
|
| Foreign adjustments | 1.5 |
| | 3.1 |
| | 1.5 |
| | 3.1 |
|
| Domestic production activities deduction | — |
| | (2.2 | ) | | — |
| | (2.2 | ) |
| Impairment and other foreign losses | 53.2 |
| | 1.5 |
| | 6.6 |
| | 1.2 |
|
| Changes in valuation allowance and reserves | (6.9 | ) | | — |
| | 0.1 |
| | — |
|
| Effect of Federal Tax Reform | (10.2 | ) | | — |
| | (1.0 | ) | | — |
|
| Prior year true-ups | (9.5 | ) | | 0.7 |
| | (1.5 | ) | | 0.4 |
|
| Equity compensation | — |
| | — |
| | (1.1 | ) | | 0.5 |
|
| Other, net | 0.1 |
| | (0.9 | ) | | (0.4 | ) | | (0.8 | ) |
| Effective rate | 51.5 | % | | 39.1 | % | | 27.5 | % | | 39.1 | % |
Our effective tax rate reflects the Company's estimate for its state income tax expense, excess tax benefits or deficiencies related to equity compensation, and the impact of nondeductible impairment charges. A portion of the $23.2 million pre-tax impairment charge recorded inFor the three and nine months ended September 30, 2018 was attributable to certain of our foreign operations for which taxes are not provided. This impairment charge increased2020, the losses in those jurisdictions with no corresponding tax benefit. The related effect on our effective tax rate has been reflected in the rate reconciliation table above. See Note 2 "Acquisitionsof 22.6% and Divestitures" for further information regarding the impairment charge.
The Act24.6%, respectively, was enacted on December 22, 2017. The Act reduceshigher than the U.S. federal corporate income taxstatutory rate from 35.0%of 21.0% due primarily to 21.0%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates newstate taxes, on certain foreign-sourced earnings. In December 2017, we recorded a tax benefit after the initial assessment of the tax effects of the Act,foreign currency translation, and we will continue refining this amount throughout 2018. We are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of our deferred tax balance or give rise to new deferred tax amounts resulting in a final adjustmentnondeductible compensation expenses in the fourth quarterU.S. and Mexico, partially offset by prior year true-ups. For the three and nine months ended September 30, 2019, the effective tax rate of 2018.22.0% 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.
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. The Company continues to evaluate the impact of the Act may differ from our estimate due to changes in the regulations, rulings, guidance, and interpretations issued by the Internal Revenue Service ("IRS") and the FASB as well as interpretations and assumptions made by the Company. The calculation of our estimated annual effective tax rate includes the estimated impact ofvarious provisions of the CARES Act such as interest limitations,on its income tax provision. Approximately $15 million of federal and foreign limitations or inclusions. These estimates could change as additional information becomes available on thesestate income tax payments deferred during the first half of the year were paid during the third quarter of 2020. As of September 30, 2020, the Company has deferred $6.2 million in payroll-related taxes in accordance with the provisions of the CARES Act.
Taxing authority examinationsThe 2014-2016 tax years have been reviewed by the IRS with no significant adjustments. The 2014-2017 tax years remain open.
We have various subsidiaries in Mexico that file separate tax returns and are subject to examination by taxing authorities at different times. The entities are generally open for their 2010 tax years and forward.
Note 9.11. Employee Retirement Plans
Total Trinity employee retirement plan expense, which includes related administrative expenses, allocated to Arcosa was $2.5 million and $7.6 million for the three and nine months ended September 30, 2018 and 2017, respectively. These costs were funded through intercompany transactions with Trinity which are reflected within the Net Parent Investment balance on the accompanying Combined Balance Sheet.is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) |
| Defined contribution plans | $ | 3.0 | | | $ | 2.0 | | | $ | 8.3 | | | $ | 6.4 | |
| Multiemployer plan | 0.4 | | | 0.5 | | | 1.3 | | | 1.4 | |
| $ | 3.4 | | | $ | 2.5 | | | $ | 9.6 | | | $ | 7.8 | |
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 $0.5 million and $1.6$1.3 million to the multiemployer plan for the three and nine months ended September 30, 2018,2020, respectively. The Company contributed $0.5 million and $1.4 million to the multiemployer plan for the three and nine months ended September 30, 2017,2019, respectively. Total contributions to the multiemployer plan for 20182020 are expected to be approximately $2.3$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 2020 are not expected to be significant.
Note 12. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss for the nine months ended September 30, 2020 and 2019 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 | | 0.3 | | | (3.4) | | | (3.1) | |
| Amounts reclassified from accumulated other comprehensive loss, net of tax expense (benefit) of $0.0, $0.0, and $0.0 | | 0 | | | 0.2 | | | 0.2 | |
| Other comprehensive income (loss) | | 0.3 | | | (3.2) | | | (2.9) | |
| Balances at September 30, 2019 | | $ | (16.5) | | | $ | (4.1) | | | $ | (20.6) | |
| | | | | | |
| Balances at December 31, 2019 | | $ | (16.3) | | | $ | (3.4) | | | $ | (19.7) | |
| Other comprehensive income (loss), net of tax, before reclassifications | | (0.5) | | | (3.9) | | | (4.4) | |
| Amounts reclassified from accumulated other comprehensive loss, net of tax expense (benefit) of $0.0, ($0.3), and ($0.3) | | 0 | | | 1.1 | | | 1.1 | |
| Other comprehensive income (loss) | | (0.5) | | | (2.8) | | | (3.3) | |
| Balances at September 30, 2020 | | $ | (16.8) | | | $ | (6.2) | | | $ | (23.0) | |
Note 10.13. Stock-Based Compensation
Stock-based compensation totaled approximately $2.7$5.2 million and $7.5$14.0 million for the three and nine months ended September 30, 2018,2020, respectively. Stock-based compensation totaled approximately $2.3$4.0 million and $6.7$11.1 million for the three and nine months ended September 30, 2017,2019, respectively.
Note 11.14. 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. Total weighted average restricted shares were 1.6 million shares for the three and nine months ended September 30, 2020, respectively. Total weighted average restricted shares were 1.6 million shares for the three and nine months ended September 30, 2019, respectively.
The computation of basic and diluted earnings per share follows.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, 2020 | | Three Months Ended
September 30, 2019 |
| | Income
(Loss) | | Average
Shares | | EPS | | Income
(Loss) | | Average
Shares | | EPS |
| (in millions, except per share amounts) |
| Net income | $ | 31.2 | | | | | | | $ | 32.7 | | | | | |
| Unvested restricted share participation | (0.2) | | | | | | | (0.3) | | | | | |
| Net income per common share – basic | 31.0 | | | 48.1 | | | $ | 0.64 | | | 32.4 | | | 47.9 | | | $ | 0.68 | |
| Effect of dilutive securities: | | | | | | | | | | | |
| Nonparticipating unvested restricted shares | 0 | | | 0.4 | | | | | 0 | | | 0.4 | | | |
| Net income per common share – diluted | $ | 31.0 | | | 48.5 | | | $ | 0.64 | | | $ | 32.4 | | | 48.3 | | | $ | 0.67 | |
| | | | | | | | | | | |
| | Nine Months Ended
September 30, 2020 | | Nine Months Ended
September 30, 2019 |
| | Income
(Loss) | | Average
Shares | | EPS | | Income
(Loss) | | Average
Shares | | EPS |
| (in millions, except per share amounts) |
| Net income | $ | 96.1 | | | | | | | $ | 92.2 | | | | | |
| Unvested restricted share participation | (0.7) | | | | | | | (1.0) | | | | | |
| Net income per common share – basic | 95.4 | | | 48.0 | | | $ | 1.99 | | | 91.2 | | | 47.8 | | | $ | 1.91 | |
| Effect of dilutive securities: | | | | | | | | | | | |
| Nonparticipating unvested restricted shares | 0 | | | 0.5 | | | | | 0 | | | 0.5 | | | |
| Net income per common share – diluted | $ | 95.4 | | | 48.5 | | | $ | 1.97 | | | $ | 91.2 | | | 48.3 | | | $ | 1.89 | |
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, workplace laws,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 September 30, 2020, the range of reasonably possible losses for such matters, taking into consideration our rights in indemnity and recourse to third parties is $1.3$0.8 million to $11.5$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 September 30, 2018,2020, total accruals of $5.2$2.4 million, including environmental and workplace matters described below, are included in accrued liabilities in the accompanying CombinedConsolidated 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 and the workplace.environment. The Company has reserved $1.1$1.2 million as of September 30, 2018,2020, included in our total accruals of $5.2$2.4 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 filed 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 "Court"). The Company and Meyer filed a motion to dismiss T&B’s claims, and an Answer and Counterclaims against T&B. On July 30, 2020, the Court granted the Company's and Meyer's motion and dismissed T&B's claims. In its ruling, the Court likewise dismissed Meyer's counterclaims. On August 28, 2020, T&B filed its Notice of Appeal to the United States Court of Appeals for the Second Circuit. We intend to vigorously defend ourselves in the subsequent appeal of 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, involvingincluding those related to the environment and the workplace 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. We believe that we are currently in substantial compliance with environmental and workplace laws and regulations.
Note 12. Subsequent Events
Separation from Trinity
In connection with the separation, Trinity and Arcosa entered into various agreements that will govern the relationship between the parties going forward, including a separation and distribution agreement, transition services agreement, tax matters agreement, employee matters agreement, and intellectual property matters agreement. These agreements will provide for the allocation between Arcosa and Trinity of Trinity's and Arcosa's assets, employees, liabilities, and obligations (including employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after the distribution date. For additional discussion of these agreements, see "Certain Relationships and Related Transactions" within our registration statement on Form 10.
Pursuant to the separation and distribution agreement, on October 31, 2018, Trinity contributed $200 million cash to Arcosa in connection with the separation.
Revolving Credit Facility
On November 1, 2018, the Company entered into a $400 million unsecured revolving credit facility that matures on November 1, 2023. The interest rates under the facility are variable based on LIBOR or an alternate base rate plus a margin that is determined based on Arcosa’s leverage as measured by a consolidated total indebtedness to consolidated EBITDA ratio, and initially are set at LIBOR plus 1.25%. A commitment fee will accrue on the average daily unused portion of the revolving facility at the rate of 0.20% to 0.35%, initially set at 0.20%. The revolving credit facility requires the maintenance of certain ratios related to leverage and interest coverage. Borrowings under the credit facility are guaranteed by certain 100%-owned subsidiaries of the Company. As of November 1, 2018, there were no outstanding loans borrowed under the facility and there were approximately $19.9 million in Letters of Credit issued.
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:
•Company Overview
•Potential Impact of COVID-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 CombinedConsolidated Financial Statements of Arcosa, Inc. and subsidiaries ("(“Arcosa," "Company," "we,"” “Company,” “we,” and "our"“our”) and related Notes in Part I, Item 1 of this Quarterly Report on Form 10-Q and the Audited AnnualConsolidated 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, 2017 in Amendment No. 6 to the Company's Registration Statement2019 (“2019 Annual Report on Form 10 filed10-K”).
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 Securities and Exchange Commission ("SEC") on September 27, 2018 (“Form 10”).
Executive Summary
Spin-off Transaction
On December 12, 2017,separation of Arcosa from Trinity Industries, Inc. (together with its subsidiaries, "Trinity"(“Trinity” or “Former Parent”) announced its intention to separate its infrastructure-related businesses, which includes its construction products, energy equipment, and transportation products businesses, from the rest of Trinity by means of a spin-off. On September 25, 2018, Trinity’s Board of Directors formally approved the separation of its infrastructure-related businesses from Trinity through a distribution of all of the common stock of Arcosa held by Trinity to Trinity stockholders. Arcosa's Form 10 was declared effective by the SEC on October 1, 2018. On November 1, 2018 Trinity stockholders received one share of Arcosa, Inc. common stock for every three shares of Trinity common stock held as of 5:00 p.m. local New York City time on October 17, 2018, the record date for the distribution. The transaction was structured to be tax-free to both Trinity and Arcosa stockholders for U.S. federal income tax purposes.
Arcosa's historical Combined Financial Statements have been prepared on a standalone basis and are derived from Trinity's consolidated financial statements and accounting records. Therefore, the Combined Financial Statements reflect, in conformity with accounting principles generally accepted in the United States, Arcosa's financial position, results of operations, comprehensive income/loss, and cash flows as the business was historically operated as part of Trinity prior to the distribution. They may not be indicative of Arcosa's future performance and do not necessarily reflect what Arcosa's combined results of operations, financial condition, and cash flows would have been had Arcosa operated as an independent, publicly-traded company, listed on the New York Stock Exchange (the “Separation”).
Potential Impact of COVID-19 On Our Business
Our highest priority is the health and safety of our employees and communities. Our businesses support critical infrastructure sectors, pursuant to the Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency standards.Our plants have continued to operate throughout the COVID-19 crisis. However, as of the date of this filing, uncertainty exists concerning the potential magnitude of the impact and duration of the COVID-19 pandemic. The following 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 impacted because of COVID-19 related illness or local, state, or federal orders requiring them to stay 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 purchase 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 $3.0-4.0 million of incremental costs related to COVID-19 during the periods presented, particularly because Arcosa expectsnine months ended September 30, 2020 for personal protective equipment, health screenings, deep cleaning services, and facilities re-configurations. We do not anticipate that changesthe enhanced health and safety protocols will occur in Arcosa's operating structure and its capitalization ashave a resultmaterial impact on the productivity of our plants.
The preparation of the spin-off from Trinity.
Arcosa’s CombinedCompany's Consolidated Financial Statements include its direct expenses for costrequires management to make estimates and assumptions that affect the reported amounts of goods sold, salesassets and marketing,liabilities and distributiondisclosure of contingent assets and administrationliabilities at the date of the financial statements as well as allocationsthe reported amounts of certain selling, engineering,revenues and administrative expenses provided by Trinityduring 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 Arcosathe 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 have experienced better than anticipated construction demand since the outbreak of the COVID-19 pandemic in March as construction activity in Texas has remained resilient and allocationsother states have reopened for business. However, we did experience a softening of related assets, liabilities,demand for our specialty materials and Parent’s investment,shoring products businesses following the outbreak that has recently shown signs of improvement in the third quarter but remains below pre-pandemic levels. The outlook for public and private construction demand remains uncertain as applicable. The allocationsthe 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 September 30, 2020 provides strong production visibility for the remainder of 2020 and new orders received during the third quarter have improved our visibility for 2021. 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. During the third quarter, we received new orders for wind towers increasing our backlog for 2021, as 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 determined onplaced in service in 2020 or 2021. Order and inquiry activity in the storage tank business has improved since the onset of COVID-19 after taking a reasonable basis; however,pause initially, as certain customers deferred new tank installations.
•Within our Transportation Products Group, our backlog for inland barges as of September 30, 2020 provides strong production visibility for the amountsremainder of 2020 and our customers remain committed to taking delivery of these orders. As anticipated, barge order levels during the second and third quarters have been below the level received in the several quarters preceding the pandemic, as barge utilization declined from the COVID-19 related economic slowdown. The underlying fundamentals for a dry barge replacement cycle remain in place, and we experienced an increase in order inquiry activity in the third quarter. Lower demand for refined products including gasoline and jet fuel and low oil prices have negatively impacted order inquiries for liquid barges. We are not necessarily representativetaking steps to reduce our capacity to align with lower anticipated production levels in 2021, while remaining flexible to allow time for the fundamentals of the amounts that would have been reflectedbarge business to overcome COVID-related weakness in the financial statements had Arcosa been an entity that operated independently of Trinity. Related party allocations are further described in Note 1, “Overview and Summary of Significant Accounting Policies”market. Demand for steel components continues to decline as the Combined Financial Statements. Trinity will continue to provide some ofoutlook for the services related to these general and administrative functions on a transitional basis for a fee following the spin-off. These services will be received under the transition services agreement filed as an exhibit to Arcosa's Current Report on Form 8-K, filed on November 1, 2018.North American rail transportation market, which was softening pre-COVID-19, remains uncertain.
Revolving Credit Facility
On November 1, 2018, the Company entered into a $400 million unsecured revolving credit facility that matures on November 1, 2023. The revolving credit facility requires the maintenance of certain ratios related to leverage and interest coverage. Borrowings under the credit facility bear interest at a defined index rate plus a margin and are guaranteed by certain 100%-owned subsidiaries of the Company. See "Liquidity and Capital Resources."
Definitive Agreement to Acquire ACG Materials
On November 14, 2018, the Company entered into a definitive agreement with an affiliate of H.I.G. Capital, LLC to acquire the ACG Materials business for approximately $315 million. The Company expects to fund the purchase price with a combination of cash on-hand and advances under its $400 million five-year credit facility. The transaction, which has been approved by the Company’s Board of Directors, is subject to customary closing conditions and regulatory provisions under the Hart-Scott-Rodino Act. The transaction is expected to close in the fourth quarter of 2018 or first quarter of 2019.
Executive Overview
Financial Operations and Operational Highlights
The Company's revenues•Revenues for the three and nine months ended September 30, 2018 were $378.62020 increased 10.1% and 14.5% to $490.0 million and $1,086.0$1,476.7 million, respectively, representing an increase of 3.5% and a decrease of 2.6%, respectively, compared to the same periods in 2017. 2019, primarily due to the impact of the Cherry acquisition in our Construction Products Group, higher hopper barge deliveries in our Transportation Products Group, and higher unit volumes in our Energy Equipment Group.
•Operating profit for the three and nine months ended September 30, 20182020 totaled $6.4$42.1 million and $68.2$135.0 million, respectively, representing a decrease of 81.0% and 37.2%, respectively,$0.7 million for the same periods in 2017. Whenthree months ended September 30, 2020 and an increase of $12.6 million for the nine months ended September 30, 2020 compared to the same periods in 2017, revenues2019.
•Selling, general, and operating profit in our Construction Products Groupadministrative expenses increased by 26.6% and 23.3%, respectively, for the three and nine months ended September 30, 2018 primarily2020 when compared to the prior year periods largely due to additional costs from the acquired Cherry business. As a percentage of revenue, selling, general, and administrative expenses increased volumes, partially due to an acquisition. The Energy Equipment Group recorded lower revenues11.8% and operating profit11.1% for the three and nine months ended September 30, 2018 resulting primarily from a planned reduction in volumes in our wind towers product line and the impact of a $23.2 million impairment charge recorded in the third quarter of 2018. Revenues and operating profit from the Transportation Products Group were higher over the three and nine months ended September 30, 2018 when2020, respectively, compared to the same period last year. For the three months ended September 30, 2018, the increase is primarily related to increased barge deliveries. For the nine months ended September 30, 2018, the increase is primarily related to increased steel component deliveries. The effect of the required adoption of new revenue accounting rules effective January 1, 2018 was to increase revenues10.2% and operating profit by $8.3 million and $2.6 million,10.3%, respectively, for the three months ended September 30, 2018 and decrease revenues and operating profit by $6.4 million and $1.0 million, respectively, for the nine months ended September 30, 2018 within our Energy Equipment Group. See Note 1 of the Combined Financial Statements.same periods in 2019.
Selling, engineering, and administrative expenses decreased by 4.3% and 2.9%, for the three and nine months ended September 30, 2018, respectively, when compared to the prior year periods primarily resulting from lower compensation-related expenses.
•The Company's effective tax rate for the three and nine months ended September 30, 20182020 was 51.5%22.6% and 27.5%24.6%, respectively, compared to 39.1%22.0% and 39.1%22.1% for the same periods in 2017, respectively.2019. The increase in the tax rate for the three months ended September 30, 2018 was primarily related to a portion of the $23.2 million impairment charge recorded in the third quarter of 2018 related to foreign operations for which taxes are not provided. The decrease in the tax rate for theand nine months ended September 30, 20182020 is primarily due to increased state taxes, tax effects of foreign currency translation, and nondeductible compensation expenses in the impactU.S. and Mexico in the current period. See Note 10 Income Taxes of the Tax Cuts and Jobs Act ("the Act"). See Note 8 of the CombinedConsolidated Financial Statements.
•Net income for the three and nine months ended September 30, 20182020 was $3.2$31.2 million and $48.0$96.1 million, respectively, compared with $20.6to $32.7 million and $66.1$92.2 million, respectively, for the same periods in 2017.2019.
Our Energy Equipment Group and Transportation Products GroupGroups 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 September 30, 20182020 and 20172019, our unsatisfied performance obligations, or backlog, were as follows:
| | | | | | | | September 30,
2020 | | September 30,
2019 |
| | September 30,
2018 | | September 30,
2017 | | (in millions) |
| Energy Equipment Group: | | Energy Equipment Group: | |
| Wind towers and utility structures | | Wind towers and utility structures | $ | 429.3 | | | $ | 563.6 | |
| Other | | Other | 13.3 | | | 44.3 | |
| | (in millions) | |
| Wind towers and utility structures | $ | 700.3 |
| | $ | 972.0 |
| |
| Transportation Products Group: | | Transportation Products Group: | |
| Inland barges | $ | 210.4 |
| | $ | 126.0 |
| Inland barges | $ | 177.5 | | | $ | 363.8 | |
Approximately 23%32% of unsatisfied performance obligations for our wind towers and utility structures in our Energy Equipment Group are expected to be delivered during 2020, with substantially all of the year ending December 31, 2018remainder expected to be delivered during 2021. Approximately 77% of the unsatisfied performance obligations for our other business lines in our Energy Equipment Group are expected to be delivered during 2020, with the remainder expected to be delivered through 2020.during 2021. Approximately 21%45% of unsatisfied performance obligations for inland barges in our Transportation Products Group are expected to be delivered during the year ending December 31, 20182020, with the remainder expected to be delivered through 2020.
Acquisition and Divestiture Activity
During the third quarter of 2018, the Company’s management team committedduring 2021. Subsequent to plans to divest certain businesses whose revenues are included in the other revenues component of the Energy Equipment Group. On October 31, 2018 and November 5, 2018, the Company completed the divestiture of these businesses, which accounted for approximately $20 million of revenues and had an operating loss for the nine months ended September 30, 2018. The net proceeds from these divestitures was not significant. We recorded a pre-tax impairment charge2020, we received additional orders of $23.2approximately $32 million during the three months ended September 30, 2018 associated with the write-down of the net assets of these businessesfor inland barges expected to their estimated fair values. See Note 2 to our Combined Financial Statements for further information regarding these divestitures.be delivered in 2021.
In March 2018, we completed the acquisition of certain assets of an inland barge business.
Results of Operations
Overall Summary
Revenues
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | Percent Change | | 2020 | | 2019 | | Percent Change |
| | (in millions) | | | (in millions) | |
| Construction Products Group | $ | 146.9 | | | $ | 115.9 | | | 26.7 | % | | $ | 444.5 | | | $ | 337.5 | | | 31.7 | % |
| Energy Equipment Group | 222.6 | | | 210.2 | | | 5.9 | | | 668.6 | | | 623.6 | | | 7.2 | |
| Transportation Products Group | 120.7 | | | 120.6 | | | 0.1 | | | 365.9 | | | 333.4 | | | 9.7 | |
| | | | | | | | | | | |
| Segment Totals before Eliminations | 490.2 | | | 446.7 | | | 9.7 | | | 1,479.0 | | | 1,294.5 | | | 14.3 | |
| Eliminations | (0.2) | | | (1.7) | | | | | (2.3) | | | (4.5) | | | |
| Consolidated Total | $ | 490.0 | | | $ | 445.0 | | | 10.1 | | | $ | 1,476.7 | | | $ | 1,290.0 | | | 14.5 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, 2018 | | Three Months Ended
September 30, 2017 | | |
| | | | |
| | Revenues | | Revenues | | Percent |
| | External | | Intersegment | | Total | | External | | Intersegment |
| | Total | | Change |
| | ($ in millions) | | |
| Construction Products Group | $ | 72.6 |
| | $ | — |
| | $ | 72.6 |
| | $ | 69.4 |
| | $ | — |
| | $ | 69.4 |
| | 4.6 | % |
| Energy Equipment Group | 197.5 |
| | 0.9 |
| | 198.4 |
| | 216.0 |
| | 1.3 |
| | 217.3 |
| | (8.7 | ) |
| Transportation Products Group | 108.5 |
| | — |
| | 108.5 |
| | 80.5 |
| | — |
| | 80.5 |
| | 34.8 |
|
| Segment Totals before Eliminations | 378.6 |
| | 0.9 |
| | 379.5 |
| | 365.9 |
| | 1.3 |
| | 367.2 |
| | 3.3 |
|
| Eliminations | — |
| | (0.9 | ) | | (0.9 | ) | | — |
| | (1.3 | ) | | (1.3 | ) | | |
| Combined Total | $ | 378.6 |
| | $ | — |
| | $ | 378.6 |
| | $ | 365.9 |
| | $ | — |
| | $ | 365.9 |
| | 3.5 |
|
Our revenues for the three months ended September 30, 2018 increased by 3.5% from the prior year period primarily as result of increased barge deliveries in our Transportation Products Group and increased production volumes and impact of an acquisition in our Construction Products Group, partially offset by a planned reduction in volumes in our Energy Equipment Group. The decrease in revenues in our Energy Equipment Group was partially offset for the three months ended September 30, 2018 due to the required adoption of new revenue accounting rules. See Note 1 of the Combined Financial Statements.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended
September 30, 2018 | | Nine Months Ended
September 30, 2017 | | |
| | | | |
| | Revenues | | Revenues | | Percent |
| | External | | Intersegment | | Total | | External | | Intersegment |
| | Total | | Change |
| | ($ in millions) | | |
| Construction Products Group | $ | 226.7 |
| | $ | — |
| | $ | 226.7 |
| | $ | 194.8 |
| | $ | — |
| | $ | 194.8 |
| | 16.4 | % |
| Energy Equipment Group | 570.0 |
| | 3.1 |
| | 573.1 |
| | 648.0 |
| | 3.3 |
| | 651.3 |
| | (12.0 | ) |
| Transportation Products Group | 289.3 |
| | — |
| | 289.3 |
| | 272.1 |
| | — |
| | 272.1 |
| | 6.3 |
|
| Segment Totals before Eliminations | 1,086.0 |
| | 3.1 |
| | 1,089.1 |
| | 1,114.9 |
| | 3.3 |
| | 1,118.2 |
| | (2.6 | ) |
| Eliminations | — |
| | (3.1 | ) | | (3.1 | ) | | — |
| | (3.3 | ) | | (3.3 | ) | | |
| Combined Total | $ | 1,086.0 |
| | $ | — |
| | $ | 1,086.0 |
| | $ | 1,114.9 |
| | $ | — |
| | $ | 1,114.9 |
| | (2.6 | ) |
Our revenues for the nine months ended September 30, 2018 decreased by 2.6% from the prior year period primarily due to a planned reduction in volumes in our Energy Equipment Group, partially offset by increased steel component deliveries in our Transportation Products Group and increased production volumes and impact of acquisitions in our Construction Products Group. •Revenues in our Energy Equipment Group was also lower for the nine months ended September 30, 2018 due to the required adoption of new revenue accounting rules. See Note 1 of the Combined Financial Statements.
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2018 | | 2017 | | Percent Change | | 2018 | | 2017 | | Percent Change |
| | (in millions) | | | (in millions) | |
| Construction Products Group | $ | 57.3 |
| | $ | 55.8 |
| | 2.7 | % | | $ | 181.4 |
| | $ | 152.3 |
| | 19.1 | % |
| Energy Equipment Group | 211.6 |
| | 196.5 |
| | 7.7 |
| | 560.6 |
| | 588.1 |
| | (4.7 | ) |
| Transportation Products Group | 95.0 |
| | 70.7 |
| | 34.4 |
| | 254.1 |
| | 241.2 |
| | 5.3 |
|
| All Other | 0.1 |
| | — |
| |
| | 0.1 |
| | — |
| | |
| Segment Totals before Eliminations and Corporate Expenses | 364.0 |
| | 323.0 |
| | 12.7 |
| | 996.2 |
| | 981.6 |
| | 1.5 |
|
| Corporate | 9.1 |
| | 10.6 |
| | (14.2 | ) | | 24.7 |
| | 28.0 |
| | (11.8 | ) |
| Eliminations | (0.9 | ) | | (1.3 | ) | | (30.8 | ) | | (3.1 | ) | | (3.3 | ) | | (6.1 | ) |
| Combined Total | $ | 372.2 |
| | $ | 332.3 |
| | 12.0 |
| | $ | 1,017.8 |
| | $ | 1,006.3 |
| | 1.1 |
|
Operating costs for the three months ended September 30, 2018 increased by 12.0% over the same period in 2017. The increase in our Construction Products Group was primarily due to higher shipment levels in our construction aggregates and other businesses. Operating costs for the Energy Equipment Group were higher for the three months ended September 30, 2018, primarily due to the impact of a $23.2 million impairment charge recorded in the third quarter of 2018. Operating costs of the Transportation Products Group were higher for the three months ended September 30, 2018 due to higher barge deliveries.
Operating costs for the nine months ended September 30, 2018 increased by 1.1% over the same period in 2017. The increase in our Construction Products Group was primarily due to higher shipment levels in our construction aggregates and other businesses. Operating costs for the Energy Equipment Group were lower for the nine months ended September 30, 2018, primarily due to a planned reduction in volumes in our wind tower product line, partially offset by the impact of a $23.2 million impairment charge recorded in the third quarter of 2018. Operating costs of the Transportation Products Group were higher for the nine months ended September 30, 2018 due to higher steel component deliveries.
Selling, engineering, and administrative expenses, including Corporate expenses, decreased for the three and nine months ended September 30, 2018,2020 increased by 4.3%10.1% and 2.9%14.5%, respectively, as a resultfrom the prior year periods.
•Revenues from our Construction Products Group increased primarily due to the impact of the Cherry acquisition.
•Revenues from our Energy Equipment Group increased primarily due to higher volumes in wind towers and utility structures and sales from our acquired traffic and telecom structures businesses.
•Revenues from our Transportation Products Group increased primarily due to higher hopper barge deliveries partially offset by lower compensation-related expenses. As a percentagetank barge deliveries and decreased deliveries and lower contractual pricing for steel components.
Operating Costs
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | Percent Change | | 2020 | | 2019 | | Percent Change |
| | (in millions) | | | (in millions) | |
| Construction Products Group | $ | 126.1 | | | $ | 99.4 | | | 26.9 | % | | $ | 382.6 | | | $ | 292.2 | | | 30.9 | % |
| Energy Equipment Group | 201.9 | | | 183.6 | | | 10.0 | | | 602.1 | | | 543.8 | | | 10.7 | |
| Transportation Products Group | 103.1 | | | 109.4 | | | (5.8) | | | 318.1 | | | 301.3 | | | 5.6 | |
| | | | | | | | | | | |
| Segment Totals before Eliminations and Corporate Expenses | 431.1 | | | 392.4 | | | 9.9 | | | 1,302.8 | | | 1,137.3 | | | 14.6 | |
| Corporate | 17.0 | | | 11.5 | | | 47.8 | | | 41.2 | | | 34.8 | | | 18.4 | |
| Eliminations | (0.2) | | | (1.7) | | | | | (2.3) | | | (4.5) | | | |
| Consolidated Total | $ | 447.9 | | | $ | 402.2 | | | 11.4 | | | $ | 1,341.7 | | | $ | 1,167.6 | | | 14.9 | |
2020 versus 2019
•Operating costs for the three and nine months ended September 30, 2018 as compared to 11.5%2020 increased by 11.4% and 10.8%14.9%, respectively,respectively.
•Cost of revenues for the same periods in 2017.
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2018 | | 2017 | | Percent Change | | 2018 | | 2017 | | Percent Change |
| | (in millions) | | | (in millions) | |
| Construction Products Group | $ | 15.3 |
| | $ | 13.6 |
| | 12.5 | % | | $ | 45.3 |
| | $ | 42.5 |
| | 6.6 | % |
| Energy Equipment Group | (13.2 | ) | | 20.8 |
| | (163.5 | ) | | 12.5 |
| | 63.2 |
| | (80.2 | ) |
| Transportation Products Group | 13.5 |
| | 9.8 |
| | 37.8 |
| | 35.2 |
| | 30.9 |
| | 13.9 |
|
| All Other | (0.1 | ) | | — |
| | | | (0.1 | ) | | — |
| | |
| Segment Totals before Eliminations and Corporate Expenses | 15.5 |
| | 44.2 |
| | (64.9 | ) | | 92.9 |
| | 136.6 |
| | (32.0 | ) |
| Corporate | (9.1 | ) | | (10.6 | ) | | (14.2 | ) | | (24.7 | ) | | (28.0 | ) | | (11.8 | ) |
| Eliminations | — |
| | — |
| |
| | — |
| | — |
| |
|
| Combined Total | $ | 6.4 |
| | $ | 33.6 |
| | (81.0 | ) | | $ | 68.2 |
| | $ | 108.6 |
| | (37.2 | ) |
Operating profit for the three months ended September 30, 2018 decreased by 81.0% when compared to the same period in 2017. Operating profit in theour Construction Products Group increased primarily due to higher volumes from the acquired Cherry business.
•Cost of revenues for the three months ended September 30, 2018 when compared to the prior year periodEnergy Equipment Group increased primarily due to higher volumes in wind towers and utility structures.
•Cost of revenues for the Transportation Products Group decreased for three months ended September 30, 2020 due to improved operating efficiencies in our construction aggregatesbarge business. Cost of revenues increased for the nine months ended September 30, 2020 primarily due to higher hopper barge deliveries partially offset by decreased volumes in steel components.
• As a percentage of revenues, selling, general, and administrative expenses, including Corporate expenses, increased to 11.8% and 11.1% for the three and nine months ended September 30, 2020, respectively, compared to 10.2% and 10.3% for the same periods in 2019. The increase is largely due to additional costs from the acquired Cherry business and higher volumesa non-recurring increase in the Group's other businesses as a resultlegal expenses of the trench shoring products acquisition$2.5 million incurred in the third quarter of 2017. Operating profit of our Energy Equipment Group decreased2020. In addition, for the threenine months ended September 30, 2018 compared2019, selling, general, and administrative expenses included a one-time $2.9 million recovery of bad debt in our utility structures business.
Operating Profit (Loss)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | Percent Change | | 2020 | | 2019 | | Percent Change |
| | (in millions) | | | (in millions) | |
| Construction Products Group | $ | 20.8 | | | $ | 16.5 | | | 26.1 | % | | $ | 61.9 | | | $ | 45.3 | | | 36.6 | % |
| Energy Equipment Group | 20.7 | | | 26.6 | | | (22.2) | | | 66.5 | | | 79.8 | | | (16.7) | |
| Transportation Products Group | 17.6 | | | 11.2 | | | 57.1 | | | 47.8 | | | 32.1 | | | 48.9 | |
| | | | | | | | | | | |
| Segment Totals before Corporate Expenses | 59.1 | | | 54.3 | | | 8.8 | | | 176.2 | | | 157.2 | | | 12.1 | |
| Corporate | (17.0) | | | (11.5) | | | 47.8 | | | (41.2) | | | (34.8) | | | 18.4 | |
| | | | | | | | | | | |
| Consolidated Total | $ | 42.1 | | | $ | 42.8 | | | (1.6) | | | $ | 135.0 | | | $ | 122.4 | | | 10.3 | |
2020 versus 2019
•Operating profit for the three and nine months ended September 30, 2020 decreased by 1.6% and increased by 10.3%, respectively.
•Operating profit in our Construction Products Group increased primarily due to the prior year period as a result of a planned reduction in volumes in the wind towers product line and the impact of a $23.2 million impairment charge recorded in the third quarter of 2018. The decrease in operatingacquired Cherry business.
•Operating profit in our Energy Equipment Group was partially offset fordecreased primarily due to lower efficiencies in our wind towers product line and operational challenges in our utility structures business related to COVID-19. For the threenine months ended September 30, 2018 by2020, operating profit also decreased due to a one-time $2.9 million recovery of bad debt recorded in the required adoption of the new revenue accounting rules. See Note 1 of the Combined Financial Statements. prior year in our utility structures business.
•Operating profit in our Transportation Products Group increased for the three months ended September 30, 2018 primarily due to increased barge deliveries compared to the same period in 2017.
Operating profit for the nine months ended September 30, 2018 decreased by 37.2% when compared to the same period in 2017. Operating profit in the Construction Products Group increased for the nine months ended September 30, 2018 when compared to the prior year period primarily due to higher volumes as a result of an acquisitionhopper barge deliveries and improved operating efficiencies in in our lightweight aggregates business in the fourth quarter of 2017 and higher volumes in the Group's other businesses as a result of the trench shoring products acquisition in the third quarter of 2017. Operating profit of our Energy Equipment Group decreased for the nine months ended September 30, 2018 compared to the prior year period as a result of a planned reduction in volumes in the wind towers product line and the impact of a $23.2 million impairment charge recorded in the third quarter of 2018. Operating profit in our Energy Equipment Group was also lower for the nine months ended September 30, 2018 due to the required adoption of the new revenue accounting rules. See Note 1 of the Combined Financial Statements. Operating profit in our Transportation Products Group increased for the nine months ended September 30, 2018 primarily due to increased steel component deliveries compared to the same period in 2017.barge business.
For a further discussion of revenues, costs, and the operating results of individual segments, see Segment Discussion below.
Other Income and Expense.
Other, income andnet (income) expense is summarized inconsists of the following table:items:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) |
| Interest income | $ | (0.1) | | | $ | (0.3) | | | $ | (0.4) | | | $ | (1.0) | |
| Foreign currency exchange transactions | (0.3) | | | (0.3) | | | (0.1) | | | 0.7 | |
| Other | (0.1) | | | (0.1) | | | (0.3) | | | (0.7) | |
| Other, net (income) expense | $ | (0.5) | | | $ | (0.7) | | | $ | (0.8) | | | $ | (1.0) | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (in millions) |
| Foreign currency exchange transactions | $ | — |
| | $ | (0.5 | ) | | $ | 2.2 |
| | $ | 0.3 |
|
| Other | (0.2 | ) | | 0.3 |
| | (0.2 | ) | | (0.3 | ) |
| Other, net | $ | (0.2 | ) | | $ | (0.2 | ) | | $ | 2.0 |
| | $ | — |
|
Income Taxes.
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 nine months ended September 30, 20182020 was 51.5%22.6% and 27.5%24.6%, respectively, compared to 39.1%22.0% and 39.1%22.1% for the same periods in 2017, respectively.2019. The increase in the tax rate for the three and nine months ended September 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 or deficiencies related to equity compensation, and the impact of nondeductible impairment charges. A portionforeign tax benefits. See Note 10 of the $23.2 million pre-tax impairment charge recorded in the three and nine months ended September 30, 2018 was attributableNotes to certain of our foreign operations for which taxes are not provided. This impairment charge increased the losses in those jurisdictions with no corresponding tax benefit.
The Act was enacted on December 22, 2017. The Act reduces the U.S. federal corporate income tax rate from 35.0% to 21.0%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign-sourced earnings. In December 2017, we recorded a tax benefit after the initial assessment of the tax effects of the Act, and we will continue refining this amount throughout 2018. We are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of our deferred tax balance or give rise to new deferred tax amounts resulting in a final adjustment in the fourth quarter of 2018. The impact of the Act may differ from our estimate due to changes in the regulations, rulings, guidance, and interpretations issued by the Internal Revenue Service ("IRS") and the FASB as well as interpretations and assumptions made by the Company. The calculation of our estimated annual effective tax rate includes the estimated impact of provisions of the Act, such as interest limitations, and foreign limitations or inclusions. These estimates could change as additional information becomes available on these provisions of the Act.
See Note 8 of the CombinedConsolidated 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 deferred during the first half of the year were paid during the third quarter of 2020. As of September 30, 2020, the Company has deferred $6.2 million in payroll-related taxes in accordance with the provisions of the CARES Act.
Segment Discussion
Construction Products Group
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | Percent | | 2020 | | 2019 | | Percent |
| | ($ in millions) | | Change | | ($ in millions) | | Change |
| Revenues: | | | | | | | | | | | |
| Construction aggregates | $ | 128.8 | | | $ | 96.9 | | | 32.9 | % | | $ | 393.0 | | | $ | 278.5 | | | 41.1 | % |
| Other | 18.1 | | | 19.0 | | | (4.7) | | | 51.5 | | | 59.0 | | | (12.7) | |
| Total revenues | 146.9 | | | 115.9 | | | 26.7 | | | 444.5 | | | 337.5 | | | 31.7 | |
| | | | | | | | | | | |
| Operating costs: | | | | | | | | | | | |
| Cost of revenues | 109.8 | | | 88.9 | | | 23.5 | | | 331.9 | | | 257.9 | | | 28.7 | |
| Selling, general, and administrative expenses | 16.3 | | | 10.5 | | | 55.2 | | | 50.7 | | | 34.3 | | | 47.8 | |
| Operating profit | $ | 20.8 | | | $ | 16.5 | | | 26.1 | | | $ | 61.9 | | | $ | 45.3 | | | 36.6 | |
| Operating profit margin | 14.2 | % | | 14.2 | % | | | | 13.9 | % | | 13.4 | % | | |
| | | | | | | | | | | |
Depreciation, depletion, and amortization(1) | $ | 15.2 | | | $ | 9.7 | | | 56.7 | | | $ | 42.9 | | | $ | 27.5 | | | 56.0 | |
(1)Depreciation, depletion, and amortization are components of operating profit.
Three Months Ended September 30, 2020 versus Three Months Ended September 30, 2019
•Revenues increased by 26.7% primarily driven by the acquisition of Cherry, which increased segment revenues by approximately 35% despite numerous tropical weather events that impacted Cherry and other locations along the Gulf Coast. Additionally, natural aggregates volumes serving construction end markets were higher than the previous year. On the downside, COVID-19 related construction delays continued to impact certain specialty materials businesses, and we experienced reduced natural aggregate volumes in plants serving oil and gas markets.
•Cost of revenues increased by 23.5% due to higher volumes from the acquired Cherry business. As a percent of revenues, cost of revenues decreased to 74.7% compared to 76.7%.
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2018 | | 2017 | | Percent | | 2018 | | 2017 | | Percent |
| | ($ in millions) | | Change | | ($ in millions) | | Change |
| Revenues: | | | | | | | | | | | |
| Construction aggregates | $ | 52.9 |
| | $ | 53.3 |
| | (0.8 | )% | | $ | 166.6 |
| | $ | 155.1 |
| | 7.4 | % |
| Other | 19.7 |
| | 16.1 |
| | 22.4 |
| | 60.1 |
| | 39.7 |
| | 51.4 |
|
| Total revenues | 72.6 |
| | 69.4 |
| | 4.6 |
| | 226.7 |
| | 194.8 |
| | 16.4 |
|
| | | | | | | | | | | | |
| Operating costs: | | | | | | | | | | | |
| Cost of revenues | 49.9 |
| | 48.4 |
| | 3.1 |
| | 159.9 |
| | 133.3 |
| | 20.0 |
|
| Selling, engineering, and administrative costs | 7.4 |
| | 7.4 |
| | — |
| | 21.5 |
| | 19.0 |
| | 13.2 |
|
| Operating profit | $ | 15.3 |
| | $ | 13.6 |
| | 12.5 |
| | $ | 45.3 |
| | $ | 42.5 |
| | 6.6 |
|
| Operating profit margin | 21.1 | % | | 19.6 | % | | | | 20.0 | % | | 21.8 | % | | |
| | | | | | | | | | | | |
Depreciation and amortization(1) | $ | 5.2 |
| | $ | 4.7 |
| | 10.6 |
| | $ | 15.4 |
| | $ | 13.3 |
| | 15.8 |
|
•Operating profit increased by 26.1%, consistent with the increase in revenues.
•Depreciation, depletion, and amortization expense increased primarily due to the acquired Cherry business.
Nine Months Ended September 30, 2020 versus Nine Months Ended September 30, 2019
•Revenues increased 31.7% primarily driven by the acquisition of Cherry, which increased segment revenues by approximately 40%. The increase was partially offset by a decrease of 12.7% 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, reduced volumes in plants serving oil and gas markets were partially offset by increased natural aggregates volumes serving other 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 28.7% primarily due to higher volumes from the acquired Cherry business. As a percent of revenues, cost of revenues decreased to 74.7% compared to 76.4%.
•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 36.6%, outpacing the increase in revenues.
•Depreciation, depletion, and amortization expense increased primarily due to the acquired Cherry business.
Energy Equipment Group
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | Percent | | 2020 | | 2019 | | Percent |
| | ($ in millions) | | Change | | ($ in millions) | | Change |
| Revenues: | | | | | | | | | | | |
| Wind towers and utility structures | $ | 181.5 | | | $ | 159.8 | | | 13.6 | % | | $ | 534.8 | | | $ | 469.4 | | | 13.9 | % |
| Other | 41.1 | | | 50.4 | | | (18.5) | | | 133.8 | | | 154.2 | | | (13.2) | |
| Total revenues | 222.6 | | | 210.2 | | | 5.9 | | | 668.6 | | | 623.6 | | | 7.2 | |
| | | | | | | | | | | |
| Operating costs: | | | | | | | | | | | |
| Cost of revenues | 183.1 | | | 165.6 | | | 10.6 | | | 547.8 | | | 497.2 | | | 10.2 | |
| Selling, general, and administrative expenses | 18.8 | | | 18.0 | | | 4.4 | | | 54.3 | | | 46.6 | | | 16.5 | |
| | | | | | | | | | | |
| Operating profit | $ | 20.7 | | | $ | 26.6 | | | (22.2) | | | $ | 66.5 | | | $ | 79.8 | | | (16.7) | |
| Operating profit margin | 9.3 | % | | 12.7 | % | | | | 9.9 | % | | 12.8 | % | | |
| | | | | | | | | | | |
Depreciation and amortization(1) | $ | 7.3 | | | $ | 6.9 | | | 5.8 | | | $ | 22.8 | | | $ | 21.2 | | | 7.5 | |
(1)Depreciation and amortization are components of operating profit.
Revenues and cost of revenues increased 4.6% and 3.1%, respectively, for the three months endedThree Months Ended September 30, 2018, when compared to the same period2020 versus Three Months Ended September 30, 2019
•Revenues increased by 5.9% driven primarily by higher volumes in 2017 primarilywind towers and utility structures and sales from higherour acquired traffic and telecom structures businesses. This increase was partially offset by lower steel prices in utility structures and lower volumes and pricing in our other product lines as a result of our trench shoring products acquisition in the third quarter of 2017. Selling, engineering and administrative costs for the three months ended September 30, 2018 remained unchanged compared to the same period in 2017.lines.
Revenues and cost•Cost of revenues increased by 16.4%10.6% driven by the acquired traffic and 20.0%, respectively, for the nine months ended September 30, 2018, when comparedtelecom structures businesses, higher overall volumes in wind towers and utility structures, and operational challenges in our utility structures business primarily related to the same periodCOVID-19. This increase was partially offset by lower volumes in 2017 primarily from higher volumes from acquisitions in both our lightweight aggregates business and trench shoring products business in 2017. other product lines.
•Selling, engineering,general, and administrative costs increased by 13.2% for the nine months ended September 30, 2018, compared to the same period in 2017,4.4% primarily due to additional costs from acquired businesses.
•Operating profit decreased by 22.2% primarily due to operational challenges related to COVID-19.
Nine Months Ended September 30, 2020 versus Nine Months Ended September 30, 2019
•Revenues increased by 7.2% driven by higher volumes in wind towers and utility structures and sales from our acquired traffic and telecom structures businesses. This was partially offset by lower steel prices in utility structures and lower volumes and pricing in our other product lines.
•Cost of revenues increased by 10.2% driven by the trench shoring acquisitionacquired traffic and telecom structures businesses, higher overall volumes in wind towers and utility structures, and operational challenges in our utility structures business related to COVID-19. This was partially offset by lower volumes in other product lines.
•Selling, general, and administrative costs increased by 16.5% primarily due to a $2.9 million recovery of bad debt recorded in the third quarterprior year related to a single customer in our utility structures business and additional costs from acquired businesses.
•Operating profit decreased by 16.7% primarily due to lower efficiencies in our wind towers business and the recovery of 2017.bad debt recorded in the prior year.
Unsatisfied Performance Obligations (Backlog) As of September 30, 2020, the backlog for wind towers and utility structures was $429.3 million compared to $563.6 million as of September 30, 2019. Approximately 32% of unsatisfied performance obligations for wind towers and utility structures are expected to be delivered during the year ending December 31, 2020 with substantially all of the remainder expected to be delivered during 2021. Future wind tower orders are subject to uncertainty as PTC eligibility for new wind farm projects is scheduled to expire at the end 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 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 reflect a market transitioning from PTC incentives. As of September 30, 2020, the backlog for our other business lines in our Energy Equipment Group was $13.3 million, of which 77% is expected to be delivered during the year ending December 31, 2020 with the remainder expected to be delivered in 2021.
Transportation Products Group
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2018 | | 2017 | | Percent | | 2018 | | 2017 | | Percent | | 2020 | | 2019 | | Percent | | 2020 | | 2019 | | Percent |
| | ($ in millions) | | Change | | ($ in millions) | | Change | | ($ in millions) | | Change | | ($ in millions) | | Change |
| Revenues: | | | | | | | | | | | | Revenues: | | | | |
| Wind towers and utility structures | $ | 147.0 |
| | $ | 167.1 |
| | (12.0 | )% | | $ | 427.5 |
| | $ | 514.4 |
| | (16.9 | )% | |
| Other | 51.4 |
| | 50.2 |
| | 2.4 |
| | 145.6 |
| | 136.9 |
| | 6.4 |
| |
| Inland barges | | Inland barges | $ | 99.4 | | | $ | 77.5 | | | 28.3 | % | | $ | 295.4 | | | $ | 193.0 | | | 53.1 | % |
| Steel components | | Steel components | 21.3 | | | 43.1 | | | (50.6) | | | 70.5 | | | 140.4 | | | (49.8) | |
| Total revenues | 198.4 |
| | 217.3 |
| | (8.7 | ) | | 573.1 |
| | 651.3 |
| | (12.0 | ) | Total revenues | 120.7 | | | 120.6 | | | 0.1 | | | 365.9 | | | 333.4 | | | 9.7 | |
| | | | | | | | | | | | | |
| Operating costs: | | | | | | | | | | | | Operating costs: | |
| Cost of revenues | 171.0 |
| | 178.8 |
| | (4.4 | ) | | 484.0 |
| | 532.1 |
| | (9.0 | ) | Cost of revenues | 97.6 | | | 103.9 | | | (6.1) | | | 301.0 | | | 284.6 | | | 5.8 | |
| Selling, engineering, and administrative costs | 17.4 |
| | 17.7 |
| | (1.7 | ) | | 53.4 |
| | 56.0 |
| | (4.6 | ) | |
| Impairment charge | 23.2 |
| | — |
| |
|
| | 23.2 |
| | — |
| | | |
| Selling, general, and administrative expenses | | Selling, general, and administrative expenses | 5.5 | | | 5.5 | | | — | | | 17.1 | | | 16.7 | | | 2.4 | |
| | Operating profit | $ | (13.2 | ) | | $ | 20.8 |
| | (163.5 | ) | | $ | 12.5 |
| | $ | 63.2 |
| | (80.2 | ) | Operating profit | $ | 17.6 | | | $ | 11.2 | | | 57.1 | | | $ | 47.8 | | | $ | 32.1 | | | 48.9 | |
| Operating profit margin | (6.7 | )% | | 9.6 | % | | | | 2.2 | % | | 9.7 | % | | | Operating profit margin | 14.6 | % | | 9.3 | % | | 13.1 | % | | 9.6 | % | |
| | | | | | | | | | | | | |
Depreciation and amortization(1) | $ | 7.4 |
| | $ | 7.5 |
| | (1.3 | ) | | $ | 22.6 |
| | $ | 22.7 |
| | (0.4 | ) | Depreciation and amortization (1) | $ | 4.4 | | | $ | 4.3 | | | 2.3 | | | $ | 13.5 | | | $ | 12.0 | | | 12.5 | |
(1)Depreciation and amortization are components of operating profit.
Revenues decreased by 8.7% for the three months endedThree Months Ended September 30, 2018 when compared2020 versus Three Months Ended September 30, 2019
•Revenues were unchanged as higher barge revenues, driven by increased hopper deliveries, were offset by lower steel components revenues due to the same period in 2017. Revenues from our wind towersdecreased deliveries and utility structures product lines decreased by 12.0% driven primarily by a planned reduction in volumes in our wind towers product line. Revenues from other product lines increased by 2.4% as a result of increased volumes. lower contractual pricing.
•Cost of revenues decreased by 4.4% for the three months ended September 30, 2018 compared to 2017, primarily6.1% driven by reduced
lower steel component volumes, in our wind towers product line, and partially offset by higher hopper barge volumes. As a $6.1 million reserve on finished goods inventory relatedpercentage of revenues, cost of revenues decreased to an order for a single customer80.9% compared to 86.2% in the prior year period primarily due to improved operating efficiencies in our utility structuresbarge business.
Revenues decreased•Selling, general, and administrative costs were unchanged and consistent as a percentage of revenues.
•Operating profit increased by 12.0% for the nine months ended57.1% driven by increased operating efficiencies in our barge business.
Nine Months Ended September 30, 2018 when compared to the same period in 2017. 2020 versus Nine Months Ended September 30, 2019
•Revenues from our wind towers and utility structures product lines decreased by 16.9%, driven primarily by a planned reduction in volumes in our wind towers product line. Revenues from other product lines increased by 6.4% as a result of increased shipping volumes. 9.7% primarily from higher hopper deliveries, partially offset by decreased deliveries and lower contractual pricing for steel components.
•Cost of revenues decreasedincreased 5.8% driven by 9.0% for the nine months ended September 30, 2018 compared to 2017, driven primarily by the reducedhigher hopper barge volumes, in our wind towers product line and a $3.9 million insurance recovery, partially offset by lower steel component volumes and by $3.3 million due to start-up costs incurred in 2019 toward the re-opening of a $6.1 million reserve on finished goods inventory relatedpreviously idled barge manufacturing plant. As a percentage of revenues, cost of revenues decreased to an order for a single customer82.3% compared to 85.4% in the prior year period primarily due to improved operating efficiencies in our utility structuresbarge business.
•Selling, engineering,general, and administrative costs decreasedincreased slightly.
•Operating profit increased by 1.7%48.9%, outpacing the increase in revenues.
Unsatisfied Performance Obligations (Backlog)
As of September 30, 2020, the backlog for the Transportation Products Group was $177.5 million compared to $363.8 million as of September 30, 2019. Approximately 45% of unsatisfied performance obligations for inland barges are expected to be delivered during the year ending December 31, 2020 with the remainder expected to be delivered in 2021. Subsequent to September 30, 2020, we received additional orders of approximately $32 million for inland barges expected to be delivered in 2021.
Corporate
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | Percent | | 2020 | | 2019 | | Percent |
| | (in millions) | | Change | | (in millions) | | Change |
| Corporate overhead costs | $ | 17.0 | | | $ | 11.5 | | | 47.8 | % | | $ | 41.2 | | | $ | 34.8 | | | 18.4 | % |
2020 versus 2019
•Corporate overhead costs increased 47.8% and 4.6%, respectively,18.4% for the three and nine months ended September 30, 2018 compared to the same periods in 20172020, respectively. The increase primarily due to decreased bad debt expense related to the same single utility structures customer.
The Company recorded an impairment chargehigher acquisition-related transaction and integration costs of $23.2 million in the third quarter of 2018 associated with the write-down of the net assets of certain businesses classified as held for sale. See Note 2 to the Combined Financial Statements for further information about the impairment charge.
In addition to the changes described above, revenues and operating profit were also higher by $8.3$1.4 million and $2.6$3.0 million, respectively, for the three months ended September 30, 2018 and lower by $6.4 million and $1.0 million, respectively, for the nine months ended September 30, 2018 due to the required adoption of new revenue accounting rules. See Note 1 of the Combined Financial Statements.
The backlog for wind towers and utility structures was $700.3 million and $972.0 million at September 30, 2018 and 2017, respectively.
Transportation Products Group
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2018 | | 2017 | | Percent | | 2018 | | 2017 | | Percent |
| | ($ in millions) | | Change | | ($ in millions) | | Change |
| Revenues: | | | | | | | | | | | |
| Inland barges | $ | 49.3 |
| | $ | 28.1 |
| | 75.4 | % | | $ | 123.0 |
| | $ | 124.3 |
| | (1.0 | )% |
| Steel components | 59.2 |
| | 52.4 |
| | 13.0 |
| | 166.3 |
| | 147.8 |
| | 12.5 |
|
| Total Revenues | 108.5 |
| | 80.5 |
| | 34.8 |
| | 289.3 |
| | 272.1 |
| | 6.3 |
|
| | | | | | | | | | | | |
| Operating costs: | | | | | | | | | | | |
| Cost of revenues | 88.8 |
| | 64.7 |
| | 37.2 |
| | 236.6 |
| | 223.7 |
| | 5.8 |
|
| Selling, engineering, and administrative costs | 6.2 |
| | 6.0 |
| | 3.3 |
| | 17.5 |
| | 17.5 |
| | — |
|
| Operating profit | $ | 13.5 |
| | $ | 9.8 |
| | 37.8 |
| | $ | 35.2 |
| | $ | 30.9 |
| | 13.9 |
|
| Operating profit margin | 12.4 | % | | 12.2 | % | | | | 12.2 | % | | 11.4 | % | | |
| | | | | | | | | | | | |
Depreciation and amortization (1) | $ | 4.2 |
| | $ | 4.5 |
| | (6.7 | ) | | $ | 11.7 |
| | $ | 12.2 |
| | (4.1 | ) |
(1) Depreciation and amortization are components of operating profit.
Revenues and cost of revenues increased for the three months ended September 30, 2018 by 34.8% and 37.2%, respectively, compared to the same period in 2017 primarily from higher barge deliveries. Revenues and cost of revenues increased for the nine months ended September 30, 2018 by 6.3% and 5.8%, respectively, compared to the same period in 2017 primarily from higher steel component deliveries. Selling, engineering, and administrative costs increased by 3.3% for the three months ended September 30, 2018 due to higher compensation-related expenses and were substantially unchanged for the nine months ended September 30, 2018 compared to the same periods in 2017.
As of September 30, 2018, the backlog for the Transportation Products Group was $210.4 million compared to $126.0 million as of September 30, 2017.
Corporate
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2018 | | 2017 | | Percent | | 2018 | | 2017 | | Percent |
| | ($ in millions) | | Change | | ($ in millions) | | Change |
| Corporate overhead costs | $ | 9.1 |
| | $ | 10.6 |
| | (14.2 | )% | | $ | 24.7 |
| | $ | 28.0 |
| | (11.8 | )% |
Corporate overhead costs consist 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 Arcosa for each of the periods using methods management believes are consistent and reasonable.
The decrease in corporate overhead costs for the three and nine months ended September 30, 2018 compared to 2017 is primarily due to lower compensation-related expenses.
As an independent public company, Arcosa expects to incur incremental costs, including costs to replace services and fees previously provided or incurred by Trinity2020, respectively, as well as other standalone costs. a non-recurring increase in legal expenses of $2.5 million incurred during the third quarter of 2020.
•We estimate that these additionalfull-year corporate costs will range from $10.0 million to $15.0be approximately $55 million in fiscal year 2019.2020, including the non-recurring legal expenses incurred in Q3 and the acquisition-related transaction and integration costs incurred throughout the year.
Liquidity and Capital Resources
Arcosa’s primary liquidity requirements are primarily to fundrequirement consists of funding our business operations, including capital expenditures, working capital requirements,investment, and disciplined acquisitions, and operational restructuring activities.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.
Pursuant to the separation and distribution agreement, on October 31, 2018, Trinity contributed $200 million cash to Arcosa in connection with the separation.
On November 1, 2018, the Company entered into a $400 million unsecured revolving credit facility that matures on November 1, 2023. The interest rates under the facility are variable based on LIBOR or an alternate base rate plus a margin that is determined based on Arcosa’s leverage as measured by a consolidated total indebtedness to consolidated EBITDA ratio, and initially are set at LIBOR plus 1.25%. A commitment fee will accrue on the average daily unused portion of the revolving facility at the rate of 0.20% to 0.35%, initially set at 0.20%. As of November 1, 2018, there were no outstanding loans borrowed under the facility and there were approximately $19.9 million in Letters of Credit issued.
The credit agreement includes customary representations, warranties, conditions, covenants and events of default. The covenants under the credit agreement include, among other things, two financial covenants: a minimum interest coverage ratio and a maximum leverage ratio. The credit agreement requires us to maintain a minimum interest coverage ratio as of the last day of each fiscal quarter, which is defined as consolidated EBITDA divided by consolidated interest expense, in each case for the four fiscal quarters then ended, of not less than 2.50 to 1.00, beginning with the fiscal quarter ended September 30, 2018. The credit agreement also requires us to maintain a maximum leverage ratio as of the last day of each fiscal quarter, which is defined as consolidated total debt as of the last day of such fiscal quarter, divided by consolidated EBITDA for the four fiscal quarters then ended, of not greater than 3.00 to 1.00, beginning with the fiscal quarter ended September 30, 2018. Following qualified acquisitions (as defined in the credit agreement), we may elect up to two times to permit the maximum leverage ratio to be greater than 3.00 to 1.00 but not greater than 3.50 to 1.00. As of September 30, 2018, we were in compliance with the financial covenants in the credit agreement.
Cash Flows
The following table summarizes our cash flows from operating, investing, and financing activities for the nine months ended September 30, 20182020 and 2017:2019:
| | | | | | | | | | | |
| | Nine Months Ended
September 30, |
| | 2020 | | 2019 |
| | (in millions) |
| Total cash provided by (required by): | | | |
| Operating activities | $ | 226.7 | | | $ | 219.0 | |
| Investing activities | (409.7) | | | (87.4) | |
| Financing activities | 131.6 | | | (103.5) | |
| Net increase (decrease) in cash and cash equivalents | $ | (51.4) | | | $ | 28.1 | |
|
| | | | | | | |
| | Nine Months Ended
September 30, |
| | 2018 | | 2017 |
| | (in millions) |
| Total cash provided by (required by): | | | |
| Operating activities | $ | 118.5 |
| | $ | 134.3 |
|
| Investing activities | (55.4 | ) | | (91.3 | ) |
| Financing activities | (59.5 | ) | | (46.8 | ) |
| Net (decrease) increase in cash, cash equivalents, and restricted cash | $ | 3.6 |
| | $ | (3.8 | ) |
Operating Activities. Net cash provided by operating activities for the nine months ended September 30, 20182020 was $118.5$226.7 million compared to net cash provided by operating activities of $134.3$219.0 million for the nine months ended September 30, 2017.2019.
Receivables at•The changes in current assets and liabilities resulted in a net source of cash of $30.8 million for the nine months ended September 30, 2018 decreased by $10.92020 compared to a net source of cash of $39.5 million or 6.6% since December 31, 2017for the nine months ended September 30, 2019. The current year activity was primarily due to lower trade receivables in our Energy Equipment Group partially offset by higher trade receivables in our Transportation Products Group driven by an increase in Inland Barge revenues. Raw materials inventory at September 30, 2018decreased inventories and increased by $35.1 million or 38.4% primarily in our Transportation Products Group. Work in process inventory decreased by $13.4 million or 28.4% and Finished goods inventory decreased by $33.8 million or 31.2% since December 31, 2017 primarily in our Energy Equipment Group. Accountsaccounts payable increased by $6.7 million, while accrued liabilities decreased by $13.8 million from December 31, 2017. We continually review reserves related to collectibility as well as the adequacy of lower of cost or net realizable value with regard to accounts receivable and inventory.Company focused on reducing working capital.
Investing Activities. Net cash required by investing activities for the nine months ended September 30, 20182020 was $55.4$409.7 million compared to $91.3$87.4 million for the nine months ended September 30, 2017. 2019.
•Capital expenditures for the nine months ended September 30, 20182020 were $33.0$56.9 million compared to $45.9$61.0 million for the same period last year. Full-year capital expenditures are expected to be approximately $80 million in 2020. We expect maintenance capital expenditures of approximately $65 million and capital expenditures related to additional growth to be $15 million in 2020.
•Proceeds from the sale of property, plant, and equipment and other assets totaled $2.6$8.9 million for the nine months ended September 30, 2018,2020, compared to $2.1$4.7 million for the same period in 2017. Net2019.
•Cash paid for acquisitions, net of cash required related to acquisitions amounted to $25.0 million and $47.5acquired, was $361.7 million for the nine months ended September 30, 2018 and 2017, respectively.2020 compared to $31.1 million for the same period in 2019. There was no divestiture activity for the nine months ended September 30, 20182020 and 2017.2019.
Financing Activities. Net cash requiredprovided by financing activities during the nine months ended September 30, 20182020 was $59.5$131.6 million compared to $46.8 million ofnet cash required by financing activities of $103.5 million for the same period in 2017. Net transfers2019.
•Current year to Trinity totaled $56.3date activity was primarily related to proceeds from the issuance of the $150 million term loan, as the $100.0 million precautionary advance under the Company's revolving credit facility was borrowed and repaid during the period. Prior year to date activity was primarily related to repayments of advances of $80 million under the revolving credit facility.
Other Investing and Financing Activities
Revolving Credit Facility
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 for borrowing and commitment fee rate are determined based on Arcosa’s leverage as measured by a consolidated total indebtedness to consolidated EBITDA ratio. The margin for borrowing ranges from 1.25% to 2.00% and was set at LIBOR plus 1.25% as of September 30, 2020. The commitment fee rate ranges from 0.20% to 0.35% and was set at 0.20% as of September 30, 2020.
In March 2020, as a precautionary measure, the Company borrowed $100.0 million under its revolving credit facility to increase our cash position and preserve financial flexibility considering the 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 September 30, 2020, we had $100.0 million of outstanding loans borrowed and $26.1 million of letters of credit issued under the facility, leaving $373.9 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 and term loan facilities require the maintenance of certain ratios related to leverage and interest coverage. As of September 30, 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 September 2020, the Company declared a quarterly cash dividend of $0.05 per share to be paid on October 30, 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 102,282 shares at a cost of $4.0 million during the nine months ended September 30, 2020. As of September 30, 2020, the Company had a remaining authorization of $32.0 million under the program. See Note 1 of the Notes to the Consolidated Financial Statements.
Derivative Instruments
In December 2018, comparedthe Company entered into an interest rate swap instrument, effective as of January 2, 2019 and expiring in 2023, to $47.3reduce 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 September 30, 2020, the Company has recorded a liability of $7.9 million for the nine months ended September 30, 2017.fair value of the instrument, all of which is recorded in accumulated other comprehensive loss. See Note 3 and Note 7 of the Notes to the Consolidated Financial Statements.
Off-Balance Sheet Arrangements
We do not engageAs of September 30, 2020, we had letters of credit issued under our revolving credit facility in any off-balance sheet financial arrangements that have oran aggregate principal amount of $26.1 million. Of the outstanding letters of credit as of September 30, 2020, all are reasonably likelyexpected to have a material current or future effect onexpire in 2021. The majority of our financial condition, changes in financial condition, revenues or expenses, resultsletters of operations, liquidity, capital expenditures or capital resources.credit obligations support the Company’s various insurance programs and generally renew by their terms each year. See Note 7 of the Notes to the Consolidated Financial Statements.
Recent Accounting Pronouncements
See Note 1 of the CombinedNotes to the Consolidated 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 Strata Materials 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;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 theour 2019 Annual Report on Form 10.10-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, 20172019 as set forth in our 2019 Annual Report on Form 10.10-K. See Note 79 of the CombinedNotes to Consolidated Financial Statements for the impact of foreign exchange rate fluctuations for the three and nine months ended September 30, 2018.2020.
Item 4. Controls and Procedures.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 SEC,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 September 30, 2020 excludes an assessment of the internal control over financial reporting of the Cherry business acquired in January 2020. The Cherry business represents approximately 13% of consolidated total assets and approximately 9% of consolidated revenues as of and for the nine months ended September 30, 2020.
PART II
Item 1.Legal Proceedings
The information providedOn 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 Note 11the Supreme Court of the Combined Financial StatementsState 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 hereby incorporated intofiled 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 "Court"). The Company and Meyer filed a motion to dismiss T&B’s claims, and an Answer and Counterclaims against T&B. On July 30, 2020, the Court granted the Company's and Meyer's motion and dismissed T&B's claims. In its ruling, the Court likewise dismissed Meyer's counterclaims. On August 28, 2020, T&B filed its Notice of Appeal to the United States Court of Appeals for the Second Circuit. We intend to vigorously defend ourselves in the subsequent appeal of this Part II, Item 1 by reference.matter.
Item 1A.Risk Factors
Our business and common stock are subject to a number of risks and uncertainties. The discussion of such risks and uncertainties may be found under "Risk Factors" in the Form 10 filed. There have been no material changes in the Company's risk factors from those set forth in our 2019 Annual Report on Form 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 risk factors.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
Not Applicable.This table provides information with respect to purchases by the Company of shares of its common stock during the quarter ended September 30, 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) |
| July 1, 2020 through July 31, 2020 | | 853 | | | $ | 42.43 | | | — | | | $ | 34,030,774 | |
| August 1, 2020 through August 31, 2020 | | 2,864 | | | $ | 46.11 | | | — | | | $ | 34,030,774 | |
| September 1, 2020 through September 30, 2020 | | 45,934 | | | $ | 44.01 | | | 45,446 | | | $ | 32,032,353 | |
| Total | | 49,651 | | | $ | 44.10 | | | 45,446 | | | $ | 32,032,353 | |
(1) These columns include the following transactions during the three months ended September 30, 2020: (i) the surrender to the Company of 4,205 shares of common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees and (ii) the purchase of 45,446 shares of common stock on the open market as part of the stock repurchase program.
(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.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 | | |
| 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 |
| | November 14, 2018October 29, 2020 |
