Arcosa, Inc.: Form 10-Q for the period ended Mar 31, 2024

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. Our MD&A is presented in the following sections:

• Company Overview
• Market Outlook
• Executive Overview
• Results of Operations
• Liquidity and Capital Resources
• Recent Accounting Pronouncements
• Forward-Looking Statements

Our MD&A should be read in conjunction with the Consolidated Financial Statements of Arcosa, Inc. and its consolidated subsidiaries (“Arcosa,” “Company,” “we,” or “our”) and related Notes in Part I, Item 1 of this Quarterly Report on Form 10-Q and the Consolidated 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, 2023 (“2023 Annual Report on Form 10-K”).

Company Overview

Arcosa, headquartered in Dallas, Texas, is a provider of infrastructure-related products and solutions with leading positions in construction, engineered structures, and transportation markets in North America. Arcosa is a Delaware corporation and was incorporated in 2018 as an independent, publicly-traded company, listed on the New York Stock Exchange.

Market Outlook

• Within our Construction Products segment, market demand remains healthy overall when seasonal weather conditions have been normal, supported by increased infrastructure spending and private non-residential activity. The outlook for single-family residential housing continues to be impacted by higher interest rates and home affordability, which has negatively impacted volumes. We have been successful in managing inflationary cost pressures through proactive price increases.
• Within our Engineered Structures segment, our backlog as of March 31, 2024 provides good production visibility for the remainder of 2024. Our customers remain committed to taking delivery of these orders. In utility structures, order and inquiry activity continues to be healthy, as customers remain focused on grid hardening and reliability initiatives. The passage of the Inflation Reduction Act ("IRA") on August 16, 2022, which included a long-term extension of the Production Tax Credit (“PTC”) for new wind farm projects and introduced new Advanced Manufacturing Production (“AMP”) tax credits for companies that domestically manufacture and sell clean energy equipment in the U.S., is a significant catalyst for our wind towers business. As demonstrated by more than $1.1 billion of new orders for delivery through 2028, which we have received since the passage of the IRA, our wind towers business is at the beginning stages of a market recovery. A large portion of these orders will support wind energy expansion projects in the Southwest. As a result, we are opening a new plant in New Mexico and expect to start delivering towers from this facility in the second quarter of 2024.
• Within our Transportation Products segment, our backlog for inland barges as of March 31, 2024 was $294.4 million, up 16% compared to December 31, 2023, and extends into 2025. Our customers remain committed to taking delivery of these orders. While still recovering from cyclical lows, our backlog at the end of the first quarter is near its highest level since the onset of the COVID-19 pandemic when order levels fell sharply and have remained low due to persistently high steel prices. Over this time, customer inquiries have remained healthy, particularly for dry barges, as the fleet continues to age, new builds have not kept pace with scrapping, and utilization rates are high. We have been successful in filling orders when we can strategically source steel. As a result, we received orders of $120 million in the first quarter for both hopper and tank barges. Demand for steel components has stabilized as the near-term outlook for the new railcar market indicates replacement-level demand.

Executive Overview

Recent Developments

In April 2024, we completed the acquisition of Ameron Pole Products, LLC ("Ameron"), a leading manufacturer of highly engineered, premium concrete and steel poles for a broad range of infrastructure applications, including lighting, traffic, electric distribution, and small-cell telecom, for a total purchase price of $180.0 million. With operations in Alabama, California, and Oklahoma, Ameron will be included in our Engineered Structures segment. The acquisition was funded with $160.0 million of borrowings under our revolving credit facility and cash on hand.

Financial Operations and Highlights

• Revenues for the three months ended March 31, 2024 increased 9.0% to $598.6 million due to higher revenues in all three segments compared to the three months ended March 31, 2023.
• Operating profit for the three months ended March 31, 2024 totaled $53.4 million, a decrease of $21.7 million year-over-year. Excluding the $21.8 million gain on the sale of depleted land in the prior period, operating profit was roughly flat as higher operating profit in Construction Products and Transportation Products was offset by lower operating profit in Engineered Structures.
• Selling, general, and administrative expenses increased 10.6% for the three months ended March 31, 2024 compared to the same period in 2023 due to increased headcount, additional costs from recently acquired businesses, and higher acquisition and divestiture-related expenses. As a percentage of revenues, selling, general, and administrative expenses increased slightly to 11.5% for the three months ended March 31, 2024, compared to 11.4% for the same period in 2023.
• The effective tax rate for the three months ended March 31, 2024 was 17.1%, compared to 20.3% for the same period in 2023. See Note 10 Income Taxes to the Consolidated Financial Statements.
• Net income for the three months ended March 31, 2024 was $39.2 million, compared to $55.7 million for the same period in 2023.

Our Engineered Structures and Transportation Products segments operate in cyclical industries. Additionally, results in our Construction Products segment are affected by weather and seasonal fluctuations with the second and third quarters historically being the quarters with the highest revenues.

Unsatisfied Performance Obligations (Backlog)

As of March 31, 2024, December 31, 2023, and March 31, 2023, our unsatisfied performance obligations, or backlog, were as follows:

(in millions)

Approximately 40% of the unsatisfied performance obligations for utility, wind, and related structures in our Engineered Structures segment are expected to be delivered during 2024, approximately 29% are expected to be delivered during 2025 and the remainder are expected to be delivered through 2028. Approximately 73% of the unsatisfied performance obligations for inland barges in our Transportation Products segment are expected to be delivered during 2024, and the remainder are expected to be delivered during 2025.

Results of Operations

Overall Summary

Revenues

(in millions)

Three Months Ended March 31, 2024 versus Three Months Ended March 31, 2023

• Revenues increased 9.0%.
• Revenues from Construction Products increased primarily due to the contribution from recent acquisitions and higher pricing across our aggregates and specialty material businesses.
• Revenues from Engineered Structures increased primarily due to increased volumes in our utility structures and wind towers businesses, partially offset by lower utility structures pricing due to product mix.
• Revenues from Transportation Products increased primarily due to higher volumes and pricing for hopper barges.

Operating Costs

(in millions)

(1) Depreciation, depletion, and amortization are components of operating costs.

Three Months Ended March 31, 2024 versus Three Months Ended March 31, 2023

• Operating costs increased 15.0%. A $21.8 million gain on the sale of depleted land was netted against operating costs in the prior period. Excluding this gain, operating costs increased 9.9%.
• Cost of revenues for Construction Products increased primarily due to increased costs from the recently acquired businesses.
• Cost of revenues for Engineered Structures increased due to higher utility structure and wind tower volumes as well as additional costs incurred for the startup of two new facilities.
• Cost of revenues for Transportation Products increased primarily due to higher volumes in inland barge.
• Depreciation, depletion, and amortization increased 10.3% as a result of recent acquisitions and organic growth investments.
• Selling, general, and administrative expenses increased 10.6% due to increased headcount, additional costs from recently acquired businesses, and higher acquisition and divestiture-related expenses. As a percentage of revenues, selling, general, and administrative expenses increased slightly to 11.5% for the three months ended March 31, 2024, compared to 11.4% for the same period in 2023.

Operating Profit (Loss)

(in millions)

Three Months Ended March 31, 2024 versus Three Months Ended March 31, 2023

• Operating profit decreased 28.9% largely due to a $21.8 million gain on the sale of depleted land in 2023. Excluding this gain, operating profit was flat.
• Operating profit in Construction Products decreased due to a decline in the gain recognized on long-lived assets, partially offset by the accretive impact of recently acquired businesses.
• Operating profit in Engineered Structures decreased due to lower margin in our utility structures business driven by project mix and additional costs incurred for the start up of two new facilities.
• Operating profit in Transportation Products increased driven by higher hopper barge volumes and improved margins.

For further discussion of revenues, costs, and the operating results of individual segments, see Segment Discussion below.

Other Income and Expense

Other, net (income) expense consists of the following items:

(in millions)

Income Taxes

The provision for income taxes results in effective tax rates that differ from the statutory rates. The Company's effective tax rate for the three months ended March 31, 2024 was 17.1% compared to 20.3% for the same period in 2023. The decrease in the tax rate for the three months ended March 31, 2024 is primarily due to AMP tax credits, excess tax benefits related to equity compensation, and reduced state income taxes, partially offset by increased foreign taxes.

Our effective tax rate differs from the federal tax rate of 21.0% due to AMP tax credits, tax effects of foreign currency translations, compensation-related items, state income taxes, prior year true-ups, and statutory depletion deductions. See Note 10 Income Taxes to the Consolidated Financial Statements for further discussion of income taxes.

Segment Discussion

Construction Products

($ in millions)

(1) Depreciation, depletion, and amortization are components of operating profit.

Three Months Ended March 31, 2024 versus Three Months Ended March 31, 2023

• Revenues increased 6.4% driven by recent acquisitions and higher organic revenues in our legacy operations. Recent acquisitions increased revenues approximately 4.5%. In our legacy operations, higher revenues resulted from increased pricing across our aggregates and specialty materials businesses and higher organic volumes in trench shoring, partially offset by lower freight revenues.
• Cost of revenues increased 8.4% primarily due to increased costs from the recently acquired businesses, including higher depreciation, depletion, and amortization expense and $1.2 million for the cost impact of the fair market value write-up of acquired inventory. As a percent of revenues, cost of revenues increased to 78.9% in the current period, compared to 77.5% in the prior period.
• Selling, general, and administrative expenses increased 6.5% due to additional costs from recently acquired businesses. Selling, general, and administrative expenses as a percentage of revenues was 11.1% in both periods.
• Operating profit decreased 41.8% primarily due to a $21.8 million gain on the sale of depleted land in the prior period. Excluding this gain, operating profit increased 4.0% driven by the accretive impact of recent acquisitions and operating improvements in our specialty materials business, partially offset by the fair value write-up of inventory from recent acquisitions.
• Depreciation, depletion, and amortization expense increased 11.9% primarily due to the fair market value write-up of long-lived assets from recent acquisitions and organic growth investments.

Engineered Structures

($ in millions)

(1) Depreciation and amortization are components of operating profit.

Three Months Ended March 31, 2024 versus Three Months Ended March 31, 2023

• Revenues increased 11.5% primarily due to increased volumes in our utility structures and wind towers businesses, partially offset by lower utility structures pricing due to project mix.
• Cost of revenues increased 15.1% primarily due to higher utility structures and wind towers volumes. Cost of revenues also increased approximately 4% due to additional expenses incurred related to the startup of two new facilities: a concrete utility structures plant and a wind tower plant. The increase was partially offset by higher AMP tax credits.
• Selling, general, and administrative expenses increased 17.1% primarily due to increased headcount and higher sales-related costs.
• During both periods presented, the Company recognized an additional gain on the sale of the storage tanks business, which was divested on October 3, 2022, related to the settlement of certain contingencies from the sale.
• Operating profit decreased 12.0% primarily due to lower margins in our utility structures business driven by project mix and additional startup costs.
• Depreciation and amortization expense increased primarily due to organic growth investments.

Unsatisfied Performance Obligations (Backlog)

As of March 31, 2024, the backlog for utility, wind, and related structures was $1,366.7 million, compared to $1,367.5 million and $1,531.4 million as of December 31, 2023 and March 31, 2023, respectively. Approximately 40% of these unsatisfied performance obligations are expected to be delivered during 2024 , approximately 29% during 2025, and the remainder are expected to be delivered through 2028.

Transportation Products

($ in millions)

(1) Depreciation and amortization are components of operating profit.

Three Months Ended March 31, 2024 versus Three Months Ended March 31, 2023

• Revenues increased 9.9%. Inland barge revenues increased 17.0% primarily due to higher volumes and pricing for hopper barges. Revenues for steel components decreased 3.2% due to a slight decline in volumes.
• Cost of revenues increased 6.3% reflecting the higher barge volumes during the current period. As a percent of revenues, cost of revenues decreased to 82.0% in the current period, compared to 84.7% in the prior period.
• Selling, general, and administrative expenses increased slightly, but decreased as a percentage of revenues to 5.4%, compared to 5.7% in the prior period.
• Operating profit increased 44.6%, outpacing the percentage increase in revenues, driven by higher hopper barge volumes and improved margins across both businesses.

Unsatisfied Performance Obligations (Backlog)

As of March 31, 2024, the backlog for inland barges was $294.4 million, compared to $253.7 million and $279.0 million as of December 31, 2023 and March 31, 2023, respectively. Approximately 73% of unsatisfied performance obligations for inland barges are expected to be delivered during 2024, and the remainder are expected to be delivered in 2025.

Corporate

(in millions)

Three Months Ended March 31, 2024 versus Three Months Ended March 31, 2023

• Corporate overhead costs increased 13.2% primarily due to higher acquisition and divestiture-related expenses of $1.6 million, compared to $0.6 million for the same period in 2023, and increased compensation-related expenses.

Liquidity and Capital Resources

Arcosa’s primary liquidity requirement consists of funding our business operations, including capital expenditures, working capital investment, and disciplined acquisitions. Our primary sources of liquidity include cash flow from operations, our existing cash balance, availability under the revolving credit facility, and, as necessary, the issuance of additional long-term debt or equity. To the extent we have available liquidity, we may also consider undertaking new capital investment projects, executing additional strategic acquisitions, returning capital to stockholders, or funding other general corporate purposes.

Cash Flows

The following table summarizes our cash flows from operating, investing, and financing activities for the three months ended March 31, 2024 and 2023:

(in millions)

Operating Activities. Net cash provided by operating activities for the three months ended March 31, 2024 was $80.5 million, compared to $27.3 million for the three months ended March 31, 2023.

• The changes in current assets and liabilities resulted in a net source of cash of $4.6 million for the three months ended March 31, 2024, compared to a net use of cash of $55.4 million for the three months ended March 31, 2023. The current year activity was primarily driven by a decrease in inventories and higher advanced billings and accounts payable, partially offset by increased receivables.

Investing Activities. Net cash required by investing activities for the three months ended March 31, 2024 was $43.5 million, compared to $34.1 million for the three months ended March 31, 2023.

• Capital expenditures for the three months ended March 31, 2024 were $54.4 million, compared to $44.4 million for the same period last year with the increase primarily driven by various growth projects within the Construction Products and Engineered Structures segments. Full-year capital expenditures are expected to be approximately $190 to $205 million in 2024.
• Proceeds from the sale of property, plant, and equipment and other assets totaled $4.2 million for the three months ended March 31, 2024, compared to $23.9 million for the same period in 2023. Prior year activity mainly related to the sale of depleted land in the Construction Products segment.
• There was no activity related to cash paid for acquisitions, net of cash acquired for the three months ended March 31, 2024, compared to $15.6 million for the same period in 2023.
• Proceeds from the sale of the storage tanks business were $6.7 million during the three months ended March 31, 2024, compared to $2.0 million for the same period in 2023, both related to the resolution of certain contingencies from the sale that closed in October 2022. There was no divestiture activity during the three months ended March 31, 2024 or 2023.

Financing Activities. Net cash provided by financing activities during the three months ended March 31, 2024 was $34.7 million, compared to net cash required by financing activities of $4.4 million for the same period in 2023.

• Current year activity was primarily driven by borrowings of $40.0 million under the revolving credit facility partially offset by scheduled debt payments and dividends paid during the period.

Other Investing and Financing Activities

Revolving Credit Facility and Senior Notes

On August 23, 2023, we entered into a Second Amended and Restated Credit Agreement to increase the revolving credit facility from $500.0 million to $600.0 million, extend the maturity date of the revolving credit facility from January 2, 2025 to August 23, 2028, and refinance and repay in full the remaining balance of the term loan then outstanding under the prior credit facility.

As of March 31, 2024, we had $200.0 million of outstanding loans borrowed under the revolving credit facility, and there were approximately $22.0 million of letters of credit issued, leaving $378.0 million available for borrowing. Of the outstanding letters of credit as of March 31, 2024, $21.4 million are expected to expire in 2024, with the remainder in 2025. The majority of our letters of credit obligations support the Company’s various insurance programs and generally renew by their terms each year.

In April 2024, we borrowed an additional $160.0 million under our revolving credit facility to fund, in part, the acquisition of Ameron.

The interest rates under the revolving credit facility are variable based on the daily simple or term Secured Overnight Financing Rate ("SOFR"), plus a 10-basis point credit spread adjustment, or an alternate base rate, in each case plus a margin for borrowing. 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 based on SOFR ranges from 1.25% to 2.00% and was set at 1.50% as of March 31, 2024. The commitment fee rate ranges from 0.20% to 0.35% and was set at 0.25% as of March 31, 2024.

The Company's revolving credit facility requires the maintenance of certain ratios related to leverage and interest coverage. As of March 31, 2024, we were in compliance with all such financial covenants. Borrowings under the revolving credit facility are guaranteed by certain wholly-owned subsidiaries of the Company.

On April 6, 2021, the Company issued $400.0 million aggregate principal amount of 4.375% senior notes (the “Notes”) that mature in April 2029. Interest on the Notes is payable semiannually in April and October. The Notes are senior unsecured obligations of the Company and are guaranteed on a senior unsecured basis by each of the Company’s domestic subsidiaries that is a guarantor under our revolving credit facility.

We believe, based on our current business plans, that our existing cash, available liquidity, and cash flow from operations will be sufficient to fund necessary capital expenditures and operating cash requirements for the foreseeable future.

Dividends and Repurchase Program

In March 2024, the Company declared a quarterly cash dividend of $0.05 per share that was paid on April 30, 2024.

In December 2022, the Board authorized a new $50.0 million share repurchase program effective January 1, 2023 through December 31, 2024 to replace a program of the same amount that expired on December 31, 2022. For the three months ended March 31, 2024, the Company did not repurchase any shares. As of March 31, 2024, the Company had a remaining authorization of $36.2 million under the program. See Note 1 Overview and Summary of Significant Accounting Policies to the Consolidated Financial Statements.

Derivative Instruments

In December 2018, the Company entered into a $100.0 million interest rate swap instrument, effective as of January 2, 2019, to reduce the effect of changes in the variable interest rates associated with the first $100.0 million of borrowings under the Company's committed credit facility. In conjunction with the replacement of LIBOR with SOFR as a benchmark for borrowings under the Amended and Restated Credit Agreement, on July 1, 2023 the swap instrument transitioned from LIBOR to SOFR. The instrument effectively fixed the SOFR component of borrowings under the revolving credit facility at a monthly rate of 2.71% until such instrument's termination. The interest rate swap instrument expired in October 2023. See Note 7 Debt to the Consolidated Financial Statements.

Recent Accounting Pronouncements

See Note 1 Overview and Summary of Significant Accounting Policies 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 and involve risks and uncertainties. These forward-looking statements include expectations, beliefs, plans, objectives, future financial performances, estimates, projections, goals, and forecasts. Arcosa uses the words “anticipates,” “assumes,” “believes,” “estimates,” “expects,” “intends,” “forecasts,” “may,” “will,” “should,” “plans,” and similar expressions to identify these forward-looking statements. Potential factors, which could cause our actual results of operations to differ materially from those in the forward-looking statements include, among others:

• the impact of pandemics, epidemics, or other public health emergencies on our sales, operations, supply chain, employees, and financial condition;
• market conditions and customer demand for our business products and services;
• the cyclical and seasonal nature of the industries in which we compete;
• variations in weather in areas where our construction products are sold, used, or installed;
• naturally occurring events and other events and disasters causing disruption to our manufacturing, product deliveries, and production capacity, thereby giving rise to an increase in expenses, loss of revenue, and property losses;
• competition and other competitive factors;
• our ability to identify, consummate, or integrate acquisitions of new businesses or products, or divest any business;
• the timing of introduction of new products;
• the timing and delivery of customer orders or a breach of customer contracts;
• the credit worthiness of customers and their access to capital;
• product price changes;
• changes in mix of products sold;
• the costs incurred to align manufacturing capacity with demand and the extent of its utilization;
• the operating leverage and efficiencies that can be achieved by our manufacturing businesses;
• availability and costs of steel, component parts, supplies, and other raw materials;
• changing technologies;
• surcharges and other fees added to fixed pricing agreements for steel, component parts, supplies and other raw materials;
• increased costs due to increased inflation;
• interest rates and capital costs;
• counter-party risks for financial instruments;
• long-term funding of our operations;
• taxes;
• material nonpayment or nonperformance by any of our key customers;
• the stability of the governments and political and business conditions in certain foreign countries, particularly Mexico;
• public infrastructure expenditures;
• changes in import and export quotas and regulations;
• business conditions in emerging economies;
• costs and results of litigation;
• changes in accounting standards or inaccurate estimates or assumptions in the application of accounting policies;
• legal, regulatory, and environmental issues, including compliance of our products with mandated specifications, standards, or testing criteria and obligations to remove and replace our products following installation or to recall our products and install different products manufactured by us or our competitors;
• actions by the executive and legislative branches of the U.S. government relative to federal government budgeting, taxation policies, government expenditures, U.S. borrowing/debt ceiling limits, and trade policies, including tariffs, and border closures;
• the inability to sufficiently protect our intellectual property rights;
• our ability to mitigate against cybersecurity incidents, including ransomware, malware, phishing emails, and other electronic security threats;
• if the Company's sustainability efforts are not favorably received by stockholders;
• if the Company does not realize some or all of the benefits expected from certain provisions of the IRA, including the AMP tax credits for wind towers, which remain subject to the issuance of additional guidance and clarification; and
• the delivery or satisfaction of any backlog or firm orders.

Any forward-looking statement speaks only as of the date on which such statement is made. Arcosa undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made. For a discussion of risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see Item 1A, “Risk Factors” in our 2023 Annual Report on Form 10-K and future Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

There has been no material change in our market risks since December 31, 2023 as set forth in our 2023 Annual Report on Form 10-K. See Note 9 Other, Net of the Notes to the Consolidated Financial Statements for the impact of foreign exchange rate fluctuations for the three months ended March 31, 2024.

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 or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) with the Securities and Exchange Commission (“SEC”), to process, summarize, and disclose this information within the time periods specified in the rules of the SEC, and that such information is accumulated and communicated to management, including our Chief Executive and Chief Financial Officers, in a timely fashion. The Company’s Chief Executive and Chief Financial Officers are responsible for establishing and maintaining these disclosure controls and procedures and evaluating their effectiveness (as defined in Rule 13(a)-15l under the Exchange Act). 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 disclosure controls and procedures were effective.

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.

There have been no material changes in the Company's risk factors from those set forth in our 2023 Annual Report on Form 10-K.