ARCOSA, INC.
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:
•Separation from Trinity
•Basis of Historical Presentation
•Executive Overview
•Results of Operations
•Liquidity and Capital Resources
•Contractual Obligations and Commercial Commitments
•Critical Accounting Policies and Estimates
•Recent Accounting Pronouncements
•Forward-Looking Statements
Our MD&A should be read in conjunction with our Consolidated and Combined
Financial Statements and related Notes in Item 8, "Financial Statements and
Supplementary Data," of this Annual Report on Form 10-K.
Separation from Trinity
Arcosa, Inc. ("Arcosa ," the "Company," "we," or "our") is a Delaware corporation
and was incorporated in 2018 in connection with the separation of Arcosa from
Trinity Industries, Inc. ("Trinity" or "Former Parent") on November 1, 2018 as
an independent, publicly-traded company, listed on the New York Stock Exchange
(the "Separation"). At the time of the Separation, Arcosa consisted of certain
of Trinity's former construction products, energy equipment, and transportation
products businesses. The Separation was effectuated through a pro rata dividend
distribution on November 1, 2018 of all of the then-outstanding shares of common
stock of Arcosa to the holders of common stock of Trinity as of October 17,
2018 , the record date for the distribution. Trinity stockholders received one
share of Arcosa common stock for every three shares of Trinity common stock held
as of the record date. The transaction was structured to be tax-free to both
Trinity and Arcosa stockholders for U.S. federal income tax purposes.
Basis of Historical Presentation
The accompanying Consolidated and Combined Financial Statements present our
historical financial position, results of operations, comprehensive income/loss,
and cash flows in accordance with accounting principles generally accepted in
the U.S. ("GAAP"). The combined financial statements for periods prior to the
Separation were derived from Trinity's consolidated financial statements and
accounting records and prepared in accordance with GAAP for the preparation of
carved-out combined financial statements. Through the date of the Separation,
all revenues and costs as well as assets and liabilities directly associated
with Arcosa have been included in the combined financial statements. Prior to
the Separation, the combined financial statements also included allocations of
certain selling, general, and administrative expenses provided by Trinity to
Arcosa and allocations of related assets, liabilities, and the Former Parent's
net investment, as applicable. The allocations were determined on a reasonable
basis; however, the amounts are not necessarily representative of the amounts
that would have been reflected in the financial statements had the Company been
an entity that operated independently of Trinity during the applicable periods.
Related party allocations prior to the Separation, including the method for such
allocation, are described further in Note 1, "Overview and Summary of
Significant Accounting Policies" to the Consolidated and Combined Financial
Statements.
Following the Separation, the consolidated financial statements include the
accounts of Arcosa and those of our wholly-owned subsidiaries and no longer
include any allocations from Trinity. Trinity continues to provide some general
and administrative functions on a transitional basis for a fee following the
Separation. Such functions were minimal as of December 31, 2019 .
Executive Overview
Financial Operations and Highlights
• Revenues for the year ended
compared to the year ended
ACG acquisition in our
prices in our
• Operating profit for year ended
representing an increase of 61.1% compared to the year ended
primarily driven by increased revenues in all segments, operating improvements
in our
prior period including an impairment charge of$23.2 million related to divested businesses. 30
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• Selling, general, and administrative expenses increased by 16.6% for the year
ended
additional costs from the acquired ACG business, incremental standalone costs
related to the replacement of services and fees previously provided or incurred
by Trinity, as well as other standalone public company costs.
• The effective tax rate for the year ended
to 20.3% for the year ended
the Consolidated and Combined Financial Statements.
• Net income for the year ended
with
Recent Developments OnJanuary 6, 2020 ,Arcosa completed the acquisition of Cherry, a leading producer of natural and recycled aggregates in theHouston, Texas market for approximately$298 million . The acquisition of Cherry broadens our geographic presence, adding 12 Houston locations toArcosa's existing 20 active aggregate and specialty materials locations inTexas , provides us a new complementary product line of recycled aggregates, a growing product category due to resource scarcity and ESG benefits, and offers a platform for additional growth in natural and recycled aggregates. The purchase was funded with a combination of cash on-hand and advances under a new$150 million five-year term loan. See Note 2 and Note 7 to the Consolidated and Combined Financial Statements. Unsatisfied Performance Obligations (Backlog) As ofDecember 31, 2019 and 2018 our backlog of firm orders was as follows:December 31, 2019 December 31 ,
2018
(in millions)
Energy Equipment Group :
Wind towers and utility structures $ 596.8 $ 633.1
Other $ 36.2 $
55.1
Transportation Products Group : Inland barges $ 346.9 $
230.5
Approximately 86% percent of unsatisfied performance obligations for our wind towers and utility structures in ourEnergy Equipment Group are expected to be delivered during the year ending 2020 with the remainder to be delivered in 2021. All of the unsatisfied performance obligations for our other business lines in ourEnergy Equipment Group are expected to be delivered during the year ending 2020. All of the unsatisfied performance obligations for barges in ourTransportation Products Group are expected to be delivered during the year ending 2020. Results of Operations The following discussion ofArcosa's results of operations should be read in connection with "Forward-Looking Statements" and "Risk Factors". These items provide additional relevant information regarding the business ofArcosa , its strategy and various industry conditions which have a direct and significant impact onArcosa's results of operations, as well as the risks associated withArcosa's business. Overall Summary Revenues Year Ended December 31, Percent Change 2019 2018 2017
2019 versus 2018 2018 versus 2017
($ in millions)
50.4 % 12.9 % Energy Equipment Group 836.6 780.1 844.1 7.2 (7.6 ) Transportation Products Group 465.7 391.4 363.3 19.0 7.7 Segment Totals before Eliminations 1,742.0 1,463.8 1,466.3 19.0 (0.2 ) Eliminations (5.1 ) (3.4 ) (3.9 ) 50.0 (12.8 ) Consolidated and Combined Total$ 1,736.9 $ 1,460.4 $ 1,462.4 18.9 (0.1 )% 2019 versus 2018 • Revenues grew by 18.9% with all segments contributing to the increase.
• Revenues from our
impact of the ACG acquisition.
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• In our
volumes in wind towers and higher pricing levels in utility structures.
• Revenues from our
higher tank barge volumes partially offset by lower contractual pricing and
decreased volumes in steel components.
2018 versus 2017 • Revenues were essentially flat in 2018 as lower volumes in our Energy Equipment
Group were largely offset by increased volumes in both the Construction
Products and Transportation Products Groups.
• Revenues from our
impact of acquisitions completed in 2018 and 2017 in both our construction
aggregates and other product lines.
• In our
reduction of volumes in our wind towers product line partially offset by an
increase in revenues from our other product lines.
• Revenues from our
increased volumes in both our inland barge and steel components product lines.
Operating Costs
Operating costs are comprised of cost of revenues; selling, general, and
administrative expenses; impairment charges; and gains or losses on property
disposals.
Year Ended December 31, Percent Change
2019 2018 2017 2019 versus 2018 2018 versus 2017
(in millions)
60.0 % 17.9 % Energy Equipment Group 735.9 751.5 765.7 (2.1 ) (1.9 ) Transportation Products Group 418.9 343.0 324.3 22.1 5.8 All Other - 0.1 0.1 Segment Totals before Eliminations and Corporate Expenses 1,541.8 1,336.5 1,295.3 15.4 3.2 Corporate 47.3 32.1 39.3 47.4 (18.3 ) Eliminations (5.1 ) (3.1 ) (3.9 ) 64.5 (20.5 )
Consolidated and Combined Total$ 1,584.0 $ 1,365.5 $ 1,330.7 16.0 2.6 2019 versus 2018 • Operating costs increased 16.0%.
• The increase in our
acquired ACG business as well as increased volumes in our legacy businesses.
• Operating costs for the
impairment charge and the elimination of operating losses from divested
businesses in 2018, partially offset by higher volumes in 2019.
• Operating costs for the
tank barge volumes and start-up costs incurred related to the re-opening of a
previously idled barge facility, partially offset by lower steel component
volumes.
• Total selling, general, and administrative expenses increased 16.6% largely due
to additional costs from the acquired ACG business, incremental standalone
costs related to the replacement of services and fees previously provided or
incurred by Trinity, and other standalone public company costs. As a percentage
of revenue, selling, general, and administrative expenses for the year ended
2018. 2018 versus 2017 • Operating costs increased 2.6%.
• The increase in operating costs in our
primarily due to the impact of businesses acquired in 2018 and 2017 in both our
construction aggregates and other product lines.
• Operating costs for the
planned reduction in volumes in our wind tower product line, partially offset
by an impairment charge of
were subsequently divested.
• Operating costs for the
increased volumes in our inland barge and steel components product lines.
• Total selling, general, and administrative expenses decreased 5.6%, primarily
due to lower compensation-related expenses.
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Operating Profit (Loss)
Year Ended December 31, Percent Change
2019 2018 2017 2019 versus 2018 2018 versus 2017
(in millions)
4.6 % (6.1 )% Energy Equipment Group 100.7 28.6 78.4 252.1 (63.5 ) Transportation Products Group 46.8 48.4 39.0 (3.3 ) 24.1 All Other - (0.1 ) (0.1 ) Segment Totals before Eliminations and Corporate Expenses 200.2 127.3 171.0 57.3 (25.6 ) Corporate (47.3 ) (32.1 ) (39.3 ) 47.4 (18.3 ) Eliminations - (0.3 ) - Consolidated and Combined Total$ 152.9 $ 94.9 $ 131.7 61.1 (27.9 ) 2019 versus 2018 • Operating profit increased 61.1%.
• Operating profit in the
due to higher volumes from the acquired ACG business.
• Operating profit in our
higher unit volumes in wind towers and higher pricing levels in utility
structures as well as the elimination of operating losses from, and the
incurrence of an impairment charge related to, businesses divested in 2018.
• Operating profit in our
due to reduced volumes and lower contractual pricing for steel components as
well as start-up costs incurred toward the re-opening of a previously idled
barge facility, partially offset by higher tank barge volumes.
2018 versus 2017 • Our operating profit decreased 27.9%.
• Operating profit in the
lower volumes in our legacy construction aggregates businesses and increased
costs related to the fair value markup of acquired inventory.
• Operating profit in our
planned reduction in volumes in our wind towers product line and the impact of
a
divested.
• Operating profit in our
increased volumes in our inland barge and steel components product lines.
For a further discussion of revenues, costs, and the operating results of individual segments, see Segment Discussion below. Other Income and Expense Other, net (income) expense consists of the following items:
Year Ended December 31,
2019 2018 2017
(in millions)
Interest income $ (1.4 ) $ (0.4 ) $ (0.1 )
Foreign currency exchange transactions 1.5 (0.2 ) 2.2
Other (0.8 ) (0.4 ) (0.5 )
Other, net (income) expense $ (0.7 ) $ (1.0 ) $ 1.6
Income Taxes
The income tax provision for the years ended December 31, 2019 , 2018, and 2017
was $33.5 million , $19.3 million , and $40.4 million , respectively. The effective
tax rate for the years ended December 31, 2019 , 2018, and 2017 was 22.8%, 20.3%,
and 31.1%, respectively. The effective tax rates differ from the federal tax
rates of 21.0%, 21.0%, and 35.0%, respectively, due to the impact of the Act,
state income taxes, excess tax deficiencies (benefits) related to equity
compensation, and the impact of foreign tax benefits.
See Note 10 of the Notes to Consolidated and Combined Financial Statements for a
further discussion of income taxes.
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Table of Contents Segment DiscussionConstruction Products Group Year Ended December 31, Percent Change 2019 2018 2017
2019 versus 2018 2018 versus 2017
($ in millions)
Revenues:
Construction aggregates
67.4 % 6.3 % Other 75.0 74.4 54.0 0.8 37.8 Total revenues 439.7 292.3 258.9 50.4 12.9 Operating costs: Cost of revenues 342.2 212.6 178.6 61.0 19.0 Selling, general, and administrative expenses 44.8 29.3 26.6 52.9 10.2 Operating profit$ 52.7 $ 50.4 $ 53.7 4.6 (6.1 ) Operating profit margin 12.0 % 17.2 % 20.7 % Depreciation, depletion, and amortization$ 38.0 $ 21.9 $ 18.4 73.5 19.0
2019 versus 2018 • Revenues increased 50.4%, driven by the acquisition of ACG, which increased
revenues by approximately 50%. In our legacy construction aggregates
businesses, increased volumes were substantially offset by lower average
selling prices, largely in our natural aggregates business in the Dallas-Fort
Worth,
• Cost of revenues increased 61.0%, primarily due to the acquired ACG business as
well as increased volumes in our legacy construction aggregates businesses.
• Selling, general, and administrative expenses increased 52.9% primarily due to
additional costs from the acquired ACG business.
• Operating profit increased primarily due to the acquired ACG business.
Operating margin decreased reflecting the change in product mix as a result of
the addition of the ACG business, which has lower margins than the legacy businesses, as well as lower average selling prices in the legacy natural aggregates business.
• Depreciation, depletion, and amortization expense increased primarily due to
the acquired ACG business. 2018 versus 2017 • Revenues and cost of revenues increased 12.9% and 19.0%, respectively,
primarily due to revenues attributable to acquisitions completed in 2017 in
both the lightweight aggregates and the trench shoring businesses and the
• Selling, general, and administrative expenses increased 10.2% primarily due to
the acquired businesses.
• Operating profit and margin decreased primarily due to lower volumes in our
legacy construction aggregates businesses and increased costs related to the
fair value markup of acquired inventory.
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Table of ContentsEnergy Equipment Group Year Ended December 31, Percent Change 2019 2018 2017
2019 versus 2018 2018 versus 2017
($ in millions)
Revenues:
Wind towers and utility $ 625.4 $ 582.9 $ 652.1 7.3 % (10.6 )%
structures
Other 211.2 197.2 192.0 7.1 2.7
Total revenues 836.6 780.1 844.1 7.2 (7.6 )
Operating costs:
Cost of revenues 670.6 658.3 691.7 1.9 (4.8 )
Selling, general, and
administrative expenses 65.3 70.0 74.0 (6.7 ) (5.4 )
Impairment charge - 23.2 -
Operating profit $ 100.7 $ 28.6 $ 78.4 252.1 (63.5 )
Operating profit margin 12.0 % 3.7 % 9.3 %
Depreciation and
amortization $ 27.9 $ 29.7 $ 30.2 (6.1 ) (1.7 )
2019 versus 2018 • Revenues increased 7.2%, driven primarily by higher unit volumes in wind towers
and higher pricing levels in utility structures. Revenues from other product
lines, which include results primarily from our storage and distribution tanks,
also increased due to higher volumes and pricing levels, partially offset by
the elimination of revenues from businesses divested in 2018.
• Cost of revenues increased 1.9%, due primarily to higher overall volumes. The
increase was partially offset by the elimination of costs from divested
businesses, as well as a
recognized in 2018 related to an order for a single customer in our utility
structures business.
• Selling, general, and administrative expenses decreased 6.7% primarily due to
the elimination of costs from divested businesses and a
of bad debt related to a single customer in our utility structures business.
2018 versus 2017 • Revenues decreased 7.6% primarily due to a planned reduction of volumes in our
wind towers product line, partially offset by an increase in revenues from
other product lines as a result of higher volumes in our storage tanks
business.
• Cost of revenues decreased 4.8% due to lower volumes in our wind tower product
line, partially offset by a
related to an order for a single customer in our utility structures business.
• Decreases in revenues and cost of revenues were also partially offset by the
required adoption of ASU 2014-09, which impacts the timing of revenue
recognition in our wind towers and certain utility structures product lines.
See Note 1 of the Notes to Consolidated and Combined Financial Statements for
further discussion of the impact of this required change in accounting policy.
• Selling, general, and administrative expenses decreased 5.4% primarily due to
bad debt expense related to a single customer recognized in 2017.
• Operating profit in 2018 was also negatively impacted by a
impairment charge on businesses that were subsequently divested.
Unsatisfied Performance Obligations (Backlog) As ofDecember 31, 2019 , the backlog for wind towers and utility structures was$596.8 million compared to$633.1 million as ofDecember 31, 2018 . Approximately 86% of our structural wind towers and utility structures backlog is expected to be delivered during the year endingDecember 31, 2020 with the remainder to be delivered in 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. Pricing of orders and individual order quantities reflect a market transitioning from PTC incentives. As ofDecember 31, 2019 , the backlog for our other business lines in ourEnergy Equipment Group was$36.2 million , all of which is expected to be delivered during the year endingDecember 31, 2020 . 35
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Table of ContentsTransportation Products Group Year Ended December 31, Percent Change 2019 2018 2017 2019 versus 2018 2018 versus 2017 ($ in millions) Revenues: Inland barges$ 293.9 $ 170.2 $ 157.9 72.7 % 7.8 % Steel components 171.8 221.2 205.4 (22.3 ) 7.7 Total revenues 465.7 391.4 363.3 19.0 7.7 Operating costs: Cost of revenues 396.8 320.5 301.2 23.8 6.4 Selling, general, and administrative expenses 22.1 22.5 23.1 (1.8 ) (2.6 ) Operating profit$ 46.8 $ 48.4 $ 39.0 (3.3 ) 24.1 Operating profit margin 10.0 % 12.4 % 10.7 % Depreciation and amortization$ 16.3 $ 15.5 $ 17.1 5.2 (9.4 )
2019 versus 2018 • Revenues increased 19.0%, primarily driven by higher tank barge volumes but
partially offset by lower contractual pricing and decreased volumes in steel
components. Railcar component demand has declined as the North American
industry outlook for new railcar builds has softened. The Company expects the
decline to continue into 2020 unless the industry backlog for new railcars
recovers.
• Cost of revenues increased 23.8%, driven by higher tank barge volumes,
partially offset by lower steel component volumes. Cost of revenues also
increased
previously idled barge manufacturing facility, which began delivering barges in
the third quarter of 2019.
• Selling, general, and administrative expenses were substantially unchanged.
2018 versus 2017 • Revenues and cost of revenues increased 7.7% and 6.4%, respectively, primarily
from higher volumes in both the inland barge and steel components product
lines.
• Selling, general, and administrative expenses decreased 2.6%.
Unsatisfied Performance Obligations (Backlog) As ofDecember 31, 2019 , the backlog for inland barges was$346.9 million compared to$230.5 million as ofDecember 31, 2018 . All of the backlog for inland barges is expected to be delivered during the year endingDecember 31, 2020 . Corporate Year Ended December 31, Percent Change 2019 versus 2019 2018 2017 2018 2018 versus 2017 ($ in millions)
Corporate overhead costs
47.4 % (18.3 )%
The increase in corporate overhead costs of 47.4% for the year ended
December 31, 2019 compared to 2018 is primarily due to incremental standalone
costs related to the replacement of services and fees previously provided or
incurred by Trinity as well as other standalone public company costs.
The 18.3% decrease in corporate overhead costs for the year ended December 31,
2018 compared to 2017 is primarily due to lower compensation related expenses.
Corporate overhead costs prior to the Separation 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. See Note 1 of the Notes to Consolidated and Combined Financial
Statements for further information.
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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.
Revolving Credit Facility
On November 1, 2018 , the Company entered into a $400.0 million unsecured
revolving credit facility that matures in November 2023 . The interest rates
under the facility 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 December 31, 2019 . The
commitment fee rate ranges from 0.20% to 0.35% and was set at 0.20% at
December 31, 2019 . Borrowings under the credit facility are guaranteed by
certain wholly-owned subsidiaries of the Company.
As of December 31, 2019 , we had $100.0 million of outstanding loans borrowed
under the facility and there were approximately $42.5 million in letters of
credit issued, leaving $257.5 million available for borrowing.
The Company's revolving credit facility requires the maintenance of certain
ratios related to leverage and interest coverage. As of December 31, 2019 , we
were in compliance with all such financial covenants.
On January 2, 2020 , the Company entered into an Amended and Restated Credit
Agreement to increase the revolving credit facility from $400.0 million to
$500.0 million and add a term loan facility of $150.0 million , in each case with
a maturity date of January 2, 2025 . The leverage-based mechanism for determining
and the applicable ranges for both the interest rate margin and commitment fee
rate are unchanged. The interest rate on the revolving credit facility was
initially set at one-month LIBOR plus 1.50% and the interest rate on the term
loan facility was initially set at three-month LIBOR plus 1.50%. The commitment
fee rate on both facilities was initially set at 0.25%. The entire term loan was
advanced on January 2, 2020 in connection with the closing of the acquisition of
Cherry, leaving $357.5 million available for borrowing under the facility.
Cash Flows
The following table summarizes our cash flows from operating, investing, and
financing activities for each of the last three years:
Year Ended December 31,
2019 2018 2017
(in millions)
Total cash provided by (required by):
Operating activities $ 358.8 $ 118.5 $ 162.0
Investing activities (109.4 ) (364.5 ) (126.4 )
Financing activities (108.4 ) 338.6 (42.8 )
Net increase (decrease) in cash and cash equivalents $ 141.0 $ 92.6 2019 versus 2018 Operating Activities. Net cash provided by operating activities for the year endedDecember 31, 2019 was$358.8 million compared to$118.5 million for the year endedDecember 31, 2018 . • The increase in cash flow provided by operating activities was primarily driven
by increased earnings for the year ended
current assets and liabilities.
• The changes in current assets and liabilities resulted in a net source of cash
of
cash of
primarily driven by a reduction in receivables and increase in advance billings
for our Energy Equipment and Transportation Products Groups.
Investing Activities. Net cash required by investing activities for the year endedDecember 31, 2019 was$109.4 million compared to$364.5 million for the year endedDecember 31, 2018 . • Capital expenditures for the year endedDecember 31, 2019 were$85.4 million
compared to
• Proceeds from the sale of property, plant, and equipment and other assets
totaled
million for the year endedDecember 31, 2018 . 37
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• Cash paid for acquisitions, net of cash acquired, was
year ended
Financing Activities. Net cash required by financing activities for the year endedDecember 31, 2019 was$108.4 million compared to$338.6 million of net cash provided by financing activities for the same period in 2018. • During the year endedDecember 31, 2019 , the Company had repayments of advances
under the Company's revolving credit facility of
ended
facility of
• Dividends paid during the year ended
• The Company paid
repurchase common stock under the current share repurchase program compared to
2018 versus 2017 Operating Activities. Net cash provided by operating activities for the year endedDecember 31, 2018 was$118.5 million compared to$162.0 million for the year endedDecember 31, 2017 . • The decrease in cash flow provided by operating activities was primarily driven
by lower operating profit.
• The changes in current assets and liabilities resulted in a net use of cash of
cash of
primarily driven by the increase in receivables. While most of this increase
relates to the timing of payments from trade receivables, approximately 10% of
the increase is due to the recognition of receivables from the Former Parent
which had previously been deemed settled in the period incurred in the
historical combined financial statements.
Investing Activities. Net cash required by investing activities for the year endedDecember 31, 2018 was$364.5 million compared to$126.4 million for the year endedDecember 31, 2017 . • Capital expenditures for the year endedDecember 31, 2018 were$44.8 million
compared to
• Proceeds from the sale of property, plant, and equipment and other assets
totaled
million for the year ended
• Cash paid for acquisitions, net of cash acquired, was
year ended
ended
year ended
ended
Financing Activities. Net cash provided by financing activities during the year endedDecember 31, 2018 was$338.6 million compared to$42.8 million of net cash required by financing activities for the same period in 2017. • During the year endedDecember 31, 2018 , we borrowed$180.0 million and retired
million in debt as scheduled.
• We received a capital contribution of
year ended
• Net transfers to Trinity totaled
2018 compared with
Other Investing and Financing Activities Repurchase Program InDecember 2018 , the Company's Board of Directors authorized a$50.0 million share repurchase program effectiveDecember 5, 2018 throughDecember 31, 2020 . For the year endedDecember 31, 2019 , the Company repurchased 361,442 shares at a cost of$11.0 million . As ofDecember 31, 2019 , the Company had a remaining authorization of$36.0 million under the program. See Note 1 of the Notes to Consolidated and Combined Financial Statements. Off-Balance Sheet Arrangements As ofDecember 31, 2019 , we had letters of credit issued under our revolving credit facility in an aggregate principal amount of$42.5 million , all of which are expected to expire in 2020. The majority of our letters of credit obligations support the Company's various insurance programs and warranty claims and generally renew by their terms each year. See Note 7 of the Notes to Consolidated and Combined Financial Statements. 38
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Derivative Instruments InDecember 2018 , the Company entered into an interest rate swap instrument, effective as ofJanuary 2, 2019 and expiring in 2023, to reduce the effect of changes in the variable interest rates associated with borrowings under the revolving credit facility. The instrument carried an initial notional amount of$100 million , thereby hedging the first$100 million of borrowings under the credit facility. The instrument effectively fixes the LIBOR component of the credit facility borrowings at a monthly rate of 2.71%. As ofDecember 31, 2019 , the Company has recorded a liability of$4.3 million for the 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 Consolidated and Combined Financial Statements. Stock-Based Compensation We have a stock-based compensation plan for our directors, officers, and employees. See Note 13 of the Notes to Consolidated and Combined Financial Statements. Employee Retirement Plans In 2019, we sponsored an employee savings plan under the 401(k) plan that covered substantially all employees and included both a company matching contribution and an annual retirement contribution of up to 3% each of eligible compensation based on our performance, as well as a Supplemental Profit Sharing Plan. Both the annual retirement contribution and the company matching contribution are discretionary, requiring board approval, and made annually with the investment of the funds directed by the participants. The Company also contributed to a multiemployer defined benefit pension plan under the terms of a collective-bargaining agreement that covered certain union-represented employees at one of our facilities. See Note 11 of the Notes to Consolidated and Combined Financial Statements. Contractual Obligations and Commercial Commitments
As of
Payments Due by Period
Contractual Obligations and Commercial Less than 1 1-3 3-5 More than
Commitments Total Year Years Years 5 Years
(in millions)
Debt $ 100.0 $ - $ - $ 100.0 $ -
Operating leases 22.7 6.4 6.6 3.7 6.0
Obligations for purchase of goods and
services 168.9 138.8 25.0 5.1 -
Total $ 291.6 $ 145.2 $ 31.6 $ 108.8 $ 6.0
As of December 31, 2019 and 2018, we had $0.0 million and $0.5 million ,
respectively, of tax liabilities, including interest and penalties, related to
uncertain tax positions. Because of the high degree of uncertainty regarding the
timing of future cash outflows associated with these liabilities, we are unable
to estimate the years in which settlement will occur with the respective taxing
authorities. See Note 15 of the Notes to Consolidated and Combined Financial
Statements.
Critical Accounting Policies and Estimates
MD&A discusses our Consolidated and Combined Financial Statements, which have
been prepared in accordance with accounting principles generally accepted in the
U.S. The preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period.
On an on-going basis, management evaluates its estimates and judgments,
including those related to bad debts, inventories, property, plant, and
equipment, goodwill, income taxes, warranty obligations, insurance,
contingencies, and litigation. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies, among others, affect our
more significant judgments and estimates used in the preparation of our
Consolidated and Combined Financial Statements.
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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.Construction Products Group The Construction Products Group recognizes revenue when the customer has accepted the product and legal title of the product has passed to the customer.Energy Equipment Group Within theEnergy Equipment Group , revenue is recognized for our wind tower, certain utility structure, and certain storage tank product lines over time as the products are manufactured using an input approach based on the costs incurred relative to the total estimated costs of production. We recognize revenue over time for these products as they are highly customized to the needs of an individual customer resulting in no alternative use to the Company if not purchased by the customer after the contract is executed, and we have the right to bill the customer for our work performed to date plus at least a reasonable profit margin for work performed. 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. Inventory Inventories are valued at the lower of cost or net realizable value. Our policy related to excess and obsolete inventory requires an analysis of inventory at the business unit level on a quarterly basis and the recording of any required adjustments. In assessing the ultimate realization of inventories, we are required to make judgments as to future demand requirements and compare that with the current or committed inventory levels. It is possible that changes in required inventory reserves may occur in the future due to then current market conditions. Long-lived Assets We periodically evaluate the carrying value of long-lived assets to be held and used for potential impairment. The carrying value of long-lived assets to be held and used is considered impaired only when the carrying value is not recoverable through undiscounted future cash flows and the fair value of the assets is less than their carrying value. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risks involved or market quotes as available. Impairment losses on long-lived assets held for sale are determined in a similar manner, except that fair values are reduced by the estimated cost to dispose of the assets.Goodwill Goodwill is required to be tested for impairment annually, or on an interim basis whenever events or circumstances change indicating that the carrying amount of the goodwill might be impaired. The quantitative goodwill impairment test is a two-step process with step one requiring the comparison of the reporting unit's estimated fair value with the carrying amount of its net assets. If necessary, step two of the impairment test determines the amount of goodwill impairment to be recorded when the reporting unit's recorded net assets exceed its fair value. Impairment is assessed at the "reporting unit" level by applying a fair value-based test for each unit with recorded goodwill. The estimates and judgments that most significantly affect the fair value calculations are assumptions, consisting of level three inputs, related to revenue and operating profit growth, discount rates, and exit multiples. Based on the Company's annual goodwill impairment test, performed at the reporting unit level as ofDecember 31, 2019 , the Company concluded that no impairment charges were determined to be necessary and that none of the reporting units evaluated were at risk of failing the first step of the goodwill impairment test. A reporting unit is considered to be at risk if its estimated fair value does not exceed the carrying value of its net assets by 10% or more. See Note 1 and Note 6 of the Notes to Consolidated and Combined Financial Statements. Given the uncertainties of the economy and its potential impact on our businesses, there can be no assurance that our estimates and assumptions regarding the fair value of our reporting units, made for the purposes of the long-lived asset and goodwill impairment tests, will prove to be accurate predictions of the future. If our assumptions regarding forecasted cash flows are not achieved, it is possible that impairments of goodwill and long-lived assets may be required. 40
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Warranties
The Company provides various express, limited product warranties that generally range from one to five years depending on the product. The warranty costs are estimated using a two-step approach. First, an engineering estimate is made for the cost of all claims that have been asserted by customers. Second, based on historical, accepted claims experience, a cost is accrued for all products still within a warranty period for which no claims have been filed. The Company provides for the estimated cost of product warranties at the time revenue is recognized related to products covered by warranties and assesses the adequacy of the resulting reserves on a quarterly basis. Workers' Compensation We are effectively self-insured for workers' compensation claims. A third-party administrator processes all such claims. We accrue our workers' compensation liability based upon independent actuarial studies. To the extent actuarial assumptions change and claims experience rates differ from historical rates, our liability may change. Contingencies and Litigation The Company is involved in claims and lawsuits incidental to our business. Based on information currently available with respect to such claims and lawsuits, including information on claims and lawsuits as to which the Company is aware but for which the Company has not been served with legal process, it is management's opinion that the ultimate outcome of all such claims and litigation, including settlements, in the aggregate will not have a material adverse effect on the Company's financial condition for purposes of financial reporting. However, resolution of certain claims or lawsuits by settlement or otherwise, could impact the operating results of the reporting period in which such resolution occurs. Environmental We are involved in various proceedings related to environmental matters. We have provided reserves to cover probable and estimable liabilities with respect to such proceedings, taking into account currently available information and our contractual recourse. However, estimates of future response costs are inherently imprecise. Accordingly, there can be no assurance that we will not become involved in future environmental litigation or other proceedings or, if we were found to be responsible or liable in any litigation or proceeding, that such costs would not be material to us. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and other tax attributes using currently enacted tax rates. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the provision for income taxes in the period that includes the enactment date. Management is required to estimate the timing of the recognition of deferred tax assets and liabilities, make assumptions about the future deductibility of deferred tax assets, and assess deferred tax liabilities based on enacted law and tax rates for the appropriate tax jurisdictions to determine the amount of such deferred tax assets and liabilities. Changes in the calculated deferred tax assets and liabilities may occur in certain circumstances including statutory income tax rate changes, statutory tax law changes, or changes in the structure or tax status of the Company. The Company assesses whether a valuation allowance should be established against its deferred tax assets based on consideration of all available evidence, both positive and negative, using a more likely than not standard. This assessment considers, among other matters, the nature, frequency, and severity of recent losses; a forecast of future profitability; the duration of statutory carryback and carryforward periods; the Company's experience with tax attributes expiring unused; and tax planning alternatives. AtDecember 31, 2019 , the Company had$22.0 million federal consolidated net operating loss carryforwards, primarily from businesses acquired, and$0.6 million of tax-effected state loss carryforwards remaining. In addition, the Company had$36.9 million of foreign net operating loss carryforwards that will begin to expire in the year 2022. We have established a valuation allowance for state and foreign tax operating losses and credits that we have estimated may not be realizable. At times, we may claim tax benefits that may be challenged by a tax authority. We recognize tax benefits only for tax positions more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. A liability for "unrecognized tax benefits" is recorded for any tax benefits claimed in our tax returns that do not meet these recognition and measurement standards. The Act was enacted onDecember 22, 2017 . The Act reduced theU.S. federal corporate income tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and created new taxes on certain foreign-sourced earnings. For the year endedDecember 31, 2017 , we recognized a provisional benefit of$6.2 million . During the year endedDecember 31, 2018 , we finalized the accounting for the enactment of the Act and recorded an additional$1.5 million benefit, primarily as a result of the true-up of our deferred taxes. 41
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For periods prior to and including the Separation, income taxes as presented
herein attribute current and deferred income taxes of the Company's standalone
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 standalone 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 financial statements of Arcosa . Similarly, the tax treatment of
certain items reflected in the separate financial statements of Arcosa may not
be reflected in the consolidated financial statements and tax returns of
Trinity; therefore, such items as net operating losses, credit carryforwards,
and valuation allowances may exist in the standalone financial statements that
may or may not exist in Trinity's consolidated financial statements.
Recent Accounting PronouncementsSee Note 1 of the Notes to Consolidated and Combined Financial Statements for information about recent accounting pronouncements.
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Forward-Looking Statements
This annual report on Form 10-K (or statements otherwise made by the Company or
on the Company's behalf from time to time in other reports, filings with the
Securities and Exchange Commission ("SEC"), news releases, conferences, internet
postings or otherwise) 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," 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:
• market conditions and customer demand for our business products and services;
• the cyclical nature of the industries in which we compete;
• variations in weather in areas where our construction products are sold,
used, or installed;
• naturally-occurring events and other events and disasters causing disruption
to our manufacturing, product deliveries, and production capacity, thereby
giving rise to an increase in expenses, loss of revenue, and property
losses;
• competition and other competitive factors;
• our ability to identify, consummate, or integrate acquisitions of new
businesses or products, including the Cherry acquisition;
• the timing of introduction of new products;
• the timing and delivery of customer orders or a breach of customer contracts;
• the credit worthiness of customers and their access to capital;
• product price changes;
• changes in mix of products sold;
• the costs incurred to align manufacturing capacity with demand and the
extent of its utilization;
• the operating leverage and efficiencies that can be achieved by 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;
• 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
• 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 andobligations 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
relative to federal government budgeting, taxation policies, government
expenditures,
including tariffs and border closures;
• the inability to sufficiently protect our intellectual property rights;
• if the Company does not realize some or all of the benefits expected to
result from the Separation, or if such benefits are delayed;
• the Company's ongoing businesses may be adversely affected and subject to
certain risks and consequences as a result of the Separation;
• if the distribution of shares of
together with certain related transactions, does not qualify as a
transaction that is generally tax-free for
the Company's stockholders at the time of the distribution and the Company
could be subject to significant tax liability; and
• if the Separation does not comply with state 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.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 which could cause actual results to differ from those contained in the forward-looking statements, see Item 1A, "Risk Factors" included elsewhere herein. 43
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