Item 1A. Risk Factors.
Arcosa's business, liquidity and financial condition, results of operations, and stock price may be impacted by a number of factors. In addition to the factors discussed elsewhere in this report, the following risks and uncertainties could materially harm its business, liquidity and financial condition, results of operations, or stock price, including causing its actual results to differ materially from those projected in any forward-looking statements. The following list of material risk factors is not all-inclusive or necessarily in order of importance. Additional risks and uncertainties not presently known to Arcosa or that it currently deems immaterial also may materially adversely affect it in future periods.
Risks Related to our Business and Operations.
The current global COVID-19 pandemic and other similar outbreaks may adversely affect Arcosa’s business, liquidity and financial condition, results of operations, and stock price.
Arcosa’s business, liquidity and financial condition, results of operations, and stock price 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. 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, liquidity and 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 or other regulatory restrictions have been imposed with respect to the COVID-19 pandemic, such as Mexico. Disruptions to Arcosa’s cross-border business transactions and activities caused by COVID-19 could materially affect Arcosa’s business and results of operations.
The extent to which the COVID-19 pandemic impacts our business, financial and liquidity position, results of operations, and stock price 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 , 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 protective equipment 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 and could materially adversely affect our business, liquidity and financial condition, results of operations, and/or stock price.
Many of the industries in which Arcosa operates are subject to global market volatility and economic cyclicality.
Instability in the global economy, negative conditions in the global credit markets, volatility in the industries that Arcosa’s products serve, fluctuations in commodity prices, changes in legislative policy, adverse changes in the availability of raw materials and supplies, or adverse changes in the liquidity and financial condition of Arcosa’s customers could lead to a reduction in orders for Arcosa’s products and customers’ requests for deferred deliveries of Arcosa’s backlog orders. Additionally, such events could result in Arcosa’s customers’ attempts to unilaterally cancel or terminate firm contracts or orders in whole or in part resulting in contract or purchase order breaches which could result in increased commercial litigation costs.
If volatile conditions in the global credit markets prevent our customers’ access to credit, product order volumes may decrease, or customers may default on payments owed to Arcosa. Likewise, if Arcosa’s suppliers face challenges obtaining credit, selling their products to customers that require purchasing credit, or otherwise operating their businesses, the supply of materials Arcosa purchases from them to manufacture its products may be interrupted.
Periodic downturns in economic conditions usually have a significant adverse effect on cyclical industries in which Arcosa participates due to decreased demand for new and replacement products. Decreased demand could result in lower sales volumes, lower prices, and/or a decline in or loss of profits. The barge industry in particular has previously experienced sharp cyclical downturns and at such times operated with a minimal backlog. While the business cycles of Arcosa’s different operations may not typically coincide, an economic downturn could affect disparate cycles contemporaneously.
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Any of the foregoing market or industry conditions or events could result in reductions in Arcosa’s revenues, increased price competition, or increased operating costs, which could adversely affect Arcosa’s business, liquidity and financial condition, and results of operations.
Arcosa operates in highly competitive industries. Arcosa may not be able to sustain its market positions, which may impact its financial results.
Arcosa faces aggressive competition in all geographic markets and each industry sector in which it operates. In addition to price, Arcosa faces competition in respect to product performance and technological innovation, quality, reliability of delivery, customer service, and other factors. The effects of this competition, which is often intense, could reduce Arcosa’s revenues and operating profits, limit Arcosa’s ability to grow, increase pricing pressure on Arcosa’s products, and otherwise affect Arcosa’s financial results.
Equipment failures or extensive damage to Arcosa’s facilities, including as might occur as a result of natural disasters, could lead to production, delivery or service curtailments or shutdowns, loss of revenue or higher expenses.
Arcosa operates a substantial amount of equipment at Arcosa’s production facilities, several of which are situated in tornado and hurricane zones and on navigable waterways in the U.S. An interruption in production capabilities or maintenance and repair capabilities at Arcosa’s facilities, as a result of equipment or technology failure or acts of nature, including non-navigation orders resulting from excessive or low-water conditions issued from time to time by the U.S. Army Corps of Engineers on one or more U.S. rivers that serve Arcosa’s facilities, could reduce or prevent Arcosa’s production, delivery, service, or repair of Arcosa’s products and increase Arcosa’s costs and expenses. A halt of production at any of Arcosa’s manufacturing facilities could severely affect delivery times to Arcosa’s customers. While Arcosa maintains emergency response and business recovery plans that are intended to allow Arcosa to recover from natural disasters that could disrupt Arcosa’s business, Arcosa cannot provide assurances that its plans would fully protect Arcosa from the effects of all such disasters. In addition, insurance may not adequately compensate Arcosa for any losses incurred as a result of natural or other disasters, which may adversely affect Arcosa’s financial condition. Any significant delay in deliveries not otherwise contractually mitigated by favorable force majeure or other provisions could result in cancellation of all or a portion of Arcosa’s orders, cause Arcosa to lose future sales, and negatively affect Arcosa’s reputation and Arcosa’s results of operations.
Arcosa depends on its key management employees, and Arcosa may not be able to retain their services in the future.
Arcosa’s success depends on the continued services of its executive team and key management employees, none of whom currently have an employment agreement with Arcosa. Arcosa may not be able to retain the services of its executives and key management in the future. The loss of the services of one or more executives or key members of Arcosa’s management team, or Arcosa’s inability to successfully develop talent for succession planning, could result in increased costs associated with attracting and retaining a replacement and could disrupt Arcosa’s operations and result in a loss of revenues.
A material disruption at one or more of Arcosa’s manufacturing facilities or in Arcosa’s supply chain could have a material adverse effect on us.
Arcosa owns and operates manufacturing facilities of various ages and levels of automated control and relies on a number of third parties as part of Arcosa’s supply chain, including for the efficient distribution of products to Arcosa’s customers. Any disruption at one of Arcosa’s manufacturing facilities or within Arcosa’s supply chain could prevent Arcosa from meeting demand or require Arcosa to incur unplanned capital expenditures. Older facilities are generally less energy-efficient and are at an increased risk of breakdown or equipment failure, resulting in unplanned downtime. Any unplanned downtime at Arcosa’s facilities, including due to a pandemic related shutdown or work stoppage, may cause delays in meeting customer timelines, result in liquidated damages claims, or cause Arcosa to lose or harm customer relationships.
Additionally, Arcosa requires specialized equipment to manufacture certain of its products, and if any of its manufacturing equipment or technology fails, the time required to repair or replace this equipment could be lengthy, which could result in extended downtime at the affected facility. Any unplanned repair or replacement work can also be very expensive. Moreover, manufacturing facilities can unexpectedly stop operating because of events unrelated to Arcosa or beyond its control, including fires and other industrial accidents, floods and other severe weather events, natural disasters, environmental incidents or other catastrophes, utility and transportation infrastructure disruptions, shortages of raw materials, acts of war or terrorism, and a pandemic related shutdown or work stoppage. Work stoppages, whether union-organized or not, can also disrupt operations at manufacturing facilities.
Furthermore, any shortages in trucking capacity, any increase in the cost thereof, or any other disruption to the highway systems, including due to a pandemic related shutdown or work stoppage, could limit Arcosa’s ability to deliver its products in a timely manner or at all. Any material disruption at one or more of Arcosa’s facilities or those of Arcosa’s customers or suppliers or otherwise within Arcosa’s supply chain, whether as a result of downtime, facility damage, an inability to deliver Arcosa’s products or otherwise, could prevent Arcosa from meeting demand, require Arcosa to incur unplanned capital expenditures, or cause other material disruption to Arcosa’s operations, any of which could have a material adverse effect on Arcosa’s business, liquidity and financial condition, and results of operations.
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Delays in construction projects and any failure to manage Arcosa’s inventory could have a material adverse effect on us.
Many of Arcosa’s products are used in large-scale construction projects which generally require a significant amount of planning and preparation before construction commences. However, construction projects can be delayed and rescheduled for a number of reasons, including unanticipated soil conditions, adverse weather or flooding, changes in project priorities, financing issues, difficulties in complying with environmental and other government regulations or obtaining permits, additional time required to acquire rights-of-way or property rights, and a pandemic related shutdown or work stoppage. These delays or rescheduling may occur with too little notice to allow Arcosa to replace those projects in Arcosa’s manufacturing schedules or to adjust production capacity accordingly, creating unplanned downtime, increasing costs and inefficiencies in Arcosa’s operations, and increased levels of obsolete inventory.
Additionally, Arcosa maintains an inventory of certain products that meet standard specifications and are ultimately purchased by a variety of end users. Arcosa forecasts demand for these products to ensure that it keeps sufficient inventory levels of certain products that Arcosa expects to be in high demand and limits its inventory for which Arcosa does not expect much interest. However, Arcosa’s forecasts are not always accurate and unexpected changes in demand for these products, whether because of a change in preferences or otherwise, can lead to increased levels of obsolete inventory. Any delays in construction projects and Arcosa’s customers’ orders or any inability to manage Arcosa’s inventory could have a material adverse effect on Arcosa’s business, liquidity and financial condition, and results of operations.
The seasonality of Arcosa’s business and its susceptibility to severe and prolonged periods of adverse weather and other conditions could have a material adverse effect on us.
Demand for Arcosa’s products in some markets is typically seasonal, with periods of snow or heavy rain negatively affecting construction activity. For example, sales of Arcosa’s products are somewhat higher from spring through autumn when construction activity is greatest. Construction activity declines in these markets during the winter months in particular due to inclement weather, frozen ground, and fewer hours of daylight. Construction activity can also be affected in any period by adverse weather conditions such as hurricanes, severe storms, torrential rains and floods, natural disasters such as fires and earthquakes, a pandemic related shutdown or work stoppage, and similar events, any of which could reduce demand for Arcosa’s products, push back existing orders to later dates or lead to cancellations.
Furthermore, Arcosa’s ability to deliver products on time or at all to Arcosa’s customers can be significantly impeded by such conditions and events described above. Public holidays and vacation periods constitute an additional factor that may exacerbate certain seasonality effects, as building projects or industrial manufacturing processes may temporarily cease. These conditions, particularly when unanticipated, can leave both equipment and personnel underutilized.
Additionally, the seasonal nature of Arcosa’s business has led to variation in Arcosa’s quarterly results in the past and is expected to continue to do so in the future. This general seasonality of Arcosa’s business and any severe or prolonged adverse weather conditions or other similar events could have a material adverse effect on Arcosa’s business, liquidity and financial condition, and results of operations.
For example, the February 2021 winter storm in Texas and the broader Southern United States will impact our Q1 performance, as we lost more than one week of production across a significant part of our operating footprint. As of the date of this release, we have restored operations in most of our facilities but may experience continuing impacts in our supply chain, particularly for steel mill production that was impacted by the storm.
Risks related to Arcosa’s operations outside of the U.S., particularly Mexico, could decrease Arcosa’s profitability.
Arcosa’s operations outside of the U.S. are subject to the risks associated with cross-border business transactions and activities. Political, legal, trade, economic change or instability, criminal activities, or social unrest could limit or curtail Arcosa’s respective foreign business activities and operations, including the ability to hire and retain employees. Violence in Mexico associated with drug trafficking is continuing. Arcosa has not, to date, been materially affected by any of these risks, but Arcosa cannot predict the likelihood of future effects from such risks or any resulting adverse impact on Arcosa’s business, liquidity and financial condition, and results of operations. Arcosa ships raw materials to Mexico and manufactures products in Mexico that are sold in the U.S. or elsewhere, which are subject to customs and other regulations and the transportation and import of such products may be disrupted. Some foreign countries where Arcosa operates have regulatory authorities that regulate products sold or used in those countries. If Arcosa fails to comply with the applicable regulations related to the foreign countries where Arcosa operates, Arcosa may be unable to market and sell its products in those countries or could be subject to administrative fines or penalties.
In addition, with respect to operations in Mexico and other foreign countries, unexpected changes in the political environment, laws, rules, and regulatory requirements; tariffs and other trade barriers, including regulatory initiatives for buying goods produced in America; more stringent or restrictive laws, rules and regulations relating to labor or the environment; adverse tax consequences; price exchange controls and restrictions; regulations affecting cross-border rail and vehicular traffic; or availability of commodities, including gasoline and electricity, could limit operations affecting production throughput and making the manufacture and distribution of Arcosa’s products less timely or more difficult.
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Furthermore, any material change in the quotas, regulations or duties on imports imposed by the U.S. government and agencies or on exports by the government of Mexico or its agencies, could affect Arcosa’s ability to export products that Arcosa manufactures in Mexico. Failure to comply with such import and export regulations could result in significant fines and penalties.
Because Arcosa has operations outside the U.S., Arcosa could be adversely affected by final judgments of non-compliance with the U.S. Foreign Corrupt Practices Act of 1977 (“FCPA”) or import/export rules and regulations and similar anti-corruption, anti-bribery, or import/export laws of other countries.
Potential expansion of our business may expose us to new business, regulatory, political, operational, financial, and economic risks associated with such expansion, both inside and outside of the U.S.
Previously, we have expanded and plan in the future to expand our business and operations, and this expansion may involve expansion into markets (either inside or outside the U.S.) in which we have limited operating experience, including with respect to seeking regulatory approvals, becoming subject to regulatory authorities, and marketing or selling products. Further, our operations in new foreign markets may be adversely affected by a number of factors, including: general economic conditions and monetary and fiscal policy; financial risks, such as longer payment cycles, difficulty in collecting from international customers, the effect of local and regional financial crises, and exposure to foreign currency exchange rate fluctuations and controls; multiple, conflicting, and changing laws and regulations such as export and import restrictions, employment laws, regulatory requirements, and other governmental approvals, permits, and licenses; interest rates and taxation laws and policies; increased government regulation; social stability; and political, economic, or diplomatic developments. Certain jurisdictions have, from time to time, experienced instances of civil unrest and hostilities, both internally and with neighboring countries. Rioting, military activity, terrorist attacks, or armed hostilities could cause our operations in such jurisdictions to be adversely affected or suspended. We generally do not have insurance for losses and interruptions caused by terrorist attacks, military conflicts, and wars.
In addition, anti-bribery and anti-corruption laws may conflict with some local customs and practices in foreign jurisdictions. Our operations in international jurisdictions may be adversely affected by regulatory and compliance risks that relate to maintaining accurate information and control over activities that may fall within the purview of the FCPA, including both its books and records provisions and its anti-bribery provisions. As a result of our policy to comply with the FCPA and similar anti-bribery laws, we may be at a competitive disadvantage to competitors that are not subject to, or do not comply with, such laws
Any of these factors could significantly harm our potential business or international expansion and our operations and, consequently, our revenues, costs, results of operations, and financial condition.
Arcosa may incur increased costs due to fluctuations in interest rates and foreign currency exchange rates.
Arcosa is exposed to risks associated with fluctuations in interest rates and changes in foreign currency exchange rates. Under varying circumstances, Arcosa may seek to minimize these risks through the use of hedges and similar financial instruments and other activities, although these measures, if and when implemented, may not be effective. Any material and untimely changes in interest rates or exchange rates could adversely impact our business, liquidity and financial condition, and results of operations.
The loss of revenues attributable to one of our customers could negatively impact our revenues and results of operations.
GE, a customer in our Engineered Structures segment, accounted for approximately 15.3% of our consolidated revenues in 2020. The loss of revenues attributable to this customer could have a material adverse effect on our revenues and results of operations.
Arcosa may not be able to successfully identify, consummate or integrate acquisitions, and acquisitions may bring additional known and unknown risks to Arcosa’s business.
Arcosa expects to routinely engage in the search for growth opportunities, including assessment of merger and acquisition prospects in new markets and/or products. However, Arcosa may not be able to identify and secure suitable opportunities. Arcosa’s ability to consummate any acquisitions on terms that are favorable to Arcosa may be limited by a number of factors, such as competition for attractive targets and, to the extent necessary, Arcosa’s ability to obtain financing on satisfactory terms, if at all.
In addition, any merger or acquisition into which Arcosa may enter is subject to known and unknown risks of such business, markets, and/or products and integrating such business, financial systems, markets, and/or products into Arcosa’s businesses and culture. The failure to successfully integrate such mergers or acquisitions could prevent Arcosa from achieving the anticipated operating and cost synergies or long-term strategic benefits from such transactions.
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If Arcosa is not able to successfully integrate its transactions to any material degree, such failure of a successful integration could result in unexpected claims or otherwise have a material adverse effect on Arcosa’s business, liquidity and financial condition, and results of operations. Integration risks include the following: (i) the diversion of management’s time and resources to integration matters from other Arcosa matters; (ii) difficulties in achieving business opportunities and growth prospects of the acquired business; (iii) difficulties in managing the expanded operations; and (iv) challenges in retaining key personnel.
Recent acquisitions bring known and unknown risks to Arcosa, and Arcosa may fail to realize all of the anticipated benefits of the acquisitions or those benefits may be delayed.
The recent acquisitions of Cherry and Strata Materials bring new lines of businesses to Arcosa, including demolition and recycling services. These new lines of businesses involve known and unknown risks. If any of these risks occur, they could result in a material adverse effect on Arcosa’s business, liquidity and financial condition, or results of operations. In addition, some or all of Arcosa’s anticipated benefits from these acquisitions may not be realized. Some of these benefits may not be realized due to Cherry’s concentration in the Houston, Texas-area market and Strata Materials’ concentration in the Dallas, Texas-area market. A downturn in these markets could have a disproportionate adverse impact on the acquired company’s business, liquidity and financial condition, and results of operations.
Acquisitions and divestitures bring risks that the counterparties to the transactions may fail to perform.
Certain acquisitions and divestitures may require Arcosa’s counterparties to indemnify Arcosa for certain liabilities, including, but not limited to, certain liabilities related to product warranties. However, third parties could also seek to hold Arcosa responsible for these liabilities that Arcosa’s counterparties agreed to provide indemnification for, and there can be no assurance that the indemnity from these counterparties or any insurance will be sufficient to protect Arcosa against the full amount of such potential liabilities, or that the counterparties will be able to fully satisfy their indemnification obligations.
Some of Arcosa’s customers place orders for Arcosa’s products (i) in reliance on their ability to utilize tax benefits or tax credits such as accelerated depreciation or the production tax credit for renewable energy or (ii) to utilize federal-aid programs that allow for purchase price reimbursement or other government funding or subsidies, any of which benefits, credits, or programs could be or are being discontinued or allowed to expire without extension thereby reducing demand for certain of Arcosa’s products.
There is no assurance that the U.S. government will reauthorize, modify, or otherwise not allow the expiration of tax benefits, tax credits, subsidies, or federal-aid programs that may include funding of the purchase or purchase price reimbursement of certain of Arcosa’s products. For example, the qualification year for new wind energy projects eligible for the federal renewable electricity production tax credit (the “PTC”) was set to expire in calendar year 2020; however, just prior to expiration, it was extended for one year as part of the Taxpayer Certainty and Disaster Relief Act of 2020, and the resulting tax credit for these new projects that begin construction in 2021 and are placed in service by 2025 was maintained at 60% of the original tax credit. Pricing of orders and individual order quantities reflect a market transitioning from the PTC incentives, as the level of credit for eligible projects placed in service through 2025 is scheduled to step down and ultimately expire. In instances where any benefits, credits, subsidies, or programs are allowed to expire or are otherwise modified or discontinued, the demand for Arcosa’s products could decrease, thereby creating the potential for a material adverse effect on Arcosa’s business, liquidity and financial condition, or results of operations and could result in non-cash impairments on long-lived assets, including intangible assets, and/or goodwill.
Arcosa's indebtedness restricts its current and future operations, which could adversely affect its ability to respond to changes in its business and manage its operations.
On January 2, 2020, Arcosa entered into an Amended and Restated Credit Agreement (the “Credit Agreement”), by and among Arcosa, as borrower, and the lenders party thereto. The Credit Agreement includes a number of restrictive covenants that impose significant operating and financial restrictions on Arcosa, including restrictions on its and its guarantors' ability to, among other things and subject to certain exceptions, incur or guarantee additional indebtedness, merge or dispose of all or substantially all of its assets, engage in transactions with affiliates and make certain restricted payments. In addition, the Credit Agreement requires Arcosa to comply with financial covenants. The Credit Agreement requires that we maintain a minimum interest coverage ratio of no less than 2.50 to 1.00 and maximum leverage ratio of no greater than 3.00 to 1.00, subject to certain exceptions, in each case, for any period of four consecutive fiscal quarters of Arcosa.
For more information on the restrictive covenants in the Credit Agreement, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.” Arcosa's ability to comply with these agreements may be affected by events beyond its control, including prevailing economic, financial, and industry conditions. These covenants could have an adverse effect on Arcosa's business by limiting its ability to take advantage of financing, merger and acquisition, or other opportunities. The breach of any of these covenants or restrictions could result in a default under the Credit Agreement.
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The phaseout of the London Interbank Offered Rate (LIBOR) and the replacement of LIBOR with a different reference rate may have an adverse effect on Arcosa’s business.
The United Kingdom’s Financial Conduct Authority (the authority that regulates LIBOR) has announced that it would phase out the most popular LIBOR indices by the end of June 2023. It is unclear whether new methods of calculating LIBOR will be established or if alternative benchmark reference rates will be adopted. Arcosa’s revolving credit facility, term loan, and other financial instruments utilize LIBOR or an alternative benchmark reference rate for calculating the applicable interest rate. After LIBOR is phased out, the interest rates for these obligations might be subject to change. The replacement of LIBOR with an alternative benchmark reference rate may adversely affect interest rates and result in higher borrowing costs under Arcosa’s current or future credit agreements and financial instruments. This could materially and adversely affect Arcosa’s business, liquidity and financial condition, results of operations, and ability to acquire debt financing. Arcosa cannot predict the effect of the elimination of LIBOR or the establishment and use of alternative benchmark reference rates and the corresponding effects on Arcosa’s cost of capital.
Fluctuations in the price and supply of raw materials and parts and components used in the production of Arcosa’s products and the availability of natural aggregates and specialty materials reserves could have a material adverse effect on its ability to cost-effectively manufacture and sell its products. In some instances, Arcosa relies on a limited number of suppliers for certain raw materials, parts, and components needed in its production.
A significant portion of Arcosa’s business depends on the adequate supply of numerous specialty and other parts and components at competitive prices such as flanges for the structural wind towers business. Arcosa’s manufacturing operations partially depend on Arcosa’s ability to obtain timely deliveries of raw materials, parts, and components in acceptable quantities and quality from Arcosa’s suppliers. Certain raw materials, parts, and components for Arcosa’s products are currently available from a limited number of suppliers and, as a result, Arcosa may have limited control over pricing, availability, and delivery schedules. If Arcosa is unable to purchase a sufficient quantity of raw materials, parts, and components on a timely basis, Arcosa could face disruptions in its production and incur delays while Arcosa attempts to engage alternative suppliers. Fewer suppliers could result from unimproved or worsening economic or commercial conditions, potentially increasing Arcosa’s rejections for poor quality and requiring Arcosa to source unknown and distant supply alternatives. Any such disruption or conditions could harm Arcosa’s business and adversely impact Arcosa’s results of operations.
The principal material used in Arcosa’s manufacturing segments is steel. Market steel prices may exhibit periods of volatility. Steel prices may experience further volatility as a result of scrap surcharges assessed by steel mills, tariffs, and other market factors. Arcosa often uses contract-specific purchasing practices, supplier commitments, contractual price escalation provisions, and other arrangements with Arcosa’s customers to mitigate the effect of this volatility on Arcosa’s operating profits for the year. To the extent that Arcosa does not have such arrangements in place, a change in steel prices could materially lower Arcosa’s profitability. In addition, meeting production demands is dependent on Arcosa’s ability to obtain a sufficient amount of steel. An unanticipated interruption in Arcosa’s supply chain could have an adverse impact on both Arcosa’s margins and production schedules.
A part of the operations in Arcosa’s Construction Products segment includes the mining of natural aggregates and specialty materials reserves. The success and viability of these operations depend on the accuracy of Arcosa’s reserve estimates, the costs of production and the ability to economically distribute the natural aggregates and specialty materials. Estimates for natural aggregate and specialty materials reserves and for the costs of production of such reserves depend upon a variety of factors and assumptions, many of which involve uncertainties beyond Arcosa’s control, such as geological and mining conditions that may not be identifiable. In addition, Arcosa's success in recovering natural aggregates and specialty materials depends on the ability to secure new reserve locations and permits to mine such reserves in areas that make distribution of materials economically viable. Inaccuracies in reserve estimates and production costs, and the inability to secure locations and permits for future operations could negatively affect our results of operations.
Reductions in the availability of energy supplies or an increase in energy costs may increase Arcosa’s operating costs.
Arcosa uses electricity and various gases, including natural gas, at Arcosa’s manufacturing facilities and uses diesel fuel in vehicles to transport Arcosa’s products to customers and to operate its plant equipment. An outbreak or escalation of hostilities between the U.S. and any foreign power and, in particular, prolonged conflicts could result in a real or perceived shortage of petroleum and/or natural gas, which could result in an increase in the cost of natural gas or energy in general. Extreme weather conditions and natural occurrences such as hurricanes, tornadoes, and floods could result in varying states of disaster and a real or perceived shortage of petroleum and/or natural gas, including rationing thereof, potentially resulting in unavailability or an increase in natural gas prices, electricity prices, or other general energy costs. Speculative trading in energy futures in the world markets could also result in an increase in natural gas and general energy cost. Future limitations on the availability (including limitations imposed by increased regulation or restrictions on rail, road, and pipeline transportation of energy supplies) or consumption of petroleum products and/or an increase in energy costs, particularly natural gas for plant operations and diesel fuel for vehicles and plant equipment, could have an adverse effect upon our ability to conduct Arcosa’s business cost effectively.
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The inability to hire and retain skilled labor could adversely impact Arcosa’s operations.
Arcosa depends on skilled labor in the manufacture, maintenance, and repair of Arcosa’s products. Some of Arcosa’s facilities are located in areas where demand for skilled laborers may exceed supply. If Arcosa is unable to hire and retain these skilled laborers, including welders, Arcosa may be limited in its ability to maintain or increase production rates and could increase Arcosa’s labor costs.
Some of Arcosa’s employees belong to labor unions and strikes or work stoppages could adversely affect Arcosa’s operations.
Arcosa is a party to collective bargaining agreements with various labor unions at some of Arcosa’s operations in the U.S. and Canada and all of Arcosa’s operations in Mexico. Disputes with regard to the terms of these agreements or Arcosa’s potential inability to negotiate acceptable contracts with these unions in the future could result in, among other things, strikes, work stoppages, or other slowdowns by the affected workers. Arcosa cannot be assured that its relations with its workforce will remain positive or that union organizers will not be successful in future attempts to organize at some of Arcosa’s facilities. If Arcosa’s workers were to engage in a strike, work stoppage, or other slowdown or other employees were to become unionized or the terms and conditions in future labor agreements were renegotiated, Arcosa could experience a significant disruption of its operations and higher ongoing labor costs. In addition, Arcosa could face higher labor costs in the future as a result of severance or other charges associated with lay-offs, shutdowns, or reductions in the size and scope of its operations or difficulties of restarting Arcosa’s operations that have been temporarily shuttered.
Our business is subject to significant regulatory compliance in the U.S., Mexico, and other countries where we do business.
We are subject to various governmental regulations in the U.S., Mexico, and other countries where we do business related to occupational safety and health, labor, and business practices. Failure to comply with current or future regulations or operating permits could result in the imposition of substantial fines, suspension of production, alterations of our production processes, cessation of operations, or other actions which could harm our business.
Although we believe that we are in material compliance with all applicable regulations and operating permits material to our business operations, amendments to existing statutes and regulations, adoption of new statutes and regulations, modification of existing operating permits, or entering into new lines of business could require us to continually alter our methods of operation and/or discontinue the sale of certain of our products resulting in costs to us that could be substantial. We may not be able, for financial or other reasons, to comply with applicable laws, rules, regulations, and permit requirements. Our failure to comply with applicable laws, rules, regulations, or permit requirements could subject us to civil remedies, including substantial fines, penalties, and injunctions, as well as possible criminal sanctions, which would, if of significant magnitude, materially adversely impact our future business, liquidity and financial condition, and results of operations.
Violations of or changes in the regulatory requirements applicable to the industries in which Arcosa operates or will operate may have a material adverse effect on Arcosa’s business, liquidity and financial condition, and results of operations.
Arcosa’s Transportation Products segment is subject to regulation by, among others, the U.S. Coast Guard; the U.S. National Transportation Safety Board; the U.S. Customs Service; the Maritime Administration of the USDOT and private industry organizations such as the American Bureau of Shipping. These organizations establish safety criteria, investigate vessel accidents, and recommend improved safety standards.
Arcosa’s Construction Products segment is subject to regulation by MSHA, USEPA, FDA, and various state agencies.
Arcosa’s Engineered Structures segment is subject to the regulations by the PHMSA and the FMCSA, both of which are part of the USDOT; and various state agencies, including state departments of transportation. These agencies promulgate and enforce rules and regulations pertaining, in part, to the manufacture of tanks that are used in the storage, transportation and transport arrangement, and distribution of regulated and non-regulated substances.
Arcosa’s operations are also subject to regulation of health and safety matters by OSHA and MSHA. In addition, our business is subject to additional regulatory requirements in Mexico and other countries where we conduct business.
Future regulatory changes, new lines of business which are covered by regulatory agencies that Arcosa has not previously been subject to, or the determination that Arcosa’s current or future products or processes are not in compliance with applicable requirements, rules, regulations, specifications, standards or product testing criteria might result in additional operating expenses, administrative fines or penalties, product recalls, reputational harm, or loss of business that could have a material adverse effect on Arcosa’s business, liquidity and financial condition, and results of operations. For example, the U.S. barge industry relies, in part, on the Jones Act, and changes to or a repeal of the legislation could have a material adverse impact on Arcosa’s barge business and revenues. In addition, the impact of a government shutdown could have a material adverse effect on Arcosa's revenues, profits, and cash flows. Arcosa relies on government personnel to conduct certain routine business processes related to the inspection and delivery of certain products that, if disrupted, could have an immediate impact on Arcosa's revenues and business.
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Arcosa is subject to health and safety laws and regulations and any failure to comply with any current or future laws or regulations could have a material adverse effect on us.
Manufacturing and construction sites are inherently dangerous workplaces. Arcosa’s manufacturing sites often put Arcosa’s employees and others in close proximity with large pieces of mechanized equipment, moving vehicles, chemical and manufacturing processes, heavy products and other items, and highly regulated materials. As a result, Arcosa is subject to a variety of health and safety laws and regulations dealing with occupational health and safety. Unsafe work sites have the potential to increase employee turnover and raise Arcosa’s operating costs. Arcosa’s safety record can also impact Arcosa’s reputation. Arcosa maintains functional groups whose primary purpose is to ensure Arcosa implements effective work procedures throughout Arcosa’s organization and take other steps to ensure the health and safety of Arcosa’s work force, but there can be no assurances these measures will be successful in preventing injuries or violations of health and safety laws and regulations. Nationally there has been an increase in COVID-19 related employee health and safety litigation alleging employer liability for failing to comply with COVID-19 health and safety standards, and Arcosa’s continued operations could expose Arcosa to similar claims. Any failure to maintain safe work sites or violations of applicable health and safety laws could expose Arcosa to significant financial losses and reputational harm, as well as civil and criminal liabilities, any of which could have a material adverse effect on Arcosa’s business, liquidity and financial condition, and results of operations.
Arcosa has potential exposure to environmental liabilities that may increase costs and lower profitability.
Arcosa is subject to comprehensive federal, state, local, and foreign environmental laws and regulations relating to: (i) the release or discharge of regulated materials into the environment at Arcosa’s facilities or with respect to Arcosa’s products while in operation; (ii) the management, use, processing, handling, storage, transport and transport arrangement, and disposal of hazardous and non-hazardous waste, substances, and materials; and (iii) other activities relating to the protection of human health and the environment. Such laws and regulations expose Arcosa to liability for its own acts and in certain instances potentially expose Arcosa to liability for the acts of others. These laws and regulations also may impose liability on Arcosa currently under circumstances where at the time of the action taken, Arcosa’s acts or those of others complied with then applicable laws and regulations. In addition, such laws may require significant expenditures to achieve compliance, and are frequently modified or revised to impose new obligations. Civil and criminal fines and penalties may be imposed for non-compliance with these environmental laws and regulations. Arcosa’s operations involving hazardous materials also raise potential risks of liability under common law.
Environmental operating permits are, or may be, required for Arcosa’s operations under these laws and regulations. These operating permits are subject to modification, renewal, and revocation. Although Arcosa regularly monitors and reviews its operations, procedures, and policies for compliance with Arcosa’s operating permits and related laws and regulations, the risk of environmental liability is inherent in the operation of Arcosa’s businesses.
However, future events, such as changes in, or modified interpretations of, existing environmental laws and regulations or enforcement policies, or further investigation or evaluation of the potential health hazards associated with the manufacture of Arcosa’s products and related business activities and properties, may give rise to additional compliance and other costs that could have a material adverse effect on Arcosa’s business, liquidity and financial condition, and results of operations.
In addition to environmental laws, the transportation of commodities by rail, barge, or container raises potential risks in the event of an accident that results in the release of an environmentally sensitive substance. Generally, liability under existing laws for an accident depends upon causation analysis and the acts, errors, or omissions, if any, of a party involved in the transportation activity, including, but not limited to, the shipper, the buyer, and the seller of the substances being transported, or the manufacturer of the barge, container, or its components. Additionally, the severity of injury or property damage arising from an incident may influence the causation responsibility analysis, exposing Arcosa to potentially greater liability. Under certain circumstances, strict liability concepts may apply. If Arcosa is found liable in any such incidents, it could have a material adverse effect on Arcosa’s business, liquidity and financial condition, and results of operations.
Responding to claims relating to improper handling, transport, storage, or disposal of hazardous materials could be time consuming and costly.
We use controlled hazardous materials in our business and generate wastes that are regulated as hazardous wastes under U.S. federal, state, and local environmental laws and under equivalent provisions of law in those and other jurisdictions in which our manufacturing facilities are located. Our use of these substances and materials is subject to stringent, and periodically changing, regulation that can impose costly compliance obligations on us and have the potential to adversely affect our manufacturing activities. We are also subject to potential liability for claims alleging property damage and personal and bodily injury or death arising from the use of or exposure to our products, especially in connection with products we manufacture that our customers use to transport or store hazardous, flammable, toxic, or explosive materials.
The risk of accidental contamination or injury from these materials cannot be completely eliminated. If an accident with these substances occurs, we could be held liable for any damages that result, as well as incurring clean-up costs and liabilities, which can be substantial. Additionally, an accident could damage our facilities, resulting in delays and increased costs.
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Our manufacturing plants or other facilities may have unknown environmental conditions that could be expensive and time-consuming to correct.
There can be no assurance that we will not encounter hazardous environmental conditions at any of our manufacturing plants or other facilities that may require us to incur significant clean-up or correction costs. Upon encountering a hazardous environmental condition or receiving a notice of a hazardous environmental condition, we may be required to correct the condition. The presence of a hazardous environmental condition relating to any of our manufacturing plants or other facilities may require significant expenditures to correct the environmental condition.
Business, regulatory, and legal developments regarding climate change, and physical impacts from climate change, could have an adverse effect on our business, liquidity and financial condition, and results of operations.
Legislation and new rules to regulate emission of greenhouse gases (“GHGs”) has been introduced in numerous state legislatures, the U.S. Congress, and by the USEPA. Some of these proposals would require industries to meet new standards that may require substantial reductions in carbon emissions. There is also a potential for climate change legislation and regulation that could adversely impact the cost of certain manufacturing inputs, including the cost of energy and electricity. While Arcosa cannot assess the direct impact of these or other potential regulations, new climate change protocols could affect demand for its products and/or affect the price of materials, input factors, energy costs, and manufactured components.
Potential impacts of climate change include physical impacts, such as disruption in production and product distribution due to impacts from major storm events, shifts in regional weather patterns and intensities, and sea level changes. Other adverse consequences of climate change could include an increased frequency of severe weather events, flooding, and rising sea levels that could affect operations at Arcosa’s manufacturing facilities as well as the price and/or availability of insurance coverage for the Company assets or other unforeseen disruptions of Arcosa’s operations, systems, property, or equipment.
The impacts of climate change and related regulations on our operations and the Company overall are highly uncertain and difficult to estimate, but such effects could be materially adverse to our business, liquidity and financial condition, and results of operations.
From time to time Arcosa may take tax positions that the Internal Revenue Service (“IRS”), the Servicio de Administracion Tributaria (“SAT”) in Mexico, or other taxing jurisdictions may contest.
Our subsidiaries have in the past and may in the future take tax positions that the IRS, the SAT, or other taxing jurisdictions may challenge. Arcosa is required to disclose to the IRS as part of Arcosa’s tax returns particular tax positions in which Arcosa has a reasonable basis for the position but not a “more likely than not” chance of prevailing. If the IRS, SAT, or other taxing jurisdictions successfully contests a tax position that Arcosa takes, Arcosa may be required to pay additional taxes or fines which may not have been previously accrued that may adversely affect its results of operations and financial position.
The limited number of customers for certain of Arcosa’s products, the variable purchase patterns of Arcosa’s customers in all of its segments, and the timing of completion, delivery, and customer acceptance of orders may cause Arcosa’s revenues and income from operations to vary substantially each quarter, potentially resulting in significant fluctuations in its quarterly results.
Some of the markets Arcosa serves have a limited number of customers. The volumes purchased by customers in each of Arcosa’s business segments vary from year to year, and not all customers make purchases every year. As a result, the order levels for Arcosa’s products have varied significantly from quarterly period to quarterly period in the past and may continue to vary significantly in the future. Therefore, Arcosa’s results of operations in any particular quarterly period may also vary. As a result of these quarterly fluctuations, Arcosa believes that comparisons of its sales and operating results between quarterly periods may not be meaningful and should not be relied upon as indicators of future performance.
Some of Arcosa’s products are sold to contractors, distributors, installers, and rental companies who may misuse, abuse, improperly install, or improperly or inadequately maintain or repair such products, thereby potentially exposing Arcosa to claims that could increase Arcosa’s costs and weaken Arcosa’s liquidity and financial condition.
The products Arcosa manufactures are designed to work optimally when properly assembled, operated, installed, repaired, and maintained. When this does not occur, Arcosa may be subjected to claims or litigation associated with personal or bodily injuries or death and property damage.
U.S. government actions relative to the federal budget, taxation policies, government expenditures, U.S. borrowing/debt ceiling limits, and trade policies could adversely affect Arcosa’s business and operating results.
Periods of impasse, deadlock, and last minute accords may continue to permeate many aspects of U.S. governance, including federal government budgeting and spending, taxation, U.S. deficit spending and debt ceiling adjustments, and international commerce. Such periods could negatively impact U.S. domestic and global financial markets, thereby reducing customer demand for Arcosa’s products and services and potentially result in reductions in Arcosa’s revenues, increased price
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competition, or increased operating costs, any of which could adversely affect Arcosa’s business, liquidity and financial condition, and results of operations.
For example, Arcosa produces many of its products at its manufacturing facilities in Mexico. Arcosa’s business benefits from free trade agreements such as the new United States-Mexico-Canada Agreement (“USMCA”). Potential developments, including failure to enforce the USMCA, potential changes or amendments to the agreement, governmental policies, and laws and regulations could adversely affect Arcosa’s existing production operations in Mexico and have a material adverse effect on Arcosa’s business, liquidity and financial condition, and results of operations.
Arcosa’s business is based in part on government-funded infrastructure projects and building activities, and any reductions or re-allocation of spending or related subsidies in these areas could have an adverse effect on us.
Certain of Arcosa’s businesses depend on government spending for infrastructure and other similar building activities. As a result, demand for some of Arcosa’s products is influenced by U.S. federal government fiscal policies and tax incentives and other subsidies. Projects in which Arcosa participates may be funded directly by governments or privately-funded, but are otherwise tied to or impacted by government policies and spending measures.
Government infrastructure spending and governmental policies with respect thereto depend primarily on the availability of public funds, which is influenced by many factors, including governmental budgets; public debt levels; interest rates; existing, anticipated, and actual federal, state, provincial, and local tax revenues; government leadership; and the general political climate, as well as other general macroeconomic and political factors. In addition, U.S. federal government funds may only be available based on states’ willingness to provide matching funding. Government spending is often approved only on a short-term basis and some of the projects in which Arcosa’s products are used require longer-term funding commitments. If government funding is not approved or funding is lowered as a result of poor economic conditions, lower than expected revenues, competing spending priorities, or other factors, it could limit infrastructure projects available, increase competition for projects, result in excess inventory, and decrease sales, all of which could adversely affect the profitability of Arcosa’s business.
Additionally, certain regions or states may require or possess the means to finance only a limited number of large infrastructure projects and periods of high demand may be followed by years of little to no activity. There can be no assurances that governments will sustain or increase current infrastructure spending and tax incentive and other subsidy levels, and any reductions thereto or delays therein could affect Arcosa’s business, liquidity and financial condition, and results of operations.
Arcosa’s manufacturer’s warranties expose Arcosa to product replacement and repair claims.
Depending on the product, Arcosa warrants its workmanship and certain materials (including surface coatings), parts, and components pursuant to express limited contractual warranties. Arcosa may be subject to significant warranty claims in the future, such as multiple claims based on one defect repeated throughout Arcosa’s production process or claims for which the cost of shipping, repairing, or replacing the defective part, component, or material is highly disproportionate to the original price. These types of warranty claims could result in significant costs associated with product recalls or product shipping, repair, or replacement, and damage to Arcosa’s reputation.
Defects in materials and workmanship could harm our reputation, expose us to product warranty or product liability claims, decrease demand for products, or materially harm existing or prospective customer relationships.
A defect in materials or in the manufacturing of our products could result in product warranty and product liability claims, decrease demand for products, or materially harm existing or prospective customer relationships. These claims may require costly repairs or replacement and may include cost related to disassembly of our products and transportation of the products from the field to our facilities and returning the products to the customer, a change in our manufacturing processes, recall of previously manufactured products, or personal injury claims, which could result in significant expense and materially harm our existing or prospective customer relationships. Any of the foregoing could materially harm our business, liquidity and financial condition, and results of operations.
Insurance coverage could be costly, unavailable or inadequate.
Arcosa is subject to potential liability for third party claims alleging property damage and personal and bodily injury or death arising from the use of or exposure to Arcosa’s products, especially in connection with products Arcosa manufactures that Arcosa’s customers use to transport hazardous, flammable, toxic, or explosive materials. Arcosa’s businesses are subject to losses arising from property damages or losses from business interruption. As policies expire, premiums for renewed or new coverage may further increase and/or require that Arcosa increase its self-insured retention, deductibles, or overall limits. Arcosa maintains primary coverage and excess coverage policies for liability claims as well as property damage. If the number of claims or the dollar amounts of any such claims rise in any policy year, Arcosa could suffer additional costs associated with accessing its excess coverage policies or in the renewal of its insurance programs. Also, an increase in the loss amounts attributable to such claims could expose Arcosa to uninsured damages if Arcosa were unable or elected not to insure against certain claims because of high premiums or other reasons. While Arcosa’s liability and property insurance coverage is at or
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above levels based on commercial norms in Arcosa’s industries, an unusually large liability claim, property loss claim, business interruption claim, or a string of claims coupled with an unusually large damage award could exceed Arcosa’s available insurance coverage. In addition, the availability of, and Arcosa’s ability to collect on, insurance coverage is often subject to factors beyond Arcosa’s control, including positions on policy coverage taken by insurers. If any of Arcosa’s third-party insurers fail, cancel, refuse coverage, or otherwise are unable to provide Arcosa with adequate insurance coverage, then Arcosa’s risk exposure and Arcosa’s operational expenses may increase and the management of its business operations would be disrupted. Moreover, any accident or incident involving Arcosa’s businesses in general or Arcosa or Arcosa’s products specifically, even if Arcosa is fully insured, contractually indemnified, or not held to be liable, could negatively affect Arcosa’s reputation among customers and the public, thereby making it more difficult for Arcosa to compete effectively, and could significantly affect the cost and availability of insurance in the future.
Arcosa’s inability to produce and disseminate relevant and/or reliable data and information pertaining to Arcosa’s business in an efficient, cost-effective, secure, and well-controlled fashion may have significant negative impacts on confidentiality requirements and obligations and trade secret or other proprietary needs and expectations and, therefore, Arcosa’s future operations, profitability, and competitive position.
Arcosa relies on information technology infrastructure and architecture, including hardware, network including the cloud, software, people, and processes to provide useful and confidential information to conduct Arcosa’s business in the ordinary course, including correspondence and commercial data and information interchange with customers, suppliers, legal counsel, governmental agencies, and consultants and to support assessments and conclusions about future plans and initiatives pertaining to market demands, operating performance, and competitive positioning. Any material failure, interruption of service, compromised data security, or cybersecurity threat could adversely affect Arcosa’s relations with suppliers and customers, place Arcosa in violation of confidentiality and data protection laws, rules, and regulations, and result in negative impacts to Arcosa’s market share, operations, and profitability. Arcosa will have to continually upgrade its infrastructure and applications, to reduce the risk of such material failures, interruptions, or security breaches. Security breaches in Arcosa’s information technology could result in theft, destruction, loss, misappropriation, or release of confidential data, trade secrets, or other proprietary or intellectual property that could adversely impact Arcosa’s future results.
Cybersecurity incidents could disrupt our business and result in the compromise of confidential information.
Our business is at risk from and may be impacted by information security incidents, including attempts to gain unauthorized access to our confidential data, ransomware, malware, phishing emails, and other electronic security events. Such incidents can range from individual attempts to gain unauthorized access to our information technology systems to more sophisticated security threats. They can also result from internal compromises, such as human error, or malicious acts. While we employ a number of measures to prevent, detect, and mitigate these threats, there is no guarantee such efforts will be successful in preventing a cyber event. This is especially true due to the increased use of remote working locations by certain of our employees due to the COVID-19 pandemic and the potential increased cybersecurity vulnerability of such remote work locations. Arcosa will have to continually upgrade its network infrastructure to reduce the risk of such cyber events. Cybersecurity incidents could disrupt our business and compromise confidential information belonging to us and third parties.
Repercussions from terrorist activities or armed conflict could harm Arcosa’s business.
Terrorist activities, anti-terrorist efforts, and other armed conflict involving the U.S. or its interests abroad may adversely affect the U.S. and global economies, potentially preventing Arcosa from meeting its financial and other obligations. In particular, the negative impacts of these events may affect the industries in which Arcosa operates. This could result in delays in or cancellations of the purchase of Arcosa’s products or shortages in raw materials, parts, or components. Any of these occurrences could have a material adverse impact on Arcosa’s business, liquidity and financial condition, and results of operations.
Arcosa’s inability to sufficiently protect Arcosa’s intellectual property rights could adversely affect Arcosa’s business.
Arcosa’s patents, copyrights, trademarks, trade secrets, and other intellectual property rights are important to Arcosa’s success. Arcosa relies on patent, copyright, and trademark law, and trade secret protection and confidentiality and/or license agreements with others to protect Arcosa’s intellectual property rights. Arcosa’s trademarks, service marks, copyrights, patents, and trade secrets may be exposed to market confusion, commercial abuse, infringement, or misappropriation and possibly challenged, invalidated, circumvented, narrowed, or declared unenforceable by countries where Arcosa’s products and services are made available, including countries where the laws may not protect Arcosa’s intellectual property rights as fully as in the U.S. Such instances could negatively impact Arcosa’s competitive position and adversely affect Arcosa’s business. Additionally, Arcosa could be required to incur significant expenses to protect its intellectual property rights.
Arcosa’s ESG efforts may not be received favorably by our stockholders and others which could cause an adverse effect on Arcosa’s business, liquidity and financial condition, results of operations, cash flows and stock price.
Arcosa has been proactive in integrating its ESG initiatives into its long-term strategy. The subjective nature and wide variety of frameworks and methods used by our stockholders and others to assess Arcosa’s ESG strategy and progress could result in a
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negative perception or misrepresentation of Arcosa’s ESG goals and progress. Arcosa’s inability to achieve satisfactory progress on its ESG initiatives on a timely basis, or at all, or to meet the ESG criteria of our stockholders and others could adversely affect Arcosa’s business, liquidity and financial condition, results of operations, cash flows and stock price.
Risks Related to Arcosa Common Stock.
Arcosa’s stock price may fluctuate significantly.
We cannot predict the prices at which shares of Arcosa common stock may trade. The trading and market price of Arcosa common stock may fluctuate significantly due to a number of factors, some of which may be beyond Arcosa’s control, including:
•Arcosa’s quarterly or annual earnings, or those of other companies in its industry;
•actual or anticipated fluctuations in Arcosa’s operating results;
•changes in earnings estimates by securities analysts or Arcosa’s ability to meet those estimates;
•Arcosa’s ability to meet its forward looking guidance;
•the operating and stock price performance of other comparable companies;
•overall market fluctuations and domestic and worldwide economic conditions; and
•other factors described in these “Risk Factors” and elsewhere in this Annual Report on Form 10-K.
Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. Broad market and industry factors may materially harm the market price of Arcosa’s common stock, regardless of Arcosa’s operating performance. In the past, following periods of volatility in the market price of a company’s securities, shareholder derivative lawsuits and/or securities class action litigation has often been instituted against that company. Such litigation, if instituted against us, could result in substantial costs and a diversion of management’s attention and resources.
In addition, investors may have difficulty accurately valuing Arcosa common stock. Investors often value companies based on the stock prices and results of operations of other comparable companies. Investors may find it difficult to find comparable companies and to accurately value Arcosa common stock, which may cause the trading price of Arcosa common stock to fluctuate.
Future sales by us or our existing stockholders may cause our stock price to decline.
Any transfer or sales of substantial amounts of our common stock in the public market or the perception that such transfer or sales might occur may cause the market price of our common stock to decline, particularly when our trading volumes are low. As of January 15, 2021, we had a total of 48.2 million shares of our common stock issued and outstanding. The sales of significant amounts of shares of our common stock or the perception in the market that this could occur may result in the lowering of the market price of our common stock.
Arcosa cannot guarantee the timing, amount, or payment of dividends on its common stock.
The timing, declaration, amount, and payment of future dividends to Arcosa’s stockholders falls within the discretion of Arcosa’s Board of Directors. The Board of Directors’ decisions regarding the payment of future dividends will depend on many factors, such as Arcosa’s financial condition, earnings, capital requirements, debt service obligations, covenants related to our debt service obligations, industry practice, legal requirements, regulatory constraints, and other factors that the Board of Directors deems relevant. Arcosa’s ability to pay future dividends will depend on its ongoing ability to generate cash from operations and access to the capital markets. Arcosa cannot guarantee that it will continue to pay any dividend in the future.
Stockholders’ percentage of ownership in Arcosa may be diluted in the future.
Stockholders’ percentage ownership in Arcosa may be diluted because of equity issuances for acquisitions, capital market transactions, or otherwise, including, without limitation, equity awards that Arcosa grants to its directors, officers, and employees.
In addition, Arcosa’s restated certificate of incorporation authorizes Arcosa to issue, without the approval of Arcosa’s stockholders, one or more classes or series of preferred stock having such designation, powers, preferences, and relative, participating, optional, and other special rights, including preferences over Arcosa common stock respecting dividends and distributions, as Arcosa’s Board of Directors generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of Arcosa common stock. For example, Arcosa could grant the holders of preferred stock the right to elect some number of Arcosa’s directors in all events or on the happening of specified events or to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences Arcosa could assign to holders of preferred stock could affect the residual value of Arcosa common stock.
Certain provisions in Arcosa’s restated certificate of incorporation and amended and restated bylaws, and of Delaware law, may prevent or delay an acquisition of Arcosa, which could decrease the trading price of the common stock.
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Arcosa’s restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and to encourage prospective acquirers to negotiate with Arcosa’s Board of Directors rather than to attempt a hostile takeover.
In addition, Arcosa is subject to Section 203 of the DGCL. Section 203 provides that, subject to limited exceptions, persons that (without prior board approval) acquire, or are affiliated with a person that acquires, more than 15 percent of the outstanding voting stock of a Delaware corporation shall not engage in any business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the date on which that person or its affiliate becomes the holder of more than 15 percent of the corporation’s outstanding voting stock.
Arcosa believes these provisions will protect its stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with Arcosa’s Board of Directors and by providing Arcosa’s Board of Directors with more time to assess any acquisition proposal. These provisions are not intended to make Arcosa immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that Arcosa’s Board of Directors determines is not in the best interests of Arcosa and its stockholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors.
In addition, an acquisition or further issuance of Arcosa’s stock could trigger the application of Section 355(e) of the Code. Under the tax matters agreement, Arcosa would be required to indemnify Trinity for the tax imposed under Section 355(e) of the Code resulting from an acquisition or issuance of Arcosa stock, even if Arcosa did not participate in or otherwise facilitate the acquisition, and this indemnity obligation might discourage, delay, or prevent a change of control that stockholders may consider favorable.
Arcosa's restated certificate of incorporation and bylaws contain exclusive forum provisions that could limit an Arcosa stockholder’s ability to choose a judicial forum that it finds favorable for certain disputes with Arcosa or its directors, officers, stockholders, employees, or agents, and may discourage lawsuits with respect to such claims.
Arcosa’s restated certificate of incorporation and bylaws provide that unless the Board of Directors otherwise determines, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of Arcosa, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer, stockholder, employee, or agent of Arcosa to Arcosa or Arcosa’s stockholders, (iii) any action asserting a claim against Arcosa or any director, officer, stockholder, employee, or agent of Arcosa arising out of or relating to any provision of the DGCL or Arcosa’s restated certificate of incorporation or bylaws, or (iv) any action asserting a claim against Arcosa or any director, officer, stockholder, employee or agent of Arcosa governed by the internal affairs doctrine, in all cases subject to the court having subject matter jurisdiction and personal jurisdiction over an indispensable party named as a defendant. These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for such disputes and may discourage these types of lawsuits. Alternatively, if a court were to find the exclusive forum provisions inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, Arcosa may incur additional costs associated with resolving such matters in other jurisdictions.
Risks Related to the Separation.
Trinity may fail to perform under various transaction agreements that were executed as part of the Separation.
The separation and distribution agreement and other agreements, including certain supply agreements, entered into in connection with the Separation included indemnifications related to liabilities and obligations as well as performance obligations by Trinity under the supply agreements. Arcosa is relying on Trinity to satisfy its performance and payment obligations under these agreements. However, third parties could also seek to hold Arcosa responsible for liabilities that Trinity has agreed to retain, and there can be no assurance that the indemnity from Trinity will be sufficient to protect Arcosa against the full amount of such liabilities, or that Trinity will be able to fully satisfy its indemnification obligations. In addition, Trinity’s insurers may attempt to deny coverage to Arcosa for liabilities associated with certain occurrences of indemnified liabilities prior to the Separation. If Trinity is unable to satisfy its obligations under these agreements, including its indemnification obligations and payment obligations, Arcosa could incur operational difficulties or losses.
Potential indemnification liabilities to Trinity pursuant to the separation and distribution agreement could materially and adversely affect Arcosa’s business, liquidity and financial condition, results of operations.
The separation and distribution agreement, among other things, provides for indemnification obligations designed to make Arcosa financially responsible for certain liabilities that may exist relating to its business activities. If Arcosa is required to indemnify Trinity under the circumstances set forth in the separation and distribution agreement, Arcosa may be subject to substantial liabilities.
Arcosa may be subject to certain contingent liabilities of Trinity following the Separation.
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There is the possibility that certain liabilities of Trinity could become Arcosa’s obligations. For example, under the U.S. Internal Revenue Code of 1986, as amended (the “Code”) and the related rules and regulations, each corporation that was a member of the Trinity U.S. consolidated group during a taxable period or portion of a taxable period ending on or before the effective time of the distribution is jointly and severally liable for the U.S. federal income tax liability of the entire Trinity U.S. consolidated group for that taxable period. Consequently, if Trinity is unable to pay the consolidated U.S. federal income tax liability for a prior period, Arcosa could be required to pay the entire amount of such tax which could be substantial and in excess of the amount allocated to it under the tax matters agreement between it and Trinity. Other provisions of federal law establish similar liability for other matters, including laws governing tax-qualified pension plans as well as other contingent liabilities.
If the distribution of shares of Arcosa, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, Arcosa's stockholders in the distribution and Trinity could be subject to significant tax liability and, in certain circumstances, Arcosa could be required to indemnify Trinity for material taxes pursuant to indemnification obligations under the tax matters agreement.
Notwithstanding a private letter ruling from the IRS and the tax opinions Trinity received from its advisors, the IRS could determine that the distribution or any such related transaction is taxable if it determines that any of these facts, assumptions, representations, or undertakings are not correct or have been violated, or that the distribution should be taxable for other reasons, including if the IRS were to disagree with the conclusions in the tax opinions that are not covered by the IRS ruling.
If the distribution is determined to be taxable for U.S. federal income tax purposes, a stockholder of Trinity that has received shares of Arcosa common stock in the distribution would be treated as having received a distribution of property in an amount equal to the fair value of such Arcosa shares on the distribution date and could incur significant income tax liabilities.
Under the tax matters agreement between Trinity and Arcosa, Arcosa may be required to indemnify Trinity against any taxes imposed on Trinity that arise from the failure of the distribution to qualify as tax-free for U.S. federal income tax purposes within the meaning of Section 355 of the Code or the failure of certain related transactions to qualify for tax-free treatment, to the extent such failure to qualify is attributable to actions, events or transactions relating to Arcosa’s stock, assets or business or any breach of Arcosa’s representations, covenants or obligations under the tax matters agreement (or any other agreement Arcosa enters into in connection with the separation and distribution), the materials submitted to the IRS in connection with the request for the IRS ruling or the representation letters provided by Arcosa in connection with the tax opinions. Events triggering an indemnification obligation under the tax matters agreement include events occurring after the distribution that cause Trinity to recognize a gain under Section 355(e) of the Code. Such tax amounts could be significant, and Arcosa’s obligations under the tax matters agreement will not be limited by amount or subject to any cap. If Arcosa is required to indemnify Trinity under the circumstances set forth above or otherwise under the tax matters agreement, Arcosa may be subject to substantial liabilities, which could materially adversely affect its financial position.
General Risk Factors.
Arcosa may be adversely affected by trade policies and practices, including trade practices of competitors that violate U.S. or other foreign laws, regulations, or practices.
Arcosa faces competition from manufacturers both in the U.S. and around the world, some of which may engage in competition and trade practices involving the importation of competing products into the U.S. in violation of U.S. or other foreign laws, regulations, or practices. For example, Arcosa’s competitors import competing products that are subsidized by foreign governments and sold in the U.S. at less than fair value. The results of trade negotiations, trade agreements, and tariffs could also negatively affect Arcosa’s supplies, cost of goods sold, and customers. These trade policies and practices could increase pricing pressure on Arcosa’s products, reduce Arcosa’s revenues and operating profits, limit Arcosa’s ability to grow, and otherwise adversely affect Arcosa’s financial results.
Arcosa’s access to capital may be limited or unavailable due to deterioration of conditions in the global capital markets and/or weakening of macroeconomic conditions.
In general, Arcosa may rely upon banks and capital markets to fund its growth strategy. These markets can experience high levels of volatility and access to capital can be constrained for extended periods of time. In addition to conditions in the capital markets, a number of other factors could cause Arcosa to incur increased borrowing costs and have greater difficulty accessing public and private markets for both secured and unsecured debt, which factors include Arcosa’s financial performance. If Arcosa is unable to secure financing on acceptable terms, Arcosa’s other sources of funds, including available cash, its committed bank facility, and cash flow from operations may not be adequate to fund its operations and contractual commitments and refinance existing debt.
Employment related lawsuits could be brought against us, which could be expensive, time consuming, and result in substantial damages to us.
Arcosa may become subject to substantial and costly litigation by its former and current employees related to improper termination of employment, sexual harassment, hostile work environment, and other employment-related claims. Such claims
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could divert management’s attention from Arcosa’s core business, be expensive to defend, and result in sizable damage awards against Arcosa. Arcosa’s current insurance coverage is limited and may not apply or may not be sufficient to cover these claims. Any employment related claims brought against Arcosa, with or without merit, could harm Arcosa’s reputation in the industry and reduce product sales. Damages assessed against Arcosa could have a material adverse impact on Arcosa’s business, liquidity and financial condition, and operating results.
Arcosa may be required to reduce the value of Arcosa’s long-lived assets, including intangible assets, and/or goodwill, which would weaken Arcosa’s financial results.
Arcosa periodically evaluates for potential impairment the carrying values of Arcosa’s long-lived assets, including intangible assets, to be held and used. The carrying value of a long-lived asset to be held and used is considered impaired when the carrying value is not recoverable through undiscounted future cash flows and the fair value of the asset is less than the 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 commensurate with the estimated cost to dispose of the assets. In addition, 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.
Certain non-cash impairments may result from a change in our strategic goals, business direction, changes in market interest rates, or other factors relating to the overall business environment. Any impairment of the value of goodwill or other intangible assets recorded in connection with previous acquisitions will result in a non-cash charge against earnings, which could have a material adverse effect on our financial condition, results of operations, shareholder’s equity, and/or share price.
Changes in accounting policies or inaccurate estimates or assumptions in the application of accounting policies could adversely affect the reported value of Arcosa’s assets or liabilities and financial results.
Arcosa’s financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The significant accounting policies, together with the other notes that follow, are an integral part of the financial statements. Some of these policies require the use of estimates and assumptions that may affect the reported value of Arcosa’s assets or liabilities and financial results and require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain. Accounting standard setters and those who interpret the accounting standards (such as the Financial Accounting Standards Board, the SEC, and Arcosa’s independent registered public accounting firm) may amend or even reverse their previous interpretations or positions on how these standards should be applied. These changes can be difficult to predict and can materially impact how Arcosa records and reports its financial condition and results of operations. In some cases, Arcosa could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements. For a further discussion of some of Arcosa’s critical accounting policies and standards and recent accounting changes, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates” and Note 1 “Overview and Summary of Significant Accounting Policies” of the Notes to Consolidated and Combined Financial Statements.
Litigated disputes and other claims could increase Arcosa’s costs and weaken Arcosa’s liquidity and financial condition.
Arcosa is currently, and may from time to time be, involved in various claims or legal proceedings arising out of Arcosa’s operations. Adverse judgments and outcomes in some or all of these matters could result in significant losses and costs that could weaken Arcosa’s liquidity and financial condition. Although Arcosa maintains reserves for its probable and reasonably estimable liability, Arcosa’s reserves may be inadequate to cover its portion of claims or final judgments after taking into consideration rights in indemnity and recourse under insurance policies or to third parties as a result of which there could be a material adverse effect on Arcosa’s business, liquidity and financial condition, and results of operations.
The use of social and other digital media (including websites, blogs and newsletters) (i) to disseminate false, misleading and/or unreliable or inaccurate data and information about our Company or (ii) to demonstrate actions which reflect negatively on our Company and/or our employees could create unwarranted volatility in our stock price and losses to our stockholders and could adversely affect our reputation, products, business, and operating results.
Investors may rely on social and other digital media to receive news, data, and information about the Company. Social and other digital media can be used by anyone to publish data and information without regard for factual accuracy. The use of social and other digital media to publish inaccurate, offensive, and disparaging data and information may influence the public’s inability to distinguish what is true and accurate and could obstruct an effective and timely response to correct inaccuracies or falsifications. Such use of social and other digital media could result (i) in unexpected and unsubstantiated claims concerning the Company in general or our products, our leadership, or our reputation among customers and the public at large or (ii) in the demonstration of action which reflects negatively on our Company and/or employees, and potentially having a material adverse effect on our business, liquidity and financial condition, and results of operations.
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Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Arcosa’s corporate headquarters is located in Dallas, Texas. We principally operate in various locations throughout the U.S. and in Mexico. Our facilities are considered to be in good condition, well maintained, and adequate for our purposes. Information about the total square footage of our facilities as of December 31, 2020 is as follows:
Approximate Square Feet(1) Approximate Square Feet Located In(1)
Owned Leased U.S. Non-U.S.
(1) Excludes non-operating facilities.
Our estimated weighted average production capacity utilization for the twelve-month period ended December 31, 2020 is reflected by the following percentages:
Production Capacity Utilized(1)
Construction Products(2) 65 %
Engineered Structures 75 %
Transportation Products 55 %
(1) Excludes non-operating facilities.
(2) Includes processing facilities and quarries.
Mineral Reserves
In our Construction Products segment, Arcosa, through its subsidiaries, operates 42 open pit quarries in 11 states as of December 31, 2020, including 29 that produce and distribute natural aggregates and 13 that produce, process, and distribute specialty materials, all of which we believe have adequate road and/or railroad access. Arcosa estimates proven and probable aggregate reserves based on the results of drill sampling and geological analysis. For a description of quarry locations, products, and customers, please refer to Item 1. “Business-Our Segments-Construction Products.”
Proven reserves are those for which the quantity, grade and quality are computed from dimensions revealed in outcrops, trenches, workings or drill holes. The grade and quality of proven reserves are computed from results of detailed sampling, and the sampling and measurement data are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well established. Probable reserves are those for which the quantity, grade and quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.
The Company's estimated reserves include recoverable material excluding reserves not available due to property boundaries, set-backs, and plant configurations. Estimated reserves include only quantities that are owned in fee or under lease, and for which all appropriate zoning and permitting have been obtained. The Company's reserve estimation processes are consistent across both its aggregates and specialty materials facilities. During the year ended December 31, 2020, no individual quarry or location accounted for more than 5% of Arcosa's consolidated revenues. Substantially all of our materials are internally sourced.
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As of December 31, 2020, the Company estimates its proven and probable reserves as follows:
Owned Leased
(1) Reserve estimates are based on various assumptions and any material inaccuracies in these assumptions could have a material impact on the accuracy of our reserve estimates.
In addition to the natural aggregates and specialty materials facilities included in the table above, we operated 12 recycled aggregates plants which are not dependent on reserves.
Natural aggregates
In 2020, due to a prolonged downturn in oil and gas markets and reduced drilling activity in Texas and Oklahoma, we exited leased and owned properties in the Eagleford, Permian, and STACK basins of these states. These changes resulted in a decline of approximately 40 million tons of estimated reserves. We also lowered our estimate of the future usage of certain leased properties in these basins, which reduced our reserves by an additional 30 million tons.
Additionally, in 2020, we completed the acquisition of Cherry Industries in Houston, Texas. One of Cherry’s primary product lines is stabilized sand, which is a mixture of sand and cement. The reserve life of stabilized sand locations tends to be lower than traditional sand and gravel mines. At the time of acquisition, Cherry’s reserve life was less than ten years, which reduced the average life of reserves in our natural aggregates platform. We plan to strategically invest approximately $5-10 million annually to increase the reserve life of our Cherry platform.
We estimate that our reserves have an average life of over thirty years in our legacy Northern Texas markets.
Production of natural aggregates increased approximately 50% from 2019 to 2020, with the addition of Cherry, several bolt-on acquisitions, and healthy improvement in our legacy businesses, partially offset by weakness in oil and gas markets.
Specialty materials
The reserve life in our specialty materials businesses remained over ninety years. Our current estimates of the future usage of leased reserves reduced our total proven and probable tons, but the average life remains above ninety years.
Production of specialty materials was approximately 16% lower in 2020 than 2019 due to COVID-related softness in our lightweight aggregates and plaster product lines, but the long-term fundamentals for these products remain healthy.
Item 3. Legal Proceedings.
See Note 15 of the Consolidated and Combined Financial Statements regarding legal proceedings.
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-K.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Mattersand Issuer Purchases of Equity Securities.
Shares of our common stock are listed on the New York Stock Exchange under the ticker symbol “ACA,” which began “regular-way” trading on November 1, 2018 immediately following the Separation. Our transfer agent and registrar is American Stock Transfer & Trust Company.
Holders
At December 31, 2020, we had 1,304 record holders of common stock. Because many of our shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these recordholders.
Performance Graph
The following Performance Graph and related information shall not be deemed“soliciting material” or to be “filed” with the SEC, nor shall such information beincorporated by reference into any future filing under the Securities Act of 1933 orSecurities Exchange Act of 1934, each as amended, except to the extent that theCompany specifically incorporates it by reference into such filing.
The following graph compares the Company's cumulative total stockholder return from November 1, 2018 (beginning of “regular-way” trading) through December 31, 2020 with the S&P Small Cap 600 Index and the S&P Small Cap 600 Construction & Engineering Industry Index. The data in the graph assumes $100 was invested in each index at the closing price on November 1, 2018 and assumes the reinvestment of dividends.
Copyright Standard and Poor’s, Inc. Used with permission. All rights reserved.
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Issuer Purchases of Equity Securities
This table provides information with respect to purchases by the Company of shares of its common stock during the quarter ended December 31, 2020:
(1) These columns include the following transactions during the three months ended December 31, 2020: (i) the surrender to the Company of 5,247 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 82,490 shares of common stock on the open market as part of the stock repurchase program.
(2) In December 2020, the Company’s Board of Directors authorized a new $50 million share repurchase program effective January 1, 2021 through December 31, 2022. The new program replaced the previous program which expired on December 31, 2020.
Item 6. Selected Financial Data.
Not Applicable. Financial information related to fiscal years 2017 and 2016 may be found in Part II, Item 6. Selected Financial Data in our fiscal 2019 Form 10-K filed with the SEC on February 27, 2020. Please refer to the Consolidated and Combined Financial Statements included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K.
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Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. Our MD&A is presented in the following sections:
•Company Overview
•Basis of Historical Presentation
•Potential Impact of COVID-19 On Our Business
•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.
Company Overview
Arcosa, Inc. and its consolidated subsidiaries, (“Arcosa,” “Company,” “we,” or “our”) headquartered in Dallas, Texas, is a provider of infrastructure-related products and solutions with leading brands serving construction, engineered structures, and transportation markets in North America. Arcosa is a Delaware corporation and was incorporated in 2018 in connection with the separation (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.
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.
We have renamed our Engineered Structures segment, previously named Energy Equipment, as of December 31, 2020 to better reflect the products delivered. There have been no changes to the businesses that have historically comprised this segment.
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, liquidity and 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
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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 $4.0-5.0 million of incremental costs related to COVID-19 during the year ended December 31, 2020 for personal protective equipment, health screenings, deep cleaning services, and facilities re-configurations. We do not anticipate that the enhanced health and safety protocols will have a material impact on the productivity of our plants.
The preparation of the Company's Consolidated and Combined Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. At this time, we have not observed any material impairments of our assets or a significant change in the fair value of assets due to the COVID-19 pandemic. However, due to the factors discussed above, we are unable to determine or predict the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources.
Market Outlook
•Within our Construction Products segment, 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 other states have reopened for business. However, we did experience a softening of demand for our specialty materials and shoring products businesses following the outbreak that has recently shown signs of improvement but remains below pre-pandemic levels. The outlook for public and private construction activity has improved as expectations for U.S. economic growth have increased following the roll-out of vaccines and associated re-opening of the economy, but the environment continues to be uncertain.Our Construction Products segment has the largest exposure to Texas, where construction demand is expected to be more favorable than national averages.
•Within our Engineered Structures segment, our backlog as of December 31, 2020 provides a healthy level of production visibility for 2021, but at a lower level than at the beginning of 2020. Our customers remain committed to taking delivery of these orders. In utility structures, order and inquiry activity continues to be strong, as customers remain focused on grid hardening and reliability initiatives. We continue to actively work with our wind tower customers on new order inquiries; however, we expect a lower level of wind tower production in 2021 as the wind industry continues to transition from 100% PTC support. In 2021, we will benefit from a full-year of revenues from the newly acquired traffic and telecom structures businesses, where demand conditions are very favorable. Order and inquiry activity in the storage tank business has improved since the onset of COVID-19 after taking a pause initially, as certain customers deferred new tank installations.
•Within our Transportation Products segment, our backlog for inland barges as of December 31, 2020 provides a base level of production visibility for 2021, but at a significantly lower level than we had at the beginning of 2020. Our customers remain committed to taking delivery of these orders. Barge order levels fell sharply in the second and third quarters of 2020, as barge utilization declined from the COVID-19 related economic slowdown. Lower demand for refined products, including gasoline and jet fuel, and low, but increasing, oil prices negatively impacted order quantities for liquid barges in 2020 and inquiries remain very low thus far in 2021. On a more positive note, the underlying fundamentals for a dry barge replacement cycle remain in place, and we received a higher level of orders in the fourth quarter, consistent with pre-pandemic demand. However, a sharp acceleration in steel prices occurring at the end of 2020 has negatively impacted the near-term outlook for hopper demand. We have reduced our capacity in all three barge operating plants to align with lower production levels in 2021, while remaining flexible to allow time for fundamentals to recover. We are evaluating additional cost reduction alternatives and if demand does not improve in the near term, we will take additional actions to reduce our cost structure. Demand for steel components continues to decline as the outlook for the North American rail transportation market, which was softening pre-COVID-19, remains uncertain.
The February 2021 winter storm in Texas and the broader Southern United States will impact our Q1 performance, as we lost more than one week of production across a significant part of our operating footprint. As of the date of this release, we have restored operations in most of our facilities but may experience continuing impacts in our supply chain, particularly for steel mill production that was impacted by the storm.
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Executive Overview
Financial Operations and Highlights
•Revenues for the year ended December 31, 2020 increased 11.4% to $1.9 billion compared to the year ended December 31, 2019 primarily due to the impact of the Cherry acquisition in our Construction Products segment, higher unit volumes in our Engineered Structures segment, and increased hopper barge deliveries in our Transportation Products segment.
•Operating profit for year ended December 31, 2020 of $151.8 million was flat compared to the year ended December 31, 2019 as increased operating profit in the Construction Product and Transportation Products segments were offset by increased costs in the Engineered Structures segment and corporate.
•Selling, general, and administrative expenses increased by 24.3% for the year ended December 31, 2020, when compared to the prior year largely due to additional costs from the acquired Cherry business and other current year acquisitions, as well as increased corporate costs.
•The effective tax rate for the year ended December 31, 2020 was 22.9% compared to 22.8% for the year ended December 31, 2019. See Note 10, “Income Taxes” to the Consolidated and Combined Financial Statements.
•Net income for the year ended December 31, 2020 was $106.6 million compared with $113.3 million for the year ended December 31, 2019.
Unsatisfied Performance Obligations (Backlog)
As of December 31, 2020 and 2019 our backlog of firm orders was as follows:
(in millions)
Engineered Structures:
Utility, wind, and related structures $ 334.0 $ 596.8
Transportation Products:
Substantially all unsatisfied performance obligations in our Engineered Structures segment are expected to be delivered during 2021 with approximately 6.0% of the unsatisfied performance obligations for storage tanks expected to be delivered during 2022. All of the unsatisfied performance obligations for barges in our Transportation Products segment are expected to be delivered during 2021.
Results of Operations
The following discussion of Arcosa’s results of operations should be read in connection with “Forward-Looking Statements” and Item 1A, “Risk Factors”. These items provide additional relevant information regarding the business of Arcosa, its strategy and various industry conditions which have a direct and significant impact on Arcosa’s results of operations, as well as the risks associated with Arcosa’s business.
Overall Summary
Revenues
Year Ended December 31, Percent Change
($ in millions)
2020 versus 2019
•Revenues increased by 11.4% with all segments contributing to the increase.
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•Revenues from our Construction Products segment increased primarily due to the impact of the Cherry acquisition.
•In our Engineered Structures segment, revenues increased primarily driven by higher volumes in utility structures and sales from our acquired traffic and telecom structures businesses.
•Revenues from our Transportation Products segment increased primarily due to higher hopper barge deliveries partially offset by lower tank barge deliveries and decreased deliveries and lower contractual pricing for steel components.
2019 versus 2018
•Revenues increased by 18.9% with all segments contributing to the increase.
•Revenues from our Construction Products segment increased primarily due to the impact of the ACG acquisition.
•In our Engineered Structures segment, revenues increased primarily driven by higher volumes in wind towers and higher pricing levels in utility structures.
•Revenues from our Transportation Products segment increased primarily due to higher tank barge volumes partially offset by lower contractual pricing and decreased volumes in steel components.
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
(in millions)
All Other — — 0.1
2020 versus 2019
•Operating costs increased 12.6%.
•The increase in our Construction Products segment was primarily due to higher volumes from the acquired Cherry business.
•Operating costs for the Engineered Structures segment increased primarily due higher volumes in utility structures and sales from our acquired traffic and telecom structures businesses.
•Operating costs for the Transportation Products segment decreased primarily due to improved operating efficiencies in our barge business.
•Total selling, general, and administrative expenses increased 24.3% largely due to additional costs from the acquired Cherry business and other current year acquisitions, as well as increased corporate costs. As a percentage of revenue, selling, general, and administrative expenses for the year ended December 31, 2020 was 11.5% compared to 10.3% for the year ended December 31, 2019.
2019 versus 2018
•Operating costs increased 16.0%.
•The increase in our Construction Products segment was primarily due to the acquired ACG business as well as increased volumes in our legacy businesses.
•Operating costs for the Engineered Structures segment decreased primarily due to an impairment charge and the elimination of operating losses from divested businesses in 2018, partially offset by higher volumes in 2019.
•Operating costs for the Transportation Products segment increased due to higher 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 December 31, 2019 was 10.3% compared to 10.5% for the year ended December 31, 2018.
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Operating Profit (Loss)
Year Ended December 31, Percent Change
(in millions)
All Other — — (0.1)
Eliminations — — (0.3)
2020 versus 2019
•Operating profit was flat year over year.
•Operating profit in the Construction Products segment increased primarily due to the impact of the acquired Cherry business.
•Operating profit in our Engineered Structures segment decreased due to the temporary idling of a wind tower facility and operational challenges in our utility structures business related to COVID-19.
•Operating profit in our Transportation Products segment increased primarily due to higher hopper barge deliveries and improved operating efficiencies in our barge business.
2019 versus 2018
•Our operating profit increased 61.1%.
•Operating profit in the Construction Products segment increased 4.6% primarily due to higher volumes from the acquired ACG business.
•Operating profit in our Engineered Structures segment increased significantly due to 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 Transportation Products segment decreased 3.3% primarily 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.
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,
(in millions)
Interest income $ (0.4) $ (1.4) $ (0.4)
Foreign currency exchange transactions 3.6 1.5 (0.2)
Other, net (income) expense $ 3.0 $ (0.7) $ (1.0)
2020 versus 2019
•Other, net expense due to foreign currency exchange transactions increased by $2.1 million primarily driven by the volatility in the U.S. dollar to Mexican peso exchange rate throughout 2020. This incremental expense resulted in a foreign income tax benefit, which had a favorable impact on our effective tax rate for the year ended December 31, 2020.
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Income Taxes
The income tax provision for the years ended December 31, 2020, 2019, and 2018 was $31.6 million, $33.5 million, and $19.3 million, respectively. The effective tax rate for the years ended December 31, 2020, 2019, and 2018 was 22.9%, 22.8%, and 20.3%, respectively. The effective tax rates differ from the federal tax rate of 21.0% due to the impact of state income taxes, excess tax benefits related to equity compensation, and the impact of foreign tax benefits.
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. 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 December 31, 2020, the Company has deferred $9.7 million in payroll-related taxes in accordance with the provisions of the CARES Act. We expect to pay $4.9 million during the year ending December 31, 2021, with the remainder to be paid during 2022.
See Note 10 of the Notes to Consolidated and Combined Financial Statements for a further discussion of income taxes.
Segment Discussion
Construction Products
Year Ended December 31, Percent Change
($ in millions)
Revenues:
Operating costs:
Impairment charge 0.8 — —
2020 versus 2019
•Revenues increased 35.0%, driven by the acquisition of Cherry, which increased segment revenues by approximately 40%. This was partially offset by a decrease of 14.4% 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 aggregates and specialty materials businesses, revenues were mostly flat as reduced volumes in plants serving oil and gas markets and from COVID-19 related construction delays were mostly offset by increased aggregates volumes serving other markets.
•Cost of revenues increased 31.4%, primarily due to higher volumes from the acquired Cherry business. As a percent of revenues, cost of revenues decreased to 75.8% compared to 77.8%.
•Selling, general, and administrative expenses increased 52.7% primarily 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 41.7%, outpacing the increase in revenues.
•Depreciation, depletion, and amortization expense increased primarily due to the acquired Cherry business.
2019 versus 2018
•Revenues increased 50.4%, driven by the acquisition of ACG Materials (“ACG”), which increased revenues by approximately 50%. In our legacy aggregates and specialty materials businesses, increased volumes were substantially offset by lower average selling prices, largely in our natural aggregates business in the Dallas-Fort Worth, Texas market area.
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•Cost of revenues increased 61.0%, primarily due to the acquired ACG business as well as increased volumes in our legacy aggregates and specialty materials 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 segment, 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.
Engineered Structures
Year Ended December 31, Percent Change
($ in millions)
Revenues:
Operating costs:
Selling, general, and administrative expenses 74.4 65.3 70.0 13.9 (6.7)
Impairment charge 1.3 — 23.2
2020 versus 2019
•Revenues increased 4.9% driven primarily by higher volumes in utility structures and sales from our acquired traffic and telecom structures businesses, partially offset by lower steel prices in utility structures and reduced volumes and pricing in our wind towers and storage tank businesses. The lower volumes in our wind towers business was partially due to a temporary idling of one of our facilities in the fourth quarter to invest in a planned product changeover.
•Cost of revenues increased 7.6% driven by the acquired traffic and telecom structures businesses, higher volumes in utility structures, product changeover costs in wind towers, and operational challenges in our utility structures business primarily related to COVID-19. This increase was partially offset by lower volumes in our storage tank business.
•Selling, general, and administrative expenses increased 13.9% primarily due to additional costs from acquired businesses.
•Operating profit decreased by 20.4% primarily due to the temporary idling of a wind tower facility and operational challenges in our utility structures business related to COVID-19.
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 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 $6.1 million finished goods inventory write-off 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 $2.9 million recovery of bad debt related to a single customer in our utility structures business.
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Unsatisfied Performance Obligations (Backlog)
As of December 31, 2020, the backlog for utility, wind, and related structures was $334.0 million compared to $596.8 million as of December 31, 2019. Substantially all of our utility, wind, and related structures backlog is expected to be delivered during the year ending December 31, 2021. Future wind tower orders are subject to uncertainty as PTC eligibility for new wind farm projects is currently in a phase-out period that extends until 2025. Pricing of orders and individual order quantities reflect a market transitioning from PTC incentives. As of December 31, 2020, the backlog for our storage tanks in our Engineered Structures segment was $15.6 million, 94.0% of which is expected to be delivered during the year ending December 31, 2021.
Transportation Products
Year Ended December 31, Percent Change
($ in millions)
Revenues:
Operating costs:
Selling, general, and administrative expenses 22.6 22.1 22.5 2.3 (1.8)
Impairment charge 5.0 — —
2020 versus 2019
•Revenues were substantially unchanged as higher barge revenues, driven by increased hopper deliveries, were offset by lower steel components revenues due to decreased deliveries and lower contractual pricing.
•Cost of revenues decreased by 3.2%, primarily due to lower steel component volumes and the elimination of $4.0 million of start-up costs incurred in the prior year related to the re-opening of a previously idled barge manufacturing plant. This was partially offset by higher hopper barge volumes. As a percentage of revenues, cost of revenues decreased to 82.4% compared to 85.2% in the prior year period primarily due to improved operating efficiencies in our barge business.
•Selling, general, and administrative expenses were substantially unchanged.
•The segment was negatively impacted by a $5.0 million non-cash impairment charge primarily related to unusable non-operating assets that were scrapped from a barge business acquired in 2018.
•Operating profit increased by 16.7%, outpacing the increase in revenues.
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.
•Cost of revenues increased 23.8%, driven by higher tank barge volumes, partially offset by lower steel component volumes. Cost of revenues also increased $2.6 million due to start-up costs related to the re-opening of a previously idled barge manufacturing facility, which began delivering barges in the third quarter of 2019.
•Selling, general, and administrative expenses were substantially unchanged.
Unsatisfied Performance Obligations (Backlog)
As of December 31, 2020, the backlog for inland barges was $175.5 million compared to $346.9 million as of December 31, 2019. All of the backlog for inland barges is expected to be delivered during the year ending December 31, 2021.
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Corporate
Year Ended December 31, Percent Change
($ in millions)
2020 versus 2019
•Corporate overhead costs increased 22.0% primarily due to higher acquisition-related transaction and integration costs of $4.6 million as well as a non-recurring increase in legal expenses of $2.5 million incurred during the third quarter of 2020.
2019 versus 2018
•Corporate overhead costs increased 47.4% 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.
•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.
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 each of the last three years:
Year Ended December 31,
(in millions)
Total cash provided by (required by):
Net increase (decrease) in cash and cash equivalents $ (144.6) $ 141.0 $ 92.6
2020 versus 2019
Operating Activities. Net cash provided by operating activities for the year ended December 31, 2020 was $259.9 million compared to $358.8 million for the year ended December 31, 2019.
•The changes in current assets and liabilities resulted in a net source of cash of $3.8 million for the year ended December 31, 2020 compared to a net source of cash of $132.6 million for the year ended December 31, 2019. The decrease was primarily driven by increased receivables in the current year compared to decreased receivables in the prior year.
Investing Activities. Net cash required by investing activities for the year ended December 31, 2020 was $528.2 million compared to $109.4 million for the year ended December 31, 2019.
•Capital expenditures for the year ended December 31, 2020 were $82.1 million compared to $85.4 million for the year ended December 31, 2019.
•Proceeds from the sale of property, plant, and equipment and other assets totaled $9.6 million for the year ended December 31, 2020 compared to $8.9 million for the year ended December 31, 2019.
•Cash paid for acquisitions, net of cash acquired, was $455.7 million for the year ended December 31, 2020 compared to $32.9 million for the year ended December 31, 2019.
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Financing Activities. Net cash provided by financing activities for the year ended December 31, 2020 was $123.7 million compared to $108.4 million of net cash required by financing activities for the same period in 2019.
•During the year ended December 31, 2020, the Company received proceeds from the issuance of the $150 million term loan, as well as from the precautionary advance under the Company's revolving credit facility of $100 million that was borrowed and repaid during the year. During the year ended December 31, 2019, the Company had repayments of advances under the Company's revolving credit facility of $80 million.
•Dividends paid during the year ended December 31, 2020 were $9.8 million.
•The Company paid $8.0 million during the year ended December 31, 2020 to repurchase common stock under the share repurchase program in effect at the time compared to $11.0 million paid during the year ended December 31, 2019.
2019 versus 2018
Operating Activities. Net cash provided by operating activities for the year ended December 31, 2019 was $358.8 million compared to $118.5 million for the year ended December 31, 2018.
•The increase in cash flow provided by operating activities was primarily driven by increased earnings for the year ended December 31, 2019 and changes in current assets and liabilities.
•The changes in current assets and liabilities resulted in a net source of cash of $132.6 million for the year ended December 31, 2019 compared to a net use of cash of $80.8 million for the year ended December 31, 2018. The increase was primarily driven by a reduction in receivables and increase in advance billings for our Engineered Structures and Transportation Products segments.
Investing Activities. Net cash required by investing activities for the year ended December 31, 2019 was $109.4 million compared to $364.5 million for the year ended December 31, 2018.
•Capital expenditures for the year ended December 31, 2019 were $85.4 million compared to $44.8 million for the year ended December 31, 2018.
•Proceeds from the sale of property, plant, and equipment and other assets totaled $8.9 million for the year ended December 31, 2019 compared to $10.2 million for the year ended December 31, 2018.
•Cash paid for acquisitions, net of cash acquired, was $32.9 million for the year ended December 31, 2019 compared to $333.2 million during for the year ended December 31, 2018.
Financing Activities. Net cash required by financing activities during the year ended December 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 ended December 31, 2019, the Company had repayments of advances under the Company's revolving credit facility of $80 million. During the year ended December 31, 2018, the Company had borrowings under the revolving credit facility of $180 million.
•Dividends paid during the year ended December 31, 2019 were $9.9 million.
•The Company paid $11.0 million during the year ended December 31, 2019 to repurchase common stock under the share repurchase program in effect at the time compared to $3.0 million paid during the year ended December 31, 2018.
Other Investing and Financing Activities
Revolving Credit Facility
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 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 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 December 31, 2020. The commitment fee rate ranges from 0.20% to 0.35% and was set at 0.20% at December 31, 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 December 31, 2020, we had $100.0 million of outstanding loans borrowed under the facility and there were approximately $28.6 million in letters of credit issued, leaving $371.4 million available for borrowing.
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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 December 31, 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.
Repurchase Program
In December 2020, the Company’s Board of Directors authorized a new $50 million share repurchase program effective January 1, 2021 through December 31, 2022. The new program replaced the previous program which expired on December 31, 2020. Under the previous program, the Company repurchased 184,772 shares at a cost of $8.0 million during the year ended December 31, 2020. See Note 1 of the Notes to Consolidated and Combined Financial Statements.
Off-Balance Sheet Arrangements
As of December 31, 2020, we had letters of credit issued under our revolving credit facility in an aggregate principal amount of $28.6 million, of which $26.1 million are expected to expire in 2021, with the remainder in 2022. The majority of our letters of credit obligations support the Company’s various insurance programs and generally renew by their terms each year. See Note 7 of the Notes to Consolidated and Combined Financial Statements.
Derivative Instruments
In December 2018, the Company entered into an interest rate swap instrument, effective as of January 2, 2019 and expiring in 2023, to reduce the effect of changes in the variable interest rates associated with borrowings under the revolving credit facility. The instrument carried an initial notional amount of $100.0 million, thereby hedging the first $100.0 million of borrowings under the credit facility. The instrument effectively fixes the LIBOR component of the credit facility borrowings at a monthly rate of 2.71%. As of December 31, 2020, the Company has recorded a liability of $7.3 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 2020, we sponsored an employee savings plan under the 401(k) plan that covered substantially all employees and included a company matching contribution 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 December 31, 2020, we had the following contractual obligations and commercial commitments:
Payments Due by Period
(in millions)
Obligations for purchase of goods and services 179.7 160.4 18.9 0.4 —
See Note 15 of the Notes to Consolidated and Combined Financial Statements.
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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 based on historical experience and 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.
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
The Construction Products segment recognizes substantially all revenue when the customer has accepted the product and legal title of the product has passed to the customer.
Engineered Structures
Within the Engineered Structures segment, revenue is recognized for our wind tower, 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
The Transportation Products segment 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 assessed at the “reporting unit” level by comparing the reporting unit's estimated fair value with the carrying amount of its net assets. If the carrying value of the reporting unit exceeds its fair value, an impairment loss is recognized. The goodwill impairment is measured as the excess of the reporting unit's carrying value over its fair value, not to exceed the amount of goodwill allocated to the reporting unit. The estimates and judgments that most significantly affect the fair value calculations are assumptions,
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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 of December 31, 2020, 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 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.
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.
At December 31, 2020, the Company had $20.8 million federal consolidated net operating loss carryforwards, primarily from businesses acquired, and $0.9 million of tax-effected state loss carryforwards remaining. In addition, the Company had $52.5 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.
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