Astec Industries, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Astec designs and manufactures equipment for road building, construction, aggregates, mining, and related markets. Its reportable segments are Infrastructure Solutions and Materials Solutions.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $318.2 million | $277.6 million | $609.4 million | $562.0 million |
| Gross profit | $60.6 million | $66.1 million | $126.7 million | $134.3 million |
| Gross margin | 19.0% | 23.8% | 20.8% | 23.9% |
| Operating income (loss) | $(4.0) million | $10.3 million | $1.4 million | $19.8 million |
| Net income (loss) | $(3.9) million | $8.3 million | $0.2 million | $16.8 million |
| Diluted EPS | $(0.17) | $0.36 | $0.01 | $0.73 |
- Q2 sales rose 14.6% year over year, while gross profit fell 8.3%. Management attributed the margin decline mainly to $34.3 million of inflation in materials, labor, and overhead, plus manufacturing inefficiencies; favorable volume, pricing, and mix offset $29.1 million of the pressure.
- For the first half, sales increased 8.4%, but gross profit decreased 5.7%. Inflation contributed $59.8 million of cost pressure, partly offset by $52.8 million of favorable volume, pricing, and mix.
- Segment Operating Adjusted EBITDA, a non-GAAP measure, was $13.1 million in Q2 versus $20.5 million a year earlier; first-half EBITDA was $31.9 million versus $41.4 million. Q2 Materials Solutions EBITDA fell to $9.5 million from $15.9 million.
- First-half operating cash flow was negative $41.9 million, versus positive $30.5 million in the prior-year period. The largest stated use was a $71.5 million inventory increase, associated with higher backlog and supply constraints. Investing cash outflow was $36.9 million, including $17.8 million for acquisitions and $18.8 million of capital expenditures.
- Cash, cash equivalents, and restricted cash totaled $50.6 million at June 30, down from $134.4 million at year-end 2021. Cash available for operations was $48.0 million; $27.4 million was held by foreign subsidiaries and considered indefinitely invested abroad.
- Total debt was approximately $6.1 million, including $5.8 million of short-term debt. No borrowings were outstanding on the $150 million revolving credit facility; $147.4 million remained available after letters of credit. The company reported covenant compliance.
- At June 30, current assets were $661.5 million and current liabilities were $273.4 million. Inventory was $371.1 million, up from $298.7 million at year-end.
Material changes and notable items
- Backlog reached $837.4 million, up 92.0% from $436.1 million at June 30, 2021. Domestic backlog was $705.1 million and international backlog was $132.3 million. Management cited pent-up demand, dealer and customer inventory replenishment, longer lead times, and U.S. infrastructure investment. Production constraints may delay fulfilling orders.
- Domestic Q2 sales increased 23.3% to $248.4 million; international sales declined 8.4% to $69.8 million. For the first half, domestic sales rose 13.1%, while international sales fell 6.3%.
- Astec acquired MINDS Automation Group for $19.3 million in cash in April 2022. The acquisition added automation and data-management products; its contribution to reported sales through June was $1.2 million.
- Q2 restructuring, impairment, and other asset charges were $3.4 million, including $3.0 million of impairments: $2.1 million for unrecoverable prepaid manufacturing equipment and $0.9 million for abandoned internal software. First-half charges were $4.4 million.
- First-half SFG transformation costs were $11.7 million, recorded in SG&A. Astec estimated total ERP implementation costs of $125–$150 million, with $25–$30 million expected annually beginning in 2022. It expected to complete global ERP design in 2022 and convert one site in 2023. The company had capitalized $6.8 million of deferred ERP implementation costs at June 30.
- Astec revised 2021 comparative financial statements for errors involving work-in-process inventory and over-time revenue calculations, which management judged immaterial to prior-period statements. For Q2 2021, the revision reduced reported net income by $0.7 million to $8.3 million.
Outlook, risks, and contingencies
- Management said current working capital, expected operating cash flows, and available credit capacity should cover working capital and capital expenditure needs for at least 12 months. It anticipated more frequent near-term use of the revolver to support domestic working capital.
- Estimated 2022 capital expenditures were $40–$50 million. Open purchase obligations totaled $405.3 million, with $351.3 million expected to be fulfilled in the remainder of 2022.
- Management described ongoing exposure to inflation, steel and oil price volatility, supply-chain and logistics disruptions, production labor shortages, and limits on passing higher costs to customers. It also cited uncertainty from COVID-19 and the conflict in Ukraine. No specific full-year revenue or earnings guidance was provided in the filing text.
- Contingencies include customer-financing guarantees and letters of credit. A shareholder class action was remanded for further proceedings after an appellate court reversed dismissal as to the company and one former executive. A separate GEFCO-related lawsuit seeks rescission and damages; the company said it could not estimate a possible loss. Management said current legal matters were not expected to have a material adverse effect, but acknowledged unfavorable outcomes could be material.
- The company was under IRS audit for the 2018 tax year and subject to other tax audits; it reported $11.1 million of unrecognized tax-position liabilities. Management did not expect a significant change in those benefits over the next 12 months.
Key facts for investors to verify
- Whether the large backlog can be converted to revenue on schedule despite supply, labor, and logistics constraints—and whether margins recover as pricing catches up with cost inflation.
- Inventory levels, operating cash flow, and use of short-term borrowing as backlog is fulfilled.
- Actual ERP spending and implementation milestones versus the $125–$150 million estimated total cost.
- Integration results from MINDS and progress of the lean-manufacturing and broader SFG initiatives.
- Developments in the remanded securities lawsuit, the GEFCO litigation, tax audits, and other guarantees or contingencies.
- Effects of the disclosed prior-period corrections and the company’s remediation of underlying inventory and revenue-recognition processes; the filing reports disclosure controls were effective at June 30, 2022.