Astec Industries, Inc. — Q1 2018 Form 10-Q
Business context and period. This unaudited filing covers the three months ended March 31, 2018, compared with Q1 2017. Astec manufactures equipment and parts for infrastructure, aggregate and mining, and energy markets. Unless noted otherwise, dollar amounts below are in millions.
Financial performance
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Net sales | $325.5 | $318.4 |
| Gross profit / margin | $78.0 / 24.0% | $75.8 / 23.8% |
| Operating income / margin | $25.9 / 8.0% | $22.7 / 7.1% |
| Net income attributable to controlling interest | $20.3 | $15.1 |
| Diluted EPS | $0.87 | $0.65 |
| Operating cash flow | $(12.3) | $(14.7) |
| Cash and cash equivalents, March 31 | $41.9 | $62.3 at December 31, 2017 |
| Total debt, March 31 | $3.4 | $4.0 at December 31, 2017 |
Revenue rose 2.2%; controlling-interest net income increased 34.0%. The effective tax rate declined to 23.0% from 34.1%, primarily reflecting the Tax Act; management expects an approximately 24.5% tax rate for 2018 after accounting for favorable first-quarter discrete items. Dividend declared remained $0.10 per share.
Operating cash use improved year over year, but receivables and inventory absorbed cash. Capital expenditures were $5.0 million; investing cash use was $5.3 million. Cash declined $20.3 million during the quarter. Current assets were $632.2 million and current liabilities $186.4 million at March 31.
Material changes and operating trends
- By segment: Infrastructure sales fell 11.0% to $147.1 million, mainly because pellet-plant revenue declined $12.0 million and international sales weakened. Aggregate and Mining sales rose 18.3% to $119.1 million; Energy sales rose 12.8% to $59.3 million. The Energy Group included RexCon, acquired in October 2017.
- Domestic sales grew 6.5% to $270.1 million, while international sales fell 14.7% to $55.4 million. Parts sales increased 8.8% to $88.1 million.
- Gross margin improved 0.2 percentage points. SG&A and engineering expense fell to $52.1 million, or 16.0% of sales, from $53.1 million, or 16.7%.
- Backlog increased 17.8% year over year to $444.9 million: domestic backlog rose 11.6% and international backlog 44.5%. About $60 million relates to a customer-financed three-line pellet plant, with revenue expected when payment is assured, currently anticipated in December 2018.
Liquidity, outlook, risks and unusual items
- The company had no borrowings under its $100 million revolving facility and $90.6 million of availability after letters of credit at March 31. It reported compliance with financial covenants. Brazilian subsidiaries had $3.4 million of outstanding loans; stated consolidated current and long-term debt was $2.1 million and $1.4 million, respectively.
- Management forecasts approximately $35 million of 2018 capital expenditures and believes cash, future operating cash flows and available credit will meet working-capital and capital-expenditure needs through May 2019.
- Management cited the FAST Act and improving order activity as supportive of domestic demand, while noting uncertainty around public infrastructure funding, economic cycles, customer confidence, interest rates, oil prices, foreign exchange and international markets. Steel prices rose substantially in Q1; management expects elevated prices at least until seasonal demand declines in the second half of 2018 and uses forward contracts and advance purchases to mitigate increases.
- Pellet-plant contingency: A major plant had not met specified production and operating standards. Astec amended the contract to compensate for shortfalls and other potential costs through June 15, 2018; penalties were incurred in Q1 and further penalties were expected in Q2. Customer acceptance depends on a 30-day test, and the deadline could be extended 120–180 days, potentially exposing Astec to additional damages. Management said it expected to meet the specifications before the deadline or any extension.
- Astec was contingently liable for $3.4 million of customer-financing guarantees and had recorded a $1.0 million related liability. Letters of credit and foreign guarantees carried maximum potential payments of $15.6 million. Management did not expect ordinary-course litigation to have a material adverse effect, but noted litigation outcomes are inherently uncertain.
- The Tax Act transition-tax amount remained provisional; the company expected to complete its analysis in Q4 2018. Adoption of the new revenue-recognition standard had no material impact. Management reported no material changes in risk factors or market-risk disclosures.
Investor verification priorities
- Track whether the pellet plant meets its performance test, the timing of acceptance, and any additional penalties, damages or deadline extensions.
- Verify financing and payment certainty for the approximately $60 million backlog pellet-plant order and its expected December 2018 revenue recognition.
- Monitor working-capital demands, particularly receivables and inventory, and whether operating cash flow improves as backlog converts to sales.
- Assess whether steel-cost inflation, pricing actions and the international-sales recovery affect margins and results.
- Follow the final Tax Act transition-tax determination, the expected 2018 tax rate, and use of the revolving facility against planned capital spending.