Astec Industries, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Astec manufactures equipment and replacement parts serving road construction, aggregate and mining, underground construction, energy and related markets. Financial statement amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $227.0 | $214.6 | $747.6 | $692.6 |
| Gross profit / margin | $49.4 / 21.8% | $46.4 / 21.6% | $166.3 / 22.2% | $163.1 / 23.5% |
| Operating income | $9.4 | $9.0 | $44.1 | $45.3 |
| Net income attributable to controlling interest | $6.9 | $7.7 | $29.5 | $32.0 |
| Diluted EPS | $0.30 | $0.34 | $1.28 | $1.39 |
- Cash flow: Nine-month operating cash flow was negative $6.2 million versus negative $4.9 million a year earlier. Investing cash outflow was $16.7 million, including $17.3 million of property and equipment expenditures. Financing cash flow was positive $0.8 million. Cash declined $21.9 million from year-end to $35.6 million.
- Liquidity and debt: Current assets were $512.1 million and current liabilities $153.4 million at September 30. No borrowings were outstanding under the $100 million revolving facility; after $14.6 million of letters of credit, $85.4 million remained available. The company reported compliance with facility covenants.
- Balance sheet: Total assets were $747.4 million, total liabilities $186.8 million and total equity $560.6 million. Inventory was $341.0 million, up $41.9 million from December 31, 2011.
- Backlog: $240.5 million at September 30, up 3.6% from $232.1 million a year earlier.
Changes versus comparable periods
- Q3 sales rose 5.8%; nine-month sales rose 7.9%. GEFCO, acquired in late 2011, contributed $12.5 million of Q3 sales and $35.6 million year to date. Aggregate and Mining and Other also grew, while Asphalt and Mobile Asphalt Paving declined.
- Despite higher sales, controlling-interest net income fell 11.3% in Q3 and 7.8% year to date. Higher income tax rates contributed to the decline; year-to-date gross margin fell 130 basis points.
- Management attributed margin pressure to Tier 4 engine redesign and production costs, raw-material costs running ahead of pricing on older backlog, and competitive pricing. Mobile Asphalt Paving segment profit fell sharply; Aggregate and Mining profit increased.
- Domestic sales increased 9.6% in Q3 and 11.6% year to date. International sales were nearly flat in Q3 and increased 2.5% year to date.
Outlook, commentary and risks
- Management forecast 2012 capital expenditures of $27.8 million, excluding the Brazilian joint venture, and stated that cash, future operating cash flows and available credit should cover working capital and capital expenditure needs through September 30, 2013. This is not an earnings forecast.
- Astec Brazil had received an initial $5 million of an expected $12 million investment; the planned manufacturing facility was expected to cost approximately $20 million. The subsidiary had limited revenue and start-up costs to date.
- MAP-21, enacted in July 2012, authorized federal highway and public transportation spending through fiscal 2014 at 2012 levels with modest inflation increases. Management said longer-term funding would better support customer planning; future funding remains uncertain.
- Other cited risks include economic cyclicality, public infrastructure spending, oil and steel prices, interest rates, currency movements, competition and customer purchasing decisions. Management expects steel prices to remain steady or decline slightly late in 2012, with modest increases possible in early 2013.
- Subsequent events: On October 31, Astec agreed to sell American Augers and certain Trencor assets for approximately $55 million cash, subject to closing adjustments; closing was expected before year-end. The assets had September 30 net book value of approximately $47.9 million and generated $41.9 million of nine-month sales. On November 1, the board approved a one-time $1.00-per-share dividend, payable December 12 to holders of record November 20.
- Contingencies: Maximum potential payments under customer financing guarantees, letters of credit and related guarantees were stated as $18.8 million. The company also disclosed ordinary-course claims and an unresolved EPA cleanup matter for which it could not estimate a potential liability; management did not expect current litigation to materially affect results, while noting adverse outcomes remain possible.
- The company reported no material changes to previously disclosed risk factors or market-risk disclosures, and management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the American Augers and Trencor sale closed, the final proceeds after adjustments, and the resulting business mix and earnings impact.
- The cash and liquidity effect of the $1.00-per-share special dividend and planned capital expenditures, including the Brazilian project.
- Whether operating cash flow improves as inventory and working-capital investment normalize.
- Whether sales growth and backlog convert to profitable orders, particularly amid Tier 4 costs and pressure in Asphalt and Mobile Asphalt Paving.
- Whether federal research and development tax credits are extended and how tax rates affect subsequent results.
- Developments in contingent guarantees, legal claims and the EPA cleanup matter.