Business context and reporting period
Astec Industries, Inc. manufactures equipment and parts for road building, aggregate and mining, underground construction, and related markets. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods unless noted. Results are seasonal, with historically 52%–55% of annual revenue in the first half.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $247.8 million | $209.2 million | $477.9 million | $402.7 million |
| Gross profit / margin | $62.0 million / 25.0% | $46.7 million / 22.3% | $116.7 million / 24.4% | $92.8 million / 23.0% |
| Income from operations | $21.0 million | $15.9 million | $36.2 million | $29.3 million |
| Net income attributable to controlling interest | $14.1 million | $10.3 million | $24.2 million | $19.1 million |
| Diluted EPS | $0.61 | $0.45 | $1.06 | $0.84 |
Q2 sales rose 18.4% and controlling-interest net income rose 36.7%; first-half sales rose 18.7% and net income rose 26.7%. Higher production volumes improved manufacturing overhead absorption and gross margins. SG&A and engineering expense increased 25.8% in Q2 and 23.2% in the first half, exceeding sales growth; Q2 expense included higher payroll, R&D, professional fees, insurance, commissions and bad-debt expense.
International sales grew 35.5% in Q2 and 32.7% in the first half, compared with domestic growth of 7.8% and 10.9%, respectively. Aggregate and Mining was the largest Q2 segment by sales and delivered strong profit growth. Underground sales grew sharply, largely internationally, but the segment remained loss-making for the first half. Asphalt Group first-half segment profit declined 2.2%; Other Group losses increased.
Cash flow, balance sheet and liquidity
Operating cash flow was a use of $3.1 million in the first half of 2011, versus $45.1 million provided in the prior-year period. The main cash uses were increases in inventory ($30.2 million) and receivables ($24.3 million), which management attributed to higher production and sales activity. Investing activities used $18.5 million, including $18.7 million of property and equipment expenditures. Cash declined $21.1 million to $73.5 million.
At June 30, 2011, total assets were $691.2 million, current assets $482.7 million and current liabilities $141.8 million. The company reported no borrowings under its credit facilities. Its $100 million Wells Fargo revolving facility, maturing May 2012, had $89.96 million available after $10.04 million of letters of credit; the company reported covenant compliance. Total investments were $11.1 million. Current assets exceeded current liabilities by $341.0 million.
Capital expenditures were forecast at $29.4 million for 2011, funded from cash, internally generated funds and available credit. No dividend or other debt balance is reported in the supplied filing text.
Outlook, risks and unusual items
- Backlog was $217.1 million at June 30, up 55.4% year over year, with 56.1% international orders. The filing does not provide specific full-year revenue or earnings guidance; management cautions that interim results are not necessarily indicative of full-year results.
- Management cited improving domestic and international conditions and efforts to expand overseas sales. It also noted uncertainty around federal highway funding after the current funding resolution expires September 30, 2011, as well as sensitivity to infrastructure spending, customer confidence, interest rates, oil and steel prices, currency movements and competition.
- Steel prices rose during the first half, then stabilized near quarter-end; management expected relative stability in Q3 but warned that cost increases may not be fully recoverable through product pricing. Oil-price volatility and any resulting effect on asphalt demand are also risks.
- A $2.17 million impairment charge was recorded in Q2 for aircraft held for sale; the aircraft’s reported fair value was $0.934 million. Foreign-currency derivatives generated a $0.891 million loss in the first half, recorded in cost of sales.
- In August 2011, Astec agreed to acquire substantially all assets and assume certain liabilities of Blue Tee’s GEFCO and STECO divisions. The transaction was expected to close in Q4 2011 for approximately $26 million, subject to adjustment, and was expected to be funded from cash. Their 2011 revenue and income were not expected to be material.
- Contingencies include customer financing guarantees of $3.20 million, with a $0.324 million recorded liability, and letters of credit and guarantees with maximum potential payments of $14.61 million. The EPA air-permitting matter had an expected expense below $0.225 million and was accrued; the outcome and potential amount of a separate Oregon enforcement action and an older Illinois cleanup matter could not be estimated. Management did not expect ordinary-course claims to have a material adverse effect, while acknowledging litigation uncertainty.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to previously disclosed market risks or risk factors were reported.
Important facts for investors to verify
- Whether the substantial backlog converts to sales and cash on expected schedules, particularly given transportation-funding uncertainty and the international share of orders.
- Whether receivables and inventory growth, which drove negative first-half operating cash flow, normalize as production and shipments progress.
- Whether higher sales and manufacturing utilization can offset rising SG&A, steel and other input costs, and whether margins remain sustainable.
- Progress and final consideration for the Blue Tee acquisition, including its funding from cash and any post-close liabilities or integration effects.
- Renewal or replacement of the Wells Fargo facility before its May 2012 maturity, and developments in guarantees, environmental matters and other contingencies.