Astec Industries, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; filed May 10, 2012. The unaudited interim results are not necessarily indicative of full-year results. Astec manufactures equipment for road building, aggregate and mining, underground construction, and related markets.
Financial performance
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Net sales | $266.6 million | $230.2 million; up 15.8% |
| Gross profit / margin | $60.6 million / 22.7% | $54.7 million / 23.8% |
| Operating income | $18.8 million | $15.2 million |
| Net income attributable to controlling interest | $12.2 million | $10.1 million; up 20.7% |
| Diluted EPS | $0.53 | $0.44 |
| Effective tax rate | 37.3% | 34.8% |
| Operating cash flow | $(11.5) million | $(10.4) million |
| Cash and cash equivalents | $41.6 million at March 31 | $57.5 million at December 31, 2011 |
| Total assets / total liabilities | $725.7 million / $182.6 million | At March 31, 2012 |
Net cash used in investing activities was $4.9 million, principally reflecting $5.4 million of capital expenditures. Cash declined $15.9 million during the quarter. Working-capital uses included higher receivables and inventories, lower customer deposits, and warranty and other liability payments. The filing reports no outstanding Wells Fargo borrowings at quarter-end; $13.5 million of letters of credit left $86.5 million available under the then-existing $100 million facility. A replacement five-year $100 million revolving facility was signed April 12, 2012, with a $25 million letter-of-credit sublimit.
Changes and operating drivers
- Sales growth reflected stronger domestic and international activity, expanded parts sales, and $13.8 million of sales from GEFCO and Astec Mobile Machinery GmbH, acquired in 2011. Parts sales rose 32.6% to $76.0 million and increased to 28.5% of sales.
- International sales increased 27.3% to $105.2 million, or 39.5% of sales; domestic sales rose 9.4% to $161.4 million.
- Gross margin fell 110 basis points. Management cited Tier 4 engine redesign and production costs, costs of newly introduced products, and selling-price increases lagging raw-material increases on older orders.
- Segment sales varied: Aggregate and Mining rose 15.8%; Underground rose 214.8%, substantially reflecting GEFCO and $7.6 million of utility product-line sales recorded with zero margins; Asphalt declined 6.9%; Mobile Asphalt Paving declined 15.9%. Other Group sales rose 75.1%, driven mainly by international sales.
- Backlog was $285.6 million, up 7.9% year over year, with domestic backlog growth more than offsetting a decline in international backlog.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance is provided. Management expects cash, operating cash flows, and available credit to meet working-capital and capital-expenditure needs through March 31, 2013.
- 2012 capital expenditures, excluding the Brazilian joint venture, are forecast at $37.4 million. Astec expects to invest $12 million in its 75%-owned Brazilian joint venture; the planned facility is expected to cost about $20 million, with plant and equipment financing expected from a local bank.
- Management notes that federal transportation funding remains uncertain: a short-term extension funded programs through June 30, 2012, while a multi-year highway funding bill had not been secured. Demand is sensitive to infrastructure spending, economic conditions, interest rates, oil and steel prices, and currency movements. Steel prices rose modestly in Q1; management expected them to level off or decrease slightly through Q3.
- Quarterly seasonality is significant: historically 24%–28% of annual revenue occurs in Q1. Management also cited Tier 4 transition costs and competitive pricing pressure as operating concerns.
- Unusual/other items include $427,000 of license-fee income, which drove much of the increase in other income; the Q1 2012 tax rate did not include research-and-development tax-credit benefits because extension legislation had not been enacted. The 2011 rate included such benefits.
- Potential obligations include customer financing guarantees of $3.6 million, for which $312,000 was accrued, and letters of credit and subsidiary guarantees with maximum potential payments of $17.5 million. The company also described ordinary-course claims and an unresolved EPA cleanup matter related to pre-1986 activities; no liability was recorded for the EPA matter because the amount could not be estimated. Management said current claims were not expected to materially affect the company, while noting unfavorable outcomes remain possible.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material change in risk factors from its 2011 Form 10-K.
Most important facts for investors to verify
- Whether sales and backlog convert to profitable shipments, given lower consolidated gross margin and uneven segment results.
- Whether negative operating cash flow and inventory/receivables growth improve as production and sales progress.
- Whether the planned $37.4 million of capital spending and $12 million Brazilian investment are funded as expected without materially weakening liquidity.
- Terms and covenant compliance under the April 2012 credit agreement, including borrowing availability after letters of credit.
- Exposure to transportation-funding uncertainty, Tier 4 costs, input-price changes, and the disclosed guarantees, legal claims, and unquantified EPA matter.