Astec Industries, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. Astec designs and manufactures equipment and components primarily for road building and related construction, operating through Infrastructure Solutions and Materials Solutions.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $350.0m | $318.2m | $697.9m | $609.4m |
| Gross profit / margin | $82.9m / 23.7% | $62.9m / 19.8% | $172.1m / 24.7% | $127.6m / 20.9% |
| Operating income (loss) | $17.3m | $(1.7)m | $34.9m | $2.3m |
| Net income (loss) attributable to controlling interest | $13.1m | $(3.9)m | $25.2m | $0.2m |
| Diluted EPS | $0.58 | $(0.17) | $1.11 | $0.01 |
Q2 operating margin was approximately 4.9%, versus a loss margin of approximately 0.5% a year earlier. For the first half, operating margin was approximately 5.0%, versus approximately 0.4%. Segment Operating Adjusted EBITDA, a non-GAAP measure, was $32.7m in Q2 versus $13.1m, and $68.5m for the first half versus $31.9m.
Cash flow: First-half operating cash use was $2.5m, improved from $41.9m used in 2022. Investing activities provided $2.6m, compared with $36.9m used, largely reflecting the $19.9m Tacoma property sale and the prior-year MINDS acquisition. Financing activities used $22.0m. Cash, cash equivalents and restricted cash ended at $44.5m, down $21.5m from year-end 2022.
Liquidity and debt: Management reported $226.8m of total liquidity at June 30: $41.4m of cash available for operating purposes and $185.4m of additional revolving-credit availability. The company had $62.0m outstanding under its credit facilities, plus $11.6m of short-term debt and $0.1m of current maturities on the balance sheet. It was in compliance with credit-facility covenants. The $250m revolving facility matures in December 2027.
Other balance-sheet measures: Total assets were $1,010.4m; current assets were $675.9m and current liabilities $264.1m. Inventory increased to $429.5m from $393.4m at December 31, 2022. Customer deposits declined to $57.7m from $69.5m.
Material changes versus prior comparable period
- Q2 sales rose 10.0%; first-half sales rose 14.5%. Domestic sales drove most of the first-half increase, while Q2 international sales declined 8.9%.
- Materials Solutions sales increased 21.2% in Q2 and 21.4% for the first half; Infrastructure Solutions sales increased 4.1% and 10.0%, respectively.
- Gross margin improved as favorable volume, pricing and mix outweighed inflation and manufacturing inefficiencies. Management cited higher warranty costs and unfavorable inventory adjustments among the inefficiencies.
- Backlog fell 17.7% year over year to $688.8m, as deliveries outpaced new orders, compared with backlog growth during 2022.
- First-half interest expense increased to $4.0m from $1.0m, primarily due to revolving-credit borrowings; management expects 2023 interest expense to be significantly higher than in prior years.
Outlook, commentary, risks and unusual items
- Outlook: No explicit revenue or earnings guidance is provided. Management expects backlog to normalize as supply chains stabilize and says capacity expansion should improve conversion of backlog to sales. Estimated 2023 capital expenditures are $25m–$35m.
- Transformation: The multi-year ERP rollout is expected to cost $125m–$150m in total, with approximately $25m–$30m annually beginning in 2022. First-half 2023 costs were $15.0m; $26.5m of deferred implementation costs were capitalized at June 30. A manufacturing initiative is expected to deliver gross-margin improvements after completion in early to mid-2024.
- Operating risks: Management identifies cyclical demand, inflation, interest rates, oil and steel price volatility, labor costs and lingering supply constraints. Long order lead times and competition may limit the ability to pass through cost increases. Backlog is not a GAAP measure or a guaranteed indicator of future revenue.
- Unusual items: The Tacoma site asset sale generated a $3.4m gain in the first half. A $1.9m out-of-period correction of prior inventory-expense over-accruals reduced first-half cost of sales; the company characterized the historical errors as immaterial. First-half restructuring included $7.3m associated with leadership change and overhead restructuring.
- Contingencies: The company disclosed a shareholder class action in discovery and litigation concerning equipment sold by GEFCO; it could not estimate a possible loss for the latter matter. Management believes current legal matters will not materially affect the company, while acknowledging an unfavorable ruling could have a material effect. Customer-financing guarantees were $1.0m; outstanding letters of credit under the revolving facility were $2.6m.
- Controls: Management concluded disclosure controls were effective at June 30, 2023. ERP implementation is expected to change internal control processes as the rollout proceeds.
Investor facts to verify
- Whether backlog conversion and new order trends support continued sales growth as backlog normalizes.
- Whether gross-margin gains persist after inflation, warranty costs, manufacturing inefficiencies and the $1.9m inventory-accounting correction.
- ERP total cost, implementation timing, capitalized costs and progress at additional sites.
- Working-capital demands, cash generation, borrowing levels, interest expense and covenant headroom.
- Developments in the disclosed litigation and tax audits, including any change in estimated exposure.