Astec Industries, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise. Astec manufactures equipment and replacement parts for infrastructure, aggregate and mining, and energy markets.
Financial performance and position
- Q3 revenue: $252.1, up 1.7% year over year. Nine-month revenue: $872.4, up 6.3%.
- Profitability: Q3 gross profit was $39.1 versus $55.4; gross margin fell to 15.5% from 22.4%. Operating loss was $6.4 versus operating income of $11.4. Net loss attributable to controlling interest was $2.7, or $(0.12) per diluted share, compared with net income of $6.8, or $0.30 per diluted share.
- For the first nine months, gross profit was $180.4 versus $200.8, and gross margin was 20.7% versus 24.5%. Net income attributable to controlling interest was $26.9, down 37.2%, with diluted EPS of $1.16 versus $1.85.
- Cash flow: Operating cash flow for the first nine months was $10.7, down from $96.8. Inventory growth used $39.3 of cash; cash taxes and other working-capital movements also weighed on cash generation. Capital expenditures were $13.9; dividends paid were $6.9.
- Liquidity and debt: Cash was $66.4 at September 30, including $16.9 held by foreign subsidiaries. Current assets were $609.9 and current liabilities $177.2. The $100 million revolving facility had no borrowings; $91.4 remained available after letters of credit. Balance-sheet current maturities and long-term debt totaled $4.9, principally Brazilian subsidiary debt. The company reported covenant compliance.
- Inventory rose to $399.3 from $360.4 at December 31, 2016. Total assets were $877.0 and total equity was $675.2.
Material changes and operating drivers
- The key adverse event was the discovery of significant design issues at two customer wood-pellet plants. Higher estimated completion costs produced a $22.7 gross loss on the two orders in Q3 and a $27.1 gross loss for the first nine months. Q3 pellet-plant revenue was negative $13.4; the comparable 2016 quarter included $19.1 of pellet-plant revenue. Management said future gross margins on the two orders are not expected to be material.
- Infrastructure Group Q3 sales fell 9.7% to $98.7 and the segment recorded a $12.5 loss, largely reflecting the pellet-plant issues. Aggregate and Mining sales rose 15.9% to $99.5, while Energy sales rose 2.3% to $53.9. Nine-month Energy sales also benefited from the 2016 acquisition of Power Flame.
- International sales increased 16.0% in Q3 and 28.3% for the nine-month period. Backlog at September 30 was $385.5, down 1.0% year over year; excluding pellet-plant orders, it was up $61.1, or 24.8%. Approximately $60 million of backlog relates to a company-financed pellet plant, with revenue expected when payment is received, anticipated in December 2018.
Outlook, risks and unusual items
- Management forecast 2017 capital expenditures of approximately $22 million and believed cash, operating cash flows and available credit would meet working-capital and capital-expenditure needs through November 2018.
- On October 1, 2017, after quarter-end, Astec acquired substantially all assets and liabilities of RexCon for $26.0 million; its results were expected to enter the Energy Group in Q4.
- Management cited dependence on infrastructure funding, economic and market cycles, steel and oil prices, interest rates, competition and a strong U.S. dollar as factors affecting demand and results. Steel prices had stabilized in Q3; the company expected seasonal declines in Q4 and moderate increases in the first half of 2018.
- Customer-financing guarantees had a maximum exposure of $3.8 million, with a $0.7 million recorded liability. Letters of credit and foreign guarantees had maximum potential exposure of $12.7 million. Management did not expect current litigation to have a material adverse effect, while acknowledging that unfavorable outcomes remain possible.
- The company had not yet determined the impact of adopting the new revenue-recognition standard, planned for January 1, 2018. The Q3 effective tax rate was 50.7%; management attributed the unusually high rate to tax deductions, credits and a favorable prior-year return adjustment relative to the quarter’s pretax loss.
Most important facts for investors to verify
- Progress, remaining costs and potential additional losses on the Georgia and Arkansas pellet-plant projects; confirm the timing and collectability of the financed $60 million backlog order.
- Whether inventory growth converts into sales and cash, and whether operating cash flow recovers from the year-to-date decline.
- Backlog quality and conversion, especially the strength of non-pellet orders and the sustainability of growth in Aggregate and Mining and Energy.
- RexCon’s integration, purchase accounting and contribution to results following the October acquisition.
- Available revolver capacity, Brazilian debt and contingent guarantee exposures, as well as the eventual financial-statement effects of the revenue-recognition standard.