Astec Industries, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; filed August 9, 2013. Amounts below are in U.S. dollars. Prior-period comparisons exclude American Augers sales, which were reported as discontinued operations following its 2012 sale.
Business context
Astec manufactures and sells road-building, aggregate-processing, paving, drilling, and related equipment and replacement parts. Its reportable groups are Asphalt, Aggregate and Mining, Mobile Asphalt Paving, and Underground. Results are seasonal: historically, 51%–53% of annual revenue is generated in the first half.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $248.1m | $238.3m | $496.0m | $490.2m |
| Gross profit / margin | $55.4m / 22.3% | $53.1m / 22.3% | $114.0m / 23.0% | $111.7m / 22.8% |
| Operating income | $17.6m | $14.6m | $35.8m | $33.1m |
| Net income attributable to controlling interest | $11.1m | $10.4m | $24.3m | $22.6m |
| Diluted EPS attributable to controlling interest | $0.48 | $0.45 | $1.05 | $0.98 |
- Q2 sales increased 4.1%; controlling-interest net income rose 7.0%. First-half sales grew 1.2% and controlling-interest net income rose 7.3%.
- SG&A and engineering expense declined year over year: 1.7% in Q2 and 0.6% in the first half. Operating income increased about 20.8% in Q2 and 8.4% in the first half.
- First-half effective tax rate was 33.1%, versus 37.3% in 2012, reflecting research-and-development tax credits, including credits related to 2012 expenditures. Q2 rates were 36.6% and 36.9%, respectively.
- Cash from operations was negative $21.9m for the first half, compared with negative $11.8m a year earlier. Capital expenditures were $15.2m; investing cash outflow was $15.0m. Financing cash outflow was $1.3m, including $2.3m of dividends paid.
- Cash and cash equivalents were $41.2m at June 30, down from $80.9m at year-end; short-term investments were $17.0m, up from $1.3m. Working-capital movements, purchases of trading securities, and currency effects contributed to the cash decline.
- Current assets were $511.1m and current liabilities $139.6m. Total liabilities were $172.1m and total equity $566.0m.
Material changes and operating trends
- Q2 growth came mainly from Aggregate and Mining (+5.3%), Asphalt (+6.3%), and Other (+13.5%); Underground sales fell 11.1%. For the first half, Asphalt, Mobile Asphalt Paving, and Aggregate and Mining grew, while Underground sales declined 23.0% and Other declined 3.7%.
- First-half domestic sales increased 4.8%, while international sales decreased 5.0%, which management attributed partly to economic uncertainty and a stronger U.S. dollar. Q2 domestic and international sales rose 5.1% and 2.3%, respectively.
- Backlog was $240.6m at June 30, 2013, down 5.6% from $254.8m a year earlier; domestic backlog fell 4.6% and international backlog 6.9%.
- Cash and cash equivalents plus short-term investments totaled $58.1m at quarter-end. Astec had no borrowings under its $100m Wells Fargo revolver; after $10.6m of letters of credit, $89.4m remained available. The company reported compliance with its financial covenants. Osborn, its South African subsidiary, had $0.2m of borrowings.
- Q2 other income fell to $0.03m from $0.62m, mainly due to lower royalties, interest income, and investment earnings. Foreign-currency derivatives produced a $1.3m first-half gain recognized in cost of sales, versus a $0.4m loss in 2012.
Outlook, risks, and unusual items
- Management forecast 2013 capital expenditures of $31.5m, excluding Brazilian operations, and planned a Brazilian manufacturing facility expected to cost about $20m. Astec stated that working capital, expected operating cash flow, and available credit should meet working-capital and capital-expenditure needs through June 30, 2014.
- Astec Brazil had received $7.5m of an expected $12.0m company investment; construction of the facility began in June 2013. The company expected to finance plant costs through parent-company borrowings and equipment through a local Brazilian bank.
- Management described Map-21, authorizing $105bn of U.S. highway and public-transportation spending through fiscal 2014, as supportive of near-term market stability, while noting that longer-term funding remains uncertain. It expected steel prices to remain near current levels, with possible modest increases, and oil prices to continue fluctuating.
- Risks discussed include infrastructure funding and customer demand, economic conditions and interest rates, oil and steel prices, foreign-exchange movements, competition, and weather-related shipment delays. Heavy rainfall delayed some U.S. customer site preparation and road projects during Q2.
- The sale of American Augers and certain trencher assets was part of the strategy to exit cyclical underground markets; the vertical oil-drilling product line was retained. A $0.5m sale-price adjustment payable to the buyer was recorded in current liabilities.
- Potential obligations included $1.6m of customer-financing guarantees (with a $0.2m recorded liability) and up to $13.0m of potential payments under letters of credit and guarantees. Management said ordinary-course legal matters were not expected to materially affect results, but unfavorable outcomes could have a material effect. A legacy EPA cleanup matter had no recorded liability because the amount could not be estimated.
- Q2 foreign-currency translation reduced other comprehensive income by $3.9m; the first-half reduction was $5.8m. The filing reports no material changes in risk factors and no material changes in internal control over financial reporting; management concluded disclosure controls were effective.
Investor verification priorities
- Assess whether backlog, particularly the 5.6% year-over-year decline, converts into sales and whether weather-related shipment delays unwind.
- Review operating cash conversion and working-capital needs alongside planned capital spending, including the Brazilian facility and its funding arrangements.
- Track performance in Underground and Aggregate and Mining, where sales or segment profitability weakened, and determine the ongoing impact of the divestitures.
- Verify the sustainability of earnings growth given the lower first-half tax rate from research-and-development credits and the effect of currency and investment gains.
- Monitor liquidity, revolver availability, covenant compliance, guarantee exposure, and the continuation of the quarterly dividend.