Astec Industries, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted. Astec manufactures equipment and parts for road building, aggregate and mining, paving, underground construction, and related markets.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $214.6 | $177.9 | $692.6 | $580.6 |
| Gross profit | $46.4 | $41.9 | $163.1 | $134.8 |
| Gross margin | 21.6% | 23.6% | 23.5% | 23.2% |
| Operating income | $9.0 | $10.1 | $45.3 | $39.4 |
| Net income attributable to controlling interest | $7.7 | $7.4 | $32.0 | $26.5 |
| Diluted EPS | $0.34 | $0.32 | $1.39 | $1.16 |
- Quarterly sales rose 20.7%; nine-month sales rose 19.3%. Management attributed the growth to improving domestic and international conditions and increased international sales efforts.
- Quarterly gross margin fell 2.0 percentage points, primarily because selling-price increases lagged raw-material cost increases on older backlog orders. Nine-month gross margin improved 0.3 percentage points.
- Q3 operating income declined despite higher sales, as SG&A and engineering expense increased 17.5% to $37.4 million. Q3 net income increased 4.9%; the effective tax rate fell to 16.1% from 30.2%, chiefly due to estimated R&D tax credits.
- For the first nine months, net income attributable to controlling interest increased 20.7%. The effective tax rate was 30.6%, compared with 34.0%.
Cash flow, liquidity and debt
- Operating cash flow was negative $4.9 million for the first nine months, versus positive $46.0 million in 2010. Increased inventory absorbed $41.3 million of cash; receivables used $21.9 million. Management linked the working-capital investment to increased sales and production.
- Investing cash outflow was $36.8 million, including $29.0 million of property and equipment spending, $3.0 million for a German business acquisition, and a $5.0 million escrow deposit toward the Blue Tee transaction. Financing cash inflow was $0.5 million.
- Cash and cash equivalents declined to $51.7 million from $94.6 million at December 31, 2010. Current assets were $472.1 million and current liabilities $137.6 million at September 30.
- No borrowings were outstanding under the $100 million Wells Fargo revolving facility; $9.2 million of letters of credit left $90.8 million available. The facility matures in May 2012, and the company reported compliance with its covenants. Subsidiary facilities also had no borrowings outstanding.
- Capital expenditures for 2011 were forecast at $30.2 million. The company expected to fund them with cash, internally generated funds, and available credit.
Changes, outlook and material items
- Backlog was $221.5 million at September 30, up 52.1% year over year; 54.6% was international. Growth was strongest in Aggregate and Mining and Asphalt.
- Nine-month sales increased across all reported groups. Aggregate and Mining sales rose 33.6%, Mobile Asphalt Paving 13.2%, Underground 40.1%, Asphalt 6.4%, and Other 10.4%. Asphalt Group profit weakened, while Aggregate and Mining profitability improved substantially; Underground remained loss-making for the nine-month period.
- In October 2011, Astec completed its acquisition of substantially all assets and assumed certain liabilities of Blue Tee’s GEFCO and STECO divisions for $30.8 million, funded from cash; $5.0 million had been deposited in escrow. Purchase-price allocation was incomplete, and management did not expect the acquired businesses to materially affect 2011 results. A German business acquisition began operations during Q3.
- Astec recorded a $2.2 million Q2 impairment on an aircraft held for sale; its September 30 carrying value was $0.9 million. It also recognized a $1.1 million Q3 gain on foreign-currency derivatives in cost of sales. These derivatives were not designated as hedges.
- Management cited uncertainty in federal transportation funding: the 2011 funding level was continued through March 31, 2012, but longer-term funding and future levels remained uncertain. The company also identified exposure to economic cycles, interest rates, oil and steel prices, foreign exchange, and competitive conditions. Management expected steel prices to remain generally stable through much of Q4, with possible strengthening later in Q4 and early 2012; oil prices were expected to remain volatile.
- Historical seasonality places 75%–80% of annual revenue in the first nine months. No specific full-year revenue or earnings forecast is provided in the filing. Management said current claims and proceedings were not expected to have a material adverse effect, while acknowledging that unfavorable outcomes are possible.
Contingencies and controls
- Customer-financing guarantees totaled $3.5 million, with a recorded liability of $0.4 million. The maximum potential exposure under letters of credit and guarantees was $11.8 million.
- An environmental cleanup matter relating to pre-1986 activities had no recorded liability because the company could not estimate any potential obligation. A separate air-permitting enforcement matter had a $175,000 accrual.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether backlog converts to revenue on schedule, particularly given shipping delays affecting some Q3 Asphalt orders and the larger international backlog share.
- Whether sales growth can translate into stronger margins as input costs, pricing, product mix, and utilization change; Q3 gross margin and operating income declined year over year.
- Whether working capital normalizes: inventory and receivables increased while nine-month operating cash flow turned negative.
- Funding and integration of the Blue Tee acquisition, its final purchase-price allocation, and the impact on cash, operations, and debt capacity.
- Renewal or replacement of the Wells Fargo facility before its May 2012 maturity, and continued compliance with credit covenants.
- Developments in federal transportation funding, steel and oil prices, foreign exchange, and the disclosed guarantees and environmental matters.