Astec Industries, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022 unless noted. Astec designs and manufactures equipment and components primarily for road building and related construction, with reportable segments Infrastructure Solutions and Materials Solutions.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Net sales | $347.9 million | $291.2 million | Up 19.5% |
| Gross profit / margin | $89.2 million / 25.6% | $64.7 million / 22.2% | Gross profit up 37.9%; margin up 3.4 percentage points |
| Income from operations | $17.6 million | $4.0 million | Operating margin was 5.1%, versus 1.4% |
| Net income attributable to controlling interest | $12.1 million | $4.1 million | Diluted EPS was $0.53, versus $0.18 |
| Segment Operating Adjusted EBITDA | $35.8 million | $18.8 million | Non-GAAP measure; Infrastructure Solutions $27.3 million, Materials Solutions $15.3 million, Corporate and Other $(6.8) million |
| Operating cash flow | $(19.2) million | $(9.6) million | Use increased, primarily reflecting working-capital needs, including inventory |
| Cash, cash equivalents and restricted cash | $42.5 million | $111.7 million | Q1 2023 ending balance; $39.6 million was available for operating purposes |
| Debt | $76.0 million | $87.7 million at Dec. 31, 2022 | Includes $65.0 million long-term debt, $10.8 million short-term debt and $0.2 million current maturities |
Investing activities provided $11.8 million, primarily due to the $19.9 million sale of the Tacoma facility assets; capital expenditures were $8.0 million. Financing activities used $16.2 million, including $2.9 million of dividends. Current assets were $680.4 million and current liabilities $272.0 million at March 31, 2023. The company reported total liquidity of $222.0 million: $39.6 million of operating cash and $182.4 million available on its revolver, subject to covenant compliance.
Material changes and operating context
- Sales growth reflected higher equipment sales, service and installation revenue, and parts and components. Domestic sales rose 20.0% to $281.3 million; international sales rose 17.5% to $66.6 million. Segment sales increased 16.4% in Infrastructure Solutions and 21.6% in Materials Solutions.
- Gross profit benefited from favorable volume, pricing and mix, partly offset by $13.8 million of inflation in materials, labor and overhead and $3.5 million of manufacturing inefficiencies. The company recorded a $1.9 million benefit from correcting immaterial historical inventory-expense over-accruals in Q1 2023.
- SG&A rose $8.2 million to $67.9 million, including higher trade-show, employee and transformation costs. Interest expense increased to $2.0 million from $0.4 million, primarily because of revolver borrowings and higher rates.
- Backlog was $800.2 million at March 31, 2023, down 4.1% year over year and 12.3% from December 31, 2022. Management attributed the sequential decline to sales outpacing new orders and expects backlog to normalize from historically high levels.
Outlook, risks and notable items
- Management expects 2023 capital expenditures of $25 million to $35 million and believes working capital, future operating cash flows and revolver availability should fund existing-business needs for at least 12 months. No specific revenue or earnings guidance is provided.
- The multi-year ERP transformation is expected to cost $125 million to $150 million in total, with an estimated $25 million to $30 million per year beginning in 2022. Q1 2023 non-capitalizable transformation costs were $7.2 million; $23.1 million of implementation costs had been capitalized at quarter-end.
- A lean-manufacturing project is expected to deliver gross-margin improvements when completed in early to mid-2024. The company also cited inflation, steel-price volatility, supplier constraints, elevated component lead times, labor availability and customer sensitivity to high inflation and interest rates as business risks.
- In January 2023, CEO Barry Ruffalo’s employment was terminated and Jaco van der Merwe succeeded him. Q1 restructuring charges included $7.0 million for leadership and overhead actions, partly offset by a $3.4 million gain on the Tacoma asset sale; net restructuring and other asset charges were $3.7 million.
- The company was in compliance with credit-facility financial covenants at March 31, 2023, but warned that increased borrowings and rates would make 2023 interest expense significantly higher than in prior years. The filing also describes ongoing shareholder litigation and equipment-related litigation; management said outcomes are uncertain and an adverse ruling could have a material effect.
- The effective tax rate was 26.7%, versus 18.0%, reflecting higher pretax income and increased valuation allowances, partly offset by a research and development credit benefit.
Important facts for investors to verify
- Whether sales and gross-margin improvement persist after considering the $1.9 million out-of-period inventory benefit and ongoing inflation and manufacturing-efficiency pressures.
- How backlog converts to revenue, and whether orders and customer spending weaken as backlog normalizes.
- Working-capital and cash-flow trends, particularly inventory growth, cash availability and reliance on revolver borrowings.
- Actual ERP and restructuring costs, implementation progress, and whether the lean-manufacturing project delivers the expected margin gains.
- Developments in the disclosed lawsuits, tax audits and contingent guarantees, and any resulting financial exposure.