Astec Industries, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Astec designs and manufactures equipment and components primarily for road building and related construction, and reports Infrastructure Solutions and Materials Solutions segments.
Financial performance
- Revenue: $291.2 million, up 2.4% from $284.4 million. Domestic sales rose 3.9% to $234.5 million; international sales fell 3.6% to $56.7 million.
- Profit and margins: Gross profit was $66.1 million, down 3.1%; gross margin declined to 22.7% from 24.0%. Operating income was $5.4 million versus $9.5 million; net income was $4.1 million versus $8.5 million. Diluted EPS was $0.18 versus $0.37 (2021 comparative figures reflect the filing’s revisions).
- Cash flow: Operating cash flow was negative $9.6 million, compared with positive $14.6 million. Capital expenditures were $11.6 million; operating cash flow less capital expenditures was negative $21.2 million. Cash, cash equivalents and restricted cash ended at $111.7 million, down $22.7 million from year-end.
- Liquidity and debt: Current assets were $675.7 million and current liabilities $256.5 million. Total reported debt was approximately $5.3 million, primarily short-term borrowings at international subsidiaries. No borrowings were outstanding under the $150 million revolving facility; $147.5 million remained available after letters of credit. The company reported compliance with facility covenants.
- Segments: Infrastructure Solutions revenue declined 2.0% to $197.5 million and Segment Operating Adjusted EBITDA fell to $16.4 million from $26.2 million. Materials Solutions revenue increased 13.0% to $93.7 million and Segment Operating Adjusted EBITDA rose to $12.2 million from $9.7 million. Segment EBITDA is a non-GAAP measure.
- Backlog: $834.7 million at March 31, up 98.4% from $420.8 million a year earlier.
Material changes and unusual items
- Inflation in materials, labor and overhead reduced gross profit by an estimated $25.5 million; favorable volume, pricing and mix partly offset this with $23.7 million of higher gross profit. Management said supply-chain constraints, labor shortages, logistics disruption and pandemic-related workforce impacts also affected production efficiency.
- Astec corrected prior-period errors it assessed as immaterial to those financial statements taken as a whole. The errors involved overstated work-in-process inventory and revenue-recognition calculation errors at one site. Revisions reduced 2021 full-year net sales by $1.7 million and net income by $2.0 million; Q1 2021 net income was revised down $0.2 million to $8.5 million.
- Strategic transformation costs were $5.3 million, versus $3.2 million a year earlier, and were recorded in SG&A. Q1 also included $1.0 million of restructuring charges. Assets held for sale included Tacoma site assets; Tacoma product-line transfers were completed during the quarter.
- In April 2022, after quarter-end, Astec acquired MINDS Automation Group for $18.2 million cash, subject to customary purchase-price adjustment. The company said the acquisition was not expected to be material to operating results.
Outlook, risks and contingencies
- Management estimated 2022 capital expenditures of $40 million to $50 million and said cash, future operating cash flows and available credit capacity should cover working-capital and capital needs for at least the next 12 months. No earnings or revenue guidance was provided.
- Management cited strong order demand, including demand associated with customer and dealer restocking and the U.S. Infrastructure Investment and Jobs Act. It also warned that long supplier lead times and constrained manufacturing capacity could delay backlog fulfillment. The filing does not quantify expected backlog conversion or timing.
- Management expected continued cost pressure from steel, oil-related inputs, labor and supply-chain constraints, and noted it may not be able to pass all cost increases to customers. The Ukraine conflict and COVID-19 impacts were among the cited uncertainties.
- The ERP rollout is a multi-year undertaking; management expected to complete global design in 2022 and convert one site in 2023. A lean manufacturing initiative began at a major site in Q1, with expected margin improvement not quantified.
- A shareholder class action was remanded for further proceedings after an appeals court reversed dismissal of the company and one former executive. In a separate GEFCO-related equipment lawsuit, the company said it could not estimate a possible loss. Management believed current claims would not have a material adverse effect, while acknowledging unfavorable outcomes could be material.
- Contingencies include customer-financing guarantees and letters of credit. The company was also subject to an IRS audit of its 2018 federal return and other tax audits; it said it did not expect a significant near-term change in unrecognized tax benefits.
Investor verification priorities
- Track whether the exceptionally high backlog converts to sales on schedule and whether production constraints or cancellations affect conversion.
- Assess whether pricing and productivity can offset inflation and restore gross margins, particularly in Infrastructure Solutions.
- Monitor inventory growth and operating cash flow: inventory used $53.7 million of cash in Q1 amid backlog and supply-chain challenges.
- Review the effects of the identified accounting errors, the company’s remediation and controls, and future reporting; management concluded disclosure controls were effective at March 31, 2022.
- Follow the shareholder and GEFCO litigation, tax audits, and the MINDS acquisition’s final purchase-price adjustment and integration.