Astec Industries, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless noted. Astec manufactures equipment and parts for road building, aggregate processing, mining, recycling, and related markets. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Net sales | $288.8 | $325.8 |
| Gross profit / gross margin | $74.0 / 25.6% | $76.9 / 23.6% |
| Operating income / margin | $15.1 / 5.2% | $18.2 / 5.6% |
| Net income attributable to controlling interest | $20.6; diluted EPS $0.91 | $14.3; diluted EPS $0.63 |
| Cash from operating activities | $5.6 | $12.0 |
| Capital expenditures | $5.8 | $3.7 |
| Cash and cash equivalents | $43.9 | $48.9 at Dec. 31, 2019 |
| Total current assets / current liabilities | $534.2 / $168.9 | $506.3 / $172.8 at Dec. 31, 2019 |
| Debt | $1.2 total; no domestic revolver borrowings | $2.0 total at Dec. 31, 2019 |
| Backlog | $245.4 | $236.5 at Mar. 31, 2019 |
Cash from operating activities less property and equipment expenditures was approximately negative $0.2 million, versus approximately positive $8.3 million in Q1 2019. Net cash decreased $5.0 million during the quarter. The $150 million domestic revolving credit facility had $142.1 million available after outstanding letters of credit; the company reported compliance with its financial covenants.
Changes versus the prior-year quarter
- Revenue declined $36.9 million, or 11.3%. Domestic sales fell 11.0%; international sales fell 12.7%, with the strong U.S. dollar weighing on overseas competitiveness.
- Infrastructure Solutions sales fell 7.6% to $202.6 million; Materials Solutions sales fell 19.1% to $86.2 million. Segment profit declined 4.7% and 30.5%, respectively.
- Gross margin rose 2.0 percentage points, attributed primarily to improved overhead absorption, lower manufacturing labor, and procurement savings. Parts were 30.7% of sales, up from 28.4%.
- Reported attributable net income increased 44.6%, but included a $9.5 million CARES Act tax benefit (about $0.42 per diluted share). The effective tax rate was negative 33.5%, versus 21.0% a year earlier; the earnings increase therefore does not reflect operating growth alone.
- Operating cash flow fell $6.4 million, with substantial uses of cash from receivables and taxes, partly offset by higher net income and deferred tax provision.
- Foreign currency translation produced a $9.3 million comprehensive loss, compared with $1.0 million of translation income in Q1 2019.
Outlook, risks, and unusual items
- Management said Q1 COVID-19 effects on sales and results were limited, but expected a more severe impact in Q2 and potentially later periods. The duration and overall effects were uncertain. Q1 included $8.8 million of identified delayed shipments and $0.3 million of canceled orders; customers cited COVID-19 in delaying $3.6 million of payments.
- Two foreign Materials Solutions operations stopped manufacturing in late March under local restrictions and were expected to remain closed until at least sometime in May. U.S. operations remained open as designated critical manufacturing.
- Management forecast approximately $30 million of 2020 capital expenditures and stated that cash, expected operating cash flows, and available credit were expected to cover working capital and capital expenditure needs through May 2021. It cited $25.7 million expected from U.S. tax refunds related to CARES Act NOL carrybacks.
- Astec recorded $2.7 million of restructuring and asset impairment charges, including a $1.6 million non-cash charge that fully impaired goodwill for its mobile asphalt equipment reporting unit. Other charges related to the Albuquerque closure, Enid oil and gas exit, and workforce reductions. Management noted possible further goodwill, intangible, long-lived asset, investment, and receivables impairments as conditions evolve.
- Headcount was 3,753 at March 31, 2020, down 13.6% from 4,344 a year earlier; management said staffing would continue to be evaluated against sales and production.
- Contingencies included $10.2 million of maximum potential payments under letters of credit and guarantees, customer financing guarantees, and two disclosed lawsuits for which the company could not estimate a possible loss. Management said current legal matters were not expected to have a material adverse effect, while noting litigation uncertainty.
- Management concluded disclosure controls were not effective at quarter-end because of material weaknesses in internal control over financial reporting previously reported in the 2019 Form 10-K. Remediation was underway but was not yet considered complete.
Investor verification points
- Assess underlying earnings excluding the $9.5 million CARES Act tax benefit, and distinguish operating performance from the reported net-income increase.
- Track the COVID-19 effect on Q2 shipments, production, collections, foreign-site reopening, customer demand, and covenant headroom.
- Monitor cash conversion, receivables and tax-refund collection, capital spending, and use of the domestic credit facility.
- Review backlog composition and conversion: total backlog rose 3.8% year over year, but domestic backlog increased while international backlog decreased; Materials Solutions backlog also declined.
- Follow the mobile asphalt reporting unit and other asset values for additional impairment risk, and the cost and execution of restructuring and site dispositions.
- Review progress in remediating the disclosed material weaknesses, along with developments in the lawsuits and guarantee exposures.