Astec Industries, Inc. — Q3 2019 Form 10-Q
Period: Three and nine months ended September 30, 2019. Unaudited figures; dollar amounts below are in millions unless stated otherwise. Astec manufactures equipment and parts for road building, aggregate and mining, and energy-related markets.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $255.8 | $256.6 | $886.4 | $854.6 |
| Gross profit | $51.9 | $58.3 | $212.0 | $137.4 |
| Gross margin | 20.3% | 22.7% | 23.9% | 16.1% |
| Operating income (loss) | $3.3 | $7.2 | $52.0 | $(17.0) |
| Net income (loss) attributable to controlling interest | $3.0 | $7.0 | $40.7 | $(13.4) |
| Diluted EPS | $0.13 | $0.30 | $1.79 | $(0.58) |
- Q3 revenue was nearly flat year over year; domestic sales fell 2.3% while international sales rose 5.7%. Q3 gross profit fell $6.4 million, with margin pressure attributed to pricing, product mix, older-inventory sales, and lower production hours that increased unabsorbed overhead.
- Nine-month revenue rose 3.7%, but comparisons are substantially affected by unusual pellet-plant transactions: 2019 included a $20.0 million Georgia plant sale, while 2018 included $75.3 million of Arkansas pellet-plant charges. The Georgia sale generated $15.3 million of after-tax income in 2019; the Arkansas charges generated a $57.2 million after-tax charge in 2018.
- Cash provided by operating activities was $84.2 million for the first nine months, versus $20.5 million used in 2018. Investing cash use was $16.2 million, including $17.9 million of capital expenditures; financing cash use was $66.7 million, primarily reflecting debt repayment and dividends.
- Cash was $26.3 million at September 30. Current assets were $529.9 million and current liabilities $173.1 million. Long-term debt was $0.7 million and current maturities $0.2 million; the domestic revolver had no borrowings outstanding. The $150 million facility had $141.4 million available after letters of credit. Total equity was $617.6 million.
Material changes and operating trends
- Q3 segment sales were $88.2 million for Infrastructure (+1.3%), $99.6 million for Aggregate and Mining (-2.1%), and $68.0 million for Energy (+0.2%). Infrastructure reported a $0.4 million segment loss; Aggregate and Mining earned $5.8 million and Energy $5.1 million.
- For nine months, Infrastructure sales increased 18.6% to $376.4 million, substantially reflecting the pellet-plant comparison effects. Aggregate and Mining sales declined 7.2% to $313.0 million; Energy sales declined 1.6% to $197.0 million.
- Backlog was $243.9 million, down 21.0% from $308.6 million a year earlier. Domestic backlog declined 29.2%; international backlog was nearly unchanged. Headcount fell from 4,401 at year-end 2018 to 4,068 at September 30, 2019.
- Debt repayment reduced domestic revolver borrowings from $58.8 million at December 31, 2018 to zero at September 30, 2019. Interest expense nevertheless increased for the nine-month period, primarily due to higher borrowings earlier in the year.
Outlook, risks, contingencies, and unusual items
- Management forecast 2019 capital expenditures of approximately $25 million and stated that cash, operating cash flow, and available credit were expected to meet working-capital and capital-expenditure needs through November 2020. No specific revenue or earnings guidance is provided in the filing.
- Management cited uncertainty in federal highway funding, cyclical customer demand, pricing competition, steel and oil price movements, foreign exchange, interest rates, and international markets. It expected steel prices to remain in a lower range through year-end 2019 and the U.S. dollar to remain strong near term.
- The company is exiting wood pellet plants and closing its German Astec Mobile Machinery subsidiary; it recorded $1.4 million of related restructuring charges in the first nine months and expected further costs. In October 2019 it announced closure of the CEI manufacturing facility and transfer of operations to Heatec and RexCon; closure costs were to be recorded in Q4.
- An interim goodwill test found no additional impairment as of August 31, 2019, but management said fair-value headroom was limited at the Power Flame and Roadtec/Carlson reporting units and further impairment remained possible.
- Astec and certain current and former executives face a putative shareholder class action; the company disputes the allegations and cannot estimate any potential loss. GEFCO is defending a warranty-related lawsuit concerning equipment sold in 2013; loss cannot be estimated. Customer financing guarantees and letters of credit create contingent exposures; the filing reports a maximum potential amount of $11.0 million for specified letters of credit and guarantees.
- Management concluded disclosure controls were not effective at period-end because of previously reported material weaknesses in internal control over financial reporting. Remediation was ongoing and was not considered complete pending sufficient operation and testing of controls.
Important facts for investors to verify
- Underlying sales, margins, and earnings excluding the non-recurring Georgia and Arkansas pellet-plant effects.
- Whether backlog declines, customer order deferrals, and reduced production persist, and the resulting impact on margins and staffing.
- Actual restructuring costs and operational effects from the AMM, wood-pellet, and CEI closures.
- Progress in remediating material weaknesses and any developments in the shareholder and GEFCO litigation or contingent exposures.
- Performance against the capital-spending and liquidity outlook, revolver covenant compliance, and potential goodwill impairment at the identified reporting units.