Astec Industries, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Unless stated otherwise, dollar amounts below are in millions; the filing presents most financial figures in thousands. Astec designs and manufactures equipment and replacement parts for road building, aggregate and mining, and energy-related markets.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $1,169.6 | $1,171.6 |
| Gross profit / margin | $239.4 / 20.5% | $135.8 / 11.6% |
| Operating income (loss) | $25.1 | $(86.4) |
| Net income (loss) attributable to controlling interest | $22.3 | $(60.4) |
| Diluted EPS | $0.98 | $(2.64) |
| Cash from (used in) operations | $112.4 | $(29.8) |
| Capital expenditures | $23.4 | $27.4 |
- Fourth-quarter 2019 net sales were $283.2 million and net loss was $18.4 million, compared with $317.0 million in sales and a $47.1 million loss in fourth-quarter 2018.
- 2019 gross margin benefited from comparison with a $75.3 million pellet-plant sales reversal and related charges in 2018, and from a $20.0 million one-time pellet-plant sale in 2019. Excluding pellet-plant transactions, reported gross profit was $219.4 million (19.1% margin) in 2019 versus $285.1 million (22.9%) in 2018. 2019 margins also reflected lower volume, competitive pricing, tariffs and inventory reserves.
- Revenue was nearly flat year over year, but excluding the pellet-plant items, sales declined 7.8%. Parts sales rose 3.4% to $319.1 million. Infrastructure Group sales increased 11.3%; Aggregate and Mining fell 10.6%; Energy declined 1.5%.
- 2019 included $32.6 million in inventory valuation adjustments across the three groups, principally for aged or slow-moving equipment and product-line exits. Restructuring and asset impairment charges were $3.2 million, down from $13.1 million in 2018, which included $11.2 million of goodwill impairment.
Liquidity, debt and capital
- Cash and cash equivalents were $48.9 million at year-end, including $19.8 million held by foreign subsidiaries. Working capital was $333.5 million, down from $371.8 million; current assets were $506.3 million and current liabilities $172.8 million.
- The $150 million revolving credit facility had no borrowings outstanding at December 31, 2019, with $141.7 million available after letters of credit. The company reported compliance with its financial covenants. Other reported debt totaled approximately $2.0 million, mainly at Astec Brazil.
- Operating cash flow improved to $112.4 million, helped by earnings and a $61.3 million reduction in inventory. Dividends paid were $9.9 million; the quarterly dividend was $0.11 per share. No shares were repurchased in 2019; approximately $126 million remained authorized under the repurchase program.
Changes, outlook and risks
- Total backlog fell 23.6% to $263.7 million, with declines in domestic and international orders. Management expected the year-end backlog to be filled during 2020; this is an expectation, not revenue guidance. Backlogs declined in each group, particularly Aggregate and Mining.
- Management introduced a “Simplify, Focus and Grow” strategy for 2020, including a shift toward centralized, matrix management, product-portfolio rationalization, supply-chain improvements and investment in innovation and international growth. The CEO and CFO were both new to their roles in 2019.
- Astec was closing its CEI facility and transferring product lines to other subsidiaries, exiting GEFCO’s oil and gas product line, and completing the closure of its German AMM operation. The GEFCO exit was expected to be completed by mid-2020; the CEI closure was expected in early 2020. The German property sale closed in January 2020.
- Management cited steel-price and tariff exposure, cyclical construction and mining demand, uncertain infrastructure funding, dealer inventory, foreign exchange, and the early-2020 coronavirus outbreak as risks. The filing provides no quantified 2020 revenue or earnings guidance.
- Management identified material weaknesses in internal controls over financial reporting, including controls related to goodwill impairment, income taxes, ERP access and change management, revenue, inventory and journal entries. Management concluded controls were ineffective at year-end and aimed to remediate the weaknesses before the end of 2020. KPMG issued an adverse opinion on internal control, while issuing an unqualified opinion on the financial statements; identified misstatements were corrected before filing, and no prior-period restatement was reported.
- Two material legal matters are disclosed: a shareholder securities class action and a GEFCO equipment warranty-related lawsuit. The company disputes both and could not estimate potential losses. It also disclosed customer-financing guarantees and letters of credit, with maximum potential future payments under the disclosed letters of credit and guarantees of $11.0 million.
Key facts for investors to verify
- Reconcile reported profitability with the one-time pellet-plant items and the $32.6 million of inventory valuation adjustments; assess fourth-quarter losses and underlying segment margins.
- Track backlog conversion, dealer inventories and demand, especially the sharp Aggregate and Mining decline, against management’s 2020 fulfillment expectation.
- Monitor cash generation and inventory reductions, capital spending, foreign-held cash, and debt and borrowing availability at the parent and subsidiaries.
- Check progress and independent testing of the internal-control remediation plan, particularly revenue, inventory, ERP and tax controls.
- Follow completion costs and execution of CEI and GEFCO exits, the new operating model, and developments in the disclosed lawsuits and guarantees.