Astec Industries, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Unless noted otherwise, dollar amounts below are in millions. The filing also reports fourth-quarter results; this is an annual report, not a quarterly filing.
Business context
Astec designs, manufactures and sells equipment and replacement parts for road building, aggregate and mining, and energy-related markets. It reports three operating segments: Infrastructure, Aggregate and Mining, and Energy. Results are exposed to construction cycles, public infrastructure spending, steel and oil prices, foreign exchange, and customer demand in mining and oil and gas markets.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net sales | $1,147.4 | $983.2 | +16.7% |
| Gross profit / margin | $265.3 / 23.1% | $218.8 / 22.3% | Margin +0.8 percentage points |
| Operating income | $87.2 | $50.0 | +74.4% |
| Net income attributable to controlling interest | $55.2 | $32.8 | +68.2% |
| Diluted EPS | $2.38 | $1.42 | +$0.96 |
| Cash provided by operating activities | $134.8 | $30.9 | +$103.9 |
| Capital expenditures | $27.4 | $21.2 | +$6.2 |
Fourth-quarter 2016 net sales were $326.6 million, versus $215.0 million in fourth-quarter 2015; net income was $12.3 million versus $3.4 million, and diluted EPS was $0.53 versus $0.16.
Cash and cash equivalents were $82.4 million at year-end, up from $25.1 million. Working capital was $408.0 million, compared with $399.8 million; current assets were $576.8 million and current liabilities $168.9 million. Total assets were $843.6 million and total equity $648.8 million.
Year-end debt included $4.6 million of short-term debt, $2.5 million of current maturities and $4.1 million of long-term debt. Astec had no borrowings under its $100 million Wells Fargo revolving facility during 2016; $8.9 million of letters of credit were outstanding, leaving $91.1 million available. The facility was due to expire in April 2017, and management said it intended to renew or replace it. Astec reported compliance with its financial covenants at year-end. Quarterly dividends were $0.10 per share, or $0.40 for the year.
Changes versus the prior year
- Infrastructure Group sales rose 42.0% to $608.9 million, principally reflecting domestic demand and a $135.2 million increase in pellet-plant sales. Segment profit more than doubled to $71.5 million.
- Aggregate and Mining sales declined 3.0% to $359.8 million, while segment profit increased 13.6% to $34.9 million, supported by higher gross margin and lower expenses.
- Energy Group sales declined 2.6% to $178.8 million; excluding the August 2016 Power Flame acquisition, management said sales would have fallen 10%. Segment profit increased 14.9% to $4.1 million.
- Domestic sales increased 30.3% to $941.3 million; international sales decreased 21.0% to $206.2 million, with international sales falling to 18.0% of total sales from 26.5%.
- Backlog increased 13.1% to $357.4 million from $315.9 million. Parts sales declined 0.6% to $263.5 million and fell to 23.0% of sales from 27.0%.
- Operating cash flow rose substantially, helped by net income and working-capital movements, including inventory reduction. Investing cash use increased to $66.2 million, including $39.8 million for Power Flame.
Outlook, commentary and risks
- Management expected the FAST Act’s five-year federal transportation authorization to support infrastructure demand, while cautioning that future public funding remains subject to political and funding uncertainty. It also cited a late-2016 administration proposal for additional infrastructure investment, not as committed guidance.
- Management expected steel prices to continue rising moderately through the first half of 2017 and planned to review contract pricing for the second half. It used forward contracts and advance purchases to mitigate steel-price exposure.
- Management expected the historical seasonal pattern to continue, with stronger revenues in the first half of the year. Approved 2017 capital expenditures totaled $29.9 million, including $4.0 million for plant expansions.
- Management expected substantially all company backlog to be filled in 2017, except a customer-financed pellet-plant order of approximately $60.2 million, for which revenue was expected in 2018 when payment became due. The Infrastructure Group and Aggregate and Mining Group separately expected their backlogs to be filled in 2017; the Energy Group section instead says its backlog would be filled in 2016, an apparent timing inconsistency that should be checked.
- Important risks include construction and mining cycles, changes or delays in government infrastructure funding, oil and steel price volatility, a strong U.S. dollar, foreign-market weakness, competition, product liability, and acquisition integration. Brazil remained challenged by regional economic conditions; management said production and sales expansion depended on an improved business environment.
- Power Flame contributed $13.6 million of 2016 revenue. Management excluded the acquired business from its year-end internal-control assessment and said it would complete that assessment during 2017. The auditor’s opinion on controls was unqualified for the assessed scope.
- Astec disclosed customer-financing guarantees of $6.5 million, with a recorded liability of $0.3 million, and potential exposure under letters of credit and guarantees of approximately $10.0 million. An unresolved EPA cleanup matter dating to pre-1986 activities had no recorded liability because the amount could not be estimated. Management said ordinary legal proceedings were not expected to have a material adverse effect, but acknowledged adverse rulings could be material.
Most important facts for investors to verify
- Whether the revolving credit facility was renewed or replaced before its April 2017 expiration, and on what terms.
- The pellet-plant customer’s payment schedule, the financing terms, and the timing and collectability of the approximately $60.2 million deferred revenue order; also assess the $135.2 million of 2016 sales to one pellet-plant customer, equal to 11.8% of company sales.
- Whether the $357.4 million backlog converts to sales as expected, particularly given the conflicting Energy Group backlog-fill dates in the filing.
- Whether the improvement in operating cash flow is sustainable, and how inventory, warranty accruals and other working-capital changes affect cash generation.
- Progress integrating Power Flame and completing its internal-control assessment, along with the performance of the acquired business.
- Exposure to foreign-exchange pressure, steel-cost increases, weak international mining and oil-and-gas markets, customer guarantees, and the unquantified EPA cleanup contingency.