Astec Industries, Inc. — Q1 2015 Form 10-Q
Business context and period: The company manufactures equipment and replacement parts for road construction, aggregate and mining, and energy markets. This unaudited report covers the three months ended March 31, 2015; comparative figures are for Q1 2014 unless noted. Financial amounts below are in U.S. dollars.
Financial performance and position
- Revenue: Net sales were $288.7 million, up 21.0%. Infrastructure sales increased 36.7% to $135.0 million, Aggregate and Mining increased 14.3% to $106.4 million, and Energy increased 1.1% to $47.3 million. Domestic sales rose 20.3%; international sales rose 22.9%.
- Profit and margins: Gross profit was $66.0 million, up 16.4%; gross margin declined to 22.9% from 23.8%. Operating income increased to $22.2 million from $13.3 million. Net income attributable to controlling interest was $15.1 million versus $9.5 million, and diluted EPS was $0.65 versus $0.41. SG&A and engineering expenses were $43.8 million, nearly flat year over year.
- Cash flow: Operating cash flow was $6.6 million versus $1.1 million. Receivables used $22.0 million of cash and customer deposits declined by $10.9 million; lower inventory-related cash use partly offset these outflows. Capital expenditures were $6.9 million. Cash and cash equivalents fell $0.6 million to $12.5 million.
- Liquidity and debt: Current assets were $568.2 million and current liabilities $165.9 million. Total debt was $10.5 million ($5.4 million short-term and $5.1 million long-term), compared with $10.9 million at year-end 2014. There were no borrowings under the $100 million Wells Fargo revolver; after $12.4 million of letters of credit, $87.6 million remained available. The company reported compliance with credit covenants.
- Other measures: Backlog was $291.2 million, down 5.9% year over year; international backlog fell 19.7%. The quarterly dividend remained $0.10 per share. Foreign-currency translation reduced other comprehensive income by $5.9 million.
Material changes and segment performance
- Infrastructure growth was the main sales and profit driver. Aggregate and Mining sales and segment profit rose, with Telestack included following its April 2014 acquisition; segment gross margin decreased 0.8 percentage points.
- Energy segment profit fell to $0.2 million from $1.9 million, primarily reflecting $0.9 million of costs associated with the planned closure of the Astec Underground Loudon facility and cost overruns on its first concrete plant.
- Corporate loss increased to $12.0 million from $9.1 million. Consolidated SG&A rose only 0.9%, while the effective tax rate increased to 37.1% from 32.2%, primarily due to tax reserves and unavailable tax benefits for certain foreign losses.
- Other income increased to $1.8 million from $0.8 million, including $1.2 million of life-insurance income following the death of the company’s Chairman and former CEO.
Outlook, risks, and contingencies
- The company forecast approximately $30 million of 2015 capital expenditures and said existing working capital, expected operating cash flow, and available credit should meet working-capital and capital-expenditure needs through March 31, 2016. It provided no specific earnings or revenue guidance.
- Management cited uncertainty in federal highway funding, economic and customer-demand cycles, oil and steel prices, interest rates, competition, and the stronger U.S. dollar. The dollar was negatively affecting some international pricing and backlog. Steel prices had declined and were expected to stabilize and then gradually increase; the company uses forward contracts and advance purchases to manage exposure.
- Approximately $59 million of backlog relates to three pellet-plant orders for one customer. Revenue is to be recorded as payments are received under a two-to-three-year financing arrangement; no revenue had yet been recorded on the initial plant order pending performance testing.
- Potential obligations include up to $2.3 million of customer financing guarantees, for which $0.1 million was accrued, and up to $13.1 million under letters of credit and other guarantees. Management said current litigation was not expected to have a material adverse effect, while noting unfavorable outcomes remain possible. A legacy EPA cleanup matter has no recorded liability because the amount cannot be estimated.
- The company adopted discontinued-operations guidance without significant impact. It planned to adopt the new revenue-recognition standard in 2017 and had not determined its impact.
Important facts for investors to verify
- Whether backlog converts to sales, particularly the pellet-plant orders, and how international backlog and currency effects develop.
- Whether the lower gross margin persists and whether the Energy Group facility closure and concrete-plant cost overruns affect subsequent results.
- Cash conversion and working-capital trends, especially receivables, customer deposits, and the availability of cash held by foreign subsidiaries.
- Execution of the $30 million capital-expenditure plan, continued revolver availability, and compliance with debt covenants.
- Potential changes in tax reserves, guarantee exposure, legal matters, and the unquantified EPA cleanup contingency.