Astec Industries, Inc. — Q2 2012 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2012. Astec manufactures equipment and parts for road building, aggregate and mining, underground construction, and related markets. Results are seasonal and cyclical, with management reporting that historically 51%–53% of annual revenue is generated in the first half.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $253.9m | $247.8m | $520.5m | $477.9m |
| Gross profit / margin | $56.2m / 22.1% | $62.0m / 25.0% | $116.9m / 22.5% | $116.7m / 24.4% |
| Operating income | $15.9m | $21.0m | $34.6m | $36.2m |
| Net income attributable to controlling interest | $10.4m | $14.1m | $22.6m | $24.2m |
| Diluted EPS | $0.45 | $0.61 | $0.98 | $1.06 |
| Operating cash flow | Not separately presented | Not separately presented | $(11.8)m | $(3.1)m |
Q2 sales rose 2.5%, but controlling-interest net income fell 26.4%. For the first half, sales increased 8.9% while controlling-interest net income declined 6.7%. Gross margin contracted in both periods. Management attributed margin pressure to Tier 4 engine redesign and production costs, new-product startup costs, pricing that lagged raw-material costs on older backlog, and competitive pricing.
Parts sales increased 12.1% in Q2 and 22.3% in the first half; parts represented 25.8% and 27.2% of sales, respectively. Management said customers delaying equipment replacements supported parts demand.
Segments and material changes
- Aggregate and Mining: Sales increased 9.6% in Q2 and 12.5% in the first half, supported by stronger U.S. demand, particularly in oil- and gas-producing regions. Segment profit rose 18.9% and 37.7%, respectively.
- Underground: Sales rose 50.9% in Q2 and 105.9% in the first half, substantially reflecting the late-2011 GEFCO acquisition and new drilling/fracturing equipment. First-half segment profit improved to $0.5m from a $3.7m loss.
- Asphalt: Sales declined 12.8% in Q2 and 9.7% in the first half; segment profit fell 57.1% and 43.3%. Management cited weak demand and uncertainty around long-term highway funding.
- Mobile Asphalt Paving: Sales fell 15.5% in Q2 and 15.7% in the first half; segment profit declined 52.2% and 49.5%, affected by weaker demand, Tier 4 costs, and pricing pressure.
- Q2 total sales growth also reflected $11.0m from GEFCO and Astec Mobile Machinery GmbH (AMM), both acquired in late 2011. First-half sales included $24.8m from those businesses.
Backlog at June 30, 2012 was $258.3m, up 8.8% year over year. Domestic backlog increased 44.4%, while international backlog declined 18.5%. The filing does not provide a full-year sales or earnings forecast.
Cash, liquidity, debt, and investment
- Cash and cash equivalents were $35.9m at June 30, down from $57.5m at year-end 2011. Current assets were $506.4m and current liabilities $154.6m; the resulting current ratio was approximately 3.3.
- First-half operating cash use was $11.8m, compared with $3.1m in the prior-year period. Working-capital uses included $17.7m for receivables and $26.9m for inventory; lower accounts payable also contributed to the year-over-year deterioration.
- Investing cash use was $10.9m, including $11.4m of capital expenditures. Financing provided $0.9m. Cash declined by $21.6m over the half-year.
- No borrowings were outstanding under the new five-year, $100m Wells Fargo revolver, which expires in April 2017. After $12.9m of letters of credit, $87.1m remained available. The facility includes financial covenants, including annual net income, tangible net worth, and capital-expenditure provisions.
- Management forecast 2012 capital expenditures of $37.4m, excluding the Brazilian venture, and said cash, operating cash flows, and available credit should meet working-capital and capital-expenditure needs through June 30, 2013.
- Astec funded the first $5m of an expected $12m investment in Astec Brazil. It anticipates 75% ownership after funding by both investors and plans for a roughly $20m manufacturing facility, with construction planned for 2012–2013.
Outlook, risks, contingencies, and unusual items
- In July 2012, MAP-21 authorized federal highway and transit programs through fiscal 2014, generally at 2012 funding levels with modest inflation increases. Management viewed this as stabilizing near-term funding but said a longer-term program would best support customer planning; future funding levels remain uncertain.
- Key demand and margin risks include public infrastructure spending, economic conditions, customer confidence, interest rates, oil and steel prices, competitive pressure, and foreign-exchange movements. Management expected steel prices to remain relatively flat into Q4 2012 and uses forward contracts and advance purchases to manage steel-price exposure.
- International sales were 36.4% of Q2 revenue, down 14.7% year over year; management cited a stronger U.S. dollar and international economic weakness. First-half international sales increased 3.5%.
- The 2012 effective tax rate was higher than in 2011 because research-and-development tax credits had expired and had not been extended by Congress as of June 30.
- Customer-debt guarantees totaled $1.0m, with a recorded liability of $0.1m. The maximum potential exposure under letters of credit and guarantees was $17.8m. Management said current ordinary-course legal matters were not expected to have a material adverse effect, while acknowledging litigation uncertainty.
- An environmental cleanup matter dating to pre-1986 activities remains unquantified; the company recorded no liability because it could not estimate the amount. No material changes to previously disclosed risk factors were reported.
- The $2.17m aircraft impairment was recorded in Q2 2011, not Q2 2012. The aircraft remained held for sale at a stated $0.8m carrying value at June 30, 2012.
Important facts for investors to verify
- Whether backlog converts to revenue and whether domestic infrastructure demand improves following MAP-21.
- Whether gross margins recover as Tier 4 transition costs, startup expenses, and raw-material pricing effects ease.
- Cash conversion and working-capital trends, especially inventory, receivables, and accounts payable.
- GEFCO and AMM contribution to sales and profitability, and progress and funding needs for the Brazil facility.
- Compliance with revolver covenants, planned capital spending, and the adequacy of liquidity through the forecast period.
- Potential changes in guarantee, legal, environmental, tax-credit, foreign-exchange, and other contingent exposures.