Astec Industries, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Astec manufactures road-building, aggregate and mining, paving, drilling, and related equipment and parts. Unless stated otherwise, financial amounts below are in U.S. dollars; income statement and cash-flow amounts are in millions.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $213.2 | $218.4 | $709.1 | $708.6 |
| Gross profit / margin | $45.8 / 21.5% | $47.3 / 21.7% | $159.8 / 22.5% | $159.6 / 22.5% |
| Operating income | $9.2 | $8.9 | $45.0 | $42.6 |
| Net income attributable to controlling interest | $6.5 | $6.9 | $30.8 | $29.9 |
| Diluted EPS attributable to controlling interest | $0.28 | $0.30 | $1.33 | $1.30 |
Q3 SG&A and engineering expense was $36.6 million, 17.2% of sales, down from $38.4 million and 17.6%. Interest expense was $0.3 million. The effective tax rate on continuing operations was 34.6% for Q3 and 33.4% year to date.
For the first nine months, operating cash flow was $6.7 million versus cash used of $6.2 million a year earlier. Capital expenditures were $22.1 million, so operating cash flow less capital expenditures was negative $15.4 million. Investing activities used $36.8 million, including a $15.0 million purchase of short-term investments; financing activities used $3.3 million, including $4.6 million of dividends. Cash declined $34.6 million to $46.3 million. Short-term investments were $16.3 million.
At September 30, current assets were $521.6 million and current liabilities $143.6 million. Total liabilities were $176.5 million and equity $573.6 million. The company had no borrowings under its $100 million Wells Fargo revolver and had $93.1 million available after letters of credit. Osborn, its South African subsidiary, had $0.3 million borrowed; Astec Australia had no facility borrowings.
Changes versus the comparable period
- Q3 sales fell 2.4% and controlling-interest net income fell 5.6%; diluted EPS declined from $0.30 to $0.28. Lower Aggregate and Mining sales were the main sales drag. Q3 gross margin edged down 0.2 percentage point.
- Nine-month sales were essentially flat, while controlling-interest net income increased 2.8% and diluted EPS rose from $1.30 to $1.33. Gross margin was unchanged at 22.5%.
- Q3 international sales fell 4.3%; domestic sales fell 1.2%. Year-to-date domestic sales rose 3.0%, while international sales declined 4.8%. Parts sales increased 8.3% in Q3 and 1.3% year to date.
- Q3 segment results were mixed: Aggregate and Mining sales decreased 13.1%; Underground sales rose 32.8%, largely due to a large international drilling-rig sale. Asphalt and Mobile Asphalt Paving segment profits improved, while Underground losses worsened.
- Backlog was $228.5 million, down 0.9% year over year. Domestic backlog increased 20.1%, while international backlog decreased 20.3%.
Outlook, commentary and risks
- Management forecast approximately $30 million of 2013 capital expenditures, including Brazilian operations, and expected available cash, future operating cash flow and credit capacity to cover working-capital and capital needs through September 30, 2014. No quantified sales or earnings guidance was provided.
- Astec had funded $9 million of an expected $12 million investment in Astec Brazil. Its manufacturing facility, expected to cost approximately $20 million, was under construction, with completion and manufacturing start-up expected in early 2014.
- Management cited infrastructure funding uncertainty, economic and customer-demand cyclicality, mining-sector weakness, foreign-exchange movements and strengthening of the U.S. dollar, and oil and steel price volatility. Heavy rainfall delayed some asphalt-equipment shipments in Q3. The company noted steel prices were rising modestly and expected relative pricing stability in early 2014.
- The company is seasonal: historically, 73%–75% of annual revenue occurs in the first nine months. Results through September therefore may not indicate full-year performance.
- A Q3-discovered interdivisional-profit elimination error led to restatement of comparative financial statements. The error understated gross margins, taxes, profits, retained earnings and inventory in prior periods; the reported 2012 comparisons reflect corrections. The company said the corrections were immaterial in each individual period, although their cumulative correction would have materially affected 2013 and 2012 income statements. The correction did not affect previously reported operating cash flows.
- Contingencies included up to $9.23 million of potential payments under letters of credit and guarantees, and customer-debt guarantees of $1.29 million, against which a $0.27 million liability was recorded. An older EPA cleanup matter could not be estimated and had no recorded liability. Management said ordinary-course claims were not expected to have a material adverse effect, but acknowledged litigation uncertainty.
- Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether subsequent quarters sustain earnings and cash generation, given Q3 profit decline and working-capital needs.
- Whether international demand and Aggregate and Mining performance recover, and whether backlog composition converts into sales.
- Execution, total funding and timing of the Brazil facility and the planned 2013 capital expenditures.
- The causes and control implications of the accounting error and the accuracy of the restated comparative figures.
- Potential exposure from guarantees, the unquantified EPA cleanup matter, and the company’s ability to maintain its dividend while funding investment.