Business context and reporting period
Astec Industries, Inc. filed this Form 10-K for the fiscal year ended December 31, 2012. The company designs and manufactures equipment and replacement parts primarily for road construction, aggregate and mining, paving, and drilling markets. Its reportable segments are Asphalt, Aggregate and Mining, Mobile Asphalt Paving, and Underground. Results for American Augers, sold in November 2012, are presented as discontinued operations.
Key financial metrics
Amounts are in U.S. dollars; figures below are for fiscal 2012 unless noted.
| Metric | 2012 | Prior comparable period |
|---|---|---|
| Net sales | $936.3 million | $908.6 million in 2011; up 3.0% |
| Gross profit / margin | $206.9 million / 22.1% | $210.5 million / 23.2% |
| Operating income | $50.1 million | $57.4 million |
| Continuing-operations net income | $33.6 million | $39.8 million |
| Net income attributable to controlling interest, including discontinued operations | $40.2 million; diluted EPS $1.74 | $39.9 million; diluted EPS $1.74 |
| Cash from operating activities | $28.6 million | $32.3 million |
| Capital expenditures | $26.0 million | $36.1 million |
| Cash and cash equivalents at year-end | $80.9 million | $57.5 million |
| Working capital at year-end | $355.5 million | $331.5 million |
| Debt and credit availability | No borrowings; $86.9 million available under $100 million revolver | No borrowings reported |
| Total backlog at year-end | $263.8 million | $268.6 million, adjusted for discontinued operations |
The company paid a one-time $1.00-per-share cash dividend in December 2012, totaling approximately $22.8 million. The filing reports no outstanding borrowings under its principal revolving facility and states that it was in compliance with facility covenants at year-end.
Material changes versus prior period
- Domestic sales rose 5.3% to $572.5 million; international sales fell 0.4% to $363.8 million. International sales were 38.9% of total sales, versus 40.2% in 2011.
- Parts sales increased 11.8% to $245.9 million, or 26.3% of sales.
- Gross margin declined 110 basis points. Management cited Tier 4 engine redesign costs, new-product production costs, underused plant capacity, competitive pricing, and selling-price increases lagging material-cost increases on older backlog orders.
- Segment sales varied: Aggregate and Mining rose 6.6%; Asphalt fell 9.9%; Mobile Asphalt Paving fell 15.9%; Underground rose 119.7%, including a full year of GEFCO results versus three months in 2011. Underground Group remained loss-making, though its loss narrowed.
- American Augers was sold for $42.9 million in proceeds. The filing reports a $3.4 million after-tax gain on sale and $3.4 million of after-tax income from discontinued operations, together contributing $6.8 million to 2012 net income.
- Cash from operations decreased $3.7 million, while cash rose $23.4 million year over year, supported in part by sale proceeds. Inventory rose $9.6 million on the balance sheet.
Fourth-quarter 2012 net sales were $227.6 million versus $253.3 million in fourth-quarter 2011. Continuing-operations net income was $5.4 million versus $8.3 million; diluted continuing-operations EPS was $0.23 versus $0.36. Fourth-quarter total net income was $10.8 million versus $8.0 million, reflecting discontinued operations and the sale-related gain.
Outlook, risks, contingencies, and unusual items
- Management expected substantially all year-end backlog to be filled in 2013. It forecast 2013 capital expenditures of $31.5 million, excluding Brazil, and planned approximately $20 million for the Brazilian manufacturing facility, expected to be financed with local bank borrowing. Production in Brazil was anticipated to begin in early 2014.
- Management expected steel prices to rise moderately as demand and mill lead times normalized, while noting uncertainty beyond the near term. It uses forward contracts and advance purchases to mitigate steel-price exposure.
- Management described the business as seasonal, with recent years’ revenues generally stronger in the first half. It cited cyclical construction and infrastructure demand, uncertain future highway funding, oil and asphalt price volatility, steel costs, competition, foreign exchange, and customer access to credit as important risks.
- The new Wells Fargo credit agreement runs through April 2017 and includes financial covenants and a maximum capital-expenditure covenant. The company reported covenant compliance at December 31, 2012.
- Customer debt guarantees totaled $2.1 million, with a recorded liability of $112,000. Letters of credit and related guarantees had a stated maximum potential exposure of $17.7 million. The company also disclosed ordinary-course legal matters and an unresolved EPA cleanup matter relating to pre-1986 activities; the potential EPA liability could not be estimated.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal control were effective at year-end.
Important facts for investors to verify
- Whether weaker gross margin and operating income stabilize as Tier 4 redesign costs, production utilization, and pricing effects change.
- How much of the 2012 reported net income and fourth-quarter improvement depended on the American Augers sale and discontinued operations.
- Whether backlog conversion, especially the domestic Asphalt Group orders, supports 2013 sales and cash generation.
- Whether projected 2013 capital spending, including the Brazil facility, proceeds on schedule and within budget while preserving liquidity and covenant compliance.
- Whether steel-cost increases, customer demand, and federal infrastructure funding develop as management anticipated.
- Potential outcomes of the EPA cleanup matter, customer guarantees, letters of credit, and other contingencies.