Astec Industries, Inc. — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also reports unaudited fourth-quarter results. Astec designs and manufactures equipment for road construction, aggregate and mining, paving, underground construction, and related markets; replacement parts are an important business. Results are sensitive to economic cycles and public infrastructure spending.
Financial performance and liquidity
| Metric | 2010 | 2009 |
|---|---|---|
| Net sales | $771.3 million | $738.1 million |
| Gross profit / margin | $179.0 million / 23.2% | $152.4 million / 20.7% |
| Operating income / margin | $47.4 million / 6.2% | $9.9 million / 1.3% |
| Net income attributable to controlling interest | $32.4 million | $3.1 million |
| Diluted earnings per share | $1.42 | $0.14 |
| Operating cash flow | $62.0 million | $49.2 million |
| Capital expenditures | $11.3 million | $17.5 million |
| Cash and cash equivalents at year-end | $94.6 million | $40.4 million |
| Working capital at year-end | $317.4 million | $278.1 million |
| Total assets / total equity at year-end | $649.6 million / $492.8 million | $590.9 million / $452.3 million |
| Borrowings under main credit facility at year-end | None | None |
Revenue increased 4.5%, while gross margin expanded 2.5 percentage points. Management attributed the margin recovery chiefly to higher plant utilization, lean-manufacturing and production efficiencies, and increased higher-margin parts sales. Parts were 26.0% of sales, up from 24.4%. The 2010 effective tax rate was 33.1%, versus 72.4% in 2009; the prior-year rate was elevated in part by impairment charges that were not fully tax deductible.
Fourth quarter: Net sales were $190.8 million, gross profit $44.3 million, net income attributable to controlling interest $6.0 million, and diluted EPS $0.26. In fourth-quarter 2009, sales were $177.9 million and the company recorded a $15.5 million net loss attributable to controlling interest, including non-cash impairment charges.
Changes versus prior year
- International sales rose 8.0% to $294.4 million and represented 38.2% of consolidated sales; domestic sales rose 2.5% to $476.9 million.
- Aggregate and Mining sales grew 17.4% to $256.4 million; Mobile Asphalt Paving grew 21.6% to $166.4 million. Asphalt Group sales fell 12.4% to $226.4 million, and Underground Group sales fell 10.8% to $60.1 million.
- Aggregate and Mining moved to $16.6 million segment profit from a $0.2 million loss; Mobile Asphalt Paving profit rose 73.7% to $23.2 million. Underground’s loss narrowed to $8.1 million, while Asphalt Group profit declined 14.3% to $28.7 million. Other Group loss narrowed to $27.1 million.
- Year-end backlog increased 60.4% to $216.6 million, with increases in every segment except Other. Management said it expected current backlog to be filled during 2011.
- Operating cash flow improved, but receivables and inventory absorbed cash as production and backlog increased. Inventory was $253.0 million at year-end, versus $248.5 million.
Outlook, risks and unusual items
- Management forecast 2011 capital expenditures of $29.4 million and said cash, expected operating cash flow, and available credit should cover working-capital and capital-spending needs through December 31, 2011. No earnings or revenue guidance was provided.
- The $100 million Wells Fargo revolving facility matures in May 2012. At year-end, $92.4 million was available after $7.6 million of letters of credit; the company was covenant-compliant. Management warned that future covenant noncompliance could trigger lender remedies.
- Steel prices began rising rapidly late in 2010, with further increases expected through the first quarter of 2011. Advance purchases and supply contracts were expected to mitigate some impact, but pricing increases may not fully offset higher costs. Oil and asphalt prices, customer credit, economic conditions, and uncertain federal highway funding also affect demand.
- Federal transportation funding remained dependent on short-term extensions; the filing cited uncertainty about funding levels and long-term legislation. Management viewed a multi-year highway program as supportive of customer planning and demand.
- Material disclosed contingencies include an EPA and Oregon environmental enforcement matter involving Johnson Crushers, for which no penalty had been proposed, and potential responsibility for an Illinois cleanup related to pre-1986 activities. The company had not recorded liabilities for either matter because amounts could not be estimated.
- Customer financing guarantees totaled $3.0 million, with a recorded liability of $0.3 million. Letters of credit and guarantees carried maximum potential payments of approximately $11.5 million. The company also committed to a $4.4 million Australian real-estate purchase, expected to close in the first half of 2011.
- The 2009 fourth-quarter impairment was $17.0 million before tax, primarily goodwill; no impairment charge was recorded in 2010. The company reported no cash dividends and did not intend to pay them in the foreseeable future.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls, with no material fourth-quarter control changes.
Investor verification points
- Check whether the substantial backlog converted to 2011 sales and cash collections, particularly given the inventory and receivables investment.
- Monitor steel-cost pass-through, gross-margin durability, and performance of the declining Asphalt and Underground segments.
- Track federal highway funding, customer financing availability, and international demand and currency effects.
- Review the status and potential cost of the two environmental matters, customer guarantees, letters of credit, and the Australian property acquisition.
- Confirm the company’s liquidity, covenant compliance, and refinancing plans ahead of the May 2012 facility maturity.