Astec Industries, Inc. — Q3 2023 Form 10-Q
Business context and reporting period. Astec designs and manufactures equipment and components for road building and related construction, as well as aggregate processing, mining, recycling and other markets. This unaudited filing covers the quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods unless noted.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $303.1 million | $315.2 million | $1,001.0 million | $924.6 million |
| Gross profit / margin | $69.6 million / 23.0% | $65.5 million / 20.8% | $241.7 million / 24.1% | $193.1 million / 20.9% |
| Operating income (loss) | $(5.2) million | $1.9 million | $29.7 million | $4.2 million |
| Net income (loss) attributable to controlling interest | $(6.6) million | $0.7 million | $18.6 million | $0.9 million |
| Diluted earnings (loss) per share | $(0.29) | $0.03 | $0.82 | $0.04 |
| Segment Operating Adjusted EBITDA | $10.4 million | $16.5 million | $78.9 million | $48.4 million |
Cash flow and liquidity. Operating cash flow was negative $18.8 million for the first nine months, improving from negative $56.8 million a year earlier. Investing cash flow was negative $3.9 million, while financing provided $30.8 million. Cash, cash equivalents and restricted cash ended at $73.8 million. Management reported total liquidity of $196.9 million, including $71.3 million of cash available for operations and $125.6 million of additional revolving-facility availability, subject to covenants.
Debt and balance sheet. At September 30, reported debt comprised $122.0 million of long-term debt, $6.9 million of short-term debt and $0.1 million of current maturities. The company had $450.1 million of inventory, up from $393.4 million at year-end 2022. Total assets were $1,074.4 million and total liabilities were $439.6 million. The company was in compliance with its credit-facility financial covenants at quarter-end.
Material changes versus prior comparable periods
- Q3 sales declined 3.8%, despite gross profit rising 6.3%; the quarter shifted to an operating and net loss. Management attributed lower sales mainly to weaker equipment, used-equipment and service/installation revenue, partly offset by parts sales.
- For the first nine months, sales increased 8.3% and gross profit rose 25.2%. Segment Operating Adjusted EBITDA increased to $78.9 million from $48.4 million.
- Q3 gross margin improved to 23.0% from 20.8%, with favorable pricing partly offset by inflation and manufacturing inefficiencies. In the nine-month period, favorable volume, pricing and mix were partly offset by inflation, inefficiencies and higher warranty costs.
- Backlog was $614.7 million, down 36.6% from $969.0 million a year earlier, as deliveries outpaced new orders and supply-chain and throughput disruptions eased.
- Interest expense rose to $2.4 million in Q3 and $6.4 million year to date, primarily because of higher revolving-credit borrowings. The company expects 2023 interest expense to be significantly higher than in prior years.
Outlook, commentary, risks and unusual items
- Management expects backlog to continue normalizing from historically high levels; it is monitoring high-volume dealer orders for possible changes, delays or cancellations. The filing provides no specific revenue or earnings guidance.
- The multi-year ERP transformation is expected to cost $125 million to $150 million in total, with an estimated $25 million to $30 million incurred annually beginning in 2022. Costs were $22.8 million in the first nine months of 2023. The company expects capital expenditures not to exceed $35 million in 2023.
- A lean-manufacturing project is expected to deliver gross-margin improvements when completed in early to mid-2024; related capital investments were expected to be largely completed by the end of 2023.
- On October 5, 2023, a jury returned a verdict against Telsmith in the 37 BP matter. Management assessed a probable loss range of $6.4 million to $18.1 million and recorded $6.4 million in Q3 as its best estimate. The filing says a court judgment was expected by year-end 2023 or Q1 2024 and could change the estimate; post-judgment interest may also apply.
- Other disclosed litigation includes a shareholder class action in discovery and a GEFCO equipment-related case for which the company could not estimate a possible loss. Management says unfavorable rulings could materially affect results, cash flows or financial position.
- Key operating exposures include economic and infrastructure spending cycles, inflation and interest rates, volatile oil and steel prices, supply availability, production staffing and the ability to pass cost increases to customers. Management also notes implementation demands and control changes associated with the ERP rollout; disclosure controls were assessed as effective at September 30, 2023.
- The filing records a $1.9 million first-quarter reduction in cost of sales to correct immaterial prior-period inventory-expense over-accruals. The company also recorded a $3.4 million gain from the Tacoma property sale in Q1 2023.
Most important facts for investors to verify
- Whether the 37 BP judgment changes the recorded $6.4 million estimate, and the resulting total liability and interest cost.
- Whether backlog conversion and new orders stabilize, and whether dealer orders are modified, delayed or cancelled.
- Whether pricing, cost control and manufacturing improvements can sustain gross-margin gains amid inflation, warranty expense and production inefficiencies.
- Progress, remaining costs and operational or financial-control effects of the ERP implementation and lean-manufacturing project.
- Future operating cash flow, inventory levels, borrowing needs, interest expense and continued compliance with credit covenants.