Astec Industries, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Astec designs and manufactures equipment and components primarily for road building and related construction, with reportable Infrastructure Solutions and Materials Solutions segments.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $315.2M | $266.9M | $924.6M | $828.9M |
| Gross profit / margin | $65.4M / 20.7% | $61.9M / 23.2% | $192.1M / 20.8% | $196.2M / 23.7% |
| Operating income | $1.8M | $6.3M | $3.2M | $26.1M |
| Net income attributable to controlling interest | $0.7M | $9.0M | $0.9M | $25.8M |
| Diluted EPS | $0.03 | $0.39 | $0.04 | $1.13 |
- Q3 sales rose 18.1%; nine-month sales rose 11.5%. Domestic sales drove growth, while nine-month international sales declined 3.9%.
- Margins and earnings weakened despite higher sales. Management attributed gross-profit pressure to inflation in materials, labor and overhead, plus manufacturing and logistics inefficiencies. Q3 gross profit also benefited from favorable volume, pricing and mix.
- For the first nine months, operating cash flow was negative $56.8M, versus positive $27.3M a year earlier. Higher inventory absorbed $98.9M of cash; the company cited increased backlog and supply-chain disruption.
- Cash, cash equivalents and restricted cash were $20.8M at September 30, versus $134.4M at December 31, 2021. Current assets were $649.6M and current liabilities $283.9M.
- Balance-sheet debt included $8.8M of short-term debt, $0.2M of current maturities and $1.3M of long-term debt. The company reported $1.2M drawn on its $150M revolving facility and $146.3M available after letters of credit; it was compliant with facility covenants.
- Shareholders’ equity was $628.1M, down from $651.3M at year-end 2021. Nine-month capital expenditures were $27.6M; dividends paid were $8.3M.
Changes versus the prior comparable period
- Q3 sales growth did not translate into higher operating profit: operating income fell $4.5M and controlling-interest net income fell 92.2% year over year.
- Nine-month gross profit decreased $4.1M even as sales increased $95.7M. Segment Operating Adjusted EBITDA was $48.4M versus $57.5M; this is a company-defined non-GAAP measure.
- Backlog grew 56.2% to $969.0M from $620.5M at September 30, 2021, with domestic backlog at $812.7M and international backlog at $156.3M.
- Inventory rose $97.7M from December 31, 2021. Current liabilities increased $60.6M, including higher accounts payable, customer deposits and accrued payroll.
- The company acquired MINDS Automation Group in April 2022 for $19.3M in cash. It also repurchased 160,445 shares for approximately $6.1M during Q3.
Outlook, management commentary and notable items
- Management cited robust demand and the U.S. Infrastructure Investment and Jobs Act as supports for orders, but said longer lead times, constrained production, component availability and manufacturing labor shortages could delay backlog fulfillment.
- Inflation, historically high steel costs, shipping and logistics disruption, and limited ability to pass through cost increases may continue to pressure margins. Management noted oil-price volatility and the ongoing effects of the conflict in Ukraine.
- The multi-year Simplify, Focus and Grow transformation incurred $18.7M of costs in the first nine months of 2022, including $7.0M in Q3. ERP implementation costs are estimated at $125M–$150M in total, with $25M–$30M expected per year beginning in 2022. Capital expenditures were estimated at $35M–$45M for full-year 2022.
- Management said working capital, future operating cash flows and available credit capacity should be sufficient for existing business needs for at least 12 months. No formal earnings or revenue guidance is stated in the provided filing text.
- The company revised prior-period figures for errors involving work-in-process inventory and over-time revenue recognition. It assessed the errors as immaterial; revised 2021 results are presented for comparison. Management reported disclosure controls effective as of September 30, 2022.
- Legal matters include a shareholder class action reinstated in part on appeal and litigation involving GEFCO equipment sales. Management could not estimate a possible loss in the GEFCO matter; it stated that current matters are not expected to have a material adverse effect, while acknowledging unfavorable outcomes could be material.
Most important facts for investors to verify
- Whether the $969.0M backlog can be produced and delivered on schedule, and converted to revenue and cash.
- Whether pricing, productivity and the lean-manufacturing initiative can offset persistent input-cost inflation and operating inefficiencies.
- Inventory growth, cash usage, working-capital needs and the company’s reliance on revolving and international credit facilities.
- Actual ERP implementation spending and milestones compared with the stated cost range and timetable.
- Developments in the disclosed litigation, tax audits and uncertain tax positions, and any further implications of the prior-period accounting corrections.