Astec Industries, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods unless otherwise noted. Astec designs and manufactures equipment and components primarily for road building and construction, with Infrastructure Solutions and Materials Solutions as its reportable segments.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $278.0 million | $265.3 million | $562.4 million | $554.1 million |
| Gross profit | $67.0 million | $59.6 million | $135.5 million | $133.0 million |
| Gross margin | 24.1% | 22.5% | 24.1% | 24.0% |
| Operating income | $11.2 million | $10.9 million | $21.0 million | $26.0 million |
| Net income attributable to controlling interest | $9.0 million | $9.3 million | $17.7 million | $29.9 million |
| Diluted EPS | $0.39 | $0.41 | $0.77 | $1.32 |
- Cash flow: Six-month operating cash flow was $30.5 million, down from $84.9 million. Capital expenditures were $7.2 million; investing cash outflow was $6.8 million and financing cash outflow was $8.1 million. Cash and cash equivalents rose to $174.5 million from $158.6 million at year-end 2020.
- Liquidity and debt: Current assets were $634.5 million and current liabilities $207.8 million at June 30. Debt totaled approximately $1.6 million, including short-term debt and current and long-term maturities. No borrowings were outstanding under the $150 million revolving facility; letters of credit reduced availability to $141.2 million. The company reported compliance with its financial covenants.
- Other: The company paid quarterly dividends of $0.11 per share. Backlog was $436.1 million, versus $181.9 million a year earlier.
Material changes and management commentary
- Q2 sales grew 4.8%, while first-half sales increased 1.5%. Growth reflected acquisitions, stronger parts sales and higher international sales; domestic sales declined, particularly equipment sales, amid production constraints.
- Q2 gross margin improved 160 basis points, attributed to pricing, product mix, manufacturing efficiencies and government subsidies in an international market. First-half gross margin was broadly flat.
- Despite higher Q2 sales and gross profit, net income attributable to Astec declined 3.2%. SG&A rose 28.7% to $48.0 million, reflecting transformation and centralization costs, higher technology and software costs, acquired-business expenses and professional services. First-half SG&A increased 14.6% to $99.7 million.
- First-half operating income fell to $21.0 million from $26.0 million and attributable net income fell to $17.7 million from $29.9 million. Prior-year results included a $9.5 million discrete tax benefit associated with the CARES Act; 2021 recorded a tax provision.
- Materials Solutions’ Q2 sales and segment profit increased 17.3% and 50.6%, respectively. Infrastructure Solutions’ Q2 sales were nearly flat and segment profit declined 16.9%.
- Operating cash flow declined largely due to working-capital timing, including higher receivables and inventories and income-tax payments, partly offset by higher accounts payable and customer deposits.
Outlook, risks and unusual items
- The filing provides no formal earnings or revenue guidance. Management estimated 2021 capital expenditures of $15–$20 million and said available working capital, operating cash flow and credit capacity should cover working-capital and capital needs for at least 12 months.
- Management cited COVID-19 uncertainty, higher material prices, steel and component availability, labor shortages and rising labor costs. These factors have constrained manufacturing throughput and extended lead times; management noted limited ability to pass cost increases through promptly, particularly on orders with fulfillment periods of up to 12 months.
- Backlog increased 139.7% year over year, driven by pent-up demand and slower production cycles. Management cautioned that labor shortages and longer material lead times may affect the ability to fulfill orders on schedule.
- The Tacoma facility is expected to cease operations at the end of 2021, with product-line transfers expected to be completed by early 2022. The broader multi-year Simplify, Focus and Grow transformation includes site consolidation and an ERP implementation. Related non-capitalizable ERP costs were $5.3 million in the first half; vendor-hosted software agreements require $47.6 million of payments through September 2027.
- A $1.5 million out-of-period SG&A expense was recorded in Q1 2021 for software licensing costs incurred in Q4 2020. First-half restructuring, impairment and other asset charges were $1.5 million, versus $8.1 million in 2020.
- Contingencies include customer-financing guarantees, letters of credit and pending litigation. A shareholder class action dismissal was appealed; a separate equipment-related lawsuit involving GEFCO and Astec remained unresolved, and the company could not estimate a possible loss. Management said current claims were not expected to have a material adverse effect, while noting litigation outcomes remain uncertain.
Key facts for investors to verify
- Whether the substantial backlog converts to revenue on expected timelines despite labor and supply-chain constraints.
- Whether higher steel, component and labor costs can be offset through pricing, sourcing and manufacturing efficiencies.
- How SG&A, transformation and ERP spending develop, and whether expected efficiency benefits materialize.
- Whether working-capital demands continue to weigh on operating cash flow as sales and backlog grow.
- Updates on the Tacoma closure, customer guarantees, tax audits and unresolved litigation, including any change in potential exposure.