Astec Industries, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial statements are unaudited. Astec manufactures equipment and replacement parts for road construction, aggregate processing, mining, recycling, and related industries. The company reorganized its reporting segments in Q1 2020 into Infrastructure Solutions, Materials Solutions, and Corporate.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $265.3 million | $304.8 million | $554.1 million | $630.6 million |
| Gross profit / margin | $59.6 million / 22.5% | $83.3 million / 27.3% | $133.6 million / 24.1% | $160.2 million / 25.4% |
| Operating income | $10.9 million | $30.5 million | $26.0 million | $48.7 million |
| Net income attributable to controlling interest | $9.3 million | $23.4 million | $29.9 million | $37.7 million |
| Diluted EPS | $0.41 | $1.03 | $1.32 | $1.66 |
| Operating cash flow | Not stated by quarter | Not stated by quarter | $84.9 million | $42.9 million |
- Cash and liquidity: Cash and cash equivalents were $119.8 million at June 30, up from $48.9 million at December 31, 2019. The balance included $25.7 million received from a CARES Act-related tax refund request. The company had $141.2 million available on its $150 million domestic revolving facility, net of letters of credit, and was covenant-compliant.
- Debt: Balance-sheet debt totaled approximately $1.4 million at June 30; there were no borrowings under the domestic revolving facility. Cash flow from operations benefited substantially from lower inventory and receivables, partly offset by reduced customer deposits.
- Other balance-sheet measures: Current assets were $530.4 million and current liabilities $144.0 million. Inventory declined to $263.2 million from $294.5 million at year-end. Shareholders’ equity was $621.5 million.
- Capital spending and dividends: First-half capital expenditures were $7.4 million; 2020 capital expenditures were forecast at approximately $20 million. The company paid quarterly dividends of $0.11 per share.
Changes and operating performance
- Q2 sales fell 13.0% year over year; first-half sales fell 12.1%. Q2 domestic sales declined 10.0% and international sales declined 25.3%. Management cited COVID-19 disruptions, a stronger U.S. dollar, and lower demand in some product lines.
- Q2 Infrastructure Solutions sales were $181.9 million, down 8.1%; Materials Solutions sales were $83.4 million, down 21.9%. The prior-year period included a non-recurring $20 million Georgia Pellet Plant sale that generated $20 million of gross profit, materially affecting comparisons.
- Gross margin contracted in Q2, principally reflecting that prior-year sale. SG&A and engineering expenses declined 19.0% in Q2, mainly due to lower consulting, travel, and employee costs.
- Q2 restructuring and impairment charges were $6.0 million, versus $44,000 a year earlier; first-half charges were $8.7 million. Items included a $2.6 million company-plane impairment and repair costs, site closures and relocations, workforce reductions, and a $1.6 million first-quarter goodwill impairment.
- First-half net income included a $9.5 million discrete tax benefit from CARES Act NOL carryback provisions. The six-month effective tax rate was negative 12.4%, compared with 22.3% in 2019.
- Backlog at June 30 was $182.0 million, down 26.1% from $246.1 million a year earlier; management attributed lower orders to COVID-19 uncertainty. Headcount was 3,529 at June 30, down from 4,183 a year earlier.
Outlook, risks, and unusual items
- Management said the pandemic’s effects were difficult to predict and expected a more severe impact on results in Q3 2020, potentially continuing into later periods. No specific sales or earnings guidance was provided.
- Management stated that cash, expected operating cash flows, and available credit were expected to fund working-capital and capital-expenditure needs through August 2021. It also described scenario planning and potential cost and cash-saving actions.
- Two Materials Solutions facilities temporarily halted manufacturing in late March; the South African and Northern Ireland sites reopened May 4 and May 11, respectively. Management said Q2 effects were largely driven by these international shutdowns.
- Other risks cited include infrastructure funding uncertainty, cyclical end markets, steel and oil-price volatility, foreign-exchange movements, customer credit, and possible future asset impairments. The filing says COVID-19-related changes in estimates could lead to future impairments or credit losses.
- Contingencies included $11.5 million of maximum potential payments under letters of credit and foreign guarantees, plus customer-financing guarantees; $2.1 million was accrued for guarantees. The company also disclosed a shareholder class action with a $0.6 million accrual and a separate GEFCO equipment lawsuit for which a possible loss could not be estimated.
- After quarter-end, Astec completed the $13.7 million Con-e-Co acquisition on July 20 and the $15.7 million BMH Systems acquisition on August 3, both paid in cash. Management had not completed purchase-price analyses.
- Disclosure controls and procedures were reported as not effective at period-end because of previously disclosed material weaknesses in internal control over financial reporting; remediation was ongoing and not yet considered complete.
Important facts for investors to verify
- Whether Q3 and subsequent results reflect the expected worsening COVID-19 impact, including the effect on sales, backlog, margins, and customer deposits.
- How much first-half operating cash flow is sustainable, given the contribution from working-capital movements, and the impact of the two post-period cash acquisitions on liquidity.
- Whether restructuring actions deliver expected efficiencies and whether further impairment or inventory write-downs are required.
- Progress in remediating internal-control material weaknesses and any changes in the disclosed legal or guarantee exposures.
- Actual 2020 capital expenditures and future dividend decisions; the filing provides no specific earnings or revenue forecast.