Astec Industries, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. Astec manufactures equipment and parts serving infrastructure, aggregate and mining, and energy markets.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $304.8 | $272.5 | $630.6 | $598.0 |
| Gross profit (margin) | $83.5 (27.4%) | $1.1 (0.4%) | $160.0 (25.4%) | $79.1 (13.2%) |
| Operating income (loss) | $30.5 | ($50.2) | $48.7 | ($24.2) |
| Net income (loss) attributable to controlling interest | $23.4 | ($40.7) | $37.7 | ($20.4) |
| Diluted EPS | $1.03 | ($1.76) | $1.66 | ($0.89) |
| Operating cash flow | Not separately reported by quarter | $42.9 | $18.4 |
Q2 sales increased 11.8% year over year and first-half sales rose 5.5%. Reported profit comparisons are heavily affected by pellet-plant items: Q2 and first-half 2019 include a $20.0 million Georgia plant sale, which generated $20.0 million of gross margin and $15.3 million of after-tax income; the comparable 2018 periods included $71.0 million of Arkansas pellet-plant charges against gross profit and $57.2 million after tax. These items make reported growth an imperfect indicator of underlying performance.
By segment, first-half sales were $288.2 million for Infrastructure (+25.2%), $213.4 million for Aggregate and Mining (-9.3%), and $129.0 million for Energy (-2.5%). Infrastructure’s reported increase reflects the Georgia sale and the absence of the Arkansas charges; excluding those pellet-plant effects, domestic Infrastructure sales declined. Aggregate and Mining and Energy segment profits also fell, reflecting lower sales and weaker production-volume absorption of overhead. First-half SG&A and engineering expense rose 7.7% to $111.3 million; interest expense increased to $1.1 million from $0.3 million, mainly due to borrowings.
Cash, debt and liquidity
- Cash and cash equivalents were $24.9 million at June 30, 2019, down from $25.8 million at December 31, 2018. $21.4 million was held by foreign subsidiaries.
- Operating cash flow was $42.9 million; investing cash use was $8.1 million, including $8.7 million of capital expenditures; financing cash use was $35.9 million. The company repaid a net $31.0 million of bank borrowings during the first half.
- Total debt was approximately $29.1 million, including $28.1 million outstanding under the revolving facility. The $150 million facility matures December 2023; $113.3 million of borrowing capacity remained after letters of credit. The company reported compliance with its financial covenants.
- Current assets were $557.5 million and current liabilities $173.9 million; the resulting current ratio was approximately 3.2. Inventories were $360.9 million, up from $355.9 million at year-end. Customer deposits declined to $35.0 million from $48.1 million.
- Shareholders’ equity was $620.0 million. Quarterly dividends were $0.11 per share. No shares were repurchased in the first half under the $150 million authorization.
Outlook, risks and unusual items
- Backlog was $246.1 million at June 30, down 18.8% from a year earlier. Domestic backlog fell 25.8%; backlog declined in all three segments. The company linked conditions to weaker demand, price competition and weather-related customer delays.
- Astec reduced headcount from 4,401 at year-end 2018 to 4,183 at June 30, 2019, citing lower backlog and manufacturing activity, and said it would continue evaluating staffing needs.
- Management forecast approximately $25 million of 2019 capital expenditures and said cash, operating cash generation and available credit should meet working-capital and capital-expenditure requirements through August 2020. It expects steel prices to remain stable in Q3 and rise moderately in Q4; purchasing and inventory initiatives are intended to support margins and reduce inventory. No specific full-year sales or earnings guidance is provided in the text.
- Management highlighted uncertainty in federal highway funding, cyclical end markets, customer demand, competitive pricing, steel and oil prices, interest rates, foreign-exchange movements and international sales. It expects the U.S. dollar to remain strong in the near term. The company is closing its German dealer operation and liquidating its assets.
- Power Flame goodwill had no excess fair value at the October 2018 impairment test; although no further impairment was recorded in the first half, management said an additional charge may be needed in 2019.
- A shareholder class action filed in February 2019 alleges securities-law violations relating to statements made from July 2016 through October 2018. Astec disputes the allegations, intends to defend itself and cannot estimate potential loss. The filing also discloses customer-financing guarantees and letters of credit; the maximum potential payments under specified letters of credit and guarantees were $12.0 million.
- Disclosure controls and procedures were deemed ineffective due to material weaknesses previously reported in the 2018 Form 10-K. Remediation was underway, but management had not concluded the weaknesses were remediated.
Most important facts for investors to verify
- Underlying sales, margins and earnings after separating the $20.0 million Georgia pellet-plant gain and the prior-year Arkansas charges.
- Whether backlog declines, weaker demand and reduced production continue, particularly in Aggregate and Mining and Energy.
- Inventory levels, working-capital conversion and the sustainability of operating cash flow.
- Progress on internal-control remediation and any subsequent disclosures about the shareholder litigation or potential goodwill impairment.
- Use of revolving credit capacity, compliance with covenants, and the company’s ability to fund planned capital spending and dividends if operating conditions weaken.