Astec Industries, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Financial amounts are in thousands of dollars, except per-share data. The financial statements are unaudited.
Business context
Astec manufactures and sells equipment and replacement parts for road building, aggregate processing, mining, energy, and related markets. Its reportable segments are Infrastructure, Aggregate and Mining, and Energy. Results are exposed to infrastructure spending, economic cycles, oil and gas activity, steel prices, foreign exchange, and customer demand.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $247,752 | $211,350 | $820,868 | $768,141 |
| Gross profit | $55,389 | $45,138 | $200,797 | $173,417 |
| Gross margin | 22.4% | 21.4% | 24.5% | 22.6% |
| Operating income | $11,439 | $4,115 | $68,081 | $45,281 |
| Net income attributable to controlling interest | $6,838 | $2,292 | $42,773 | $29,201 |
| Diluted EPS | $0.30 | $0.10 | $1.85 | $1.26 |
- Q3 sales rose 17.2%; nine-month sales rose 6.9%. Q3 profit attributable to controlling interest increased 198.3%, and the nine-month figure increased 46.5%.
- For the first nine months, operating cash flow was $96,773, versus $22,144 a year earlier. Investing cash outflow was $56,693, including $39,613 for the Power Flame acquisition; financing cash outflow was $12,634. Cash increased to $52,474 from $25,062 at year-end 2015.
- At September 30, current assets were $590,567 and current liabilities were $190,206. Total debt was approximately $6,940: $2,159 current and $4,781 long-term. The company had no borrowings under its $100 million Wells Fargo revolver and $84,804 of availability after outstanding letters of credit.
- Quarterly and year-to-date dividends declared were $0.10 and $0.30 per share, respectively.
Changes versus comparable periods
- Infrastructure was the main growth driver: Q3 segment sales increased 27.6%, and nine-month sales increased 23.2%, supported by domestic road-equipment demand and pellet-plant sales. Consolidated gross margin improved in both comparison periods, primarily on Infrastructure mix and volume.
- International sales fell 12.9% in Q3 and 29.9% year to date, affected by the strong U.S. dollar and weak mining and oil-and-gas markets. Domestic sales increased 27.8% in Q3 and 20.3% year to date.
- Year-to-date Aggregate and Mining sales declined 2.9%, and Energy sales declined 11.6%. Q3 Energy segment profit fell 58.5%, with pricing pressure, lower margins, overhead and Power Flame costs.
- Year-to-date other income declined $1,219, mainly because 2015 included $1,204 of key-man life insurance proceeds. Corporate loss increased, reflecting higher taxes, profit sharing, SERP and restricted-stock expense.
- Customer deposits rose $35,685 from year-end, contributing to operating cash flow; receivables and inventory also increased. The 2016 period includes the Power Flame acquisition, completed August 1.
Outlook, commentary, and risks
- Management forecast 2016 capital expenditures of approximately $23 million and said existing working capital, expected operating cash flows, and credit availability should cover working-capital and capital-expenditure needs through September 30, 2017.
- Backlog at September 30 was $389,260, up 54.6% from $251,775 a year earlier; 83.6% was domestic. Backlog includes approximately $60 million for a customer-financed pellet plant, with revenue expected to be recorded when payment is received in 2017, and approximately $74.1 million remaining on another pellet-plant order.
- Management expects steel prices to increase slightly through the remainder of 2016 and into 2017 and uses fixed-price contracts and advance purchases to mitigate exposure. Management noted that oil-price volatility, low oil and gas prices, a strong dollar, weak mining activity, interest rates, and uncertain infrastructure funding may affect demand and results.
- Power Flame was acquired for approximately $39.6 million, funded from cash. The preliminary purchase-price allocation included $13.1 million of goodwill and $17.4 million of intangible assets; management did not expect its 2016 revenue or profit to be material.
- Contingencies include $1.945 million of customer financing guarantees, $15.196 million of Wells Fargo letters of credit, and $1.911 million of Osborn guarantees. The company recorded $153,000 for customer guarantees. Management said current claims and proceedings were not expected to have a material adverse effect, but noted unfavorable rulings remain possible. An older EPA cleanup matter could not be estimated and had no recorded liability.
- The company reported compliance with credit covenants, effective disclosure controls, and no material changes to previously disclosed risk factors or market-risk disclosures.
Important facts for investors to verify
- Whether the substantial backlog converts to sales and cash on expected timing, particularly the customer-financed pellet-plant orders and their payment terms.
- Whether Infrastructure growth and margin improvement can offset continued weakness in international, mining, and oil-and-gas markets.
- How Power Flame performs after acquisition, including the final purchase-price adjustments, escrow resolution, and integration costs.
- Whether working-capital requirements, warranty claims, currency movements, and steel costs affect future cash generation and margins.
- Revolver renewal before its April 2017 expiration, foreign subsidiary debt and guarantees, and the potential outcomes of legal and environmental contingencies.