Astec Industries, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Amounts below are in millions of dollars unless otherwise noted. Astec manufactures equipment and replacement parts for road building, aggregates and mining, energy, and related markets.
Financial performance and position
- Sales: $278.7, down 3.5% from $288.7 in Q1 2015. Domestic sales rose 11.0% to $234.2; international sales fell 42.8% to $44.5. Parts sales increased 1.3% to $74.1.
- Profitability: Gross profit increased 8.9% to $72.0, with gross margin rising to 25.8% from 22.9%. Operating income rose to $28.2 from $22.2. Net income attributable to controlling interest was $17.7, up 17.5%; diluted EPS was $0.77 versus $0.65. SG&A and engineering expense was essentially flat at $43.8.
- Cash flow: Operating cash flow was $45.1 versus $6.6 a year earlier, primarily reflecting earnings and a customer deposit on a pellet plant order. Investing cash outflow was $5.0, including $5.1 of capital expenditures; financing cash outflow was $3.1. Cash increased to $62.4 from $25.1 at year-end.
- Liquidity and debt: Current assets were $599.9 and current liabilities $182.6 at March 31. Total reported debt was $10.9 ($4.7 current and $6.3 long-term), consisting of Brazilian subsidiary loans. The $100.0 Wells Fargo revolver had no borrowings and $82.4 of availability after letters of credit. The company reported compliance with its financial covenants.
- Other metrics: Backlog was $432.8, up 48.7% year over year. The quarterly dividend remained $0.10 per share. Total assets were $835.8 and total equity $626.3.
Changes and segment performance
- Infrastructure sales grew 13.4% to $153.1 and segment profit rose 41.0% to $21.9, supported by a pellet plant sale, domestic demand, favorable mix, lean-manufacturing savings, and intercompany profit recapture.
- Aggregate and Mining sales declined 13.1% to $92.5 and segment profit fell 17.7% to $9.5. International mining demand remained weak, although the segment’s gross margin improved.
- Energy sales fell 30.0% to $33.1; the segment moved from $0.2 profit to a $0.2 loss, mainly amid low oil and gas prices and weaker international sales.
- International sales mix fell to 16.0% of consolidated sales from 26.9%. Management cited the strong U.S. dollar, low oil and gas prices, and the mining-sector downturn as pressures. Domestic Infrastructure sales benefited from the December 2015 federal highway law.
Outlook, risks, and unusual items
- No specific full-year sales or earnings guidance is provided. Management forecast 2016 capital expenditures of approximately $30.1 and said available working capital, future operating cash flow, and credit capacity should meet working-capital and capital-expenditure needs through March 31, 2017.
- Management expected steel prices to continue rising into Q3 2016 if U.S. demand remained on track; it used forward contracts and advance purchases to limit exposure. Oil-price volatility, interest rates, foreign exchange, public infrastructure funding, and customer confidence were identified as factors affecting demand. The FAST Act authorizes $305 billion in transportation funding over five years, but management cautioned that future funding could be reduced or redirected.
- Backlog included approximately $60.0 for a financed pellet plant, with revenue expected when payment is received, anticipated in mid-2017. A separate $122.5 pellet plant order received in Q1 was expected to contribute approximately $75.0 of sales in 2016, with the balance in 2017.
- Gross-margin improvement included favorable product mix, lower manufacturing costs, foreign-exchange effects, and recapture of previously deferred intercompany profit. Q1 2015 other income included $1.2 of key-man life-insurance proceeds; its absence contributed to lower other income in 2016. Q1 2016 also included a $0.2 excess tax benefit from stock awards under newly adopted accounting guidance.
- Brazilian working-capital loans totaled $9.5 and carried rates of 10.4%–20.8%; equipment financing totaled $1.4. Foreign cash was $14.9, and management said it had no near-term plans to repatriate it; repatriation could result in taxes.
- Contingencies included up to $18.9 under letters of credit and guarantees, plus $1.9 of customer debt guarantees (with a $0.1 recorded liability). Management said ordinary-course legal matters were not expected to have a material adverse effect, but outcomes remain uncertain. The company could not estimate potential liability from a legacy EPA cleanup matter and had recorded no liability for it.
- Management reported no material change in risk factors from the 2015 Form 10-K and no material change in market-risk disclosures. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the sharp fall in international sales and weak Energy and mining demand persist, and how foreign-exchange movements affect reported results.
- How much of backlog converts to revenue and cash, especially the financed $60.0 pellet plant and the expected timing of the $122.5 order.
- Whether Q1 operating cash flow is sustainable: the increase included a $22.1 rise in customer deposits, while receivables and inventory used cash.
- Exposure to Brazilian borrowing costs, foreign cash repatriation taxes, letters of credit, customer guarantees, and the unquantified EPA cleanup matter.
- Whether margin gains from mix, cost initiatives, currency effects, and intercompany profit recapture continue, and whether steel-cost increases can be offset.