Astec Industries, Inc. — Q3 2014 Form 10-Q
Period: Three and nine months ended September 30, 2014. Unaudited consolidated results; amounts below are in $ millions unless stated otherwise. Astec manufactures specialized equipment and parts for infrastructure, aggregate and mining, and energy markets.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $220.2 | $213.2 | $736.1 | $709.1 |
| Gross profit / margin | $43.3 / 19.7% | $45.8 / 21.5% | $162.2 / 22.0% | $159.8 / 22.5% |
| Operating income | $4.4 | $9.2 | $39.7 | $45.0 |
| Net income attributable to controlling interest | $1.9 | $6.5 | $26.0 | $30.8 |
| Diluted EPS | $0.08 | $0.28 | $1.12 | $1.33 |
| Operating cash flow | Nine months: $12.8 vs. $6.7 | — |
Q3 sales rose 3.3%, but gross margin fell 180 basis points and controlling-interest net income declined 70.6%. For the nine-month period, sales increased 3.8%, while controlling-interest net income decreased 15.7%. SG&A and engineering expenses increased 6.7% year to date, to $122.5 million.
Liquidity, debt and cash flows
- At September 30, cash and cash equivalents were $13.8 million and short-term investments were $1.9 million, down from $35.6 million and $17.2 million, respectively, at year-end 2013. Current assets were $531.6 million and current liabilities $150.1 million.
- Nine-month operating cash flow was $12.8 million. Investing cash outflow was $36.6 million, including $35.0 million for the Telestack acquisition; financing provided $2.3 million. Cash declined $21.7 million over the period.
- No borrowings were outstanding on the $100 million Wells Fargo revolver; $90.7 million remained available after letters of credit. Astec was in compliance with its covenants. Foreign subsidiary borrowings included $1.6 million at Osborn and $6.7 million at Astec Brazil.
- Capital expenditures for 2014 were forecast at approximately $23 million. The company continued paying a quarterly dividend of $0.10 per share.
Material changes and operating drivers
- Q3 domestic sales increased 7.7%, while international sales declined 3.9%; year-to-date domestic sales rose 10.1% and international sales fell 7.5%. Management cited a stronger U.S. dollar and economic uncertainty in several foreign markets.
- Q3 segment sales were $78.7 million for Infrastructure (down 5.5%), $88.2 million for Aggregate and Mining (up 10.5%), and $53.3 million for Energy (up 6.4%). Infrastructure segment profit fell to $0.5 million, while Energy segment profit improved to $2.8 million. Aggregate and Mining profit was nearly unchanged at $6.8 million.
- Telestack was acquired April 1, 2014, for a stated purchase price of $36.2 million. It added $18.3 million of preliminary goodwill and $14.4 million of intangible assets. Management said its results were not significant in the period; acquisition-related inventory valuation and intangible amortization offset profit contribution.
- Backlog at September 30 was $295.0 million, up 27.7% from the comparable prior-year figure adjusted for Telestack. It included $59.3 million for three pellet plant orders from one customer. The company said revenue on these financed orders would be recognized as payments are received, after final performance testing.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said U.S. highway funding was authorized only through May 2015 under a short-term measure and that a longer-term program would better support customer planning. Public infrastructure funding, economic conditions, oil and steel prices, interest rates, competition, and foreign exchange movements may affect demand and margins.
- Management expected steel prices to remain relatively stable in Q4 2014, with moderate increases anticipated in early 2015. It used forward contracts and advance purchases to mitigate steel-price exposure. A South African union strike temporarily closed Osborn from July 1 to 29 and reduced Q3 international sales in Africa.
- The Q3 effective tax rate was 64.0%, affected by foreign subsidiary losses without tax benefits and a $0.5 million increase in the reserve for uncertain tax positions. Management expected the 2014 annual rate to moderate, depending in part on whether research and development tax credits were extended.
- Contingencies included $2.2 million of customer debt guarantees and up to $10.3 million of potential payments under letters of credit and other guarantees. Management did not expect ordinary-course litigation to have a material adverse effect, but noted unfavorable outcomes remain possible. An older EPA cleanup matter could not be estimated and had no recorded liability.
- Foreign currency translation reduced comprehensive income; Q3 other comprehensive loss was $5.1 million, primarily from a $5.6 million translation adjustment. Management reported no material change in market-risk disclosures or risk factors from the 2013 Form 10-K.
Investor verification priorities
- Track whether the gross-margin and profit declines persist, particularly in Infrastructure, and how much improvement in Energy is sustainable.
- Verify conversion and profitability of the $295.0 million backlog, including the timing, performance testing, financing terms, and revenue recognition for the pellet plant orders.
- Assess the cash impact of inventory and receivables growth, planned capital spending, and the Brazilian facility; confirm liquidity remains adequate.
- Review Telestack’s finalized purchase accounting and subsequent contribution to sales, margins, and cash flow.
- Monitor international demand, currency effects, steel costs, and U.S. highway funding, along with the tax-rate assumptions and unresolved contingencies.