Astec Industries, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unless otherwise noted, dollar amounts below are in millions. Astec manufactures equipment for road construction, aggregate and mining, energy, and related industries.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $277.3 | $248.1 | $515.9 | $496.0 |
| Gross profit / margin | $62.2 / 22.4% | $55.4 / 22.3% | $118.9 / 23.1% | $114.0 / 23.0% |
| Operating income | $21.9 | $17.6 | $35.3 | $35.8 |
| Net income attributable to controlling interest | $14.5 | $11.1 | $24.0 | $24.3 |
| Diluted EPS | $0.63 | $0.48 | $1.04 | $1.05 |
- Q2 sales rose 11.7% year over year, with higher sales in all three groups: Infrastructure +14.3%, Aggregate and Mining +6.8%, and Energy +16.8%. Q2 diluted EPS rose 31.3%.
- First-half sales increased 4.0%, but controlling-interest net income declined 0.9%. Domestic sales rose 11.1%; international sales fell 9.3%, which management attributed partly to economic uncertainty and a stronger U.S. dollar.
- SG&A and engineering expense increased 7.0% for the first half, including ConExpo trade-show costs and Telestack expenses. Other income also increased, primarily from investment and customer interest income.
Cash, liquidity and debt
- Six-month operating cash flow was $13.0, versus a $6.9 use in the prior-year period. Receivables and inventory absorbed $23.4 and $13.1, respectively, while changes in payables and customer deposits supported cash generation.
- Cash and cash equivalents were $18.6 at June 30, down from $35.6 at year-end 2013; short-term investments were $1.4, down from $17.2. Investing cash outflow was $32.1, including $35.0 for the Telestack acquisition; financing provided $1.8. Cash declined $16.9 over the period.
- Current assets were $536.4 and current liabilities $160.0. Receivables and inventories increased from year-end by $25.4 and $21.8, respectively.
- No borrowings were outstanding on the $100 million Wells Fargo revolver at quarter-end; $94.0 remained available after letters of credit. Astec was in compliance with its financial covenants. Foreign subsidiaries also had borrowings, including $2.2 at Osborn and $2.3 in a Brazilian working-capital loan, plus Brazilian equipment financing.
Business developments, outlook and risks
- Astec acquired Telestack Limited on April 1 for a stated purchase price of $36.2. Preliminary purchase accounting included $18.0 of goodwill and $14.4 of intangible assets; final accounting was expected by the end of Q1 2015. Telestack’s reported-period contribution was not significant.
- Management forecast 2014 capital expenditures of approximately $33.0, including spending for the Brazilian manufacturing facility, then scheduled for completion in Q3. The filing does not provide a clear full-year sales or earnings forecast.
- Backlog was $264.1 at June 30, up 6.8% from the comparable prior-year amount adjusted for Telestack. It included $58.7 for three pellet-plant orders from one customer. The company agreed to finance these orders for two to three years; revenue recognition was tied to payments and, for the first plant, completion of performance testing scheduled for Q3.
- A South African factory strike began July 1 and temporarily closed Osborn. Management did not expect a material adverse effect, but noted possible effects on international sales. Other sensitivities include public infrastructure funding, oil and steel prices, interest rates, foreign exchange, and cyclical customer demand. Steel prices rose modestly in the first half; management expected moderate increases in Q3.
- Potential contingencies include up to $9.8 of letters of credit and guarantees and $1.3 of customer-debt guarantees; $0.1 was accrued for the latter. The company also disclosed an EPA-related cleanup matter for which it could not estimate a potential liability. Management said ordinary-course legal matters were not expected to have a material adverse effect, while acknowledging litigation uncertainty.
- The $0.10 quarterly dividend continued; another $0.10 dividend was approved in July for payment in August. The board may modify or suspend the policy.
Key facts for investors to verify
- Whether backlog converts to revenue and cash as expected, particularly the concentrated pellet-plant orders, their financing terms, and testing milestones.
- Whether working-capital growth, especially receivables and inventory, remains manageable and operating cash flow sustains its improvement.
- Telestack’s finalized purchase accounting, integration, and contribution to segment profit; its acquisition-date inventory write-up limited Q2 segment-profit benefit.
- The duration and operational effects of the Osborn strike, as well as currency and international-demand trends.
- The filing contains an apparent MD&A direction error for Q2 Energy Group sales: the segment table and reported amounts show an increase of $7.5 million, while one narrative sentence calls it a decrease.