Astec Industries, Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Astec manufactures equipment and parts for road building, aggregate processing, mining, underground construction, and related markets. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $177.9 | $166.1 | $580.6 | $560.2 |
| Gross profit / margin | $41.9 / 23.6% | $34.6 / 20.9% | $134.8 / 23.2% | $121.3 / 21.6% |
| Operating income | $10.1 | $4.2 | $39.4 | $27.8 |
| Net income attributable to controlling interest | $7.4 | $3.3 | $26.5 | $18.5 |
| Diluted EPS | $0.32 | $0.15 | $1.16 | $0.82 |
| Operating cash flow | Not presented separately | Not presented separately | $46.0 | $38.7 |
- Q3 sales rose 7.1%, controlling-interest net income increased 120.2%, and diluted EPS more than doubled. Nine-month sales rose 3.6%, net income increased 42.9%, and diluted EPS increased 41.5%.
- Gross-margin improvement reflected manufacturing efficiency and cost reductions, better plant utilization, and a larger share of international sales, which typically carry higher margins. SG&A and engineering expense rose 4.5% in Q3 and 2.0% year to date, but declined as a percentage of sales.
- Nine-month operating cash flow was $46.0 million; property and equipment expenditures were $7.6 million, implying approximate operating cash flow after capital expenditures of $38.4 million. Cash increased to $81.4 million from $40.4 million at year-end 2009.
- At September 30, total assets were $630.3 million, current assets $428.2 million, current liabilities $119.0 million, and total liabilities $147.1 million. No borrowings were outstanding under the principal revolving facility; net of letters of credit, $92.5 million was available.
Material changes and operating trends
- International sales drove consolidated growth: Q3 international sales increased 22.2% to $79.3 million, while domestic sales fell 2.6% to $98.6 million. For the first nine months, international sales rose 12.8% and domestic sales declined 1.4%.
- Year-to-date segment sales varied considerably: Aggregate and Mining increased 14.3%, Mobile Asphalt Paving increased 19.9%, and Other increased 12.7%; Asphalt declined 8.4% and Underground declined 23.1%. Underground remained loss-making, although its segment loss narrowed to $7.0 million from $9.6 million.
- Backlog was $145.6 million, up 0.9% from September 30, 2009. Domestic backlog increased 11.5%, partly offset by an 8.9% decline internationally.
- Receivables rose $20.2 million from year-end. Management attributed this mainly to extended terms for selected customers; days outstanding increased from 35 to 46. Inventory declined $6.4 million.
Outlook, risks, and unusual items
- No specific sales or earnings guidance was provided. Management forecast 2010 capital expenditures of $15.3 million and said cash, future operating cash flow, and credit availability should cover working-capital and capital-expenditure needs through September 30, 2011.
- Management said the short-term federal transportation funding extension supported the highway program, but a new multi-year bill would better enable customers to plan projects. Domestic sales were affected by uncertainty following expiration of the prior highway legislation. The company cited economic conditions, infrastructure spending, customer confidence, oil and steel prices, interest rates, currency movements, and competition as factors affecting results.
- Management expected steel pricing to remain stable through year-end 2010, while noting possible upward pressure in early 2011. It may raise product prices or use purchasing strategies to offset cost increases, but said it might not recover all increases.
- The business is seasonal: historically 75%–80% of annual revenue occurs in the first nine months, and Q4 is normally the weakest quarter. Interim results therefore may not indicate full-year performance.
- Contingencies included $3.2 million of customer-financing guarantees, with a $0.3 million recorded liability, and up to $11.4 million of potential exposure related to letters of credit and bonds. EPA-related matters involved alleged air-permitting violations at a subsidiary and possible responsibility for an Illinois cleanup; no liability was recorded because the amounts could not be estimated. Management said ordinary-course legal matters were not expected to have a material adverse effect, while acknowledging uncertainty.
- Foreign-currency derivative liabilities totaled $0.8 million current and $0.05 million long-term. The company recorded derivative fair-value losses of $0.8 million for the first nine months, in cost of sales; no derivatives were designated as hedges.
- The filing reports nine-month income tax expense as $13.665 million in the financial statements but $13.655 million in MD&A. The reported effective tax rate was 34.0%, versus 35.4% a year earlier.
Key investor verification points
- Assess whether international demand and backlog can offset continued domestic weakness and the absence of long-term federal highway funding.
- Monitor receivable collection and the effect of extended customer payment terms, along with working-capital cash-flow swings.
- Track the recovery or further deterioration of the Asphalt and Underground segments and the sustainability of gross-margin gains.
- Review the amount and potential outcomes of the EPA matters, customer guarantees, and letters of credit and bonds.
- Confirm the income-tax expense discrepancy and evaluate the assumptions behind management’s liquidity and capital-expenditure outlook.