Astec Industries, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Unless noted otherwise, dollar amounts below are in millions. The company manufactures equipment and parts for infrastructure, aggregate and mining, and energy markets.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $325.8 | $325.5 | Up 0.1% |
| Gross profit / margin | $76.5 / 23.5% | $78.0 / 24.0% | Profit down 1.9%; margin down 0.5 percentage point |
| Operating income | $18.2 | $25.9 | Down 29.9% |
| Net income attributable to controlling interest | $14.3 | $20.3 | Down 29.6% |
| Diluted EPS | $0.63 | $0.87 | Down $0.24 |
| Cash from operating activities | $12.0 | $(12.3) | Improved $24.3 |
| Capital expenditures | $3.7 | $5.0 | Down $1.3 |
At March 31, cash and cash equivalents were $28.6, current assets $576.1, and current liabilities $190.8. Long-term debt was $56.6, plus $0.3 of current maturities. The $150.0 revolving facility had $55.8 outstanding and $84.8 available after letters of credit; the company reported compliance with its financial covenants. Of cash, $24.3 was held by foreign subsidiaries.
Operating cash flow benefited from smaller increases in receivables and inventory than in the prior-year quarter, partly offset by lower net income and reduced customer deposits. Cash increased $2.8 during the quarter to $28.6.
Changes versus the prior-year quarter
- Domestic sales fell 2.7% to $262.8, with management citing weather-related project and production delays. International sales rose 13.7% to $63.0; reported foreign-subsidiary sales would have been $3.4 higher at prior-year exchange rates.
- Infrastructure Group sales increased 5.4% to $155.0; Aggregate and Mining sales decreased 10.5% to $106.5; Energy Group sales increased 8.4% to $64.3.
- Parts sales rose 5.1% to $92.6, or 28.4% of sales versus 27.1% a year earlier.
- SG&A and engineering expenses increased $6.3 to $58.3, rising to 17.9% of sales from 16.0%. Management attributed much of the increase to consulting and outside services, professional fees, incentive-plan costs, and recruitment and relocation expenses.
- Interest expense increased to $0.6 from $0.2, primarily due to higher borrowings on the domestic credit line. The effective tax rate fell to 21.0% from 23.0%, primarily reflecting estimated R&D credits and lower effects from foreign tax differentials and GILTI.
Outlook, commentary, and risks
- Order backlog was $236.5 at March 31, down 46.8% from $444.9 a year earlier. The decline affected all segments and included a $64.6 reduction related to pellet plants. Management said the changes reflected current industry conditions but could not determine whether the trend was industry-wide.
- Management forecast 2019 capital expenditures of approximately $25.0 and said cash, expected operating cash flow, and available credit should meet working-capital and capital-expenditure needs through May 2020.
- The company expects procurement and sales-and-operations-planning initiatives to improve gross margins and reduce inventory in 2019 and thereafter. Steel prices were higher than the prior year but mostly stable in Q1; management expected minimal changes over the next several months.
- Demand is exposed to economic cycles, public infrastructure funding, customer capital-spending decisions, interest rates, steel and oil prices, competition, and foreign exchange. Management highlighted uncertainty around future federal highway funding and expected the U.S. dollar to remain strong near term.
- The company made limited headcount reductions in Q1, from 4,401 employees at year-end 2018 to 4,344 at March 31, and said it would continue to assess staffing against sales and production.
- The company is closing its German dealer operation in 2019. It has exited the wood-pellet-plant business; related inventory was written down to zero in Q4 2018, and a sale to the original customer remains uncertain.
- A putative shareholder class action filed in February 2019 alleges securities-law violations concerning statements made from July 2016 through October 2018. The company disputes the allegations, intends to defend itself, and cannot estimate a possible loss.
- Customer-financing guarantees totaled $2.6, with a recorded liability of $1.4. Letters of credit and guarantees create additional contingent exposure; the filing reports a maximum potential amount of $12.0 for specified letters of credit and guarantees.
- Disclosure controls and procedures were reported ineffective at quarter-end because of material weaknesses previously disclosed in the 2018 Form 10-K. Remediation was underway but had not yet been considered complete.
Most important facts for investors to verify
- Whether backlog stabilizes or converts to sales, particularly in Infrastructure and Aggregate and Mining, and the implications of the pellet-plant-related decline.
- Whether lower production absorption, elevated operating expenses, and consulting costs continue to pressure margins and earnings.
- Whether the company achieves expected inventory and procurement improvements while funding approximately $25.0 of 2019 capital expenditures.
- Future borrowing levels, credit-facility availability, covenant compliance, and the concentration of cash held overseas.
- Progress in remediating the disclosed internal-control material weaknesses and developments in the shareholder litigation and other contingencies.