Astec Industries, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. Financial amounts below are in millions of dollars unless stated otherwise. Astec manufactures equipment and replacement parts for road construction, aggregate and mining, and energy-related markets.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $1,171.6 | $1,184.7 |
| Gross profit / margin | $135.8 / 11.6% | $243.1 / 20.5% |
| Operating income (loss) | $(86.4) | $55.5 |
| Net income (loss) attributable to controlling interest | $(60.4) | $37.8 |
| Diluted EPS | $(2.64) | $1.63 |
| Cash from operating activities | $(29.8) | $41.9 |
| Capital expenditures | $27.4 | $20.0 |
Fourth-quarter 2018 sales were $317.0 million, gross loss was $1.6 million, and net loss was $47.1 million. Fourth-quarter 2017 sales were $312.4 million, gross profit $62.8 million, and net income $10.9 million.
- Reported annual sales decreased 1.1%; excluding the $75.3 million pellet-plant sales reduction, sales increased $62.2 million. Parts sales rose 8.9% to $308.7 million.
- Segment sales: Infrastructure $442.3 million, down 20.1%; Aggregate and Mining $453.2 million, up 12.2%; Energy $276.1 million, up 21.5%. Segment profit declined sharply in Infrastructure to a $113.0 million loss and in Energy to $3.1 million; Aggregate and Mining profit rose to $45.5 million.
- Cash and cash equivalents were $25.8 million, down from $62.3 million. Working capital was $371.8 million, versus $423.8 million. Current assets were $561.0 million and current liabilities $189.2 million.
- Year-end debt included $58.8 million drawn on the revolving facility and approximately $1.3 million of Brazilian loans. The $100 million facility had $30.2 million of additional availability after letters of credit. In February 2019, the facility was expanded to $150 million and extended to December 2023.
- Annual dividends declared were $0.42 per share. The company repurchased 582,000 shares for $24.1 million in 2018.
Material changes and unusual items
- A pellet-plant settlement reduced 2018 sales by $75.3 million, including a $68.0 million cash payment and forgiveness of $7.3 million in receivables. The settlement released Astec from contractual obligations after the plant failed to meet specified operating requirements. The customer may owe $7.0 million if emissions targets are met by May 1, 2019.
- Astec wrote down a company-financed Georgia pellet plant inventory to zero, recording a $65.7 million cost-of-sales charge, and recorded a further $7.5 million Energy Group inventory valuation charge. The company decided to exit the pellet-plant business line.
- Gross profit was adversely affected by $136.7 million in pellet-plant-related margin reductions. The company also recorded $11.2 million of goodwill impairment at Power Flame and RexCon and a $1.9 million charge to close its German distributor, Astec Mobile Machinery.
- Operating cash flow fell by $71.7 million year over year, primarily because of the $68.0 million pellet-plant settlement payment. Net cash decreased $36.5 million.
- Backlog fell 16.2% to $345.0 million, largely reflecting removal of pellet-plant orders; Aggregate and Mining and Energy backlogs increased. Management expected current backlog to be filled in 2019.
Outlook, risks and contingencies
- Management expected steel prices to remain at elevated levels in the first half of 2019 and cited tariffs as a source of higher input costs. Purchasing and sales-planning initiatives were intended to improve gross margins and reduce excess inventory.
- Management anticipated typical seasonal patterns and expected new asphalt-plant models tailored to international markets in 2019. Approved 2019 capital expenditures totaled $39.5 million; no formal earnings guidance was provided.
- Key exposures include cyclical construction and infrastructure demand, uncertainty in public highway funding, steel and oil-price movements, interest rates, foreign exchange, competition, and customer credit availability. The company was compliant with credit covenants at year-end.
- On January 22, 2019, CEO and President Ben Brock resigned. Richard Dorris became interim CEO and President while the company searched for a successor. Astec Mobile Machinery was being liquidated.
- A shareholder class-action lawsuit filed in February 2019 alleges securities-law violations relating to statements made between July 2016 and October 2018. Astec disputes the allegations; the possible loss could not be estimated. The filing also describes customer-financing guarantees and letters of credit, with maximum potential payments under specified guarantees of $13.1 million.
- Management and KPMG concluded that internal control over financial reporting was ineffective at December 31, 2018, citing material weaknesses involving goodwill impairment, income taxes, business-unit monitoring, Roadtec’s ERP controls, revenue recognition, and inventory. KPMG issued an adverse opinion on internal-control effectiveness but an unqualified opinion on the financial statements. Management reported no prior-period restatement and planned remediation before the end of 2019.
Important facts for investors to verify
- Whether the internal-control remediation plan was completed and independently tested, and whether subsequent filings identify any financial-statement corrections.
- Progress on resolving the Georgia pellet plant, including any sale proceeds and the potential $7.0 million emissions-related payment.
- Whether operating cash flow, gross margins, inventory levels, and segment profitability improved after the exceptional 2018 charges.
- Execution of the 2019 backlog, capital-spending plan, and expanded credit facility, including borrowing availability and covenant compliance.
- Developments in the shareholder lawsuit, CEO succession, and liquidation of the German subsidiary.