Astec Industries, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise.
Business context and results
Astec manufactures specialized equipment and parts for infrastructure, aggregate and mining, and energy markets. Q3 results improved year over year, while nine-month results were substantially affected by a wood-pellet-plant settlement.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $256.6 | $252.1 | $854.6 | $872.4 |
| Gross profit / margin | $58.3 / 22.7% | $39.1 / 15.5% | $137.4 / 16.1% | $180.4 / 20.7% |
| Operating income (loss) | $7.2 | ($6.4) | ($17.0) | $37.5 |
| Net income (loss) attributable to controlling interest | $7.0 | ($2.7) | ($13.4) | $26.9 |
| Diluted EPS | $0.30 | ($0.12) | ($0.58) | $1.16 |
Q3 sales rose 1.8%; international sales increased 12.4% and parts sales increased 8.0%. Nine-month sales declined 2.0%. Aggregate and Mining and Energy sales grew 9.7% and 26.6%, respectively, while Infrastructure sales fell 22.0%, largely reflecting the pellet-plant settlement. Excluding pellet-plant effects, management reported domestic sales growth of 6.8% for the first nine months.
Cash flow, liquidity and capital
- Operating cash flow was a use of $20.5 for the first nine months, versus a source of $10.7 a year earlier. Investing cash flow was a use of $17.1, primarily for $17.5 of capital expenditures; financing cash flow was a source of $2.5.
- Cash and equivalents were $25.7 at September 30, down $36.6 from year-end 2017. Inventories increased $37.8 to $429.2. Current assets were $624.4 and current liabilities $207.0.
- Total debt was approximately $27.3, including $25.6 drawn on the $100.0 revolving facility. After $9.5 of letters of credit, $64.9 remained available. The company reported compliance with facility covenants.
- Capital expenditures for 2018 were forecast at approximately $23.0. Management said cash, future operating cash flow and available credit should meet working-capital and capital-expenditure needs through November 2019.
- The quarterly dividend was raised to $0.11 per share in July. A $150.0 share-repurchase authorization was approved; $13.9 had been spent to repurchase 297,000 shares through September 30.
Material changes, outlook and risks
- Pellet-plant settlement: After a customer’s plant missed contractual performance specifications, Astec agreed in July to pay $68.0 and forgive $7.315 of receivables, recording a $75.315 sales charge and $71.029 reduction in gross profit in Q2. It paid $51.0 in Q3; $17.0 remained payable in Q4. The customer may pay Astec $7.0 if specified emissions targets are met by May 1, 2019.
- Separate plant exposure: Another customer-financed pellet plant, carried in inventory at $59.522, is being jointly marketed to a new buyer. Sale timing and price are uncertain; Astec may face inventory losses, operating losses or further investment, and could retake the plant if the customer defaults when its note matures in December 2018.
- Backlog was $308.6, down 20.2% year over year. Domestic backlog fell 28.1%; international backlog rose 12.4%. The prior-year comparison included an approximately $60.0 pellet-plant order subsequently removed from backlog.
- Management cited the FAST Act and improved international markets as supportive factors, but noted uncertainty around public infrastructure funding, economic cycles, interest rates, steel and oil prices, competition, and a strong U.S. dollar. Steel prices had stabilized since June; management expected near-term prices to remain around current levels and modest increases in early 2019.
- The nine-month loss includes an after-tax pellet-settlement charge of $57.182. The effective tax rate was 14.4% for the nine months; Astec increased its estimated transition tax under the Tax Act by $1.235 in Q3. Revenue-standard adoption had no material reported impact.
- Management reported no material change in risk factors and assessed disclosure controls as effective. Ordinary-course legal matters were not expected by management to have a material adverse effect, though unfavorable outcomes remain possible.
Important facts for investors to verify
- Whether the remaining $17.0 settlement payment was made as scheduled and whether the potential $7.0 emissions payment becomes collectible.
- Progress, sale proceeds and any additional costs or reserves for the separate $59.522 pellet plant, including the December 2018 note maturity.
- Whether operating cash flow improves as inventory and receivables convert to cash, and whether the company remains within credit-facility covenants.
- How backlog trends develop, particularly the divergence between declining domestic and growing international orders.
- Actual 2018 capital expenditures and the effect of repurchases and dividends on cash, debt and liquidity.