Astec Industries, Inc. — 2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017. Astec designs and manufactures equipment and replacement parts for road building, aggregate and mining, energy, and related markets. Its three reportable segments are Infrastructure, Aggregate and Mining, and Energy. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $1,184.7 | $1,147.4 |
| Gross profit / margin | $243.1 / 20.5% | $265.3 / 23.1% |
| Operating income | $55.5 | $87.2 |
| Net income attributable to controlling interest | $37.8 | $55.2 |
| Diluted earnings per share | $1.63 | $2.38 |
| Cash from operating activities | $41.9 | $134.8 |
| Cash and cash equivalents at year-end | $62.3 | $82.4 |
- Sales rose 3.3%, but gross profit fell 8.3%; gross margin contracted 260 basis points. Operating income declined 36.3% and attributable net income fell 31.5%.
- Operating cash flow decreased by $92.9 million, primarily reflecting higher inventory, lower net income, increased prepaid expenses and lower accounts payable. Investing cash use was $46.9 million, including $26.4 million for acquisitions and $20.0 million of property and equipment expenditures. Financing cash use was $16.8 million, including $9.2 million of dividends.
- Working capital was $423.8 million, up from $408.0 million. The current ratio was approximately 3.4x, based on current assets of $603.0 million and current liabilities of $179.1 million.
- Consolidated balance-sheet debt was $4.0 million, down from $11.3 million; the company had no borrowings under its $100 million revolving facility. Letters of credit used $9.8 million of the facility, leaving $90.2 million available. Astec Brazil had $4.0 million of outstanding loans, included in reported debt.
- Quarterly dividends were $0.10 per share, or $0.40 for the year.
Material changes versus 2016
- International sales increased 22.5% to $252.4 million and rose to 21.3% of total sales from 18.0%. Domestic sales declined 1.0%, largely because wood-pellet-plant sales fell by approximately $127.2 million and no new pellet-plant orders were received.
- Parts sales increased 7.6% to $283.4 million. Year-end backlog increased 13.7% to $411.5 million, including a $60.2 million customer-financed pellet-plant order for which revenue recognition depends on customer payments.
- Segment sales and profit were mixed: Infrastructure sales fell 9.1% to $553.7 million and segment profit declined 62.7% to $26.6 million; Aggregate and Mining sales rose 12.2% to $403.7 million and profit rose 2.5% to $35.7 million; Energy sales rose 27.2% to $227.3 million and profit increased to $16.2 million from $4.1 million.
- Astec acquired RexCon in October 2017 for approximately $26.4 million; its fourth-quarter contribution to 2017 sales was $2.7 million. Power Flame, acquired in 2016, also contributed to Energy Group growth.
- Fourth-quarter 2017 sales were $312.4 million and attributable net income was $10.9 million, compared with $326.6 million and $12.4 million, respectively, in fourth-quarter 2016. Third-quarter 2017 recorded a net loss of $2.7 million.
Outlook, risks and unusual items
- Management expected substantially all year-end backlog to be filled in 2018. Backlog is not a guarantee of future revenue, and the $60.2 million financed pellet-plant order is not expected to generate revenue until customer payments begin, anticipated in late 2018.
- Management approved $35.4 million of 2018 capital expenditures, including facility additions at Roadtec and Carlson, and expected to fund them with cash, operating cash flow and available credit. Management anticipated higher average steel prices in 2018 and uses forward contracts and advance purchases to mitigate increases.
- Wood-pellet projects materially affected results: installation cost overruns and design issues reduced pellet-plant margins by $60.1 million year over year. A customer’s Arkansas plant had not met output and operating specifications; a February 2018 amendment provided for compensation for certain shortfalls and other potential costs through June 15, 2018. Production shortfalls occurred in January and February 2018. Management expected to meet specifications by the deadline; no significant margin was expected on the Georgia plant in 2018.
- The Tax Cuts and Jobs Act reduced 2017 tax expense by $1.1 million net, including a provisional $0.5 million transition-tax charge. Management expected a typical effective tax rate of 23%–25% beginning in 2018, approximately 11 percentage points below its historic average; finalization of tax-reform accounting could change the provisional amount.
- Key risks include cyclical construction and mining demand; changes or delays in public infrastructure funding; steel, oil and asphalt price movements; competition and foreign-exchange exposure; acquisition integration; project execution and product performance; and credit-market access. International sales represented 21.3% of 2017 sales.
- The company reported compliance with credit-facility covenants and no material expected adverse effect from ordinary-course legal matters, while noting that unfavorable litigation outcomes remain possible. Customer-financing guarantees totaled $3.8 million, with an $0.8 million recorded liability; letters of credit and other guarantees could expose the company to up to $13.3 million.
- Management and the auditor reported effective internal control over financial reporting; the assessment excluded RexCon, which had $29.3 million of assets and $2.7 million of 2017 revenue. KPMG issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Progress on the Arkansas pellet plant’s operating specifications, customer compensation, and any further cost or warranty exposure.
- Whether customer payments for the financed pellet-plant orders begin as expected, and the timing and revenue treatment of those orders.
- Backlog conversion, order trends by segment, and the extent to which the 2017 backlog increase translates into profitable sales.
- Inventory growth, operating cash-flow recovery, and the company’s ability to fund the $35.4 million capital plan while maintaining liquidity.
- Actual steel-cost trends, the 2018 effective tax rate and final transition-tax accounting, and completion of the RexCon internal-control assessment.