Astec Industries, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Amounts are in millions of dollars unless otherwise noted. Comparisons are with the corresponding 2015 periods; balance-sheet comparisons are with December 31, 2015.
Business context
Astec manufactures equipment and replacement parts for infrastructure, aggregate and mining, and energy-related markets. Results are sensitive to public infrastructure spending, oil and gas prices, steel costs, foreign exchange rates, and economic conditions in customer markets.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $294.4 | $268.0 | $573.1 | $556.8 |
| Gross profit | $73.5 | $62.2 | $145.4 | $128.3 |
| Gross margin | 25.0% | 23.2% | 25.4% | 23.0% |
| Operating income | $28.5 | $18.9 | $56.6 | $41.2 |
| Net income attributable to controlling interest | $18.2 | $11.8 | $35.9 | $26.9 |
| Diluted EPS | $0.79 | $0.51 | $1.55 | $1.16 |
- Q2 sales increased 9.8%; first-half sales rose 2.9%. First-half sales growth in Infrastructure was offset by declines in Aggregate and Mining and Energy.
- Domestic sales rose 24.5% in Q2 and 17.4% in the first half. International sales fell 28.9% and 36.0%, respectively, with management citing the strong U.S. dollar and weak mining, oil, and gas markets.
- Q2 earnings growth reflected higher sales and improved gross margin. Management attributed margin improvement partly to foreign-exchange gains and lower payroll-related costs. First-half margin also benefited from lower manufacturing utilities and supplies and the absence of 2015 costs related to the Astec Underground facility closure and relocation.
- SG&A and engineering expense rose 3.8% in Q2 and 1.9% for the first half. First-half other income declined to $0.8 million from $2.0 million, largely because 2015 included $1.2 million of key-man life insurance proceeds. Effective tax rates were 36.2% for Q2 and 36.8% for the first half.
Cash flow, liquidity, and debt
- First-half operating cash flow was $64.1 million, versus $14.4 million in 2015. The increase included higher earnings and a $22.4 million increase in customer deposits, primarily tied to a large pellet plant order; increased receivables and prepaid expenses partly offset these sources.
- Investing cash outflow was $13.2 million, including $13.3 million of capital expenditures. Financing cash outflow was $7.4 million, including $4.6 million of dividends. Cash increased $43.4 million to $68.5 million.
- Current assets were $607.0 million and current liabilities $179.2 million at June 30. Total debt was $10.6 million; the company had no borrowings under its $100 million Wells Fargo revolver and reported $82.8 million available after letters of credit. It was in compliance with credit covenants.
- Brazilian subsidiary debt included $9.2 million of working-capital loans at 10.4%–20.8% and $1.4 million of equipment loans. Total balance-sheet debt includes current and long-term maturities.
- Management forecast 2016 capital expenditures of approximately $30.1 million and said available working capital, operating cash flows, and credit capacity should meet working-capital and capital-expenditure needs through June 30, 2017.
Backlog, outlook, and notable developments
- Backlog was $364.5 million at June 30, up 58.8% from a year earlier. Domestic backlog increased 80.3%; international backlog decreased 5.3%.
- Backlog included approximately $60 million for a three-line pellet plant under a company-financed arrangement, with revenue expected to be recorded when payment is received, expected in 2017. A separate $122.5 million pellet plant order received in Q1 had approximately $84 million remaining in backlog at quarter-end.
- Infrastructure demand benefited from the federal highway funding law enacted in December 2015 and pellet plant sales. Management cautioned that future government funding remains uncertain. Low oil and gas prices pressured Energy Group demand; the mining downturn and strong dollar weighed on international and Aggregate and Mining sales. Steel prices rose in the first half; management expected stability for the remainder of 2016 and used forward contracts and advance purchases to manage exposure.
- After quarter-end, in August 2016, Astec acquired substantially all assets and certain liabilities of Power Flame for approximately $43 million, paid from available cash. The purchase-price allocation was not complete; management did not expect the acquisition to materially affect 2016 operating results.
Risks, contingencies, and controls
- Potential exposures include customer-financing guarantees of $2.1 million, for which a $0.2 million liability was recorded, and letters of credit and guarantees with a stated maximum potential exposure of $19.3 million. These amounts are contingent and are not equivalent to recorded debt.
- Astec disclosed ordinary-course legal matters that management did not expect to have a material adverse effect, while noting that unfavorable outcomes remain possible. An older EPA-related cleanup matter could not be estimated and had no recorded liability.
- Other key risks include cyclical end markets, public funding uncertainty, oil and steel price movements, currency fluctuations, competitive pressures, and inventory valuation judgments. The company reported no material changes to its previously disclosed risk factors, no material changes in internal control over financial reporting, and effective disclosure controls.
Most important facts for investors to verify
- Whether the elevated backlog converts to sales and cash on schedule, particularly the pellet plant orders, customer deposits, and financed order whose revenue is expected in 2017.
- How much recent earnings and operating cash flow depend on favorable working-capital movements, and whether receivables and prepaid expenses remain manageable.
- Whether domestic Infrastructure strength can offset continued weakness in international markets, mining, and oil- and gas-related demand.
- The final Power Flame purchase-price allocation, post-closing adjustments, and effect of the approximately $43 million cash purchase on liquidity.
- Changes in Brazil-related debt, borrowing costs, letters of credit, warranty reserves, and other contingent exposures.