Astec Industries, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, with unaudited fourth-quarter data included. Unless noted otherwise, amounts below are in millions of U.S. dollars.
Business context
Astec designs, manufactures and sells equipment and replacement parts for road construction, aggregate processing and mining, and energy-related markets. Its reporting segments are Infrastructure, Aggregate and Mining, and Energy. Demand is cyclical and sensitive to infrastructure spending, customer financing, oil and steel prices, economic conditions, and seasonality. Telestack, acquired in April 2014, added bulk-material-handling products to Aggregate and Mining.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $975.6 | $933.0 |
| Gross profit / margin | $215.3 / 22.1% | $207.1 / 22.2% |
| Operating income / margin | $51.7 / 5.3% | $55.7 / 6.0% |
| Net income attributable to controlling interest | $34.5 | $39.0 |
| Diluted EPS | $1.49 | $1.69 |
| Cash from operating activities | $18.9 | $5.9 |
- Sales increased 4.6%; net income attributable to controlling interest declined 11.7%. Gross margin was nearly flat, while higher SG&A, research and development expense, and the effective tax rate contributed to lower earnings. The effective tax rate rose to 36.2% from 32.7%.
- Domestic sales rose 9.2% to $654.2 million; international sales fell 3.8% to $321.4 million, representing 32.9% of sales versus 35.8% in 2013. Parts sales increased 3.2% to $254.7 million.
- Segment sales and profit: Infrastructure $386.4 million and $29.5 million (sales down 3.0%); Aggregate and Mining $384.9 million and $32.9 million (sales up 9.8%); Energy $204.4 million and $10.3 million (sales up 11.0%).
- Operating cash flow improved but remained below net income. Inventory increased $45.5 million to $387.8 million, including equipment built for stock and the pellet plant order. Investing cash outflow was $42.8 million, including $35.0 million for Telestack; capital expenditures were $24.9 million.
- Year-end current assets were $553.2 million and current liabilities $161.1 million (working capital $392.1 million; current ratio about 3.4). Cash and cash equivalents were $13.0 million, with $1.9 million in current investments.
- Total debt was $10.9 million: $3.8 million short-term and $7.1 million long-term, largely at Brazilian and South African subsidiaries. No borrowings were outstanding under the $100 million Wells Fargo revolver; $12.6 million of letters of credit left $87.4 million available. The company reported covenant compliance.
Fourth quarter and changes versus prior year
Fourth-quarter 2014 sales were $239.5 million versus $223.9 million in fourth-quarter 2013; gross profit was $53.1 million versus $47.3 million. Net income was $8.4 million versus $8.3 million, and diluted EPS was $0.37 versus $0.36. For the full year, higher sales did not translate into higher earnings, and operating income fell 7.2%.
Year-end backlog rose 11.4% to $332.1 million from $298.2 million (2013 adjusted to include Telestack). Infrastructure backlog was $147.2 million, Aggregate and Mining $89.8 million, and Energy $95.1 million. Infrastructure’s reported backlog includes $59.3 million for a three-line pellet plant order; revenue recognition is deferred until customer payments are received under the financing arrangement.
Outlook, risks and unusual items
- Management expected current backlog generally to be filled in 2015; Energy backlog included about $12 million expected to extend beyond 2015. The company forecast 2015 capital expenditures of $30.2 million.
- Management cited uncertainty over longer-term U.S. highway funding, a strong U.S. dollar and political and economic instability in some foreign markets. Federal transportation funding at the time was authorized only through May 31, 2015. Management viewed long-term highway legislation as an important factor for customer purchasing decisions.
- Management expected near-term steel prices to remain around then-current levels, but noted uncertainty later in 2015. Oil-price movements can affect asphalt-related demand; lower oil and gas prices may also weigh on Energy Group demand.
- Astec Brazil began assembly at its new facility in fourth-quarter 2014 and expected full production to begin in first-quarter 2015. The company also planned to end production at its Loudon, Tennessee facility and transfer product lines to GEFCO’s Enid, Oklahoma facility in 2015.
- Customer-debt guarantees were $2.4 million; letters of credit and other guarantees totaled up to $13.2 million. The company disclosed ordinary-course legal claims and an unresolved potential EPA cleanup liability relating to pre-1986 activity; the amount, if any, could not be estimated.
- Auditors issued unqualified opinions on the financial statements and internal control. Management’s internal-control assessment excluded Telestack, which contributed $44.9 million of year-end assets and $23.8 million of 2014 revenue; assessment of its controls was planned for 2015.
Key facts for investors to verify
- How much of the $59.3 million pellet-plant backlog converts to recognized revenue and cash, and on what schedule; assess the customer-financing and collection exposure.
- Whether 2015 highway funding, foreign-market conditions, exchange rates and Energy Group exposure to oil and gas investment support the reported backlog and sales outlook.
- Inventory growth, cash conversion and working-capital needs, including the effect of production built for stock and Brazilian operations.
- Progress on Astec Brazil’s production ramp-up, financing and ownership structure, and the expected costs and savings from the Loudon consolidation.
- Potential exposure from customer guarantees, letters of credit, the EPA matter and other legal contingencies; also confirm Telestack’s integration and internal-control assessment.