Astec Industries, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; compared with Q1 2013 unless otherwise noted. The unaudited filing describes a manufacturer of equipment for roadbuilding, aggregate and mining, energy, drilling, and wood processing. Financial statement amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $238.7 | $247.8 | Down 3.7% |
| Gross profit / margin | $56.8 / 23.8% | $58.6 / 23.6% | Profit down 3.1%; margin up 0.2 percentage points |
| Operating income / margin | $13.3 / 5.6% | $18.2 / 7.3% | Down 26.7% |
| Net income attributable to controlling interest | $9.5 | $13.2 | Down 27.5% |
| Diluted EPS | $0.41 | $0.57 | Down $0.16 |
| Operating cash flow | $1.1 | $0.8 | Up $0.3 |
| Capital expenditures | $8.4 | $9.3 | Down $1.0 |
SG&A and engineering expense rose 7.6% to $43.4 million, or 18.2% of sales versus 16.3%. Management attributed the increase primarily to $4.0 million of additional expense for the tri-annual ConExpo trade show. The effective tax rate increased to 32.2% from 29.8%; the 2014 rate did not include research and development tax credits that had expired and had not been renewed as of quarter-end.
Liquidity, balance sheet and debt
- At March 31, cash and cash equivalents were $45.0 million and short-term investments were $1.5 million, compared with $35.6 million and $17.2 million, respectively, at December 31, 2013. Cash provided by investing activities included $16.2 million from sales of short-term investments.
- Current assets were $545.4 million and current liabilities $153.0 million at quarter-end, versus $522.4 million and $133.5 million at year-end. Inventory rose $18.9 million to $361.2 million; trade receivables rose $13.9 million to $105.9 million.
- Total liabilities were $185.5 million and total equity was $589.3 million at March 31. The company had $2.1 million drawn on its $100 million unsecured Wells Fargo revolving facility and $91.9 million of remaining availability after outstanding letters of credit. It reported compliance with financial covenants.
- Operating cash flow was modest despite positive net income, as receivables and inventory used cash. Cash generation also reflected higher accounts payable and lower prepaid expenses. The company paid $2.3 million in dividends during the quarter.
Material changes and operating drivers
- Domestic sales increased 8.3% to $175.4 million, while international sales fell 26.4% to $63.2 million. Management cited economic uncertainty in several markets and a stronger U.S. dollar; international declines were broad-based, with increases in Asia and Central America.
- Infrastructure Group sales declined 9.6% to $98.8 million and segment profit fell 31.7% to $8.8 million. Management cited unusually cold U.S. weather, customer delays pending a new highway bill, weaker international sales, and higher ConExpo expenses. No pellet-plant sales revenue was recorded in the quarter.
- Aggregate and Mining sales increased 2.6% to $93.1 million, while segment profit was nearly flat at $9.1 million. Domestic growth was partly offset by lower international sales.
- Energy Group sales declined 2.0% to $46.8 million, but segment profit rose 61.5% to $1.9 million, supported by a 4.3 percentage-point increase in gross margin and stronger domestic heater and drilling-rig sales.
- Backlog was $299.6 million at March 31, up 8.4% year over year; domestic backlog increased 17.7%, while international backlog decreased 5.9%. Backlog included $58.6 million for three pellet plants for one customer. The company said it would finance those orders for two to three years and recognize revenue as payments are received.
Outlook, risks and notable items
- Management forecast 2014 capital expenditures of approximately $39.2 million, to be funded through cash, internally generated funds, credit facilities, and local financing for the new Brazilian facility. The filing provides no clear numerical full-year sales or earnings guidance.
- Management expected steel prices to rise through Q2 2014 and then level off for the rest of the year, and said it used forward contracts and advance purchases to mitigate increases. It expected oil prices to fluctuate. Public infrastructure funding, customer confidence, interest rates, foreign exchange, and economic conditions were identified as important demand factors.
- On April 1, 2014, the company acquired Telestack Limited for $36.0 million in cash, with $2.5 million placed in escrow and the purchase price subject to adjustments. At March 31, $36.0 million of cash had been set aside for the acquisition; the acquisition was subsequent to quarter-end, and Telestack results were to be included in Aggregate and Mining beginning in Q2.
- Potential contingencies include customer financing guarantees of $0.8 million, for which a $0.1 million liability was recorded, and letters of credit and guarantees with a stated maximum potential exposure of $7.7 million. Management said current claims and legal proceedings were not expected to have a material adverse effect, while noting litigation uncertainty. An older EPA cleanup matter related to pre-1986 activities remained unquantified and had no recorded liability.
- The company reported no material change in risk factors or market-risk disclosures, no material quarter-end change in internal control over financial reporting, and effective disclosure controls. Its business is cyclical and exposed to public infrastructure spending, commodity and steel prices, currency movements, and competitive pressures.
Important facts for investors to verify
- Whether the weaker international demand and Infrastructure Group performance persist, and whether the backlog converts into sales and profit on expected timing.
- Customer concentration, delivery and performance progress, and cash collection for the $58.6 million pellet-plant orders, including the financing and payment-based revenue recognition terms.
- Telestack’s post-acquisition contribution, purchase-price adjustments, and the effect of the $36.0 million cash outlay on liquidity and borrowing needs.
- Inventory and receivables growth, low quarterly operating cash flow, planned capital expenditures, and continued dividend capacity.
- Steel-cost trends, foreign exchange exposure, outstanding guarantees and letters of credit, and the unresolved EPA matter.