Astec Industries, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Astec manufactures equipment and replacement parts for infrastructure, aggregate and mining, and energy markets. Financial amounts below are in U.S. dollars, millions, except per-share data.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $301.9 | $294.4 | $620.3 | $573.1 |
| Gross profit / margin | $65.5 / 21.7% | $73.5 / 25.0% | $141.3 / 22.8% | $145.4 / 25.4% |
| Operating income | $21.3 | $28.5 | $44.0 | $56.6 |
| Net income attributable to controlling interest | $14.4 | $18.2 | $29.5 | $35.9 |
| Diluted EPS | $0.62 | $0.79 | $1.27 | $1.55 |
- Q2 sales rose 2.6%, but controlling-interest net income fell 20.7%. For the first half, sales increased 8.2% while controlling-interest net income declined 17.8%.
- Gross margin fell 330 basis points in Q2 and 260 basis points for the first half. Management cited product mix, higher costs for new products, and pellet-plant installation cost overruns.
- SG&A and engineering expense was $44.2 million in Q2, down from $45.0 million; first-half expense increased to $97.3 million from $88.8 million, including higher ConExpo, selling, and engineering costs.
- Six-month operating cash flow was negative $9.1 million, versus positive $64.1 million in 2016. Receivables and inventory growth were significant cash uses; receivables days outstanding rose to 43.7 from 38.9.
- Cash and cash equivalents were $52.1 million at June 30, down from $82.4 million at year-end. Current assets were $611.1 million and current liabilities $175.9 million. Total debt was approximately $5.3 million; there were no borrowings under the main revolving facility.
- Investing cash outflow was $11.2 million, including $10.8 million of property and equipment spending. Financing cash outflow was $10.9 million, including $4.6 million of dividends and $5.9 million of bank-loan repayments.
Material changes and segment trends
- Q2 sales increased in Aggregate and Mining (+8.1%) and Energy (+20.7%), but decreased in Infrastructure (-6.1%). First-half sales increased across all three segments.
- Infrastructure’s Q2 segment profit fell 49.7% to $9.9 million, primarily due to pellet-plant site preparation and installation overruns and new-product costs. First-half profit declined 32.4% to $28.1 million.
- Energy’s first-half sales rose 37.2% and segment profit increased to $5.9 million from $2.4 million; results include Power Flame, acquired in August 2016. Aggregate and Mining first-half sales rose 8.4%, while segment profit declined 3.4% to $19.8 million.
- International sales rose 24.6% in Q2 and 34.4% in the first half, while domestic sales fell 2.2% in Q2 and rose 2.9% for the first half. Parts sales grew 7.8% in Q2 and 8.6% year to date.
- Backlog was $352.4 million at June 30, down 5.1% year over year. Domestic backlog declined 12.7%; international backlog increased 38.7%. Approximately $60 million relates to a customer-financed pellet plant, with revenue expected when payment is received, anticipated in late 2018.
Outlook, risks and contingencies
- Management forecast 2017 capital expenditures of approximately $25 million and said available cash, operating cash flows, and credit capacity should meet working-capital and capital needs through June 30, 2018. The filing provides no specific full-year sales or earnings guidance.
- Management viewed the FAST Act and other public funding as supportive of domestic demand, while noting uncertainty around future infrastructure funding. Steel prices rose in the first half; moderate increases were expected in the second half, with contracts and advance purchases used to mitigate exposure.
- Management cited a strong U.S. dollar, market cyclicality, customer financing conditions, oil and gas prices, steel costs, competition, and public infrastructure spending as factors that could affect results. It expected the dollar to remain strong in the near term.
- Customer-debt guarantees totaled $3.3 million, with a recorded liability of $0.5 million. Letters of credit and foreign guarantees had maximum potential payments of $9.8 million. Management did not expect current litigation to materially affect the company, but noted outcomes are uncertain.
- An older EPA environmental-cleanup matter remains unquantified; the company has recorded no liability because it cannot estimate any potential obligation. Inventory valuation also depends on estimates involving steel prices, product demand, obsolescence, and used-equipment values.
- The company planned to adopt the new revenue-recognition standard in 2018 but had not determined its impact. It reported no material changes to risk factors or market-risk disclosures and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether gross-margin pressure and pellet-plant installation overruns persist, and whether the company completes the remaining pellet-plant work profitably.
- Whether working-capital investment converts to cash, especially the increase in receivables and inventory, and whether operating cash flow recovers.
- How backlog converts to sales and cash, including the timing and payment terms for the approximately $60 million financed pellet-plant order.
- Whether international sales gains continue despite currency and market headwinds, and whether Energy’s improvement is sustainable apart from the Power Flame acquisition.
- Developments in infrastructure funding, steel prices, contingent guarantees, the EPA matter, and the estimated effects of new accounting standards.