Astec Industries, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; unaudited. Astec manufactures equipment and replacement parts for road building, aggregate and mining, and energy-related markets. Financial amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $268.0 | $277.3 | $556.8 | $515.9 |
| Gross profit | $62.2 | $62.2 | $128.3 | $118.9 |
| Gross margin | 23.2% | 22.4% | 23.0% | 23.1% |
| Operating income | $18.9 | $21.9 | $41.2 | $35.3 |
| Net income attributable to controlling interest | $11.8 | $14.5 | $26.9 | $24.0 |
| Diluted EPS | $0.51 | $0.63 | $1.16 | $1.04 |
- Q2 sales fell 3.3% year over year and controlling-interest net income fell 18.6%; gross margin improved 0.8 percentage points, but operating income declined as SG&A and engineering expenses rose 7.6% to $43.3 million.
- First-half sales rose 7.9% and controlling-interest net income rose 11.9%. Gross margin edged down 0.1 percentage points. Growth was led by Infrastructure, with sales up 15.5%; Aggregate and Mining rose 2.7%, and Energy rose 1.7%.
- Q2 domestic sales increased 5.4%, while international sales declined 20.7%, partly reflecting currency effects. Parts sales rose 12.0% in Q2 and represented 25.2% of sales.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $14.4 million, compared with $13.0 million in 2014. Capital expenditures were $10.7 million; investing cash outflow was $9.6 million. Cash increased $3.3 million to $16.4 million.
- At June 30, current assets were $566.7 million and current liabilities $144.9 million. Total assets were $803.8 million and total equity $619.2 million.
- Reported short- and long-term debt totaled $12.0 million ($6.5 million short-term and $5.5 million long-term), primarily associated with foreign subsidiaries. No borrowing was outstanding under the parent’s $100 million revolving facility; after $11.8 million of letters of credit, $88.2 million remained available. The company reported compliance with its credit covenants.
- The company held $11.0 million of its $16.4 million cash balance at foreign subsidiaries and said it had no plans to repatriate it in the foreseeable future; repatriation could create tax liabilities.
Material developments, outlook and risks
- Backlog was $229.5 million at June 30, down 13.1% from a year earlier. Domestic backlog increased 9.2%, while international backlog fell 46.1%. About $59 million of backlog relates to three pellet-plant orders for one customer; revenue is to be recognized as customer payments are received after performance testing.
- Astec Underground’s Loudon, Tennessee facility ceased operations effective May 31, 2015, with product-line responsibility transferred to GEFCO. Closure and transfer costs were $1.5 million for the first half, including $0.6 million in Q2. The facility property, carried at $9.3 million, was classified as held for sale; management said it was being marketed above carrying value.
- Management forecast 2015 capital expenditures of approximately $25 million and said cash, operating cash flows and available credit were expected to cover working-capital and capital needs through June 30, 2016. No specific full-year sales or earnings guidance was provided.
- Management cited uncertainty in federal highway funding, a strong U.S. dollar affecting international sales and backlog, weaker mining-sector demand, and oil-price volatility as relevant business factors. Steel prices had declined for much of Q2; management expected stability through Q3 and mild increases in Q4, while using forward contracts and advance purchases to manage exposure.
- Q2 performance reflected weaker Aggregate and Mining sales and lower Energy Group profit; Energy results included Loudon closure/transfer costs and higher research and development spending. The first half included $1.2 million of key-person life-insurance income following the death of the chairman and former CEO. Foreign-exchange derivative gains recognized in cost of sales were $0.8 million for the first half.
- Contingencies include customer-financing guarantees of $2.4 million (with a $0.1 million recorded liability) and letters of credit and other guarantees with a stated maximum potential exposure of $12.7 million. Management said current litigation was not expected to have a material adverse effect, but noted outcomes are uncertain. A legacy EPA cleanup matter remains unquantifiable and has no recorded liability.
- The company said there were no material changes to previously disclosed risk factors or market-risk disclosures. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track whether backlog stabilizes, especially the steep decline in international orders, and how much of the pellet-plant backlog converts to recognized revenue and cash.
- Assess whether the Q2 earnings decline and Energy Group margin pressure persist after the Loudon closure and transfer costs.
- Monitor foreign-exchange effects, foreign-subsidiary debt and cash, and the availability and covenant terms of credit facilities.
- Compare planned $25 million capital expenditures with cash generation, and review the sensitivity of inventory values and margins to steel prices and demand.
- Verify developments in highway-funding legislation, the unquantified EPA matter, and potential exposure under customer guarantees and letters of credit.