Astec Industries, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Astec manufactures equipment and parts for road building, aggregate processing and related markets. The company reports Infrastructure Solutions and Materials Solutions segments, plus Corporate.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $231.4m | $255.8m | $785.6m | $886.4m |
| Gross profit / margin | $50.4m / 21.8% | $51.9m / 20.3% | $184.1m / 23.4% | $212.0m / 23.9% |
| Operating income (loss) | $(0.8)m | $3.3m | $25.2m | $52.0m |
| Net income attributable to controlling interest | $1.6m | $3.0m | $31.6m | $40.7m |
| Diluted EPS | $0.07 | $0.13 | $1.38 | $1.79 |
| Operating cash flow | Not separately reported | Not separately reported | $103.3m | $84.2m |
Q3 sales declined 9.5% year over year; nine-month sales fell 11.4%. Q3 net income attributable to controlling interest declined 45.2%; the nine-month decline was 22.4%. Q3 SG&A and engineering expenses rose 2.5% to $48.8m, while nine-month expenses fell 6.8% to $147.8m. Restructuring and asset impairment charges were $2.4m in Q3 and $11.1m year to date, versus $0.9m and $1.4m in the comparable 2019 periods.
Q3 gross margin increased 150 basis points, while nine-month margin decreased 50 basis points. The 2019 nine-month comparison included $20.0m of gross profit from a non-recurring Georgia Pellet Plant sale. Q3 operating results also reflected a $2.5m Enid inventory write-down, partly offset by a $1.1m gain on the sale of the Albuquerque facility. Nine-month net income included a $9.5m tax benefit from CARES Act NOL carryback provisions; the tax benefit materially affects period-to-period earnings comparability.
Liquidity, debt and capital
At September 30, 2020, cash and cash equivalents were $108.5m, versus $48.9m at December 31, 2019. Current assets were $533.2m and current liabilities $161.2m. Total reported debt was approximately $0.9m; there were no borrowings under the domestic $150.0m revolving facility, with $141.4m available after letters of credit. The company was in compliance with its financial covenants. Cash included $25.7m received through a CARES Act tax refund request; $20.9m of cash was held by foreign subsidiaries.
Nine-month operating cash flow of $103.3m was supported notably by a $43.2m inventory reduction, partly offset by lower customer deposits and other working-capital movements. Investing cash outflow was $32.9m, including $28.3m for acquisitions; financing cash outflow was $8.3m, including $7.5m of dividends. Cash increased by $59.7m during the period. Management forecast 2020 capital expenditures of approximately $15.0m and stated that cash, operating cash flows and available credit should cover working-capital and capital-expenditure needs through November 2021.
Segments and material developments
- Infrastructure Solutions: Q3 sales were $151.1m, down 3.3%; segment profit was $6.3m versus $3.9m. Nine-month sales fell 6.6% to $535.6m and segment profit fell to $37.7m from $48.9m.
- Materials Solutions: Q3 sales were $80.3m, down 19.4%; segment profit was $7.2m versus $5.8m. Nine-month sales fell 20.1% to $250.0m and segment profit fell to $21.7m from $23.0m.
- Q3 international sales declined 24.1%; management cited COVID-19 disruptions and a strong U.S. dollar. Backlog was $218.5m at quarter-end, down 10.4% year over year, with lower orders attributed to COVID-19 uncertainty.
- The company acquired concrete-equipment businesses CON-E-CO and BMH Systems for a combined purchase price of approximately $29.5m. It sold Enid water-well assets after quarter-end for approximately $7.5m and acquired certain Grathwol telematics assets on November 2, 2020; purchase accounting for Grathwol was not complete.
- Restructuring included site closures, relocations and workforce reductions. Headcount was 3,582 at September 30, down 11.9% from a year earlier. The company was closing its Mequon site and marketing Enid production facilities.
Outlook, risks and contingencies
Management said COVID-19 was a primary source of uncertainty and expected its effects on results to become more severe in Q4 2020 and potentially later periods. It reported no clearly discernible business trends and said the duration and broader impact remained unknown. No specific numerical sales or earnings guidance was provided. Management cited its liquidity, contingency planning and operational cost actions as responses to potential disruption.
Other principal sensitivities include infrastructure spending and highway funding, customer capital spending, steel and oil prices, foreign exchange, and competitive conditions. Management expected steel prices to trend upward in Q4 and the U.S. dollar to remain strong in the near term. Potential guarantee and letter-of-credit exposure was up to $11.0m. The company had accrued $0.6m for a shareholder class action; it could not estimate a possible loss in a separate GEFCO-related equipment litigation matter. Management said current litigation outcomes were not expected to have a material adverse effect, while noting the uncertainty inherent in legal proceedings.
Controls: Management concluded disclosure controls were not effective at quarter-end because of material weaknesses in internal control over financial reporting previously disclosed in the 2019 Form 10-K. Remediation was in progress and had not yet been deemed complete.
Investor verification priorities
- Track whether COVID-19 impacts, orders and backlog stabilize or worsen, particularly in Materials Solutions and international markets.
- Assess earnings excluding the $9.5m CARES Act tax benefit and unusual restructuring, impairment, asset-sale and inventory charges.
- Monitor cash conversion and working-capital trends, including inventory reductions and declining customer deposits, alongside acquisition spending and planned capital expenditures.
- Review progress and costs from site closures, relocations and workforce restructuring, and the final purchase accounting and performance of recent acquisitions.
- Verify remediation of the disclosed internal-control material weaknesses and monitor legal claims, guarantees and credit-facility availability.