Astec Industries, Inc. — Q2 2018 Form 10-Q
Business context and period. Astec manufactures and sells equipment and parts for road building, aggregate and mining, energy, and related markets. This unaudited report covers the quarter and six months ended June 30, 2018; financial statement amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $272.5 | $301.9 | $598.0 | $620.3 |
| Gross profit / margin | $1.1 / 0.4% | $65.5 / 21.7% | $79.1 / 13.2% | $141.3 / 22.8% |
| Operating income (loss) | $(50.2) | $21.3 | $(24.2) | $44.0 |
| Net income (loss) attributable to controlling interest | $(40.7) | $14.4 | $(20.4) | $29.5 |
| Basic and diluted EPS | $(1.76) | $0.63 / $0.62 | $(0.89) | $1.28 / $1.27 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $18.4 | $(9.1) |
- Cash, debt and liquidity: Cash was $65.2 at June 30, 2018, versus $62.3 at year-end 2017. Current assets were $642.2 and current liabilities $242.7. Debt on the balance sheet totaled approximately $2.4, primarily at the Brazilian subsidiary. The $100.0 revolving facility had no borrowings and $90.1 available after letters of credit; the company reported compliance with its financial covenants.
- Cash flow and investment: Six-month investing cash flow was $(8.4), including $8.7 of capital expenditures; financing cash flow was $(5.9), including $4.6 of dividends. Operating cash flow benefited from a $68.0 accrued pellet-plant payment obligation, not paid by June 30. Receivables and inventory also used cash.
- Other metrics: Backlog was $302.9, down 16.0% year over year; domestic backlog declined 23.3%, while international backlog rose 11.3%. Parts sales increased 14.4% in Q2 and 11.4% for the first half.
Material changes and principal unusual item
- Results were heavily affected by a wood pellet plant contract. After the plant missed contractual performance requirements by the June 29 deadline, Astec agreed on July 20 to pay the customer $68.0 over 120 days and forgive $7.315 of receivables in exchange for a release of contractual obligations. The company recorded a $75.315 reduction in Q2 sales and a $71.029 reduction in gross profit; the after-tax charge was $57.182. The customer could pay Astec $7.0 if emissions targets are met before May 1, 2019.
- Excluding the pellet-plant charge’s effect on reported sales, management said core Infrastructure business improved. Aggregate and Mining and Energy sales also grew. Q2 reported sales nevertheless fell 9.7% and six-month sales fell 3.6% year over year. The Infrastructure Group reported a Q2 segment loss of $62.7; Aggregate and Mining and Energy reported segment profits of $12.5 and $8.5, respectively.
- RexCon, acquired in October 2017, contributed $9.5 of Q2 sales and $16.1 for the first half, supporting Energy Group growth.
- A separate customer-financed pellet plant, carried in inventory at $59.5, was removed from backlog after the customer sought to modify its obligations. The parties agreed to market it jointly; Astec expects proceeds above carrying value but warns that inventory reserves or a loss may result and that it may bear operating losses before sale.
Outlook, commentary and risks
- Management forecast approximately $35.0 of 2018 capital expenditures and said available working capital, operating cash flows and credit capacity should cover working-capital and capital-expenditure needs through August 2019. No numerical sales or earnings guidance is provided in the filing.
- Management cited improving international order activity and an 11.3% increase in international backlog, alongside domestic support from the FAST Act and other funding. The overall backlog decline includes removal of the approximately $60.0 pellet-plant order.
- Risks and uncertainties include dependence on public infrastructure funding and cyclical end markets; steel, oil and interest-rate movements; a strong U.S. dollar and foreign-market competition; and uncertainty in international demand. Steel prices rose substantially in the first half; management said prices had stabilized since June and expected near-term increases to be relatively small, subject to tariff changes and seasonal demand.
- The board approved a $150.0 share repurchase authorization on July 29, 2018, with no completion deadline; purchases may be suspended or discontinued. It also approved a quarterly dividend of $0.11 per share, up from $0.10, for payment in August 2018.
- Customer-financing guarantees had a maximum potential exposure of $3.2, with $0.831 recorded as a liability. Letters of credit and foreign guarantees had maximum potential payments of $12.939. Management said ordinary-course litigation was not expected to have a material adverse effect, while acknowledging the inherent uncertainty of claims.
Important facts for investors to verify
- Review the pellet-plant agreement, payment schedule, release terms and potential $7.0 emissions-related payment; distinguish this settled contract from the separate $59.5 inventory plant still being marketed.
- Assess underlying sales, margins and cash generation apart from the one-time pellet-plant charge, including the effect of the $68.0 accrual on reported operating cash flow.
- Track backlog composition and conversion, especially domestic orders, the remaining Infrastructure business and the separate pellet-plant inventory.
- Monitor working-capital requirements, Brazilian subsidiary debt, revolver covenants and the ability to fund capital expenditures, dividends and any share repurchases.
- Check subsequent tax accounting: the filing says the Tax Act transition-tax amount remained provisional, with completion expected in Q4 2018.