Astec Industries, Inc. — Q1 2017 Form 10-Q
Business context and reporting period: Unaudited results for the three months ended March 31, 2017, compared with Q1 2016. Astec manufactures equipment and parts for infrastructure, aggregate and mining, and energy markets. The Energy Group includes Power Flame, acquired in August 2016.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $318.4 million | $278.7 million | +14.2% |
| Gross profit / margin | $75.8 million / 23.8% | $72.0 million / 25.8% | Profit +5.3%; margin -2.0 percentage points |
| Operating income | $22.7 million | $28.2 million | -19.5% |
| Net income attributable to controlling interest | $15.1 million | $17.7 million | -14.8% |
| Diluted EPS | $0.65 | $0.77 | -$0.12 |
| Operating cash flow | $(14.7) million | $45.1 million | Down $59.8 million |
| Cash and cash equivalents, March 31 | $55.4 million | $62.4 million | Down $27.0 million from Dec. 31, 2016 |
| Total debt, March 31 | $7.0 million | — | Includes current and long-term debt |
Current assets were $606.3 million and current liabilities $184.6 million at quarter-end (approximately 3.3x current ratio). Total assets were $874.5 million and total equity was $664.4 million. The company declared dividends of $0.10 per share, consistent with Q1 2016.
Changes and operating drivers
- Sales rose in all three segments. Infrastructure sales increased 7.9% to $165.2 million; Aggregate and Mining increased 8.8% to $100.6 million; Energy increased 58.7% to $52.5 million, including Power Flame contribution.
- International sales grew 45.9% to $64.9 million and rose to 20.4% of total sales, from 16.0%. Domestic sales increased 8.2% to $253.5 million. Parts sales increased 9.3% to $81.0 million but declined as a share of sales, to 25.4% from 26.6%.
- Despite higher sales, gross margin fell due to product mix, costs associated with new products, higher inventory obsolescence and warranty expense, lower foreign-exchange gains, and reduced recapture of deferred intercompany profits. SG&A and engineering costs rose 21.3% to $53.1 million, including ConExpo-2017 exhibit expenses.
- Segment profit declined in Infrastructure, to $18.2 million from $21.9 million, and Aggregate and Mining, to $8.4 million from $9.5 million. Energy returned to profitability, with $2.7 million versus a $0.2 million loss.
- Backlog at March 31 was $361.8 million, down 17.5% year over year. Domestic backlog declined 25.1%; international backlog increased 40.6%. Backlog includes about $60 million for a pellet plant order whose revenue is expected to be recognized when payment is received, currently expected in 2018.
Cash flow, debt and outlook
Operating cash use reflected a $45.9 million increase in receivables and a $12.2 million increase in inventories, partly offset by higher accounts payable. Management attributed the receivables increase in part to days sales outstanding rising from 38.7 to 43.3. Investing cash use was $5.6 million, including $5.4 million of capital expenditures; financing cash use was $7.1 million, including $4.6 million of bank-loan repayments and $2.3 million of dividends.
Management forecast approximately $30 million in 2017 capital expenditures and said available working capital, operating cash flows and credit capacity should meet working-capital and capital-expenditure needs through March 31, 2018. On April 12, 2017, the company renewed its $100 million Wells Fargo facility through April 12, 2022; at March 31, $91.5 million was available after letters of credit. The amended facility includes annual net income and minimum tangible net worth covenants. The company reported compliance with covenants at quarter-end.
Management commentary, risks and contingencies
- Management cited the multi-year federal FAST Act highway funding as a potential support for infrastructure demand, while noting that future public funding remains subject to political uncertainty and could be reduced or redirected.
- Steel prices rose in Q1, and management expected further increases through Q2. The company uses forward contracts and advance purchases to mitigate cost increases. A stronger U.S. dollar, oil and gas price volatility, interest rates, and cyclical customer markets may affect demand and international sales.
- Customer-debt guarantees totaled $1.5 million, with a $0.6 million recorded liability. Letters of credit and foreign guarantees had maximum potential payments of $9.7 million. Management considered ordinary-course legal matters not expected to have a material adverse effect, but noted outcomes are uncertain. A historical EPA cleanup matter remains unquantifiable and no liability was recorded.
- Management reported no material changes to previously disclosed risk factors and concluded disclosure controls were effective; no material change in internal control over financial reporting was reported.
- The company planned to adopt the new revenue recognition standard in 2018 but had not determined its impact. It also had not determined the impact of several other forthcoming accounting standards, including financial instruments and leases.
Key investor verification points
- Whether revenue growth converts to stronger earnings, given lower gross margins, higher overhead and lower segment profits in Infrastructure and Aggregate and Mining.
- Whether receivables and inventory normalize and operating cash flow improves; track receivable days, collections and working-capital requirements.
- Backlog quality and conversion, especially the approximately $60 million pellet plant order dependent on expected 2018 payment, and the continued decline in domestic backlog.
- Steel-cost trends, pricing actions, and the effects of foreign exchange, oil and gas markets, and public infrastructure funding on demand.
- Compliance with the renewed credit facility covenants, foreign-subsidiary debt and contingent guarantees, and any developments in the EPA cleanup matter.