Astec Industries, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited. Financial amounts below are in millions unless otherwise noted.
Business context and reporting period
Astec manufactures equipment and replacement parts for road building, aggregate and mining, underground construction, and wood processing. Results are affected by infrastructure spending, economic conditions, oil and steel prices, interest rates, and foreign exchange. Historically, 25% to 28% of annual revenue is generated in the first quarter, so quarterly results may not indicate full-year performance.
Financial results and liquidity
| Metric | Q1 2011 | Q1 2010 or comparison |
|---|---|---|
| Net sales | $230.2 | $193.5; up 19.0% |
| Gross profit / margin | $54.7 / 23.8% | $46.1 / 23.9% |
| Operating income | $15.2 | $13.4 |
| Net income attributable to controlling interest | $10.1 | $8.8; up 15.4% |
| Diluted EPS | $0.44 | $0.39 |
| Operating cash flow | $(10.4) | $9.6 |
| Capital expenditures | $4.0 | $1.8 |
Gross margin was nearly flat year over year. SG&A and engineering expense rose 20.7% to $39.5 million, including higher payroll, commissions, and $2.7 million of ConExpo costs; lower health insurance expense partly offset the increases. The effective tax rate was 34.8%, versus 35.9%, reflecting research and development credits and other tax items.
Cash and cash equivalents were $80.2 million at March 31, down from $94.6 million at year-end. Operating cash use primarily reflected higher inventory and receivables associated with increased production and sales. Current assets were $474.2 million and current liabilities $144.8 million. The filing reports no borrowings under the main revolving facility; $92.4 million remained available after $7.6 million of letters of credit. The $100 million Wells Fargo facility matures in May 2012, and the company reported compliance with its covenants. No material interest-bearing debt balance is reported.
Material changes and segment performance
- Domestic sales rose 14.0% to $147.5 million; international sales rose 29.2% to $82.7 million, or 35.9% of total sales. Management attributed international growth in part to improved markets and a weaker U.S. dollar.
- Parts sales increased 14.0% to $57.3 million, but declined to 24.9% of revenue from 26.0%, as equipment sales grew faster.
- Aggregate and Mining sales increased 33.8% to $78.9 million; segment profit nearly doubled to $5.6 million. Mobile Asphalt Paving sales rose 18.7% to $50.0 million and segment profit increased to $7.3 million.
- Asphalt sales rose 5.3% to $73.8 million, while segment profit fell 15.4% to $10.8 million, partly because the prior-year quarter included unusually high-margin transactions. Underground sales increased 30.7% to $11.7 million, but its segment loss widened to $3.8 million. All Others reported a segment loss of $8.5 million.
- Order backlog reached $244.8 million at March 31, up 81.6% from a year earlier, with international orders representing 50.9%.
Outlook, risks, and contingencies
Management forecast 2011 capital expenditures of $29.4 million, expected to be funded with cash, internally generated funds, and available credit. The filing provides no quantified full-year sales or earnings guidance. Management described economic conditions as improving in domestic and international markets, but emphasized uncertainty around long-term U.S. highway funding; current federal transportation authorization was due to expire September 30, 2011.
- Management expected steel prices could rise through Q2 2011 and believed they might stabilize in the second half. Advanced purchases and supply contracts partly mitigated Q1 increases; the company may not be able to pass future cost increases fully to customers.
- Oil price volatility, higher interest rates, weaker infrastructure spending, competitive pressure, and a stronger U.S. dollar could reduce demand or margins. Higher oil and gas prices may benefit certain drilling-related products.
- Customer financing guarantees were $3.2 million, with a recorded liability of $0.3 million. Letters of credit and guarantees had a stated maximum potential exposure of $11.4 million.
- The company committed to purchase Australian real estate for $5.0 million, with closing expected in Q2 2011.
- Legal and environmental matters include an EPA and Oregon DEQ enforcement action concerning alleged air-permitting violations and a possible share of costs for an Illinois environmental cleanup. No liability was recorded for these environmental matters because the amounts could not be estimated. Management said ordinary-course claims were not expected to have a material adverse effect, while noting that unfavorable outcomes remain possible.
- Foreign-currency contracts had an average notional amount of $14.3 million; derivative liabilities were $1.2 million. The company recorded a $0.5 million net loss on derivatives in cost of sales, and none were designated as hedges.
Important facts for investors to verify
- Whether backlog converts to revenue as expected, and whether its growth is sustained across domestic and international markets.
- Whether working-capital investment, especially inventory and receivables, moderates and operating cash flow recovers.
- Whether higher steel and other input costs can be offset through pricing, sourcing, or productivity without further margin pressure.
- Progress on federal transportation funding and any resulting effect on customer orders, particularly in asphalt-related businesses.
- Execution and funding of the $29.4 million capital expenditure plan and the Australian property purchase.
- Developments and potential financial exposure from the environmental matters, customer guarantees, and letters of credit.