Astec Industries(ASTE) - 2019 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements Presents Astec Industries' unaudited condensed consolidated financial statements for Q3 and nine months ended September 30, 2019, including balance sheets, operations, cash flows, and equity Condensed Consolidated Balance Sheets Total assets decreased to $815.7 million from $855.5 million, driven by reduced current assets, while total liabilities significantly decreased to $198.1 million from $270.2 million due to lower long-term debt Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Current Assets | $529,884 | $560,991 | | Total Assets | $815,669 | $855,457 | | Total Current Liabilities | $173,081 | $189,231 | | Long-term Debt | $717 | $59,709 | | Total Liabilities | $198,085 | $270,167 | | Total Equity | $617,584 | $585,290 | Condensed Consolidated Statements of Operations Q3 2019 net sales were flat at $255.8 million, with net income decreasing to $3.0 million; nine-month net sales increased to $886.4 million, swinging to a $40.7 million net income Statement of Operations Summary (in thousands, except per share data) | Metric | Q3 2019 | Q3 2018 | Nine Months 2019 | Nine Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $255,807 | $256,613 | $886,389 | $854,595 | | Gross Profit | $51,860 | $58,284 | $212,027 | $137,398 | | Income (loss) from operations | $3,342 | $7,230 | $52,002 | $(16,998) | | Net income (loss) attributable to controlling interest | $3,010 | $6,995 | $40,662 | $(13,411) | | Diluted EPS | $0.13 | $0.30 | $1.79 | $(0.58) | Condensed Consolidated Statements of Cash Flows Net cash from operations significantly improved to $84.2 million for the nine months, compared to a $20.5 million use in the prior year, primarily due to higher net income and working capital changes Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided (used) by operating activities | $84,175 | $(20,534) | | Net cash used by investing activities | $(16,249) | $(17,105) | | Net cash provided (used) by financing activities | $(66,706) | $2,506 | - The significant increase in operating cash flow was mainly due to a swing from a net loss to net income, a smaller increase in inventories compared to the prior year, and improved collections on receivables[12] Notes to Financial Statements Details accounting policies, including new lease standards adoption, revenue recognition, segment performance, debt, legal contingencies, and restructuring charges - The company adopted new lease accounting standards (Topic 842) on January 1, 2019, resulting in the recognition of right-of-use assets of $5.0 million and corresponding lease liabilities[22][57] - Restructuring charges of $0.9 million in Q3 2019 and $1.4 million year-to-date were incurred related to the exit from the wood pellet plant business and the closure of the Astec Mobile Machinery (AMM) subsidiary in Germany[104] - The company is a defendant in a putative shareholder class action lawsuit alleging violations of the Securities Exchange Act of 1934, disputing allegations and unable to estimate a possible loss[95] Management's Discussion and Analysis (MD&A) Discusses Q3 and nine-month 2019 financial performance, market factors, segment results, liquidity, and capital resources, highlighting non-recurring items' impact Business Overview and Market Factors Company performance is influenced by public infrastructure spending, economic conditions, and commodity prices, with a strong U.S. dollar negatively impacting international sales - The company's financial performance is sensitive to public sector spending on infrastructure, with the FAST Act, funding projects through September 2020, being a key driver[119][122] - Commodity price fluctuations are a significant factor, as steel is a major component cost, and oil prices impact both the Infrastructure Group (via asphalt costs) and the Energy Group (via demand for drilling equipment)[127][128][129] - The company is implementing initiatives with a consulting firm to reduce raw material costs and inventory levels, expected to positively impact gross margins from late 2019 onwards[136] Results of Operations Q3 2019 net sales were flat, with gross margin declining; nine-month sales grew 3.7%, and gross margin improved significantly due to a pellet plant sale and non-recurrence of prior-year charges - The nine-month 2019 results include a $20 million sale from the Georgia Pellet Plant, which had its inventory value written down to zero in 2018, directly contributing to gross profit[137] - The nine-month 2018 results were negatively impacted by $75.3 million in charges against sales related to the Arkansas Pellet Plant agreement, significantly depressing prior-year gross profit[138] Net Sales Comparison (in thousands) | Period | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | Q3 Net Sales | $255,807 | $256,613 | (0.3)% | | Nine Months Net Sales | $886,389 | $854,595 | 3.7% | Gross Profit Comparison | Period | 2019 Gross Profit | 2019 Margin | 2018 Gross Profit | 2018 Margin | | :--- | :--- | :--- | :--- | :--- | | Q3 | $51,860 | 20.3% | $58,284 | 22.7% | | Nine Months | $212,027 | 23.9% | $137,398 | 16.1% | Segment Performance Q3 2019 saw slight Infrastructure sales growth, while Aggregate & Mining and Energy sales declined or were flat; nine-month Infrastructure sales grew 18.6%, driven by a pellet plant sale Q3 2019 Segment Net Sales (in thousands) | Segment | Q3 2019 Sales | Q3 2018 Sales | % Change | | :--- | :--- | :--- | :--- | | Infrastructure Group | $88,219 | $87,063 | 1.3% | | Aggregate and Mining Group | $99,617 | $101,735 | (2.1)% | | Energy Group | $67,971 | $67,815 | 0.2% | Nine Months 2019 Segment Net Sales (in thousands) | Segment | Nine Months 2019 Sales | Nine Months 2018 Sales | % Change | | :--- | :--- | :--- | :--- | | Infrastructure Group | $376,448 | $317,359 | 18.6% | | Aggregate and Mining Group | $312,985 | $337,100 | (7.2)% | | Energy Group | $196,956 | $200,136 | (1.6)% | - The order backlog as of September 30, 2019, was $243.9 million, a 21.0% decrease from $308.6 million a year prior, with declines across all three segments[163] Liquidity and Capital Resources Strong liquidity with $26.3 million cash and $141.4 million available credit; operating cash flow significantly improved to $84.2 million for the nine months - The company had $26.3 million in cash and zero borrowings under its $150 million revolving credit facility as of September 30, 2019[183] - Capital expenditures for 2019 are forecasted to be approximately $25 million[189] - No shares were repurchased in 2019 under the stock buy-back program, which has $125.9 million remaining authorization[190] Quantitative and Qualitative Disclosures about Market Risk No material changes to market risk disclosures from the 2018 Annual Report on Form 10-K - There were no material changes to the company's market risk profile during the quarter[197] Controls and Procedures Disclosure controls and procedures were ineffective as of September 30, 2019, due to previously identified material weaknesses in internal control over financial reporting - The company's principal executive and financial officers concluded that disclosure controls and procedures were not effective as of the end of the period[199] - The ineffectiveness is due to material weaknesses in internal control over financial reporting previously identified in the 2018 Form 10-K, and remediation efforts are ongoing[199][201] PART II – OTHER INFORMATION Legal Proceedings Updates on a shareholder class action lawsuit and a GEFCO subsidiary breach of warranty claim, with potential losses currently unestimable - The company and certain officers are defendants in a shareholder class action lawsuit filed on behalf of shareholders who purchased stock between July 26, 2016, and October 22, 2018; a motion to dismiss was filed on October 25, 2019[204] - The GEFCO subsidiary is involved in a lawsuit alleging breach of warranty for equipment sold in 2013 with an original purchase price of approximately $8.5 million[205] Risk Factors No material changes to the company's risk factors from those disclosed in the 2018 Annual Report on Form 10-K - There have been no material changes in the Company's risk factors from those disclosed in the 2018 Form 10-K[206] Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased during the first nine months of 2019 under the existing $150 million share repurchase program - No shares were repurchased during the first nine months of 2019 under the existing $150 million share repurchase program[207] Exhibits Lists filed exhibits, including an amendment to the Supplemental Executive Retirement Plan and CEO/CFO certifications - Exhibits filed include CEO/CFO certifications (Sections 302 and 906) and an amendment to the Supplemental Executive Retirement Plan[209]