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ASTE > SEC Filings for ASTE > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for ASTEC INDUSTRIES INC

Form 10-Q for ASTEC INDUSTRIES INC


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements contained anywhere in this Quarterly Report on Form 10-Q that are not limited to historical information are considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are sometimes identified by the words "will," "would," "should," "could," "may," "believes," "anticipates," "intends," "forecasts" and "expects" and similar expressions. Such forward-looking statements include, without limitation, statements regarding the Company's expected sales and results of operations during 2012, the Company's expected capital expenditures in 2012, the expected benefit and impact of financing arrangements, the ability of the Company to meet its working capital and capital expenditure requirements through September 30, 2013, the amount and impact of any current or future state or federal funding for transportation construction programs, the need for road improvements, the amount and impact of other public sector spending and funding mechanisms, changes in the economic environment as it affects the Company, the timing and impact of changes in the economy, the market confidence of customers and dealers, the Company being called upon to fulfill certain contingencies, the expected dates of granting of restricted stock units, changes in interest rates and the impact of such changes on the financial results of the Company, changes in the prices of steel and oil and the impact of such changes generally and on the demand for the Company's products, customer's buying decisions and the Company's business, the ability of the Company to offset future changes in prices in raw materials, the change in the strength of the dollar and the level of the Company's presence and sales in international markets, the impact that further development of domestic oil and natural gas production capabilities would have on the domestic economy and the Company's business, the seasonality of the Company's business, the percentage of the Company's equipment sold directly to end users, the amount or value of unrecognized tax benefits, the Company's discussion of its critical accounting policies and the ultimate outcome of the Company's current claims and legal proceedings.

These forward-looking statements are based largely on management's expectations, which are subject to a number of known and unknown risks, uncertainties and other factors discussed in this Report and in other documents filed by the Company with the Securities and Exchange Commission, which may cause actual results, financial or otherwise, to be materially different from those anticipated, expressed or implied by the forward-looking statements. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements to reflect future events or circumstances.

The risks and uncertainties identified herein under the caption "Item 1A. Risk Factors" in Part II of this Report, elsewhere herein and in other documents filed by the Company with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011, should be carefully considered when evaluating the Company's business and future prospects.

Overview
Astec Industries, Inc. ("the Company") is a leading manufacturer and marketer of equipment for road building, aggregate processing, directional drilling, trenching and wood processing. The Company's businesses:

design, engineer, manufacture and market equipment that is used in each phase of road building, including quarrying and crushing the aggregate to producing asphalt or concrete, recycling old asphalt or concrete and applying the asphalt;

design, engineer, manufacture and market additional equipment and components including trenching, auger boring, directional drilling, geothermal drilling, oil and natural gas drilling, industrial heat transfer, wood chipping and grinding, wood pellet processing, solid waste transfer and dump trailers; and

manufacture and sell replacement parts for equipment in each of its product lines.


The Company has 16 manufacturing companies, 15 of which fall within four reportable operating segments, which include the Asphalt Group, the Aggregate and Mining Group, the Mobile Asphalt Paving Group and the Underground Group. The business units in the Asphalt Group design, manufacture and market a complete line of asphalt plants and related components, heating and heat transfer processing equipment and storage tanks for the asphalt paving and other unrelated industries including energy production, concrete mixing plants and wood pellet processing equipment. The business units in the Aggregate and Mining Group design, manufacture and market equipment for the aggregate, metallic mining and recycling industries. The business units in the Mobile Asphalt Paving Group design, manufacture and market asphalt pavers, material transfer vehicles, milling machines, stabilizers and screeds. The business units in the Underground Group design, manufacture and market trenching equipment, directional drills, geothermal drills and auger boring machines for the underground construction market, as well as vertical drills for gas and oil field development and water well industry. The Company also has one other category that contains the business units that do not meet the requirements for separate disclosure as an operating segment. The business units in the Other category include Peterson Pacific Corp. ("Peterson"), Astec Australia Pty Ltd ("Astec Australia"), Astec Insurance Company ("Astec Insurance" or "the captive") and Astec Industries, Inc., the parent company. Peterson designs, manufactures and markets whole-tree pulpwood chippers, horizontal grinders and blower trucks. Astec Australia markets and installs equipment, services and provides parts for many of the products produced by the Company's manufacturing companies. Astec Insurance is a captive insurance company.

The Company's financial performance is affected by a number of factors, including the cyclical nature and varying conditions of the markets it serves. Demand in these markets fluctuates in response to overall economic conditions and is particularly sensitive to the amount of public sector spending on infrastructure development, privately funded infrastructure development, changes in the price of crude oil, which affects the cost of fuel and liquid asphalt, and changes in the price of steel.

In August 2005, President Bush signed into law the Safe, Accountable, Flexible and Efficient Transportation Equity Act - A Legacy for Users ("SAFETEA-LU"), which authorized appropriation of $286.5 billion in guaranteed federal funding for road, highway and bridge construction, repair and improvement of the federal highways and other transit projects for federal fiscal years October 1, 2004 through September 30, 2009. The Company believes that federal highway funding such as SAFETEA-LU influences the purchasing decisions of the Company's customers who are more comfortable making purchasing decisions with such legislation in place. Federal funding provides for approximately 25% of all highway, street, roadway and parking construction in the United States.

SAFETEA-LU funding expired on September 30, 2009 and federal transportation funding operated on short-term appropriations through March 17, 2010. On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment ("HIRE") Act. This law extended authorization of the surface transportation programs previously funded under SAFETEA-LU through December 31, 2010 at 2009 levels. In addition, the HIRE Act authorized a one-time transfer of $19.5 billion from the general fund to the highway trust fund related to previously foregone interest payments. It also shifted the cost of fuel tax exemptions for state and local governments from the highway trust fund to the general fund, which is estimated to generate an anticipated $1.5 billion annually, and allows the highway trust fund to retain interest earned on future unexpended balances. The U.S. Congress funded federal transportation expenditures for the fiscal year ended September 30, 2011 at the 2010 level of $41.1 billion, and it subsequently approved short-term funding of federal transportation expenditures at the same levels through September 30, 2012. In July 2012, President Obama signed into law the "Moving Ahead for Progress in the 21st Century Act" ("Map-21"), which authorizes federal spending on highway and public transportation programs through fiscal year 2014. Map-21 continues federal highway and transit funding at 2012 levels with modest increases for inflation. Although the Company believes Map 21 will help stabilize the federal highway program in the near term, the Company believes a longer multi-year highway program would have the greatest positive impact on the road construction industry and allow its customers to plan and execute longer-term projects. The level of future federal highway construction is uncertain and any future funding may be at lower levels than in the past.

Several other countries implemented infrastructure spending programs in recent years to stimulate their economies. The Company believes these spending programs have had a positive impact on its financial performance; however, the magnitude of that impact cannot be determined.


The public sector spending described above is needed to fund road, bridge and mass transit improvements. The Company believes that increased funding is unquestionably needed to restore the nation's highways to a quality level required for safety, fuel efficiency and mitigation of congestion. In the Company's opinion, amounts needed for such improvements are significantly greater than amounts approved to date, and funding mechanisms such as the federal usage fee per gallon of gasoline, which has not been increased in 20 years, would likely need to be increased along with other measures to generate the funds needed.

In addition to public sector funding, the economies in the markets the Company serves, the price of oil and its impact on customers' purchase decisions and the price of steel may each affect the Company's financial performance. Economic downturns generally result in decreased purchasing by the Company's customers, which, in turn, causes reductions in sales and increased pricing pressure on the Company's products. Rising interest rates also typically negatively impact customers' attitudes toward purchasing equipment. The Federal Reserve has maintained historically low interest rates in response to the current economic downturn; however interest rates may increase during the remainder of 2012 or thereafter.

Significant portions of the Company's revenues relate to the sale of equipment involved in the production, handling, recycling or installation of asphalt mix. Liquid asphalt is a by-product of oil production. An increase in the price of oil increases the cost of asphalt, which is likely to decrease demand for asphalt and therefore decrease demand for certain Company products. While increasing oil prices may have a negative financial impact on many of the Company's customers, the Company's equipment can use a significant amount of recycled asphalt pavement, thereby mitigating the effect of increased oil prices on the final cost of asphalt for the customer. The Company continues to develop products and initiatives to reduce the amount of oil and related products required to produce asphalt mix. Oil price volatility makes it difficult to predict the costs of oil-based products used in road construction such as liquid asphalt and gasoline. The Company's customers appear to be adapting their prices in response to the fluctuating oil prices, and the fluctuations did not appear to significantly impair equipment purchases during 2011 or the first nine months of 2012. The Company expects oil prices to continue to fluctuate during 2012 and thereafter. Minor fluctuations in oil prices should not have a significant impact on customers' buying decisions. However, political uncertainty in oil producing countries, interruptions in oil production due to disasters, whether natural or man-made, or other economic factors could significantly impact oil prices which could negatively impact demand for the Company's products.

Contrary to the negative impact of higher oil prices on many of the Company's products as discussed above, sales of several of the Company's products, including products manufactured by the Underground Group, which are used to drill for oil and natural gas and install oil and natural gas pipelines, would benefit from higher oil and natural gas prices, to the extent that such higher prices lead to further development of oil and natural gas production. The Company believes further development of domestic oil and natural gas production capabilities is needed and would positively impact the domestic economy and the Company's business.

Steel is a major component in the Company's equipment. Steel prices are expected to remain steady or decline slightly through the latter part of 2012. As is typical in the early months of most years, the Company anticipates pricing to increase modestly during the first quarter of 2013. Further increases may occur if the economy strengthens significantly in 2013. The Company continues to utilize forward-looking contracts as well as advanced steel purchases to minimize the impact of increased steel prices. The Company will continue to review the trends in steel prices in future months and establish future contract pricing accordingly.

In addition to the factors stated above, many of the Company's markets are highly competitive, and its products compete worldwide with a number of other manufacturers and dealers that produce and sell similar products. A relatively weak U.S. dollar, combined with improving economic conditions in certain foreign economies, has had a positive impact on the Company's international sales in recent years. Recently, however, the U. S. dollar has strengthened against several currencies where the Company markets its products causing the Company's products to be more expensive in the local currencies in those countries. Increasing domestic interest rates or weakening economic conditions abroad could continue to cause the dollar to strengthen, which could negatively impact the Company's international sales.


In the United States and internationally, the Company's equipment is marketed directly to customers as well as through dealers. Approximately 75% to 80% of equipment sold by the Company was sold directly to the end user in recent years. The Company expects this ratio to remain relatively consistent through 2012.

The Company is operated on a decentralized basis with a complete management team for each operating subsidiary. Finance, insurance, legal, shareholder relations, corporate accounting and other corporate matters are primarily handled at the corporate level (i.e., Astec Industries, Inc., the parent company). The engineering, design, sales, manufacturing and basic accounting functions are all handled at each individual subsidiary. Standard accounting procedures are prescribed and followed in all reporting.

The non-union employees of each subsidiary have the opportunity to earn profit-sharing incentives in the aggregate of up to 10% of each subsidiary's after-tax profit if such subsidiary meets established goals. These goals are based on the subsidiary's return on capital employed, cash flow on capital employed and safety. The profit-sharing incentives for subsidiary presidents are normally paid from a separate corporate pool.

Results of Operations
Net Sales
Net sales increased $12,417,000 or 5.8% from $214,624,000 for the third quarter of 2011 to $227,041,000 for the third quarter of 2012. Sales are generated primarily from new equipment and parts sales to domestic and international customers. The overall increase in sales for the third quarter of 2012 compared to the third quarter of 2011 is due to sales of $12,462,000 by GEFCO, Inc. ("GEFCO"), which was acquired in late 2011. Additionally, sales by the Aggregate and Mining Group increased by $8,628,000 due to strong domestic results and sales by the Other Group increased by $4,565,000 due to strong international sales, particularly by Astec Australia. These increased sales were offset by sales declines of $3,661,000 in the Asphalt Group and $2,525,000 in the Mobile Asphalt Paving Group. Sales in these two groups were negatively impacted by the delay in passing the federal highway bill which was not passed until after most states had already issued the paving contracts for the summer season and by the uncertainty in the U.S. tax and regulatory environment.

Net sales increased $54,985,000 or 7.9% from $692,569,000 for the first nine months of 2011 to $747,554,000 for the first nine months of 2012. Sales are generated primarily from new equipment and parts sales to domestic and international customers. The increase in sales for the first nine months of 2012 compared to the first nine months of 2011 is partially due to sales of $35,600,000 by GEFCO, which was acquired in late 2011. Additionally, sales by the Aggregate and Mining Group increased $29,377,000 due to strong domestic results and sales by the Other Group increased by $19,687,000 due to strong international sales, particularly by Astec Australia. Sales declined by $17,498,000 in the Asphalt Group and by $18,795,000 in the Mobile Asphalt Group and were negatively impacted by the delay in passing the federal highway bill which was not passed until after most states had already issued the paving contracts for the summer season and by the uncertainty in the U.S. tax and regulatory environment.

Domestic sales for the third quarter of 2012 were $139,479,000 or 61.4% of consolidated net sales compared to $127,282,000 or 59.3% of consolidated net sales for the third quarter of 2011, an increase of $12,197,000 or 9.6%, due primarily to increases in sales by the Underground and Aggregate and Mining groups. The increased Underground Group's sales were the result of the addition of GEFCO sales in 2012 results. Overall, international sales remained flat for the third quarter of 2012 at $87,562,000 or 38.6% of consolidated net sales compared to $87,342,000 or 40.7% of consolidated net sales for the third quarter of 2011, increasing in the Asphalt and Aggregate and Mining and Other groups and declining in the Mobile Asphalt and Underground groups. The increases in international sales occurred primarily in Russia and other post-Soviet states, other European countries, Canada, Australia, Mexico and other Central American countries and were offset by sales declines in the Middle East, India, other Asian countries and Africa.


Domestic sales for the first nine months of 2012 were $462,355,000 or 61.8% of consolidated net sales compared to $414,235,000 or 59.8% of consolidated net sales for the first nine months of 2011, an increase of $48,120,000 or 11.6%, due primarily to increases in sales in the Underground and Aggregate and Mining groups, offset by domestic sales declines in the Asphalt, Mobile Asphalt and Other groups. The increased Underground Group's sales were partially the result of the addition of GEFCO sales in 2012 results. International sales for the first nine months of 2012 were $285,199,000 or 38.2% of consolidated net sales compared to $278,334,000 or 40.2% of consolidated net sales for the first nine months of 2011, an increase of $6,865,000 or 2.5%. The overall increase in international sales for the first nine months of 2012 compared to the first nine months of 2011 occurred primarily in the Other Group, and was offset by declines in international sales by the Asphalt and Mobile Asphalt Paving groups. The increases in international sales occurred primarily in Australia, Russia and other post-Soviet states, Brazil, Central America, Mexico and other European countries, and were offset by a decline in international sales in South America (other than Brazil), the Middle East, Africa, India and Canada.

Parts sales remained relatively constant at $58,264,000 for the third quarter of 2012 as compared to $58,822,000 for the third quarter of 2011. Parts sales as a percentage of net sales decreased 170 basis points from 27.4% for the third quarter of 2011 to 25.7% for the third quarter of 2012 due to equipment sales increasing while parts sales remained constant.

Parts sales increased 14.5% or $25,245,000 from $174,637,000 for the first nine months of 2011 to $199,882,000 for the first nine months of 2012. Parts sales as a percentage of net sales increased 150 basis points from 25.2% for the first nine months of 2011 to 26.7% for the first nine months of 2012 due to parts sales increasing faster than equipment sales. This increase was partially attributable to the acquisition of GEFCO in late 2011 and was also positively impacted by customers delaying replacement equipment orders due to the uncertainty in the economy and thereby maintaining older equipment already in use.

Gross Profit
Consolidated gross profit increased 6.6% or $3,043,000 from $46,400,000 for the third quarter of 2011 to $49,443,000 for the third quarter of 2012. Gross profit as a percentage of sales increased slightly from 21.6% for the third quarter of 2011 to 21.8% for the third quarter of 2012.

Consolidated gross profit increased 2.0% or $3,246,000 from $163,074,000 for the first nine months of 2011 to $166,320,000 for the first nine months of 2012. Gross profit as a percentage of sales decreased 130 basis points to 22.2% for the first nine months of 2012 from 23.5% for the first nine months of 2011 due partially to the costs associated with the redesign of certain of our products as a result of the switch to Tier 4 engines mandated by the federal government as well as increased production costs associated with new products recently introduced to the market. Sales price increases lagging behind raw material price increases on the aged backlog of equipment orders and competitive pricing pressures also contributed to the decrease in gross profit as a percent of sales.

Selling, General, Administrative and Engineering Expenses Selling, general, administrative and engineering expenses for the third quarter of 2012 were $40,003,000, or 17.6% of net sales, compared to $37,362,000, or 17.4% of net sales, for the third quarter of 2011, an increase of $2,641,000, or 7.1%, due primarily to $1,942,000 of expenses incurred by GEFCO, which was acquired in late 2011. Excluding costs incurred by GEFCO, the net increase in selling, general, administrative and engineering expense is primarily due to increased health insurance costs of $931,000, profit sharing expense of $597,000, SERP expense of $886,000, exhibit expenses of $486,000 and payroll and related costs of $573,000, offset by a decrease in research and development cost of $1,385,000.

Selling, general, administrative and engineering expenses for the first nine months of 2012 were $122,266,000, or 16.4% of net sales, compared to $115,640,000, or 16.7% of net sales, for the first nine months of 2011, an increase of $6,626,000, or 5.7%, due primarily to $6,689,000 of expenses incurred by GEFCO and Astec Mobile Machinery GmbH ("AMM"), which were acquired in late 2011. Excluding the costs incurred by GEFCO and AMM, the net increase in selling, general, administrative and engineering expense is primarily due to increases in health insurance costs of $3,606,000 and payroll and related expenses of $4,314,000. These increases were offset by decreases in ConExpo exhibit costs of $3,510,000, stock incentive expenses of $1,216,000, bad debt expense of $1,071,000, research and development expense of $656,000 and legal and professional expense of $648,000.


Asset Impairment Charge
During the second quarter of 2011, the Company designated an airplane that it intends to replace as an "asset held for sale" and performed a market analysis to determine its fair value. Due to the deterioration of aircraft values in the used aviation equipment market, the fair value of the airplane was determined to be significantly below its carrying value, and as a result the Company recorded an impairment charge of $2,170,000 in the second quarter of 2011. An additional $134,000 impairment of this equipment was recorded in December 2011. The $800,000 fair value of the airplane is included in other current assets in the Company's September 30, 2012 balance sheet.

Interest Expense
Interest expense for the third quarter of 2012 increased $106,000 to $152,000 from $46,000 for the third quarter of 2011.

Interest expense for the first nine months of 2012 increased $102,000 to $242,000 from $140,000 for the first nine months of 2011.

Other Income, net of expenses
Other income, net of expenses was $856,000 for the third quarter of 2012 compared to $264,000 for the third quarter of 2011, an increase of $592,000. Other income is generated primarily by earnings on investments held by Astec Insurance, the Company's captive insurance company, as well as interest income and license fee income.

Other income, net of expenses was $2,333,000 for the first nine months of 2012 compared to $1,037,000 for the first nine months of 2011, an increase of $1,296,000. Other income is generated primarily by earnings on investments held by Astec Insurance, the Company's captive insurance company, as well as interest income and license fee income.

Income Tax
Income tax expense for the third quarter of 2012 was $3,244,000, compared to income tax expense of $1,492,000 for the third quarter of 2011. The Company's combined effective tax rates for the third quarters of 2012 and 2011 were 32.0% and 16.1%, respectively. The increase in the tax rate between periods is primarily due to the tax rate for the third quarter of 2011 including the effect of federal research and development tax credits that are currently not available for the third quarter of 2012 as Congress has not yet passed legislation extending these credits which expired as of December 31, 2011. The income tax rate for the three-month period ended September 30, 2012 was reduced to reflect a favorable return to provision adjustment for the federal research and development tax credits and federal IRC Section 199 deductions. The income tax rate for the three-month period ended September 30, 2011 was reduced due to an increase in estimated research and development tax credits.

Income tax expense for the first nine months of 2012 was $16,558,000, compared to income tax expense of $14,134,000 for the first nine months of 2011. The Company's combined effective tax rates for the first nine months of 2012 and 2011 were 35.9% and 30.6%, respectively. The increase in the tax rate between periods is primarily due to the tax rate for the first nine months of 2011 including the effect of federal research and development tax credits that are currently not available for the first nine months of 2012 as Congress has not yet passed legislation extending these credits which expired as of December 31, 2011.

Net Income
The Company had net income attributable to controlling interest of $6,852,000 for the third quarter of 2012 compared to $7,723,000 for the third quarter of 2011, a decrease of $871,000, or 11.3%. Earnings per diluted share were $0.30 for the third quarter of 2012 compared to $0.34 for the third quarter of 2011, a decrease of $0.04 or 11.8%. Diluted shares outstanding for the quarters ended September 30, 2012 and 2011 were 23,053,000 and 23,007,000, respectively. The increase in diluted shares outstanding is primarily due to granting of . . .

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