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ASTE > SEC Filings for ASTE > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for ASTEC INDUSTRIES INC

Form 10-Q for ASTEC INDUSTRIES INC


12-Nov-2013

Quarterly Report


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

Explanatory Note
Astec Industries, Inc. ("the Company") has restated its previously filed Condensed Consolidated Balance Sheet as of December 31, 2012, its Condensed Consolidated Statements of Income for the three and nine-month periods ended September 30, 2012 and its Condensed Consolidated Statement of Cash Flows and Condensed Consolidated Statement of Equity for the nine-month period ended September 30, 2012 to correct immaterial accounting errors related to the elimination of intercompany profits on interdivisional sales within the Company's Asphalt Group. Management discovered the error during its routine month-end review of its September 2013 internal financial statements while investigating an unexpected variance at one of its subsidiaries. The errors caused the financial results and inventory levels previously reported for 2009 through 2012 to be understated by an immaterial amount each period. Although the impact of the errors was immaterial in each period, the cumulative impact of the correcting the errors, when aggregated together, would have been material to the Company's Consolidated Income Statement for the third quarter of 2013. A description of the error follows.

As part of the process to consolidate each of the Company's subsidiaries' financial statements each month, intercompany and interdivisional sales and cost of sales recorded on the Company's subsidiaries' books must be reversed. Additionally, inventory levels must be decreased and margins deferred for the portion of these products that have not yet been sold to non-affiliated customers. Beginning in 2009, sales and cost of sales on interdivisional transactions between the two divisions of the Company's subsidiary, Astec, Inc., were properly reversed at the time of the interdivision sales; however, the related margins were not subsequently recognized when the products were eventually sold to non-affiliated customers. This resulted in an understatement of margins, related income taxes and inventory levels as reported in the Company's consolidated financial statements for each period.

For further details on the nature of the corrections and the related impact on the Company's previously issued consolidated financial statements, see Note 19, "Restatement of Previously issued Financial States" included in the Notes to Unaudited Condensed Consolidated Financial Statements contained elsewhere in this filing.

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 2013, the Company's expected capital expenditures in 2013, 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, 2014, 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 Company's investments, the percentage of the Company's equipment sold directly to end users, the amount or value of unrecognized tax benefits, plans for the startup of the Company's manufacturing facility in Brazil, payment of dividends by the Company, 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, 2012, should be carefully considered when evaluating the Company's business and future prospects.

Overview
The Company is a leading manufacturer and seller of equipment for road building, aggregate processing, geothermal, water and oil and gas drilling 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 geothermal drilling, oil and natural gas drilling, industrial heat transfer, wood chipping and grinding, wood pellet processing; and

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

The Company has 15 manufacturing companies, 14 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 portable drilling rigs and related equipment for the water well, environmental, groundwater monitoring, construction, geothermal, mining and oil and gas exploration and production industries. 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. The Other Group's results also include United States federal income taxes on all companies, which are recorded on the parent company's books. 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 recent history through September 2009, federal funding for road, highway and bridge construction, repair and improvement of the federal highways and other transit projects was accomplished by long-term (typically six years) legislation. From September 2009 until July 2012 such federal funding was accomplished by several shorter term legislative actions. The Company believes that federal highway funding enacted through long-term legislation positively influences the purchasing decisions of the Company's customers who are more comfortable making purchasing decisions with multi-year legislation in place. Federal funding provides for approximately 25% of all highway, street, roadway and parking construction in the United States.

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 approved short-term funding of federal transportation expenditures through September 30, 2012 at the same levels. In July 2012, President Obama signed into law the "Moving Ahead for Progress in the 21st Century Act" ("Map-21"), which authorized $105 billion of federal spending on highway and public transportation programs through fiscal year 2014. Map-21 is the first long-term highway legislation enacted since 2005 and 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 have implemented infrastructure spending programs 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 is currently still at the 1993 level of 18.4 cents per gallon, 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' purchasing 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 2013 and 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 in 2012 or the first nine months of 2013. The Company expects oil prices to continue to fluctuate in 2013 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, 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 price levels are rising modestly leading into the fourth quarter of 2013. Management anticipates supply and demand to be relatively balanced during the beginning of 2014, which should result in pricing stability for the first quarter. The Company will review the trends in steel prices during the latter portion of 2013 and establish future contract pricing accordingly to minimize the impact of any potential price increases.

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. During 2010, 2011 and a portion of 2012, a weak dollar, combined with improving economic conditions in certain foreign economies, had a positive impact on the Company's international sales. The dollar strengthened against many foreign currencies during the later portion of 2012 and the first nine months of 2013, which has negatively impacted pricing in certain foreign markets. Increasing domestic interest rates or weakening economic conditions abroad could cause the dollar to further 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. In recent years, approximately 75% to 80% of equipment sold by the Company was sold directly to the end user. The Company expects this ratio to remain relatively consistent through the end of 2013.

The Company is operated on a decentralized basis and there is 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 decreased $5,214,000 or 2.4% from $218,391,000 for the third quarter of 2012 to $213,177,000 for the third quarter of 2013. Sales are generated primarily from new equipment and parts sales to domestic and international customers. Sales decreased by $12,068,000 in the Aggregate and Mining Group and $1,199,000 in the Mobile Asphalt Paving Group. These decreased sales were offset by increased sales of $6,738,000 in the Underground Group, $1,054,000 in the Other Group, and $261,000 in the Asphalt Group.

Net sales increased $503,000 or 0.1% from $708,633,000 for the first nine months of 2012 to $709,136,000 for the first nine months of 2013. Sales are generated primarily from new equipment and parts sales to domestic and international customers. Sales increased by $6,863,000 in the Asphalt Group and $4,689,000 in the Mobile Asphalt Paving Group. These increased sales were offset by sales decreases of $7,586,000 in the Aggregate and Mining Group, $2,751,000 in the Underground Group and $712,000 in the Other Group.


Domestic sales for the third quarter of 2013 were $132,420,000 or 62.1% of consolidated net sales compared to $134,038,000 or 61.4% of consolidated net sales for the third quarter of 2012, a decrease of $1,618,000 or 1.2%, due primarily to decreases in sales by the Underground and Mobile Asphalt Paving groups offset by an increase in domestic sales by the Asphalt Group. International sales for the third quarter of 2013 were $80,757,000 or 37.9% of consolidated net sales compared to $84,353,000 or 38.6% of consolidated net sales for the third quarter of 2012, a decrease of $3,596,000 or 4.3%, due primarily to decreases in sales by the Aggregate and Mining and Asphalt groups, offset by an increase in international sales by the Underground Group. Sales were negatively impacted by economic uncertainties in several of the countries in which the Company markets its products as well as a strengthening of the U.S. dollar against many foreign currencies. The decreases in international sales occurred primarily in Europe, Canada, Brazil and other South American countries, offset by an increase in sales in the Post-Soviet states.

Domestic sales for the first nine months of 2013 were $456,664,000 or 64.4% of consolidated net sales compared to $443,491,000 or 62.6% of consolidated net sales for the first nine months of 2012, an increase of $13,173,000 or 3.0%, due primarily to increases in sales by the Asphalt, Mobile Asphalt Paving and Other groups, offset by a decrease in domestic sales in the Underground Group. International sales for the first nine months of 2013 were $252,472,000 or 35.6% of consolidated net sales compared to $265,142,000 or 37.4% of consolidated net sales for the first nine months of 2012, a decrease of $12,670,000 or 4.8%, due primarily to decreases in sales by the Aggregate and Mining, Asphalt and Other groups, offset by a sales increase in the Underground Group. Sales were negatively impacted by economic uncertainties in several of the countries in which the Company markets its products as well as a strengthening of the U.S. dollar against many foreign currencies. The decreases in international sales occurred primarily in Canada, Australia, Europe, Brazil and other South American countries, offset by increases in the West Indies, Mexico, Russia and other Post-Soviet states.

Parts sales for the third quarter of 2013 were $59,385,000 compared to $54,837,000 for the third quarter of 2012, an increase of $4,548,000 or 8.3%. Parts sales as a percentage of net sales increased 280 basis points from 25.1% for the third quarter of 2012 to 27.9% for the third quarter of 2013. The increase in parts sales occurred primarily in the Mobile Asphalt Paving and Aggregate and Mining groups and was offset by a decline in parts sales in the Underground Group.

Parts sales for the first nine months of 2013 were $190,153,000 compared to $187,718,000 for the first nine months of 2012, an increase of $2,435,000 or 1.3%. Parts sales as a percentage of net sales increased 30 basis points from 26.5% for the first nine months of 2012 to 26.8% for the first nine months of 2013. The increase in parts sales occurred primarily in the Aggregate and Mining Group and was offset by a decline in parts sales in the Underground Group.

Gross Profit
Consolidated gross profit decreased $1,510,000 or 3.2% to $45,787,000 for the third quarter of 2013 compared to $47,297,000 for the third quarter of 2012. Gross profit as a percentage of sales decreases slightly to 21.5% for the third quarter of 2013 compared to 21.7% for the third quarter of 2012.

Consolidated gross profit increased $155,000 or 0.1% to $159,795,000 for the first nine months of 2013 compared to $159,640,000 for the first nine months of 2012. Gross profit as a percentage of sales remained flat at 22.5% for the first nine months of 2013 and 2012.

Selling, General, Administrative and Engineering Expenses Selling, general, administrative and engineering expenses for the third quarter of 2013 were $36,635,000, or 17.2% of net sales, compared to $38,411,000, or 17.6% of net sales for the third quarter of 2012, a decrease of $1,776,000 or 4.6%, due primarily to reductions in selling expenses of $504,000, research and development expenses of $819,000 and legal expenses of $310,000.

Selling, general, administrative and engineering expenses for the first nine months of 2013 were $114,797,000, or 16.2% of net sales, compared to $117,010,000, or 16.5% of net sales for the first nine months of 2012, a decrease of $2,213,000 or 1.9%, due primarily to reductions in research and development expenses of $2,411,000 and legal expenses of $1,337,000, offset by an increase in health insurance related costs of $1,150,000.


Interest Expense
Interest expense for the third quarter of 2013 increased $117,000 to $269,000 from $152,000 for the third quarter of 2012 due primarily to an increase in interest paid upon settlements of tax return audits with state taxing authorities.

Interest expense for the first nine months of 2013 increased $177,000 to $417,000 from $240,000 for the first nine months of 2012 due primarily to interest paid upon settlements of tax return audits with state taxing authorities.

Other Income, net of expenses
Other income, net of expenses was $1,100,000 for the third quarter of 2013 compared to $836,000 for the third quarter of 2012, an increase of $264,000. Other income is generated primarily by earnings on investments of excess cash and funds held by Astec Insurance, the Company's captive insurance company, as well as interest income and license fee income. The increase between years is primarily due to investment returns on excess cash invested in mutual funds during 2013.

Other income, net of expenses was $1,885,000 for the first nine months of 2013 compared to $2,305,000 for the first nine months of 2012, a decrease of $420,000. Other income is generated primarily by earnings on investments of excess cash and funds held by Astec Insurance, the Company's captive insurance company, as well as interest income and license fee income. The decrease between years is primarily related to decreases in license fee income.

Income Tax on Continuing Operations
Income tax expense on continuing operations for the third quarter of 2013 was $3,456,000, compared to $2,937,000 for the third quarter of 2012. The Company's combined effective tax rates for the third quarters of 2013 and 2012 were 34.6% and 30.7%, respectively. The Company's effective tax rate for three months ended September 30, 2012 was favorably impacted by a favorable return to provision adjustment related to federal research and development tax credits and federal IRC Section 199 deductions.

Income tax expense on continuing operations for the first nine months of 2013 was $15,536,000, compared to $16,028,000 for the first nine months of 2012. The Company's combined effective tax rates for the first nine months of 2013 and 2012 were 33.4% and 35.9%, respectively. The effective tax rate for the first nine months of 2013 was favorably impacted by benefits for research and development tax credits on eligible expenses incurred in both 2012 and the first nine months of 2013, as the tax legislation enacting the tax credit for 2012 was not approved by Congress until January 2013.

Net Income
The Company had net income attributable to controlling interest of $6,514,000 for the third quarter of 2013 compared to $6,903,000 for the third quarter of 2012, a decrease of $389,000, or 5.6%. Net income attributable to controlling interest per diluted share was $0.28 for the third quarter of 2013 compared to $0.30 for the third quarter of 2012, a decrease of $0.02. Diluted shares outstanding for the quarters ended September 30, 2013 and 2012 were 23,082,000 and 23,053,000, respectively.

The Company had net income attributable to controlling interest of $30,776,000 for the first nine months of 2013 compared to $29,943,000 for the first nine months of 2012, an increase of $833,000, or 2.8%. Net income attributable to controlling interest per diluted share was $1.33 for the first nine months of 2013 compared to $1.30 for the first nine months of 2012, an increase of $0.03. Diluted shares outstanding for the nine months ended September 30, 2013 and 2012 were 23,077,000 and 23,049,000, respectively.


Business Divesture
On October 31, 2012, the Company entered into an agreement to sell its ownership interest in American Augers, Inc., ("Augers") a wholly owned subsidiary of the Company, as well as certain assets of the Trencor large trencher product line of Astec Underground to The Charles Machine Works, Inc. The sale of Augers was completed in November 2012 and is being accounted for as a discontinued operations, and therefore revenues, expenses and net income from continuing operations for the three and nine-month periods ended September 30, 2012 shown in the consolidated statement of income have been adjusted from previously reported results to exclude the operations of Augers. Augers accounted for approximately $8,650,000 and $38,921,000 of net sales during the three and nine-month periods ended September 30, 2012, respectively.

The Company's strategy over the years has been to buy and grow companies; . . .

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