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ASTE > SEC Filings for ASTE > Form 10-Q on 5-Aug-2014All Recent SEC Filings

Show all filings for ASTEC INDUSTRIES INC

Form 10-Q for ASTEC INDUSTRIES INC


5-Aug-2014

Quarterly Report


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

Explanatory Note
As previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2013 and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, due to the recent change in the Company's chief operating decision maker, sale of a Company subsidiary and other product lines as well as the transfer of responsibility for certain product lines between Company's subsidiaries, the Company performed an evaluation of its reportable segments composition. This process was completed during the first quarter of 2014 and the composition of the Company's reportable segments was changed beginning with the Company's Form 10-Q for the quarter ended March 31, 2014. Financial information by segment is included in Note 11 to the accompanying financial statements and elsewhere in Management's Discussion and Analysis of Financial Condition and Results of Operations. Historical segment information included in this Report has been reclassified to reflect the new segment structure.

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 2014, the Company's expected capital expenditures in 2014, the expected benefit and impact of financing arrangements, the ability of the Company to meet its working capital and capital expenditure requirements through June 30, 2015, 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 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, the impact of IRS tax regulations, payment of dividends by the Company, the effect of the South African factory workers strike, 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, 2013, should be carefully considered when evaluating the Company's business and future prospects.


Overview
The Company is a manufacturer of specialized equipment for asphalt road building, aggregate processing, oil, gas and water 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 equipment for the aggregate, mining, construction, port and recycling industries;

design, engineer, manufacture and market additional equipment and components including geothermal drilling, oil and natural gas drilling, industrial heat transfer, biomass recycling, wood chipping and grinding, wood pellet processing; and

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

The Company has 16 manufacturing companies which fall within three business segments, which include the Infrastructure Group, the Aggregate and Mining Group and the Energy Group.

Infrastructure Group - This segment consists of five business units, three of which design, engineer, manufacture and market a complete line of portable, stationary and relocatable hot-mix asphalt plants, asphalt pavers, material transfer vehicles, milling machines and paver screeds. The other two business units in this segment operate as Company-owned dealers in the foreign countries in which they are domiciled. These two business units sell, service and install products produced by the manufacturing subsidiaries of the Company, and a majority of their sales are to customers in the infrastructure industry. The principal purchasers of the products produced by this group are asphalt producers, highway and heavy equipment contractors and foreign and domestic governmental agencies.

Aggregate and Mining Group - This segment consists of eight business units that design, engineer, manufacture and market a complete line of jaw crushers, cone crushers, horizontal shaft impactors, vertical shaft impactors, material handling systems, roll rock crushers and stationary rockbreaker systems, vibrating feeders and high frequency vibrating screens, conveyors, inclined, vertical and horizontal screens and sand classifying and washing equipment. The principal purchasers of products produced by this group are distributors, open mine operators, quarry operators, port operators, highway and heavy equipment contractors and foreign and domestic governmental agencies.

Energy Group - This segment consists of five business units that design, engineer, manufacture and market a complete line of drilling rigs for the oil and gas, geothermal and water well industries, high pressure diesel pump trailers for fracking and cleaning oil and gas wells, a variety of industrial heaters to fit a broad range of applications including heating equipment for refineries, oil sands and energy related processing, heat transfer processing equipment, thermal fluid storage tanks, waste heat recovery equipment, and whole-tree pulpwood and biomass chippers and horizontal grinders. The principal purchasers of products produced by this group are oil, gas and water well drilling industry contractors, processors of oil, gas and biomass for energy production and contractors in the construction and demolition recycling markets.

Individual Company subsidiaries included in the composition of the Company's revised segments are as follows:

1. Infrastructure Group - Astec, Inc., Roadtec, Inc., Carlson Paving Products, Inc., Astec Australia, Pty Ltd and Astec Mobile Machinery GmbH.

2. Aggregate and Mining Group - Telsmith, Inc., Kolberg-Pioneer, Inc., Johnson Crushers International, Inc., Osborn Engineered Products SA (Pty) Ltd, Breaker Technology, Inc., Astec Mobile Screens, Inc., Astec do Brasil Fabricacao de Equipamentos LTDA and Telestack Ltd (which was acquired on April 1, 12014).

3. Energy Group - Heatec, Inc., CEI, Inc., GEFCO, Inc., Astec Underground, Inc. and Peterson Pacific, Inc.


The Company has two other business units that do not meet the requirement for separate disclosure as an operating segment: the Company's parent company, Astec Industries, Inc., and Astec Insurance Company, a Company-owned captive insurance company. The Company evaluates performance and allocates resources to its operating segments based on profit or loss from operations before U.S. federal income taxes and corporate overhead and thus these costs are included in the Corporate category.

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, the amount of 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.

The U.S. Congress funded federal transportation expenditures for the fiscal year ending September 30, 2011 at the 2010 level of $41.1 billion, and it approved short-term funding of federal transportation expenditures for the six-month period ending on June 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 was the first long-term highway legislation enacted since 2005 and continued federal highway and transit funding at 2012 levels with modest increases for inflation. Although Map-21 helped 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 2014 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 2013 or the first half of 2014. The Company expects oil prices to continue to fluctuate in 2014 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 Energy 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 prices increased modestly during the first six months of 2014, and a continuing strong demand for steel is expected to cause additional moderate price increases during the third quarter of 2014. The rate of the increase in steel prices has slowed since the raw material supply constraints experienced in first six months of 2014 have subsided, and we anticipate that pricing will soon plateau as pricing pressure from imports increases. The Company continues to utilize forward-looking contracts coupled with 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 weak dollar, combined with improving economic conditions in certain foreign economies, had a positive impact on the Company's international sales in 2010 through mid-2012. The dollar strengthened against many foreign currencies during the later portion of 2012 through mid-2014, which has negatively impacted pricing and the Company's backlog at June 30, 2014 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 2014.

The Company is operated on a decentralized basis, and there is a complete management team for each operating subsidiary with oversight by Company Group Presidents. 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.

A factory union strike in South Africa began on July 1, 2014 and has forced the temporary closing of our Osborn facility. The strike could have an impact on the Company's international sales, but the Company does not believe it will have a material adverse effect on our business, financial position, cash flows or results of operations.

Results of Operations (dollar amounts shown in thousands) Net Sales
Net sales for the second quarter of 2014 were $277,256 compared to $248,127 for the second quarter of 2013, an increase of $29,129 or 11.7%. Sales are generated primarily from new equipment and parts sales to domestic and international customers. Sales increased by $14,831 in the Infrastructure Group, $6,807 in the Aggregate and Mining Group and $7,491 in the Energy Group.

Net sales for the first six months of 2014 were $515,929 compared to $495,960 for the first six months of 2013, an increase of $19,969 or 4.0%. Sales are generated primarily from new equipment and parts sales to domestic and international customers. Sales increased by $4,302 in the Infrastructure Group, $9,153 in the Aggregate and Mining Group and $6,514 in the Energy Group.


Domestic sales for the second quarter of 2014 were $184,676 or 66.6% of consolidated net sales compared to $162,304 or 65.4% of consolidated net sales for the second quarter of 2013, an increase of $22,372 or 13.8%, Domestic sales increased $8,297 in the Infrastructure Group, $6,981 in the Aggregate and Mining Group and $7,094 in the Energy Group. International sales for the second quarter of 2014 were $92,580 or 33.4% of consolidated net sales compared to $85,823 or 34.6% of consolidated net sales for the second quarter of 2013, an increase of $6,757 or 7.9%. International sales increased by $6,534 in the Infrastructure Group and were relatively flat in the Energy Group and the Aggregate and Mining Group. The increases in international sales occurred primarily in Russia, Asia and China, offset by a decrease in sales in Canada, Africa, Australia and the West Indies.

Domestic sales for the first six months of 2014 were $360,107 or 69.8% of consolidated net sales compared to $324,245 or 65.4% of consolidated net sales for the first six months of 2013, an increase of $35,862 or 11.1%, due to increases in all groups. International sales for the first six months of 2014 were $155,822 or 30.2% of consolidated net sales compared to $171,715 or 34.6% of consolidated net sales for the first six months of 2013, a decrease of $15,893 or 9.3%, due to decreases in all groups. 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, Africa, Australia, Europe and the West Indies, offset by an increase in sales in Asia, Russia and other post-Soviet States and Central America.

Parts sales for the second quarter of 2014 were $60,168 compared to $62,736 for the second quarter of 2013, a decrease of $2,568 or 4.1%. Parts sales as a percentage of net sales decreased 360 basis points from 25.3% for the second quarter of 2013 to 21.7% for the second quarter of 2014. The decrease in parts sales occurred in the Aggregate and Mining and Energy groups and was offset by an increase in parts sales in the Infrastructure Group.

Parts sales for the first six months of 2014 were $129,426 compared to $130,767 for the first six months of 2013, a decrease of $1,341 or 1.0%. Parts sales as a percentage of net sales decreased 130 basis points from 26.4% for the first six months of 2013 to 25.1% for the first six months of 2014. The decrease in parts sales occurred primarily in the Aggregate and Mining Group along with a small decline in the Energy Group and was offset by an increase in parts sales in the Infrastructure Group.

Gross Profit
Consolidated gross profit increased $6,736 or 12.1% to $62,178 for the second quarter of 2014 compared to $55,442 for the second quarter of 2013. Gross profit as a percentage of sales remained relatively flat at 22.4% for the second quarter of 2014 compared to 22.3% for the second quarter of 2013.

Consolidated gross profit increased $4,926 or 4.3% to $118,935 for the first six months of 2014 compared to $114,009 for the first six months of 2013. Gross profit as a percentage of sales remained relatively flat at 23.1% for the first six months of 2014 compared to 23.0% for the first six months of 2013.

Selling, General, Administrative and Engineering Expenses Selling, general, administrative and engineering expenses for the second quarter of 2014 were $40,247 or 14.5% of net sales, compared to $37,795 or 15.2% of net sales for the second quarter of 2013, an increase of $2,452 or 6.5%, due primarily to Telestack (acquired on April 1, 2014) operating expenses of $1,329 being included in the second quarter of 2014. Additional increases occurred in salaries, commissions, profit sharing, bad debt and acquisition costs.

Selling, general, administrative and engineering expenses for the first six months of 2014 were $83,672 or 16.2% of net sales, compared to $78,162 or 15.8% of net sales for the first six months of 2013, an increase of $5,510 or 7.0%, due primarily to an increase in expenses related to the tri-annual Con-Expo trade show held in March 2014 along with the inclusion of Telestack's operating expenses since its acquisition in April 2014. Additional increases occurred in salaries, commissions, profit sharing, and acquisition costs.

Interest Expense
Interest expense for the second quarter of 2014 increased $33 to $109 from $76 for the second quarter of 2013.


Interest expense for the first six months of 2014 increased $35 to $182 from $147 for the first six months of 2013.

Other Income, net of expenses
Other income, net of expenses was $729 for the second quarter of 2014 compared to $32 for the second quarter of 2013, an increase of $697. 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 from customers and license fee income. The increase is primarily due to increased interest income, primarily from customers.

Other income, net of expenses was $1,544 for the first six months of 2014 compared to $784 for the first six months of 2013, an increase of $760. 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 from customers and license fee income. The increase is primarily due to increased earnings on investments, interest income (primarily from customers), and license fee income received by the Company's subsidiaries.

Income Tax Expense
Income tax expense for the second quarter of 2014 was $8,061 compared to $6,450 for the second quarter of 2013. The Company's combined effective tax rates for the second quarters of 2014 and 2013 were 35.7% and 36.6%, respectively. The Company's effective tax rate for the second quarter of 2014 includes the effect of state income taxes and other discrete items but does not include a benefit for research and development tax credits given that Congress had not extended the research and development credit to 2014 as of June 30, 2014. The Company's effective tax rate for the second quarter of 2013 included a benefit for research and development tax credits.

Income tax expense for the first six months of 2014 was $12,589 compared to $12,081 for the first six months of 2013. The Company's combined effective tax rates for the first six months of 2014 and 2013 were 34.4% and 33.1%, respectively. The Company's effective tax rate for the six months ended June 30, 2014 includes the effect of state income taxes and other discrete items but does not include a benefit for research and development tax credits given that Congress had not extended the research and development credit to 2014 as of June 30, 2014. The Company's effective tax rate for the six months ended June 30, 2013 included a benefit for research and development tax credits earned for the first six months of 2013 as well as the entire 2012 calendar year given that Congress did not extend the tax credit for the 2012 calendar year until January 2013.

In September 2013, the Treasury Department and the Internal Revenue Service released the final regulations governing when taxpayers must capitalize or deduct their expenses for acquiring, maintaining, repairing, and replacing tangible property. The regulations became effective January 1, 2014. It is management's opinion that any adjustments resulting from the implementation of the regulations will not be material. Management is currently taking the necessary steps to comply with the final regulations by the end of 2014.

Net Income
The Company had net income attributable to controlling interest of $14,497 for the second quarter of 2014 compared to $11,092 for the second quarter of 2013, an increase of $3,405, or 30.7%. Net income attributable to controlling interest per diluted share was $0.63 for the second quarter of 2014 compared to $0.48 for the second quarter of 2013, an increase of $0.15. Diluted shares outstanding for the quarters ended June 30, 2014 and 2013 were 23,099 and 23,069, respectively.

The Company had net income attributable to controlling interest of $24,042 for the first six months of 2014 compared to $24,263 for the same period in 2013, a decrease of $221, or 0.9%. Net income attributable to controlling interest per diluted share was $1.04 for the first six months of 2014 compared to $1.05 for the first six months of 2013, a decrease of $0.01. Diluted shares outstanding for the six months ended June 30, 2014 and 2013 were 23,101 and 23,075, respectively.


Dividends
On February 28, 2013, the Company's Board of Directors approved a dividend policy pursuant to which the Company began paying a quarterly $0.10 per share dividend on its common stock beginning in the second quarter of 2013. The actual amount of future quarterly dividends, if any, will be based upon the Company's financial position, results of operations, cash flows, capital requirements and restrictions under the Company's existing credit agreement, among other factors. The Board retained the power to modify, suspend or cancel . . .

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