UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549 |
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FORM 10-Q |
(Mark One) |
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 30, 2010March 31, 2011 |
OR |
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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Commission File Number 001-11595 |
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Astec Industries, Inc. |
(Exact name of registrant as specified in its charter) |
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Tennessee | 62-0873631 |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) |
incorporation or organization) | |
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1725 Shepherd Road, Chattanooga, Tennessee | 37421 |
(Address of principal executive offices) | (Zip Code) |
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(423) 899-5898 |
(Registrant's telephone number, including area code) |
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |
YES ý | NO o |
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). |
YES ý | NO o |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): |
Large Accelerated Filer ý | Accelerated Filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller Reporting Company o |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). |
YES o | NO ý |
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Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. |
Class | Outstanding at October 26, 2010April 18, 2011 |
Common Stock, par value $0.20 | 22,623,32122,657,050 |
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ASTEC INDUSTRIES, INC. |
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PART I -- FINANCIAL INFORMATION Item 1. Financial Statements
Condensed Consolidated Balance Sheets (in thousands) | Condensed Consolidated Balance Sheets (in thousands) | | Condensed Consolidated Balance Sheets (in thousands) | |
| | September 30, 2010 (unaudited) | | | December 31, 2009 | | | March 31, 2011 (unaudited) | | | December 31, 2010 | |
ASSETS | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 81,366 | | | $ | 40,429 | | | $ | 80,171 | | | $ | 94,597 | |
Trade receivables, net | | | 86,545 | | | | 66,338 | | | | 97,985 | | | | 77,978 | |
Other receivables | | | 1,721 | | | | 1,767 | | | | 2,236 | | | | 2,885 | |
Inventories | | | 242,137 | | | | 248,548 | | | | 272,663 | | | | 252,981 | |
Prepaid expenses and other | | | 4,680 | | | | 15,216 | | | | 7,212 | | | | 9,041 | |
Deferred income tax assets | | | 11,772 | | | | 12,067 | | | | 13,961 | | | | 10,339 | |
Total current assets | | | 428,221 | | | | 384,365 | | | | 474,228 | | | | 447,821 | |
Property and equipment, net | | | 168,414 | | | | 172,057 | | | | 167,567 | | | | 168,242 | |
Investments | | | 11,233 | | | | 11,965 | | | | 12,506 | | | | 11,672 | |
Goodwill | | | 13,907 | | | | 13,907 | | | | 13,907 | | | | 13,907 | |
Other long-term assets | | | 8,558 | �� | | | 8,607 | | | | 8,612 | | | | 7,997 | |
Total assets | | $ | 630,333 | | | $ | 590,901 | | | $ | 676,820 | | | $ | 649,639 | |
LIABILITIES AND EQUITY | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | |
Accounts payable | | $ | 39,382 | | | $ | 36,388 | | | $ | 52,124 | | | $ | 44,493 | |
Income tax payable | | | | 5,036 | | | | 406 | |
Accrued product warranty | | | 8,852 | | | | 8,714 | | | | 9,979 | | | | 9,891 | |
Customer deposits | | | 28,688 | | | | 26,606 | | | | 36,588 | | | | 35,602 | |
Accrued payroll and related liabilities | | | 15,666 | | | | 13,331 | | | | 14,254 | | | | 16,121 | |
Accrued loss reserves | | | 4,046 | | | | 3,640 | | | | 4,453 | | | | 3,796 | |
Other accrued liabilities | | | 22,367 | | | | 17,628 | | | | 22,374 | | | | 20,117 | |
Total current liabilities | | | 119,001 | | | | 106,307 | | | | 144,808 | | | | 130,426 | |
Deferred income tax liabilities | | | 13,492 | | | | 14,975 | | | | 16,639 | | | | 12,653 | |
Other long-term liabilities | | | 14,602 | | | | 17,359 | | | | 13,348 | | | | 13,754 | |
Total liabilities | | | 147,095 | | | | 138,641 | | | | 174,795 | | | | 156,833 | |
Shareholders’ equity | | | 482,758 | | | | 451,903 | | | | 501,432 | | | | 492,208 | |
Non-controlling interest | | | 480 | | | | 357 | | | | 593 | | | | 598 | |
Total equity | | | 483,238 | | | | 452,260 | | | | 502,025 | | | | 492,806 | |
Total liabilities and equity | | $ | 630,333 | | | $ | 590,901 | | | $ | 676,820 | | | $ | 649,639 | |
See Notes to Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Statements of OperationsIncome (in thousands, except shares and per share data) (unaudited) |
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended March 31, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | | | 2011 | | | 2010 | |
Net sales | | $ | 177,853 | | | $ | 166,084 | | | $ | 580,557 | | | $ | 560,231 | | | $ | 230,189 | | | $ | 193,454 | |
Cost of sales | | | 135,913 | | | | 131,439 | | | | 445,797 | | | | 438,968 | | | | 175,485 | | | | 147,313 | |
Gross profit | | | 41,940 | | | | 34,645 | | | | 134,760 | | | | 121,263 | | | | 54,704 | | | | 46,141 | |
Selling, general, administrative and engineering expenses | | | 31,808 | | | | 30,445 | | | | 95,351 | | | | 93,478 | | | | 39,489 | | | | 32,718 | |
Income from operations | | | 10,132 | | | | 4,200 | | | | 39,409 | | | | 27,785 | | | | 15,215 | | | | 13,423 | |
Interest expense | | | 30 | | | | 66 | | | | 289 | | | | 418 | | | | 36 | | | | 123 | |
Other income, net of expenses | | | 492 | | | | 555 | | | | 1,103 | | | | 1,330 | | | | 406 | | | | 488 | |
Income before income taxes | | | 10,594 | | | | 4,689 | | | | 40,223 | | | | 28,697 | | | | 15,585 | | | | 13,788 | |
Income taxes | | | 3,198 | | | | 1,320 | | | | 13,665 | | | | 10,157 | | | | 5,427 | | | | 4,956 | |
Net income | | | 7,396 | | | | 3,369 | | | | 26,558 | | | | 18,540 | | | | 10,158 | | | | 8,832 | |
Net income attributable to non-controlling interest | | | 34 | | | | 25 | | | | 94 | | | | 16 | | | | 14 | | | | 38 | |
Net income attributable to controlling interest | | $ | 7,362 | | | $ | 3,344 | | | $ | 26,464 | | | $ | 18,524 | | | $ | 10,144 | | | $ | 8,794 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Earnings per common share | | | | | | | | | | | | | | | | | | | | | | | | |
Net income attributable to controlling interest: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.33 | | | $ | 0.15 | | | $ | 1.18 | | | $ | 0.83 | | | $ | 0.45 | | | $ | 0.39 | |
Diluted | | $ | 0.32 | | | $ | 0.15 | | | $ | 1.16 | | | $ | 0.82 | | | $ | 0.44 | | | $ | 0.39 | |
Weighted average number of common shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 22,533,606 | | | | 22,453,073 | | | | 22,504,876 | | | | 22,439,635 | | | | 22,566,105 | | | | 22,473,599 | |
Diluted | | | 22,843,300 | | | | 22,735,064 | | | | 22,814,634 | | | | 22,711,526 | | | | 22,919,430 | | | | 22,767,460 | |
See Notes to Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) | Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) | | Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) | |
| | Nine Months Ended September 30, | | | Three Months Ended March 31, | |
| | 2010 | | | 2009 | | | 2011 | | | 2010 | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net income | | $ | 26,558 | | | $ | 18,540 | | | $ | 10,158 | | | $ | 8,832 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 14,191 | | | | 14,158 | | | | 4,642 | | | | 4,866 | |
Provision (recoveries) for doubtful accounts | | | (89 | ) | | | 782 | | |
Provision for doubtful accounts | | | | 335 | | | | 51 | |
Provision for inventory reserve | | | 4,280 | | | | 3,313 | | | | 1,610 | | | | 1,301 | |
Provision for warranty | | | 9,878 | | | | 8,048 | | | | 2,901 | | | | 2,859 | |
Deferred compensation provision (benefit) | | | 155 | | | | (536 | ) | |
Purchase (sale) of trading securities, net | | | 1,014 | | | | (2,106 | ) | |
Deferred compensation provision | | | | 479 | | | | 192 | |
Sale of trading securities, net | | | | 14 | | | | 530 | |
Stock-based compensation | | | 1,231 | | | | 705 | | | | 923 | | | | 633 | |
Tax benefit from stock option exercises | | | (462 | ) | | | (44 | ) | |
Deferred income tax provision (benefit) | | | (1,245 | ) | | | 692 | | |
Loss on disposition of fixed assets | | | 4 | | | | 69 | | |
Tax benefit from stock incentive plans | | | | (9 | ) | | | (49 | ) |
Deferred income tax provision | | | | (1,382 | ) | | | (1,925 | ) |
(Gain) loss on disposition of fixed assets | | | | 40 | | | | (1 | ) |
(Increase) decrease in: | | | | | | | | | | | | | | | | |
Trade and other receivables | | | (20,365 | ) | | | 9,346 | | | | (20,053 | ) | | | (15,116 | ) |
Inventories | | | 457 | | | | 18,547 | | | | (21,292 | ) | | | 815 | |
Prepaid expenses | | | 10,191 | | | | 3,565 | | | | 1,581 | | | | 6,316 | |
Other assets | | | (157 | ) | | | 709 | | | | (976 | ) | | | (17 | ) |
Increase (decrease) in: | | | | | | | | | | | | | | | | |
Accounts payable | | | 2,994 | | | | (14,609 | ) | | | 7,631 | | | | 5,783 | |
Accrued product warranty | | | (9,740 | ) | | | (9,425 | ) | | | (2,813 | ) | | | (3,024 | ) |
Customer deposits | | | 2,082 | | | | (11,220 | ) | | | 986 | | | | (3,572 | ) |
Income taxes payable | | | 3,299 | | | | 369 | | | | 4,638 | | | | 1,150 | |
Other accrued liabilities | | | 1,732 | | | | (2,251 | ) | | | 212 | | | | 5 | |
Net cash provided by operating activities | | | 46,008 | | | | 38,652 | | |
Net cash provided (used) by operating activities | | | | (10,375 | ) | | | 9,629 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | |
Expenditures for property and equipment | | | (7,625 | ) | | | (12,392 | ) | | | (3,964 | ) | | | (1,751 | ) |
Adjustment to acquisition purchase price | | | - | | | | (8 | ) | |
Proceeds from sale of property and equipment | | | 156 | | | | 196 | | | | 49 | | | | 20 | |
Net cash used by investing activities | | | (7,469 | ) | | | (12,204 | ) | | | (3,915 | ) | | | (1,731 | ) |
Cash flows from financing activities: | | | | | | | | | | | | | | | | |
Net repayments under revolving line of credit | | | - | | | | (3,427 | ) | |
Tax benefit from stock option exercise | | | 462 | | | | 44 | | | | 9 | | | | 49 | |
Cash paid for acquisition of minority shares of subsidiary | | | - | | | | (639 | ) | |
Supplemental Executive Retirement Plan transactions, net | | | (65 | ) | | | (192 | ) | | | (56 | ) | | | (52 | ) |
Proceeds from exercise of stock options | | | 1,011 | | | | 840 | | | | 20 | | | | 272 | |
Net cash provided (used) by financing activities | | | 1,408 | | | | (3,374 | ) | | | (27 | ) | | | 269 | |
Effect of exchange rates on cash | | | 990 | | | | 3,401 | | | | (109 | ) | | | 588 | |
Net increase in cash and cash equivalents | | | 40,937 | | | | 26,475 | | |
Net increase (decrease) in cash and cash equivalents | | | | (14,426 | ) | | | 8,755 | |
Cash and cash equivalents, beginning of period | | | 40,429 | | | | 9,674 | | | | 94,597 | | | | 40,429 | |
Cash and cash equivalents, end of period | | $ | 81,366 | | | $ | 36,149 | | | $ | 80,171 | | | $ | 49,184 | |
See Notes to Unaudited Condensed Consolidated Financial Statements
| |
Condensed Consolidated Statement of Equity | |
For the Nine Months Ended September 30, 2010 | |
(in thousands, except shares) | |
(unaudited) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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| | Common Stock Shares | | | Common Stock Amount | | | Additional Paid-in- Capital | | | Accumulated Other Compre- hensive Income | | | Company Shares Held by SERP | | | Retained Earnings | | | Non- controlling Interest | | | Total Equity | |
Balance, December 31, 2009 | | | 22,551,283 | | | $ | 4,510 | | | $ | 124,381 | | | $ | 4,551 | | | $ | (2,128 | ) | | $ | 320,589 | | | $ | 357 | | | $ | 452,260 | |
Net income | | | | | | | | | | | | | | | | | | | | | | | 26,464 | | | | 94 | | | | 26,558 | |
Other comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | | | | | | | | | | | | | 1,809 | | | | | | | | | | | | 29 | | | | 1,838 | |
Change in unrecognized pension and post retirement costs, net of tax | | | | | | | | | | | | | | | (57 | ) | | | | | | | | | | | | | | | (57 | ) |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 123 | | | | 28,339 | |
Stock-based compensation | | | 3,935 | | | | 1 | | | | 1,230 | | | | | | | | | | | | | | | | | | | | 1,231 | |
Exercise of stock options | | | 66,623 | | | | 13 | | | | 1,460 | | | | | | | | | | | | | | | | | | | | 1,473 | |
SERP transactions, net | | | | | | | | | | | 13 | | | | | | | | (78 | ) | | | | | | | | | | | (65 | ) |
Balance, September 30, 2010 | | | 22,621,841 | | | $ | 4,524 | | | $ | 127,084 | | | $ | 6,303 | | | $ | (2,206 | ) | | $ | 347,053 | | | $ | 480 | | | $ | 483,238 | |
| |
Condensed Consolidated Statement of Equity | |
For the Three Months Ended March 31, 2011 | |
(in thousands, except shares) | |
(unaudited) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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| | Common Stock Shares | | | Common Stock Amount | | | Additional Paid-in- Capital | | | Accumulated Other Compre- hensive Income | | | Company Shares Held by SERP | | | Retained Earnings | | | Non- controlling Interest | | | Total Equity | |
Balance, December 31, 2010 | | | 22,646,822 | | | $ | 4,529 | | | $ | 128,831 | | | $ | 8,046 | | | $ | (2,217 | ) | | $ | 353,019 | | | $ | 598 | | | $ | 492,806 | |
Net income | | | | | | | | | | | | | | | | | | | | | | | 10,144 | | | | 14 | | | | 10,158 | |
Other comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments, net of tax | | | | | | | | | | | | | | | (1,770 | ) | | | | | | | | | | | (19 | ) | | | (1,789 | ) |
Change in unrecognized pension and post retirement costs, net of tax | | | | | | | | | | | | | | | (46 | ) | | | | | | | | | | | | | | | (46 | ) |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | (5 | ) | | | 8,323 | |
Stock-based compensation | | | 4,908 | | | | 1 | | | | 922 | | | | | | | | | | | | | | | | | | | | 923 | |
Stock issued under incentive plans | | | 1,300 | | | | 1 | | | | 28 | | | | | | | | | | | | | | | | | | | | 29 | |
SERP transactions, net | | | | | | | | | | | | | | | | | | | (56 | ) | | | | | | | | | | | (56 | ) |
Balance, March 31, 2011 | | | 22,653,030 | | | $ | 4,531 | | | $ | 129,781 | | | $ | 6,230 | | | $ | (2,273 | ) | | $ | 363,163 | | | $ | 593 | | | $ | 502,025 | |
See Notes to Unaudited Condensed Consolidated Financial Statements
ASTEC INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated under the Securities Act of 1933. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periodsthree-month period ended September 30, 2010March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.2011. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Astec Industries, Inc. Annual Report on Form 10-K for the year ended December 31, 2009.2010.
The condensed consolidated balance sheet at December 31, 20092010 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
A reclassification has been made to prior period data as previously reported to conform to current year presentation regarding foreign exchange gains and losses which have been reclassified to cost of sales from selling, general, administrative and engineering expenses and other income, net of expenses.
Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (“FASB”) issued guidance that supersedes certain previous rules relating to how a company allocates consideration to all of its deliverables in a multiple-deliverable revenue arrangement. The revised guidance eliminates the use of the residual method of allocation in which the undelivered element is measured at its estimated selling price and the delivered element is measured as the residual of the arrangement consideration and alternatively requires that the relative-selling-price method be used in all circumstances in which an entity recognizes revenue for an arrangement with multiple-deliverables. The revised guidance requires both ongoing disclosures regarding an entity̵ 7;sentity’s multiple-element revenue arrangements as well as certain transitional disclosures during periods after adoption. All entities must adopt the revised guidance no later than the beginning of their first fiscal year beginning on or after June 15, 2010 with earlier adoption allowed. Entities may elect to adopt the guidance through either prospective application or through retrospective application to all revenue arrangements for all periods presented. The Company plans to adoptadopted the revised guidance using the prospective application method effective January 1, 2011. The Company does not believeCompany’s sales contracts typically contain provisions pricing each separate component, including separate equipment components, installation services and freight, on which multiple element accounting may be applied; therefore the adoption of this new guidance will havehas not had a significant impact on the Company’s financial statements.
Note 2. Earnings per Share
Basic earnings per share is determined by dividing net income attributable to controlling interest by the weighted average number of common shares outstanding during each period. Diluted earnings per share include the potential dilutive effects of options, restricted stock units and shares held in the Company’s Supplemental Executive Retirement Plan.
The following table sets forth the computation of basic and diluted earnings per share:
| | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
Numerator: | | | | | | | | | | | | |
Net income attributable to controlling interest | | $ | 7,362,000 | | | $ | 3,344,000 | | | $ | 26,464,000 | | | $ | 18,524,000 | |
Denominator: | | | | | | | | | | | | | | | | |
Denominator for basic earnings per share | | | 22,533,606 | | | | 22,453,073 | | | | 22,504,876 | | | | 22,439,635 | |
Effect of dilutive securities: | | | | | | | | | | | | | | | | |
Employee stock options and restricted stock units | | | 211,923 | | | | 182,058 | | | | 211,464 | | | | 175,259 | |
Supplemental Executive Retirement Plan | | | 97,771 | | | | 99,933 | | | | 98,294 | | | | 96,632 | |
Denominator for diluted earnings per share | | | 22,843,300 | | | | 22,735,064 | | | | 22,814,634 | | | | 22,711,526 | |
| | | | | | | | | | | | | | | | |
Net income attributable to controlling interest per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.33 | | | $ | 0.15 | | | $ | 1.18 | | | $ | 0.83 | |
Diluted | | $ | 0.32 | | | $ | 0.15 | | | $ | 1.16 | | | $ | 0.82 | |
| | For the Three Months Ended March 31, | |
| | 2011 | | | 2010 | |
Numerator: | | | | | | |
Net income attributable to controlling interest | | $ | 10,144,000 | | | $ | 8,794,000 | |
Denominator: | | | | | | | | |
Denominator for basic earnings per share | | | 22,566,105 | | | | 22,473,599 | |
Effect of dilutive securities: | | | | | | | | |
Employee stock options and restricted stock units | | | 254,949 | | | | 196,733 | |
Supplemental Executive Retirement Plan | | | 98,376 | | | | 97,128 | |
Denominator for diluted earnings per share | | | 22,919,430 | | | | 22,767,460 | |
| | | | | | | | |
Net income attributable to controlling interest per share: | | | | | | | | |
Basic | | $ | 0.45 | | | $ | 0.39 | |
Diluted | | $ | 0.44 | | | $ | 0.39 | |
A total of 1,4271,072 and 1,801 options were antidilutive for the three months ended September 30,March 31, 2011 and 2010, and 2009, respectively. A total of 1,433 and 1,814 options were antidilutive for the nine months ended September 30, 2010 and 2009, respectively. Antidilutive options are not included in the diluted earnings per share computation.
Note 3. Receivables
Receivables are net of allowances for doubtful accounts of $1,784,000$1,925,000 and $2,215,000$1,820,000 as of September 30, 2010March 31, 2011 and December 31, 2009,2010, respectively.
Note 4. Inventories
Inventories consist of the following (in thousands):
| | September 30, 2010 | | | December 31, 2009 | | | March 31, 2011 | | | December 31, 2010 | |
Raw materials and parts | | $ | 92,415 | | | $ | 90,150 | | | $ | 108,424 | | | $ | 96,731 | |
Work-in-process | | | 56,951 | | | | 52,010 | | | | 69,085 | | | | 60,463 | |
Finished goods | | | 74,754 | | | | 87,968 | | | | 74,674 | | | | 77,583 | |
Used equipment | | | 18,017 | | | | 18,420 | | | | 20,480 | | | | 18,204 | |
Total | | $ | 242,137 | | | $ | 248,548 | | | $ | 272,663 | | | $ | 252,981 | |
The above inventory amounts are net of reserves totalling $18,027,000$20,232,000 and $16,378,000$19,399,000 as of September 30, 2010March 31, 2011 and December 31, 2009,2010, respectively.
Note 5. Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation of $165,286,000$174,182,000 and $152,959,000$169,955,000 as of September 30, 2010March 31, 2011 and December 31, 2009,2010, respectively.
Note 6. Fair Value Measurements
The Company has various financial instruments that must be measured at fair value on a recurring basis including marketable debt and equity securities held by Astec Insurance Company (“Astec Insurance”), the Company’s captive insurance company, and marketable equity securities held in an unqualified Supplemental Executive Retirement Plan (“SERP”). The financial assets held in the SERP also constitute a liability of the Company for financial reporting purposes. The Company’s subsidiaries also occasionally enter into foreign currency exchange contracts to mitigate exposure to fluctuations in currency exchange rates.
For cash and cash equivalents, trade receivables, other receivables, revolving debt and accounts payable, the carrying amount approximates the fair value because of the short-term nature of these instruments. Investments are carried at their fair value based on quoted market prices for identical or similar assets or, where no quoted prices exist, other observable inputs for the asset. The fair values of foreign currency exchange contracts are based on quotations from various banks for similar instruments using models with market based inputs.
Financial assets and liabilities are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The inputs used to measure the fair value are identified in the following hierarchy:
Level 1 - | Unadjusted quoted prices in active markets for identical assets or liabilities. |
Level 2 - | Unadjusted quoted prices in active markets for similar assets or liabilities; or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable for the asset or liability. |
Level 3 - | Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. |
As indicated in the table below (which excludes the Company’s pension assets), the Company has determined that all its financial assets and liabilities excluding pension assets, at September 30, 2010March 31, 2011 are level 1 and level 2 in the fair value hierarchy as defined above (in thousands):
| | Level 1 | | | Level 2 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Financial Assets: | | | | | | | | | | | | | | | | | | | | | |
Trading equity securities: | | | | | | | | | | | | | | | | | | | | | |
SERP money market fund | | $ | 1,532 | | | $ | - | | | $ | 1,532 | | | $ | 988 | | | $ | - | | | $ | - | | | $ | 988 | |
SERP mutual funds | | | 1,076 | | | | - | | | | 1,076 | | | | 1,782 | | | | - | | | | - | | | | 1,782 | |
Preferred stocks | | | 559 | | | | - | | | | 559 | | | | 515 | | | | - | | | | - | | | | 515 | |
Trading debt securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate bonds | | | - | | | | 4,963 | | | | 4,963 | | | | - | | | | 5,769 | | | | - | | | | 5,769 | |
Municipal bonds | | | - | | | | 3,784 | | | | 3,784 | | | | - | | | | 3,343 | | | | - | | | | 3,343 | |
Floating rate notes | | | - | | | | 654 | | | | 654 | | | | - | | | | 225 | | | | - | | | | 225 | |
U.S. Treasury bill | | | | 249 | | | | - | | | | - | | | | 249 | |
Other government bonds | | | - | | | | 92 | | | | 92 | | | | - | | | | 78 | | | | - | | | | 78 | |
Total financial assets | | $ | 3,167 | | | $ | 9,493 | | | $ | 12,660 | | | $ | 3,534 | | | $ | 9,415 | | | $ | - | | | $ | 12,949 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
SERP liabilities | | $ | 5,398 | | | $ | - | | | $ | 5,398 | | | $ | 6,438 | | | $ | - | | | $ | - | | | $ | 6,438 | |
Derivative liabilities | | | - | | | | 820 | | | | 820 | | |
Derivative financial instruments | | | | - | | | | 1,240 | | | | - | | | | 1,240 | |
Total financial liabilities | | $ | 5,398 | | | $ | 820 | | | $ | 6,218 | | | $ | 6,438 | | | $ | 1,240 | | | $ | - | | | $ | 7,678 | |
The Company’s investments (other than pension assets) consist of the following (in thousands):
| | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Fair Value (Net Carrying Amount) | |
March 31, 2011: | | | | | | | | | | | | |
Trading equity securities | | $ | 3,203 | | | $ | 82 | | | $ | - | | | $ | 3,285 | |
Trading debt securities | | | 9,405 | | | | 320 | | | | 61 | | | | 9,664 | |
| | $ | 12,608 | | | $ | 402 | | | $ | 61 | | | $ | 12,949 | |
| | | | | | | | | | | | | | | | |
December 31, 2010: | | | | | | | | | | | | | | | | |
Trading equity securities | | $ | 3,089 | | | $ | 154 | | | $ | 7 | | | $ | 3,236 | |
Trading debt securities | | | 9,393 | | | | 266 | | | | 67 | | | | 9,592 | |
| | $ | 12,482 | | | $ | 420 | | | $ | 74 | | | $ | 12,828 | |
| | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Fair Value (Net Carrying Amount) | |
September 30, 2010: | | | | | | | | | | | | |
Trading equity securities | | $ | 3,117 | | | $ | 89 | | | $ | 39 | | | $ | 3,167 | |
Trading debt securities | | | 9,170 | | | | 359 | | | | 36 | | | | 9,493 | |
| | $ | 12,287 | | | $ | 448 | | | $ | 75 | | | $ | 12,660 | |
| | | | | | | | | | | | | | | | |
December 31, 2009: | | | | | | | | | | | | | | | | |
Trading equity securities | | $ | 2,753 | | | $ | 29 | | | $ | 79 | | | $ | 2,703 | |
Trading debt securities | | | 10,564 | | | | 405 | | | | 56 | | | | 10,913 | |
| | $ | 13,317 | | | $ | 434 | | | $ | 135 | | | $ | 13,616 | |
The trading equity investments noted above are valued at their estimated fair value based on their quoted market prices and the debt securities are valued based upon a mix of observable market prices and model driven prices derived from a matrix of observable market prices for assets with similar characteristics obtained from a nationally recognized third party pricing service. Additionally, a significant portion of the trading equity securities are in equity money market and mutual funds and also comprise a portion of the Company’s liability under its SERP.
Trading debt securities are comprised of marketable debt securities held by Astec Insurance. Astec Insurance has an investment strategy that focuses on providing regular and predictable interest income from a diversified portfolio of high-quality fixed income securities. At September 30, 2010March 31, 2011 and December 31, 2009, $1,427,0002010, $443,000 and $1,651,000,$1,156,000, respectively, of trading debt securities were due to mature within twelve months and, accordingly, are included in other current assets in the accompanying balance sheets.assets. The financial liabilities related to the SERP shown above are included in other long-term liabilities and the derivative financial liabilities are included in other accrued liabilities in the accompanying balance sheets.
Net unrealized gains or losses incurred during the three and nine-monththree-month periods ended September 30,March 31, 2011 and 2010 on investments still held as of September 30, 2010 totaledthe end of each reporting period amounted to gains of $242,000$600,000 and $227,000,$86,000, respectively.
Note 7. Debt
During April 2007, the Company entered into an unsecured credit agreement with Wachovia Bank, National Association (“Wachovia”), whereby Wachovia has extended to the Company an unsecured line of credit of up to $100,000,000, including a sub-limit for letters of credit of up to $15,000,000. Wachovia has subsequently been acquired by Wells Fargo Bank, N.A. (“Wells Fargo”), and therefore the credit agreement is now with Wells Fargo.
The WachoviaWells Fargo credit facility had an original term of three years with two one-year extensions available. Early in 2010, the Company exercised the final extension bringing the new loan maturity date to May 2012. The interest rate for borrowings is a function of the Adjusted LIBOR Rate or Adjusted LIBOR Market Index Rate, as elected by the Company, plus a margin based upon a leverage ratio pricing grid ranging between 0.5% and 1.5%. As of September 30, 2010March 31, 2011 the applicable margin based upon the leverage ratio pricing grid was equal to 0.5%. The unused facility fee is 0.125%. The WachoviaWells Fargo credit facility requires no principal amortization and interest only payments are due, in the case of loans bearing interest at the Adjusted LIBOR Market Index Rate, monthly in arrears and, in the ca secase of loans bearing interest at the Adjusted LIBOR Rate, at the end of the applicable interest period therefore. The WachoviaWells Fargo credit agreement contains certain financial covenants related to minimum fixed charge coverage ratios, minimum tangible net worth and maximum allowed capital expenditures. At September 30, 2010,March 31, 2011, the Company had no borrowings outstanding under the credit facility but did have letters of credit totalling $7,504,000totaling $7,608,000 outstanding, resulting in additional borrowing availability of $92,496,000$92,392,000 on the WachoviaWells Fargo credit facility. The Company was in compliance with the financial covenants under its credit facility as of September 30, 2010.March 31, 2011.
The Company's South African subsidiary, Osborn Engineered Products SA (Pty) Ltd. (“Osborn”), has available a credit facility of approximately $8,580,000$8,833,000 (ZAR 60,000,000) to finance short-term working capital needs, as well as to cover letterperformance letters of credit, performance, advance payment and retention guarantees. As of September 30, 2010,March 31, 2011, Osborn had no outstanding borrowings under the credit facility, but approximately $3,865,000$3,760,000 in performance letters of credit, advance payment and retention bondsguarantees were issued under the facility. The facility is secured by Osborn's buildings and improvements, accounts receivable, cash balances and a $2,000,000 letter of credit issued by the parent Company. As of September 30, 2010,March 31, 2011, Osborn had available credit under the facility of approximately $4,715,000.$5,073,000. The facility ha shas an ongoing, indefinite term subject to annual reviews by the bank. The interest rate is the South African prime rate. The agreement has an unused facility fee of 0.793%.
The Company’s Australian subsidiary, Astec Australia Pty Ltd (“Astec Australia”) has an available credit facility to finance short-term working capital needs of approximately $773,000$827,000 (AUD 800,000), and banking arrangements to finance foreign exchange dealer limit orders of approximately $1,450,000up to $1,705,000 (AUD 1,500,000) and to provide bank guarantees to others of $193,000 (AUD 200,000). The facility is1,650,000) secured by cash balances in the amount of $1,033,000 (AUD 1,000,000) and a $1,000,000 letter of credit issued by the parent Company. No amounts were outstanding under the credit facility at September 30, 2010.March 31, 2011. The interest rate is the Australian adjusted Bank Business Rate plus a margin of 1.05%.
Note 8. Product Warranty Reserves
The Company warrants its products against manufacturing defects and performance to specified standards. The warranty period and performance standards vary by market and uses of its products, but generally range from three months to one year or up to a specified number of hours of operations. The Company estimates the costs that may be incurred under its warranties and records a liability at the time product sales are recorded. The product warranty liability is primarily based on historical claim rates, nature of claims and the associated cost.
Changes in the Company's product warranty liability for the three and nine-monththree-month periods ended September 30,March 31, 2011 and 2010 and 2009 are as follows (in thousands):
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
Reserve balance at the beginning of the period | | $ | 8,682 | | | $ | 9,099 | | | $ | 8,714 | | | $ | 10,050 | |
Warranty liabilities accrued during the period | | | 2,923 | | | | 2,520 | | | | 9,878 | | | | 8,048 | |
Warranty liabilities settled during the period | | | (2,816 | ) | | | (2,994 | ) | | | (9,782 | ) | | | (9,581 | ) |
Other | | | 63 | | | | 48 | | | | 42 | | | | 156 | |
Reserve balance at the end of the period | | $ | 8,852 | | | $ | 8,673 | | | $ | 8,852 | | | $ | 8,673 | |
| | Three Months Ended March 31, | |
| | 2011 | | | 2010 | |
Reserve balance, beginning of the period | | $ | 9,891 | | | $ | 8,714 | |
Warranty liabilities accrued | | | 2,901 | | | | 2,859 | |
Warranty liabilities settled | | | (2,804 | ) | | | (3,043 | ) |
Other | | | (9 | ) | | | 19 | |
Reserve balance, end of the period | | $ | 9,979 | | | $ | 8,549 | |
Note 9. Accrued Loss Reserves
The Company accrues reserves for losses related to known workers' compensation and general liability claims that have been incurred but not yet paid or are estimated to have been incurred but not yet reported to the Company. The undiscounted reserves are actuarially determined based on the Company's evaluation of the type and severity of individual claims and historical information, primarily its own claims experience, along with assumptions about future events. Changes in assumptions, as well as changes in actual experience, could cause these estimates to change in the future. Total accrued loss reserves were $8,001,000$7,766,000 at September 30, 2010March 31, 2011 compared to $9,253,000$8,044,000 at December 31, 2009,2010, of which $3,955,000$3,313,000 and $5,613,000$4,248,000 were included in other long-term liabilities at September 30, 2010March 31, 2011 and December 31, , 2009,2010, respectively.
Note 10. Income Taxes
The Company’s combined effective income tax rate was 30.2% and 28.2% for the three-month periods ended September 30, 2010 and 2009, respectively. The primary reasons for the difference in the third quarter’s effective and statutory tax rates are a mixture of increased state income taxes offset by an increase in estimated research and development tax credits for 2009 and increasing domestic production activity deductions.
The Company’s combined effective income tax rate was 34.0%34.8% and 35.4%35.9% for the nine-monththree-month periods ended September 30,March 31, 2011 and 2010, and 2009, respectively. The primary reasonCompany’s effective tax rate for the reduction in nine-month rates between years was due to an increase inthree months ended March 31, 2011 includes the effect of state income taxes and other discrete benefits consisting primarily of tax deductioncredits for research and development activities and the Company receives for domestic production activities and increaseddeduction. The Company’s effective tax rate for the three months ended March 31, 2010 did not contain a benefit for research and development tax credits.credits as the legislation providing the credits was not enacted by Congress until later in 2010.
The Company's liability recorded for uncertain tax positions as of September 30, 2010March 31, 2011 has not changed significantly in amount or composition since December 31, 2009.2010.
Note 11. Segment Information
The Company has four reportable operatingsegments. These segments which include the Asphalt Group, the Aggregate and Mining Group, the Mobile Asphalt Paving Group and the Underground Group. Theare combinations of business units in the that offer similar products and services. A brief description of each segment is as follows:
Asphalt Group - This segment consists of three business units that design, engineer, manufacture and market a complete line of portable, stationary and relocatable hot-mix asphalt plants and related components heating and a variety of heaters, heat transfer processing equipment, thermal fluid storage tanks for the asphalt paving and other non-related industries as well as a line of concrete mixing plants. The business units in the principal purchasers of these products are asphalt producers, highway and heavy equipment contractors and foreign and domestic governmental agencies.
Aggregate and Mining Group design, manufacture and market equipment for the aggregate, metallic mining and recycling industries. The - This segment consists of six business units in the Mobile Asphalt Paving Groupthat design, manufacture and market asphalt pavers, material transfer vehicles, milling machines and scre eds. The business units in the Underground Group design,engineer, manufacture and market a complete line of rock crushers, feeders, conveyors, screens and washing equipment. The principal purchasers of these products are open-mine and quarry operators.
Mobile Asphalt Paving Group - This segment consists of two business units that design, engineer, manufacture and market asphalt pavers, asphalt material transfer vehicles, milling machines and paver screeds. The principal purchasers of these products are highway and heavy equipment contractors and foreign and domestic governmental agencies.
Underground Group - This segment consists of two business units that design, engineer, manufacture and market auger boring machines, directional drills, fluid/mud systems, chain and wheel trenching equipment, directionalrock saws, road miners, geothermal drills for the underground construction market and oil and natural gas drilling rigs. Businessdrills. The principal purchasers of these products are pipeline and utility contractors and oil and natural gas drillers.
All Others - This category consists of the Company’s other business units, that do not meet the requirements for separate disclosure as operating segments are shown in the "All Others" category, including Peterson Pacific Corp. (“Peterson”), Astec Australia Pty Ltd.,Ltd (“Astec Australia”), Astec Insurance Company and the parent company, Astec Industries, Inc., that do not meet the requirements for separate disclosure as an operating segment. Peterson designs, manufactures and markets whole-tree pulpwood chippers, horizontal grinders and blower trucks. Astec Australia markets equipment and installs, services and provides parts support for many of the products produced by the Company’s manufacturing companies.
| | (in thousands) | |
| | Three Months Ended | |
| | September 30, 2010 | |
| | Asphalt Group | | | Aggregate and Mining Group | | | Mobile Asphalt Paving Group | | | Underground Group | | | All Others | | | Total | |
Net sales to external customers | | $ | 45,478 | | | $ | 60,263 | | | $ | 36,681 | | | $ | 19,220 | | | $ | 16,211 | | | $ | 177,853 | |
Intersegment sales | | | 2,014 | | | | 5,831 | | | | 3,679 | | | | 10 | | | | - | | | | 11,534 | |
Gross profit | | | 11,001 | | | | 14,839 | | | | 10,395 | | | | 2,007 | | | | 3,698 | | | | 41,940 | |
Gross profit percent | | | 24.2 | % | | | 24.6 | % | | | 28.3 | % | | | 10.4 | % | | | 22.8 | % | | | 23.6 | % |
Segment profit (loss) | | $ | 4,041 | | | $ | 4,437 | | | $ | 5,188 | | | $ | (1,569 | ) | | $ | (4,480 | ) | | $ | 7,617 | |
Segment Information:
| | (in thousands) | |
| | Three Months Ended | |
| | March 31, 2011 | |
| | Asphalt Group | | | Aggregate and Mining Group | | | Mobile Asphalt Paving Group | | | Underground Group | | | All Others | | | Total | |
Net sales to external customers | | $ | 73,754 | | | $ | 78,853 | | | $ | 49,955 | | | $ | 11,667 | | | $ | 15,960 | | | $ | 230,189 | |
Intersegment sales | | | 4,458 | | | | 7,164 | | | | 3,777 | | | | 1,419 | | | | - | | | | 16,818 | |
Gross profit | | | 19,228 | | | | 18,749 | | | | 13,440 | | | | 123 | | | | 3,164 | | | | 54,704 | |
Gross profit percent | | | 26.1 | % | | | 23.8 | % | | | 26.9 | % | | | 1.1 | % | | | 19.8 | % | | | 23.8 | % |
Segment profit (loss) | | $ | 10,820 | | | $ | 5,622 | | | $ | 7,312 | | | $ | (3,849 | ) | | $ | (8,500 | ) | | $ | 11,405 | |
| | (in thousands) | |
| | Nine Months Ended | |
| | September 30, 2010 | |
| | Asphalt Group | | | Aggregate and Mining Group | | | Mobile Asphalt Paving Group | | | Underground Group | | | All Others | | | Total | |
Net sales to external customers | | $ | 180,901 | | | $ | 186,182 | | | $ | 125,995 | | | $ | 41,783 | | | $ | 45,696 | | | $ | 580,557 | |
Intersegment sales | | | 12,125 | | | | 17,981 | | | | 10,877 | | | | 1,893 | | | | - | | | | 42,876 | |
Gross profit | | | 46,169 | | | | 43,225 | | | | 33,138 | | | | 2,519 | | | | 9,709 | | | | 134,760 | |
Gross profit percent | | | 25.5 | % | | | 23.2 | % | | | 26.3 | % | | | 6.0 | % | | | 21.2 | % | | | 23.2 | % |
Segment profit (loss) | | $ | 24,410 | | | $ | 12,232 | | | $ | 16,662 | | | $ | (7,012 | ) | | $ | (18,058 | ) | | $ | 28,234 | |
| | (in thousands) | |
| | Three Months Ended | |
| | September 30, 2009 | |
| | Asphalt Group | | | Aggregate and Mining Group | | | Mobile Asphalt Paving Group | | | Underground Group | | | All Others | | | Total | |
Net sales to external customers | | $ | 44,556 | | | $ | 55,865 | | | $ | 36,814 | | | $ | 16,939 | | | $ | 11,910 | | | $ | 166,084 | |
Intersegment sales | | | 2,700 | | | | 8,449 | | | | 2,774 | | | | 114 | | | | - | | | | 14,037 | |
Gross profit | | | 10,769 | | | | 12,367 | | | | 9,148 | | | | 784 | | | | 1,577 | | | | 34,645 | |
Gross profit percent | | | 24.2 | % | | | 22.1 | % | | | 24.8 | % | | | 4.6 | % | | | 13.2 | % | | | 20.9 | % |
Segment profit (loss) | | $ | 4,045 | | | $ | 2,811 | | | $ | 4,281 | | | $ | (3,007 | ) | | $ | (4,505 | ) | | $ | 3,625 | |
| | (in thousands) | | | (in thousands) | |
| | Nine Months Ended | | | Three Months Ended | |
| | September 30, 2009 | | | March 31, 2010 | |
| | Asphalt Group | | | Aggregate and Mining Group | | | Mobile Asphalt Paving Group | | | Underground Group | | | All Others | | | Total | | | Asphalt Group | | | Aggregate and Mining Group | | | Mobile Asphalt Paving Group | | | Underground Group | | | All Others | | | Total | |
Net sales to external customers | | $ | 197,385 | | | $ | 162,893 | | | $ | 105,077 | | | $ | 54,331 | | | $ | 40,545 | | | $ | 560,231 | | | $ | 70,061 | | | $ | 58,919 | | | $ | 42,082 | | | $ | 8,927 | | | $ | 13,465 | | | $ | 193,454 | |
Intersegment sales | | | 10,312 | | | | 17,039 | | | | 5,914 | | | | 302 | | | | - | | | | 33,567 | | | | 6,554 | | | | 7,594 | | | | 4,141 | | | | 932 | | | | - | | | | 19,221 | |
Gross profit | | | 49,860 | | | | 36,761 | | | | 24,501 | | | | 3,818 | | | | 6,323 | | | | 121,263 | | |
Gross profit (loss) | | | | 20,207 | | | | 13,187 | | | | 10,510 | | | | (357 | ) | | | 2,594 | | | | 46,141 | |
Gross profit percent | | | 25.3 | % | | | 22.6 | % | | | 23.3 | % | | | 7.0 | % | | | 15.6 | % | | | 21.6 | % | | | 28.8 | % | | | 22.4 | % | | | 25.0 | % | | | (4.0 | %) | | | 19.3 | % | | | 23.9 | % |
Segment profit (loss) | | $ | 27,325 | | | $ | 8,532 | | | $ | 10,632 | | | $ | (9,589 | ) | | $ | (18,320 | ) | | $ | 18,580 | | | $ | 12,795 | | | $ | 2,822 | | | $ | 5,210 | | | $ | (3,542 | ) | | $ | (7,510 | ) | | $ | 9,775 | |
A reconciliation of total segment profits to the Company's consolidated totals is as follows (in thousands):
| | Three Months Ended March 31, | |
| | 2011 | | | 2010 | |
Total segment profits | | $ | 11,405 | | | $ | 9,775 | |
Net income attributable to non-controlling interest in subsidiary | | | (14 | ) | | | (38 | ) |
Elimination of intersegment profit | | | (1,247 | ) | | | (943 | ) |
Net income attributable to controlling interest | | $ | 10,144 | | | $ | 8,794 | |
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
Total segment profits | | $ | 7,617 | | | $ | 3,625 | | | $ | 28,234 | | | $ | 18,580 | |
Net income attributable to non- controlling interest in subsidiary | | | (34 | ) | | | (25 | ) | | | (94 | ) | | | (16 | ) |
Elimination of intersegment profit | | | (221 | ) | | | (256 | ) | | | (1,676 | ) | | | (40 | ) |
Net income attributable to controlling interest | | $ | 7,362 | | | $ | 3,344 | | | $ | 26,464 | | | $ | 18,524 | |
Note 12. Contingent Matters
Certain customers have financed purchases of Company products through arrangements expiring through May 2016 in which the Company is contingently liable for customer debt of approximately $3,172,000$3,173,000 and $4,276,000$3,037,000 at September 30, 2010March 31, 2011 and December 31, 2009,2010, respectively. At September 30, 2010,March 31, 2011, the maximum potential amount of future payments for which the Company would be liable is equal to $3,172,000.$3,173,000. These arrangements also provide that the Company will receive the lender’s full security interest in the equipment financed if the Company is required to fulfill its contingent liability under these arrangements. The Company has recorded a liability of $302,000$330,000 related to these guarantees at September 30, 2010.March 31, 2011.
TheIn addition, the Company is contingently liable under letters of credit issued by Wachovia totalling approximately $7,504,000Wells Fargo totaling $7,608,000 as of September 30, 2010,March 31, 2011, including a $1,000,000 and a $2,000,000 letter of credit issued on behalf of Astec Australia and Osborn, respectively, two of the Company’s foreign subsidiaries. The outstanding letters of credit expire at various dates through June 2011. Additionally, asApril 2012. As of September 30, 2010March 31, 2011, Osborn is contingently liable for a total of $3,865,000$3,760,000 in outstandingperformance letters of credit.credit, advance payments and retention guarantees. As of September 30, 2010,March 31, 2011, the maximum potential amount of future payments under these letters of credit and bondsguarantees for which the Company could be liable is approximately $11,369,000.$11,368,000.
Pursuant to a purchase agreement executed in late 2010, the Company is committed to purchase real estate facilities in Australia for a total of $4,960,000 (AUD 4,800,000), of which $496,000 (AUD 480,000) was paid as a deposit prior to December 31, 2010. Final closing on the acquisition is expected in the second quarter of 2011, after which time the property will be used as the primary facilities of Astec Australia in place of their currently leased property.
The Company is currently a party to various claims and legal proceedings that have arisen in the ordinary course of business. If management believes that a loss arising from such claims and legal proceedings is probable and can reasonably be estimated, the Company records the amount of the loss (excluding estimated legal fees), or the minimum estimated liability when the loss is estimated using a range, and no point within the range is more probable than another. As management becomes aware of additional information concerning such contingencies, any potential liability related to these matters is assessed and the estimates are revised, if necessary. If management believes that a loss arising from such claims and legal proceedings is either (i) probable but cannot be reasonably estimated or (ii) reason ablyreasonably possible but not probable, the Company does not record the amount of the loss, but does make specific disclosure of such matter, if material.matter. Based upon currently available information and with the advice of counsel, management believes that the ultimate outcome of its current claims and legal proceedings, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position, cash flows or results of operations. However, claims and legal proceedings are subject to inherent uncertainties and rulings unfavorable to the Company could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse effect on the Company’s financial position, cash flows or results of operations.
TheDuring 2009, the Company has received notice that Johnson Crushers International, Inc. is subject to an enforcement action brought by the U.S. Environmental Protection Agency (EPA)(“EPA”) and the Oregon Department of Environmental Quality related to an alleged failure to comply with federal and state air permitting regulations. Each agency is expected to seek sanctions that will include monetary penalties. No penalties havepenalty has yet been proposed. The Company believes that it has cured the alleged violations and is cooperating fully with the regulatory agencies. At this stage of the investigations, the Company is unable to predict the outcome or the amount of any such sanctions or monetary penalties that may be assessed.sanctions.
TheDuring 2004, the Company also has received notice from the EPA that it may be responsible for a portion of the costs incurred in connection with an environmental cleanup in Illinois. The discharge of hazardous materials and associated cleanup relate to activities occurring prior to the Company’s acquisition of Barber-Greene in 1986. The Company believes that over 300 other parties have received similar notices. At this time, the Company cannot predict whether the EPA will seek to hold the Company liable for a portion of the cleanup costs or the amount of any such liability.
The Company has not recorded a liability with respect to either EPA relatedenvironmental matter because no estimates of the amount of any such liabilities can be made at this time.
Note 13. Shareholders’ Equity
Under terms of the Company’s stock option plans, officers and certain other employees were granted options to purchase the Company’s common stock at no less than 100% of the market price on the date the option was granted. No additional options can be granted under these plans; however the Company has reserved unissued shares of common stock for the exercise of the 113,82791,323 unexercised and outstanding options as of September 30, 2010March 31, 2011 under these employee plans. All options granted to employees under these plans vested prior to 2007.
In addition, a Non-employee Directors Stock Incentive Plan has been established to allow non-employee directors to have a personal financial stake in the Company through an ownership interest. Directors may elect to receive their compensation in cash, common stock, deferred stock or stock options. Options granted tounder the Non-employee Directors Stock Incentive Plan vest and become fully exercisable immediately upon grant.immediately. All stock options have a 10-year term. The shares reserved under the 1998 Non-Employee Directors Stock Incentive Plan total 145,304140,063 as of September 30, 2010,March 31, 2011, of which 135,054132,210 shares are available for future grants of stock or deferred stock to directors. No additional options can be granted under this plan. The fair value of stock awards granted to non-employee directors totaled $49,000 for each of$58,000 and $42,000 during the three-month periods ended September 30,March 31, 2011 and 2010, and 2009 . The fair value of stock awards granted to non-employee directors totaled $140,000 and $161,000 for the nine-month periods ended September 30, 2010 and 2009, respectively.
In August 2006, the Compensation Committee of the Board of Directors implementedCompany adopted a five-year plan to award key members of management restricted stock units (“RSU’s”) each year. The details of the plan were formulatedyear under the Company’s 2006 Incentive Plan approved by the Company’s shareholders in their annual meeting held in April 2006.Plan. The plan allowsallowed the Company to grant up to 700,000 sharesRSU’s to be granted to employees. RSU’s granted each year will be determinedemployees based upon the annual performance of individual subsidiaries and consolidated annual financial performance.the Company as a whole during each of the five years ended December 31, 2010. Additional RSU’s may bewere granted in 2011 based upon cumulative five-year performance. Generally, each award will vest at the end of five years from theits date of grant, or at the time a recipient retires after reaching age 65, if earlier. Co mpensationIn early 2011, a subsequent plan was formulated under the Company’s 2011 Incentive Plan which was approved by the Company’s shareholders in their annual meeting held in April 2011. This plan also allows the Company to grant up to 700,000 RSU’s to employees and will operate in a similar fashion to the 2006 Incentive Plan for each of the five years ending December 31, 2015. Compensation expense of $367,000$865,000 and $(43,000)$591,000 has been recorded in the three-month periods ended September 30,March 31, 2011 and 2010, and 2009, respectively, to reflect the fair value of the total shares granted or expected to be granted under both plans, amortized over the portion of the vesting period occurring during the periods. Compensation expense of $1,091,000 and $545,000 has been recorded in the nine-month periods ended September 30, 2010 and 2009, respectively, to reflect theThe fair value of the total shares amortized overRSU’s that vested in the portion of the vestingthree-month period occurring during the periods.ending March 31, 2011 was $115,000.
Note 14. Seasonality
Based upon historical results of the past several years, 75%25% to 80%28% of the Company's annual revenues typically occur during the first ninethree months of the year. During the usual seasonal trend, the first three quarters of the year are the Company's stronger quarters for sales volume, with the fourth quarter normally being the weakest quarter.
Note 15. Comprehensive Income
The components of total comprehensive income attributable to controlling interest for the three and nine-monththree-month periods ended September 30,March 31, 2011 and 2010 and 2009 is presented below (in thousands):
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
Net income | | $ | 7,396 | | | $ | 3,369 | | | $ | 26,558 | | | $ | 18,540 | |
Change in unrecognized pension and post retirement benefit costs, net of tax | | | 1 | | | | (9 | ) | | | (57 | ) | | | 37 | |
Foreign currency translation adjustments | | | 2,874 | | | | 2,292 | | | | 1,838 | | | | 6,390 | |
Comprehensive income | | | 10,271 | | | | 5,652 | | | | 28,339 | | | | 24,967 | |
Comprehensive income attributable to non-controlling interest | | | 74 | | | | 28 | | | | 123 | | | | 164 | |
Comprehensive income attributable to controlling interest | | $ | 10,197 | | | $ | 5,624 | | | $ | 28,216 | | | $ | 24,803 | |
| | Three Months Ended March 31, | |
| | 2011 | | | 2010 | |
Net income | | $ | 10,158 | | | $ | 8,832 | |
Change in unrecognized pension and post retirement benefit costs, net of tax | | | (46 | ) | | | (61 | ) |
Foreign currency translation adjustments, net of tax | | | (1,789 | ) | | | 772 | |
Comprehensive income | | | 8,323 | | | | 9,543 | |
Comprehensive income attributable to non-controlling interest | | | 5 | | | | (44 | ) |
Comprehensive income attributable to controlling interest | | $ | 8,328 | | | $ | 9,499 | |
Note 16. Other Income, net of expenses
Other income, net of expenses for the three and nine-monththree-month periods ended September 30,March 31, 2011 and 2010 and 2009 is presented below (in thousands):
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended March 31, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | | | 2011 | | | 2010 | |
Interest income | | $ | 249 | | | $ | 196 | | | $ | 687 | | | $ | 463 | | | $ | 230 | | | $ | 234 | |
Gain on investments | | | 169 | | | | 277 | | | | 242 | | | | 470 | | | | 60 | | | | 92 | |
Other | | | 74 | | | | 82 | | | | 174 | | | | 397 | | | | 116 | | | | 162 | |
Total | | $ | 492 | | | $ | 555 | | | $ | 1,103 | | | $ | 1,330 | | | $ | 406 | | | $ | 488 | |
Note 17. Derivative Financial Instruments
The Company is exposed to certain risks related to its ongoing business operations. The primary risk managed by using derivative instruments is foreign currency risk. From time to time the Company’s foreign subsidiaries enter into foreign currency exchange contracts to mitigate exposure to fluctuations in currency exchange rates. The fair value of the derivative financial instrument is recorded on the Company’s balance sheet and is adjusted to fair value at each measurement date based on the contractual forward exchange rate and the forward exchange rate at the measurement date. The changes in fair value are recognized in the consolidated statements of operations in the current period. The Company does not engage in speculative transactions nor does it hold or issue financial instruments for t radingtrading purposes. The average U.S. dollar equivalent notional amount of outstanding foreign currency exchange contracts was $14,286,000 during the three months ended March 31, 2011. The Company reported $1,240,000 of derivative liabilities of $775,000 in other accrued liabilities and $45,000 in other long-term liabilities at September 30, 2010.March 31, 2011. The Company reported $111,000$1,221,000 of derivative liabilities in other accrued liabilities and $10,000$30,000 in other long-term liabilities at December 31, 2009.2010. The Company recognized, as a component of cost of sales, lossesa net loss of $978,000$530,000 and $156,000a net gain of $14,000 on the change in fair value of derivative financial instruments in the three-month periods ended September 30,March 31, 2011 and 2010, and 2009, respectively. The Company recognized, as a component of cost of sales, losses of $809,000 and $872,000 on the change in fair value of derivative financial instruments for the nine months ended September 30, 2010 and 2009, respectively. There were no derivatives that were designated as hedges at September 30, 2010March 31, 2011 or December 31, 2009.2010.
Item2. 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 2010,2011, the Company's expected capital expenditures in 2010,2011, 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, 2011,March 31, 2012, the impact of the enactment of the Hiring Incentives to Restore Employment (HIRE) Act of 2010 or any future state or federal funding for transportation construction programs, the need for road improvements, the 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, the ability of the Company to offset future changes in prices in raw materials, the change in the level of the Company's presence and sales in international markets, 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, 2009,2010, 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; and
• manufacture and sell replacement parts for equipment in each of its product lines.
The Company has 14 manufacturing companies, 13 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 and concrete mixing plants. The business units in the Aggregate and Mining Group design, manufacture and market equipment for the aggregate, metallic mining and recycling industries. In September 2009 this segment acquired a small company with unique machine technology to make wood pellets. The Company began production of the new pellet pro duction equipment in January 2010. 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 a complete line of 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. 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)(“Peterson”), Astec Australia Pty Ltd (Astec Australia)(“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, a nd installs,and 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 significantly 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 f uturefuture unexpended balances. Although the HIRE Act helped stabilize the federal highway program, the Company believes a new multi-year highway program at increased funding levels would have the greatest positive impact on the road construction industry and allow its customers to plan and execute longer termlonger-term projects. The current resolution funding federal transportation expenditures expires on September 30, 2011 and funds federal highway spending for fiscal year 2011 at the 2010 level of $41.1 billion. 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 also implemented infrastructure spending programs to stimulate their economies. The Company believes these spending programs have had a positive impact on theits financial performance of certain of its business segments;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 17nearly 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’ purchasepurchasing decisions and the price of steel may each affect the Company’s financial performance. Economic downturns like the one experienced from 2001 through 2003, and the current downturn that began in late 2008, 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 currentrecent economic downturn, anddownturn; however, the Company expects only slight changes, if any, in interest rates in the near ter m; however, management believes that upward pressure is building on long-term interest rates.to begin to increase during 2011.
Significant portions of the Company’s revenues relate to the sale of equipment involved in the production, handling and installation of asphalt mix. AsphaltLiquid 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 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 2009 and2010 or the first three quartersquarter of 2010.2011. The Company expects oil prices to continue to fluctuate during the remainder of 2011. Minor fluctuations in 2010 but doesoil prices should not believe the fluctuation will 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 in turn 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 increased modestlypricing declined sharply in the fourth quarter of 2008 and into 2009. Favorable pricing continued through 2009, causing steel mills to reduce production to match reduced demand. Steel customers worked through their excess inventories of steel during the first half of2009 and began buying steel again in 2010, with small variations through the third quarter. We expect pricingalbeit at reduced levels, causing steel prices to remain stable throughrelatively stable. Near the end of 2010. Seasonal demand2010, as the result of an increase in the price of certain raw materials used to make steel, steel prices began a rapid series of increases forthat will likely continue through the second quarter of 2011. The Company was able to mitigate a portion of this increase in price of steel duringin the first quarter of 2011 coupled with possibleas a result of its advanced steel purchases and existing supply contracts at previously negotiated prices. The Company may experience rising steel prices during the second quarter of 2011; however, management believes that steel prices will remain stable in the second half of 2011. Although the Company normally institutes price increases in scrapresponse to rising steel and iron orecomponent prices, could put upward pressure on steel pricing. We will continue our practice of mixing spot purchases and long-term contracts to offset potential market fluctuations. In the event of significant steel, commodity and other component increases, the Company would institute price increases; however, the Company may not be able to raise the prices of its products enough to cover increased costs, which wouldmay have a negative effect on the Company’s financial res ults. If theresults. The Company expects thatwill continue to closely monitor steel prices will increase, itpricing and will take advantage of buying opportunities to offset such future pricing where possible.
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 and through the first halfquarter of 2009 the dollar was stronger relative to currencies in many of the Company’s foreign markets, negatively impacting the Company’s international sales. During the latter half of 2009 and during 2010,2011, a weakening dollar, combined with improving economic conditions in certain foreign economies, had a positive impact on the Company’s international sales. The Company expects the dollar to fluctuate duringremain weak in the remainder of 2010. Future strengthening ofnear-term relative to most foreign currencies; however, increasing domestic interest rates or weakening economic conditions abroad could cause the dollar could have a negativeto strengthen, which may negatively impact on 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. During 2009, approximately2010, 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 2010.2011.
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 sharingprofit-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 sharingprofit-sharing incentives for subsidiary presidents are normally paid from a separate corporate pool.
Results of Operations
Net Sales
Net sales increased $11,769,000$36,735,000 or 7.1%19.0%, from $166,084,000$193,454,000 for the thirdfirst quarter of 20092010 to $177,853,000$230,189,000 in the thirdfirst quarter of 2010.2011. Sales are generated primarily from new equipment and related parts purchases made by customers for use in construction for infrastructure funded by both the private and public sectors. The overall increase in sales for the thirdfirst quarter of 2010 compared to the third quarter of 2009 reflects strengthening international economic conditions. Domestic sales decreased slightly in the third quarter of 2010 compared to the third quarter of 2009.
Net sales increased $20,326,000 or 3.6%, from $560,231,000 for the first nine months of 2009 to $580,557,000 in the first nine months of 2010. The overall increase in sales for the first nine months of 20102011 compared to the first nine months of 2009 reflects strengthening international economic conditions. Domestic sales decreased slightly during the nine months ended September 30, 2010 compared to the same period in 2009.
Domestic sales for the third quarter of 2010 were $98,602,000 or 55.4% of consolidated net sales compared to $101,241,000 or 61.0% of consolidated net sales for the third quarter of 2009, a decrease of $2,639,000, or 2.6%. International sales for the third quarter of 2010 were $79,251,000 or 44.6% of consolidated net sales compared to $64,843,000 or 39.0% of consolidated net sales for the third quarter of 2009, an increase of $14,408,000 or 22.2%. Domestic sales were negatively impacted by the lack of action by Congress in renewing the long-term highway bill to replace the previous bill that expired in September 2009. The overall increase in international sales for the third quarter of 2010 compared to the third quarter of 2009 is due to improvedreflects strengthening economic conditions in several of theboth international markets the com pany serves and the adoption of stimulus packages with significant emphasis on the development of highways and other infrastructure projects. The increases occurred primarily in the Middle East, Canada, Australia, Africa and Asia.domestic markets.
Domestic sales for the first nine monthsquarter of 20102011 were $357,341,000$147,523,000 or 61.6%64.1% of consolidated net sales compared to $362,422,000$129,451,000 or 64.7%66.9% of consolidated net sales for the first nine monthsquarter of 2009, a decrease2010, an increase of $5,081,000$18,072,000, or 1.4%14.0%. International sales for the first nine monthsquarter of 20102011 were $223,216,000$82,666,000 or 38.4%35.9% of consolidated net sales compared to $197,809,000$64,003,000 or 35.3%33.1% of consolidated net sales for the first nine monthsquarter of 2009,2010, an increase of $25,407,000$18,663,000 or 12.8%29.2%. Domestic sales were negatively impacted by the lack of action by Congress in renewing the new long-term highway bill to replace the previous bill that expired in September 2009. The overall increase in international sales for the first nine monthsquarter of 20102011 compared to the first nine monthsquarter of 20092010 is due to improved economic conditions in sev eralinternational markets and significant weakness in the dollar compared to currencies in many of the international markets the company serves and the adoption of stimulus packages with significant emphasis on the development of highways and other infrastructure projects.Company serves. The year-to-date increases in international sales occurred primarily in Canada, South America, Africa, Central AmericaEurope, Canada, Russia and Australia.
Parts sales for the thirdfirst quarter increased 6.6%14.0% or $7,061,000 from $46,146,000$50,264,000 in 20092010 to $49,193,000$57,325,000 in 2010. Parts sales for the third quarter of 2010 as a percentage of consolidated net sales decreased 10 basis points from 27.8% in 2009 to 27.7% in 2010.
2011. Parts sales for the first nine months increased 9.9% from $136,188,000 in 2009 to $149,661,000 in 2010. Parts sales for the first nine monthsquarter of 20102011 as a percentage of consolidated net sales increased 150decreased 110 basis points from 24.3%26.0% in 20092010 to 25.8%24.9% in 2010.2011 due to equipment sales increasing faster than part sales.
Gross Profit
Consolidated gross profit as a percentage of sales increased 270 basis points to 23.6% in the third quarter of 2010 from 20.9% in the third quarter of 2009. Reasons for the increasefirst quarter increased 18.6% or $8,563,000 from $46,141,000 in gross margin as a percent of sales include efficiency and cost cutting improvements2010 to $54,704,000 in our manufacturing facilities implemented during 2009 and 2010, improved plant utilization and increased international sales which typically carry a higher gross margin than domestic sales.
Consolidated2011; however gross profit as a percentage of sales increased 160decreased 10 basis points to 23.2%23.8% in the first nine monthsquarter of 20102011 from 21.6%23.9% in the first nine monthsquarter of 2009. Reasons for the increase in gross margin as a percent2010. Absorption of sales include efficiency and cost cutting improvements in our manufacturing facilities implemented during 2009 and 2010, improved plant utilization andoverhead increased internationalby $4,019,000 due to higher production volumes resulting from increased sales. Parts sales, which typically carryyield a higher gross margin, than domestic sales.decreased as a percentage of net sales from 26.0% in the first quarter of 2010 to 24.9% in the first quarter of 2011.
Selling, General, Administrative and Engineering Expenses
Selling, general, administrative and engineering expenses for the thirdfirst quarter of 20102011 were $31,808,000,$39,489,000, or 17.9%17.2% of net sales, compared to 30,445,000,$32,718,000, or 18.3%16.9% of net sales, for the thirdfirst quarter of 2009,2010, an increase of $1,363,000,$6,771,000, or 4.5%20.7%. The increase was composed of increases in SERP expensepayroll and related expenses of $496,000 and restricted stock expense of $410,000, both of which primarily resulted from an increase in the Company’s stock price during the third quarter of 2010, along with a decrease in the Company’s stock price during the third quarter of 2009 plus increases in sales salaries and$3,472,000, commissions of $596,000$1,166,000 and sales promotions and accommodationsexpenses of $536,000.$2,655,000 related to ConExpo, the triennial equipment show held in March of 2011. These increasedincreases in expenses were offset by a decrease in research and developmenthealth insurance expense of $608,000.
Selling, general, administrative and engineering expenses for the nine months ending September 30, 2010 were $95,351,000, or 16.4% of net sales, compared to $93,478,000, or 16.7% of net sales, for the first nine months of 2009, an increase of $1,873,000, or 2.0%. The increase was primarily due to an increase in profit sharing expense of $1,091,000 due to improved performance at certain subsidiaries, increases in SERP expense of $692,000 and restricted stock expense of $546,000, both of which primarily resulted from an increase in the Company’s stock price during the nine months ended September 30, 2010 along with a decrease in the Company’s stock price during the same period in 2009, plus increases in sales salaries and commissions of $1,501,000. These increased expenses were offset by decreases in re search and development expense of $990,000 and bad debt expense of $871,000.$1,587,000.
Interest Expense
Interest expense in the thirdfirst quarter of 20102011 decreased $36,000,$87,000, or 54.5%70.7%, to $30,000$36,000 from $66,000 in the third quarter of 2009.
Interest expense$123,000 in the first nine monthsquarter of 2010 decreased $129,000, or 30.9%, to $289,000 from $418,000 in the first nine months of 2009 due to the reduction in borrowings outstanding for the comparable periods.2010.
Other Income, net of expenses
Other income, net of expenses was income of $492,000$406,000 for the thirdfirst quarter of 2011 compared to $488,000 in the first quarter of 2010, compared to income of $555,000 in the third quarter of 2009, a decrease in income of $63,000,$82,000, or 11.4%16.8%. The decrease is primarily attributable to a decrease in investment income of $108,000.
Other income net of expenses was income of $1,103,000 foris generated primarily by investments held by Astec Insurance, the nine months ending September 30, 2010 compared to income of $1,330,000 for nine months ending September 30, 2009, a decrease in income of $227,000, or 17.1%. The decrease is primarily attributable to a decrease in investment income of $228,000.Company’s captive insurance company.
Income Tax
Income tax expense for the third quarter of 2010 was $3,198,000, compared to income tax expense of $1,320,000 for the third quarter of 2009. The effective tax rates for the third quarters of 2010 and 2009 were 30.2% and 28.2%, respectively. The primary reasons for the difference in the third quarter’s effective and statutory tax rates are a mixture of increased state income taxes offset by an increase in estimated research and development tax credits for 2009 and increasing domestic production activity deductions.
Income tax expense for the first nine monthsquarter of 20102011 was $13,655,000,$5,427,000, compared to income tax expense of $10,157,000$4,956,000 for the first nine monthsquarter of 2009.2010. The effective tax rates for the first nine monthsquarters of 2011 and 2010 were 34.8% and the first nine months of 2009 were 34.0% and 35.4%35.9%, respectively. The reasonsdifference in effective tax rates for the decreasefirst quarters of 2011 and 2010 is related to research and development tax credits which were recognized in the effective tax rate fromfirst quarter of 2011 but not in the first nine monthsquarter of 20092010 due to the first nine monthstiming of 2010 were an increase in a tax deductionCongressional approval of the Company receives for domestic production activity and increased research and development credits.
Net Income
The Company had net income attributable to controlling interest of $7,362,000$10,144,000 for the thirdfirst quarter of 2011 compared to $8,794,000 in the first quarter of 2010, compared to $3,344,000 in the third quarter of 2009, an increase of $4,018,000,$1,350,000, or 120.2%15.4%. Earnings per diluted share were $0.32$0.44 in the thirdfirst quarter of 2011 compared to $0.39 in the first quarter of 2010, compared to $0.15 in the third quarter of 2009, an increase of $0.17$0.05 or 113.3%12.8%. Diluted shares outstanding for the quarters ended September 30,March 31, 2011 and 2010 were 22,919,430 and 2009 were 22,843,300 and 22,735,064,22,767,460, respectively. The increase in shares outstanding is primarily due to the exercise of stock options by employees of the Company.
The Company had net income attributable to controlling interest of $26,464,000 for the nine months ending September 30, 2010 compared to $18,524,000 in the first nine months of 2009, an increase of $7,940,000, or 42.9%. Earnings per diluted share were $1.16 in the first nine months of 2010 compared to $0.82 in the first nine months of 2009, an increase of $0.34 or 41.5%. Diluted shares outstanding for the nine-month periods ended September 30, 2010 and 2009 were 22,814,634 and 22,711,526, respectively. The increase in shares outstanding is primarily due to the exercise of stock options by employees of the Company.
Backlog
The backlog of orders at September 30, 2010March 31, 2011 was $145,643,000$244,808,000 compared to $144,282,000$134,838,000 at September 30, 2009,March 31, 2010, an increase of $1,361,000,$109,970,000, or 0.9%81.6%. The increase in backlog is due to an increase in domestic backlogs of $8,000,000$42,642,000 or 11.5% offset by a decrease55.1% and an increase in international backlogs of $6,639,000$67,328,000 or 8.9%117.3%. The increase in backlogstotal backlog was alsoprimarily due primarily to an increaseincreases in the backlog of the Mobile Asphalt PavingAggregate and Mining Group of $1,795,000$51,131,000 or 41.3%124.2% and the Underground Group of $1,343,000 or 45.6%, offset by a decrease in the backlog of the Asphalt Group of $2,294,000$41,051,000 or 3.0%58.3%. The March 31, 2011 backlog was comprised of 49.1% domestic orders and 50.9% international orders as compared to 57.4% domestic orders and 42.6% international orders at March 31, 2010. The Company is unable to determine whether the changes in backlogs were experienced by the industry as a whole; however, the Company believes the changes in backlogs reflect the current economic conditions the industry is experiencing.
Segment Net Sales-Quarter (in thousands):
| | Three Months Ended September 30, | | | | | | Three Months Ended March 31, | | | | |
| | 2010 | | | 2009 | | | $ Change | | | % Change | | | 2011 | | | 2010 | | | $ Change | | | % Change | |
Asphalt Group | | $ | 45,478 | | | $ | 44,556 | | | $ | 922 | | | | 2.1 | % | | $ | 73,754 | | | $ | 70,061 | | | $ | 3,693 | | | | 5.3 | % |
Aggregate and Mining Group | | | 60,263 | | | | 55,865 | | | | 4,398 | | | | 7.9 | % | | | 78,853 | | | | 58,919 | | | | 19,934 | | | | 33.8 | % |
Mobile Asphalt Paving Group | | | 36,681 | | | | 36,814 | | | | (133 | ) | | | (0.4 | %) | | | 49,955 | | | | 42,082 | | | | 7,873 | | | | 18.7 | % |
Underground Group | | | 19,220 | | | | 16,939 | | | | 2,281 | | | | 13.5 | % | | | 11,667 | | | | 8,927 | | | | 2,740 | | | | 30.7 | % |
Other Group | | | 16,211 | | | | 11,910 | | | | 4,301 | | | | 36.1 | % | | | 15,960 | | | | 13,465 | | | | 2,495 | | | | 18.5 | % |
Asphalt Group: Sales in this group were $45,478,000$73,754,000 for the thirdfirst quarter of 20102011 compared to $44,556,000$70,061,000 for the same period in 2009,2010, an increase of $922,000$3,693,000 or 2.1%5.3%. Domestic sales for the Asphalt Group decreased $233,000$5,223,000 or 0.8%8.8% in the thirdfirst quarter of 20102011 compared to the same period in 2009. International sales for the Asphalt Group increased $1,155,000 or 6.8% in the third quarter of 2010 compared to the same period in 2009.2010. Domestic sales werecontinued to be impacted by Congress’s failure to renew the long-term federal highway funding legislation that expired in September 2009. International sales for the Asphalt Group increased $8,916,000 or 83.0% in the first quarter of 2011 compared to the same period in 2010. The highway fund operated under continuation bills atimprovement in international sales is due to improved economic conditions and significant weakness in the previously approved funding levels from September 30, 2009 until April 2010 when a new short-term bill fundingdollar compared to currencies in many of the 2010 calendar year was passed.markets the Company serves. In the thirdfirst quarter inter nationalinternational sales increased primarily in the Middle EastCanada and AfricaEurope while decreasing in CanadaMexico and South America. Parts sales for the Asphalt Group decreased 7.4%increased 13.9% in the thirdfirst quarter of 20102011 compared to the same period in 2009.2010.
Aggregate and Mining Group: Sales in this group were $60,263,000$78,853,000 for the thirdfirst quarter of 20102011 compared to $55,865,000$58,919,000 for the same period in 2009,2010, an increase of $4,398,000$19,934,000 or 7.9%33.8%. Domestic sales for the Aggregate and Mining Group decreased $2,654,000increased $13,485,000 or 9.3%60.0% in the thirdfirst quarter of 20102011 compared to the same period in 2009.2010. Domestic sales were positively impacted by improving domestic economic conditions and increasing activity in domestic mining. International sales for the Aggregate and Mining Group increased $7,052,000$6,449,000 or 25.9%17.7% in the thirdfirst quarter of 20102011 compared to the same period in 2009.2010. The improvement in international sales is due to improved economic conditions and significant weakness in the dollar compared to currencies in many of the markets the Company serves. The increase in international sales occurred primarily in South America, Canada and Australia.America. These increases were offset by decreases in Central America and the Middle East.East, Mexico and Canada. Parts sales for this group increased 18.8%16.2% in the thirdfirst quarter of 20102011 compared to the same period in 2009.2010.
Mobile Asphalt Paving Group: Sales in this group were $36,681,000$49,955,000 for the thirdfirst quarter of 20102011 compared to $36,814,000$42,082,000 for the same period in 2009, a decrease2010, an increase of $133,000$7,873,000 or 0.4%18.7%. Domestic sales for the Mobile Asphalt Paving Group decreased $2,633,000increased $5,377,000 or 8.9%15.1% in the thirdfirst quarter of 20102011 compared to the same period in 2009.2010. The lack of a long-term highway bill caused customers to focus on short-term contracts for road overlay, which positively impacted domestic sales for this group. International sales for the Mobile Asphalt Paving Group increased $2,500,000$2,495,000 or 34.8%38.9% in the thirdfirst quarter of 20102011 compared to the same period in 2009,2010, due partiallyprimarily to weakness in the adoption of infrastructuredollar relative to currencies in many foreign countries, as well as stimulus plans byin certain foreign countries.countries that focused on road building. The increase internationally occurred primarily in Canada, AsiaRussia and Central America and was offset by decreased sales in South America.Canada. Parts sales for this group decreased 6.3%increased 16.6% in the thirdfirst quarter of 20102011 compared to the same period in 2009.2010.
Underground Group: Sales in this group were $19,220,000$11,667,000 for the thirdfirst quarter of 20102011 compared to $16,939,000$8,927,000 for the same period in 2009,2010, an increase of $2,281,000$2,740,000 or 13.5%30.7%. Domestic sales for the Underground Group increased $1,437,000$2,628,000 or 21.5%58.5% in the thirdfirst quarter of 20102011 compared to the same period in 20092010 due primarily to increased drill rig and auger boring machine sales.improving domestic economic conditions. International sales for the Underground Group increased $844,000$112,000 or 8.2%2.5% in the thirdfirst quarter of 20102011 compared to the same period in 2009.2010. The increase in international sales occurred in Canada and Asia. The increase in international sales is primarily due to the increased drill rig and auger boring machine sales.South America. Parts sales for the Underground Group increased 8.2%decreased 10.3% in the thirdfirst quarter of 20102011 compared to t hethe same period in 2009.2010.
Other Group: Sales for the Other Group were $16,211,000$15,960,000 for the thirdfirst quarter of 20102011 compared to $11,910,000$13,465,000 for the same period in 2009,2010, an increase of $4,301,000$2,495,000 or 36.1%18.5%. Domestic sales for the Other Group, which are primarily generated by Peterson Pacific Corp., increased $1,443,000$1,806,000 or 16.8%24.1% in the thirdfirst quarter of 20102011 compared to the same period in 2009. This increase is2010, due primarily to the strength of theimproving domestic economy during the third quarter of 2010 as compared to the third quarter of 2009.economic conditions. International sales for the Other Group increased $2,858,000$689,000 or 86.5%11.6% in the thirdfirst quarter of 20102011 compared to the same period in 2009. This2010. The increase is primarily attributable to Astec Australia’s salesoccurred in Australia and Peterson’s sales in Canada and was offset by a decline in Peterson̵ 7;s salesdeclines in South America.America and Canada. Parts sales for the Other Group increased 13.7%25.7% in the thirdfirst quarter of 20102011 compared to the same period in 2009.
Segment Net Sales-Year-to-Date (in thousands):
| | Nine Months Ended September 30, | | | | |
| | 2010 | | | 2009 | | | $ Change | | | % Change | |
Asphalt Group | | $ | 180,901 | | | $ | 197,385 | | | $ | (16,484 | ) | | | (8.4 | %) |
Aggregate and Mining Group | | | 186,182 | | | | 162,893 | | | | 23,289 | | | | 14.3 | % |
Mobile Asphalt Paving Group | | | 125,995 | | | | 105,077 | | | | 20,918 | | | | 19.9 | % |
Underground Group | | | 41,783 | | | | 54,331 | | | | (12,548 | ) | | | (23.1 | %) |
Other Group | | | 45,696 | | | | 40,545 | | | | 5,151 | | | | 12.7 | % |
Asphalt Group: Sales in this group were $180,901,000 for the first nine months of 2010 compared to $197,385,000 for the same period in 2009, a decrease of $16,484,000 or 8.4%. Domestic sales for the Asphalt Group decreased $24,786,000 or 15.9% in the first nine months of 2010 compared to the same period in 2009. International sales for the Asphalt Group increased $8,302,000 or 20.2% in the first nine months of 2010 compared to the same period in 2009. Domestic sales were impacted by Congress’s failure to renew the long-term federal highway funding legislation that expired in September 2009. The highway fund operated under continuation bills at the previously approved funding levels until April 2010 when a new short-term bill funding the 2010 calendar year was passed. International sale s increased primarily in the Middle East, Africa, the West Indies and South America while decreasing in Europe, Canada and Asia. Parts sales for the Asphalt Group increased 6.9% in the first nine months of 2010 compared to the same period in 2009.
Aggregate and Mining Group: Sales in this group were $186,182,000 for the first nine months of 2010 compared to $162,893,000 for the same period in 2009, an increase of $23,289,000 or 14.3%. Domestic sales for the Aggregate and Mining Group increased $7,631,000 or 10.2% in the first nine months of 2010 compared to the same period in 2009. The primary driver of this increase was increased road building activity due to the federal stimulus plan plus increased parts sales. International sales for the Aggregate and Mining Group increased $15,658,000 or 17.8% in the first nine months of 2010 compared to the same period in 2009. This increase was primarily due to strengthening in the construction and mining markets globally. The increase in international sales occurred in Canada, South America, Africa, Central America, Europe and Australia. These increases were offset by decreases in Asia, China, the West Indies and the Middle East. Parts sales for the Aggregate and Mining Group increased 21.0% in the first nine months of 2010 compared to the same period in 2009.
Mobile Asphalt Paving Group: Sales in this group were $125,995,000 for the first nine months of 2010 compared to $105,077,000 for the same period in 2009, an increase of $20,918,000 or 19.9%. Domestic sales for the Mobile Asphalt Paving Group increased $10,511,000 or 12.1% in the first nine months of 2010 compared to the same period in 2009. The increase in domestic sales is primarily due to the federal stimulus package, which funded highway resurfacing projects. International sales for the Mobile Asphalt Paving Group increased $10,406,000 or 56.3% in the first nine months of 2010 compared to the same period in 2009, due partially to the adoption of infrastructure stimulus plans by foreign countries. The increase internationally occurred primarily in Canada, Central America and Europe. Parts sales for this group increased 1.6% in the first nine months of 2010 compared to the same period in 2009.
Underground Group: Sales in this group were $41,783,000 for the first nine months of 2010 compared to $54,331,000 for the same period in 2009, a decrease of $12,548,000 or 23.1%. Domestic sales for the Underground Group decreased $3,189,000 or 13.1% in the first nine months of 2010 compared to the same period in 2009. The primary reason for this decline is the continuing weak domestic residential and commercial construction markets. International sales for the Underground Group decreased $9,358,000 or 31.3% in the first nine months of 2010 compared to the same period in 2009. The decrease in international sales occurred primarily in the Middle East, Africa and Canada. The decrease in international sales is primarily due to weakness in gas drilling, pipeline and utility construction in those certain foreign markets. Parts sales for the Underground Group decreased 3.0% in the first nine months of 2010 compared to the same period in 2009.
Other Group: Sales for the Other Group were $45,696,000 for the first nine months of 2010 compared to $40,545,000 for the same period in 2009, an increase of $5,151,000 or 12.7%. Domestic sales for the Other Group, which are primarily generated by Peterson Pacific Corp., increased $4,752,000 or 23.2% in the first nine months of 2010 compared to the same period in 2009. The increase in domestic sales by Peterson in the first nine months of 2010 compared to the same period in 2009 is due to a slight rebound in the number of machines sold from the abnormally low 2009 volume which was impacted by the recession. International sales for the Other Group increased $398,000 or 2.0% in the first nine months of 2010 compared to the same period in 2009. This increase is primarily attributable to Astec Australia 217;s sales in Australia and Peterson’s sales in Canada offset by a decline in Peterson’s sales in Europe. Parts sales for the Other Group increased 8.1% in the first nine months of 2010 compared to the same period in 2009.2010.
Segment Profit (Loss)-Quarter (in thousands):
| | Three Months Ended September 30, | | | | | | Three Months Ended March 31, | | | | |
| | 2010 | | | 2009 | | | $ Change | | | % Change | | | 2011 | | | 2010 | | | $ Change | | | % Change | |
Asphalt Group | | $ | 4,041 | | | $ | 4,045 | | | $ | (4 | ) | | | (0.1 | %) | | $ | 10,820 | | | $ | 12,795 | | | $ | (1,975 | ) | | | (15.4 | %) |
Aggregate and Mining Group | | | 4,437 | | | | 2,811 | | | | 1,626 | | | | 57.8 | % | | | 5,622 | | | | 2,822 | | | | 2,800 | | | | 99.2 | % |
Mobile Asphalt Paving Group | | | 5,188 | | | | 4,281 | | | | 907 | | | | 21.2 | % | | | 7,312 | | | | 5,210 | | | | 2,102 | | | | 40.3 | % |
Underground Group | | | (1,569 | ) | | | (3,007 | ) | | | 1,438 | | | | 47.8 | % | | | (3,849 | ) | | | (3,542 | ) | | | (307 | ) | | | (8.7 | %) |
Other Group | | | (4,480 | ) | | | (4,505 | ) | | | 25 | | | | 0.6 | % | | | (8,500 | ) | | | (7,510 | ) | | | (990 | ) | | | (13.2 | %) |
Asphalt Group: Segment profit for this group was $4,041,000$10,820,000 for the thirdfirst quarter of 20102011 compared to $4,045,000$12,795,000 for the same period in 2009,2010, a decrease of $4,000$1,975,000 or 0.1%15.4%. This decrease is due primarily to a decrease in sales for the Asphalt Group as well as a decline in gross profit percentage from 28.8% in the first quarter of 2010 to 26.1% in the first quarter of 2011. The gross profit percentage returned to a normal level in the first quarter of 2011 compared to the higher percentage for the first quarter of 2010, which was the result of a few very high margin sales transactions that were recognized in the first quarter of 2010.
Aggregate and Mining Group: Segment profit for this group was $4,437,000$5,622,000 for the thirdfirst quarter of 20102011 compared to $2,811,000$2,822,000 for the same period in 2009,2010, an increase of $1,626,000$2,800,000 or 57.8%99.2%. This group’s profits were positively impacted by a 7.9%33.8% increase in sales and a 250140 basis point increase in gross margin aided by an 18.8%a 16.2% increase in parts sales for the quarter and improved plant utilization.
Mobile Asphalt Paving Group: Segment profit for this group was $5,188,000$7,312,000 for the thirdfirst quarter of 2011 compared to $5,210,000 in the first quarter of 2010, compared to $4,281,000 in 2009, an increase of $907,000$2,102,000 or 21.2%40.3%. The primary reason for the increase in profit was an increase in gross margin of 350190 basis points during the thirdfirst quarter of 2011 compared to the first quarter of 2010 compareddue to the third quarter of 2009.increased demand and production volumes.
Underground Group: This group had a segment loss of $1,569,000$3,849,000 in the thirdfirst quarter of 20102011 compared to a loss of $3,007,000$3,542,000 in the thirdfirst quarter of 20092010 for an improvementa decrease of $1,438,000$307,000 or 47.8%. The primary drivers of this improvement were an increase of 13.5% in sales and gross margin improvement of 580 basis points8.7% due to increased selling expenses, primarily to continuing cost containment efforts and improved efficiencies associated with the higher sales volumes.ConExpo related.
Other Group: The Other Group had a segment loss of $4,480,000$8,500,000 in the thirdfirst quarter of 20102011 compared to a loss of $4,505,000$7,510,000 in the third quarter of 2009 for an improvement of $25,000 or 0.6%. This group’s profits were positively impacted by a 36.1% increase in sales and a 960 basis point improvement in gross margin for the two manufacturing companies included in the group. These improvements were offset by increased income taxes of $1,543,000 due to increased consolidated pretax profits and an increase in selling, general, administrative and engineering expenses of $483,000 for the thirdfirst quarter of 2010 compared to the same period in 2009.
Segment Profit (Loss)-Year-to-Date (in thousands):
| | Nine Months Ended September 30, | | | | |
| | 2010 | | | 2009 | | | $ Change | | | % Change | |
Asphalt Group | | $ | 24,410 | | | $ | 27,325 | | | $ | (2,915 | ) | | | (10.7 | %) |
Aggregate and Mining Group | | | 12,232 | | | | 8,532 | | | | 3,700 | | | | 43.4 | % |
Mobile Asphalt Paving Group | | | 16,662 | | | | 10,632 | | | | 6,030 | | | | 56.7 | % |
Underground Group | | | (7,012 | ) | | | (9,589 | ) | | | 2,577 | | | | 26.9 | % |
Other Group | | | (18,058 | ) | | | (18,320 | ) | | | 262 | | | | 1.4 | % |
Asphalt Group: Segment profit for this group was $24,410,000 for the first nine months of 2010 compared to $27,325,000 for the same period in 2009, a decrease of $2,915,000$990,000 or 10.7%13.2%. The reduction in profits between periods directly resulted fromThis group includes the related 8.4% reduction in sales duringparent company, Astec Industries, Inc., which records all of the period and a 20 basis point reduction in gross margin.
Aggregate and Mining Group: Segment profit for this group was $12,232,000domestic federal tax expense for the first nine months of 2010 compared to $8,532,000 for the same period in 2009, an increase of $3,700,000 or 43.4%. The increase resulted from a 14.3% increase in sales, including a 21.0% increase in parts sales, and an improvement in plant utilization that contributed to a 60 basis point increase in gross margin.
Mobile Asphalt Paving Group: Segment profit for this group was $16,662,000 for the first nine months of 2010 compared to $10,632,000 in 2009, an increase of $6,030,000 or 56.7%. The primary reasons for the increase in profit were an increase in sales of 19.9% during the first nine months of 2010 compared to the first nine months of 2009,Company as well as an improvement in plant utilization that contributed to a 300 basis point increase in gross margin.
Underground Group: This group had a segment loss of $7,012,000 in the first nine months of 2010 compared to a loss of $9,589,000 in the first nine months of 2009, an improvement of $2,577,000 or 26.9%. The primary driver in the improvement between periods was a reduction in selling, general,other non-allocable administrative and engineering expenses of $3,428,000 offset by the impact of a 23.1% reduction in sales including a 3.0% reduction in parts sales.
Other Group: The Other Group had a segment loss of $18,058,000 in the first nine months of 2010 compared to a loss of $18,320,000 in the first nine months of 2009 for an improvement of $262,000 or 1.4%. This group’s profits were positively impacted by a 12.7% increase in sales and a 560 basis point improvement in gross margin for the two manufacturing companies included in the group. These improvements were offset by increased income taxes of $1,792,000 due to increased consolidated pretax profits and an increase in selling, general, administrative and engineering expenses of $1,355,000 for the first nine months of 2010 compared to the same period in 2009.
costs.
Liquidity and Capital Resources
The Company’s primary sources of liquidity and capital resources are its cash on hand, investments, borrowing capacity under a $100 million revolving credit facility and cash flows from operations. The Company had $81,366,000$80,171,000 of cash available for operating purposes at September 30, 2010.March 31, 2011. In addition, the Company had no borrowings outstanding under its credit facility with WachoviaWells Fargo Bank, National AssociationN.A. (“Wachovia”Wells Fargo”) at September 30, 2010 as discussed further below.any time during the first quarter ended March 31, 2011. Net of letters of credit of $7,504,000,$7,608,000, the Company had borrowing availability of $92,496,000$92,392,000 under the credit facility as of September 30, 2010.March 31, 2011.
During April 2007, the Company entered into an unsecured credit agreement with Wachovia whereby Wachovia has extended to the Company an unsecured line of credit of up to $100,000,000 including a sub-limit for letters of credit of up to $15,000,000. The WachoviaWells Fargo credit facility had an original term of three years with two one-year extensions available. Early in 2010, the Company exercised the final extension bringing the new loan maturity date to May 2012. The interest rate for borrowings is a function of the Adjusted LIBOR Rate or Adjusted LIBOR Market Index Rate, as defined, as elected by the Company, plus a margin based upon a leverage ratio pricing grid ranging between 0.5% and 1.5%. As of September 30, 2010,March 31, 2011, the applicable margin based upon the leverage ratio pricing grid was equal to 0.5%. The unused facility fee is 0. 125%0.125%. The WachoviaWells Fargo credit facility requires no principal amortization and interest only payments are due, in the case of loans bearing interest at the Adjusted LIBOR Market Index Rate, monthly in arrears and, in the case of loans bearing interest at the Adjusted LIBOR Rate, at the end of the applicable interest period. The WachoviaWells Fargo credit agreement contains certain financial covenants, including a minimum fixed charge coverage ratio, minimum tangible net worth and maximum allowed capital expenditures. The Company was in compliance with the covenants under its credit facility as of September 30, 2010.March 31, 2011.
The Company's South African subsidiary, Osborn Engineered Products SA (Pty) Ltd. (“Osborn”), has available a credit facility of approximately $8,580,000$8,833,000 (ZAR 60,000,000) to finance short-term working capital needs, as well as to cover letterperformance letters of credit, performance, advance payment and retention guarantees. As of September 30, 2010,March 31, 2011, Osborn had no outstanding borrowings under the credit facility, but approximately $3,865,000$3,760,000 in performance letters of credit, advance payment and retention bondsguarantees were issued under the facility. The facility is secured by Osborn's buildings and improvements, accounts receivable, cash balances and a $2,000,000 letter of credit issued by the parent Company. As of September 30, 2010,March 31, 2011, Osborn had available credit under the facility of approximately $4,715,000.$5,073,000. The facility ha shas an ongoing, indefinite term subject to annual reviews by the bank. The interest rate is the South African prime rate. The agreement has an unused facility fee of 0.793%.
The Company’s Australian subsidiary, Astec Australia Pty Ltd (“Astec Australia”) has an available credit facility to finance short-term working capital needs of approximately $773,000$827,000 (AUD 800,000), and banking arrangements to finance foreign exchange dealer limit orders of approximately $1,450,000up to $1,705,000 (AUD 1,500,000) and to provide bank guarantees to others of $193,000 (AUD 200,000). The facility is1,650,000) secured by cash balances in the amount of $1,033,000 (AUD 1,000,000) and a $1,000,000 letter of credit issued by the parent Company. No amounts were outstanding under the credit facility at September 30, 2010.March 31, 2011. The interest rate is the Australian adjusted Bank Business Rate plus a margin of 1.05%.
Cash Flows from Operating Activities (in(in thousands):
| | Nine Months Ended | | | | | | Three Months Ended March 31, | | | Increase | |
| | September 30, 2010 | | | September 30, 2009 | | | Increase/ (Decrease) | | | 2011 | | | 2010 | | | (Decrease) | |
Net income | | $ | 26,558 | | | $ | 18,540 | | | $ | 8,018 | | | $ | 10,158 | | | $ | 8,832 | | | $ | 1,326 | |
Non-cash items in net income, net | | | 28,963 | | | | 25,081 | | | | 3,882 | | | | 9,553 | | | | 8,457 | | | | 1,096 | |
Changes in working capital: | | | | | | | | | | | | | | | | | | | | | | | | |
(Increase) decrease in receivables | | | (20,365 | ) | | | 9,346 | | | | (29,711 | ) | | | (20,053 | ) | | | (15,116 | ) | | | (4,937 | ) |
(Increase) decrease in prepaid expenses | | | | 1,581 | | | | 6,316 | | | | (4,735 | ) |
(Increase) decrease in inventories | | | 457 | | | | 18,547 | | | | (18,090 | ) | | | (21,292 | ) | | | 815 | | | | (22,107 | ) |
(Increase) decrease in prepaid expenses | | | 10,191 | | | | 3,565 | | | | 6,626 | | |
Increase (decrease) in accounts payable | | | 2,994 | | | | (14,609 | ) | | | 17,603 | | | | 7,631 | | | | 5,783 | | | | 1,848 | |
Increase (decrease) in customer deposits | | | 2,082 | | | | (11,220 | ) | | | 13,302 | | | | 986 | | | | (3,572 | ) | | | 4,558 | |
Increase (decrease) in taxes payable | | | 3,299 | | | | 369 | | | | 2,930 | | |
Increase (decrease) in other accrued liabilities | | | 1,733 | | | | (2,251 | ) | | | 3,984 | | |
Increase (decrease) in income taxes payable | | | | 4,638 | | | | 1,150 | | | | 3,488 | |
Other, net | | | (9,904 | ) | | | (8,716 | ) | | | (1,188 | ) | | | (3,577 | ) | | | (3,036 | ) | | | (541 | ) |
Net cash provided by operating activities | | $ | 46,008 | | | $ | 38,652 | | | $ | 7,356 | | |
Net cash provided (used) by operating activities | | | $ | (10,375 | ) | | $ | 9,629 | | | $ | (20,004 | ) |
For the first ninethree months of 2010,ended March 31, 2011, net cash provided byfrom operating activities increased $7,356,000decreased $20,004,000 compared to the same period in 2009.2010. The primary reasons for the increasedecrease in operating cash flows are an increase in cash providedused by net incomeinventory of $8,018,000, accounts payable$22,107,000, receivables of $17,603,000$4,937,000 and prepaid expenses of $6,626,000 plus an improvement in customer deposits of $13,302,000.$4,735,000. These positivenegative cash changes were offset by an increasea decrease in cash used by receivablesfrom customer deposits of $29,711,000$4,558,000 and inventoryincome taxes payable of $18,090,000.$3,488,000. These changes in operating cash flows reflect increased sales and production activity during the first ninethree months of 20102011 compared to the first ninethree months of 2009.2010.
Cash Flows from Investing Activities (in(in thousands):
| | Nine Months Ended | | | | |
| | September 30, 2010 | | | September 30, 2009 | | | Increase/ (Decrease) | |
Expenditures for property and equipment | | $ | (7,625 | ) | | $ | (12,392 | ) | | $ | 4,767 | |
Other, net | | | 156 | | | | 188 | | | | (32 | ) |
Net cash used by investing activities | | $ | (7,469 | ) | | $ | (12,204 | ) | | $ | 4,735 | |
Net | | Three Months Ended March 31, | | | Increase | |
| | 2011 | | | 2010 | | | (Decrease) | |
Expenditures for property and equipment | | $ | (3,964 | ) | | $ | (1,751 | ) | | $ | (2,213 | ) |
Other, net | | | 49 | | | | 20 | | | | 29 | |
Net cash used by investing activities | | $ | (3,915 | ) | | $ | (1,731 | ) | | $ | (2,184 | ) |
For the three months ended March 31, 2011, net cash used by investing activities in the first nine months of 2010 decreased $4,735,000increased $2,184,000 compared to the same period in 20092010 primarily due to reductionsan increase in cash used for capital expenditures of $4,767,000.$2,213,000.
Capital expenditures for 20102011 are forecasted to total $15,291,000.$29,382,000. The Company expects to finance these expenditures using currently available cash balances, internally generated funds and available credit under the Company’s credit facility. Capital expenditures are generally for machinery, equipment and facilities used by the Company in the production of its various products.
Cash Flows from Financing Activities (in(in thousands):
| | Nine Months Ended | | | | |
| | September 30, 2010 | | | September 30, 2009 | | | Increase/ (Decrease) | |
Net repayments under revolving line of credit | | $ | - | | | $ | (3,427 | ) | | $ | 3,427 | |
Other, net | | | 1,408 | | | | 53 | | | | 1,355 | |
Net cash provided (used) by financing activities | | $ | 1,408 | | | $ | (3,374 | ) | | $ | 4,782 | |
| | Three Months Ended March 31, | | | Increase | |
| | 2011 | | | 2010 | | | (Decrease) | |
Proceeds from exercise of stock options | | $ | 20 | | | $ | 272 | | | $ | (252 | ) |
Other, net | | | (47 | ) | | | (3 | ) | | | (44 | ) |
Net cash provided (used) by financing activities | | $ | (27 | ) | | $ | 269 | | | $ | (296 | ) |
Cash provided byfrom financing activities increased $4,782,000decreased $296,000 in the first ninethree months of 20102011 compared to the same period in 2009. During the first nine months of 2009, the Company repaid $3,427,000 of previous borrowings against its revolving line of credit. The Company had no similar borrowings during the first nine months of 2010.
The Company believes that its current working capital, cash flows generated from future operations and available capacity under its credit facilities will be sufficient to meet the Company’s working capital and capital expenditure requirements through September 30, 2011.
Financial Condition
The Company’s current assets increased to $428,221,000$474,228,000 at September 30, 2010March 31, 2011 from $384,365,000$447,821,000 at December 31, 2009,2010, an increase of $43,856,000,$26,407,000, or 11.4%5.9%. The increase is primarily attributable to an increase in cash and cash equivalentsinventories of $40,937,000$19,682,000 combined with an increase in trade receivables of $20,207,000.$20,007,000. The increase in inventories is due to increased manufacturing activity in response to increased sales volumes. The increase in trade receivables is due primarily to extended terms given to select customersan increase in sales volume in the thirdfirst quarter of 2010 which increase2011 as compared to the days outstanding from 35 days at December 31, 2009 to 46 days at September 30,fourth quarter of 2010. These increases were offset by decreases in prepaid expensescash and othercash equivalents of $10,536,000 and inventory of $6,411,000. Prepaid expenses and other decreased due to decreases in prepaid income taxes and prepaid insurance. The reduction in inventory is due to incr eased sales in the current year and the Company’s efforts to improve inventory turns.$14,426,000.
The Company’s current liabilities increased to $119,001,000$144,808,000 at September 30, 2010March 31, 2011 from $106,307,000$130,426,000 at December 31, 2009,2010, an increase of $12,694,000,$14,382,000, or 11.9%11.0%. The increase is primarily attributable to increases in accounts payable of $2,994,000, accrued payroll$7,631,000 and income taxes payable of $4,630,000. Accounts payable increased in the first quarter of 2011 due primarily to increased purchases of inventory related liabilitiesto increased sales volumes. Income taxes payable increased during the first quarter of $2,335,000, customer deposits2011 primarily due to increased earnings compared to the fourth quarter of $2,082,000 and other accrued liabilities of $4,739,000.2010.
Market Risk and Risk Management Policies
We have no material changes to the disclosure on this matter made in our Annual Report on Form 10-K for the year ended December 31, 2009.2010.
Off-balance Sheet Arrangements
As of September 30, 2010,March 31, 2011, the Company does not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.
Seasonality
The Company’s businesses are subject to the effects of seasonality. Consequently, the operating results for the three and nine-month periodsthree-month period ended September 30, 2010March 31, 2011 for each business segment, and for the Company as a whole, are not necessarily indicative of results to be expected for the full year. Based upon historical results of the past several years, 75%25% to 80%28% of the Company's annual revenues typically occur during the first ninethree months of the year. During the usual seasonal trend, the first three quarters of the year are the Company's stronger quarters for sales volume, with the fourth quarter normally being the weakest quarter.
Contractual Obligations
During the three months ended September 30, 2010,March 31, 2011, there were no substantial changes in our commitments or contractual liabilities.
Item3. Quantitative and Qualitative Disclosures about Market Risk We have no material changes to the disclosure on this matter made in our Annual Report on Form 10-K for the year ended December 31, 2009.2010.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. The Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s disclosure controls and procedu resprocedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.
Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2010March 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
During the quarter ended September 30, 2010, we began utilizing a new Enterprise Resource Planning system at one of our manufacturing subsidiaries, which we believe has strengthened our internal controls at the subsidiary. We will continue to evaluate the effects the new system has on our internal controls and make adjustments as necessary.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings The Company is involved from time to time in legal actions arising in the ordinary course of our business. Other than as set forth in Part I, “Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2009,2010, we currently have no pending or threatened litigation that we believe will result in an outcome that would materially affect our business. Nevertheless, there can be no assurance that future litigation to which we become a party will not have a material adverse effect on our business.
In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009,2010, which could materially affect our business, financial condition or future results. There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.2010. The risks described in our Annual Report on Form 10-K for the year ended December 31, 20092010 and in this Quarterly Report on Form 10-Q are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.
Exhibit No. | | Description 160; |
| 3.1 | | Amended and Restated Bylaws of Astec Industries Inc, adopted on March 14, 1990 and as amended on July 29, 1993, July 27, 2007 and July 23, 2008. |
| 31.1 | | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32 | *32* | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS101.INS** | ** | XBRL Instance Document |
101.SCH101.SCH** | ** | XBRL Taxonomy Extension Schema |
101.CAL101.CAL** | ** | XBRL Taxonomy Extension Calculation Linkbase |
101.DEF101.DEF** | ** | XBRL Taxonomy Extension Definition Linkbase |
101.LAB101.LAB** | ** | XBRL Taxonomy Extension Label Linkbase |
101.PRE101.PRE** | ** | XBRL Taxonomy Extension Presentation Linkbase |
The Exhibits are numbered in accordance with Item 601 of Regulation S-K. Inapplicable Exhibits are not included in the list.
* In accordance with Release No. 34-47551, this exhibit is hereby furnished to the SEC as an accompanying document and is not to be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended.
** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under those sections.
Items 2, 3, 4 and 5 are not applicable and have been omitted.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ASTEC INDUSTRIES, INC. (Registrant) | |
| | |
| | |
Date: November 9, 2010May 10, 2011 | /s/ J. Don Brock | |
| J. Don Brock Chairman of the Board and President (Principal Executive Officer) | |
| | |
| | |
Date: November 9, 2010May 10, 2011 | /s/ F. McKamy Hall | |
| F. McKamy Hall Chief Financial Officer, Vice President, and Treasurer (Principal Financial and Accounting Officer) | |
| | EXHIBIT INDEX |
| 3.1 | | Amended and Restated Bylaws of Astec Industries Inc, adopted on March 14, 1990 and as amended on July 29, 1993, July 27, 2007 and July 23, 2008. |
| 31.1 | | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS | | XBRL Instance Document |
101.SCH | | XBRL Taxonomy Extension Schema |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase |
101.LAB | | XBRL Taxonomy Extension Label Linkbase |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
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