1
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934. For the quarterly period ended June 30, 1999.
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934. For the Transition period from to .
--------------- ---------------
Commission File Number 0-14714
Astec Industries, Inc.
(Exact Name of Registrant as Specified in its Charter)
Tennessee 62-0873631
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4101 Jerome Avenue, Chattanooga, Tennessee 37407
---------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(423) 867-4210
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
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 X NO
----- -----
Indicate the number of shares outstanding of each of the registrant's
classes of stock as of the latest practicable date.
Class Outstanding at August 10, 1999
----- ------------------------------
Common Stock, par value $0.20 19,096,516
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ASTEC INDUSTRIES, INC.
INDEX
Page Number
-----------
PART I - Financial Information
Item 1. Financial Statements-Unaudited
Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998 1
Consolidated Statements of Income
for the Three and Six Months Ended June 30,
1999 and 1998 2
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1999
and 1998 3
Notes to Unaudited Consolidated Financial
Statements 4
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 7
PART II - Other Information
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Items 14
Item 6. Exhibits and Reports on Form 8-K 14
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ASTEC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
ACCOUNT DESCRIPTION JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 5,675 $ 5,353
-------- --------
RECEIVABLES - NET 72,305 52,427
-------- --------
INVENTORIES 82,846 76,729
-------- --------
PREPAID EXPENSES AND OTHER 11,279 10,373
-------- --------
TOTAL CURRENT ASSETS 172,105 144,882
-------- --------
PROPERTY AND EQUIPMENT - NET 95,576 81,142
-------- --------
OTHER ASSETS 28,946 23,140
-------- --------
TOTAL ASSETS $296,627 $249,164
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
NOTES PAYABLE $ 87 $ 146
-------- --------
CURRENT MATURITIES OF LONG-TERM DEBT 500 500
-------- --------
ACCOUNTS PAYABLE - TRADE 32,545 27,418
-------- --------
OTHER ACCRUED LIABILITIES 35,243 34,953
-------- --------
TOTAL CURRENT LIABILITIES 68,375 63,017
-------- --------
LONG-TERM DEBT, LESS CURRENT MATURITIES 65,225 47,220
-------- --------
OTHER LONG-TERM LIABILITIES 9,610 6,269
-------- --------
TOTAL SHAREHOLDERS' EQUITY 153,417 132,658
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $296,627 $249,164
-------- --------
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ASTEC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30
1999 1998 1999 1998
----------- ----------- ----------- -----------
NET SALES $ 119,958 $ 108,124 $ 232,436 $ 196,288
----------- ----------- ----------- -----------
COST OF SALES 86,119 82,298 170,588 148,158
----------- ----------- ----------- -----------
GROSS PROFIT 33,839 25,826 61,848 48,130
----------- ----------- ----------- -----------
S,G, & A EXPENSES 15,830 12,841 29,770 25,514
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 18,009 12,985 32,078 22,616
----------- ----------- ----------- -----------
INTEREST EXPENSE 948 852 1,642 1,401
----------- ----------- ----------- -----------
OTHER INCOME, NET OF EXPENSE 1,219 127 1,862 300
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 18,280 12,260 32,298 21,515
----------- ----------- ----------- -----------
INCOME TAXES 7,125 4,871 12,576 8,567
----------- ----------- ----------- -----------
NET INCOME $ 11,155 $ 7,389 $ 19,722 $ 12,948
----------- ----------- ----------- -----------
EARNINGS PER COMMON SHARE *
BASIC $ 0.59 $ 0.39 $ 1.04 $ 0.69
-----------------------------------------------------
DILUTED $ 0.55 $ 0.38 $ 0.99 $ 0.67
-----------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING *
BASIC 19,051,990 18,784,456 19,020,445 18,727,790
-----------------------------------------------------
DILUTED 20,111,740 19,398,682 19,963,481 19,277,662
-----------------------------------------------------
* Restated to retroactively reflect a two-for-one
stock split that took effect on January 18, 1999.
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ASTEC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
JUNE JUNE
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 19,722 $ 12,948
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 5,511 3,855
PROVISION FOR DOUBTFUL ACCOUNTS 274 245
PROVISION FOR INVENTORY RESERVE 340 939
PROVISION FOR WARRANTY RESERVE 1,794 2,682
(GAIN) ON SALE OF FIXED ASSETS (21) (59)
PROVISION FOR PENSION RESERVE 121
(GAIN) ON SALE OF LEASE PORTFOLIO (204)
(INCREASE) DECREASE IN:
TRADE RECEIVABLES (11,124) (10,183)
FINANCE RECEIVABLES (16,505) (9,258)
INVENTORIES (6,457) 4,579
PREPAID EXPENSES AND OTHER (906) (6,699)
OTHER RECEIVABLES 296 (183)
OTHER NON-CURRENT ASSETS 1,001 (91)
INCREASE (DECREASE) IN:
ACCOUNTS PAYABLE 5,127 3,527
ACCRUED PRODUCT WARRANTY (1,242) (1,755)
OTHER ACCRUED LIABILITIES (796) 1,736
INCOME TAXES PAYABLE 3,876 8,644
TOTAL ADJUSTMENTS (19,036) (1,900)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 686 11,048
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALE OF PROPERTY
AND EQUIPMENT - NET 53 304
PROCEEDS FROM SALE OF LEASE PORTFOLIO 11,808 12,649
EXPENDITURES FOR PROPERTY AND EQUIPMENT (17,366) (8,037)
EXPENDITURES FOR EQUIPMENT ON OPERATING LEASE (13,841) (13,942)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (19,346) (9,026)
CASH FLOWS FROM FINANCING ACTIVITIES:
NET BORROWINGS (REPAYMENTS) UNDER
REVOLVING CREDIT AGREEMENT 17,946 13,111
PROCEEDS FROM ISSUANCE OF COMMON STOCK 1,036 390
NET CASH PROVIDED BY FINANCING ACTIVITIES 18,982 13,501
NET DECREASE IN CASH 322 15,523
CASH AT BEGINNING OF PERIOD 5,353 2,926
-------- --------
CASH AT END OF PERIOD $ 5,675 $ 18,449
-------- --------
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ASTEC INDUSTRIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to From 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles 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-month period ended June 30, 1999
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Astec Industries, Inc. and subsidiaries
annual report on Form 10-K for the year ended December 31, 1998.
.
NOTE 2. RECEIVABLES
Receivables are net of allowance for doubtful accounts of $1,680,000
and $1,459,000 for June 30, 1999 and December 31, 1998, respectively.
NOTE 3. INVENTORIES
Inventories are stated at the lower of first-in, first-out cost or
market and consist of the following: (in thousands)
June 30, December 31,
1999 1998
-------- ------------
Raw Materials $ 21,247 $ 35,275
Work-in-Process 21,987 18,138
Finished Goods 39,611 23,316
-------- ----------
Total $ 82,845 $ 76,729
======== ==========
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Property and equipment is net
of accumulated depreciation of $40,702,000 and $36,759,000 for June 30, 1999 and
December 31, 1998, respectively.
NOTE 5. EARNINGS PER SHARE
Basic and diluted earnings per share are calculated in accordance with
SFAS No. 128. Basic earnings per share exclude any dilutive effects of options,
warrants and convertible securities.
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Notes to Unaudited Financial Statements - Continued
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
----------- ----------- ----------- -----------
Numerator:
Net income $11,155,000 $ 7,389,000 $19,722,000 $12,948,000
Denominator:
Denominator for basic earnings per
share 19,051,990 18,784,456 19,020,445 18,727,790
Effect of dilutive securities:
Employee stock options 1,059,750 614,226 943,036 549,872
----------- ----------- ----------- -----------
Denominator for diluted earnings
per share 20,111,740 19,398,682 19,963,481 19,277,662
=========== =========== =========== ===========
Earnings per common share:
Basic $ 0.59 $ 0.39 $ 1.04 $ 0.69
Diluted $ 0.55 $ 0.38 $ 0.99 $ 0.67
=========== =========== =========== ===========
NOTE 6. COMPREHENSIVE INCOME
Total comprehensive income was $11,155,000 and $19,722,000 for the
three and six months ended June 30, 1999 and $7,389,000 and $12,948,000 for the
three and six months ended June 30, 1998.
NOTE 7. CONTINGENT MATTERS
Certain customers have financed purchases of Astec products through
arrangements in which the Company is contingently liable for customer debt
aggregating approximately $1,263,000 at June 30, 1999 and $1,271,000 at December
31, 1998.
NOTE 8. SEGMENT INFORMATION
Three months ended
June 30, 1999
------------------------------------------------------------
Hot-mix Aggregate Mobile Asphalt
Asphalt Processing Construction All
Plants Equipment Equipment Others Total
-------- ---------- -------------- -------- --------
Revenues from external customers $ 50,450 $ 39,544 $ 23,711 $ 6,253 $119,958
-------- ---------- -------------- -------- --------
Intersegment revenues 3,366 3,294 1 2,572 9,233
-------- ---------- -------------- -------- --------
Segment profit $ 7,725 $ 5,723 $ 4,970 $ (7,335) $ 11,083
-------- ---------- -------------- -------- --------
Three months ended
June 30, 1998
------------------------------------------------------------
Hot-mix Aggregate Mobile Asphalt
Asphalt Processing Construction All
Plants Equipment Equipment Others Total
-------- ---------- -------------- -------- --------
Revenues from external customers $ 46,331 $ 31,893 $ 19,307 $ 10,593 $108,124
-------- ---------- -------------- -------- --------
Intersegment revenues 3,318 1,978 0 (1,719) 3,577
-------- ---------- -------------- -------- --------
Segment profit $ 5,071 $ 4,172 $ 3,659 $ (6,078) $ 6,824
-------- ---------- -------------- -------- --------
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Notes to Unaudited Financial Statements - Continued
Six months ended
June 30, 1999
------------------------------------------------------------
Hot-mix Aggregate Mobile Asphalt
Asphalt Processing Construction All
Plants Equipment Equipment Others Total
-------- ---------- -------------- -------- --------
Revenues from external customers $100,150 $ 77,751 $ 41,214 $ 13,321 $232,436
-------- ---------- -------------- -------- --------
Intersegment revenues 5,780 6,210 1 3,729 15,720
-------- ---------- -------------- -------- --------
Segment profit $ 14,577 $ 11,167 $ 8,150 $(14,064) $ 19,830
-------- ---------- -------------- -------- --------
Six months ended
June 30, 1998
------------------------------------------------------------
Hot-mix Aggregate Mobile Asphalt
Asphalt Processing Construction All
Plants Equipment Equipment Others Total
-------- ---------- -------------- -------- --------
Revenues from external customers $ 91,267 $ 58,816 $ 32,260 $ 13,945 $196,288
-------- ---------- -------------- -------- --------
Intersegment revenues 6,127 3,414 2 2,169 11,712
-------- ---------- -------------- -------- --------
Segment profit $ 11,988 $ 7,146 $ 5,546 $(11,712) $ 12,983
-------- ---------- -------------- -------- --------
Reconciliations of the reportable segment totals for profit or loss to the
Company's consolidated totals are as follows:
Three months Six months
ended June 30, ended June 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
PROFIT:
Total profit for reportable segments $ 18,418 $ 12,902 $ 33,894 $ 24,680
-------- -------- -------- --------
Other profit (loss) (7,335) (6,078) (14,064) (11,697)
-------- -------- -------- --------
Equity in income of joint venture 9 74 52 96
-------- -------- -------- --------
Elimination of intersegment profit 63 491 (160) (131)
-------- -------- -------- --------
Total consolidated net income $ 11,155 $ 7,389 $ 19,722 $ 12,948
-------- -------- -------- --------
NOTE 9. LEGAL MATTERS
There have been no material developments in legal proceedings
previously reported. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Part I - Item 2 "Contingencies" of this
Report.
NOTE 10. SEASONALITY
Due to varied product lines, the Company's business has become less
seasonal during the past few years. Currently, approximately 50% to 55% of the
Company's business volume occurs during the first six months of the year.
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Item 2. Management's Discussion and Analysis Of Financial Condition And Results
Of Operations
When used in this report, press releases and elsewhere by management
or the Company from time to time, the words, "believes," "anticipates," and
"expects" and similar expressions are intended to identify forward-looking
statements that involve certain risks and uncertainties. A variety of factors
could cause actual results to differ materially from those anticipated in the
Company's forward-looking statements, some of which include market conditions
in the road building and related construction equipment industry, competition
in the Company's markets from existing and new competitors and the products or
services they provide, the ability to expand in existing markets and penetrate
new markets, federal and state legislation affecting infrastructure, and other
risk factors that are discussed from time to time in the Company's SEC reports.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date such statements are made. The
Company undertakes no obligations to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date such statements are made or to reflect
the occurrence of unanticipated events.
RESULTS OF OPERATIONS
For the three months ended June 30, 1999, net sales increased to
$119,958,000 from $108,124,000 for the three-months ended June 30, 1998,
representing a 10.9% increase. The acquisition of Johnson Crushers
International, Inc. during October 1998, accounted for approximately $8,051,000
of the increase in sales for the second quarter of 1999 compared to the second
quarter of 1998. The remainder of the increase in net sales for the second
quarter of 1999 compared to the second quarter of 1998 related mainly to sales
of mobile asphalt construction equipment. International sales for the second
quarter of 1999 decreased to $14,117,000, from $16,000,000 for the same period
of 1998.
Net sales for the six months ended June 30, 1999 increased
approximately 18.4% to $232,436,000 from $196,288,000 for the same period of
1998. For the six months ended June 30, 1999, approximately 46% of the increase
in net sales are attributable to Johnson Crushers International, Inc. The
remainder of the increase in net sales for the six months ended June 30, 1999
is primarily attributable to increased sales of mobile asphalt construction
equipment, secondly to both asphalt mixing plants and related components and
aggregate crushing equipment.
Gross profit for the quarter ended June 30, 1999 increased to
$33,839,000, from $25,826,000 for the quarter ended June 30, 1998, while the
gross profit percentage for the three months ended June 30, 1999 increased to
28.2% from 23.9% at June 30, 1998.
Gross profit for the six months ended June 30, 1999 was $61,848,000
compared to gross profit of $48,130,000 for the same period of 1998. The gross
profit percentage for the six months ended June 30, 1999 was 26.6% compared to
24.5% for the six months ended June 30, 1998. The increase in the gross profit
margin for the three and six months ended June 30, 1999 relates primarily to
the Company's initiation of several cost-reduction strategies to increase
profit margins on several product lines.
Selling, general, and administrative expenses for the second quarter
of 1999 were $15,830,000 or 13.2% of net sales, compared to $12,841,000 or
11.9% of net sales for the same period of 1998. Approximately 25% of the
increase in selling, general and administrative expenses for the quarter ended
June 30, 1999 compared to the same quarter in 1998, relates to the acquisition
of Johnson Crushers International, Inc. in October 1998.
Selling, general and administrative expenses for the six months ended
June 30, 1999 increased to $29,770,000, from $25,514,000 for the six months
ended June 30, 1998, an increase of $4,256,000, or 16.7%. Approximately 31% of
the increase in selling, general and administrative expenses for the six months
ended June 30, 1999 compared to the same period of 1998 related to Johnson
Crushers
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International, Inc. The remaining increase in selling, general and
administrative expenses for the three and six months ended June 30, 1999,
compared to the same prior year periods, relates primarily to increased sales
department expenses at the road paving and aggregate crushing equipment
companies and increased engineering department expenses at the asphalt mixing
plant subsidiary.
Interest expense increased to $948,000 for the quarter ended June 30,
1999 from $852,000 for the quarter ended June 30, 1998. Interest expense as a
percentage of net sales remained consistent at .8% for the quarters ended June
30, 1999 and June 30, 1998.
Interest expense for the six months ended June 30, 1999 compared to
the six months ended June 30, 1998 increased to $1,642,000 from $1,401,000,
respectively. The increase in interest expense for the three and six months
ended June 30, 1999 compared to the three and six months ended June 30, 1998,
is due mainly to increased borrowing under of the Company's revolving credit
facility primarily by the Company's captive finance company.
Other income, net of other expense, was $1,219,000, or 1.0% of net
sales for the quarter ended June 30, 1999, compared to other income, net of
other expense, of $127,000, or 0.1% of net sales for the quarter ended June 30,
1998. Other income, net of other expense for the six months ended June 30, 1999
was $1,862,000 compared to other income, net of other expense for the six
months ended June 30, 1998 of $300,000, an increase of $1,562,000. The increase
in Other income, net of other expense for the three and six months ended June
30, 1999 relates mainly to gains from lease portfolio sales and income from
selling an interest swap to First Chicago Bank, along with other financing
service related fee income.
Income tax expense for the second quarter of 1999 increased to
$7,125,000 from $4,871,000 at June 30, 1998, an increase of $2,254,000 or
46.3%. Tax expense is 5.9% and 4.5% of net sales for the quarters ended June
30, 1999 and 1998, respectively. The effective tax rate for the second quarter
of 1999 and 1998, respectively, was 39%.
Backlog of orders at June 30, 1999 was $82,816,000 compared to
$69,895,000 at June 30, 1998. For comparison, the June 30, 1998 backlog of
Johnson Crushers International, Inc. was included in the June 30, 1998 backlog.
The majority of the increase in the backlog at June 30, 1999 compared to that
of June 30, 1998 related to a significant increase in domestic orders for
asphalt mixing plants and related components and aggregate processing
equipment.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had working capital of $103,730,000
compared to $89,786,000 at June 30, 1998.
Total short-term borrowings, including current maturities of long-term
debt, were $587,000 at June 30, 1999 compared to $500,000 at June 30, 1998. The
current portion of outstanding Industrial Development Revenue Bonds account for
$500,000 of the current maturities of long-term debt at June 30, 1999.
Long-term debt, less current maturities was $65,225,000 at June 30, 1999 and
$48,341,000 at June 30, 1998. The increase in outstanding debt at June 30, 1999
compared to the same period of 1998 is due to utilization of the revolving line
of credit. The captive finance company's long-term debt for lease financing and
capital expenditures increased by approximately $10,200,000 from the same time
in the prior year. In addition, the aggregate processing subsidiary located in
Eugene, Oregon purchased a larger manufacturing facility to provide adequate
facilities in which to expand operations.
Capital expenditures in 1999 for plant expansion and for further
modernization of the Company's manufacturing processes are expected to approach
$26,000,000. The Company expects to finance these expenditures using both the
revolving credit facility and internally generated funds. Capital expenditures
for the six months ended June 30, 1999 were $17,366,000.
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During the second quarter of 1999 the Company increased its available
unsecured revolving credit with First Chicago NBD from $70,000,000 to
$90,000,000, retaining the original expiration date of November 22, 2002. At
June 30, 1999, the Company was utilizing $45,025,000 of the available credit.
Principal covenants under the First Chicago credit agreement include (i) the
maintenance of certain levels of net worth and compliance with certain net
worth, leverage and interest coverage ratios, (ii) a limitation on capital
expenditures and rental expense, (iii) a prohibition against dividends, and
(iv) a prohibition on large acquisitions except upon the consent of the
lenders.
As part of the Company's $90,000,000 revolving credit facility, Astec
Financial Services, Inc. has a segregated portion of $40,000,000. At June 30,
1999, Astec Financial Services, Inc. had utilized $32,025,000 of this line,
which is included in the above stated utilization. Advances under this line of
credit are limited to "Eligible Receivables" of Astec Financial Services, Inc.
as defined in the credit agreement. The Company and Astec Financial Services
were in compliance with all financial covenants related to the line of credit
at June 30, 1999.
YEAR 2000
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. The term "Year 2000" is a
general term used to describe the various problems that may result from the
improper processing of dates and date-sensitive calculations by computers and
other machinery as the year 2000 is approached and reached. Many computer
systems process dates using two digits rather than four to define a specific
year. Absent corrective actions, a program may recognize a date using "00" as
the year 1900 rather than the year 2000. Such an occurrence could result in
system failures or miscalculations causing disruptions to various activities.
Software failures due to processing errors potentially arising from
calculations using the Year 2000 date are a known risk.
Management presently believes that with modifications or replacements
of existing software and certain hardware, the Year 2000 issue will be
mitigated. However, in the unlikely event such modifications and replacements
are not made, or are not completed timely, the Year 2000 issue could have a
material impact on the operations of the Company.
The Company's plan to resolve the Year 2000 issue involves four
phases: assessment, remediation, testing and implementation. The Company has
completed its assessment of all systems that could be significantly affected by
the Year 2000.
A limited amount of operating equipment, mainly used in manufacturing,
is date sensitive. Manufacturers of the affected equipment were contacted and
the Company has either already installed update modifications or has the
appropriate modification on order to install and test prior to September 30,
1999. The remediation phase of updating the operating equipment is more than
95% complete, and the testing and implementation phases of modifying the
operating equipment is approximately 80% complete.
The Company manufactures products that use either internally or
externally developed software that is susceptible to Year 2000. Various
measures were taken to notify and assist customers to become Year 2000
compliant. Although customer response determines the readiness for Year 2000 of
the Company's products already in the hands of customers, the Company is 100%
complete in the remediation, testing and implementation phases of modifying
product systems for Year 2000.
The Company queried its significant suppliers and other external
agents (no external agents share information systems with the Company) as to
their readiness for the Year 2000. The assessment phase of querying significant
third party associations is 100% complete. The Company is more than 90%
complete in remediation, testing and implementation of various processes with
significant suppliers and external agents.
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The total cost of the Year 2000 project is estimated to be
approximately $3,000,000 and is being funded through operating cash flows.
During 1998, the Company incurred approximately $2,200,000, related to all
phases of the Year 2000 project. The originally budgeted capitalized
expenditures for 1999 were estimated at $620,000. Currently, with additional
information, and considering additional software and hardware requirements, the
Company expects 1999 capital expenditures related to the Year 2000 project to
reach $1,000,000. The related project costs expected to be expensed have
decreased from approximately $180,000 to $170,000.
Management of the Company believes it has an effective program in
place to timely resolve the Year 2000 issue. In the event that the company does
not complete any additional phases, the Company could lose revenues due to
inability to manufacture its product to specified quality or deliver equipment
as scheduled.
Year 2000 issues could also hinder the Company's ability to provide
customer technical support or to provide customer parts orders as quickly as
necessary, among other potential risks. In addition, the Company could be
subject to litigation for computer systems product failure or for failure to
properly date business records. Also, for applications using software and
systems dependent on outside technical support, depending upon demand,
technical support may not be available with sufficient time to prevent adverse
effects on operations. In the unlikely event any of the situations described
above occur, the amount of potential liability and lost revenues cannot be
reasonably estimated at this time.
The Company does not have a fully documented contingency plan in place
in the event it does not complete all phases of the Year 2000 project, but it
has begun to document prudent preventive measures that can be undertaken to
secure operational capabilities in case of system failure. These measures
include identifying secondary sources for raw materials, goods and services;
identifying alternate manufacturing routing methods; stocking additional
critical raw materials; printing of paper documents and reports as reference
tools; and performing disaster recovery testing for potential power
interruptions or machine failures. The Company plans to evaluate the status of
completion of the Year 2000 project during August and September 1999 and
continue to set contingency plans mainly for external factors beyond the
Company's immediate control which could impact operations. These external
factors could include interruptions related to energy, raw materials or
transportation.
The Company designates each of the statements made by it in this
section entitled Year 2000 as a Year 2000 Readiness Disclosure. Such statements
are made pursuant to the Year 2000 Information and Readiness Disclosure Act.
CONTINGENCIES
The Company is engaged in certain pending litigation involving claims
or other matters arising in the ordinary course of business. Most of these
claims involve product liability or other tort claims for property damage or
personal injury against which the Company is insured. As a part of its
litigation management program, the Company maintains general liability
insurance covering product liability and other similar tort claims providing
the Company coverage of $8,000,000 subject to a substantial self-insured
retention under the terms of which the Company has the right to coordinate and
control the management of its claims and the defense of these actions.
Management has reviewed all claims and lawsuits and, upon the advice
of its litigation counsel, has made provision for any estimable losses.
Notwithstanding the foregoing, the Company is unable to predict the ultimate
outcome of any outstanding claims and lawsuits.
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RISK FACTORS
Acquisition Strategy; Integration of Acquired Businesses. As part of
its growth strategy, the Company intends to evaluate the acquisitions of other
companies, assets or product lines that would complement or expand its existing
businesses or broaden its customer relationships. Although the Company conducts
due diligence reviews of potential acquisition candidates, the Company may not
be able to identify all material liabilities or risks related to potential
acquisition candidates. There can be no assurance that the Company will be able
to locate and acquire any business, retain key personnel and customers of an
acquired business or integrate any acquired business successfully, including
its recent acquisitions.
Competition. The Company faces strong competition in price, service
and product performance in each of its product lines. While the Company does
not compete with any one manufacturer in all of its product lines, it does
compete as to certain products with both large publicly held companies with
resources significantly greater than the Company and various smaller
manufacturers. Furthermore, demand for the Company's products is generally
affected by economic conditions in the United States. A weak domestic economy
could result in increased competition and reduced margins on sales of the
Company's products.
Imports do not constitute significant competition for most of the
Company's products marketed in the United States. In connection with its
international sales, however, the Company generally competes with foreign
manufacturers, which may have a local or regional presence in the market, that
the Company is attempting to penetrate. The competition of foreign
manufacturers and weak foreign economies could have a material impact on the
Company's international sales and results of operations.
Regulation. The Company does not operate within a highly regulated
industry. However, air pollution equipment manufactured by the Company
principally for hot mix asphalt plants must comply with certain performance
standards promulgated by the Environmental Protection Agency under the Clean
Air Act applicable to "new sources" or new plants. While the Company's products
are designed to meet or exceed current regulatory requirements and applicable
state pollution standards and environmental protection laws, there can be no
assurance that any future changes to such requirements will not adversely
affect the Company. In addition, due to the size and weight of certain
component equipment, which the Company manufacturers, the Company and its
customers sometimes confront, conflicting state regulations on maximum weights
transportable on highways and roads. Also, some states have regulations
governing the operation of the Company's component equipment, including asphalt
mixing plants and soil remediation equipment, and most states have regulations
relating to the accuracy of weights and measures which affect some of the
control systems manufactured by the Company.
Year 2000 Compliance. Many existing computer systems and applications,
and other control devices use only two digits to identify a year in the date
field, without considering the impact of the upcoming change in the century. As
a result, such systems and applications could fail or create erroneous results
unless corrected so that they can process data related to the year 2000. The
Company relies on its computer systems, applications and devices in operating
and monitoring all major aspects of its business. The Company has for some time
been pursuing a Year 2000 compliance program. The Company believes that with
modifications or replacements of existing software and certain hardware, the
Year 2000 issue will be mitigated. However, if the Company is unable to make
the required modifications and replacements, or are if they are not made on a
timely basis, the Year 2000 issue could have a material impact on the
operations of the Company.
Product Liability. The Company is engaged in a business that could
expose it to possible liability claims for personal injury or property damage
due to alleged design or manufacturing defects in the Company's products. The
Company believes that it meets existing professional specification standards
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recognized or required in the industries in which it operates. Although the
Company currently maintains product liability coverage which it believes is
adequate for the continued operation of its business, such insurance may prove
inadequate or become difficult to obtain or unobtainable in the future on terms
acceptable to the Company.
Cyclicality in Operating Results. The Company's business is somewhat
cyclical with operating results typically affected by general economic
conditions and other factors affecting the construction industry as a whole.
Historically, during periods of a weak domestic economy, economic pressures have
adversely affected the construction industry and have resulted in increased
competition and reduced margins on sales of the Company's products.
International Exposure. For the first six months of 1999,
international sales represented approximately 10.5% of the Company's total
revenues. The Company anticipates that international operations will continue
to account for a portion of its business for the foreseeable future. As a
result, the Company may be subject to certain risks, including difficulty in
managing distributors and dealers, adverse tax consequences, political and
economic instability of governments, and difficulty in accounts receivable
collection. The Company is subject to the risks associated with the imposition
of protective legislation and regulations, including those relating to import
or export or otherwise resulting from trade or foreign policy, in the nations
in which it now or in the future will conduct business. The Company cannot
predict whether quotas, duties, taxes or other charges or restrictions will be
implemented by the U.S. or any other country upon the import or export of the
Company's products. There can be no assurance that any of these factors, or the
adoption of restrictive policies, will not have a material adverse effect on
the Company's business, financial condition and results of operations.
Intellectual Property Matters. The Company holds numerous patents
covering technology and applications related to various products, equipment and
systems, and numerous trademarks and trade names registered with the U.S.
Patent and Trademark Office and in various foreign countries. There can be no
assurance as to the breadth or degree of protection that existing or future
patents or trademarks may afford the Company, or that any pending patent or
trademark applications will result in issued patents or trademarks, or that the
Company's patents, registered trademarks or patent applications, if any, will
be upheld if challenged, or that competitors will not develop similar or
superior methods or products outside the protection of any patents issued,
licensed or sublicensed to the Company. Although the Company believes that none
of its patents, technologies, products or trademarks infringe upon the patents,
technologies, products or trademarks of others, it is possible that its
existing patent, trademark or other rights may not be valid or that
infringement of existing or future patents, trademarks or proprietary rights
may occur. In the event that the Company's products are deemed to infringe upon
the patent or proprietary rights of others, the Company could be required to
modify the design of its products, change the name of its products or obtain a
license for the use of certain technologies incorporated into its products.
There can be no assurance that the Company would be able to do any of the
foregoing in a timely manner, upon acceptable terms and conditions, or at all,
and the failure to do so could have a material adverse effect on the Company.
Dependence on Key Personnel. The success of the Company's business
will continue to depend substantially upon the efforts, abilities and services
of its executive officers and certain other key employees. The loss of one or
more key employees could adversely affect the Company's operations. The
Company's ability to attract and retain qualified engineers and other
professionals, either through direct hiring, or acquisition of other businesses
employing such professionals, will also be an important factor in determining
the Company's future success.
Anti-takeover Provisions. The Company's charter and its bylaws contain
various provisions that may have the affect, either alone or in combination
with each other, of making more difficult or
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discouraging a business combination or an attempt to obtain control of the
Company that is deemed undesirable by the Board of Directors. These provisions
include (i) the right of the Board of Directors to issue shares of Preferred
Stock and one or more series and designate the number of shares of each such
series and the relative rights and preferences of such series, including voting
rights, terms of redemption, redemption prices and conversion rights without
further shareholder approval; (ii) a classified Board of Directors elected in
three year staggered terms; (iii) prohibitions on the right of shareholders to
remove directors other than for cause, and any such removal requiring at least
two-thirds of the total number of shares issued and outstanding; (iv)
requirements for advanced notice of actions proposed by shareholders for
consideration at meetings of the shareholders; (v) limitations on the right of
shareholders to call a special meeting of the shareholders or from acting by
written consent in lieu of a meeting unless all shareholders entitled to vote
on such action consent to taking such action without a meeting; and (vi) an
election to be governed by the Tennessee Control Share Acquisition Act. The
Company's charter and bylaws also limit the liability of directors in certain
cases and provide for the Company to indemnify its directors and officers to
the fullest extent permitted by applicable law. In addition, as a Tennessee
Corporation, the Company is subject to the Tennessee Business Combination Act,
which may have the affect of discouraging a non-negotiated bid or proposal to
acquire the Company.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments in the legal proceedings
previously reported by the registrant since the filing of its Annual Report on
Form 10-K for the year ended December 31, 1998. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Contingencies"
in Part I - Item 2 of this Report.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company held on April 22,
1999, the following matters were brought before and voted upon by the
stockholders:
1. The proposal to elect the following individuals to serve as Class I
Directors until the annual meeting of shareholders in 2002, or in the case of
each director until his successor is duly elected and qualified:
Authority Granted Authority Withheld
----------------- ------------------
William D. Gehl 14,957,304 475,084
Ronald W. Dunmire 14,957,304 475,084
Robert Dressler 14,957,304 475,084
Item 5. Other Items
Shareholder Proposals
The proxy statement solicited by the Board of Directors of the Company
with respect to the 2000 Annual Meeting of Shareholders will confer
discretionary authority on the proxies named therein to vote on any shareholder
proposals intended to be presented for consideration at such Annual Meeting
that are submitted to the Company after November 22, 1999.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
- ----------- -----------
3.1 Restated Charter of the Company (incorporated by reference to
the Company's Registration Statement on Form S-1, effective
June 18, 1986, File No. 33-5348).
3.2 Articles of Amendment to the Restated Charter of the Company,
effective September 12, 1988 (incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1988, File No. 0-14714).
3.3 Articles of Amendment to the Restated Charter of the Company,
effective June 8, 1989 (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1989, File No. 0-14714).
3.4 Articles of Amendment to the Restated Charter of the Company,
effective January 15, 1999.
3.5 Amended and Restated Bylaws of the Company, adopted March 14,
1990 (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1989,
File No. 0-14714).
4.1 Trust Indenture between City of Mequon and Firstar Trust
Company, as Trustee, dated as of February 1, 1994
(incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1993, File No.
0-14714).
4.2 Indenture of Trust, dated April 1, 1994, by and between
Grapevine Industrial Development Corporation and Bank One,
Texas, NA, as Trustee (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993, File No. 0-14714).
4.3 Shareholder Protection Rights Agreement, dated December 22,
1995 (incorporated by reference to the Company's Current
Report on Form 8-K dated December 22, 1995, File No.
0-14714).
10.1 Second Amendment to Second Amended and Restated Credit
Agreement dated as of June 3, 1999 by and among Astec
Industries, Inc., Astec Financial Services, Inc., the
financial institutions parties thereto in their capacities as
lenders and The First National Bank of Chicago, as agent.
27 Financial Data Schedule (EDGAR Filing Only).
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the quarter ended June
30, 1998.
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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)
8/12/99 /s/ J. Don Brock
-------------- -----------------------------------
Date J. Don Brock
Chairman of the Board
and President
8/12/99 /s/ F. McKamy Hall
-------------- -----------------------------------
Date F. McKamy Hall
Vice President and Chief
Financial Officer
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Restated Charter of the Company (incorporated by reference to
the Company's Registration Statement on Form S-1, effective
June 18, 1986, File No. 33-5348).
3.2 Articles of Amendment to the Restated Charter of the Company,
effective September 12, 1988 (incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1988, File No. 0-14714).
3.3 Articles of Amendment to the Restated Charter of the Company,
effective June 8, 1989 (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1989, File No. 0-14714).
3.4 Articles of Amendment to the Restated Charter of the Company,
effective January 15, 1999.
3.5 Amended and Restated Bylaws of the Company, adopted March 14,
1990 (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1989,
File No. 0-14714).
4.1 Trust Indenture between City of Mequon and Firstar Trust
Company, as Trustee, dated as of February 1, 1994
(incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1993, File No.
0-14714).
4.2 Indenture of Trust, dated April 1, 1994, by and between
Grapevine Industrial Development Corporation and Bank One,
Texas, NA, as Trustee (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993, File No. 0-14714).
4.3 Shareholder Protection Rights Agreement, dated December 22,
1995 (incorporated by reference to the Company's Current
Report on Form 8-K dated December 22, 1995, File No.
0-14714).
10.1 Second Amendment to Second Amended and Restated Credit
Agreement dated as of June 3, 1999 by and among Astec
Industries, Inc., Astec Financial Services, Inc., the
financial institutions parties thereto in their capacities as
lenders and The First National Bank of Chicago, as agent.
27 Financial Data Schedule (EDGAR Filing Only).
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