Item
1. Financial Statements
Astec
Industries, Inc. and Subsidiaries
|
|
|
|
(in
thousands)
|
|
|
|
September
30, 2007
(unaudited)
|
|
|
December
31,
2006
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
48,164
|
|
|
$
|
44,878
|
|
Trade
receivables, net
|
|
|
82,036
|
|
|
|
64,591
|
|
Other
receivables
|
|
|
1,288
|
|
|
|
2,083
|
|
Inventories
|
|
|
201,982
|
|
|
|
157,836
|
|
Prepaid
expenses and other
|
|
|
4,675
|
|
|
|
5,750
|
|
Deferred
income tax assets
|
|
|
9,350
|
|
|
|
7,880
|
|
Total
current assets
|
|
|
347,495
|
|
|
|
283,018
|
|
Property
and equipment, net
|
|
|
137,312
|
|
|
|
113,914
|
|
Goodwill
|
|
|
25,754
|
|
|
|
19,384
|
|
Other
|
|
|
16,935
|
|
|
|
5,547
|
|
Total
assets
|
|
$
|
527,496
|
|
|
$
|
421,863
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
55,303
|
|
|
$
|
42,561
|
|
Accrued
product warranty
|
|
|
8,021
|
|
|
|
7,184
|
|
Customer
deposits
|
|
|
34,917
|
|
|
|
22,486
|
|
Accrued
payroll and related liabilities
|
|
|
9,686
|
|
|
|
9,298
|
|
Accrued
loss reserves
|
|
|
2,607
|
|
|
|
2,976
|
|
Income
taxes payable
|
|
|
3,421
|
|
|
|
671
|
|
Other
accrued liabilities
|
|
|
24,859
|
|
|
|
19,693
|
|
Total
current liabilities
|
|
|
138,814
|
|
|
|
104,869
|
|
Deferred
income tax liabilities
|
|
|
6,075
|
|
|
|
6,332
|
|
Accrued
retirement benefit costs
|
|
|
2,225
|
|
|
|
3,000
|
|
Other
|
|
|
14,346
|
|
|
|
10,797
|
|
Minority
interest
|
|
|
833
|
|
|
|
699
|
|
Total
shareholders' equity
|
|
|
365,203
|
|
|
|
296,166
|
|
Total
liabilities and shareholders' equity
|
|
$
|
527,496
|
|
|
$
|
421,863
|
|
See
Notes
to Unaudited Condensed Consolidated Financial Statements
Astec
Industries, Inc. and Subsidiaries
|
|
|
|
(in
thousands, except per-share and share amounts)
|
|
(unaudited)
|
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
sales
|
|
$
|
206,239
|
|
|
$
|
171,470
|
|
|
$
|
648,216
|
|
|
$
|
548,455
|
|
Cost
of sales
|
|
|
157,678
|
|
|
|
130,427
|
|
|
|
486,339
|
|
|
|
414,835
|
|
Gross
profit
|
|
|
48,561
|
|
|
|
41,043
|
|
|
|
161,877
|
|
|
|
133,620
|
|
Selling,
general, administrative and engineering
expenses
|
|
|
31,926
|
|
|
|
25,270
|
|
|
|
92,774
|
|
|
|
80,237
|
|
Income
from operations
|
|
|
16,635
|
|
|
|
15,773
|
|
|
|
69,103
|
|
|
|
53,383
|
|
Interest
expense
|
|
|
149
|
|
|
|
421
|
|
|
|
765
|
|
|
|
1,268
|
|
Other
income, net of expense
|
|
|
638
|
|
|
|
519
|
|
|
|
2,038
|
|
|
|
921
|
|
Income
before income taxes and minority interest
|
|
|
17,124
|
|
|
|
15,871
|
|
|
|
70,376
|
|
|
|
53,036
|
|
Income
taxes
|
|
|
5,482
|
|
|
|
5,807
|
|
|
|
24,812
|
|
|
|
19,666
|
|
Income
before minority interest
|
|
|
11,642
|
|
|
|
10,064
|
|
|
|
45,564
|
|
|
|
33,370
|
|
Minority
interest
|
|
|
68
|
|
|
|
38
|
|
|
|
151
|
|
|
|
82
|
|
Net
income
|
|
$
|
11,574
|
|
|
$
|
10,026
|
|
|
$
|
45,413
|
|
|
$
|
33,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.52
|
|
|
$
|
0.47
|
|
|
$
|
2.08
|
|
|
$
|
1.56
|
|
Diluted
|
|
$
|
0.51
|
|
|
$
|
0.46
|
|
|
$
|
2.03
|
|
|
$
|
1.52
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,116,275
|
|
|
|
21,520,512
|
|
|
|
21,881,565
|
|
|
|
21,383,889
|
|
Diluted
|
|
|
22,581,075
|
|
|
|
21,927,051
|
|
|
|
22,393,677
|
|
|
|
21,960,133
|
|
See
Notes
to Unaudited Condensed Consolidated Financial Statements
Astec
Industries, Inc. and Subsidiaries
|
|
|
|
(in
thousands-unaudited)
|
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
45,413
|
|
|
$
|
33,288
|
|
Adjustments
to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
11,136
|
|
|
|
8,686
|
|
Provision
for doubtful accounts
|
|
|
327
|
|
|
|
457
|
|
Provision
for inventory reserve
|
|
|
2,174
|
|
|
|
2,827
|
|
Provision
for warranty reserve
|
|
|
9,105
|
|
|
|
9,318
|
|
Deferred
compensation provision (benefit)
|
|
|
2,194
|
|
|
|
(864
|
)
|
Purchase/sale
of trading security by supplemental executive retirement plan,
net
|
|
|
(1,656
|
)
|
|
|
(443
|
)
|
Stock-based
payments
|
|
|
1,395
|
|
|
|
470
|
|
Tax
benefit from stock option exercise
|
|
|
(4,269
|
)
|
|
|
(2,639
|
)
|
Deferred
income tax benefit
|
|
|
(2,414
|
)
|
|
|
(530
|
)
|
(Gain)
Loss on sale and disposition of fixed assets
|
|
|
16
|
|
|
|
(21
|
)
|
Minority
interest in earnings of subsidiary
|
|
|
151
|
|
|
|
(82
|
)
|
(Increase)
decrease in:
|
|
|
|
|
|
|
|
|
Trade
and other receivables
|
|
|
(6,862
|
)
|
|
|
(15,752
|
)
|
Inventories
|
|
|
(33,784
|
)
|
|
|
(18,762
|
)
|
Prepaid
expenses and other
|
|
|
1,323
|
|
|
|
4,729
|
|
Other
non-current assets
|
|
|
1,124
|
|
|
|
(1,073
|
)
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
7,702
|
|
|
|
(432
|
)
|
Accrued
product warranty
|
|
|
(8,783
|
)
|
|
|
(7,830
|
)
|
Customer
deposits
|
|
|
12,282
|
|
|
|
1,362
|
|
Income
taxes payable
|
|
|
6,864
|
|
|
|
5,252
|
|
Accrued
loss reserves
|
|
|
(370
|
)
|
|
|
1,167
|
|
Other
accrued liabilities
|
|
|
3,962
|
|
|
|
3,590
|
|
Net
cash provided by operating activities
|
|
|
47,030
|
|
|
|
22,718
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of Peterson, Inc., net of cash acquired of $1,702
|
|
|
(19,627
|
)
|
|
|
-
|
|
Expenditures
for property and equipment
|
|
|
(30,628
|
)
|
|
|
(23,102
|
)
|
Purchase
of investment securities
|
|
|
(6,892
|
)
|
|
|
-
|
|
Proceeds
from sale of property and equipment
|
|
|
174
|
|
|
|
916
|
|
Cash
paid for acquisition of minority shares of subsidiary
|
|
|
(106
|
)
|
|
|
(197
|
)
|
Cash
received from sale of minority shares of subsidiary
|
|
|
72
|
|
|
|
288
|
|
Net
cash used by investing activities
|
|
|
(57,007
|
)
|
|
|
(22,095
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayment
of loan assumed in purchase of Peterson, Inc.
|
|
|
(7,500
|
)
|
|
|
-
|
|
Tax
benefit from stock option exercise
|
|
|
4,269
|
|
|
|
2,639
|
|
Purchase/sale
of company shares by supplemental executive retirement plan,
net
|
|
|
1,468
|
|
|
|
15
|
|
Proceeds
from issuance of common stock
|
|
|
13,619
|
|
|
|
9,201
|
|
Net
cash provided by financing activities
|
|
|
11,856
|
|
|
|
11,855
|
|
Effect
of exchange rate changes on cash
|
|
|
1,407
|
|
|
|
(777
|
)
|
Net
increase in cash and cash equivalents
|
|
|
3,286
|
|
|
|
11,701
|
|
Cash
and cash equivalents at beginning of period
|
|
|
44,878
|
|
|
|
22,598
|
|
Cash
and cash equivalents at end of period
|
|
$
|
48,164
|
|
|
$
|
34,299
|
|
See
Notes
to Unaudited Condensed Consolidated Financial Statements
Astec
Industries, Inc. and Subsidiaries
|
|
|
|
For
the Nine Months Ended September 30, 2007
|
|
(
in thousands, except shares)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
Shares
|
|
|
Common
Stock
Amount
|
|
|
Additional
Paid in Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other Comprehensive Income
|
|
|
Company
Shares Held by SERP
|
|
|
Total
Shareholders’ Equity
|
|
Balance
December
31,
2006
|
|
|
21,696,374
|
|
|
$
|
4,339
|
|
|
$
|
93,760
|
|
|
$
|
197,661
|
|
|
$
|
2,487
|
|
|
$
|
(2,081
|
)
|
|
$
|
296,166
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,413
|
|
|
|
|
|
|
|
|
|
|
|
45,413
|
|
Other
comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,916
|
|
|
|
|
|
|
|
2,916
|
|
Change
in minority
ownership
of
subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
(4
|
)
|
Change
in
unrecognized
pension
and
post retirement
benefit
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
25
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,350
|
|
Stock
incentive plan
expense,
gross
|
|
|
|
|
|
|
|
|
|
|
1,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,395
|
|
FIN
48 adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
(65
|
)
|
Exercise
of stock
options
and stock to directors, including
tax
benefits
|
|
|
595,877
|
|
|
|
119
|
|
|
|
17,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,889
|
|
SERP
transactions, net
|
|
|
|
|
|
|
|
|
|
|
1,038
|
|
|
|
|
|
|
|
|
|
|
|
430
|
|
|
|
1,468
|
|
Balance,
September
30,
2007
|
|
|
22,292,251
|
|
|
$
|
4,458
|
|
|
$
|
113,963
|
|
|
$
|
243,009
|
|
|
$
|
5,424
|
|
|
$
|
(1,651
|
)
|
|
$
|
365,203
|
|
See
Notes
to Unaudited Condensed Consolidated Financial Statements
ASTEC
INDUSTRIES, INC. AND SUBSIDIARIES
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 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 periods
ended September 30, 2007 are not necessarily indicative of the results that
may
be expected for the year ending December 31, 2007. 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. and subsidiaries Annual Report on Form 10-K for the year ended December
31,
2006.
The
condensed consolidated balance
sheet at December 31, 2006 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements.
Certain
reclassifications were made to
the prior year presentation to conform to the current year
presentation. 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,
2006.
Recent
Accounting Pronouncements
In
July 2006, the FASB issued FASB
Interpretation 48, “Accounting for Uncertainty in Income Taxes: an
interpretation of FASB Statement No. 109, Accounting for Income Taxes” (FIN
48). FIN 48 defines a criterion that an income tax position would
have to meet for some or all of the benefit of that position to be recognized
in
an entity’s financial statements. FIN 48 requires that the cumulative
effect of applying its provisions be reported as an adjustment to retained
earnings at the beginning of the period in which it is adopted. FIN
48 is effective for fiscal years beginning after December 15, 2006 and the
Company began applying its provisions effective January 1, 2007. The
impact of adopting this statement is described in Note 7.
In
September 2006, the FASB issued SFAS
No. 157, “Fair Value Measurements” (SFAS No. 157), which provides guidance on
how to measure assets and liabilities that use fair value. SFAS No.
157 will apply whenever another US GAAP standard requires (or permits) assets
or
liabilities to be measured at fair value but does not expand the use of fair
value to any new circumstances. This standard also will require
additional disclosures in both annual and quarterly reports. SFAS No.
157 will be effective for financial statements issued for fiscal years beginning
after November 15, 2007, and the Company will begin applying its provisions
effective January 1, 2008. The Company has not yet determined the
impact, if any, that the implementation of this statement will have on the
Company’s financial statements.
In
February 2007, the FASB issued SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities”. This statement allows entities to voluntarily choose,
at specified election dates, to measure many financial assets and financial
liabilities (as well as certain nonfinancial instruments that are similar
to
financial instruments) at fair value. The election is made on an
instrument-by-instrument basis and is irrevocable. SFAS No. 159 is
effective for an entity’s fiscal year that begins after November 15, 2007, and
the Company will begin applying its provisions effective January 1,
2008. The Company has not yet determined the impact, if any, the
implementation of this statement will have on the Company’s financial
statements.
Note
2. Stock-based Compensation
Under
terms of the Company’s stock
option plans, officers and certain other employees may be granted options
to
purchase the Company’s common stock at no less than 100% of the market price on
the date the option is granted. The Company has reserved shares of
common stock for exercise of outstanding non-qualified options and incentive
options of officers and employees of the Company and its subsidiaries at
prices
determined by the Board of Directors. 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 under
the Non-employee Directors Stock Incentive Plan and the Executive Officer
Annual
Bonus Equity Election Plan vest and become fully exercisable
immediately. Generally, other options granted vest over 12
months. All stock options have a ten-year term. All granted options
were vested prior to December 31, 2006, therefore no stock option expense
was
recorded in the nine months ended September 30, 2007, and there were no
unrecognized compensation costs related to stock options previously granted
as
of that date. The Company recorded stock option expense of $21,000 and $381,000
in the three and nine month periods ended September 30, 2006,
respectively.
In
August 2006, the Compensation
Committee of the Board of Directors implemented a five-year plan to award
key
members of management restricted stock units each year. The details of the
plan
were formulated under the 2006 Incentive Plan approved by the Company’s
shareholders in their annual meeting held in April, 2006. The plan allows
up to
700,000 shares to be granted to employees. Units granted each year
will be determined based upon the performance of individual subsidiaries
and
consolidated annual financial performance. Each award will vest at the end
of
five years from the date of grant, or at the time a recipient reaches age
65, if
earlier. On March 8, 2007 management was granted 65,500 restricted stock
units, net of forfeitures, for preformance during 2006. It is anticipated
that an additional 64,900 units will be granted in March 2008 for performance
in
2007. Based upon the March 8, 2007 fair value of $38.76 for the 65,500
units and the September 28, 2007 fair value of $57.45 for the 64,900 units,
$4,140,000 of compensation costs will be recognized in future periods through
2013. The fair value of the 64,900 restricted stock units will be adjusted
quarterly to the period-end market value of the Company’s stock until the units
are actually granted, which is expected to be in March, 2008. Compensation
expense of $485,000 and $1,395,000 has been recorded in the three and nine
month
periods ended September 30, 2007, respectively, to reflect the fair value
of the
130,400 total shares amortized over the portion of the vesting period occurring
during the three and nine month periods ended September 30, 2007.
Note
3. Receivables
Receivables
are net of allowance for
doubtful accounts of $1,732,000 and $1,781,000 as of September 30, 2007 and
December 31, 2006, respectively.
Note
4. Inventories
Inventories
are stated at the lower of
first-in, first-out cost or market and consist of the following:
|
|
(in
thousands)
|
|
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
Raw
Materials
|
|
$
|
97,034
|
|
|
$
|
77,229
|
|
Work-in-Process
|
|
|
51,972
|
|
|
|
43,227
|
|
Finished
Goods
|
|
|
42,695
|
|
|
|
27,993
|
|
Used
Equipment
|
|
|
10,281
|
|
|
|
9,387
|
|
Total
|
|
$
|
201,982
|
|
|
$
|
157,836
|
|
Note
5. Earnings per Share
Basic
and diluted earnings per share
are calculated in accordance with SFAS No. 128 and SFAS No.
123I. Basic earnings per share exclude any dilutive effects of stock
options and restricted stock units.
The
following table sets forth the
computation of basic and diluted earnings per share:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
11,574,000
|
|
|
$
|
10,026,000
|
|
|
$
|
45,413,000
|
|
|
$
|
33,288,000
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share
|
|
|
22,116,275
|
|
|
|
21,520,512
|
|
|
|
21,881,565
|
|
|
|
21,383,889
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock option & incentive plans
|
|
|
379,791
|
|
|
|
287,427
|
|
|
|
414,218
|
|
|
|
459,850
|
|
Supplemental
Executive Retirement Plan
|
|
|
85,009
|
|
|
|
119,112
|
|
|
|
97,894
|
|
|
|
116,394
|
|
Denominator
for diluted earnings per share
|
|
|
22,581,075
|
|
|
|
21,927,051
|
|
|
|
22,393,677
|
|
|
|
21,960,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.52
|
|
|
$
|
0.47
|
|
|
$
|
2.08
|
|
|
$
|
1.56
|
|
Diluted
|
|
$
|
0.51
|
|
|
$
|
0.46
|
|
|
$
|
2.03
|
|
|
$
|
1.52
|
|
No
options were antidilutive for the
three months ended September 30, 2007. A total of approximately
673,000 options were antidilutive for the three months ended September 30,
2006
and were therefore not included in the diluted earnings per share
computation. A total of approximately 110 and 225,000 options for the
nine months ended September 30, 2007 and 2006, respectively, were antidilutive
and were therefore not included in the diluted earnings per share
computation.
Note
6. Property and Equipment
Property
and equipment is stated at
cost, less any required impairment charge. Property and equipment is
net of accumulated depreciation of $119,737,000 and $110,521,000 as of September
30, 2007 and December 31, 2006, respectively.
Note
7. Uncertainty in Income Taxes
Astec
Industries, Inc. and one or more
of its subsidiaries (the Company) file income tax returns in the U.S. federal
jurisdiction, and in various state and foreign jurisdictions. The
Company is no longer subject to U.S. federal income tax examinations by
authorities for years prior to 2004. With few exceptions, the Company
is no longer subject to state and local or non-U.S. income tax examinations
by
authorities for years prior to 2001. During the2nd quarter of 2007
Revenue Canada completed its examination of the 2003, 2004, and 2005 Canadian
income tax returns of Breaker Technology, Ltd. (BTL), the Company’s Canadian
subsidiary. The resulting adjustments to income are
immaterial and net operating loss carryforwards will offset any additional
taxes
due. During the3rd quarter of 2007 The Ontario Ministry of
Finance completed its examination of the 2003, and 2004 Ontario income tax
returns of BTL. The adjustments to income are
immaterial.
The
Company adopted provisions of FASB
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes,
on
January 1, 2007. As a result of the implementation of FIN 48, the
Company recognized approximately $65,000 increase in the liability for
unrecognized tax benefits, which was accounted for as a reduction to the
January
1 balance of retained earnings. The Company has a $1,191,000
liability recorded for unrecognized tax benefits as of January 1, 2007 which
includes interest and penalties of $94,000. The Company recognizes
interest and penalties accrued related to unrecognized tax benefits in tax
expense. The total amount of unrecognized tax benefits that, if
recognized, would affect the effective tax rate is $818,000, which includes
interest and penalties of $94,000. The Company does not currently
anticipate that the total amount of unrecognized tax benefits will significantly
increase or decrease by the end of 2007. There were no material
changes to the liability for unrecognized tax benefits for the quarter-ended
September 30, 2007.
In
the September 30, 2007 balance of
unrecognized tax benefits, there are no tax positions for which the ultimate
deductibility is highly certain but the timing of such deductibility is
uncertain. Accordingly there is no impact to the deferred tax
accounting for certain tax benefits.
Note
8. Comprehensive Income
Total
comprehensive income for the
three month periods ended September 30, 2007 and 2006 was $12,993,000 and
$9,311,000, respectively. Total comprehensive income for the nine
month periods ended September 30, 2007 and 2006 was $48,350,000 and $32,330,000,
respectively. The components of comprehensive income for the periods
indicated are set forth below:
|
|
(in
thousands)
|
|
|
(in
thousands)
|
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
income
|
|
$
|
11,574
|
|
|
$
|
10,026
|
|
|
$
|
45,413
|
|
|
$
|
33,288
|
|
Change
in unrecognized pension and post retirement
benefit
costs
|
|
|
9
|
|
|
|
-
|
|
|
|
25
|
|
|
|
-
|
|
Increase
in minority interest
ownership
of subsidiary
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
|
(2
|
)
|
Increase
(decrease) in foreign currency translation
|
|
|
1,414
|
|
|
|
(713
|
)
|
|
|
2,916
|
|
|
|
(956
|
)
|
Total
comprehensive income
|
|
$
|
12,993
|
|
|
$
|
9,311
|
|
|
$
|
48,350
|
|
|
$
|
32,330
|
|
Note
9. Contingent Matters
Certain
customers have financed
purchases of Astec products through arrangements in which the Company is
contingently liable for customer debt of approximately $732,000 and for residual
value guarantees aggregating approximately $147,000 at September 30, 2007
and
contingently liable for customer debt of approximately $2,755,000 and for
residual value guarantees aggregating approximately $147,000 at December
31,
2006. At September 30, 2007, the maximum potential amount of future
payments under these guarantees for which the Company would be liable is
equal
to $2,854,000. The Company does not believe it will be called on to
fulfill any of these contingencies, and therefore the carrying amounts on
the
consolidated balance sheets of the Company for these contingent liabilities
are
zero.
In
addition, the Company is
contingently liable under letters of credit totaling approximately $6,835,000,
including a $2,000,000 letter of credit issued to the Company’s South African
subsidiary, Osborn Engineered Products SA (Pty) (Osborn). The
outstanding letters of credit expire at various dates through March 2009.
Osborn
is contingently liable for a total of $2,854,000 in performance and retention
bonds, of which $2,000,000 are secured by the $2,000,000 letter of credit
issued
by the Company. As of September 30, 2007, the maximum potential
amount of future payments under these letters of credit and bonds for which
the
Company could be liable is approximately $7,689,000.
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 coverage for product liability
and other similar tort claims in amounts the Company believes are
adequate. The coverage is 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.
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) reasonably possible but not probable, the Company does
not
record the amount of the loss, but does make specific disclosure of such
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.
Note
10. Segment Information
The
Company has 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
non-related industries. The business units in the Aggregate and
Mining Group design, manufacture and market equipment for the aggregate,
metallic mining and recycling industries. The business units in the
Mobile Asphalt Paving Group design, manufacture and market asphalt pavers,
material transfer vehicles, milling machines and screeds. The
business units in the Underground Group design, manufacture and market a
complete line of trenching equipment and directional drills for the underground
construction market. The Company also has one other category that
contains the business units that do not meet the requirements for separate
disclosure as an operating segment. The business units in the Other
category include Peterson Pacific Corp. (Peterson), Astec Insurance Company
and
Astec Industries, Inc., the parent company. Peterson designs,
manufactures and markets whole-tree pulpwood chippers, horizontal grinders
and
blower trucks.
|
|
(in
thousands)
|
|
|
|
Three
Months Ended
|
|
|
|
September
30, 2007
|
|
|
|
Asphalt
Group
|
|
|
Aggregate
and
Mining
Group
|
|
|
Mobile
Asphalt
Paving
Group
|
|
|
Underground
Group
|
|
|
All
Others
|
|
|
Total
|
|
Net
sales from external customers
|
|
$
|
51,860
|
|
|
$
|
81,801
|
|
|
$
|
33,323
|
|
|
$
|
28,335
|
|
|
$
|
10,920
|
|
|
$
|
206,239
|
|
Intersegment
sales
|
|
|
3,556
|
|
|
|
3,633
|
|
|
|
1,274
|
|
|
|
1,493
|
|
|
|
-
|
|
|
|
9,956
|
|
Gross
profit
|
|
|
12,375
|
|
|
|
18,700
|
|
|
|
8,096
|
|
|
|
7,498
|
|
|
|
1,892
|
|
|
|
48,561
|
|
Gross
profit percent
|
|
|
23.9
|
%
|
|
|
22.9
|
%
|
|
|
24.3
|
%
|
|
|
26.5
|
%
|
|
|
17.3
|
%
|
|
|
23.5
|
%
|
Segment
profit
|
|
$
|
6,656
|
|
|
$
|
8,154
|
|
|
$
|
3,542
|
|
|
$
|
3,223
|
|
|
$
|
(9,794
|
)
|
|
$
|
11,781
|
|
|
|
(in
thousands)
|
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2007
|
|
|
|
Asphalt
Group
|
|
|
Aggregate
and
Mining
Group
|
|
|
Mobile
Asphalt
Paving
Group
|
|
|
Underground
Group
|
|
|
All
Others
|
|
|
Total
|
|
Net
sales from external customers
|
|
$
|
183,507
|
|
|
$
|
253,138
|
|
|
$
|
117,662
|
|
|
$
|
82,988
|
|
|
$
|
10,921
|
|
|
$
|
648,216
|
|
Intersegment
sales
|
|
|
10,904
|
|
|
|
9,126
|
|
|
|
4,892
|
|
|
|
9,281
|
|
|
|
-
|
|
|
|
34,203
|
|
Gross
profit
|
|
|
48,358
|
|
|
|
62,444
|
|
|
|
28,999
|
|
|
|
20,209
|
|
|
|
1,867
|
|
|
|
161,877
|
|
Gross
profit percent
|
|
|
26.4
|
%
|
|
|
24.7
|
%
|
|
|
24.6
|
%
|
|
|
24.4
|
%
|
|
|
17.1
|
%
|
|
|
25.0
|
%
|
Segment
profit
|
|
$
|
29,827
|
|
|
$
|
30,859
|
|
|
$
|
14,768
|
|
|
$
|
6,515
|
|
|
$
|
(36,534
|
)
|
|
$
|
45,435
|
|
|
|
(in
thousands)
|
|
|
|
Three
Months Ended
|
|
|
|
September
30, 2006
|
|
|
|
Asphalt
Group
|
|
|
Aggregate
and
Mining
Group
|
|
|
Mobile
Asphalt
Paving
Group
|
|
|
Underground
Group
|
|
|
All
Others
|
|
|
Total
|
|
Net
sales from external customers
|
|
$
|
45,076
|
|
|
$
|
69,083
|
|
|
$
|
28,961
|
|
|
$
|
28,350
|
|
|
$
|
-
|
|
|
$
|
171,470
|
|
Intersegment
sales
|
|
|
2,705
|
|
|
|
1,461
|
|
|
|
806
|
|
|
|
844
|
|
|
|
-
|
|
|
|
5,816
|
|
Gross
profit
|
|
|
11,164
|
|
|
|
16,664
|
|
|
|
5,996
|
|
|
|
7,238
|
|
|
|
(19
|
)
|
|
|
41,043
|
|
Gross
profit percent
|
|
|
24.8
|
%
|
|
|
24.1
|
%
|
|
|
20.7
|
%
|
|
|
25.5
|
%
|
|
|
-
|
|
|
|
23.9
|
%
|
Segment
profit
|
|
$
|
5,939
|
|
|
$
|
7,562
|
|
|
$
|
2,029
|
|
|
$
|
2,889
|
|
|
$
|
(8,188
|
)
|
|
$
|
10,231
|
|
|
|
(in
thousands)
|
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2006
|
|
|
|
Asphalt
Group
|
|
|
Aggregate
and
Mining
Group
|
|
|
Mobile
Asphalt
Paving
Group
|
|
|
Underground
Group
|
|
|
All
Others
|
|
|
Total
|
|
Net
sales from external customers
|
|
$
|
149,026
|
|
|
$
|
217,942
|
|
|
$
|
103,199
|
|
|
$
|
78,288
|
|
|
$
|
-
|
|
|
$
|
548,455
|
|
Intersegment
sales
|
|
|
8,071
|
|
|
|
7,706
|
|
|
|
2,892
|
|
|
|
2,671
|
|
|
|
-
|
|
|
|
21,340
|
|
Gross
profit
|
|
|
37,997
|
|
|
|
53,223
|
|
|
|
24,659
|
|
|
|
17,783
|
|
|
|
(42
|
)
|
|
|
133,620
|
|
Gross
profit percent
|
|
|
25.5
|
%
|
|
|
24.4
|
%
|
|
|
23.9
|
%
|
|
|
22.7
|
%
|
|
|
-
|
|
|
|
24.4
|
%
|
Segment
profit
|
|
$
|
20,722
|
|
|
$
|
24,729
|
|
|
$
|
12,125
|
|
|
$
|
5,328
|
|
|
$
|
(29,347
|
)
|
|
$
|
33,557
|
|
Reconciliation
of the reportable segment totals for profit or loss to the Company's
consolidated totals is as follows:
|
|
(in
thousands)
|
|
|
(in
thousands)
|
|
|
|
Three
Months Ended September30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Total
profit for reportable segments
|
|
$
|
11,781
|
|
|
$
|
10,231
|
|
|
$
|
45,435
|
|
|
$
|
33,557
|
|
Minority
interest in earnings
|
|
|
(68
|
)
|
|
|
(38
|
)
|
|
|
(151
|
)
|
|
|
(82
|
)
|
Recapture
(elimination) of
intersegment
profit
|
|
|
(139
|
)
|
|
|
(167
|
)
|
|
|
129
|
|
|
|
(187
|
)
|
Consolidated
net income
|
|
$
|
11,574
|
|
|
$
|
10,026
|
|
|
$
|
45,413
|
|
|
$
|
33,288
|
|
Note
11. Seasonality
Based
upon historical results of the
past several years and expected results for this year, seventy-seven percent
(77%) to seventy-nine percent (79%) of the Company's business volume typically
occurs during the first nine months of the year. During the usual
seasonal trend, the first three quarters of the year are the Company's stronger
quarters for business volume, with the fourth quarter normally being the
weakest
quarter.
Note
12. Goodwill
At
September 30, 2007 and December 31,
2006, the Company had unamortized goodwill in the amount of $25,754,000 and
$19,384,000, respectively.
The
changes in the carrying amount of
goodwill by operating segment for the periods ended September 30, 2007 are
as
follows:
|
|
Asphalt
Group
|
|
|
Aggregate
and
Mining
Group
|
|
|
(in
thousands)
Mobile
Asphalt
Paving
Group
|
|
|
Underground
Group
|
|
|
Other
|
|
|
Total
|
|
Balance
December 31, 2006
|
|
$
|
1,157
|
|
|
$
|
16,581
|
|
|
$
|
1,646
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
19,384
|
|
Foreign
currency translation
|
|
|
-
|
|
|
|
40
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40
|
|
Balance
March 31, 2007
|
|
$
|
1,157
|
|
|
$
|
16,621
|
|
|
$
|
1,646
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
19,424
|
|
Foreign
currency translation
|
|
|
-
|
|
|
|
585
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
585
|
|
Balance
June 30,2007
|
|
$
|
1,157
|
|
|
$
|
17,206
|
|
|
$
|
1,646
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20,009
|
|
Foreign
currency translation
|
|
|
-
|
|
|
|
467
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
467
|
|
Purchase
of Peterson, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,278
|
|
|
|
5,278
|
|
Balance
September 30,
2007
|
|
$
|
1,157
|
|
|
$
|
17,673
|
|
|
$
|
1,646
|
|
|
$
|
-
|
|
|
$
|
5,278
|
|
|
$
|
25,754
|
|
Note
13. Debt
During
April 2007, Astec Industries,
Inc. and certain of its subsidiaries (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 loan of
up to
$100,000,000 including a sub-limit for letters of credit of up to
$15,000,000. The Wachovia credit agreement replaced the previously
$87,500,000 secured credit facility the Company had in place with General
Electric Capital Corporation and General Electric Capital-Canada.
The
Wachovia credit facility is
unsecured and has an original term of three years (which is subject to further
extensions as provided therein). 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, 2007, if any loans
would have been outstanding, the applicable margin based upon the leverage
ratio
pricing grid would equal 0.5%. The Wachovia 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 at the Adjusted LIBOR Rate, at
the end
of the applicable interest period therefore. The Wachovia credit
agreement contains certain financial covenants related to minimum fixed charge
coverage ratios, minimum tangible net worth and maximum allowed capital
expenditures. No amounts were outstanding under the credit facility
at September 30, 2007.
The
Company was in compliance with the
financial covenants under its credit facility as of September 30,
2007.
The
Company's South African subsidiary,
Osborn Engineered Products SA (Pty) Ltd., (Osborn) has available a credit
facility of approximately $4,907,000 (ZAR 33,760,000) to finance short-term
working capital needs, as well as to cover the short-term establishment of
letter of credit performance guarantees. As of September 30, 2007, Osborn
had no
outstanding borrowings under the credit facility, but approximately $2,854,000
in performance and retention bonds were guaranteed under the
facility. The facility is secured by Osborn's account receivables,
retention and cash balances and a $2,000,000 letter of credit issued by the
parent Company. The portion of the available facility not secured by
the $2,000,000 letter of credit fluctuates monthly based upon fifty percent
(50%) of Osborn's accounts receivable, retention and cash balances at the
end of
the prior month. As of September 30, 2007, Osborn Engineered Products
had available credit under the facility of approximately
$2,053,000.
Note
14. Product Warranty Reserves
Changes
in the Company's product
warranty liability for the three and nine month periods ended September 30,
2007
and 2006 are as follows:
|
|
(in
thousands)
|
|
|
(in
thousands)
|
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Reserve
balance at the beginning of the period
|
|
$
|
8,137
|
|
|
$
|
7,036
|
|
|
$
|
7,184
|
|
|
$
|
5,666
|
|
Warranty
liabilities accrued during the period
|
|
|
2,736
|
|
|
|
2,751
|
|
|
|
9,105
|
|
|
|
9,318
|
|
Warranty
liabilities settled during the period
|
|
|
(2,852
|
)
|
|
|
(2,633
|
)
|
|
|
(8,268
|
)
|
|
|
(7,830
|
)
|
Reserve
balance at the end of the period
|
|
$
|
8,021
|
|
|
$
|
7,154
|
|
|
$
|
8,021
|
|
|
$
|
7,154
|
|
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. 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.
Note
15. Post Retirement Benefits
The
Company expects to contribute
approximately $800,000 to its pension plan and $200,000 to its post-retirement
benefit plan during 2007. Approximately $649,000 of the contribution
was paid to the pension plan and approximately $148,000 was paid for
post-retirement benefits during the nine months ended September 30,
2007.
The
components of net periodic pension cost and post-retirement benefit cost
for the
nine months ended September 30, 2007 and 2006 are as follows:
|
|
(in
thousands)
|
|
|
|
Pension
Benefit
|
|
|
Post-Retirement
Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Service
cost
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
36
|
|
|
$
|
46
|
|
Interest
cost
|
|
|
424
|
|
|
|
408
|
|
|
|
34
|
|
|
|
43
|
|
Expected
return on assets
|
|
|
(479
|
)
|
|
|
(410
|
)
|
|
|
-
|
|
|
|
-
|
|
Amortization
of transitional obligation
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
25
|
|
Amortization
of prior service cost
|
|
|
-
|
|
|
|
-
|
|
|
|
21
|
|
|
|
(4
|
)
|
Amortization
of net (gain) loss
|
|
|
68
|
|
|
|
103
|
|
|
|
(56
|
)
|
|
|
(59
|
)
|
Net
periodic benefit cost
|
|
$
|
13
|
|
|
$
|
101
|
|
|
$
|
35
|
|
|
$
|
51
|
|
Note
16. Accrued Loss Reserves
The
Company accrues reserves for losses
related to 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 reserves are estimated 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.
Note
17. Other Income, net of expense
For
the three months ended September
30, 2007 and 2006, the Company had other income, net of expenses, totaling
$638,000 and $519,000, respectively. For the nine months ended
September 30, 2007 and 2006, the Company had other income, net of expenses,
totaling $2,038,000 and $921,000, respectively. Major items
comprising the net totals for the periods are as follows:
|
|
(in
thousands)
Three
Months Ended
September
30,
|
|
|
(in
thousands)
Nine
Months Ended
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Interest
income
|
|
$
|
850
|
|
|
$
|
518
|
|
|
$
|
2,278
|
|
|
$
|
1,018
|
|
(Gain)
Loss on foreign currency transactions
|
|
|
(300
|
)
|
|
|
10
|
|
|
|
(430
|
)
|
|
|
(234
|
)
|
Other
|
|
|
88
|
|
|
|
(9
|
)
|
|
|
190
|
|
|
|
137
|
|
Total
|
|
$
|
638
|
|
|
$
|
519
|
|
|
$
|
2,038
|
|
|
$
|
921
|
|
Note
18. Purchase of Peterson, Inc.
On
July 31, 2007 the Company
consummated its purchase of all the outstanding capital stock of Peterson,
Inc.,
an Oregon company (Peterson), to be effective July 1, 2007, with approximately
$21,100,000 being paid to the sellers plus transaction costs of approximately
$200,000. Peterson is a leading manufacturer of whole-tree pulpwood
chippers, horizontal grinders and blower trucks. Founded in 1961 as
Wilbur Peterson & Sons, a heavy construction company, Peterson expanded into
manufacturing in 1982 to develop equipment to suit their land clearing and
construction needs. Peterson will continue to operate from its
Eugene, Oregon headquarters under the name Peterson Pacific
Corp. Additional conditional earn-out payments of up to $3,000,000
may be due to the sellers based upon actual 2008 and 2009 results of
operations. In addition to the purchase price paid to the sellers,
the Company also paid off approximately $7,500,000 of outstanding Peterson
debt
coincident with the purchase, including $500,000 that had been paid off by
Peterson during July. The Company and Peterson’s majority owner and
his wife have also entered into a separate agreement for the Company to purchase
the real estate and improvements used by Peterson for $7,000,000 at a later
date.
The
Company has accounted for the
acquisition as a business combination using the required purchase method
of
accounting. As the transaction was completed during the third quarter
with an effective date of July 1, 2007, the fair value related assets
and liabilities of Peterson were recorded as of that date in the Company’s
Condensed Consolidated Balance Sheet, and Peterson’s three month results of
operations are included in the Company’s September 30, 2007 Consolidated
Statement of Income. In certain circumstances, the allocation of the
purchase price recorded has been based on preliminary estimates and
assumptions. The preliminary purchase price allocation, which
resulted in the recording of $5,278,000 of goodwill, may be adjusted within
one
year of the purchase date for changes in estimates of the fair value of assets
acquired and liabilities assumed.
Item
2. Management's Discussion and Analysis of Financial Condition And
Results of Operations
Forward-Looking
Statements
This
Quarterly Report on Form 10-Q contains forward-looking statements made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform
Act of
1995. Statements contained anywhere in this Quarterly Report on Form
10-Q that are not limited to historical information are considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are
sometimes identified by the words, “will,” “would,” “should,” “could,”
“believes,” “anticipates,” “intends,” and “expects” and similar
expressions. Such forward-looking statements include, without
limitation, statements regarding the Company's expected sales during 2007,
the
Company's expected effective tax rates for 2007, the Company's expected capital
expenditures in 2007, the expected benefit of financing arrangements, the
ability of the Company to meet its working capital and capital expenditure
requirements through September 30, 2008, the impact of the enactment of
SAFTEA-LU, the need for road improvements, the impact of other public sector
spending and funding mechanisms, the Company's backlog levels, 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's
general liability insurance coverage for product liability and other similar
tort claims, the Company being called upon to fulfill certain contingencies,
the
expected contributions by the Company to its pension plan, its post-retirement
plan and other benefits, 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 change
in
the level of the Company's presence in international markets, the seasonality
of
the Company’s business, the outcome of audits by taxing authorities, 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.
In
addition to the risks and uncertainties identified elsewhere herein and in
other
documents filed by the Company with the Securities and Exchange Commission,
most
recently in the Company's Annual Report on Form 10-K for the fiscal year
ended
December 31, 2006, the risk factors described in the section under the caption
“Risk Factors” should be carefully considered when evaluating the Company's
business and future prospects.
Overview
The
Company is a leading manufacturer and marketer of construction
equipment. The Company's businesses:
§
design,
engineer, manufacture and market equipment that is used in road building,
from
quarrying and crushing the aggregate, to the road surface;
§
manufacture
certain equipment and components unrelated to road construction, including
trenching, auger boring, directional 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 13 companies that fall
within four reportable operating segments, 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. The business units in the Aggregate and
Mining Group design, manufacture and market equipment for the aggregate,
metallic mining and recycling industries. The business units in the
Mobile Asphalt Paving Group design, manufacture and market asphalt pavers,
material transfer vehicles, milling machines and screeds. The
business units in the Underground Group design, manufacture and market a
complete line of trenching equipment and directional drills and auger boring
machines for the underground construction market. The Company also
has one other category that contains the business units that do not meet
the
requirements for separate disclosure as an operating segment. The
business units in the Other category include Peterson Pacific Corp. (Peterson),
Astec Insurance Company and Astec Industries, Inc., the parent
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
(fuel costs 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 authorizes appropriation of $286.5
billion in guaranteed federal funding for road, highway and bridge construction,
repair and improvement of the federal highway and transit projects for federal
fiscal years October 1, 2004 through September 30, 2009. The Company
believes that the federal highway funding significantly influences the
purchasing decisions of many of the Company's customers who are more comfortable
making purchasing decisions with the legislation in place. The
Federal funding provides for approximately 25% of highway, street, roadway
and
parking construction funding in the United States. President Bush
signed into law on February 15, 2007, a funding bill for the 2007 fiscal
year,
which among other things included record investment levels for the federal
highway programs.
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
above the amounts proposed, and funding mechanisms such as the federal usage
fee
per gallon of gasoline, which has not been increased in fourteen years, would
need to be increased along with other measures to generate the funds
needed.
In
addition to public sector funding, the economies in the markets the Company
serves, the price of oil and its impact on customers' purchase decisions
and the
price of steel may each affect the Company's financial
performance. Economic downturns, like the one experienced from 2001
through 2003, 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 have the effect of negatively impacting customers' attitudes toward
purchasing equipment. The Company expects only slight changes in
interest rates during the remainder of 2007 and does not expect such changes
to
have a material impact on the financial results of the Company.
Significant
portions of the Company's revenues relate to the sale of equipment that produces
asphalt mix. A major component of asphalt is oil. An
increase in the price of oil increases the cost of providing asphalt, which
could likely decrease demand for asphalt, and therefore decrease demand for
certain Company products. While increasing oil prices may have an
impact on the Company’s customers, the Company’s equipment can use a significant
amount of recycled asphalt pavement, thereby mitigating the cost of asphalt
for
the customer. The Company continues to work on 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 do not appear
to
be significantly impairing the equipment purchases by them at this
time.
Steel
is
a major component in the Company's equipment. Steel prices increased
dramatically during 2004 and, although they abated somewhat during 2005 and
2006, they remain at historically high levels. Although the Company
increased prices in response to the rising cost of steel, purchased parts
and
component prices, if the Company is not able to raise the prices of its products
enough to cover the increased costs of goods, the Company's financial results
will be negatively affected. If the Company sees increases in
upcoming steel prices it 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 distributors that
produce and sell similar products. The reduced value of the dollar
relative to many foreign currencies and the current positive economic conditions
in certain foreign economies continue to have a positive impact on international
sales.
Results
of Operations
For
the three months ended September
30, 2007, net sales increased $34,769,000, or 20.2%, to $206,239,000 from
$171,470,000 for the three months ended September 30, 2006. Peterson
accounted for $11,000,000 of the sales increase, resulting in an increase,
net
of Peterson, of $23,769,000, or 13.9% for the third quarter of 2007 as compared
to the third quarter of 2006. Sales are generated primarily from new
equipment purchases made by customers for use in construction for privately
funded infrastructure development and public sector spending on infrastructure
development. The overall growth in sales for three months ended
September 30, 2007 compared to the three months ended September 30, 2006
is
reflective of a strong economy, an overwhelming need for road improvements
causing state initiatives to increase funding, market acceptance of new
products, improving market share, increasing sales of recycling equipment
and
stronger international sales. For the quarter ended September 30,
2007 compared to the quarter ended September 30, 2006, (1) net sales for
the
Asphalt Group increased approximately $6,784,000 or 15.1%; (2) net sales
for the
Aggregate and Mining Group increased approximately $12,718,000 or 18.4%;
(3) net
sales for the Underground Group decreased approximately $15,000 or 0.1%;
and (4)
net sales for the Mobile Asphalt Paving Group increased approximately $4,362,000
or 15.1%. Parts sales for the quarter ended September 30, 2007 were
$49,186,000 compared to $40,239,000 for the quarter ended September 30, 2006,
for an increase of $8,947,000 or 22.2%. Peterson accounted for
$3,794,000 of the increase in parts sales, resulting in a change in parts
sales,
net of Peterson, of $5,153,000 or 12.8% for the third quarter of 2007 compared
to the same quarter in 2006. For the quarter ended September 30, 2007
compared to the same period of 2006, international sales increased in the
Aggregate and Mining, Mobile Asphalt Paving and Underground segments while
international sales decreased in the Asphalt segment. Domestic sales
increased in the Asphalt and Mobile Asphalt Paving segments while domestic
sales
decreased in the Aggregate and Mining and the Underground
segments. Domestic sales accounted for 63.9% and international sales
accounted for 36.1% of the third quarter revenues of 2007 compared to 67.7%
for
domestic sales and 32.3% for international sales for the third quarter of
2006.
For
the nine months ended September 30,
2007, net sales increased $99,761,000, or 18.2%, to $648,216,000 from
$548,455,000 for the nine months ended September 30, 2006. Peterson
accounted for $11,000,000 of the sales increase resulting in an increase,
net of
Peterson, of $88,761,000, or 16.2% for the nine months ended September 2007
as
compared to the same period in 2006. Sales are generated primarily
from new equipment purchases made by customers for use in construction for
privately funded infrastructure development and public sector spending on
infrastructure development. The overall growth in sales for the nine
months ended September 30, 2007 compared to the nine months ended September
30,
2006 is reflective of a strong domestic economy, an overwhelming need for
road
improvements causing state initiatives to increase funding, market acceptance
of
new products, improving market share, increasing sales of recycling equipment
and stronger international sales. For the nine months ended September
30, 2007 compared to the nine months ended September 30, 2006, (1) net sales
for
the Asphalt Group increased approximately $34,481,000 or 23.1%; (2) net sales
for the Aggregate and Mining Group increased approximately $35,196,000 or
16.1%;
(3) net sales for the Underground Group increased approximately $4,700,000
or
6.0%; and (4) net sales for the Mobile Asphalt Paving Group increased
approximately $14,463,000 or 14.0%. Parts sales for the nine months
ended September 30, 2007 were $137,212,000 compared to $126,989,000 for the
nine
months ended September 30, 2006, for an increase of $10,223,000 or
8.1%. Peterson accounted for $3,794,000 of the increase in parts
sales, resulting in a change in parts sales, net of Peterson, of $6,429,000
or
5.1% for the first nine months of 2007 compared to the same period in
2006. For the nine months ended September 30, 2007 compared to the
same period of 2006, the increase in sales for all segments was due to increases
in both international and domestic sales. Domestic sales accounted
for 70.1% and international sales accounted for 29.9% of revenues for the
first
nine months of 2007, compared to 73.8% for domestic sales and 26.2% for
international sales during the first nine months of 2006.
International
sales for the quarter
ended September 30, 2007 compared to the same period of 2006 increased
$19,175,000, or 34.6%. Net of Peterson, international sales increased
$17,050,000, or 30.8% for the third quarter of 2007 compared to the same
period
in 2006. International sales were $74,528,000 for the quarter ended
September 30, 2007 compared to $55,353,000 for the quarter ended September
30,
2006. For the quarters ended September 30, 2007 and 2006,
international sales accounted for approximately 36.1% and 32.3% of net sales,
respectively. International sales increased for the third quarter of
2007 compared to the same period in 2006, in Australia, Africa, the West
Indies,
Canada, the Middle East, South America and Southeast Asia while international
sales decreased in Europe, China, Japan, Korea and Central America for the
comparable period. There were only nominal changes in all other
geographic markets. The Company believes the overall increased level
of international sales relates to strong economic conditions in certain foreign
markets, continued weakness of the U.S. dollar compared to most foreign
currencies and increased sales efforts by the Company in foreign
markets.
International
sales for the nine months
ended September 30, 2007 compared to the same period of 2006 increased
$49,936,000, or 34.8%. Net of Peterson, international sales increased
$47,811,000, or 33.3% for the nine months ended September 30, 2007 compared
to
the same period in 2006. International sales were $193,508,000 for
the nine months ended September 30, 2007 compared to $143,572,000 for the
nine
months ended September 30, 2006. For the nine months ended September
30, 2007 and 2006, international sales accounted for approximately 29.9%
and
26.2% of net sales, respectively. International sales increased for
the first nine months of 2007 compared to the same period in 2006, in Australia,
Africa, Canada, Central America, Europe, the West Indies, the Middle East
and
Southeast Asia while international sales decreased in South America for the
comparable period. There were only nominal changes in all other
geographic markets. The Company believes the overall increased level
of international sales relates to strong economic conditions in certain foreign
markets, continued weakness of the U.S. dollar compared to most foreign
currencies and increased sales efforts by the Company in foreign
markets.
Gross
profit for the three months ended
September 30, 2007 increased $7,518,000 or 18.3%, to $48,561,000 from
$41,043,000 for the three months ended September 30, 2006. Peterson
accounted for $1,858,000 of the gross profit increase in the third quarter
of
2007 compared to the third quarter of 2006. Gross profit as a
percentage of sales for the three months ended September 30, 2007 and 2006
was
23.5% and 23.9%, respectively, or a decrease of 40 basis points. For
the quarter ended September 30, 2007 compared to the same period in 2006,
gross
profit for the Asphalt Group increased from approximately $11,164,000 to
approximately $12,375,000 or an increase of approximately $1,211,000 or
10.8%. This resulted in a decrease in gross profit as a percentage of
sales from 24.8% to 23.9% or 90 basis points for the same periods for this
group. For the quarter ended September 30, 2007 compared to the same
period in 2006, gross profit for the Aggregate and Mining Group increased
from
approximately $16,664,000 to approximately $18,700,000 or an increase of
approximately $2,036,000 or 12.2%. Gross profit as a percentage of
sales decreased 120 basis points from 24.1% to 22.9% for the third quarter
of
2007 as compared to the third quarter of 2006 for the Aggregate and Mining
Group. For the quarter ended September 30, 2007 compared to the same
period in 2006, gross profit for the Mobile Asphalt Paving Group increased
from
approximately $5,996,000 to approximately $8,096,000 or an increase of
approximately $2,100,000 or 35.0%. Gross profit, as a percentage of
sales increased from 20.7% to 24.3%, or 360 basis points. For the
quarter ended September 30, 2007 compared to the same period in 2006, gross
profit for the Underground Group increased from approximately $7,238,000
to
approximately $7,498,000 or an increase of approximately $260,000 or
3.6%. This resulted in an increase in gross profit as a percentage of
sales from 25.5% to 26.5% or 100 basis points for the same periods for the
Underground Group. On a consolidated basis, the gross profit
percentage decrease for the quarter ended September 30, 2007 compared to
the
same period of 2006 was primarily due to the introduction of certain new
products and new models of existing product lines.
Gross
profit for the nine months ended
September 30, 2007 increased $28,257,000 or 21.1%, to $161,877,000 from
$133,620,000 for the nine months ended September 30, 2006. Peterson
accounted for $1,858,000 of the gross profit increase in the nine months
ended
September 30, 2007 compared to the nine months ended September 30,
2006. Gross profit as a percentage of sales for the nine months ended
September 30, 2007 and 2006 was 25.0% and 24.4%, respectively, or an increase
of
60 basis points. For the nine months ended September 30, 2007
compared to the same period in 2006, gross profit for the Asphalt Group
increased from approximately $37,997,000 to approximately $48,358,000 or
an
increase of approximately $10,361,000 or 27.3%. This resulted in an
increase in gross profit as a percentage of sales from 25.5% to 26.4% or
90
basis points for the same periods for this group. For the nine months
ended September 30, 2007 compared to the same period in 2006, gross profit
for
the Aggregate and Mining Group increased from approximately $53,223,000 to
approximately $62,444,000 or an increase of approximately $9,221,000 or
17.3%. Gross profit as a percentage of sales increased 30 basis
points from 24.4% to 24.7% for the first nine months of 2007 and 2006,
respectively, for the Aggregate and Mining Group. For the nine months
ended September 30, 2007 compared to the same period in 2006, gross profit
for
the Mobile Asphalt Paving Group increased from approximately $24,659,000
to
approximately $28,999,000 or an increase of approximately $4,340,000 or
17.6%. As a percentage of sales, gross profit increased from 23.9% to
24.6%, or 70 basis points. For the nine months ended September 30,
2007 compared to the same period in 2006, gross profit for the Underground
Group
increased from approximately $17,783,000 to approximately $20,209,000 or
an
increase of approximately $2,426,000 or 13.6%. This resulted in an
increase in gross profit as a percentage of sales from 22.7% to 24.4% or
170
basis points for the same periods for this group. On a consolidated
basis, the gross profit percentage increase for the nine months ended September
30, 2007 compared to the same period of 2006 was primarily due to a favorable
mix of products, increased international sales, price increases and the impact
of the Company's cost and design initiative programs.
Selling,
general, administrative and
engineering expenses for the quarter ended September 30, 2007 were $31,926,000,
or 15.5% of net sales, compared to $25,270,000, or 14.7% of net sales for
the
quarter ended September 30, 2006, an increase of $6,656,000 or
26.3%. The following discussion is presented net of the increase in
selling, general, administrative and engineering expenses of $1,993,000 due
to
the operations of Peterson. The increase in selling, general,
administrative and engineering expenses for the three months ended September
30,
2007 compared to the same period of 2006 related primarily to an increase
in
non-cash expenses related to the Supplemental Executive Retirement Plan of
$2,478,000 due to the increase in the market price of the Company’s stock from
June 30, 2007 to September 30, 2007 and a decrease in the price of the Company’s
stock from June 30, 2006 to September 30, 2006. The profit sharing
bonus expense, which is formula driven, increased approximately $686,000
due to
improved performance by the subsidiaries as compared to the same quarter
in
2006. Expenses related to the Company’s stock-based compensation plan
increased approximately $396,000 primarily due to the timing of the approval
of
the new restricted stock unit plan discussed below (the plan was not approved
until the middle of the third quarter of 2006) and the increase in the market
price of the Company’s stock. Personnel and related expenses
increased approximately $326,000 due to increased staffing in order to support
increased sales volume. Sales commissions increased approximately
$250,000 due to increased sales volumes while travel expense, including airline
tickets, rental cars, lodging and meals increased approximately $356,000
due to
increased selling efforts by the Company and cost increases by
vendors. Depreciation also increased approximately $201,000 due
primarily to capital expenditures. These increases were offset by
decreases in research and development expense of $534,000 and legal and
professional expenses of $610,000.
Selling,
general, administrative and
engineering expenses for the nine months ended September 30, 2007 were
$92,774,000, or 14.3% of net sales, compared to $80,237,000, or 14.6% of
net
sales for the nine months ended September 30, 2006, an increase of $12,537,000
or 15.6%. The following discussion is presented net of the increase
in selling, general, administrative and engineering expenses of $1,993,000
due
to the operations of Peterson. The increase in selling, general,
administrative and engineering expenses for the nine months ended September
30,
2007 compared to the same period of 2006 related primarily to an increase
in
non-cash expenses related to the Supplemental Executive Retirement Plan of
$3,058,000 due to the increase in the market price of the Company’s stock from
December 31, 2006 to September 30, 2007. Personnel and related
expenses increased approximately $1,809,000 due to increased staffing in
order
to support increased sales volume. The profit sharing bonus expense,
which is formula driven, increased approximately $2,059,000 due to improved
performance by the subsidiaries. Expenses related to the Company’s
stock-based compensation plan increased approximately $925,000 due primarily
to
the timing of the approval of the new restricted stock unit plan discussed
below
(the plan was not approved until middle of the third quarter of 2006 and
thus no
expense was recorded in the first two quarters of 2006) and the increase
in the
market price of the Company’s stock. Sales commissions increased
approximately $823,000 due to increased sales volumes while travel expense,
including airline tickets, rental cars, lodging and meals increased
approximately $982,000 due to increased selling efforts by the Company and
cost
increases by vendors. Depreciation also increased approximately
$621,000 due primarily to capital expenditures. These increases were
offset by decreases in research and development expense of $667,000 and legal
and professional expenses $721,000.
On
January 1, 2006, the Company began
accounting for share based payments under the provisions of Statement of
Financial Accounting Standards No. 123R, “Share Based Payment” (SFAS
123R). SFAS 123R requires the share based compensation expense to be
recognized over the period during which an employee is required to provide
service in exchange for the award (the vesting period). All granted
stock options were vested prior to December 31, 2006, therefore no stock
option
expense was recorded in the nine months ended September 30, 2007, and there
was
no unrecognized compensation costs related to stock options previously granted
as of that date. The Company recorded stock option expense of $21,000 and
$381,000 in the three and nine month periods ended September 30, 2006,
respectively.
In
August 2006, the Compensation
Committee of the Board of Directors implemented a five-year plan to award
key
members of management restricted stock units each year. The details of the
plan
were formulated under the 2006 Incentive Plan approved by the Company’s
shareholders in their annual meeting held in April, 2006. The plan allows
up to
700,000 shares to be granted to employees. Units granted each year
will be determined based upon the performance of individual subsidiaries
and
consolidated annual financial performance. Each award will vest at the end
of
five years from the date of grant, or at the time a recipient reaches age
65, if
earlier. On March 8, 2007 management was granted 65,500 restricted stock
units, net of forfeitures, for performance during 2006. It is anticipated
that an additional 64,900 units will be granted in March 2008 for performance
in
2007. Based upon the March 8, 2007 fair value of $38.76 for the 65,500
units and the September 28, 2007 fair value of $57.45 for the 64,900 units,
$4,140,000 of compensation costs will be recognized in future periods through
2013. The fair value of the 64,900 restricted stock units will be adjusted
quarterly to the period-end market value of the Company’s stock until the units
are actually granted, which is expected to be in March, 2008. Compensation
expense of $485,000 and $1,395,000 has been recorded in the three and nine
month
periods ended September 30, 2007, respectively, to reflect the fair value
of the
130,400 total shares amortized over the portion of the vesting period occurring
during the three and nine month periods ended September 30, 2007.
For
the quarter ended September 30,
2007 compared to the quarter ended September 30, 2006, interest expense
decreased $272,000, or 65.0%, to $149,000 from $421,000. Interest
expense as a percentage of net sales was 0.07% and 0.25% for the quarters
ended
September 30, 2007 and 2006, respectively. Interest expense for the
three months ended September 30, 2007 related primarily to the payment of
interest on letters of credit issued by the Company. The reduction in
interest expense was due to significant reductions in collection day charges,
unused line of credit fees and amortization of prepaid loan costs under the
Company’s new financing arrangement with Wachovia, as compared to these costs
under the Company’s previous financing agreement.
For
the nine months ended September 30,
2007 compared to the nine months ended September 30, 2006, interest expense
decreased $503,000, or 39.7%, to $765,000 from $1,268,000. Interest
expense as a percentage of net sales was 0.12% and 0.23% for the nine months
ended September 30, 2007 and 2006, respectively. Interest expense for
the nine months ended September 30, 2007 related primarily to the amortization
of prepaid loan fees ending in April 2007 and the payment of interest on
letters
of credit issued by the Company. The reduction in interest expense
was due to significant reductions in collection day charges, unused line
of
credit fees and amortization of prepaid loan costs under the Company’s new
financing arrangement with Wachovia, as compared to these costs under the
Company’s previous financing agreement.
Other
income, net was $638,000 for the
quarter ended September 30, 2007 compared to other income, net of $519,000
for
the quarter ended September 30, 2006, for an increase of
$119,000. Other income, net for the quarter ended September 30, 2007
consisted primarily of interest income earned on the Company’s cash balances
offset by losses from foreign currency transactions. Other income,
net for the quarter ended September 30, 2006 consisted primarily of interest
income earned on the Company's cash balances.
Other
income, net was $2,038,000 for
the nine months ended September 30, 2007 compared to other income, net of
$921,000 for the nine months ended September 30, 2006, for an increase of
$1,117,000. Other income, net for the nine months ended September 30,
2007 and 2006 consisted primarily of interest income earned on the Company's
cash balances offset by losses from foreign currency transactions.
For
the three months ended September
30, 2007, the Company recorded income tax expense of $5,482,000, compared
to
income tax expense of $5,807,000 for the three months ended September 30,
2006. This resulted in effective tax rates for the quarters ended
September 30, 2007 and 2006 of 32.0% and 36.6%, respectively. The
primary reason for the decline in the effective tax rate was the recognition
of
research and development tax credits and foreign tax credits in the third
quarter of 2007 in excess of those recognized in the same period in
2006.
For
the nine months ended September 30,
2007, the Company recorded income tax expense of $24,812,000, compared to
income
tax expense of $19,666,000 for the nine months ended September 30,
2006. This resulted in effective tax rates for the nine months ended
September 30, 2007 and 2006 of 35.3% and 37.1%, respectively. The
primary reason for the decline in the effective tax rate was the recognition
of
research and development tax credits and foreign tax credits in the first
nine
months of 2007 in excess of those recognized in the same period in
2006.
The
Company adopted provisions of FASB Interpretation No. 48 (FIN 48), Accounting
for Uncertainty in Income Taxes, on January 1, 2007. As a result of
the implementation of FIN 48, the Company recognized an approximately $65,000
increase in the liability for unrecognized tax benefits, which was accounted
for
as a reduction to the January 1 balance of retained earnings. The
Company had a liability of approximately $1,191,000 recorded for unrecognized
tax benefits as of January 1, 2007 which includes interest and penalties
of
approximately $94,000. The Company recognizes interest and penalties
accrued related to unrecognized tax benefits in tax expense. The
total amount of unrecognized tax benefits that, if recognized, would impact
the
effective tax rate is approximately $818,000, which includes interest and
penalties of approximately $94,000. Management does not currently
anticipate that the total amount of unrecognized tax benefits will significantly
increase or decrease by the end of 2007. There were no material
changes to the liability for unrecognized tax benefits for the quarter ended
September 30, 2007.
For
the three months ended September
30, 2007, the Company had net income of $11,574,000 compared to net income
of
$10,026,000 for the three months ended September 30, 2006 for an increase
of
$1,548,000 or 15.4%. Earnings per diluted share for the three months
ended September 30, 2007 were $0.51 compared to earnings per diluted share
for
the quarter ended September 30, 2006 of $0.46 for an increase of $0.05 or
10.9%. Diluted shares outstanding for the three months ended
September 30, 2007 and 2006 were 22,581,075 and 21,927,051,
respectively. The increase in shares outstanding is primarily due to
the exercise of stock options by employees of the Company.
For
the nine months ended September 30,
2007, the Company had net income of $45,413,000 compared to net income of
$33,288,000 for the nine months ended September 30, 2006 for an increase
of
$12,125,000 or 36.4%. Earnings per diluted share for the nine months
ended September 30, 2007 were $2.03 compared to earnings per diluted share
for
the nine months ended September 30, 2006 of $1.52 for an increase of $0.51
or
33.6%. Diluted shares outstanding for the nine months ended September
30, 2007 and 2006 were 22,393,677 and 21,960,133, respectively. The
increase in shares outstanding is primarily due to the exercise of stock
options
by employees of the Company.
The
backlog of orders at September 30, 2007 was $239,906,000 compared to
$131,191,000, including the backlog of Peterson, at September 30, 2006, for
an
increase of $108,715,000 or 82.9%. The increase in the backlog of
orders at September 30, 2007 compared to September 30, 2006 related to an
increase in domestic backlog totaling approximately $49,812,000 and an increase
in international backlog of orders of approximately $58,903,000. The
increase in domestic backlog at September 30, 2007 was due primarily to a
$49,597,000 increase in the Asphalt Group's domestic backlog. The
increase in international backlog at September 30, 2007 related primarily
to a
$37,008,000 increase in the Aggregate and Mining Group’s international backlog
accompanied by an increase of $14,765,000 in the Asphalt Group’s international
backlog. The primary reason for the increase in the backlog as a
whole is the strength of economic conditions in certain foreign markets,
continued weakness of the U.S. dollar compared to certain foreign currencies, a
strong domestic economy, increased state funding of road projects, market
acceptance of new products, improving market share and increasing sales of
recycling equipment. The Company is unable to determine whether the
increase in backlog was experienced by the industry as a
whole
.
Liquidity
and Capital Resources
During
April 2007, Astec Industries,
Inc. and certain of its subsidiaries (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 loan of
up to
$100,000,000 including a sub-limit for letters of credit of up to
$15,000,000. The Wachovia credit agreement replaced the previous
$87,500,000 secured credit facility the Company had in place with General
Electric Capital Corporation and General Electric Capital-Canada.
The
Wachovia credit facility is
unsecured and has an original term of three years (which is subject to further
extensions as provided therein). The interest rate for borrowings is
a function of the Adjusted LIBOR Rate or Adjusted LIBOR Market Index Rate,
as
elected by Astec, plus a margin based upon a leverage ratio pricing grid
ranging
between 0.5% and 1.5%. As of September 30, 2007, if any loans would
have been outstanding, the applicable margin based upon the leverage ratio
pricing grid would equal 0.5%. The Wachovia 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 at the Adjusted LIBOR Rate, at
the end
of the applicable interest period therefore. The Wachovia credit
agreement contains certain financial covenants related to minimum fixed charge
coverage ratios, minimum tangible net worth and maximum allowed capital
expenditures. No amounts were outstanding under the credit facility
at September 30, 2007.
The
Company was in compliance with the
financial covenants under its credit facility as of September 30,
2007.
The
Company's South African subsidiary,
Osborn Engineered Products SA (Pty) Ltd., (Osborn) has available a credit
facility of approximately $4,907,000 (ZAR 33,760,000) to finance short-term
working capital needs, as well as to cover the short-term establishment of
letter of credit performance guarantees. As of September 30, 2007, Osborn
had no
outstanding borrowings under the credit facility, but approximately $2,854,000
in performance and retention bonds were guaranteed under the
facility. The facility is secured by Osborn's account receivables,
retention and cash balances and a $2,000,000 letter of credit issued by the
parent Company. The portion of the available facility not secured by
the $2,000,000 letter of credit fluctuates monthly based upon fifty percent
(50%) of Osborn's accounts receivable, retention and cash balances at the
end of
the prior month. As of September 30, 2007, Osborn Engineered Products
had available credit under the facility of approximately
$2,053,000.
Net
cash provided by operating
activities for the nine months ended September 30, 2007 was $47,030,000 compared
to net cash provided by operating activities of $22,718,000 for the nine
months
ended September 30, 2006. The increase in net cash provided by
operating activities for the nine months ended September 30, 2007 compared
to
the same period of 2006 relates primarily to an increase in net income, accounts
payable and customer deposits accompanied by a reduced growth in receivables
compared to the prior period. These increases were offset by
increases in inventory, deferred income tax benefits and tax benefits from
stock
option exercises.
Net
cash used by investing activities
for the nine months ended September 30, 2007 was $57,007,000 compared to
net
cash used by investing activities of $22,095,000, for the nine months ended
September 30, 2006. The increase in net cash used by investing
activities for the nine months ended September 30, 2007 compared to the same
period of 2006 relates primarily to the acquisition of Peterson for $19,627,000,
net of cash acquired, combined with the purchase of investment securities
of
$6,491,000 by Astec Insurance Company during the current period. In
addition, expenditures for property and equipment were $30,628,000 for the
nine
months ended September 30, 2007, which was $7,526,000 more than expenditures
for
property and equipment of $23,102,000 for the comparable period in
2006.
Net
cash provided by financing
activities for the nine months ended September 30, 2007 was $11,856,000 compared
to net cash provided by financing activities of $11,855,000 for the nine
months
ended September 30, 2006. The increase in net cash provided by
financing activities for the nine months ended September 30, 2007 compared
to
the same period of 2006 relates primarily to increased proceeds from the
exercise of stock options by Company employees in 2007 as compared with 2006
combined with the tax benefit of those option exercises and the net proceeds
from the sale of shares of the Company’s stock by the Supplemental Executive
Retirement Plan. These three components were $7,501,000 greater in
2007 than 2006. These increased cash inflows in 2007 were offset by
the repayment of $7,500,000 of debt assumed in the purchase of
Peterson.
The
Company believes that its current
working capital, cash flows generated from future operations and available
capacity remaining under its credit facility will be sufficient to meet the
Company's working capital and capital expenditure requirements through September
30, 2008.
Capital
expenditures for 2007 are
forecasted to total approximately $35,600,000. The Company expects to
finance these expenditures using currently available cash balances and
internally generated funds.
Off-balance
Sheet Arrangements
As
of September 30, 2007, the Company
does not have any off-balance sheet arrangements as defined by Item 303(a)(4)
of
Regulation S-K.
Contingencies
During
the nine months ended September
30, 2007, there were no substantial changes in our commitments or contractual
liabilities including the effects of the adoption of FIN 48. We are
unable to make reasonably reliable estimates of the period of potential cash
settlements, if any, with taxing authorities.
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 coverage for product liability
and other similar tort claims in amounts the Company believes are
adequate. The coverage is 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.
As
mentioned above, 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 (including estimated
legal
costs), 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) reasonably
possible but not probable, the Company does not record the amount of the
loss
but does make specific disclosure of such 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.