PART I
Item 1
.
Business
General
Astec Industries, Inc. (the "Company") is a Tennessee corporation which was incorporated in 1972. The Company designs, engineers, manufactures and markets equipment and components used primarily in road building and related construction activities as well as other products discussed below. The Company's products are used in each phase of road building, from quarrying and crushing the aggregate to application of the road surface. The Company also manufactures certain equipment and components unrelated to road construction, including equipment for the mining, quarrying, construction and demolition industries; gas and oil drilling rigs; water well and geothermal drilling rigs; industrial heat transfer equipment; whole-tree pulpwood chippers; horizontal grinders; and blower trucks. The Company also manufactures a line of multiple use plants for cement treated base, roller compacted concrete and ready-mix concrete. The Company recently developed and began marketing pelletizing equipment used to compress wood and other products into dense pellets for the renewable energy market among other applications. The Company's subsidiaries hold 78 United States and 36 foreign patents and have an additional 46 United States and 29 foreign patent applications pending. The Company has been responsible for many technological and engineering innovations in the industries in which it operates. The Company's products are marketed both domestically and internationally. In addition to equipment sales, the Company manufactures and sells replacement parts for equipment in each of its product lines and replacement parts for some competitors' equipment. The distribution and sale of replacement parts is an integral part of the Company's business.
The Company's fifteen manufacturing subsidiaries are: (i) Breaker Technology Ltd/Inc., which designs, engineers, manufactures and markets rock breaking systems in addition to processing equipment and utility vehicles for the mining and quarrying industries; (ii) Johnson Crushers International, Inc., which designs, engineers, manufactures and markets portable and stationary aggregate and ore processing equipment; (iii) Kolberg-Pioneer, Inc., which designs, engineers, manufactures and markets aggregate processing equipment for the crushed stone, gravel, manufactured sand, recycle, top soil and remediation markets; (iv) Osborn Engineered Products SA (Pty) Ltd, which designs, engineers, manufactures and markets a complete line of bulk material handling and minerals processing plant and equipment used in the aggregate, mineral mining, metallic mining and recycling industries; (v) Astec Mobile Screens, Inc. which designs, engineers, manufactures and markets mobile screening plants, portable and stationary structures and vibrating screens for the aggregate, recycle and material processing industries; (vi) Telsmith, Inc., which designs, engineers, manufactures and markets aggregate processing and mining equipment for the production and classification of sand, gravel, crushed stone and minerals used in road construction and other applications; (vii) Astec, Inc., which designs, engineers, manufactures and markets hot-mix asphalt plants, concrete mixing plants and related components of each and wood pellet plants; (viii) CEI Enterprises, Inc., which designs, engineers, manufactures and markets thermal fluid heaters, storage tanks, hot-mix asphalt plants, rubberized asphalt and polymer blending systems; (ix) Heatec, Inc., which designs, engineers, manufactures and markets thermal fluid heaters, process heaters, waste heat recovery equipment, liquid storage systems and polymer and rubber blending systems; (x) Astec Underground, Inc., which designs, engineers, manufactures and markets high pressure diesel powered pump trailers used for fracking and cleaning oil and gas wells and drilling rigs for the oil and gas industries as well as functioning as a contract manufacturer for other Astec companies; (xi) Carlson Paving Products, Inc., which designs, engineers, manufactures and markets asphalt paver screeds, a commercial paver and a windrow
pickup machine; (xii) Roadtec, Inc., which designs, engineers, manufactures and markets asphalt pavers, material transfer vehicles, milling machines and a line of asphalt reclaiming and soil stabilizing machinery; (xiii) Peterson Pacific Corp., which designs, engineers, manufactures and markets whole-tree pulpwood chippers, horizontal grinders and blower trucks; (xiv) GEFCO, Inc., which designs, engineers, manufactures and markets portable drilling rigs and related equipment for the water well, environmental, groundwater monitoring, construction, geothermal, mining and shallow oil and gas exploration and production industries; and (xv) Astec Mobile Machinery GmbH, located in Hameln, Germany, which designs, manufactures and markets asphalt rollers and screeds and a road widener attachment and distributes products produced by other Company subsidiaries, primarily Roadtec, Inc. The Company also has a subsidiary in Australia, Astec Australia Pty Ltd, that markets and installs equipment and services and provides parts in the region for many of the products produced by the Company’s subsidiaries. In late 2011, the Company entered into an agreement with MDE, a Brazilian company, to form a manufacturing subsidiary in Brazil (“Astec Brazil”), with 75% of the ownership expected to be held by Astec Industries, Inc. Astec Brazil began construction of a manufacturing facility during 2012 and expects to begin producing equipment by mid- to late-2014 to supply the South American market with various Company products for the aggregate and mining industries.
The Company's strategy is to be the industry's most cost-efficient producer in each of its product lines while continuing to develop innovative new products and provide first class service for its customers. Management believes that the Company is the technological innovator in the markets in which it operates and is well positioned to capitalize on the need to rebuild and enhance roadway and utility infrastructure as well as in other areas in which it offers products and services, both in the United States and abroad.
Segment Reporting
The Company's business units have their own decentralized management teams and offer different products and services. The business units have been aggregated into four reportable business segments based upon the nature of the product or services produced, the type of customer for the products, the similarity of economic characteristics, the manner in which management reviews results and the nature of the production process, among other considerations. The Company’s current reportable business segments are (i) Asphalt Group, (ii) Aggregate and Mining Group, (iii) Mobile Asphalt Paving Group and (iv) Underground Group. All remaining companies, including the Company, Astec Insurance Company, Peterson Pacific Corp. and Astec Australia Pty Ltd, as well as U.S. federal income tax expenses for all business segments, are included in the "Other Business Units" category for reporting. Due to recent internal changes in management responsibility and product transfers between some of the Company’s subsidiaries, the Company is currently reevaluating its reportable segments composition and changes in reporting are expected during 2014.
Financial information in connection with the Company's financial reporting for segments of a business and for geographic areas under FASB Accounting Standards Codification (ASC) 280 is included in Note 18, Operations by Industry Segment and Geographic Area, in "Notes to Consolidated Financial Statements” presented in Appendix A of this report.
Asphalt Group
The Asphalt Group segment is made up of three business units: Astec, Inc. ("Astec"), Heatec, Inc. ("Heatec") and CEI Enterprises, Inc. ("CEI"). These business units design, engineer, manufacture and market a complete line of asphalt plants, concrete mixing plants, wood pellet plants, and related components of each, heating and heat transfer processing equipment and storage tanks for the asphalt paving and other non-related industries.
Products
Astec designs, engineers, manufactures and markets a complete line of portable, stationary and relocatable hot-mix asphalt plants and related components under the ASTEC
®
trademark, as well as a line of concrete mixing plants introduced by Astec in 2009. An asphalt mixing plant typically consists of heating and storage equipment for liquid asphalt (manufactured by CEI or Heatec); cold feed bins for blending aggregates; a counter-flow continuous type unit (Astec Double Barrel) for drying, heating and mixing; a baghouse composed of air filters and other pollution control devices; hot storage bins or silos for temporary storage of hot-mix asphalt; and a control house. Astec introduced the concept of high plant portability in 1979. Its current generation of portable asphalt plants is marketed as the Six Pack
TM
and consists of six or more portable components, which can be disassembled, moved to the construction site and reassembled, thereby reducing relocation expenses. High plant portability represents an industry innovation developed and successfully marketed by Astec. Astec's enhanced version of the Six Pack
TM
,
known as the Turbo Six Pack
TM
, is a highly portable plant which is especially useful in less populated areas where plants must be moved from job-to-job and can be disassembled and erected without the use of cranes.
Astec developed a Double Barrel Green System (patent pending), which allows the asphalt mix to be prepared and placed at lower temperatures than conventional systems and operates with a substantial reduction in smoke emissions during paving and load-out. Previous technologies for warm mix production rely on expensive additives, procedures and/or special asphalt cement delivery systems that add significant costs to the cost per ton of mix. The Company’s new Astec multi-nozzle device eliminates the need for the expensive additives by mixing a small amount of water and asphalt cement together to create microscopic bubbles that reduce the viscosity of the asphalt mix coating on the rock, thereby allowing the mix to be handled and worked at lower temperatures.
The components in Astec's asphalt mixing plants are fully automated and use both microprocessor-based and programmable logic control systems for efficient operation. The plants are manufactured to meet or exceed federal and state clean air standards. Astec also builds batch type asphalt plants and has developed specialized asphalt recycling equipment for use with its hot-mix asphalt plants.
Astec’s concrete production equipment is designed to be easy to operate and maintain. Materials are managed with continuous blending using belt scales and variable frequency conveyor drives. Shaft-driven mixers with high-torque folding action deliver a uniform concrete mix. Astec’s tower plants, which are designed in modular configurations for either dry or wet arrangements, provide an exciting new alternative in vertical stationary concrete plants.
In 2013, Astec began commercial production of wood pellet plants. Astec's ground-breaking, state-of-the-art wood pellet plant features a number of industry innovations and is designed to change the wood pellet production industry. The modular design with replicated parallel lines results in fewer points in the process where an equipment failure can shut the entire plant down. In most other plants, a dryer outage would result in a total plant shutdown. In the event of a dryer outage in one line of a 60 TPH Astec plant, which consists of three 20 TPH lines, the plant would continue to operate at 40 TPH. Major maintenance cycles may be performed line-by-line while the plant continues to operate on the other lines.
Certain of Astec’s products are also available through licensing agreements with TIL, Ltd. in India and CCCC Xi’an Road Construction Co. Ltd. in China.
Heatec designs, engineers, manufactures and markets a variety of thermal fluid heaters, process heaters, waste heat recovery equipment, liquid storage systems and polymer and rubber blending systems under the HEATEC
®
trademark. For the construction industry, Heatec manufactures a complete line of asphalt heating and storage equipment to serve the hot-mix asphalt industry and water heaters for concrete plants. In addition, Heatec builds a wide variety of industrial heaters to fit a broad range of applications, including heating equipment for marine vessels, roofing material plants, refineries, oil sands, energy related processing, chemical processing, rubber plants and agribusiness. Heatec has the technical staff to custom design heating systems and has systems operating as large as 50,000,000 BTU's per hour.
CEI designs, engineers, manufactures and markets thermal fluid heaters, storage tanks, rubberized asphalt and polymer blending systems under the CEI
®
trademark. CEI designs and builds heaters with outputs up to 50,000,000 BTU’s per hour and portable, vertical and stationary storage tanks up to 50,000 gallons in capacity. CEI is a leading supplier of crumb rubber blending plants in the U.S.
Marketing
Astec markets its hot-mix asphalt products both domestically and internationally under the Astec and Astec Dillman trademarks. Asphalt equipment is sold directly to the customers through Astec's domestic and international sales departments, although independent agents are also used to market asphalt plants and their components in international markets.
Heatec and CEI equipment is marketed through both direct sales and dealer sales. Manufacturers' representatives sell heating products for applications in industries other than the asphalt industry.
In total, the products of the Asphalt Group segment are marketed by approximately 55 direct sales employees, 17 domestic independent distributors and 56 international independent distributors.
Raw Materials
Raw materials used in the manufacture of products in the Asphalt Group include carbon steel, pipe and various types of alloy steel, which are normally purchased from distributors. Raw materials for manufacturing are normally readily available. Most steel is delivered on a "just-in-time" arrangement from the supplier to reduce inventory requirements at the manufacturing facilities, but steel is occasionally inventoried after purchase.
Competition
This industry segment faces strong competition in price, service and product performance and competes with both large publicly-held companies and various smaller manufacturers. Domestic hot-mix asphalt plant competitors include Terex Corporation, Gencor Industries, Inc., ADM, Parker and Almix. In the international market, the hot-mix asphalt plant competitors include Ammann, Fayat/Marini, Terex/Cifali, Speco and local manufacturers. The market for the Company's heat transfer equipment is diverse because of the multiple applications for such equipment. Competitors for the construction product line of heating equipment include, among others, Gencor Industries, Inc./Hyway Heat Systems, American Heating, Pearson Heating Systems, Reliable Asphalt Products, F&C and Meeker. Competitors for the industrial product line of heating equipment include New Point Thermal, Fulton Thermal Corporation, Sigma Thermal and Vapor Power International, NATCO, Broach and TFS, among others.
Employees
At December 31, 2013, the Asphalt Group segment employed 1,075 individuals, of which 762 were engaged in manufacturing, 142 in engineering and 171 in selling, general and administrative functions.
Backlog
The backlog for the Asphalt Group at December 31, 2013 and 2012 was approximately $153,719,000 and $139,828,000, respectively. Management expects substantially all current backlogs to be filled in 2014.
Aggregate and Mining Group
The Company's Aggregate and Mining Group is comprised of seven business units focused on supplying heavy equipment and parts in the aggregate, metallic mining, quarrying and recycling markets. These business units achieve their strength by distributing products into niche markets and drawing on the advantages of brand recognition in the global market. These business units are Telsmith, Inc. ("Telsmith"), Kolberg-Pioneer, Inc. ("KPI"), Astec Mobile Screens, Inc. ("AMS"), Johnson Crushers International, Inc. ("JCI"), Breaker Technology Ltd/Breaker Technology Inc. ("BTI"), Osborn Engineered Products, SA (Pty) Ltd ("Osborn") and Astec do Brasil Fabricacao de Equipamentos Ltda (“Astec Brazil”).
Products
Telsmith, founded in 1906, is the oldest subsidiary of the group. The primary markets served under the TELSMITH
®
trade name are the aggregate, metallic mining and recycling industries.
Telsmith’s core products are jaw, cone and impact crushers, as well as vibrating feeders and inclined and horizontal screens. Telsmith also provides consulting and engineering services to provide complete “turnkey” processing systems. Both portable and modular plant systems are available in production ranges from 300 tph to 1500 tph.
Telsmith maintains an ISO 9001:2008 certification, an internationally recognized standard of quality assurance. In addition, Telsmith has achieved CE designation (a standard for quality assurance and safety) on its jaw crusher, cone crusher and vibrating screen products marketed into European Union countries.
Telsmith recently introduced ten new or enhanced equipment models in several of its product lines to address customer needs by adding additional features and functionality to its existing product line while also addressing manufacturing cost concerns. Product lines with new or enhanced equipment models include portable cone crushers, horizontal screens and screen plants, fold-up conveyors, rock hoppers, crushing stations, skid mounted crushing plants and vibrating pan feeders.
KPI and JCI (“KPI-JCI”) designs, engineers, manufactures and supports a complete line of stationary and portable aggregate and ore processing equipment for the sand and gravel, mining, quarrying, concrete and asphalt recycling markets under the KPI-JCI product brand name. This equipment, along with the related screen products from AMS, is jointly marketed through an extensive network of KPI-JCI and AMS dealers.
KPI-JCI products include a complete line of primary, secondary, tertiary and quaternary crushers, including jaw, cone, horizontal shaft impactor, vertical shaft impactor and roll rock crushers as well as industry related washing and conveying equipment and vertical and horizontal screens. KPI-JCI rock crushers are used by mining, quarrying and sand and gravel producers to crush oversized aggregate to salable size, in addition to their use for recycled concrete and asphalt. Equipment furnished by KPI-JCI can be purchased as individual components, as portable plants for flexibility or as completely engineered systems for both portable and stationary applications. KPI-JCI’s portable plant offerings include the highly-portable Fast Pack ® System, featuring quick setup and teardown, thereby maximizing production time and minimizing downtime. KPI-JCI also offers portable fully self-contained and self-propelled Fast Trax ® track-mounted jaw and horizontal shaft crushers in six different models, which are ideal for either recycle or hard rock applications, allowing the producer to move the equipment to the material. KPI-JCI’s expanded Global Trax line of these track-mounted crushers focuses more specifically on the need for these types of products in the global market. KPI-JCI screens are low-profile machines for use in both portable and stationary applications.
KPI-JCI portable plants combine various combinations of cone crushers, horizontal screens, combo screens and conveyors, mounted on tow away chassis and track chassis configurations. Due to high transportation costs of construction materials, many producers use portable equipment to produce materials they need close to their job sites. Portable plants allow aggregate producers the ability to quickly and efficiently move equipment from one location to another as their jobs necessitate. The portable track plants are fully self-contained and allow operators to be producing materials within minutes of unloading equipment off of their transport trucks. The introduction of track-mounted crushing and screening plants has enabled contractors to perform jobs that in the past were not economically feasible and also allows our dealers to compete in the large track-mounted rental market.
KPI-JCI sand classifying and washing equipment is designed to clean, separate and re-blend deposits to meet the size specifications for critical applications. KPI-JCI products include fine and coarse material washers, log washers, blade mills and sand classifying tanks. KPI-JCI also offers additional portable and stationary plants to handle the growing needs in specialty sands and fines recovery. Screening plants are available in both stationary and highly portable models and are complemented by a full line of radial stacking and overland belt conveyors.
KPI-JCI conveying equipment is designed to move or store aggregate and other bulk materials in radial cone-shaped or windrow stockpiles. KPI-JCI’s SuperStacker telescoping conveyor and its Wizard Touch® automated controls are designed to add efficiency and accuracy to whatever the stockpile specifications require. Additionally, high capacity rail and barge loading/unloading material handling systems are an important part of the KPI-JCI product lines.
AMS designs, engineers, manufactures and markets mobile screening plants, portable and stationary screen structures and vibrating screens designed for the recycle, crushed stone, sand and gravel, industrial and general construction industries. These screening plants include the AMS Vari-Vibe and Duo-Vibe high frequency screens and a multi-frequency screen. The AMS high frequency screens are used for chip sizing, sand removal and sizing recycled asphalt where conventional screens are not ideally suited. Certain of AMS products are also available through licensing agreements with TIL, Ltd. in India.
In 2013, KPI-JCI and Astec Mobile Screens launched seven new products, including the new generation SuperStacker™, the GT125 Jaw Crusher, the GT145S Screen Plant, the GT165DF Screen Plant, the Kodiak Plus K500+ Cone Crusher, the Series 9000 De-Watering Screen and the High Frequency Screen for the industrial sands market. Additionally, a number of new screen models were introduced in 2013 targeted for markets not previously served by our existing products.
BTl designs, engineers, manufactures and markets a complete line of stationary rockbreaker systems for the mining, quarry and recycling industries, and provides large-scale stationary rockbreakers for open pit mining, as well as mid-sized stationary rock breakers for underground applications. BTl also designs, engineers, manufactures and markets a complete line of four wheel drive articulated production and utility vehicles for underground mining.
In addition to supplying equipment for the mining and quarry industries, BTl also designs, manufactures and markets a complete line of hydraulic breakers, compactors and demolition attachments for the North American construction and demolition markets.
BTl maintains ISO9001:2008 and 14001:2004 certifications, internationally recognized standards of quality and environmental assurance. BTl offers an extensive aftermarket sales and service program through a highly qualified and trained dealer network.
During 2013, BTI shipped its first extra-large stationary rockbreaker system to a large iron ore mine operator in Canada. These systems are the largest in the world and weigh over 100,000 pounds and are designed to work on gyratory crusher installations in strip mining applications and are offered in four models with 48 to 64 foot reach. BTI is also currently finalizing the development of several new products including two new stationary rockbreaker systems, a multipurpose mine utility vehicle, a 18,500 foot-pound class hydraulic breaker and a range of small sized high flow hydraulic breakers for skid steer applications.
Osborn, which is located in South Africa, maintains ISO:9000; 14000 and 18000 certifications for quality assurance and designs, engineers, manufactures and markets a complete line of bulk material handling and minerals processing equipment. This equipment is used in the aggregate, mining, metallurgical and recycling industries. Osborn has been a licensee of Telsmith's technology for over 60 years and recently became a licensee of KPI’s vertical and horizontal shaft impact crushers. In addition to Telsmith and KPI products, Osborn also has an in-house brand, Hadfields. Osborn also offers the following equipment: mineral sizers; single and double-toggle jaw crushers; cone crushers; rotary breakers; roll crushers; rolling ring crushers; mills; out-of-balance or exciter-driven screens and feeders; portable, track-mounted or skid mounted crushing and screening plants; and a full range of idlers.
Osborn has recently added a number of new products to its product offerings, including a 300 HP gyratory crusher for secondary applications, horizontal shaft impactors, an extension to the range of out-of-balance exciter gearboxes and a low profile apron feeder, in addition to numerous modernization and updates to its existing product lines
.
Astec Brazil is in the process of constructing a manufacturing facility in Brazil. The approximately 132,400 square foot facility is scheduled to begin operations in the second half of 2014. Manufacturing operations, sales, distribution and product support will be located within the new facility, which is expected to employee approximately 120 employees at full capacity. The new facility will initially manufacture stationary jaw and cone crushers, vibrating feeders, screens and track-mounted crushing units, representing the brands of AMS, KPI-JCI, and Telsmith in the construction and mining industries. The Company also plans to manufacture other product lines at the facility in the future, such as BTI products for underground mining. Once fully funded, Astec Brazil is expected to be 75% owned by the Company, with the other 25% being owned by MDE, a recognized leader in providing material handling solutions to the Brazilian market.
Prior to completion of the facility, Astec Brazil is operating as a distributor in the South American market for the other Astec Aggregate and Mining companies and Astec asphalt plants.
Marketing
Aggregate processing and mining equipment is marketed by approximately 108 direct sales employees, 133 domestic independent distributors and 85 international independent distributors. The principal purchasers of aggregate processing equipment include highway and heavy equipment contractors, open mine operators, quarry operators and foreign and domestic governmental agencies.
Raw Materials
Raw materials used in the manufacture of products in the Aggregate and Mining Group include carbon steel and various types of alloy steel, which are normally purchased from distributors. Raw materials for manufacturing are normally readily available. BTI purchases hydraulic breakers under a purchasing arrangement with a South Korean supplier. The Company believes the South Korean supplier has sufficient capacity to meet the Company's anticipated demand; however, alternative suppliers exist for these components should any supply disruptions occur.
Competition
The Aggregate and Mining Group faces strong competition in price, service and product performance. Aggregate and Mining equipment competitors include Metso, Cedarapids, Powerscreen and Finlay, McCloskey, Superior, Pegson, Jacques, subsidiaries of Terex Corporation, Klemmann, Deister, F. L. Smith, McLanahan, Sandvik, and other smaller manufacturers, both domestic and international.
Employees
At December 31, 2013, the Aggregate and Mining Group segment employed 1,539 individuals, of which 1,108 were engaged in manufacturing, 127 in engineering and engineering support functions and 304 in selling, general and administrative functions.
Telsmith has a labor agreement covering approximately 161 manufacturing employees which expires on September 17, 2017. None of Telsmith's other employees are covered by a collective bargaining agreement. Approximately 211 of Osborn's manufacturing employees fall within the scope of a collective labor union agreement that expires on June 30, 2014.
Backlog
At December 31, 2013 and 2012, the backlog for the Aggregate and Mining Group was approximately $105,022,000 and $88,123,000, respectively. Management expects all current backlogs to be filled in 2014.
Mobile Asphalt Paving Group
The Mobile Asphalt Paving Group is comprised of Roadtec, Inc. ("Roadtec"), Carlson Paving Products, Inc. ("Carlson") and Astec Mobile Machinery GmbH (“Astec Mobile Machinery”), which began operations in the third quarter of 2011 in Hameln, Germany. Roadtec designs, engineers, manufactures and markets asphalt pavers, material transfer vehicles, milling machines and a line of asphalt reclaiming and soil stabilizing machinery. Carlson designs, engineers and manufactures asphalt paver screeds that attach to asphalt pavers to control the width and depth of the asphalt as it is applied to the roadbed. Carlson also manufactures windrow pickup machines which transfer hot mix asphalt from the road bed into the paver's hopper and a heavy duty commercial class 8 ft. asphalt paver designed for parking lots, residential and other secondary roads. Astec Mobile Machinery serves as a distributor for Roadtec’s products in Europe and also designs, manufactures and markets screeds primarily for road construction markets outside the United States as well as a small road widener attachment.
Products
Roadtec's Shuttle Buggy
®
is a mobile, self-propelled material transfer vehicle which allows continuous paving by separating truck unloading from the paving process while remixing the asphalt. A typical asphalt paver must stop paving to permit truck unloading of asphalt mix. By permitting continuous paving, the Shuttle Buggy
®
allows the asphalt paver to produce a smoother road surface, while reducing the time required to pave the road surface and reducing the number of haul trucks required. As a result of the pavement smoothness achieved with this machine, certain states now require the use of the Shuttle Buggy
®
. Studies using infrared technology have revealed problems caused by differential cooling of the hot-mix during hauling. The Shuttle Buggy
®
remixes the material to a uniform temperature and gradation, thus eliminating these problems.
Asphalt pavers are used in the application of hot-mix asphalt to the road surface. Roadtec pavers have been designed to minimize maintenance costs while exceeding road surface smoothness requirements. Roadtec also manufactures a paver model designed for use with the Shuttle Buggy material transfer vehicle described above. This paver model is designed to carry and spray tack coat directly in front of the hot mix asphalt in a single process.
Roadtec manufactures milling machines designed to remove old asphalt from the road surface before new asphalt mix is applied. Roadtec's milling machine lines, for larger jobs, are manufactured with a simplified control system, wide conveyors, direct drives and a wide range of horsepower and cutting capabilities to provide versatility in product application. In addition to its half-lane and larger highway class milling machines, Roadtec also manufactures a smaller, utility class machine for two to four foot cutting widths. In addition, in 2013 Roadtec introduced a new utility class cold planer model mounted on wheels. Other new products introduced in 2013 include a gravity fed stealth paver and a roller compacted concrete paver.
Roadtec produced soil stabilizers in 2013 at configurations of 275 HP, 440HP, 625HP and 755HP. These machines double as asphalt reclaiming machines for road rehabilitations, in addition to their primary purpose of stabilizing soil sub-grades with additives to provide an improved base on which to pave. One additional model is being developed for production beginning in late 2014.
Carlson's patented screeds are attachments to asphalt paving machines that place asphalt on the roadbed at a desired thickness and width while smoothing and compacting the surface. Carlson screeds can be configured to fit many types of asphalt paving machines. The Carlson screed uses a hydraulic powered generator to electrify elements that heat a screed plate so asphalt will not stick to it while paving. A generator is also available to power tools or lights for night paving. Carlson offers options which allow extended paving widths and the addition of a curb on the road edge. Carlson also offers a commercial class eight foot paver to fill the void between competitors’ commercial pavers, which tend to be lighter and less robust machines, and Roadtec’s highway class paver line.
Astec Mobile Machinery is functioning primarily as a distributor for Roadtec products in Europe. Additionally, it designs and manufactures screeds and a small road widener attachment designed to meet the unique needs of the European market. Astec Mobile Machinery is developing an additional tamper bar screed for introduction into the European market in 2014.
Marketing
The Mobile Asphalt Paving Group equipment is marketed both domestically and internationally to highway and heavy equipment contractors, utility contractors and foreign and domestic governmental agencies. Mobile construction equipment and factory authorized machine rebuild services are marketed both directly and through dealers. This segment employs 39 direct sales staff, 74 domestic independent distributors and 22 international independent distributors, including Astec-owned distributors in Australia and Germany.
Raw Materials
Raw materials used in the manufacture of products in the Mobile Asphalt Paving Group include carbon steel and various types of alloy steel, which are normally purchased from distributors and other sources. Raw materials for manufacturing are normally readily available. Most steel is delivered on a "just-in-time" arrangement from suppliers to reduce inventory requirements at the manufacturing facilities, but some steel is occasionally inventoried after purchase. Components used in the manufacturing process include engines, gearboxes, power transmissions and electronic systems.
Competition
The Mobile Asphalt Paving Group faces strong competition in price, service and performance. Paving equipment and screed competitors include Wailer, Caterpillar Paving Products, Inc., Volvo Construction Equipment, CMI Corporation, a subsidiary of Terex Corporation, Vogele America, a subsidiary of Wirtgen America, Dynapac, a subsidiary of Atlas-Copco, and Lee Boy. The segment's milling machine equipment competitors include Wirtgen, CMI, Caterpillar, Bomag, Dynapac and Volvo.
Employees
At December 31, 2013, the Mobile Asphalt Paving Group segment employed 501 individuals, of which 322 were engaged in manufacturing, 47 in engineering and engineering support functions and 132 in selling, general and administrative functions.
Backlog
The backlog for the Mobile Asphalt Paving Group segment at December 31, 2013 and 2012 was approximately $6,090,000 and $4,265,000, respectively. Management expects all current backlogs to be filled in 2014.
This segment typically operates with a smaller backlog in relation to sales than the Company’s other segments as many customers expect immediate delivery due to the types of products being sold and the lead times typically available on competitors’ equipment sold through dealers.
Underground Group
During 2011 and most of 2012, the Underground Group consisted of three manufacturing companies: Astec Underground, Inc. ("Astec Underground"), American Augers, Inc. ("American Augers") and GEFCO, Inc. (“GEFCO”), which was acquired by the Company in October 2011. During late 2012, the Company sold American Augers and the large trencher product line of Astec Underground and the Underground Group now consists of GEFCO and Astec Underground (also referred to as “GEFCO-Loudon”). GEFCO designs, engineers and manufactures a complete line of drilling rigs for the oil and gas, geothermal and water well industries as well as its line of King Oil tools. Astec Underground continues to produce high pressure diesel powered pump trailers used for fracking and cleaning oil and gas wells and drilling rigs for the oil and gas industries. Astec Underground also serves as a contract manufacturer for other Astec companies.
Products
In 2012, Astec Underground began manufacturing and selling a trailer-mounted double fluid pumper for use in the hydraulic fracturing and the oil and gas extraction industries, and it is currently developing a single fluid pumper for introduction in 2014. The units include engines, transmissions, gearboxes, application specific cooling packages, displacement tank, plumbing and all related controls. Subsequent to the sale of American Augers, Astec Underground assumed the American Augers’ large oil and gas well drilling equipment product line.
GEFCO, which began operations in 1931, manufactures portable drilling rigs and related equipment for the water well, environmental, groundwater monitoring, construction, mining and shallow oil and gas exploration and production industries. GEFCO’s EarthPro
®
Geothermal Drill, introduced in 2009, features a heavy-duty mast with a dual rack and pinion drive system. Other features distinguishing this drill from its competitors include an automated rod loading system, a tethered two-speed ground drive system and dual multi-function joystick controls. The Earth Pro
®
offers increased productivity in a drill/trip out application due to its pull up/ down capacity, three-speed drive motors, and the ability to be operated by one person rather than the usual requirement of three persons.
GEFCO is in the process of introducing a new, smaller drilling rig to serve certain geographic locations in the residential geothermal and water well market better than current models. The new rigs will be offered in both truck-mounted and track-mounted options.
Marketing
Astec Underground typically distributes its pump trailers directly to the end users using a sales force of 5 employees. GEFCO primarily markets its products domestically and internationally directly to the end users utilizing a combination of employee and independent sales agents. This segment employs a total of 23 direct sales staff.
Raw Materials
Raw materials used in the manufacture of products in the Underground Group include carbon steel and various types of alloy steel, which are normally purchased from distributors and other sources. Raw materials for manufacturing are normally readily available. Most steel is delivered on a "just-in-time" arrangement from suppliers to reduce inventory requirements at the manufacturing facilities, but steel is occasionally inventoried after purchase. Components used in the manufacturing process include engines, hydraulic pumps and motors, gearboxes, power transmissions and electronic systems.
Competition
The Underground Group segment faces strong competition in price, service and product performance and competes both with large companies that have resources significantly greater than those of the Company and with various smaller manufacturers. Major competitors include Versa Drill, Schramm, Atlas Copco, National Oil Well, Blohm & Vos, Oil Country, NOV/Rolligon, Stewart & Stevenson and Dragon.
E
mployees
At December 31, 2013, the Underground Group segment employed 283 individuals, of which 199 were engaged in manufacturing, 28 in engineering and 56 in selling, general and administrative functions. Included in the totals are 190 employees of GEFCO. GEFCO has a collective bargaining agreement in place for approximately 80 manufacturing employees. The current agreement expires on May 31, 2016.
Backlog
The backlog for the Underground Group segment at December 31, 2013 and 2012 was approximately $14,573,000 and $13,904,000, respectively. Management expects all current backlogs to be filled in 2014.
Other Business Units
This category consists of the Company's business units that do not meet the requirements for separate disclosure as an operating segment. At December 31, 2013, these other operating units included Peterson Pacific Corp. (“Peterson”), Astec Australia Pty Ltd (“Astec Australia”), Astec Insurance Company and Astec Industries, Inc., the parent company. Peterson designs, engineers, manufactures and distributes whole-tree pulpwood chippers, biomass chippers, horizontal grinders and blower trucks. Astec Australia is the sole distributor of many of the company’s product lines in Australia and New Zealand. As a distributor, Astec Australia sells, installs, services and provides parts support for many of the products produced by the Company’s manufacturing companies. Astec Insurance Company is a captive insurance company.
Products
The primary markets served by Peterson are the wood grinding, chipping and blower truck markets. Peterson produces 3 models of whole-tree pulpwood chippers ranging from 765 to 1200 horsepower, 2 flail delimbers, 2 drum chipper models, 9 horizontal grinder models ranging from 475 to 1200 horsepower, 2 blower truck models and 2 self-contained blower trailers. A deck screen model for the wood chipping and grinding market is produced for Peterson by JCI. Peterson has granted rights under a licensing agreement to Morbark, USA, whereby Morbark may produce and sell certain grinder equipment covered by a Peterson patent.
Astec Australia markets relocatable and portable asphalt plants and components produced by Astec, Heatec and CEI, asphalt paving equipment and components produced by Roadtec and Carlson, and aggregate equipment produced by the Company’s Aggregate & Mining Group. In addition to selling equipment, Astec Australia provides complete support for their customers’ equipment with service, training and spare parts. Astec Australia also provides turnkey installation solutions for large asphalt plants, aggregate and mining plants and bitumen tank farms.
Marketing
Peterson markets its machines and spare parts both domestically and internationally in the wood grinding, chipping and blower truck industries. Peterson’s disc chippers and debarkers primarily serve the pulp and paper industry. Peterson’s drum chippers primarily serve the biomass energy market. Peterson’s grinders serve the compost, mulch, biomass energy and construction and demolition recycling markets. Peterson’s blower trucks and trailers are used primarily in landscape and erosion control markets. Peterson’s domestic sales are accomplished through a combination of 15 independent distributors and 12 direct sales and support personnel. The international market is served with 12 independent distributors plus direct sales to customers in some countries. The principal customers of Peterson products are independent contractors who supply the markets listed above. Municipal governments also purchase waste grinders.
Astec Australia’s primarily markets its products in Australia and New Zealand; however, the company is also pursuing opportunities in other areas of the Pacific Rim and in Southeast Asia. Astec Australia opened a new office in Tullamarine, Australia in 2012, which gives the company representation on both the east and west coasts of Australia.
Raw Materials
Raw materials used in the manufacture of products in this segment include carbon steel and various types of alloy steel, which are normally purchased from distributors and other sources. Raw materials for manufacturing are normally readily available. Most steel is delivered on a "just-in-time" arrangement from the supplier to reduce inventory requirements at the manufacturing facilities, but some steel is occasionally inventoried after purchase. Purchased components used in the manufacturing process include engines, gearboxes, power transmissions and electronic control systems.
Competition
Peterson faces strong competition based on product performance, price and service. The principal competitors in North America for high speed grinders are Morbark, Rotochopper, Vermeer, Bandit, Diamond Z and CBI, along with other smaller competitors. Internationally, Doppstadt, Komptech, Jenz and other smaller companies compete in the grinder segment. Mobile chipper competitors include Morbark, Precision, Doppstadt, Jenz and other smaller companies. The principal competitors in the blower truck business are Finn and Express Blower (a division of Finn). Multiple competitors in the organic screening market include Power Screen (Terex), CEI, Doppstadt, Komptech and Terra Select.
Astec Australia’s competitors in each product line are typically the same companies that compete with the Company in other locations. Competitors for asphalt plants, mobile asphalt equipment, and aggregate and mining equipment are primarily overseas manufacturers who are therefore subject to the same importation issues as Astec Australia. The price impact of competition between European, American and Asian products is dependent primarily on the relationship between the US dollar and the Euro exchange rate as compared to the Australian dollar.
Employees
At December 31, 2013, the Other Business Units segment employed 310 individuals, of which 224 were employed by Peterson and 47 were employed by Astec Australia. Peterson has 139 employees engaged in manufacturing, 24 in engineering and 61 in selling and general and administrative functions. Astec Australia has 28 employees engaged in service and installation work and 19 in selling and general and administrative functions. The remaining 39 employees are engaged in selling and general and administrative functions at the parent company.
Backlog
The backlog for the Other Business Units segment at December 31, 2013 and 2012, all of which is attributable to Peterson and Astec Australia, was approximately $10,838,000 and $17,671,000, respectively. Management expects all current backlogs to be filled in 2014.
Common to All Operating Segments
The following information applies to all operating segments of the Company.
Raw Materials
Steel is a major component in the Company’s equipment. After moderate increases during the fourth quarter of 2013, steel prices have stabilized during early 2014. Steel demand is currently moderate with relatively short mill lead times for most products. Management expects steel prices to remain near current levels in the near term unless there are significant demand increases due to growth in the broader economy. It is uncertain, however, if current pricing will continue throughout the remainder of 2014. The Company continues to utilize forward-looking contracts coupled with advanced steel purchases to minimize the impact of price increases. The Company will review the trends in steel prices entering into the second half of 2014 and establish future contract pricing accordingly.
Government Regulations
The Company is subject to various laws and governmental regulations concerning environmental matters and employee safety and health in the United States and other countries. The Environmental Protection Agency, the Occupational Safety & Health Administration, other federal agencies and certain state agencies have the authority to promulgate regulations that have an effect on the Company’s operations. Many of these federal and state agencies may seek fines and penalties for violations of these laws and regulations. The Company has been able to operate under these laws and regulations without any material adverse effect on its business.
None of the Company's operating segments operate within highly regulated industries. However, air pollution control equipment manufactured by the Company, principally for hot-mix asphalt plants, must comply with certain performance standards promulgated by the federal Environmental Protection Agency under the Clean Air Act applicable to "new sources" or new plants. Management believes the Company's products meet all material requirements of such regulations and applicable state pollution standards and environmental protection laws.
In addition, due to the size and weight of certain equipment the Company manufactures, the Company and its customers may encounter conflicting state regulations on maximum weights transportable on highways. Also, some states have regulations governing the operation of asphalt mixing plants, and most states have regulations relating to the accuracy of weights and measures, which affect some of the control systems manufactured by the Company.
Compliance with these government regulations has no material effect on the Company’s capital expenditures, earnings, or competitive position within the market.
Employees
At December 31, 2013, the Company and its subsidiaries employed 3,708 individuals, of which 2,558 were engaged in manufacturing, 368 in engineering, including support staff, and 782 in selling, administrative and management functions.
Other than the Telsmith and Osborn labor agreements described under the “Employee” subsection of the Aggregate and Mining Group above and the GEFCO labor agreement described under the “Employee” subsection of the Underground Group above, there are no other collective bargaining agreements applicable to employees of the Company or its subsidiaries. The Company considers its employee relations to be good.
Manufacturing
The Company manufactures many of the component parts and related equipment for its products, while several large components of its products are purchased "ready-for-use". Such items include engines, axles, tires and hydraulics. In many cases, the Company designs, engineers and manufactures custom component parts and equipment to meet the particular needs of individual customers. Manufacturing operations during 2013 took place at 20 separate locations. The Company's manufacturing operations consist primarily of fabricating steel components and the assembly and testing of its products to ensure that the Company achieves quality control standards.
Seminars and Technical Bulletins
The Company periodically conducts technical and service seminars, which are primarily for dealer representatives, contractors, owners, employees and other users of equipment manufactured by the Company. In 2013, approximately 415 representatives of contractors and owners of hot-mix asphalt plants attended seminars held by the Company in Chattanooga, Tennessee. These seminars, which are taught by Company management and employees, along with select outside speakers and discussion leaders, cover a range of subjects, including, but not limited to, technological innovations in the hot-mix asphalt, aggregate processing, paving, milling and recycling markets.
The Company also sponsors executive seminars for the management of the customers of Astec, Heatec, CEI and Roadtec. Primarily, members of the Company's management conduct the various seminars, but outside speakers and discussion leaders are also utilized.
During 2013, seven service training seminars were held at the Roadtec facility for approximately 520 customer representatives, and six remote seminars were conducted at other locations for approximately 225 additional customer personnel. Telsmith conducted three technical seminars for approximately 107 customer and dealer representatives during 2013. KPI, JCI and AMS jointly conduct National Dealers Conference, an annual dealer event. The event offers the entire dealer network a preview of future products, marketing and promotional programs to help dealers operate successful businesses. In addition to this event, the companies also provide factory customer and dealer training and on-site local, regional and national sales training programs throughout the year.
In addition to seminars, the Company publishes a number of technical bulletins and information bulletins detailing various technological and business issues relating to the industries in which it operates.
Patents and Trademarks
The Company seeks to obtain patents to protect the novel features of its products and processes. The Company's subsidiaries hold 78 United States patents and 36 foreign patents. The Company’s subsidiaries have 46 United States and 29 foreign patent applications pending.
The Company and its subsidiaries have 85 trademarks registered in the United States, including logos for Astec, Astec Dillman, Astec Underground, Carlson Paving, CEI, Gefco, Heatec, JCI, Peterson Pacific, Roadtec, and Telsmith, and the names ASTEC, CARLSON, HEATEC, JCI, KOLBERG, PETERSON, ROADTEC and TELSMITH, as well as a number of other product names. The Company also has 70 trademarks registered in foreign jurisdictions, including Australia, Brazil, Canada, China, France, Germany, Great Britain, India, Italy, Mexico, South Africa, South Korea, Thailand, Vietnam and the European Union. The Company and its subsidiaries have 6 United States and 23 foreign trademark registration applications pending.
Engineering and Product Development
The Company dedicates substantial resources to engineering and product development. At December 31, 2013, the Company and its subsidiaries had 368 full-time individuals employed in engineering and design capacities.
Seasonality and Backlog
Revenues for recent years, adjusted for acquisitions, have been strongest during the first half of the year, with the second half of the year consistently being weaker. We expect future operations in the near term to be typical of this historical trend.
As of December 31, 2013, the Company had a backlog for delivery of products at certain dates in the future of approximately $290,242,000 and $263,791,000 at December 31, 2013 and 2012, respectively. The Company's contracts reflected in the backlog generally are not, by their terms, subject to termination. Management believes the Company is in substantial compliance with all manufacturing and delivery timetables.
Competition
Each business segment operates in domestic markets that are highly competitive regarding price, service and product quality. While specific competitors are named within each business segment discussion above, imports do not generally constitute significant competition for the Company in the United States, except for milling machines and track-mounted crushers. In international sales efforts, however, the Company often competes with foreign manufacturers that may have a local presence in the market the Company is attempting to penetrate.
In addition, asphalt and concrete are generally considered competitive products as a surface choice for new roads and highways. A portion of the interstate highway system is paved in concrete, but over 90% of all surfaced roads in the United States are paved with asphalt. Although concrete is used for some new road surfaces, asphalt is used for most resurfacing.
Available Information
The Company’s internet website can be found at www.astecindustries.com. We make available, free of charge on or through our internet website, access to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is filed with, or furnished to, the Securities and Exchange Commission. Information contained in our website is not part of, and is not incorporated into, this Annual Report on Form 10-K.
Item 1A
.
Risk Factors
Downturns in the general economy or the commercial and residential construction industries may adversely affect our revenues and operating results.
General economic downturns, including downturns in the commercial and residential construction industries, could result in a material decrease in our revenues and operating results. Demand for many of our products, especially in the commercial construction industry, is cyclical. Sales of our products are sensitive to the states of the U.S., foreign and regional economies in general, and in particular, changes in commercial construction spending and government infrastructure spending. In addition, many of our costs are fixed and cannot be quickly reduced in response to decreased demand. The following factors could cause a downturn in the commercial and residential construction industries:
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a decrease in the availability of funds for construction;
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declining economy domestically and internationally;
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labor disputes in the construction industry causing work stoppages;
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rising gas and oil prices;
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rising steel prices and steel surcharges;
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energy or building materials shortages;
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availability of credit for customers.
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Downturns in the general economy and restrictions in the credit markets may negatively
impact our earnings, cash flows and/or financial position and
access to financing sources by the Company and our customers.
Worldwide economic conditions and the international credit markets have significantly deteriorated in recent years and may remain depressed for the foreseeable future. Continued deterioration of economic conditions and credit markets could adversely impact our earnings as sales of our products are sensitive to general declines in U.S. and foreign economies and the ability of our customers to obtain credit. In addition, we rely on the capital markets and the banking markets to meet our financial commitments and short-term liquidity needs if internal funds are not available from our operations. Further disruptions in the capital and credit markets, or deterioration of our creditors' financial condition, could adversely affect the Company's ability to draw on its revolving credit facility. The Company’s current credit facility expires in April 2017, and deterioration in the credit markets could make it more difficult or expensive for us to replace our current credit facility, enter into a new credit facility or obtain additional financing.
A decrease or delay in government funding of highway construction and maintenance may cause our revenues and profits to decrease.
Many of our customers depend on government funding of highway construction and maintenance and other infrastructure projects. Any decrease or delay in government funding of highway construction and maintenance and other infrastructure projects could cause our net sales and profits to decrease. Historically, federal government funding of infrastructure projects has typically been accomplished through bills that establish funding over a multi-year period, such as the Safe, Accountable, Flexible and Efficient Transportation Equity Act - A Legacy for Users (“SAFETEA-LU”), which provided $286.5 billion to fund federal transit projects from 2004 to 2009. SAFETEA-LU funding expired on September 30, 2009, and federal transportation funding has operated on a number of shorter term appropriations since that date. The most recent funding legislation, commonly referred to as Map-21, was passed in July 2012 and funds federal transportation expenditures through September 30, 2014.
With the current political environment in Washington, the level of funding for federal highway projects is uncertain. Although continued funding is expected, it may be at lower levels than in the past, and Congress may not enact long-term funding acts in the near future. In addition, Congress could pass legislation in future sessions that would allow for the diversion of previously appropriated highway funds for other national purposes, or it could restrict funding of infrastructure projects unless states comply with certain federal policies.
The cyclical nature of our industry and the customization of the equipment we sell may cause adverse fluctuations to our revenues and operating results.
We sell equipment primarily to contractors whose demand for equipment depends greatly upon the volume of road or utility construction projects underway or to be scheduled by both government and private entities. The volume and frequency of road and utility construction projects are cyclical; therefore, demand for many of our products is cyclical. The equipment we sell is durable and typically lasts for several years, which also contributes to the cyclical nature of the demand for our products. As a result, we may experience cyclical fluctuations to our revenues and operating results.
An increase in the price of oil or decrease in the availability of oil could reduce demand for our products. Significant increases in the purchase price of certain raw materials used to manufacture our equipment could have a negative impact on the cost of production and related gross margins.
A significant portion of our revenues relates to the sale of equipment involved in the production, handling, recycling or installation of asphalt mix. Liquid asphalt is a byproduct of the refining of oil, and asphalt prices correlate with the price and availability of oil. An increase in the price of oil or a decrease in the availability of oil would increase the cost of producing asphalt, which would likely decrease demand for asphalt, resulting in decreased demand for many of our products. This would likely cause our revenues and profits to decrease. Rising gasoline, diesel fuel and liquid asphalt prices will also adversely impact the operating and raw material costs of our contractor and aggregate producer customers, and if such customers do not properly adjust their pricing, they could experience reduced profits resulting in possible delays in purchasing capital equipment.
Steel is a major component in the Company’s equipment. Steel prices fluctuate routinely. Our reliance on third-party suppliers for steel and other raw materials exposes us to volatility in the prices and availability of these materials. Price increases or a decrease in the availability of these raw materials could increase our operating costs and adversely affect our financial results.
Acquisitions that we have made in the past and future acquisitions involve risks that could adversely affect our future financial results.
We have completed several acquisitions in the past, including the acquisition of the GEFCO division of Blue Tee Corp. and the businesses now operating as Astec Mobile Machinery GmbH in 2011. We may acquire additional businesses in the future. We may be unable to achieve the benefits expected to be realized from our acquisitions. In addition, we may incur additional costs and our management's attention may be diverted because of unforeseen expenses, difficulties, complications, delays and other risks inherent in acquiring businesses, including the following:
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we may have difficulty integrating the financial and administrative functions of acquired businesses;
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acquisitions may divert management's attention from our existing operations;
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fluctuations in exchange rates and a weakening of the dollar may impact the competitiveness of acquired businesses;
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we may have difficulty in competing successfully for available acquisition candidates, completing future acquisitions or accurately estimating the financial effect of any businesses we acquire;
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we may have delays in realizing the benefits of our strategies for an acquired business;
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we may not be able to retain key employees necessary to continue the operations of the acquired business;
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acquisition costs may deplete significant cash amounts or may decrease our operating income;
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we may choose to acquire a company that is less profitable or has lower profit margins than our company;
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future acquired companies may have unknown liabilities that could require us to spend significant amounts of additional capital; and
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we may incur domestic or international economic declines that impact our acquired companies.
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Competition could reduce revenue from our products and services and cause us to lose market share.
We currently face strong competition in product performance, price and service. Some of our domestic and international competitors have greater financial, product development and marketing resources than we have. If competition in our industry intensifies or if our current competitors enhance their products or lower their prices for competing products, we may lose sales or be required to lower the prices we charge for our products. This may reduce revenue from our products and services, lower our gross margins or cause us to lose market share.
Our success depends on key members of our management and other employees.
Certain members of our senior management team are of significant importance to our business and operations. The loss of their services may adversely affect our business. In addition, our ability to attract and retain qualified engineers, skilled manufacturing personnel and other professionals, either through direct hiring or acquisition of other businesses employing such professionals, will also be an important factor in determining our future success.
Difficulties in managing and expanding in international markets could divert management's attention from our existing operations.
In 2013, international sales represented approximately 35.8% of our total sales as compared to 38.9% in 2012. We plan to continue our significant sales and production efforts in international markets. In connection with any increase in international sales efforts, we will need to hire, train and retain qualified personnel in countries where language, cultural or regulatory barriers may exist. Any difficulties in expanding our international sales may divert management's attention from our existing operations. In addition, international revenues are subject to the following risks:
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fluctuating currency exchange rates, which can reduce the profitability of foreign sales;
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the burden of complying with a wide variety of foreign laws and regulations;
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dependence on foreign sales agents;
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political and economic instability of governments;
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the imposition of protective legislation such as import or export barriers; and
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fluctuating strengths or weakness of the dollar, which can impact net sales or the cost of purchased products.
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We may be unsuccessful in complying with the financial ratio covenants or other provisions of our credit agreement.
As of December 31, 2013, we were in compliance with the financial covenants contained in our credit agreement with Wells Fargo Bank, N.A. However, in the future we may be unable to comply with the financial covenants in our credit facility or to obtain waivers with respect to such financial covenants. If such violations occur, the Company’s creditors could elect to pursue their contractual remedies under the credit facility, including requiring immediate repayment in full of all amounts then outstanding. As of December 31, 2013, the Company had no outstanding borrowings but did have $6,943,000 of letters of credit outstanding under the credit agreement. Additional amounts may be borrowed in the future. The Company’s Osborn and Astec Australia subsidiaries have their own independent loan agreements in place.
Our quarterly operating results are likely to fluctuate, which may decrease our stock price.
Our quarterly revenues, expenses and operating results have varied significantly in the past and are likely to vary significantly from quarter to quarter in the future. As a result, our operating results in some quarters may fall below the expectations of securities analysts and investors, which could result in a decrease in the market price of our common stock. The reasons our quarterly results may fluctuate include:
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general competitive and economic conditions, domestically and internationally;
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delays in, or uneven timing in, the delivery of customer orders;
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the seasonal trend in our industry;
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the introduction of new products by us or our competitors;
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product supply shortages; and
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reduced demand due to adverse weather conditions.
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Period-to-period comparisons of such items should not be relied on as indications of future performance.
We may face product liability claims or other liabilities due to the nature of our business. If we are unable to obtain or maintain insurance or if our insurance does not cover liabilities, we may incur significant costs which could reduce our profitability.
We manufacture heavy machinery, which is used by our customers at excavation and construction sites and on high-traffic roads. Any defect in or improper operation of our equipment can result in personal injury and death, and damage to or destruction of property, any of which could cause product liability claims to be filed against us. The amount and scope of our insurance coverage may not be adequate to cover all losses or liabilities we may incur in the event of a product liability claim. We may not be able to maintain insurance of the types or at the levels we deem necessary or adequate or at rates we consider reasonable. Any liabilities not covered by insurance could reduce our profitability or have an adverse effect on our financial condition.
If we are unable to protect our proprietary technology from infringement or if our technology infringes technology owned by others, then the demand for our products may decrease or we may be forced to modify our products, which could increase our costs.
We hold numerous patents covering technology and applications related to many of our products and systems as well as numerous trademarks and trade names registered with the U.S. Patent and Trademark Office and in foreign countries. Our existing or future patents or trademarks may not adequately protect us against infringements, and pending patent or trademark applications may not result in issued patents or trademarks. Our patents, registered trademarks and patent applications, if any, may not be upheld if challenged, and competitors may develop similar or superior methods or products outside the protection of our patents. This could reduce demand for our products and materially decrease our revenues. If our products are deemed to infringe upon the patents or proprietary rights of others, we could be required to modify the design of our products, change the name of our products or obtain a license for the use of some of the technologies used in our products. We may be unable 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 cause us to incur additional costs or lose revenues.
If we become subject to increased governmental regulation, we may incur significant costs.
Our hot-mix asphalt plants contain air pollution control equipment and several of our other products contain engines that must comply with performance standards promulgated by the Environmental Protection Agency. These performance standards may increase in the future. Changes in these requirements could cause us to undertake costly measures to redesign or modify our equipment or otherwise adversely affect the manufacturing processes of our products. Such changes could have a material adverse effect on our operating results.
Also, due to the size and weight of some of the equipment that we manufacture, we often are required to comply with conflicting state regulations on the maximum weight transportable on highways and roads. In addition, some states regulate the operation of our component equipment, including asphalt mixing plants and soil remediation equipment, and most states regulate the accuracy of weights and measures, which affect some of the control systems we manufacture. We may incur material costs or liabilities in connection with the regulatory requirements applicable to our business.
As an innovative leader in the industries in which we operate, we occasionally undertake the engineering, design, manufacturing and construction of equipment systems that are new to the market. Estimating the cost of such innovative equipment can be difficult and could result in our realization of significantly reduced or negative margins on such projects.
In the past, we have experienced negative margins on certain large, specialized aggregate systems projects. These large contracts included both existing and innovative equipment designs, on-site construction and minimum production levels. Since it can be difficult to achieve the expected production results during the project design phase, field testing and redesign may be required during project installation, resulting in added cost. In addition, due to any number of unforeseen circumstances, which can include adverse weather conditions, projects can incur extended construction and testing delays which can cause significant cost overruns. We may not be able to sufficiently predict the extent of such unforeseen cost overruns and may experience significant losses on specialized projects. Additionally, the Company typically incurs substantial research and development costs each year and has historically received significant research and development tax credits due to these expenditures. While these tax credits were approved through 2013, they may not be approved for future years.
Our Articles of Incorporation, Bylaws and Rights Agreement and Tennessee law may inhibit a takeover, which could delay or prevent a transaction in which shareholders might receive a premium over market price for their shares.
Our charter and bylaws and Tennessee law contain provisions that may delay, deter or inhibit a future acquisition or an attempt to obtain control of us. This could occur even if our shareholders are offered an attractive value for their shares or if a substantial number or even a majority of our shareholders believe the takeover is in their best interest. These provisions are intended to encourage any person interested in acquiring us or obtaining control of us to negotiate with and obtain the approval of our Board of Directors in connection with the transaction. Provisions that could delay, deter or inhibit a future acquisition or an attempt to obtain control of us include the following:
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having a staggered Board of Directors;
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requiring a two-thirds vote of the total number of shares issued and outstanding to remove directors other than for cause;
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requiring advance notice of actions proposed by shareholders for consideration at shareholder meetings;
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limiting the right of shareholders to call a special meeting of shareholders;
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requiring that all shareholders entitled to vote on an action provide written consent in order for shareholders to act without holding a shareholders’ meeting; and
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being governed by the Tennessee Control Share Acquisition Act.
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In addition, the rights of holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of our preferred stock that may be issued in the future and that may be senior to the rights of holders of our common stock. In December 2005, our Board of Directors approved an Amended and Restated Shareholder Protection Rights Agreement, which provides for one preferred stock purchase right in respect of each share of our common stock ("Rights Agreement"). These rights become exercisable upon the acquisition by a person or group of affiliated persons, other than an existing
15% shareholder, of 15% or more of our then-outstanding common stock by all persons. This Rights Agreement also could discourage bids for the shares of common stock at a premium and could have a material adverse effect on the market price of our shares.
Item 1B
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Unresolved Staff Comments
None.
Item 2.
Properties
The location, approximate square footage, acreage occupied and principal function and use by the Company’s reporting segments of the properties owned or leased by the Company are set forth below:
Location
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Approximate
Square Footage
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Approximate
Acreage
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Principal Function (Use by Segment)
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Chattanooga, Tennessee
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518,000
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63
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Offices, manufacturing and training center – Astec (Asphalt Group)
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Chattanooga, Tennessee
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-
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51
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Storage yard – Astec (Asphalt Group)
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Rossville, Georgia
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40,500
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3
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Manufacturing – Astec (Asphalt Group)
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Prairie du Chien, WI
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91,500
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39
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Manufacturing – Dillman division of Astec (Asphalt Group)
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Chattanooga, Tennessee
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109,700
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15
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Offices and manufacturing – Heatec (Asphalt Group)
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Chattanooga, Tennessee
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207,000
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15
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Offices, manufacturing and training center – Roadtec (Mobile Asphalt Paving Group)
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Chattanooga, Tennessee
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51,200
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7
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Manufacturing – Roadtec (Mobile Asphalt Paving Group)
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Chattanooga, Tennessee
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14,100
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--
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Leased Hanger and Offices – Astec Industries, Inc. (Other Business Units)
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Chattanooga, Tennessee
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10,000
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2
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Corporate offices – Astec Industries, Inc. (Other Business Units)
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Mequon, Wisconsin
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236,000
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30
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Offices and manufacturing – Telsmith (Aggregate and Mining Group)
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Sterling, Illinois
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60,000
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8
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Offices and manufacturing – AMS (Aggregate and Mining Group)
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Orlando, Florida
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9,000
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--
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Leased machine repair and service facility – Roadtec (Mobile Asphalt Paving Group)
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Loudon, Tennessee
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327,000
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112
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Offices and manufacturing – Astec Underground (Underground Group)
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Location
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Approximate
Square Footage
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Approximate
Acreage
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Principal Function (Use by Segment)
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Eugene, Oregon
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130,000
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8
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Offices and manufacturing – JCI (Aggregate and Mining Group)
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Albuquerque, New Mexico
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115,000
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|
|
14
|
|
Offices and manufacturing – CEI (Asphalt Group) (partially leased to a third party)
|
Yankton, South Dakota
|
|
|
312,000
|
|
|
|
50
|
|
Offices and manufacturing – KPI (Aggregate and Mining Group)
|
Thornbury, Ontario, Canada
|
|
|
60,500
|
|
|
|
12
|
|
Offices and manufacturing – BTI (Aggregate and Mining Group)
|
Thornbury, Ontario Canada
|
|
|
7,000
|
|
|
|
--
|
|
Leased warehouse/parts sales office – BTI (Aggregate and Mining Group)
|
Walkerton, Ontario Canada
|
|
|
655
|
|
|
|
--
|
|
Leased engineering office – BTI (Aggregate and Mining Group)
|
Riverside, California
|
|
|
12,500
|
|
|
|
--
|
|
Leased offices, sales, assembly and warehouse – BTI (Aggregate and Mining Group)
|
Solon, Ohio
|
|
|
8,900
|
|
|
|
--
|
|
Leased offices, sales, assembly and warehouse – BTI (Aggregate and Mining Group)
|
Tacoma, Washington
|
|
|
41,000
|
|
|
|
8
|
|
Offices and manufacturing – Carlson (Mobile Asphalt Paving Group)
|
Tacoma, Washington
|
|
|
4,400
|
|
|
|
1
|
|
R&D/Services Offices-Carlson (Mobile Asphalt Paving Group)
|
Cape Town, South Africa
|
|
|
4,600
|
|
|
|
--
|
|
Leased sales office and warehouse – Osborn (Aggregate and Mining Group)
|
Durban, South Africa
|
|
|
3,800
|
|
|
|
--
|
|
Leased sales office and warehouse – Osborn (Aggregate and Mining Group)
|
Witbank, South Africa
|
|
|
1,000
|
|
|
|
--
|
|
Leased sales office and warehouse – Osborn (Aggregate and Mining Group)
|
Tullamarine, Australia
|
|
|
6,000
|
|
|
|
--
|
|
Leased office, warehouse and storage yard-Astec Australia Pty Ltd (Other Business Unit)
|
Location
|
|
Approximate
Square Footage
|
|
|
Approximate
Acreage
|
|
Principal Function (Use by Segment)
|
Johannesburg, South Africa
|
|
|
239,000
|
|
|
|
21
|
|
Offices and manufacturing – Osborn (Aggregate and Mining Group)
|
Eugene, Oregon
|
|
|
130,000
|
|
|
|
7
|
|
Offices and manufacturing – Peterson Pacific Corp. (Other Business Units)
|
Enid, Oklahoma
|
|
|
350,000
|
|
|
|
42
|
|
Offices and manufacturing – GEFCO, Inc. (Underground Group)
|
West Columbia, South Carolina
|
|
|
7,600
|
|
|
|
--
|
|
Leased distribution center – Peterson Pacific Corp. (Other Business Units)
|
Acacia Ridge, Australia
|
|
|
31,000
|
|
|
|
5
|
|
Offices, warehousing, service, light fabrication and storage yard – Astec Australia Pty Ltd (Other Business Units)
|
Canning Vale, Australia
|
|
|
9,000
|
|
|
|
--
|
|
Leased office, warehouse and storage yard - Astec Australia Pty Ltd (Other Business Unit)
|
Hameln, Germany
|
|
|
35,300
|
|
|
|
3
|
|
Offices and manufacturing – Asphalt Mobile Machinery GmbH (Mobile Asphalt paving Group)
|
Vespasiano-MG Brazil
|
|
|
2,200
|
|
|
|
--
|
|
Leased sales/administrative offices-Astec Brazil (Aggregate and Mining Group)
|
Vespasiano-MG Brazil
|
|
|
132,400
|
|
|
|
10
|
|
Manufacturing plant and offices under construction-Astec Brazil (Aggregate and Mining Group
|
The properties above are owned by the Company unless they are indicated as being leased.
Management believes each of the Company's facilities provides office or manufacturing space suitable for its current needs. Additionally, management considers the terms under which it leases facilities to be reasonable.
Item 3
.
Legal Proceedings
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 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 material 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.
During 2004 the Company received notice from the Environmental Protection Agency that it may be responsible for a portion of the costs incurred in connection with an environmental cleanup in Illinois. The discharge of hazardous materials and associated cleanup relate to activities occurring prior to the Company’s acquisition of Barber Greene in 1986. The Company believes that over 300 other parties have received similar notice. At this time, the Company is unable to predict whether the EPA will seek to hold the Company liable for a portion of the cleanup costs or the amount of any such liability.
Item 4. Mine Safety Disclosures
None.
Executive Officers
The name, title, ages and business experience of the executive officers of the Company are listed below.
Benjamin G. Brock
has served as the Company’s Chief Executive Officer and President since January 2014. He previously served as the Vice President and President of the Company’s Asphalt Group from August 2012 to December 2013 and as President of Astec, Inc. from 2006 to 2013. From 2003 until 2006 he held the position of Vice President - Sales of Astec, Inc. and Vice President/General Manager of CEI Enterprises, Inc. from 1997 until 2002. Mr. Brock's career with Astec began as a salesman in 1993. Mr. Brock is the son of J. Don Brock, Chairman of the Company. Mr. Brock has been a Director of the Company since 2013. He is 43.
David C. Silvious
, a Certified Public Accountant, has served as the Vice President, Chief Financial Officer and Treasurer of the Company since August 2011. He previously served as Corporate Controller of the Company from 2005 to 2011 and as Corporate Financial Analyst from 1999 to 2005. Mr. Silvious also serves as Treasurer of each of the Company’s U.S. operating subsidiaries and Vice President of Astec Insurance Company. He is 46.
Richard J. Dorris
has served as the Company’s Chief Operating Officer and Executive Vice President since January 2014. He previously served as the Group Vice President and President of the Company’s Energy Group from August 2012 to December 2013 and as President of Heatec, Inc. from 2004 to January 2014. From 1999 to 2004 he held the positions of National Accounts Manager, Project Manager and Director of Projects for Astec, Inc. Prior to joining Astec, Inc. he was President of Esstee Manufacturing Company from 1990 to 1999 and was Sales Engineer from 1984 to 1990. He is 53.
J. Don Brock
has served as Chairman of the Company’s Board since 1975 and as Chairman of the Company since January 2014. He also served as President of the Company from its incorporation in 1972 until August 2012 and as the Chief Executive Officer of the Company until December 2013. Dr. Brock also serves as a director and a member of the Audit Committee of The Dixie Group, Inc., a public company in the floor-covering manufacturing business. Dr. Brock is the father of Benjamin G. Brock, who is the Chief Executive Officer, President and a Director of the Company, and Dr. Brock and Thomas R. Campbell, who served as the Group Vice President – Mobile Asphalt Paving and Underground until his retirement in September 2013, are first cousins. Dr. Brock has been a Director of the Company since 1972. He is 75.
W. Norman Smith
has served as the Vice Chairman of the Company’ Board of Directors since January 2014 and the Group President of the Company’s Mobile Asphalt Paving Group since October 2013. He previously served as the President and Chief Operating Officer of the Company from August 2012 to December 2013, as the Group Vice President – Asphalt of the Company from 1998 until August 2012, as the President of Astec, Inc., a subsidiary of the Company, from 1994 until 2006, and as the President of Heatec, Inc., a subsidiary of the Company, from 1977 until 1994. Mr. Smith received his B.S. degree in mechanical engineering from the University of Tennessee and is a registered professional engineer. Mr. Smith has been a Director of the Company since 1982. He is 74.
Richard A. Patek
has served as the Group President of the Company’s Aggregate & Mining Group since October 2013 after having served as the Group’s Vice President since 2008. He has also served as President of Telsmith, Inc. since May 2001. He served as President of Kolberg-Pioneer, Inc. from 1997 until 2001. From 1995 to 1997, he served as Director of Materials of Telsmith, Inc. From 1992 to 1995, Mr. Patek was Director of Materials and Manufacturing of the former Milwaukee plant location. From 1978 to 1992, he held various manufacturing management positions at Telsmith. Mr. Patek also serves as the 2014 Chairman for the Association of Equipment Manufacturers (AEM) and a corporate board member for the Milwaukee School of Engineering. He is 57.
Joseph P. Vig
has served as the Group President of the Company’s AggRecon Group since October 2013 after having served as the Group’s Vice President since 2008. He has also served as President of Kolberg-Pioneer, Inc., since 2001. From 1994 until 2001, he served as Engineering Manager of Kolberg-Pioneer, Inc. From 1978 to 1993 he was Director of Engineering with Morgen Mfg. Co., and then Engineering Manager of Essick-Mayco in 1993-94. Mr. Vig is registered as a Professional Engineer. He is 64.
Stephen C. Anderson
has served as Vice President of Administration since August 2011, as Secretary of the Company since January 2007 and as the Director of Investor Relations since January 2003. Mr. Anderson also serves as the Company’s compliance officer and manages the corporate information technology and aviation departments. He has also been President of Astec Insurance Company since January 2007. He was Vice President of Astec Financial Services, Inc. from 1999 to 2002. Prior to his employment with the Company, Mr. Anderson spent a combined fourteen years in commercial banking with AmSouth and SunTrust Banks. He is 50.
Robin A. Leffew
has served as Corporate Controller since August 2011 and also serves as Secretary of Astec Insurance Company. She previously served as the Company’s Director of Internal Audit from 2005 to 2011 and Controller of Astec, Inc. from 1990 to 2005. From 1987 to 1990, she served as Corporate Financial Analyst for the Company. She is 52.
Michael A. Bremmer
has served as the President of CEI Enterprises, Inc. since 2006. From 2003 until 2006, he held the position of Vice President and General Manager of CEI Enterprises, Inc. From 2001 until 2003, he held the position of Director of Engineering of CEI Enterprises, Inc. He is 58.
Chris Colwell
has served as President of Carlson Paving Products since May 2011. Prior to joining Astec, Mr. Colwell held the position of Regional Operations Manager for Alta Equipment Company from 2010 to 2011. From 2008 to 2010 he served as Vice President-Asphalt Division for Wolverine Tractor and Equipment Company. From 1999 to 2008 Mr. Colwell served as President of Colwell Equipment Company Incorporated where he previously served in various positions since 1985 including General Manager, Director of Management Information Systems, Assistant Controller and Product Support Manager. Mr. Colwell is 48.
Larry R. Cumming
has served as the President of Peterson Pacific Corp. since 2007. He joined the company in 2003, prior to which he held positions of General Manager and Chief Executive Officer of Peterson, Inc. Prior to joining Peterson, he held senior management positions in North America and Europe with Timberjack and John Deere (Deere acquired Timberjack in 2000). Mr. Cumming also held prior positions with Timberjack as Vice President Engineering and Senior Vice President Sales and Marketing, Chief Operating Officer and Executive Vice President Product Supply. He is a registered professional engineer in the Province of Ontario. Mr. Cumming is 65.
Jeffery J. Elliott
has served as the President of Johnson Crushers, Inc. since 2001. From 1999 to 2001, he served as Senior Vice President for Cedarapids, Inc. (a Terex company), and from 1996 to 1999, he served as Vice President of the Crushing and Screening Group. From 1978 to 1996, he held various domestic and international sales and marketing positions with Cedarapids, Inc. He is 60.
Timothy Gonigam
has served as the President of Astec Mobile Screens, Inc. since 2000. From 1995 to 2000, Mr. Gonigam held the position of Sales Manager of Astec Mobile Screens, Inc. He is 51.
Aaron Harmon
has served as President of GEFCO, Inc. since its acquisition by the Company in October 2011. He previously served as President of the GEFCO Division of Blue Tee Corp. since 2005. Mr. Harmon joined GEFCO in 1995 and has served in several capacities within the organization including V. P. of North American Sales and Operations Manager. Mr. Harmon is 41.
Matthew B. Haven
has served as the President of Telsmith, Inc. since February 2013. He previously served as Executive Vice President and General Manager of Telsmith from January 2012 to February 2013 and as Vice President from 2008 to 2011. Mr. Haven joined Telsmith in January 1997 and served as Chief Engineer, Research and Development and Director of Engineering prior to his appointment as Vice President. Prior to joining Telsmith, Mr. Haven served as Chief Engineer, Product Design and Development of Cedarapids, Inc. Mr. Haven is 51.
Tom Kruger
has served as the Managing Director of Osborn Engineered Products SA (Pty) Ltd since 2005. For the previous five years, Mr. Kruger was employed as Operations Director of Macsteel Tube and Pipe (Pty) Ltd, a manufacturer of carbon steel tubing in Johannesburg, South Africa. He served as Sales and Marketing Director of Macsteel prior to becoming Operations Director. From 1993 to 1998, Mr. Kruger was employed by Barloworld Ltd as Operations Director and Regional Managing Director responsible for a trading organization in steel, tube and water conveyance systems. Prior to that, he held the position of Works Director. He is 56.
Jeffrey L. May
has served as the President of Kolberg-Pioneer, Inc. since September 2013. He previously served as the Vice President of Operations and Finance of Kolberg-Pioneer, Inc. from 2011 to 2013 and as Controller of Kolberg-Pioneer, Inc. from 1997 to 2010. Mr. May is 50.
Jeffrey L. Richmond, Sr.
has served as the President of Roadtec, Inc. since 2004. From 1996 until 2004, he held the positions of Sales Manager, Vice President of Sales and Marketing and Vice President/General Manager of Roadtec, Inc. He is 58.
Donald J. Sissons
has served as the President of Breaker Technology Ltd. and Breaker Technology Inc. since January 2014. He previously served as Vice President of Manufacturing Operations from January 2012 to January 2014 and as Plant Operations Manager from December 2003 until January 2012. Mr. Sissons is registered as a Professional Engineer. He is 47.
David H. Smale
has served as the General Manager of Astec Australia Pty Ltd since 2008. He served as the General Manager of Allen’s Asphalt from 2006 to 2008 and as their Operations Manager from 2004 to 2006. Mr. Smale is 58.
Malcolm L. Swanson
has served as the President of Astec, Inc. since January 2014. He previously served as Vice President – Engineering of Astec, Inc. from 1995 to 2013 and as Chief Engineer of Astec, Inc. from 1989 to 1995. Prior to joining Astec, Inc., Mr. Swanson worked as a design engineer and project manager for Combustion Engineering of Chattanooga, TN in both the Fossil and Nuclear Power divisions. Mr. Swanson is a Professional Engineer holding registration in eight states. Mr. Swanson is 65.
Thomas H. Wilkey
has served as the President of Heatec, Inc. since January 2014. From 1987 to 2004, he held the positions of Sales coordinator, Sales Manager, and Vice-President of Sales of Heatec, Inc., and in 2004 he became Executive Vice President of Heatec, Inc. Mr. Wilkey is 60.
Liquidity and Capital Resources
The Company’s primary sources of liquidity and capital resources are its cash on hand, investments, borrowing
capacity under a $100,000,000 revolving credit facility and cash flows from operations. The Company had
$35,564,000 (of which $12,442,000 was held by our foreign subsidiaries) of cash and $16,073,000 of short- term investments available for operating purposes at December 31, 2013. In addition, the Company had no borrowings outstanding under its credit facility with Wells Fargo Bank, N.A. (“Wells Fargo”) at any time during the year ended December 31, 2013. The Company had outstanding letters of credit of $6,943,000 and borrowing availability of $93,057,000 under the credit facility as of December 31, 2013.
On April 12, 2012, the Company and certain of its subsidiaries entered into an amended and restated credit agreement with Wells Fargo whereby Wells Fargo extended to the Company an unsecured line of credit of up to $100,000,000, including a sub-limit for letters of credit of up to $25,000,000. The amended and restated credit agreement replaced the expiring $100,000,000 credit facility between the Company and Wells Fargo. The amended and restated agreement has a five-year term expiring in April 2017. Borrowings under the agreement are subject to an interest rate equal to the daily one-month LIBOR rate plus a 0.75% margin. The unused facility fee is 0.175%. Interest only payments are due monthly. The amended and restated credit agreement contains certain financial covenants, including provisions concerning required levels of annual net income, minimum tangible net worth and maximum allowed capital expenditures. The Company was in compliance with these covenants as of December 31, 2013.
The Company’s South African subsidiary, Osborn Engineered Products SA (Pty) Ltd (“Osborn”), has a credit facility of $7,146,000 (ZAR 75,000,000) to finance short-term working capital needs, as well as to cover performance letters of credit, advance payment and retention guarantees. As of December 31, 2013, Osborn had no cash borrowings under the credit facility, and $648,000 in performance, advance payment and retention guarantees under the facility. The facility is unsecured. As of December 31, 2013, Osborn had available credit under the facility of $6,498,000. The interest rate is 0.25% below the South Africa prime rate, resulting in a rate of 8.25% at December 31, 2013.
Cash Flows from Operating Activities (in thousands)
|
|
2013
|
|
|
2012
|
|
|
Increase/
Decrease
|
|
Net income
|
|
$
|
39,214
|
|
|
$
|
40,989
|
|
|
$
|
(1,775
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
22,265
|
|
|
|
23,048
|
|
|
|
(783
|
)
|
Provision for warranty
|
|
|
12,199
|
|
|
|
11,152
|
|
|
|
1,047
|
|
Sale/purchase of trading securities, net
|
|
|
(1,350
|
)
|
|
|
(146
|
)
|
|
|
(1,204
|
)
|
Gain on sale of subsidiary
|
|
|
--
|
|
|
|
(5,358
|
)
|
|
|
5,358
|
|
Stock based compensation
|
|
|
1,461
|
|
|
|
1,285
|
|
|
|
176
|
|
Deferred income tax provision (benefits)
|
|
|
(2,220
|
)
|
|
|
6,223
|
|
|
|
(8,443
|
)
|
Other, net
|
|
|
1,075
|
|
|
|
511
|
|
|
|
564
|
|
Changes in working capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in receivables
|
|
|
(8,849
|
)
|
|
|
7,555
|
|
|
|
(16,404
|
)
|
(Increase) decrease in inventories
|
|
|
(36,561
|
)
|
|
|
(41,145
|
)
|
|
|
4,584
|
|
(Increase) decrease in prepaid expenses
|
|
|
(5,433
|
)
|
|
|
(1,655
|
)
|
|
|
(3,778
|
)
|
Increase (decrease) in accounts payable
|
|
|
1,028
|
|
|
|
(6,425
|
)
|
|
|
7,453
|
|
Increase (decrease in customer deposits
|
|
|
(5,436
|
)
|
|
|
4,918
|
|
|
|
(10,354
|
)
|
Increase (decrease) in accrued product warranties
|
|
|
(10,163
|
)
|
|
|
(11,021
|
)
|
|
|
858
|
|
Increase (decrease) in other accrued liabilities
|
|
|
1,085
|
|
|
|
298
|
|
|
|
787
|
|
Other, net
|
|
|
(2,454
|
)
|
|
|
(1,596
|
)
|
|
|
(858
|
)
|
Net cash provided by operating activities
|
|
$
|
5,861
|
|
|
$
|
28,633
|
|
|
$
|
(22,772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities decreased $22,772,000 in 2013 compared to 2012. The primary
reasons for the decrease in operating cash flows relate to receivables and customer deposits.
Cash Flows from Investing Activities (in thousands)
|
|
|
2013
|
|
|
|
2012
|
|
|
|
Increase/
Decrease
|
|
Expenditures for property and equipment
|
|
$
|
(27,673
|
)
|
|
$
|
(26,018
|
)
|
|
$
|
(1,655
|
)
|
Proceeds from sale of subsidiary
|
|
|
--
|
|
|
|
42,940
|
|
|
|
(42,940
|
)
|
Purchase of short-term investments
|
|
|
(15,000
|
)
|
|
|
--
|
|
|
|
(15,000
|
)
|
Other
|
|
|
424
|
|
|
|
375
|
|
|
|
49
|
|
Net cash provided (used) by investing activities
|
|
$
|
(42,249
|
)
|
|
$
|
17,297
|
|
|
$
|
(59,546
|
)
|
Investing activities used cash of $42,249,000 in 2013 compared to cash provided of $17,297,000 in 2012. The change is primarily due to a $15,000,000 purchase of short-term investments in 2013 and a non-recurring proceed from the sale of a subsidiary of 2012.
Cash Flows from Financing Activities (in thousands)
|
|
2013
|
|
|
2012
|
|
|
Increase/
Decrease
|
|
Payment of dividends
|
|
$
|
(6,856
|
)
|
|
$
|
(22,790
|
)
|
|
$
|
15,934
|
|
Other, net
|
|
|
270
|
|
|
|
318
|
|
|
|
(48
|
)
|
Net cash used by financing activities
|
|
$
|
(6,586
|
)
|
|
$
|
(22,472
|
)
|
|
$
|
15,886
|
|
Financing activities used cash of $6,586,000 in 2013 and $22,472,000 in 2012 for a net change of $15,886,000 due primarily to the payment of the Company’s initial $1.00 per common share dividend in December 2012 compared to $.10 per share quarterly dividends beginning in the second quarter of 2013.
Capital expenditures for 2014 are forecasted to total $39,244,000. The Company expects to finance these expenditures using currently available cash balances, short-term investments, internally generated funds and available credit under the Company’s credit facility as well as local financing for the equipment in the new Brazilian manufacturing facility. Capital expenditures are generally for machinery, equipment and facilities used by the Company in the production of its various products.
The Company sold American Augers, Inc. on November 30, 2012. Cash flows from the operations of American Augers are reflected in the statements of cash flows through the date of sale. Cash flows from the operations of American Augers were not material during the periods presented, and the absence of cash flows related to American Augers is not expected to impact the Company’s future liquidity or capital resources. See Note 22, Discontinued Operations, for additional information regarding the sale of American Augers.
Financial Condition
The Company’s current assets increased to $522,411,000 at December 31, 2013 from $504,084,000 at December 31, 2012, an increase of $18,327,000. The increase is primarily due to an increase of $29,630,000 in inventory.
The Company’s current liabilities decreased to $133,531,000 at December 31, 2013 from $145,548,000 at December 31, 2012, a decrease of $12,017,000. The decrease is primarily attributable to decreases in customer deposits of $6,726,000 and other accrued liabilities of $7,095,000.
Market Risk and Risk Management Policies
The Company is exposed to changes in interest rates, primarily from its revolving credit agreements. A hypothetical 100 basis point adverse move (increase) in interest rates would not have materially affected interest expense for the year ended December 31, 2013, since there were no amounts outstanding on the revolving credit agreements during the year. The Company does not hedge variable interest.
The Company is subject to foreign exchange risk at its foreign operations. Foreign operations represent 14.9% and 16.3% of total assets at December 31, 2013 and 2012, respectively, and 14.0% and 14.4% of total revenue for the years ended December 31, 2013 and 2012, respectively. Each period the balance sheets and related results of operations of the Company’s foreign subsidiaries are translated from their functional foreign currency into U.S. dollars for reporting purposes. As the dollar strengthens against those foreign currencies, the foreign denominated net assets and operating results become less valuable in the Company’s reporting currency. When the dollar weakens against those currencies, the foreign denominated net assets and operating results become more valuable in the Company’s reporting currency. At each reporting date, the fluctuation in the value of the net assets and operating results due to foreign exchange rate changes is
recorded as an adjustment to other comprehensive income in equity. The Company views its investments in foreign subsidiaries as long-term and does not hedge the net investments in foreign subsidiaries.
From time to time the Company’s foreign subsidiaries enter into transactions not denominated in their functional currency. In these situations, the Company evaluates the need to hedge those transactions against foreign currency rate fluctuations. When the Company determines a need to hedge a transaction, the subsidiary enters into a foreign currency exchange contract. The Company does not apply hedge accounting to these contracts and, therefore, recognizes the fair value of these contracts in the consolidated balance sheets and the change in the fair value of the contracts in current earnings.
Due to the limited exposure to foreign exchange rate risk, a 10% fluctuation in the foreign exchange rates at December 31, 2013 or 2012 would not have a material impact on the Company’s consolidated financial statements.
Contractual Obligations
Contractual obligations and the period in which payments are due as of December 31, 2013 are as follows (in thousands):
|
|
|
|
|
Payments Due by Period
|
|
Contractual Obligations
|
|
Total
|
|
|
Less Than 1 Year
|
|
|
1 to 3 Years
|
|
|
3 to 5 Years
|
|
|
More Than 5 Years
|
|
Operating lease obligations
|
|
$
|
2,442
|
|
|
$
|
1,272
|
|
|
$
|
945
|
|
|
$
|
188
|
|
|
$
|
37
|
|
Inventory purchase obligations
|
|
|
1,652
|
|
|
|
1,652
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Total
|
|
$
|
4,094
|
|
|
$
|
2,924
|
|
|
$
|
945
|
|
|
$
|
188
|
|
|
$
|
37
|
|
The above table excludes our liability for unrecognized tax benefits, which totaled $1,933,000 at December 31, 2013, since we cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities.
In 2013, the Company made contributions of approximately $811,000 to its pension plan, compared to
$755,000 in 2012. The Company estimates that it will contribute $353,000 to the pension plan during 2014. The Company’s funding policy is to make the minimum annual contributions required by applicable regulations.
Contingencies
Management has reviewed all claims and lawsuits and has made adequate provision for any losses that can be reasonably estimated. 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.
Certain customers have financed purchases of the Company’s products through arrangements in which the Company is contingently liable for customer debt aggregating $693,000 and $2,091,000 at December 31, 2013 and 2012, respectively. These obligations have average remaining terms of 1.4 years. The Company has recorded a liability of $121,000 related to these guarantees at December 31, 2013.
The Company is contingently liable under letters of credit of approximately $8,442,000, primarily for performance guarantees to customers, banks or insurance carriers.
Off-balance Sheet Arrangements
As of December 31, 2013 the Company does not have off-balance sheet arrangements as defined by Item
303(a)(4) of Regulation S-K.
Environmental Matters
During 2004, the Company received notice from the Environmental Protection Agency that it may be responsible for a portion of the costs incurred in connection with an environmental cleanup in Illinois. The discharge of hazardous materials and associated cleanup relate to activities occurring prior to the Company’s acquisition of Barber-Greene in 1986. The Company believes that over 300 other parties have received similar notice. At this time, the Company cannot predict whether the EPA will seek to hold the Company liable for a portion of the cleanup costs or the amount of any such liability. The Company has not recorded a liability with respect to this matter because no estimate of the amount of any such liability can be made at this time.
Critical Accounting Policies
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. Application of these principles requires the Company to make estimates and judgments that affect the amounts as reported in the consolidated financial statements. Accounting policies that are critical to aid in understanding and evaluating the results of operations and financial position of the Company include the following:
Inventory
Valuation:
Inventories are valued at the lower of a first-in first-out cost or market. The most significant component of the Company’s inventories is steel. Open market prices, which are subject to volatility, determine the cost of steel for the Company. During periods when open market prices decline, the Company may need to reduce the carrying value of the inventory. In addition, certain items in inventory become obsolete over time, and the Company reduces the carrying value of these items to their net realizable value. These reductions are determined by the Company based on estimates, assumptions and judgments made from the information available at that time. The Company does not believe it is reasonably likely that the inventory values will materially change in the near future.
Self-Insurance
Reserves:
The Company insures the retention portion of workers’ compensation claims and general liability claims by way of a captive insurance company, Astec Insurance Company. The objectives of Astec Insurance are to improve control over and reduce retained loss costs; to improve focus on risk reduction with development of a program structure which rewards proactive loss control; and to ensure active management participation in the defense and settlement process for claims.
For general liability claims, the captive is liable for the first $1,000,000 per occurrence and $3,000,000 per year in the aggregate. The Company carries general liability, excess liability and umbrella policies for claims in excess of those covered by the captive.
For workers’ compensation claims, the captive is liable for the first $350,000 per occurrence and $2,750,000 per year in the aggregate. The Company utilizes a large national insurance company as third-party administrator for workers’ compensation claims and carries insurance coverage for claims liabilities in excess of amounts covered by the captive.
The financial statements of the captive are consolidated into the financial statements of the Company. The short-term and long-term reserves for claims and probable claims related to general liability and workers’ compensation under the captive are included in accrued loss reserves and other long-term liabilities, respectively, in the consolidated balance sheets depending on the expected timing of future payments. The undiscounted reserves are actuarially determined based on the Company’s evaluation of the type and severity of individual claims and historical information, primarily its own claims experience, along with assumptions about future events. Changes in assumptions, as well as changes in actual experience, could cause these estimates to change in the future. However, the Company does not believe it is reasonably likely that the reserve level will materially change in the near future.
At all but one of the Company’s domestic manufacturing subsidiaries, the Company is self-insured for health and prescription claims under its Group Health Insurance Plan. The Company carries reinsurance coverage to limit its exposure for individual health claims above certain limits. Third parties administer health claims and prescription medication claims. The Company maintains a reserve for the self-insured health plan which is included in accrued loss reserves on the Company’s consolidated balance sheets. This reserve includes both unpaid claims and an estimate of claims incurred but not reported, based on historical claims and payment experience. Historically the reserves have been sufficient to provide for claims payments. Changes in actual claims experience, or payment patterns, could cause the reserve to change, but the Company does not believe it is reasonably likely that the reserve level will materially change in the near future.
The remaining U.S. subsidiary is covered under a fully insured group health plan. Employees of the Company’s foreign subsidiaries are insured under health plans in accordance with their local governmental requirements. No reserves are necessary for these fully insured health plans.
Product
Warranty
Reserve
: The Company accrues for the estimated cost of product warranties at the time revenue is recognized. Warranty obligations by product line or model are evaluated based on historical warranty claims experience. For machines, the Company’s standard product warranty terms generally include post-sales support and repairs of products at no additional charge for periods ranging from three months to two years or up to a specified number of hours of operation. For parts from component suppliers, the Company relies on the original manufacturer’s warranty that accompanies those parts. Generally, fabricated parts are not covered by specific warranty terms. Although failure of fabricated parts due to material or workmanship is rare, if it occurs, the Company’s policy is to replace fabricated parts at no additional charge.
The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of component suppliers. Estimated warranty obligations are based upon warranty terms, product failure rates, repair costs and current period machine shipments. If actual product failure rates, repair costs, service delivery costs or post-sales support costs differ from estimates, revisions to the estimated warranty liability would be required. The Company does not believe it is reasonably likely that the warranty reserve will materially change in the near future.
Revenue
Recognition
: Revenue is generally recognized on sales at the point in time when persuasive evidence of an arrangement exists, the price is fixed or determinable, the product has been delivered or services have been rendered and there is reasonable assurance of collection of the sales proceeds. The Company generally obtains purchase authorizations from its customers for a specified amount of product at a specified price with specified delivery terms. A significant portion of the Company’s equipment sales represents equipment produced in the Company’s plants under short-term contracts for a specific customer project or equipment designed to meet a customer’s specific requirements. Most of the equipment sold by the Company is based on standard configurations, some of which are modified to meet customer needs or specifications. The Company provides customers with technical design and performance specifications and performs pre-shipment testing to ensure the equipment performs according to design specifications, regardless of whether the Company provides installation services in addition to selling the equipment.
Certain contracts include terms and conditions through which the Company recognizes revenues upon completion of equipment production, which is subsequently stored at the Company’s plant at the customer’s request. Revenue is recorded on such contracts upon the customer’s assumption of title and risk of ownership and when collectability is reasonably assured. In addition, there must be a fixed schedule of delivery of the goods consistent with the customer’s business practices, the Company must not have retained any specific performance obligations such that the earnings process is not complete and the goods must have been segregated from the Company’s inventory prior to revenue recognition.
The Company has certain sales accounted for as multiple-element arrangements, whereby revenue attributable to the sale of a product is recognized when it is shipped, and the revenue attributable to services provided with respect to the product (such as installation services) is recognized when the service is performed. Consideration is determined using the fair value method and approximates the sales price of the product shipped or services performed. The Company evaluates sales with multiple deliverable elements (such as an agreement to deliver equipment and related installation services) to determine whether revenue related to individual elements should be recognized separately, or as a combined unit. In addition to the previously mentioned general revenue recognition criteria, the Company only recognizes revenue on individual delivered elements when there is objective and reliable evidence that the delivered element has a determinable value to the customer on a standalone basis and there is no right of return.
Goodwill
and
Other
Intangible
Assets:
Intangible assets are classified into two categories: (1) intangible assets with definite lives subject to amortization, and (2) goodwill. Intangible assets with definite lives are tested for impairment if conditions exist that indicate the carrying value may not be recoverable. Risk factors that may be considered include an economic downturn in the general economy, a geographic market or the commercial and residential construction industries, a change in the assessment of future operations as well as the cyclical nature of our industry and the customization of the equipment we sell, each of which may cause adverse fluctuations in operating results. Other risk factors considered would be an increase in the price or a decrease in the availability of oil that could reduce the demand for our products in addition to the significant fluctuations in the purchase price of raw materials that could have a negative impact on the cost of production and gross
margins as well as others more fully described in the Risk Factors section of our Form 10-K. An impairment charge is recorded when the carrying value of the definite lived intangible asset is not recoverable by the cash flows generated from the use of the asset. Some of the inputs used in the impairment testing are highly subjective and are affected by changes in business factors and other conditions. Changes in any of the inputs could have an effect on future tests and result in impairment charges.
Goodwill is not amortized but is tested for impairment annually or more frequently if events or circumstances indicate that such intangible assets or goodwill might be impaired. See Note 1, Summary of Significant Accounting Policies, for a detailed description of testing performed by the Company to determine if the recorded value of intangible assets or goodwill has been impaired.
The useful lives of identifiable intangible assets are determined after considering the specific facts and circumstances related to each intangible asset. Factors considered when determining useful lives include the contractual term of any agreement, the history of the asset, the Company’s long-term strategy for the use of the asset, any laws or other local regulations which could impact the useful life of the asset, and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have definite lives are amortized, generally on a straight-line basis, over their useful lives, ranging from 6 to 15 years.
Stock-based
Compensation:
Beginning in 2006 and again in 2011, the Company implemented five-year plans to award key members of management restricted stock units (“RSUs”) each year based upon annual financial performance of the Company and its subsidiaries. Each five-year plan allows up to 700,000 of newly issued shares of Company stock to be granted to employees. The number of RSUs granted each year is determined based upon the performance of individual subsidiaries and consolidated annual financial performance with additional RSUs available for cumulative five-year results. Generally, each award vests at the end of five years from the date of grant, or at the time a recipient retires after reaching age 65, if earlier. These plans are more fully described in Note 17, Shareholders’ Equity, to the consolidated financial statements.
Recent Accounting Pronouncements
There are no recently promulgated accounting pronouncements (either recently adopted or yet to be adopted)
that are likely to have a material impact on the Company’s financial reporting in the foreseeable future.
Forward-Looking Statements
This annual report 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 Annual Report that are not limited to historical information are considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding:
•
execution of the Company’s growth and operation strategy;
•
plans for technological innovation;
•
compliance with covenants in our credit facility;
•
liquidity and capital expenditures;
•
sufficiency of working capital, cash flows and available capacity under the Company’s credit facilities;
•
compliance with government regulations;
•
compliance with manufacturing and delivery timetables;
•
forecasting of results;
•
general economic trends and political uncertainty;
•
government funding and growth of highway construction and commercial projects;
•
integration of acquisitions;
•
pricing, demand and availability of steel, oil and liquid asphalt;
•
development of domestic oil and natural gas production;
•
condition of the economy;
•
strength of the dollar relative to foreign currencies;
•
the success of new product lines;
•
presence in the international marketplace;
•
suitability of our current facilities;
•
future payment of dividends;
•
competition in our business segments;
•
product liability and other claims;
•
protection of proprietary technology;
•
future fillings of backlogs;
•
the seasonality of our business;
•
tax assets and reserves for uncertain tax positions;
•
critical accounting policies and the impact of accounting changes;
•
anticipated start-up dates for our Brazilian operations;
•
ability to satisfy contingencies;
•
contributions to retirement plans and plan expenses;
•
reserve levels for self-insured insurance plans and product warranties;
•
construction of new manufacturing facilities;
•
supply of raw materials;
•
changes in the composition of the Company’s reportable segments.
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 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. You can identify these statements by forward-looking words such as “expect”, “believe”, “anticipate”, “goal”, “plan”, “intend”, “estimate”, “may”, “will”, “should” and similar expressions.
In addition to the risks and uncertainties identified elsewhere herein and in documents filed by the Company with the Securities and Exchange Commission, the following factors should be carefully considered when evaluating the Company’s business and future prospects: changes or delays in highway funding; rising interest rates; changes in oil prices; changes in steel prices; changes in the general economy; unexpected capital expenditures and decreases in liquidity; the timing of large contracts; production capacity; general business conditions in the industry; non-compliance with covenants in the Company’s credit facilities; demand for the Company’s products; and those other factors listed from time to time in the Company’s reports filed with the Securities and Exchange Commission. Certain of the risks, uncertainties and other factors discussed or noted above are more fully described in the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
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ASTEC INDUSTRIES, INC.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Astec Industries, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Management, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control
-
Integrated Framework: 1992. Based on its assessment, management concluded that, as of December 31, 2013, the Company’s internal control over financial reporting was effective.
Ernst & Young LLP, the Company’s independent registered public accounting firm, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2013.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Summary of Significant Accounting Policies
Basis
of
Presentation
-
The consolidated financial statements include the accounts of Astec Industries, Inc. and its domestic and foreign subsidiaries. The Company’s significant wholly-owned and consolidated subsidiaries at December 31, 2013 are as follows:
Astec Australia Pty Ltd
|
Astec do Brasil Fabricacao de Equipamentos LTDA
|
Astec, Inc.
|
Astec Insurance Company
|
Astec Mobile Machinery GmbH
|
Astec Mobile Screens, Inc.
|
Astec Underground, Inc.
|
Breaker Technology, Inc.
|
Breaker Technology Ltd.
|
Carlson Paving Products, Inc.
|
CEI Enterprises, Inc.
|
GEFCO, Inc.
|
Heatec, Inc.
|
Johnson Crushers International, Inc.
|
Kolberg-Pioneer, Inc.
|
Osborn Engineered Products SA (Pty) Ltd (93% owned)
|
Peterson Pacific Corp.
|
Roadtec, Inc.
|
Telsmith, Inc.
|
On November 30, 2012, the Company sold its former American Augers, Inc. subsidiary to The Charles Machine Works, Inc. American Augers’ results of operations have been reclassified as discontinued operations in 2012 and 2011.
All intercompany accounts and transactions have been eliminated in consolidation.
Use
of
Estimates
-
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Actual results could differ from those estimates.
Foreign
Currency
Translation
-
Subsidiaries located in Australia, Brazil, Canada, Germany and South Africa operate primarily using local functional currencies. Accordingly, assets and liabilities of these subsidiaries are translated using exchange rates in effect at the end of the period, and revenues and costs are translated using average exchange rates for the period. The resulting adjustments are presented as a separate component of accumulated other comprehensive income. Foreign currency transaction gains and losses, net are included in cost of sales and amounted to a loss of $522,000 in 2013 and gains of $867,000 and $490,000 in 2012 and 2011, respectively.
Fair
Value
of
Financial
Instruments
-
For cash and cash equivalents, trade receivables, other receivables, revolving debt and accounts payable, the carrying amount approximates the fair value because of the short- term nature of those instruments. Trading equity investments are valued at their estimated fair value based on their quoted market prices and debt securities are valued based upon a mix of observable market prices and model driven prices derived from a matrix of observable market prices for assets with similar characteristics obtained from a nationally recognized third party pricing service.
Financial assets and liabilities are categorized as of the end of each reporting period based upon the level of judgment associated with the inputs used to measure their fair value. The inputs used to measure the fair value are identified in the following hierarchy:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2
-
Unadjusted quoted prices in active markets for similar assets or liabilities; or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable for the asset or liability.
Level 3
-
Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
All financial assets and liabilities held by the Company at December 31, 2013 and 2012 are classified as Level
1 or Level 2 as summarized in Note 4, Fair Value Measurements.
Cash
and
Cash
Equivalents
-
All highly liquid investments with an original maturity of three months or less when purchased are considered to be cash and cash equivalents.
Investments
-
Investments consist primarily of investment-grade marketable securities. Trading securities are carried at fair value, with unrealized holding gains and losses included in net income. Realized gains and losses are accounted for on the specific identification method. Purchases and sales are recorded on a trade date basis. Management determines the appropriate classification of its investments at the time of acquisition and reevaluates such determination at each balance sheet date.
Concentration
of
Credit
Risk
-
The Company sells products to a wide variety of customers. Accounts receivable are carried at their outstanding principal amounts, less an allowance for doubtful accounts. The Company extends credit to its customers based on an evaluation of the customers’ financial condition generally without requiring collateral although the Company normally requires advance payments or letters of credit on large equipment orders. Credit risk is driven by conditions within the economy and the industry and is principally dependent on each customer’s financial condition. To minimize credit risk, the Company monitors credit levels and financial conditions of customers on a continuing basis. After considering historical trends for uncollectible accounts, current economic conditions and specific customer recent payment history and financial stability, the Company records an allowance for doubtful accounts at a level which management believes is sufficient to cover probable credit losses. Amounts are deemed past due when they exceed the payment terms agreed to by the customer in the sales contract. Past due amounts are charged off when reasonable collection efforts have been exhausted and the amounts are deemed uncollectible by management. As of December 31, 2013, concentrations of credit risk with respect to receivables are limited due to the wide variety of customers and industries in which the Company operates.
Allowance
for
Doubtful
Accounts
-
The following table represents a rollforward of the allowance for doubtful accounts for the years ended December 31, 2013, 2012 and 2011 (in thousands):
|
|
Year Ended December 31
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Reserve balance, beginning of year
|
|
$
|
2,143
|
|
|
$
|
2,398
|
|
|
$
|
1,820
|
|
Provision
|
|
|
629
|
|
|
|
759
|
|
|
|
1,510
|
|
Write offs
|
|
|
(1,042
|
)
|
|
|
(764
|
)
|
|
|
(884
|
)
|
Other
|
|
|
(22
|
)
|
|
|
(250
|
)
|
|
|
(48
|
)
|
Reserve balance, end of year
|
|
$
|
1,708
|
|
|
$
|
2,143
|
|
|
$
|
2,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
- Inventory costs include materials, labor and overhead. Inventories (excluding used equipment) are stated at the lower of first-in, first-out cost or market. Used equipment inventories are stated at the lower of specific unit cost or market.
When the Company determines that the value of inventory has become impaired through damage, deterioration, obsolescence, changes in price levels, excessive levels of inventory or other causes, the Company reduces the carrying value to estimated market value based on estimates, assumptions and judgments made from the information available at that time. Abnormal amounts of idle facility expense, freight, handling cost and wasted materials are recognized as current period charges.
Property
and
Equipment
-
Property and equipment is stated at cost. Depreciation is calculated for financial reporting purposes using the straight-line method based on the estimated useful lives of the assets as follows: airplanes (20 years), buildings (40 years) and equipment (3 to 10 years). Both accelerated and straight-line methods are used for tax compliance purposes. Routine repair and maintenance costs and planned major maintenance are expensed when incurred.
Goodwill
and
Other
Intangible
Assets
- The Company’s intangible assets are classified as either intangible assets with definite lives subject to amortization or goodwill.
The Company tests intangible assets with definite lives for impairment if conditions exist that indicate the carrying value may not be recoverable. Such conditions may include an economic downturn in a geographic market or a change in the assessment of future operations. An impairment charge is recorded when the carrying value of the definite lived intangible asset is not recoverable by the future undiscounted cash flows generated from the use of the asset.
The Company determines the useful lives of identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors considered when determining useful lives include the contractual terms of agreements, the history of the asset, the Company’s long-term strategy for the use of the asset, any laws or other local regulations which could impact the useful life of the asset, and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have definite lives are amortized over their useful lives, ranging from 6 to 15 years.
Goodwill is not amortized. The Company tests goodwill for impairment annually or more frequently if events or circumstances indicate that goodwill might be impaired. The tests utilize a two-step method at the reporting unit level. The Company’s reporting units are typically defined as either subsidiaries or a combination of two subsidiaries. No impairment was indicated in these tests in 2013, 2012 and 2011.
The first step of the goodwill impairment test compares book value of a reporting unit, including goodwill, with the unit’s fair value. In this first step, the Company estimates the fair values of each of its reporting units that have goodwill using the income approach. The income approach uses a reporting unit’s projection of estimated future operating results and cash flows which are then discounted using a weighted average cost of capital determined based on current market conditions for the individual reporting unit. The projection uses management’s best estimates of cash flows over the projection period based on estimates of annual and terminal growth rates in sales and costs, changes in operating margins, selling, general and administrative expenses, working capital requirements and capital expenditures.
The fair value of the operating subsidiaries/reporting units that do not have goodwill are estimated using either the income or market approaches, depending on which approach is the most appropriate for each reporting unit. The fair value of the reporting units that serve operating units in supporting roles, such as the captive insurance company and the corporate reporting unit, are estimated using the cost approach. The sum of the fair values of all reporting units is compared to its calculation of the fair value of the consolidated Company using the market approach, which is inferred from the market capitalization of the Company at the date of the valuation, to confirm that the Company’s estimation of the fair value of its reporting units is reasonable.
If the book value of a reporting unit exceeds its fair value, an indication of possible goodwill impairment, the second step of the impairment test must be performed to determine the amount, if any, of goodwill impairment. In this second step, the total implied fair value of the reporting unit’s goodwill is estimated by allocating the fair value of the reporting unit to all its assets, including any unrecognized intangible assets and liabilities other than goodwill. The difference between the total fair value of the reporting unit and the fair value of its assets and liabilities other than goodwill is the implied fair value of its goodwill. The amount of any impairment loss is equal to the excess, if any, of the book value of the goodwill over the implied fair value of its goodwill.
Determining the “step one” fair values of the Company’s reporting units involves the use of significant estimates and assumptions. Due to the inherent uncertainty involved in making these estimates and assumptions, actual results could differ materially from those estimates.
Impairment
of Long-lived
Assets
- In the event that facts and circumstances indicate the carrying amounts of long-lived assets may be impaired, an evaluation of recoverability is performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the carrying amount for each asset (or group of assets) to determine if a writedown is required. If this review indicates that the assets will not be recoverable, the carrying values of the impaired assets are reduced to their estimated fair value. Fair value is estimated using discounted cash flows, prices for similar assets or other valuation techniques.
Self-Insurance
Reserves
-
The Company retains the risk for a portion of its workers’ compensation claims and general liability claims by way of a captive insurance company, Astec Insurance Company, (“Astec Insurance” or “the captive”). Astec Insurance is incorporated under the laws of the state of Vermont. The objectives of Astec Insurance are to improve control over and reduce the cost of claims; to improve focus on risk reduction with development of a program structure which rewards proactive loss control; and to ensure management participation in the defense and settlement process for claims.
For general liability claims, the captive is liable for the first $1,000,000 per occurrence and $3,000,000 per year in the aggregate. The Company carries general liability, excess liability and umbrella policies for claims in excess of those covered by the captive.
For workers’ compensation claims, the captive is liable for the first $350,000 per occurrence and $2,750,000 per year in the aggregate. The Company utilizes a large national insurance company as third party administrator for workers’ compensation claims and carries insurance coverage for claims liabilities in excess of amounts covered by the captive.
The financial statements of the captive are consolidated into the financial statements of the Company. The short-term and long-term reserves for claims and potential claims related to general liability and workers’ compensation under the captive are included in accrued loss reserves or other long-term liabilities, respectively, in the consolidated balance sheets depending on the expected timing of future payments. The undiscounted reserves are actuarially determined to cover the ultimate cost of each claim 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. However, the Company does not believe it is reasonably likely that the reserve level will materially change in the foreseeable future.
At all but one of the Company’s domestic manufacturing subsidiaries, the Company is self-insured for health and prescription claims under its Group Health Insurance Plan. The Company carries reinsurance coverage to limit its exposure for individual health claims above certain limits. Third parties administer health claims and prescription medication claims. The Company maintains a reserve for the self-insured health plan which is included in accrued loss reserves on the Company’s consolidated balance sheets. This reserve includes both unpaid claims and an estimate of claims incurred but not reported, based on historical claims and payment experience. Historically the reserves have been sufficient to provide for claims payments. Changes in actual claims experience or payment patterns could cause the reserve to change, but the Company does not believe it is reasonably likely that the reserve level will materially change in the near future.
The remaining U.S. subsidiary is covered under a fully insured group health plan. Employees of the Company’s foreign subsidiaries are insured under separate health plans. No reserves are necessary for these fully insured health plans.
Revenue
Recognition
-
Revenue is generally recognized on sales at the point in time when persuasive evidence of an arrangement exists, the price is fixed or determinable, the product has been delivered or services have been rendered and there is a reasonable assurance of collection of the sales proceeds. The Company generally obtains purchase authorizations from its customers for a specified amount of products at a specified price with specified delivery terms. A significant portion of the Company’s equipment sales represents equipment produced in the Company’s plants under short-term contracts for a specific customer project or equipment designed to meet a customer’s specific requirements. Most of the equipment sold by the Company is based on standard configurations, some of which are modified to meet customer needs or specifications. The Company provides customers with technical design and performance specifications and performs pre-shipment testing to ensure the equipment performs according to design specifications, regardless of whether the Company provides installation services in addition to selling the equipment.
Certain contracts include terms and conditions pursuant to which the Company recognizes revenues upon completion of equipment production, which is subsequently stored at the Company’s plant at the customer’s request. Revenue is recorded on such contracts upon the customer’s assumption of title and risk of ownership and when collectability is reasonably assured. In addition, there must be a fixed schedule of delivery of the goods consistent with the customer’s business practices, the Company must not have retained any specific performance obligations such that the earnings process is not complete and the goods must have been segregated from the Company’s inventory prior to revenue recognition.
The Company accounts for certain sales as multiple-element arrangements, whereby the revenue attributable to the sale of a product is recognized when the product is shipped and the revenue attributable to services provided with respect to the product (such as installation services) is recognized when the service is performed. Consideration is determined using the fair value method and approximates sales price of the product shipped or service performed. The Company evaluates sales with multiple deliverable elements (such as an agreement to deliver equipment and related installation services) to determine whether revenue related to individual elements should be recognized separately, or as a combined unit. In addition to the previously mentioned general revenue recognition criteria, the Company only recognizes revenue on individual delivered elements when there is objective and reliable evidence that the delivered element has a determinable value to the customer on a standalone basis and there is no right of return.
The Company presents in the statements of income any taxes assessed by a governmental authority that are directly imposed on revenue-producing transactions between the Company and its customers, such as sales, use, value-added and some excise taxes, on a net (excluded from revenue) basis.
Advertising
Expense
-
The cost of advertising is expensed as incurred. The Company incurred $3,770,000,
$4,223,000, and $3,346,000 in advertising costs during 2013, 2012 and 2011, respectively, which is included in selling, general and administrative expenses.
Income
Taxes
-
Income taxes are based on pre-tax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. The Company periodically assesses the need to establish valuation allowances against its deferred tax assets to the extent the Company no longer believes it is more likely than not that the tax assets will be fully utilized.
The Company evaluates a tax position to determine whether it is more likely than not that the tax position will be sustained upon examination, based upon the technical merits of the position. A tax position that meets the more-likely-than-not recognition threshold is subject to a measurement assessment to determine the amount of benefit to recognize and the appropriate reserve to establish, if any. If a tax position does not meet the more-likely-than-not recognition threshold, no benefit is recognized. The Company is periodically audited by
U.S. federal and state as well as foreign tax authorities. While it is often difficult to predict final outcome or timing of resolution of any particular tax matter, the Company believes its reserve for uncertain tax positions is adequate to reduce the uncertain positions to the greatest amount of benefit that is more likely than not realizable.
Product
Warranty
Reserve
-
The Company accrues for the estimated cost of product warranties at the time revenue is recognized. Warranty obligations by product line or model are evaluated based on historical warranty claims experience. For machines, the Company’s standard product warranty terms generally include post-sales support and repairs of products at no additional charge for periods ranging from three months to two years or up to a specified number of hours of operation. For parts from component suppliers, the Company relies on the original manufacturer’s warranty that accompanies those parts. Generally, Company fabricated parts are not covered by specific warranty terms. Although failure of fabricated parts due to material or workmanship is rare, if it occurs, the Company’s policy is to replace fabricated parts at no additional charge.
The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers. Estimated warranty obligations are based upon warranty terms, product failure rates, repair costs and current period machine shipments. If actual product failure rates, repair costs, service delivery costs or post-sales support costs differ from our estimates, revisions to the estimated warranty liability would be required.
Pension
and
Retirement
Plans
-
The determination of obligations and expenses under the Company’s pension plan is dependent on the Company’s selection of certain assumptions used by independent actuaries in calculating such amounts. Those assumptions are described in Note 13, Pension and Retirement Plans and include among others, the discount rate, expected return on plan assets and the expected mortality rates. In accordance with accounting principles generally accepted in the United States, actual results that differ from assumptions are accumulated and amortized over future periods and, therefore, generally affect the recognized expense in such periods. Significant differences in actual experience or significant changes in the assumptions used may materially affect the pension obligations and future expenses.
The Company recognizes the overfunded or underfunded status of its pension plan as an asset or liability. Actuarial gains and losses, amortization of prior service cost (credit) and amortization of transition obligations are recognized through other comprehensive income in the year in which the changes occur. The Company measures the funded status of its pension plan as of the date of the Company’s fiscal year-end.
Stock-based
Compensation
-
The Company currently has stock-based compensation plans in effect for its employees whereby participants may earn restricted stock units. The plans were put in place during 2006 and 2011 and will continue through at least 2015. These plans are more fully described in Note 17, Shareholders’ Equity. The Company recognizes the cost of employee services received in exchange for equity awards in the financial statements based on the grant date calculated fair value of the awards. The Company recognizes stock-based compensation expense over the period during which an employee is required to provide service in exchange for the award (the vesting period).
Restricted stock units (“RSUs”) awarded under the Company’s 2006 Incentive Plan were granted shortly after the end of each year through 2010 based upon the performance of the Company and its individual subsidiaries. RSUs were granted for performance in each of the years from 2006 through 2010 with additional RSUs granted based upon cumulative five-year performance. Upon the expiration of the 2006 Incentive Plan, the Company adopted a 2011 Incentive Plan which operates similar to the 2006 Incentive Plan for each of the five years ending December 31, 2015. The Company estimates the number of shares that will be granted for the most recent fiscal year end and the five-year cumulative performance based on actual and expected future operating results. Compensation expense for RSUs expected to be granted for the most recent fiscal year and the cumulative five-year based awards is calculated using the fair value of the Company stock at each period end and is adjusted to the fair value as of each future period-end until granted.
Earnings
Per
Share
-
Basic earnings per share is based on the weighted average number of common shares outstanding and diluted earnings per share includes potential dilutive effects of options, restricted stock units and shares held in the Company’s supplemental executive retirement plan.
The following table sets forth the compensation of net income attributable to controlling interest from continuing operations and the number of basic and diluted earnings per share (in thousands):
|
|
Year ended December 31
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
39,214
|
|
|
$
|
34,210
|
|
|
$
|
40,440
|
|
Net income attributable to non-controlling interests
|
|
|
172
|
|
|
|
161
|
|
|
|
102
|
|
Net income attributable to controlling interest from
continuing operations
|
|
$
|
39,042
|
|
|
$
|
34,049
|
|
|
$
|
40,338
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
|
|
|
22,749
|
|
|
|
22,680
|
|
|
|
22,589
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options and restricted stock units
|
|
|
218
|
|
|
|
262
|
|
|
|
294
|
|
Supplemental executive retirement plan
|
|
|
114
|
|
|
|
109
|
|
|
|
101
|
|
Denominator for diluted earnings per share
|
|
|
23,081
|
|
|
|
23,051
|
|
|
|
22,984
|
|
Antidilutive options were not included in the diluted EPS computation for the years presented. The number of antidilutive options in the three years ended December 31, 2013 was not material.
Derivatives
and
Hedging
Activities
-
The Company recognizes all derivatives in the consolidated balance sheets at their fair value. Derivatives that are not hedges are adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through income or recognized in other comprehensive income until the hedged item is recognized in income. The ineffective portion of a derivative’s change in fair value is immediately recognized in income. From time to time the Company’s foreign subsidiaries enter into foreign currency exchange contracts to mitigate exposure to fluctuation in currency exchange rates. See Note 14, Derivative Financial Instruments, regarding foreign exchange contracts outstanding at December 31, 2013 and 2012.
Shipping
and
Handling
Fees
and
Cost
- The Company records revenues earned for shipping and handling
as revenue, while the cost of shipping and handling is classified as cost of goods sold.
Litigation
Contingencies
-
In the normal course of business in the industry, the Company is named as a defendant in a number of legal proceedings associated with product liability and other matters. See Note 16, Contingent Matters for additional discussion of the Company’s legal contingencies.
Business Combinations
- The Company accounts for business combinations using the acquisition method. Accordingly, intangible assets are recorded apart from goodwill if they arise from contractual or legal rights or if they are separable from goodwill. Related third party acquisition costs are expensed as incurred and contingent consideration is booked at its fair value as part of the purchase price.
Subsequent
Events
Review
-
Management has evaluated events occurring between December 31, 2013 and the date these financial statements were filed with the Securities and Exchange Commission for proper recording or disclosure therein.
2.
Restatement of Previously Issued Financial Statements
During 2013, the Company identified errors related to the elimination of intercompany profits on interdivisional sales within the Asphalt Group from 2009 through June 30, 2013. Management discovered the errors during its month-end review of its September 2013 internal financial statements while investigating a variance at one of its subsidiaries. The errors caused the gross margins, income taxes, profits, retained earnings and inventory levels previously reported for 2009 through June 30, 2013 to be understated each period. The adjustments necessary to correct the errors do not have a material impact on our previously presented financial statements as of any date; however, the correction of the cumulative effect of the errors would have been material to our income statement for 2013. The impact of the errors on the Company’s first two quarters of 2013 results was not material, and as such, the correction of the 2013 year-to-date error was recorded in the third quarter of 2013. The errors had no impact on total cash flows from operations as previously reported.
In accordance with applicable accounting guidance, an adjustment to the financial statements for each individual period presented is required to reflect the correction of the period-specific effects of the errors described above. Consequently, the Company has restated the consolidated financial statements included herein to correct for these errors. The cumulative impact of the errors was an understatement of finished goods inventory and retained earnings at December 31, 2012 by $4,061,000 and $2,736,000, at December 31, 2011 by $3,049,000 and $2,115,000 and at December 31, 2010 by $2,008,000 and
$1,470,000, respectively. The December 31 consolidated balance sheets for each of these periods have been restated accordingly. Additionally, the accompanying consolidated income statements for the periods ended December 31, 2012 and 2011 have been restated to reflect the correction by increasing gross profit and pretax income by $1,012,000 and $1,041,000 and increasing net income from continuing operations by
$621,000 and $645,000, respectively. Basic and diluted earnings per share for the years ending December
31, 2012 and 2011 were increased by $0.03 in the restated financial statements.
Inventories consist of the following (in thousands):
|
|
December 31
|
|
|
|
2013
|
|
|
2012
|
|
Raw materials and parts
|
|
$
|
139,372
|
|
|
$
|
129,676
|
|
Work-in-process
|
|
|
74,663
|
|
|
|
76,052
|
|
Finished goods
|
|
|
99,812
|
|
|
|
85,061
|
|
Used equipment
|
|
|
28,466
|
|
|
|
21,894
|
|
Total
|
|
$
|
342,313
|
|
|
$
|
312,683
|
|
|
|
|
|
|
|
|
|
|
4.
Fair Value Measurements
The Company has various financial instruments that must be measured at fair value on a recurring basis, including marketable debt and equity securities held by Astec Insurance Company (“Astec Insurance”), the Company’s captive insurance company, and marketable equity securities held in an unqualified Supplemental Executive Retirement Plan (“SERP”). The financial assets held in the SERP also constitute a liability of the Company for financial reporting purposes. The Company’s subsidiaries also occasionally enter into foreign currency exchange contracts to mitigate exposure to fluctuations in currency exchange rates.
For cash and cash equivalents, trade receivables, other receivables, revolving debt and accounts payable, the carrying amount approximates the fair value because of the short-term nature of these instruments. Investments are carried at their fair value based on quoted market prices for identical or similar assets or, where no quoted prices exist, other observable inputs for the asset. The fair values of foreign currency exchange contracts are based on quotations from various banks for similar instruments using models with market based inputs.
As indicated in the tables below, the Company has determined that its financial assets and liabilities at
December 31, 2013 and 2012 are level 1 and level 2 in the fair value hierarchy (in thousands):
|
|
December 31, 2013
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial Assets:
|
|
Trading equity securities:
|
|
SERP money market fund
|
|
$
|
783
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
783
|
|
SERP mutual funds
|
|
|
2,813
|
|
|
|
--
|
|
|
|
--
|
|
|
|
2,813
|
|
Preferred stocks
|
|
|
1,170
|
|
|
|
--
|
|
|
|
--
|
|
|
|
1,170
|
|
Short-term investments in mutual funds
|
|
|
16,073
|
|
|
|
--
|
|
|
|
--
|
|
|
|
16,073
|
|
Trading debt securities:
|
|
Corporate bonds
|
|
|
3,696
|
|
|
|
1,155
|
|
|
|
--
|
|
|
|
4,851
|
|
Municipal bonds
|
|
|
--
|
|
|
|
1,908
|
|
|
|
--
|
|
|
|
1,908
|
|
Floating rate notes
|
|
|
103
|
|
|
|
446
|
|
|
|
--
|
|
|
|
549
|
|
U.S. Treasury bill
|
|
|
250
|
|
|
|
--
|
|
|
|
--
|
|
|
|
250
|
|
Other government bonds
|
|
|
--
|
|
|
|
864
|
|
|
|
--
|
|
|
|
864
|
|
Derivative financial instruments
|
|
|
--
|
|
|
|
452
|
|
|
|
--
|
|
|
|
452
|
|
Total financial assets
|
|
$
|
24,888
|
|
|
$
|
4,825
|
|
|
$
|
--
|
|
|
$
|
29,713
|
|
Financial Liabilities:
|
|
SERP liabilities
|
|
$
|
--
|
|
|
$
|
7,828
|
|
|
$
|
--
|
|
|
$
|
7,828
|
|
Total financial liabilities
|
|
$
|
--
|
|
|
$
|
7,828
|
|
|
$
|
--
|
|
|
$
|
7,828
|
|
|
|
December 31, 2012
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial Assets:
|
|
Trading equity securities:
|
|
SERP money market fund
|
|
$
|
996
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
996
|
|
SERP mutual funds
|
|
|
1,835
|
|
|
|
--
|
|
|
|
--
|
|
|
|
1,835
|
|
Preferred stocks
|
|
|
720
|
|
|
|
--
|
|
|
|
--
|
|
|
|
720
|
|
Trading debt securities:
|
|
Corporate bonds
|
|
|
3,342
|
|
|
|
909
|
|
|
|
--
|
|
|
|
4,251
|
|
Municipal bonds
|
|
|
1,449
|
|
|
|
957
|
|
|
|
--
|
|
|
|
2,406
|
|
Floating rate notes
|
|
|
749
|
|
|
|
--
|
|
|
|
--
|
|
|
|
749
|
|
U.S. Treasury bill
|
|
|
200
|
|
|
|
--
|
|
|
|
--
|
|
|
|
200
|
|
Other government bonds
|
|
|
--
|
|
|
|
409
|
|
|
|
--
|
|
|
|
409
|
|
Total financial assets
|
|
$
|
9,291
|
|
|
$
|
2,275
|
|
|
$
|
--
|
|
|
$
|
11,566
|
|
Financial Liabilities:
|
|
SERP liabilities
|
|
$
|
--
|
|
|
$
|
6,674
|
|
|
$
|
--
|
|
|
$
|
6,674
|
|
Derivative financial instruments
|
|
|
--
|
|
|
|
145
|
|
|
|
--
|
|
|
|
145
|
|
Total financial liabilities
|
|
$
|
--
|
|
|
$
|
6,819
|
|
|
$
|
--
|
|
|
$
|
6,819
|
|
The Company reevaluates the volume of trading activity for each of its investments at the end of each reporting period and adjusts the level within the fair value hierarchy as needed. Due to decreased trading activity, $564,000 of investments included in Level 1 at December 31, 2012 were transferred to Level 2 at December 31, 2013.
The Company’s trading securities consist of the following (in thousands):
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
(Net Carrying
Amount)
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading equity securities
|
|
$
|
19,411
|
|
|
$
|
1,459
|
|
|
$
|
31
|
|
|
$
|
20,839
|
|
Trading debt securities
|
|
|
8,385
|
|
|
|
174
|
|
|
|
137
|
|
|
|
8,422
|
|
Total
|
|
$
|
27,796
|
|
|
$
|
1,633
|
|
|
$
|
168
|
|
|
$
|
29,261
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading equity securities
|
|
$
|
3,432
|
|
|
$
|
130
|
|
|
$
|
11
|
|
|
$
|
3,551
|
|
Trading debt securities
|
|
|
7,836
|
|
|
|
228
|
|
|
|
49
|
|
|
|
8,015
|
|
Total
|
|
$
|
11,268
|
|
|
$
|
358
|
|
|
$
|
60
|
|
|
$
|
11,566
|
|
Trading equity investments noted above are valued at their estimated fair value based on their quoted market prices and trading debt securities are valued based upon a mix of observable market prices and model driven prices derived from a matrix of observable market prices for assets with similar characteristics obtained from a nationally recognized third party pricing service. Additionally, a significant portion of the trading equity securities are in equity money market and mutual funds and also comprise a portion of the Company’s liability under its SERP. See Note 13, Pension and Retirement Plans, for additional information on these investments and the SERP.
Trading debt securities are comprised mainly of marketable debt securities held by Astec Insurance. Astec Insurance has an investment strategy that focuses on providing regular and predictable interest income from a diversified portfolio of high-quality fixed income securities.
Net unrealized gains or (losses) incurred during 2013, 2012 and 2011 on investments still held as of the end of each reporting period, amounted to $175,000, $173,000 and ($77,000), respectively.
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Current U.S. accounting guidance provides that goodwill and indefinite-lived intangible assets be tested for impairment at least annually. The Company performs the required valuation procedures each year as of December 31 after the following year’s forecasts are submitted and reviewed. The valuations performed in 2013, 2012 and 2011 indicated no impairment of goodwill.
The changes in the carrying amount of goodwill by reporting segment during the years ended December 31, 2013 and 2012 are as follows (in thousands):
|
|
Asphalt
Group
|
|
|
Aggregate
and
Mining
Group
|
|
|
Mobile
Asphalt
Paving
Group
|
|
|
Underground
Group
|
|
|
Other
|
|
|
Total
|
|
Balance, December 31, 2011
|
|
$
|
5,922
|
|
|
$
|
6,339
|
|
|
$
|
2,728
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
14,989
|
|
Foreign currency translation
|
|
|
--
|
|
|
|
--
|
|
|
|
22
|
|
|
|
--
|
|
|
|
--
|
|
|
|
22
|
|
Balance, December 31, 2012
|
|
|
5,922
|
|
|
|
6,339
|
|
|
|
2,750
|
|
|
|
--
|
|
|
|
--
|
|
|
|
15,011
|
|
Foreign currency translation
|
|
|
--
|
|
|
|
--
|
|
|
|
46
|
|
|
|
--
|
|
|
|
--
|
|
|
|
46
|
|
Balance, December 31, 2013
|
|
$
|
5,922
|
|
|
$
|
6,339
|
|
|
$
|
2,796
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
15,057
|
|
7.
Long-lived and Intangible Assets
Long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Impairment losses for long-lived assets “held and used” are recorded if the sum of the estimated future undiscounted cash flows used to test for recoverability is less than the carrying value.
As a result of certain aviation equipment being classified as held for sale in 2011, an impairment charge was recorded in the amount of $2,304,000 in selling, general and administrative expenses by the All Others Group to reduce the carrying value of the asset to its fair value as determined based upon the industry blue book valuations of used aircraft (level 3 in the fair value hierarchy). Additional impairment charges of $394,000 were recorded in 2011 related to long-lived assets in the Underground Group. Other charges related to inventory valuation of $1,845,000 due to the sale of the utility product line assets were included in cost of sales in the Underground Group. An additional impairment charge of $26,000 was recorded in 2011 by the Asphalt Group related to long-lived assets.
Amortization expense on intangible assets was $1,066,000, $1,855,000 and $573,000 for 2013, 2012 and 2011, respectively. Intangible assets, which are included in other long-term assets on the accompanying consolidated balance sheets, consisted of the following at December 31, 2013 and 2012 (in thousands):
|
2013
|
|
2012
|
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
|
Dealer network and customer
relationships
|
|
$
|
6,678
|
|
|
$
|
(3,019
|
)
|
|
$
|
3,659
|
|
|
$
|
7,062
|
|
|
$
|
(2,527
|
)
|
|
$
|
4,535
|
|
Trade names
|
|
|
2,575
|
|
|
|
(353
|
)
|
|
|
2,222
|
|
|
|
2,609
|
|
|
|
(184
|
)
|
|
|
2,425
|
|
Other
|
|
|
1,535
|
|
|
|
(873
|
)
|
|
|
662
|
|
|
|
1,524
|
|
|
|
(659
|
)
|
|
|
865
|
|
Total
|
|
$
|
10,788
|
|
|
$
|
(4,245
|
)
|
|
$
|
6,543
|
|
|
$
|
11,195
|
|
|
$
|
(3,370
|
)
|
|
$
|
7,825
|
|
Intangible asset amortization expense is expected to be $932,000, $831,000, $807,000, $693,000, and
$601,000 in the years ending December 31, 2014, 2015, 2016, 2017 and 2018, respectively, and $2,679,000 thereafter.
8.
|
Property and Equipment
|
Property and equipment consist of the following (in thousands):
|
|
December 31
|
|
|
|
2013
|
|
|
2012
|
|
Land
|
|
$
|
13,952
|
|
|
$
|
13,000
|
|
Building and land improvements
|
|
|
136,000
|
|
|
|
130,105
|
|
Manufacturing and office equipment
|
|
|
227,641
|
|
|
|
217,047
|
|
Aviation equipment
|
|
|
14,913
|
|
|
|
14,852
|
|
Less accumulated depreciation
|
|
|
(207,986
|
)
|
|
|
(192,165
|
)
|
Total
|
|
$
|
184,520
|
|
|
$
|
182,839
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense
was
$20,966,000,
$20,945,000
and
$18,551,000
for
the
years
ended
Decem
ber 31, 2013, 2012 and 2011, respectively.
The Company leases certain land, buildings and equipment for use in its operations under various operating leases. Total rental expense charged to operations under operating leases was approximately $2,436,000,
$2,753,000 and $2,472,000 for the years ended December 31, 2013, 2012 and 2011, respectively.
Minimum rental commitments for all noncancelable operating leases at December 31, 2013 are as follows (in thousands):
2013
|
$
|
1,272
|
2014
|
|
578
|
2015
|
|
367
|
2016
|
|
109
|
2017
|
|
79
|
Thereafter
|
|
37
|
|
$
|
2,442
|
10.
Debt
On April 12, 2012, the Company and certain of its subsidiaries entered into an amended and restated credit agreement with Wells Fargo whereby Wells Fargo extended to the Company an unsecured line of credit of up to $100,000,000, including a sub-limit for letters of credit of up to $25,000,000. The amended and restated credit agreement replaced the expiring $100,000,000 credit facility between the Company and Wells Fargo. There were no outstanding revolving or term loan borrowings under the credit facilities at the time of transition or as of December 31, 2013. Letters of credit totaling $6,943,000 were outstanding under the new agreement as of December 31, 2013, resulting in additional borrowing ability of $93,057,000 on the Wells Fargo credit facility as of December 31, 2013. The amended and restated agreement has a five-year term expiring in April 2017. Borrowings under the agreement are subject to an interest rate equal to the daily one-month LIBOR rate plus a 0.75% margin. The unused facility fee is 0.175%. Interest only payments are due monthly. The amended and restated credit agreement contains certain financial covenants, including provisions concerning required levels of annual net income, minimum tangible net worth and maximum allowed capital expenditures. The Company was in compliance with these covenants as of December 31, 2013.
The Company’s South African subsidiary, Osborn Engineered Products SA (Pty) Ltd (“Osborn”), has a credit facility of $7,146,000 (ZAR 75,000,000) to finance short-term working capital needs, as well as to cover performance letters of credit, advance payment and retention guarantees. As of December 31, 2013, Osborn had no cash borrowings and $648,000 in performance, advance payment and retention guarantees outstanding under the facility. The facility is unsecured and no unused facility fees are charged. As of December 31, 2013, Osborn had available credit under the facility of $6,498,000. The interest rate is 0.25% less than the South Africa prime rate, resulting in a rate of 8.25% as of December 31, 2013.
11.
Product Warranty Reserves
The Company warrants its products against manufacturing defects and performance to specified standards. The warranty period and performance standards vary by product, but generally range from three months to two years or up to a specified number of hours of operation. The Company estimates the costs that may be incurred under its warranties and records a liability at the time product sales are recorded. The warranty liability is primarily based on historical claim rates, nature of claims and the associated costs.
Changes in the Company’s product warranty liability during 2013, 2012 and 2011 are as follows (in thousands):
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Reserve balance, beginning of year
|
|
$
|
11,052
|
|
|
$
|
12,663
|
|
|
$
|
9,891
|
|
Warranty liabilities accrued
|
|
|
12,199
|
|
|
|
11,152
|
|
|
|
13,029
|
|
Warranty liabilities settled
|
|
|
(10,171
|
)
|
|
|
(11,022
|
)
|
|
|
(10,567
|
)
|
Other
|
|
|
(364
|
)
|
|
|
(1,741
|
)
|
|
|
310
|
|
Reserve balance, end of year
|
|
$
|
12,716
|
|
|
$
|
11,052
|
|
|
$
|
12,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
Accrued Loss Reserves
The Company accrues reserves for losses related to known workers’ compensation and general liability claims that have been incurred but not yet paid or are estimated to have been incurred but not yet reported to the Company. The undiscounted reserves are actuarially determined based on the Company’s evaluation of the type and severity of individual claims and historical information, primarily its own claim experience, along with assumptions about future events. Changes in assumptions, as well as changes in actual experience, could cause these estimates to change in the future. Total accrued loss reserves at December 31, 2013 were $7,344,000 compared to $7,315,000 at December 31, 2012, of which $4,016,000 and $4,094,000 was included in other long-term liabilities at December 31, 2013 and 2012, respectively.
13.
Pension and Retirement Plans
Prior to December 31, 2003, all employees of the Company’s Kolberg-Pioneer, Inc. subsidiary were covered by a defined benefit pension plan. After December 31, 2003, all benefit accruals under the plan ceased and no new employees could become participants in the plan. Benefits paid under this plan are based on years of service multiplied by a monthly amount. The Company’s funding policy for the plan is to make the minimum annual contributions required by applicable regulations.
The Company’s investment strategy for the plan is to earn a rate of return sufficient to match or exceed the long- term growth of pension liabilities. The investment policy states that the Plan Committee in its sole discretion shall determine the allocation of plan assets among the following four asset classes: cash equivalents, fixed- income securities, domestic equities and international equities. The Plan Committee attempts to ensure adequate diversification of the invested assets through investment in an exchange traded mutual fund that invests in a diversified portfolio of stocks, bonds and money market securities.
The following provides information regarding benefit obligations, plan assets and the funded status of the plan
(in thousands, except as noted *):
|
|
Pension Benefits
|
|
|
|
2013
|
|
|
2012
|
|
Change in benefit obligation
|
|
|
|
|
|
|
Benefit obligation, beginning of year
|
|
$
|
14,958
|
|
|
$
|
13,699
|
|
Interest cost
|
|
|
561
|
|
|
|
599
|
|
Actuarial (gain)/loss
|
|
|
(1,178
|
)
|
|
|
1,161
|
|
Benefits paid
|
|
|
(526
|
)
|
|
|
(501
|
)
|
Benefit obligation, end of year
|
|
|
13,815
|
|
|
|
14,958
|
|
Accumulated benefit obligation
|
|
$
|
13,815
|
|
|
$
|
14,958
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of year (Level 1)
|
|
$
|
10,784
|
|
|
$
|
9,378
|
|
Actual gain on plan assets
|
|
|
1,624
|
|
|
|
1,152
|
|
Employer contribution
|
|
|
811
|
|
|
|
755
|
|
Benefits paid
|
|
|
(526
|
)
|
|
|
(501
|
)
|
Fair value of plan assets, end of year (Level 1)
|
|
|
12,693
|
|
|
|
10,784
|
|
Funded status, end of year
|
|
$
|
(1,122
|
)
|
|
$
|
(4,174
|
)
|
Amounts recognized in the consolidated balance sheets
|
|
|
|
|
|
|
|
|
Noncurrent liabilities
|
|
$
|
(1,122
|
)
|
|
$
|
(4,174
|
)
|
Net amount recognized
|
|
$
|
(1,122
|
)
|
|
$
|
(4,174
|
)
|
Amounts recognized in accumulated other comprehensive income consist of
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
4,076
|
|
|
$
|
6,721
|
|
Net amount recognized
|
|
$
|
4,076
|
|
|
$
|
6,721
|
|
Weighted average assumptions used to determine benefit obligations as of December 31*
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.60
|
%
|
|
|
3.82
|
%
|
Expected return on plan assets
|
|
|
7.00
|
%
|
|
|
7.00
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
The measurement date used for the plan was December 31.
In determining the expected return on plan assets, the historical experience of the plan assets, the current and expected allocation of the plan assets and the expected long-term rates of return were considered.
All assets in the plan are invested in an exchange traded mutual fund. The allocation of assets within the mutual fund as of the measurement date (December 31) and the target asset allocation ranges by asset category are as follows:
|
|
Actual Allocation
|
|
|
|
|
Asset Category
|
|
2013
|
|
|
2012
|
|
|
2013 & 2012
Target
Allocation Ranges
|
|
Equity securities
|
|
|
65.4
|
%
|
|
|
63.5
|
%
|
|
|
53 - 73
|
%
|
Debt securities
|
|
|
27.8
|
%
|
|
|
32.6
|
%
|
|
|
21 - 41
|
%
|
Money market funds
|
|
|
6.8
|
%
|
|
|
3.9
|
%
|
|
|
0 - 15
|
%
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
Net periodic benefit cost for 2013, 2012 and 2011 included the following components (in thousands, except
as noted *):
|
|
Pension Benefits
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
561
|
|
|
$
|
599
|
|
|
$
|
604
|
|
Expected return on plan assets
|
|
|
(693
|
)
|
|
|
(648
|
)
|
|
|
(741
|
)
|
Amortization of actuarial loss
|
|
|
536
|
|
|
|
502
|
|
|
|
257
|
|
Net periodic benefit cost
|
|
$
|
404
|
|
|
$
|
453
|
|
|
$
|
120
|
|
Other changes in plan assets and benefit obligations recognized in other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial (gain)/loss for the year
|
|
$
|
(2,109
|
)
|
|
$
|
656
|
|
|
$
|
2,864
|
|
Amortization of net gain/(loss)
|
|
|
(536
|
)
|
|
|
(502
|
)
|
|
|
(257
|
)
|
Total recognized in other comprehensive income
|
|
|
(2,645
|
)
|
|
|
154
|
|
|
|
2,607
|
|
Total recognized in net periodic benefit cost and other comprehensive income
|
|
$
|
(2,241
|
)
|
|
$
|
607
|
|
|
$
|
2,727
|
|
Weighted average assumptions used to determine net periodic benefit cost for years ended December 31*
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.82
|
%
|
|
|
4.46
|
%
|
|
|
5.40
|
%
|
Expected return on plan assets
|
|
|
7.00
|
%
|
|
|
7.00
|
%
|
|
|
8.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company expects to contribute $353,000 to the plan during 2014.
Amounts in accumulated other comprehensive income expected to be recognized in net periodic benefit cost
in 2014 for the amortization of a net loss is $295,000.
The following estimated future benefit payments are expected to be paid in the years indicated (in thousands):
|
|
|
Pension Benefits
|
|
2014
|
|
$
|
680
|
|
2015
|
|
|
720
|
|
2016
|
|
|
750
|
|
2017
|
|
|
790
|
|
2018
|
|
|
820
|
|
2019 - 2023
|
|
|
4,370
|
|
The Company sponsors a 401(k) defined contribution plan to provide eligible employees with additional income upon retirement. The Company’s contributions to the plan are based on employee contributions. The Company’s contributions totaled $4,941,000, $5,099,000, and $4,515,000 in 2013, 2012 and 2011, respectively.
The Company maintains a Supplemental Executive Retirement Plan (“SERP”) for certain of its executive officers. The plan is a non-qualified deferred compensation plan administered by the Board of Directors of the Company, pursuant to which the Company makes quarterly cash contributions of a certain percentage of executive officers’ compensation. Investments are self-directed by participants and can include Company stock. Upon retirement, participants receive their apportioned share of the plan assets in the form of cash.
Assets of the SERP consist of the following (in thousands):
|
December 31, 2013
|
|
December 31, 2012
|
|
|
Cost
|
|
Market
|
|
Cost
|
|
Market
|
|
Company stock
|
|
$
|
2,786
|
|
|
$
|
4,232
|
|
|
$
|
2,855
|
|
|
$
|
3,844
|
|
Equity securities
|
|
|
3,241
|
|
|
|
3,596
|
|
|
|
2,745
|
|
|
|
2,830
|
|
Total
|
|
$
|
6,027
|
|
|
$
|
7,828
|
|
|
$
|
5,600
|
|
|
$
|
6,674
|
|
The Company periodically adjusts the deferred compensation liability such that the balance of the liability equals the total fair market value of all assets held by the trust established under the SERP. Such liabilities are included in other long-term liabilities on the consolidated balance sheets. The equity securities are included in investments in the consolidated balance sheets and classified as trading equity securities. See Note 5, Investments, for additional information. The cost of the Company stock held by the plan is included as a reduction in shareholders’ equity in the consolidated balance sheets.
The change in the fair market value of Company stock held in the SERP results in a charge or credit to selling, general and administrative expenses in the consolidated statements of income because the acquisition cost of the Company stock in the SERP is recorded as a reduction of shareholders’ equity and is not adjusted to fair market value; however, the related liability is adjusted to the fair market value of the stock as of each period end. The Company recognized expense of $601,000 and $115,000 in 2013 and 2012, respectively, and income of $45,000 in 2011 related to the change in the fair value of the Company stock held in the SERP.
14.
Derivative Financial Instruments
The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is foreign currency risk. From time to time the Company’s foreign subsidiaries enter into foreign currency exchange contracts to mitigate exposure to fluctuations in currency exchange rates. The fair value of the derivative financial instrument is recorded on the Company’s balance sheet and is adjusted to fair value at each measurement date. The changes in fair value are recognized in the consolidated statements of income in the current period. The Company does not engage in speculative transactions nor does it hold or issue derivative financial instruments for trading purposes. The average U.S. dollar equivalent notional amount of outstanding foreign currency exchange contracts was $11,543,000 during 2013. At December 31, 2013, the Company reported $452,000 of derivative assets in other current assets. The Company reported $145,000 of derivative liabilities in other accrued liabilities as of December 31, 2012. The Company recognized, as a component of cost of sales, a net gain on the change in fair value of derivative instruments of $1,061,000 for the year ended December 31, 2013. The Company recognized, as a component of cost of sales, a net loss on the change in fair value of derivative instruments of $594,000 and $144,000 for the years ended December 31, 2012 and 2011, respectively. There were no derivatives that were designated as hedges at December 31, 2013 or 2012.
For financial reporting purposes, income from continuing operations before income taxes includes the following
components (in thousands):
|
|
Year Ended December 31
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Conintuing operations
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
53,315
|
|
|
$
|
47,400
|
|
|
$
|
52,583
|
|
Foreign
|
|
|
4,927
|
|
|
|
6,297
|
|
|
|
7,590
|
|
Income from continuing operations before income taxes
|
|
$
|
58,242
|
|
|
$
|
53,697
|
|
|
$
|
60,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes consists of the following (in thousands):
|
|
Year Ended December 31
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
16,239
|
|
|
$
|
9,637
|
|
|
$
|
17,167
|
|
State
|
|
|
2,785
|
|
|
|
2,096
|
|
|
|
3,245
|
|
Foreign
|
|
|
2,664
|
|
|
|
1,996
|
|
|
|
1,481
|
|
Total current provision
|
|
|
21,688
|
|
|
|
13,729
|
|
|
|
21,893
|
|
Deferred provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(885
|
)
|
|
|
6,135
|
|
|
|
(1,903
|
)
|
State
|
|
|
(923
|
)
|
|
|
(768
|
)
|
|
|
(677
|
)
|
Foreign
|
|
|
(852
|
)
|
|
|
391
|
|
|
|
420
|
|
Total deferred provision (benefit)
|
|
|
(2,660
|
)
|
|
|
5,758
|
|
|
|
(2,160
|
)
|
Total provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
15,354
|
|
|
|
15,772
|
|
|
|
15,264
|
|
State
|
|
|
1,862
|
|
|
|
1,328
|
|
|
|
2,568
|
|
Foreign
|
|
|
1,812
|
|
|
|
2,387
|
|
|
|
1,901
|
|
Income tax provision on continuing operations
|
|
|
19,028
|
|
|
|
19,487
|
|
|
|
19,733
|
|
Income tax provision (benefit) on discontinued operations
|
|
|
-
|
|
|
|
3,796
|
|
|
|
(56
|
)
|
Total tax provision
|
|
$
|
19,028
|
|
|
$
|
23,283
|
|
|
$
|
19,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company’s income tax provision is computed based on the domestic and foreign federal statutory rates
and the average state statutory rates, net of related federal benefit.
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before income taxes. A reconciliation of the provision for income taxes at the statutory federal income tax rate to the amount provided is as follows (in thousands):
|
|
Year Ended December 31
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax at the statutory federal income tax rate
|
|
$
|
20,385
|
|
|
$
|
18,794
|
|
|
$
|
21,061
|
|
Qualified production activity deduction
|
|
|
(1,395
|
)
|
|
|
(958
|
)
|
|
|
(1,228
|
)
|
State income tax, net of federal income tax
|
|
|
1,105
|
|
|
|
758
|
|
|
|
1,651
|
|
Other permanent differences
|
|
|
464
|
|
|
|
360
|
|
|
|
370
|
|
Research and development tax credits
|
|
|
(2,054
|
)
|
|
|
(419
|
)
|
|
|
(2,135
|
)
|
Change in valuation allowance
|
|
|
810
|
|
|
|
1,034
|
|
|
|
62
|
|
Other items
|
|
|
(287
|
)
|
|
|
(82
|
)
|
|
|
(48
|
)
|
Income tax provision on continued operations
|
|
|
19,028
|
|
|
|
19,487
|
|
|
|
19,733
|
|
Income tax provision (benefit) on discontinued operations
|
|
|
--
|
|
|
|
3,796
|
|
|
|
(56
|
)
|
Total tax provision
|
|
$
|
19,028
|
|
|
$
|
23,283
|
|
|
$
|
19,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
|
|
December 31
|
|
|
|
2013
|
|
|
2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Inventory reserves
|
|
$
|
6,340
|
|
|
$
|
3,702
|
|
Warranty reserves
|
|
|
3,558
|
|
|
|
2,894
|
|
Bad debt reserves
|
|
|
636
|
|
|
|
678
|
|
State tax loss carryforwards
|
|
|
2,100
|
|
|
|
2,001
|
|
Accrued vacation
|
|
|
1,805
|
|
|
|
1,797
|
|
SERP
|
|
|
1,245
|
|
|
|
1,180
|
|
Deferred compensation
|
|
|
1,226
|
|
|
|
790
|
|
Restricted stock units
|
|
|
2,601
|
|
|
|
2,963
|
|
Foreign exchange gains/losses
|
|
|
2,345
|
|
|
|
683
|
|
Pension and post-employment benefits
|
|
|
1,498
|
|
|
|
2,475
|
|
Other
|
|
|
6,684
|
|
|
|
4,856
|
|
Valuation allowances
|
|
|
(4,354
|
)
|
|
|
(3,065
|
)
|
Total deferred tax assets
|
|
|
25,684
|
|
|
|
20,954
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
19,711
|
|
|
|
18,933
|
|
Amortization
|
|
|
1,200
|
|
|
|
1,120
|
|
Goodwill
|
|
|
2,012
|
|
|
|
1,770
|
|
Pension
|
|
|
1,132
|
|
|
|
1,186
|
|
Foreign tax rate differential
|
|
|
3,681
|
|
|
|
2,873
|
|
Total deferred tax liabilities
|
|
|
27,736
|
|
|
|
25,882
|
|
Total net deferred liabilities
|
|
$
|
(2,052
|
)
|
|
$
|
(4,928
|
)
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013, the Company has state net operating loss carryforwards of $48,342,000, foreign net operating loss carryforwards of approximately $5,181,000, and state tax credit carryforwards of $1,200,000 for tax purposes, which will be available to offset future taxable income. If not used, these carryforwards will expire between 2014 and 2027. A significant portion of the valuation allowance for deferred tax assets relates to the future utilization of state and foreign net operating loss and state tax credit carryforwards. Future utilization of these net operating loss and state tax credit carryforwards is evaluated by the Company on a periodic basis and the valuation allowance is adjusted accordingly. In 2013, the valuation allowance on these carryforwards was increased by $1,322,000 due to uncertainty about whether certain entities will realize their state net operating loss and state tax credit carryforwards. The Company has also determined that the recovery of certain other deferred tax assets is uncertain. The valuation allowance for these deferred tax assets was decreased by $33,000.
Undistributed earnings of the Company’s Canadian subsidiary, Breaker Technology Ltd., are considered to be indefinitely reinvested; accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to Canada. The cumulative amount of Breaker Technology, Ltd.’s unrecovered basis difference is
$8,100,000 as of December 31, 2013. The determination of the unrecognized deferred tax liability on the basis difference is not practical at this time.
The Company files 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 2010. 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 2007.
The Company has a liability for unrecognized tax benefits of $1,933,000 and $2,095,000 (excluding accrued interest and penalties) as of December 31, 2013 and 2012, respectively. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The Company recognized tax benefits of $101,000 and $178,000 in 2013 and 2012, respectively, for penalties and interest related to amounts that were settled for less than previously accrued. The net total amount of unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate is $1,954,000 and $2,125,000 at December 31, 2013 and 2012, respectively. The Company does not expect a significant increase or decrease to the total amount of unrecognized tax benefits within the next twelve months.
A reconciliation of the beginning and ending unrecognized tax benefits excluding interest and penalties is as
follows (in thousands):
|
|
Year Ended December 31
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Balance, beginning of year
|
|
$
|
2,095
|
|
|
$
|
1,682
|
|
|
$
|
1,025
|
|
Additions for tax positions related to the current year
|
|
|
102
|
|
|
|
396
|
|
|
|
546
|
|
Additions for tax positions related to prior years
|
|
|
128
|
|
|
|
90
|
|
|
|
192
|
|
Reductions due to lapse of statutes of limitations
|
|
|
(149
|
)
|
|
|
(73
|
)
|
|
|
(81
|
)
|
Decreases related to settlements with tax authorities
|
|
|
(243
|
)
|
|
|
--
|
|
|
|
--
|
|
Balance, end of year
|
|
$
|
1,933
|
|
|
$
|
2,095
|
|
|
$
|
1,682
|
|
The December 31, 2013 balance of unrecognized tax benefits includes 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.
Certain customers have financed purchases of Company products through arrangements in which the Company is contingently liable for customer debt of $693,000 and $2,091,000 at December 31, 2013 and 2012, respectively. At December 31, 2013, the maximum potential amount of future payments for which the Company would be liable is equal to $693,000. These arrangements also provide that the Company will receive the lender’s full security interest in the equipment financed if the Company is required to fulfill its contingent liability under one of these arrangements. The Company has recorded a liability of $121,000 related to these guarantees at December 31, 2013.
In addition, the Company is contingently liable under letters of credit issued by Wells Fargo totaling $6,943,000 as of December 31, 2013, including a $1,600,000 letter of credit issued on behalf of Astec Australia. The outstanding letters of credit expire at various dates through November 2017. As of December 31, 2013, Osborn and Astec Australia are contingently liable for a total of $648,000 and $851,000, respectively, in performance advance payment and retention guarantees. As of December 31, 2013, the maximum potential amount of future payments under these letters of credit and guarantees for which the Company could be liable is $8,442,000.
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 material 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.
During 2004, the Company received notice from the Environmental Protection Agency that it may be responsible for a portion of the costs incurred in connection with an environmental cleanup in Illinois. The discharge of hazardous materials and associated cleanup relate to activities occurring prior to the Company’s acquisition of Barber-Greene in 1986. The Company believes that over 300 other parties have received similar notice. At this time, the Company cannot predict whether the EPA will seek to hold the Company liable for a portion of the cleanup costs or the amount of any such liability. The Company has not recorded a liability with respect to the matter because no estimate of the amount, if any, of any such liability can be made at this time.
Beginning in 2006 and again in 2011, the Company implemented five-year plans to award key members of management restricted stock units (“RSUs”) each year based upon annual financial performance of the Company and its subsidiaries. Each five-year plan allows up to 700,000 of newly issued shares of Company stock to be granted to employees. The number of RSUs granted each year is determined based upon the performance of individual subsidiaries and consolidated annual financial performance, with additional RSUs available for cumulative five-year results. Generally, each award vests at the end of five years from the date of grant, or at the time a recipient retires after reaching age 65, if earlier. The fair value of the RSUs that vested during 2013, 2012 and 2011 was $2,405,000, $2,719,000 and $406,000, respectively. The grant date tax benefit was reduced by $77,000 and $67,000 upon the vesting of RSUs in 2013 and 2012, respectively.
Compensation expense of $1,231,000, $1,054,000 and $2,602,000 was recorded in the years ended December 31, 2013, 2012 and 2011, respectively, to reflect the fair value of RSUs granted (or anticipated to be granted for 2013 performance) less estimated forfeitures, amortized over the portion of the vesting period occurring during the period. Related income tax benefits of $417,000, $387,000 and $848,000 were recorded in 2013, 2012 and 2011, respectively. Based upon the grant date fair value of RSUs, it is anticipated that $2,431,000 of additional compensation costs will be recognized in future periods through 2021 for RSUs earned through December 31, 2013. The weighted average period over which this additional compensation cost will be expensed is 3.8 years. RSUs do not participate in Company paid dividends.
Changes in restricted stock units during the year ended December 31, 2013 are as follows:
|
|
2013
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
Unvested restricted stock units, beginning of year
|
|
|
312,496
|
|
|
$
|
31.87
|
|
Restricted stock units granted
|
|
|
21,432
|
|
|
|
35.61
|
|
Restricted stock units forfeited
|
|
|
(3,595
|
)
|
|
|
34.97
|
|
Restricted stock units vested
|
|
|
(68,629
|
)
|
|
|
37.95
|
|
Unvested restricted stock units, end of year
|
|
|
261,704
|
|
|
|
30.54
|
|
The grant date fair value of the restricted stock units granted during 2013, 2012 and 2011 was $763,000,
$1,303,000 and $4,240,000, respectively.
The Company has adopted an Amended and Restated Shareholder Protection Rights Agreement and declared a distribution of one right (the “Right”) for each outstanding share of Company common stock, par value
$0.20 per share (the “Common Stock”). Each Right entitles the registered holder (other than the “Acquiring Person” as defined below) to purchase from the Company one one-hundredth of a share (a “Unit”) of Series A Participating Preferred Stock, par value $1.00 per share (the “Preferred Stock”), at a purchase price of
$72.00 per Unit, subject to adjustment. The Rights currently attach to the certificates representing shares of outstanding Company Common Stock, and no separate Rights certificates will be distributed. The Rights will separate from the Common Stock upon the earlier of ten business days (unless otherwise delayed by the Board) following the: 1) public announcement that a person or group of affiliated or associated persons (the “Acquiring Person”) has acquired, obtained the right to acquire, or otherwise obtained beneficial ownership of fifteen percent (15%) or more of the then outstanding shares of Common Stock, or 2) commencement of a tender offer or exchange offer that would result in an Acquiring Person beneficially owning fifteen percent (15%) or more of the then outstanding shares of Common Stock. The Board of Directors may terminate the Rights without any payment to the holders thereof at any time prior to the close of business ten business days following announcement by the Company that a person has become an Acquiring Person. Once the Rights
are separated from the Common Stock, then the Rights entitle the holder (other than the Acquiring Person) to purchase shares of Common Stock (rather than Preferred Stock) having a current market value equal to twice the Unit purchase price. The Rights, which do not have voting power and are not entitled to dividends, expire on December 22, 2015. In the event of a merger, consolidation, statutory share exchange or other transaction in which shares of Common Stock are exchanged, each Unit of Preferred Stock will be entitled to receive the per share amount paid in respect of each share of Common Stock.
18.
Operations by Industry Segment and Geographic Area
The Company has four reportable segments. These segments are combinations of business units that offer similar products and services. A brief description of each segment is as follows:
Asphalt
Group
-
This segment consists of three business units that design, engineer, manufacture and market a complete line of portable, stationary and relocatable hot-mix asphalt plants and related components and a variety of heaters, heat transfer processing equipment, thermal fluid storage tanks, concrete plants and wood pellet plants. The principal purchasers of these products are asphalt producers, highway heavy equipment contractors, wood pellet processors and foreign and domestic governmental agencies.
Aggregate
and
Mining
Group
-
This segment consists of seven business units that design, engineer, manufacture and market a complete line of rock crushers, feeders, conveyors, screens and washing equipment. The principal purchasers of these products are open-mine and quarry operators.
Mobile
Asphalt
Paving
Group
-
This segment consists of three business units that design, engineer, manufacture and market asphalt pavers, asphalt material transfer vehicles, milling machines and paver screeds. The principal purchasers of these products are highway and heavy equipment contractors and foreign and domestic governmental agencies.
Underground
Group
-
This segment consists of two business units that design, engineer, manufacture and market a complete line of drilling rigs for the oil and gas, geothermal and water well industries, and high pressure diesel pump trailers for fracking and cleaning oil and gas wells. This segment previously included American Augers, Inc., which was sold in November 2012.
All
Others
-
This category consists of the Company’s other business units, including Peterson Pacific Corp., Astec Australia Pty Ltd, Astec Insurance Company and the parent company, Astec Industries, Inc., that do not meet the requirements for separate disclosure as an operating segment.
The Company evaluates performance and allocates resources based on profit or loss from operations before
U.S. federal income taxes and corporate overhead. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
Intersegment sales and transfers are valued at prices comparable to those for unrelated parties. For management purposes, the Company does not allocate U.S. federal income taxes or corporate overhead (including interest expense) to its business units.
Segment information for 2013 (in thousands)
|
|
Asphalt
Group
|
|
|
Aggregate
and
Mining
Group
|
|
|
Mobile
Asphalt
Paving
Group
|
|
|
Underground
Group
|
|
|
|
|
|
Total
|
|
Revenues from external customers
|
|
$
|
237,959
|
|
|
$
|
350,514
|
|
|
$
|
168,444
|
|
|
$
|
73,104
|
|
|
$
|
102,977
|
|
|
$
|
932,998
|
|
Intersegment revenues
|
|
|
14,577
|
|
|
|
45,435
|
|
|
|
17,658
|
|
|
|
2,304
|
|
|
|
--
|
|
|
|
79,974
|
|
Interest expense
|
|
|
11
|
|
|
|
12
|
|
|
|
6
|
|
|
|
--
|
|
|
|
394
|
|
|
|
423
|
|
Depreciation and
amortization
|
|
|
4,591
|
|
|
|
7,906
|
|
|
|
3,439
|
|
|
|
3,526
|
|
|
|
2,803
|
|
|
|
22,265
|
|
Income taxes
|
|
|
1,573
|
|
|
|
2,642
|
|
|
|
884
|
|
|
|
(406
|
)
|
|
|
14,335
|
|
|
|
19,028
|
|
Segment profit (loss)
|
|
|
26,962
|
|
|
|
33,031
|
|
|
|
11,767
|
|
|
|
(4,902
|
)
|
|
|
(27,375
|
)
|
|
|
39,483
|
|
Segment assets
|
|
|
407,483
|
|
|
|
427,565
|
|
|
|
174,743
|
|
|
|
78,297
|
|
|
|
381,257
|
|
|
|
1,469,345
|
|
Capital expenditures
|
|
|
3,300
|
|
|
|
15,649
|
|
|
|
3,343
|
|
|
|
3,831
|
|
|
|
1,550
|
|
|
|
27,673
|
|
Segment information for 2012 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asphalt
Group
|
|
|
Aggregate
and
Mining
Group
|
|
|
Mobile
Asphalt
Paving
Group
|
|
|
Underground
Group
|
|
|
All Others
|
|
|
Total
|
|
Revenues from external customers
|
|
$
|
234,562
|
|
|
$
|
355,428
|
|
|
$
|
158,115
|
|
|
$
|
82,802
|
|
|
$
|
105,366
|
|
|
$
|
936,273
|
|
Intersegment revenues
|
|
|
30,697
|
|
|
|
25,776
|
|
|
|
16,474
|
|
|
|
1,688
|
|
|
|
168
|
|
|
|
74,803
|
|
Interest expense
|
|
|
49
|
|
|
|
32
|
|
|
|
3
|
|
|
|
--
|
|
|
|
255
|
|
|
|
339
|
|
Depreciation and amortization
|
|
|
4,729
|
|
|
|
7,381
|
|
|
|
3,262
|
|
|
|
2,934
|
|
|
|
2,629
|
|
|
|
20,935
|
|
Income taxes on continuing operations
|
|
|
829
|
|
|
|
1,582
|
|
|
|
(348
|
)
|
|
|
(230
|
)
|
|
|
17,654
|
|
|
|
19,487
|
|
Segment profit (loss)
|
|
|
22,012
|
|
|
|
34,687
|
|
|
|
10,721
|
|
|
|
(2,238
|
)
|
|
|
(30,453
|
)
|
|
|
34,729
|
|
Segment assets
|
|
|
386,478
|
|
|
|
399,832
|
|
|
|
157,675
|
|
|
|
83,744
|
|
|
|
392,833
|
|
|
|
1,420,562
|
|
Capital expenditures
|
|
|
4,430
|
|
|
|
9,376
|
|
|
|
3,239
|
|
|
|
7,137
|
|
|
|
1,836
|
|
|
|
26,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment information for 2011 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asphalt
Group
|
|
|
Aggregate
and
Mining
Group
|
|
|
Mobile
Asphalt
Paving
Group
|
|
|
Underground
Group
|
|
|
All Others
|
|
|
Total
|
|
Revenues from external customers
|
|
$
|
260,404
|
|
|
$
|
333,278
|
|
|
$
|
187,988
|
|
|
$
|
37,683
|
|
|
$
|
89,288
|
|
|
$
|
908,641
|
|
Intersegment revenues
|
|
|
24,925
|
|
|
|
25,219
|
|
|
|
18,629
|
|
|
|
5,083
|
|
|
|
--
|
|
|
|
73,856
|
|
Interest expense
|
|
|
14
|
|
|
|
3
|
|
|
|
5
|
|
|
|
--
|
|
|
|
168
|
|
|
|
190
|
|
Depreciation and amortization
|
|
|
4,268
|
|
|
|
6,932
|
|
|
|
2,788
|
|
|
|
1,566
|
|
|
|
2,451
|
|
|
|
18,005
|
|
Income taxes on continuing operations
|
|
|
1,476
|
|
|
|
1,834
|
|
|
|
1,009
|
|
|
|
(550
|
)
|
|
|
15,964
|
|
|
|
19,733
|
|
Segment profit (loss)
|
|
|
30,275
|
|
|
|
31,493
|
|
|
|
26,485
|
|
|
|
(7,318
|
)
|
|
|
(38,549
|
)
|
|
|
42,386
|
|
Segment assets
|
|
|
373,186
|
|
|
|
359,931
|
|
|
|
155,676
|
|
|
|
134,376
|
|
|
|
408,903
|
|
|
|
1,432,072
|
|
Capital expenditures
|
|
|
9,172
|
|
|
|
8,138
|
|
|
|
6,678
|
|
|
|
945
|
|
|
|
11,197
|
|
|
|
36,130
|
|
The totals of segment information for all reportable segments reconciles to consolidated totals as follows (in thousands):
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Sales
|
|
|
|
|
|
|
|
|
|
Total external sales for reportable segments
|
|
$
|
830,021
|
|
|
$
|
830,907
|
|
|
$
|
819,353
|
|
Intersegment sales for reportable segments
|
|
|
79,974
|
|
|
|
74,635
|
|
|
|
73,856
|
|
Other sales
|
|
|
102,977
|
|
|
|
105,366
|
|
|
|
89,288
|
|
Elimination of intersegment sales
|
|
|
(79,974
|
)
|
|
|
(74,635
|
)
|
|
|
(73,856
|
)
|
Total consolidated sales
|
|
$
|
932,998
|
|
|
$
|
936,273
|
|
|
$
|
908,641
|
|
Net income attributable to controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
Total profit for reportable segments
|
|
$
|
66,858
|
|
|
$
|
65,182
|
|
|
$
|
80,935
|
|
Other losses
|
|
|
(27,375
|
)
|
|
|
(30,453
|
)
|
|
|
(38,549
|
)
|
Net income attributable to non-controlling interest
|
|
|
(172
|
)
|
|
|
(161
|
)
|
|
|
(102
|
)
|
Elimination of intersegment profit
|
|
|
(269
|
)
|
|
|
(519
|
)
|
|
|
(1,946
|
)
|
Income from discontinued operations, net of tax
|
|
|
--
|
|
|
|
3,401
|
|
|
|
225
|
|
Gain on disposal of discontinued operations, net of tax
|
|
|
--
|
|
|
|
3,378
|
|
|
|
--
|
|
Total consolidated net income attributable to controlling interest
|
|
$
|
39,042
|
|
|
$
|
40,828
|
|
|
$
|
40,563
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets for reportable segments
|
|
$
|
1,088,088
|
|
|
$
|
1,027,729
|
|
|
$
|
1,023,169
|
|
Other assets
|
|
|
381,257
|
|
|
|
392,833
|
|
|
|
408,903
|
|
Elimination of intercompany profit in inventory
|
|
|
(4,679
|
)
|
|
|
(4,410
|
)
|
|
|
(3,890
|
)
|
Elimination of intercompany receivables
|
|
|
(482,768
|
)
|
|
|
(469,254
|
)
|
|
|
(461,721
|
)
|
Elimination of investment in subsidiaries
|
|
|
(195,199
|
)
|
|
|
(186,556
|
)
|
|
|
(160,988
|
)
|
Other eliminations
|
|
|
(37,408
|
)
|
|
|
(31,559
|
)
|
|
|
(85,541
|
)
|
Total consolidated assets
|
|
$
|
749,291
|
|
|
$
|
728,783
|
|
|
$
|
719,932
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense for reportable segments
|
|
$
|
29
|
|
|
$
|
84
|
|
|
$
|
22
|
|
Other interest expense
|
|
|
394
|
|
|
|
255
|
|
|
|
168
|
|
Total consolidated interest expense
|
|
$
|
423
|
|
|
$
|
339
|
|
|
$
|
190
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization for reportable segments
|
|
$
|
19,462
|
|
|
$
|
18,306
|
|
|
$
|
15,554
|
|
Other depreciation and amortization
|
|
|
2,803
|
|
|
|
2,629
|
|
|
|
2,451
|
|
Depreciation from discontinued operations
|
|
|
-
|
|
|
|
2,113
|
|
|
|
1,254
|
|
Total consolidated depreciation and amortization
|
|
$
|
22,265
|
|
|
$
|
23,048
|
|
|
$
|
19,259
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures for reportable segments
|
|
$
|
26,123
|
|
|
$
|
24,182
|
|
|
$
|
24,933
|
|
Other capital expenditures
|
|
|
1,550
|
|
|
|
1,836
|
|
|
|
11,197
|
|
Total consolidated capital expenditures
|
|
$
|
27,673
|
|
|
$
|
26,018
|
|
|
$
|
36,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales into major geographic regions were as follows (in thousands):
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
United States
|
|
$
|
599,054
|
|
|
$
|
572,522
|
|
|
$
|
543,527
|
|
Canada
|
|
|
70,991
|
|
|
|
79,554
|
|
|
|
82,853
|
|
Africa
|
|
|
62,911
|
|
|
|
60,811
|
|
|
|
65,472
|
|
Australia and Oceania
|
|
|
47,505
|
|
|
|
62,683
|
|
|
|
48,890
|
|
South America (excluding Brazil)
|
|
|
33,526
|
|
|
|
38,049
|
|
|
|
57,616
|
|
Post-Soviet States (excluding Russia)
|
|
|
25,849
|
|
|
|
11,533
|
|
|
|
12,526
|
|
Russia
|
|
|
17,440
|
|
|
|
14,641
|
|
|
|
8,494
|
|
Mexico
|
|
|
15,917
|
|
|
|
23,084
|
|
|
|
9,885
|
|
Other European Countries
|
|
|
15,428
|
|
|
|
20,249
|
|
|
|
23,653
|
|
Brazil
|
|
|
11,620
|
|
|
|
15,675
|
|
|
|
11,602
|
|
Middle East
|
|
|
6,699
|
|
|
|
6,705
|
|
|
|
18,215
|
|
Other Asian Countries
|
|
|
5,836
|
|
|
|
8,315
|
|
|
|
7,200
|
|
Central America (excluding Mexico)
|
|
|
5,620
|
|
|
|
6,843
|
|
|
|
4,156
|
|
West Indies
|
|
|
5,294
|
|
|
|
2,765
|
|
|
|
5,461
|
|
China
|
|
|
3,857
|
|
|
|
6,687
|
|
|
|
2,923
|
|
India
|
|
|
3,672
|
|
|
|
4,648
|
|
|
|
4,476
|
|
Japan and Korea
|
|
|
1,749
|
|
|
|
1,509
|
|
|
|
1,672
|
|
Other
|
|
|
30
|
|
|
|
--
|
|
|
|
20
|
|
Total foreign
|
|
|
333,944
|
|
|
|
363,751
|
|
|
|
365,114
|
|
Total consolidated sales
|
|
$
|
932,998
|
|
|
$
|
936,273
|
|
|
$
|
908,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets by major geographic region are as follows (in thousands):
|
|
|
December 31
|
|
|
|
|
2013
|
|
|
|
2012
|
|
United States
|
|
$
|
156,927
|
|
|
$
|
157,344
|
|
Brazil
|
|
|
9,024
|
|
|
|
1,234
|
|
South Africa
|
|
|
7,203
|
|
|
|
8,973
|
|
Australia
|
|
|
5,680
|
|
|
|
9,630
|
|
Canada
|
|
|
4,145
|
|
|
|
4,120
|
|
Germany
|
|
|
1,541
|
|
|
|
1,538
|
|
Total foreign
|
|
|
27,593
|
|
|
|
25,495
|
|
Total
|
|
$
|
184,520
|
|
|
$
|
182,839
|
|
19.
Accumulated Other Comprehensive Income (Loss)
The balance of related after-tax components comprising accumulated other comprehensive income (loss) is summarized below (in thousands):
|
|
December 31
|
|
|
|
2013
|
|
|
2012
|
|
Foreign currency translation adjustment
|
|
$
|
(2,484
|
)
|
|
$
|
4,679
|
|
Unrecognized pension and post-retirement benefit cost, net of tax of $1,498 and $2,471, respectively
|
|
|
(2,410
|
)
|
|
|
(4,177
|
)
|
Accumulated other comprehensive income (loss)
|
|
$
|
(4,894
|
)
|
|
$
|
502
|
|
|
|
|
|
|
|
|
|
|
See Note 13, Pension and Retirement Plans, for discussion of the amounts recognized in accumulated other
comprehensive income related to the Company’s Kolberg-Pioneer, Inc. defined pension plan.
20.
Other Income (Expense)
-
Net
Other income (expense), net from continuing operations consists of the following (in thousands):
|
|
Year Ended December 31
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Investment income
|
|
$
|
853
|
|
|
$
|
116
|
|
|
$
|
27
|
|
Licensing fees
|
|
|
764
|
|
|
|
1,211
|
|
|
|
449
|
|
Other
|
|
|
320
|
|
|
|
456
|
|
|
|
606
|
|
Total
|
|
$
|
1,937
|
|
|
$
|
1,783
|
|
|
$
|
1,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.
Business Combinations
On August 10, 2011, the Company purchased substantially all of the assets of Protec Technology and Machinery GmbH (“Protec”), a German corporation; Construction Machinery GmbH (“Construction Machinery”), a German corporation; and Protec Technology Ltd. (“Protec, Ltd.”), a Hong Kong corporation, for $3,000,000. The Company formed a new subsidiary, Astec Mobile Machinery GmbH (“AMM”), located in Hameln, Germany, to operate the acquired businesses. AMM designs, manufactures and markets asphalt rollers, screeds and a road widener attachment and distributes products produced by other Company subsidiaries, primarily Roadtec, Inc.
On October 1, 2011, the Company acquired the GEFCO division of Blue Tee Corp. for $30,407,000. The Company formed a new subsidiary, GEFCO, Inc., to operate the acquired business. This purchase resulted in the recognition of $3,877,000 of amortizable intangible assets which consist of trade names (15 year useful life) and customer relationships (8 year useful life). The effective date of the purchase was October 1, 2011, and the results of GEFCO Inc.’s operations have been included in the Company’s consolidated financial statements since that date. During January 2012, the purchase price allocation was finalized and funds previously held in escrow were distributed.
GEFCO (formerly known as George E. Failing Company) was established in 1931 and was a leading manufacturer of portable drilling rigs and related equipment for the water well, environmental, groundwater monitoring, construction, mining and shallow oil & gas exploration and production industries. GEFCO, Inc. continues to manufacture Failing, SpeedStar and King Oil Tools equipment from its Enid, Oklahoma facilities.
The revenue and pre-tax income of Protec, Protec, Ltd., Construction Machinery and GEFCO were not significant in relation to the Company’s 2011 financial statements and would not have been significant on a pro forma basis to any earlier periods.
The Company has funded an investment of $12,835,000 in Astec do Brasil Fabricação de Equipamentos LTDA (“Astec Brazil”) located in Vespasiano, Minas Gerais, Brazil, a consolidated subsidiary of the Company. When fully funded by both the Company and MDE, a minority Brazil based shareholder, the Company anticipates a 75% ownership in Astec Brazil. In 2013, Astec Brazil operated by selling imported products from other Astec subsidiaries with some equipment assembled locally. The Astec Brazil manufacturing facility is currently under construction and is expected to open for production by mid to late 2014. The expected cost of the manufacturing facility is approximately $23,000,000. The acquisition cost of the manufacturing facility is being funded by capital contributions and loans from the parent company, borrowings from a Brazilian bank and capital contributions by MDE. The Company expects to increase its international market penetration in Brazil and Latin American countries with the aggregate, mining and asphalt segment’s product lines to be produced in the Astec Brazil manufacturing facility.
22.
Discontinued Operations
In October 2012, the Company entered into an agreement to sell its American Augers, Inc. (“Augers”) subsidiary, as well as certain assets related to the Trencor large trencher product line of Astec Underground, Inc., to The Charles Machine Works, Inc. of Perry, Oklahoma. Augers and the Trencor large trencher product line were part of the Company’s Underground Group. The sale of Augers included substantially all the assets and liabilities of Augers and was completed on November 30, 2012 for $42,940,000, net of cash included in the sale and subject to closing adjustments. The Company retained the Augers vertical oil and gas drill rig
product line and relocated it to Astec Underground, the Company’s subsidiary located in Loudon, Tennessee. The sale of the Trencor product line was immaterial to the transaction and is included in the Company’s consolidated financial statements in continuing operations. This divestiture, as well as the sale of the small utility trencher and drill line of products to Toro earlier in 2012, is part of the Company’s strategy to exit the cyclical underground sector.
The Company calculated the post-closing adjustments to the sale price and recorded the resulting $288,000 purchase price adjustment in other accrued liabilities in the December 31, 2012 consolidated balance sheet. The post-closing adjustment to the sales price was increased to a total of $499,000 when finalized and paid in early 2013.
The results of operations and the gain on the sale of Augers are presented as discontinued operations for
2012 and 2011. Summarized financial information for Augers is below (in thousands):
|
|
Year Ended December 31
|
|
|
|
2012
|
|
|
2011
|
|
Revenues
|
|
$
|
53,619
|
|
|
$
|
47,088
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
Operating income before tax
|
|
$
|
5,218
|
|
|
$
|
169
|
|
Income tax provision (benefit)
|
|
|
1,817
|
|
|
|
(56
|
)
|
Income from operations
|
|
|
3,401
|
|
|
|
225
|
|
|
Gain on sale of subsidiary
|
|
|
|
|
|
|
|
|
Gain on sale of subsidiary before tax
|
|
|
5,357
|
|
|
|
--
|
|
Income tax provision
|
|
|
1,979
|
|
|
|
--
|
|
Gain on sale of subsidiary
|
|
|
3,378
|
|
|
|
--
|
|
Income from discontinued operations
|
|
$
|
6,779
|
|
|
$
|
225
|
|
The carrying amounts of the major classes of assets and liabilities disposed on November 30, 2012 were as follows (in thousands):
|
|
|
2012
|
|
Assets
|
|
|
|
|
Cash
|
|
$
|
636
|
|
Receivables
|
|
|
5,334
|
|
Inventories
|
|
|
26,568
|
|
Prepaid and other assets
|
|
|
430
|
|
Property and equipment, net
|
|
|
13,500
|
|
Other assets
|
|
|
465
|
|
Total assets
|
|
|
46,933
|
|
Liabilities
|
|
Accounts payable
|
|
|
2,518
|
|
Other liabilities
|
|
|
6,484
|
|
Total liabilities
|
|
|
9,002
|
|
Net assets disposed
|
|
$
|
37,931
|
|
Page intentially left blank
Astec Industries, Inc.
Comparision of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
Performance Graph for Astec Industries, Inc.
Notes:
|
A. Data complete through last fiscal year.
|
B. Corporate Performance Graph with peer group uses peer group only performance (excludes only company).
|
C. Peer group indices use beginning of period market capitalization weighting.
|
D. Calculated (or Derived) based from CRSP NYSE/AMEX/NASDAQ Market (US Companies), Center for
Research in Security Prices (CRSP®), Graduate School of Business, The University of Chicago.
Copyright 2014. Used with permission. All rights reserved.
E. The graph assumes $100 invested at the closing price of the Company’s common stock on December 31,
2008 and assumes that all dividends were invested on the date paid.
|