Astec Industries 10-K 2010
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended December 31, 2009
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _______________________
Commission file number 001-11595
ASTEC INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Registrant's telephone number, including area code:
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Securities registered pursuant to Section 12(g) of the Act:
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
As of June 30, 2009, the aggregate market value of the registrant's voting and non-voting common stock held by non-affiliates of the registrant was approximately $587,290,000 based upon the closing sales price as reported on the National Association of Securities Dealers Automated Quotation System National Market System.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:
As of February 24, 2010, Common Stock, par value $0.20 - 22,554,133 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents have been incorporated by reference into the Parts of this Annual Report on Form 10-K indicated:
ASTEC INDUSTRIES, INC.
2009 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
This Annual Report on Form 10-K 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 on Form 10-K that are not limited to historical information are considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, 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;
· ability to secure adequate or timely replacement of financing to repay our lenders;
· liquidity and capital expenditures;
· sufficiency of working capital, cash flows and available capacity under teh 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;
· taxes or usage fees;
· renewal of the federal highway bill which expired September 30, 2009
· integration of acquisitions;
· financing plans;
· industry trends;
· pricing and availability of oil and liquid asphalt;
· pricing and availability of steel;
· pricing of scrap metal;
· condition of the economy;
· 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;
· demand for products
· future filling of backlogs;
· tax assets;
· the impact of account changes;
· the effect of increased international sales on our backlog;
· critical account policies;
· ability to satisfy contingencies;
· contributions to retirement plans;
· supply of raw materials; and
These forward-looking statements are based largely on management's expectations which are subject to a number of known and unknown risks, uncertainties and other factors discussed in this report and in other documents filed by us 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 us on the date hereof, and we assume 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," "goal," "plan," "intend," "estimate," "may," "will" and similar expressions.
In addition to the risks and uncertainties identified elsewhere herein and in other documents filed by us with the Securities and Exchange Commission, the risk factors described in this document under the caption "Risk Factors" should be carefully considered when evaluating our business and future prospects.
Item 1. Business
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, utility 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 trenching, auger boring, directional drilling, gas and oil drilling rigs, industrial heat transfer equipment, whole-tree pulpwood chippers, horizontal grinders and blower trucks. The Company has also recently designed and introduced a line of multiple use plants for cement treated base, roller compacted concrete and ready-mix concrete as well as 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 101 United States patents and 36 foreign patents, have 53 patent applications pending, and have been responsible for many technological and engineering innovations in the industry. 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 fourteen manufacturing subsidiaries are: (i) Breaker Technology Ltd/Inc., which designs, engineers, manufactures and markets rock breaking and processing equipment and utility vehicles for mining and pelletizing equipment; (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, 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; (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) American Augers, Inc., which designs, engineers, manufactures and markets large horizontal, directional drills, oil and gas drilling rigs, auger boring machines and the down-hole tooling to support these units; (xi) Astec Underground, Inc., formerly Trencor, Inc., which designs, engineers, manufactures, and markets heavy-duty Trencor trenchers, and a comprehensive line of Astec utility trenchers, vibratory plows, and compact horizontal directional drills and vertical drills for the geo thermal/water well applications; (xii) Carlson Paving Products, Inc., which designs, engineers, manufactures and markets asphalt paver screeds, a commercial paver and a windrow pickup machine; (xiii) 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; and (xiv) Peterson Pacific Corp., which designs, engineers, manufactures and markets whole-tree pulpwood chippers, horizontal grinders and blower trucks. The Company also has a subsidiary in Australia, Astec Australia Pty Ltd, that distributes certain of the Company’s products in the region.
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, and other areas in which it offers products and services, both in the United States and abroad.
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 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 federal income tax expenses for all business segments are included in the "Other Business Units" category for reporting.
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 17 to "Notes to Consolidated Financial Statements - Operations by Industry Segment and Geographic Area," presented in Appendix A of this report.
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 and related components of each, heating and heat transfer processing equipment and storage tanks for the asphalt paving and other non-related industries.
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 new line of concrete mixing plants introduced by Astec, Inc. 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 PackTM 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 PackTM, known as the Turbo Six PackTM, 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 reduces 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, designed as modular configurations for either dry or wet arrangements, provide an exciting new alternative in vertical stationary concrete plants.
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 the 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, hot-mix asphalt plants, rubberized asphalt and polymer blending systems under the CEI® trademark. CEI designs and builds heaters with outputs up to 6,300,000 BTU’s per hour and portable, vertical, and stationary storage tanks up to 40,000 gallons in capacity. CEI’s hot-mix plants are built for domestic and international use and employ parallel and counter flow designs with capacities up to 180 tons per hour. CEI is a leading supplier of crumb rubber blending plants in the U.S.
Astec markets its hot-mix asphalt products both domestically and internationally. Dillman Equipment, Inc., a manufacturer of asphalt production equipment in Prairie du Chien, Wisconsin was acquired by Astec in October 2008 and now operates as a division of Astec. The Dillman line of equipment is offered to the market as an addition to the Astec product line. The principal purchasers of asphalt and related equipment are highway contractors. Asphalt equipment, including Dillman products, are 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 51 direct sales employees, 19 domestic independent distributors and 32 international independent distributors.
Raw materials used in the manufacture of products include carbon steel 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 some steel is bought and occasionally inventoried.
This industry segment faces strong competition in price, service and product performance and competes with both large publicly-held companies with resources significantly greater than those of the Company and with various smaller manufacturers. Domestic hot-mix asphalt plant competitors include Terex Corporation, Gencor Industries, Inc., ADM and Almix. In the international market the hot-mix asphalt plant competitors include Ammann, Parker, 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., American Heating, Pearson Heating Systems, F&C and Meeker. Competitors for the industrial product line of heating equipment include New Point Thermal, Fulton Thermal Corporation, Vapor Power International, NATCO, Broach and TFS, among others.
At December 31, 2009, the Asphalt Group segment employed 1,051 individuals, of which 757 were engaged in manufacturing, 119 in engineering and 175 in selling, general and administrative functions.
The backlog for the Asphalt Group at December 31, 2009 and 2008 was approximately $75,591,000 and $106,223,000, respectively. Management expects all current backlogs to be filled in 2010.
Aggregate and Mining Group
The Company's Aggregate and Mining Group is comprised of six business units focused on the aggregate, metallic mining 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") and Osborn Engineered Products SA (Pty) Ltd ("Osborn").
Founded in 1906, Telsmith is the oldest subsidiary of the group. The primary markets served under the TELSMITH® trade name are the aggregate and metallic mining industries.
Telsmith’s core products are jaw, cone and impact crushers as well as vibrating feeders, 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.
Recent additions to the Telsmith product line include the QuarryTrax TI6060 track mobile primary impact crushing plant and the HydraJaw H2550 hydraulic clearing jaw crusher These products both incorporate advanced hydraulic systems with PLC controls to enhance the operator’s ability to safely operate and maintain the equipment with lower operating costs.
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.
KPI designs, engineers, manufactures and supports a complete line of aggregate processing equipment for the sand and gravel, mining, quarrying, concrete and asphalt recycling markets under the Pioneer® and Kolberg® product brand names. This equipment, along with the full line of portable and stationary aggregate and ore processing products from JCI and the related screen products from AMS, are all jointly marketed through an extensive network of KPI-JCI dealers.
Pioneer® products include a complete line of primary, secondary, tertiary and quaternary crushers, including jaws, horizontal shaft impactor, vertical shaft impactor and roll crushers. KPI 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 Pioneer® can be purchased as individual components, as portable plants for flexibility or as completely engineered systems for both portable and stationary applications. Included in the portable area is a highly-portable Fast Pack® System, featuring quick setup and teardown, thereby maximizing production time and minimizing downtime. Also included in the portable Pioneer® line are the fully self-contained and self-propelled Fast Trax® Track-Mounted-Jaw and HSI 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.
Kolberg® sand classifying and washing equipment is relied upon to clean, separate and re-blend deposits to meet the size specifications for critical applications. The Kolberg® product line includes fine and coarse material washers, log washers, blade mills and sand classifying tanks. 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.
Kolberg® conveying equipment, including telescopic conveyers, is designed to move or store aggregate and other bulk materials in radial cone-shaped or windrow stockpiles. The Wizard Touch™ automated controls are designed to add efficiency and accuracy to whatever the stockpile specifications require.
Recent additions to the KPI product line include (i) the 2148-50LP Low Pro drive-over unloaders which offer a three foot low profile to deliver the convenience, efficiency, ease-of-use and environmentally friendly characteristics many customers prefer while reducing set-up time by requiring smaller earthen ramps thereby cutting customers labor needs and fuel costs; (ii) the 33-48150 Extendable Superstackers which are capable of creating custom-shaped, partially or fully desegregated stockpiles to fit maximum material in minimum space; (iii) a series of Vanguard Plus Jaw crushers which represent the latest in jaw crusher technology designed to deliver up to 25% more tons per hour than other comparable crushers; (iv) the RS series machines which are streamlined versions of our other jaw crusher and washing plants designed especially for the needs of our rental customers.
Founded in 1995, JCI is one of the youngest subsidiaries in the group. JCI designs, engineers, manufactures and distributes portable and stationary aggregate and ore processing equipment. This equipment is used in the aggregate, mining and recycle industries. JCI's principal products are cone crushers, three-shaft horizontal screens, portable plants, track-mounted plants and replacement parts for competitive equipment. JCI offers completely re-manufactured cone crushers and screens from its service repair facility.
JCI® cone crushers are used primarily in secondary and tertiary crushing applications, and come in both remotely adjusted and manual models. Horizontal screens are low-profile machines for use primarily in portable applications. They are used to separate aggregate materials by sizes. The Combo® screen features an inclined feed section with flat discharge section and utilizes the oval stroke impulse mechanism, and offers increased capacity particularly in scalping applications where removal of fines is desired.
Portable plants combine various configurations of cone crushers, horizontal screens, Combo® screens, and conveyors mounted on tow-away chassis. Because transportation costs are high, producers use portable equipment to operate nearer to their job sites. Portable plants allow the aggregate producers to quickly and efficiently move their equipment from one location to another. JCI and KPI market a portable rock crushing plant appropriately named the Fast Pack®. This complete portable plant is self-erecting with production capability in excess of 500 tons per hour and can be reassembled and ready for production in under four hours, making it one of the industry's most mobile and cost-effective high-capacity crushing systems. The Fast Pack® design reduces operating costs as much as 30%, compared to traditional plant designs, and the user-friendly controls provide a safer work environment for the user. During 2009, JCI continued to refine all configurations of the Fast Pack® which we consider the most mobile and cost-effective high capacity crushing system ever conceived.
JCI mounts its screens and cone crushers on self-contained track mounted units marketed under the name Fast Trax®. JCI co-markets the Fast Trax® with KPI. These units are self-contained and easily transported to where the work is. Key features were recently added to the FT6203 Fast Trax platform including a windrow conveyor package and a hydraulic erecting grizzly section for rejecting oversized material. This product fits nicely into JCI’s distribution channel as many sales start as short-term rentals. All products sold by KPI or JCI carry the combined branding logo of KPI-JCI.
Recent additions to the JCI product line include a single unit crushing and screening plant marketed as the 2036/120/5163CC which has both primary and secondary crushers operating in a closed circuit to process 200 tons per hour.
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. The AMS high frequency screens are used for chip sizing, sand removal and sizing recycled asphalt where conventional screens are not ideally suited.
AMS recently expanded the mobile screening plant product line with the introduction of the FT 3620 Fold n Go which is a triple deck screening plant for processing material. AMS also continued its development of high frequency screen boxes with the focus on increased production and performance in fine screening applications. These products are primarily marketed to the crushed stone, recycle, sand and gravel and general construction industries.
BTI maintains an ISO:2000 certification, an internationally recognized standard of quality assurance. BTI designs, engineers, manufactures and markets hydraulic rock breaker systems for the aggregate, mining and recycling industries. BTI also designs, engineers and manufactures a complete line of four-wheel drive articulated utility vehicles for underground mines and quarries. Complementing its DS Series of scaling vehicles is an effective and innovative vibratory pick scaling attachment.
In addition to the quarry and mining industries, BTI designs, engineers, manufactures and markets a complete line of hydraulic breakers, compactors and demolition attachments for the North American construction and demolition markets. In addition to the hydraulic demolition attachments, two mechanical pulverizers are under development. These attachments are designed to fit a variety of equipment including excavators, backhoe loaders, wheel loaders and skid steer loaders.
BTI recently acquired pelletizing technology from Industrial Mechanical & Integration. A new division has been formed within BTI which will manufacture and market pelletizers to a large diversified market. The pelletizer product also opens the door for developing multi-million dollar complete densification plants.
BTI offers an extensive aftermarket sales and service program through a highly qualified and trained dealer network.
Osborn 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. In addition to Telsmith, Osborn also manufactures under license of American Pulverizer (USA), IFE (Austria) and Mogensen (UK) and has an in-house brand, Hadfields. Osborn also offers the following equipment: double-toggle jaw crushers, rotary breakers, roll crushers, rolling ring crushers, mills, out-of-balance or exciter-driven screens and feeders, conveyors, portable track-mounted or skid mounted crushing and screening plants and a full range of idlers.
Aggregate processing and mining equipment is marketed by approximately 84 direct sales employees, 136 domestic independent distributors and 110 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 used in the manufacture of products 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 purchasing arrangements with a Japanese and a Korean supplier. The Japanese and Korean suppliers have sufficient capacity to meet the Company's anticipated demand; however, alternative suppliers exist for these components should any supply disruptions occur.
The Aggregate and Mining Group faces strong competition in price, service and product performance. Aggregate processing and mining equipment competitors include Metso (Nordberg); Sandvik (formerly Svedala Industry AB), Rammer, subsidiaries of Terex Corporation (Cedarapids, Powerscreen, Finlay and BL-Pegson), Deister; Eagle Iron Works, McLanahan, McCloskey, Allied Construction Products, Ohio Central Steel, Superior Industries, Joy Global Machinery, Lippmann, Equipos Minera, Normet, Atlas-Copco, Eagle Crushers, FLSmidth, Masaba and other smaller manufacturers, both domestic and international.
At December 31, 2009, the Aggregate and Mining Group segment employed 1,186 individuals, of which 807 were engaged in manufacturing, 107 in engineering and engineering support functions, and 272 in selling, general and administrative functions.
Telsmith has a labor agreement covering approximately 139 manufacturing employees which expires on September 18, 2010. None of Telsmith's other employees are covered by a collective bargaining agreement.
Approximately 125 of Osborn's manufacturing employees are members of three national labor unions with agreements that expire on June 30, 2011.
At December 31, 2009 and 2008, the backlog for the Aggregate and Mining Group was approximately $47,793,000 and $65,340,000, respectively. Management expects all current backlogs to be filled in 2010.
Mobile Asphalt Paving Group
The Mobile Asphalt Paving Group is comprised of Roadtec, Inc. ("Roadtec") and Carlson Paving Products, Inc. ("Carlson"). 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 the asphalt paver 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.
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 material transfer vehicle described above, which 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 larger half-lane and up highway class milling machines, Roadtec also manufactures a smaller, utility class machine for 2 ft. to 4ft. cutting widths. Additional upgrades and options are available from Roadtec to enhance its products and their capabilities.
Roadtec’s 700 hp soil stabilizer, which also doubles as an asphalt reclaiming machine for road rehabilitation, stabilizes the sub-grade with additives to provide an improved base on which to pave. The existing road materials are pulverized and remixed with additives to prepare the surface so the new combined asphalt mix can be applied. Roadtec’s engineering staff is currently developing the second and third smaller, lower horsepower machines in this class that are expected to be introduced in 2010. The third machine will be geared to the European and Australian markets that require a machine with a strict 2.5M haul width.
Carlson's patented screeds are part of the asphalt paving machine that lays 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. A Carlson screed uses a hydraulic powered generator to electrify elements that heat a screed plate so that asphalt will not stick to it while paving. The 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 recently introduced the CP 90 commercial class 8 ft. paver which fills the void between competitors commercial pavers, which tend to be lighter and less robust machines, and Roadtec’s highway class paver line.
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 31 direct sales staff, 33 domestic independent distributors and 29 international independent distributors.
Raw materials used in the manufacture of products 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 bought and occasionally inventoried. Components used in the manufacturing process include engines, gearboxes, power transmissions and electronic systems.
The Mobile Asphalt Paving Group faces strong competition in price, service and performance. Paving equipment and screed competitors include Caterpillar Paving Products, Inc., a subsidiary of Caterpillar, 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.
At December 31, 2009, the Mobile Asphalt Paving Group segment employed 431 individuals, of which 279 were engaged in manufacturing, 32 in engineering and engineering support functions, and 120 in selling, general and administrative functions.
The backlog for the Mobile Asphalt Paving Group segment at December 31, 2009 and 2008 was approximately $3,609,000 and $2,855,000, respectively. Management expects all current backlogs to be filled in 2010. 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.
The Underground Group consists of two manufacturing companies, Astec Underground, Inc. ("Astec Underground"), previously named Trencor, Inc., and American Augers, Inc. ("American Augers"). These two business units design, engineer and manufacture a complete line of underground construction equipment and related accessories. Astec Underground produces heavy-duty Trencor trenchers and the Astec line of utility trenchers, vibratory plows, and compact horizontal directional drills and recently added vertical drills for geothermal/water well applications to its product line. American Augers manufactures maxi drills and auger boring machines, and the down-hole tooling to support these units for the underground construction market. American Augers also manufacturers large vertical drills for the oil and natural gas industry.
Astec Underground produces 8 heavy duty trencher models, 2 vertical drills, 14 utility trencher models and 5 compact horizontal directional drills. American Augers manufactures 21 models of trenchless equipment. In addition to these product models, each factory produces numerous attachments and tools for the equipment.
Astec branded products include trenchers and vibratory plows from 13 to 250 horsepower, and horizontal directional drill (HDD) models with pullback ratings from 6,000 to 100,000 pounds. These are sold and serviced through a network of 56 dealers that operate 100 locations worldwide.
Trencor® heavy-duty trenchers are among the most powerful in the world. They have the ability to cut a trench 35 feet deep and 8 feet wide through solid rock in a single pass. Utilizing a unique mechanical power train, Trencor machines are used to trench pipelines, lay fiber optic cable, cut irrigation ditches, insert highway drainage materials, and more. Astec Underground also makes foundation trenchers that are used in areas where drilling and blasting are prohibited. Astec Underground manufactures a side-cutting rock saw, which permits trenching alongside vertical objects like fences, guardrails, and rock walls in mountainous terrain. The rock saw is used for laying water and gas lines, fiber optic cable, and constructing highway drainage systems, among other uses. Astec Underground’s Surface Miner is a maneuverable 1,650-horsepower miner that can cut through rock 10 feet wide and up to 26 inches deep in a single pass. When equipped with a GPS unit and its automatic grade and slope system, the Surface Miner allows road construction contractors to match the exact specifications of a survey plan.
Four Road Miner® models are available with an attachment that allows them to cut a path up to 13½ feet wide and 5 feet deep on a single pass. The Road Miner® has applications in the road construction industry and in mining and aggregate processing operations.
Astec Underground introduced the EarthPro® Geothermal Drill in 2009. The drill features a heavy-duty mast with a dual rack and pinion drive system as well as 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 / pull down capacity, three speed drive motors, and the ability to be ran by one operator versus the usual three person operation.
American Augers designs, engineers, manufactures and markets a wide range of trenchless and vertical drilling equipment. Today, American Augers is one of the largest manufacturers of auger boring machines in the world, designing and engineering state of the art boring machines, vertical rigs, directional drills and fluid/mud systems used in the underground construction or trenchless market. The company has one of the broadest product lines in the industry. It serves global customers in the sewer, power, fiber-optic telecommunication, electric, oil and gas and water industries throughout the world.
In 2009 American Augers introduced the MCR-10,000, its highest ever cleaning capacity Drilling Fluid Cleaning and Recycling system. The MCR-10,000 maximizes cleaning capacity and screening area, utilizing three first cut shakers (minimizing contaminants entering the system) and two final cut shakers (operating under four Krebs gMAX hydro cyclones). This high volume, rock-over design is a perfect match with American Auger’s large directional drills and P-750 Mud Pump. American Augers also introduced the 84/96-1800 NG boring machine in 2009. The 84-96-1800NG is the largest and most powerful horizontal auger boring machine on the market today. This fast return system provides up to 20,000 pounds of push/pull at high speed, eliminating dogging or winching during retract.
Astec Underground distributes its Trencor® and Earth Pro® brands using a combined sales force with American Augers comprised of 6 domestic and 6 international sales associates. Astec Underground markets its utility products domestically through a dealer network serviced by 5 utility and 5 parts sales associates. This segment employs a total of 18 direct sales staff, 37 domestic independent distributors and 21 international independent distributors.
Astec Underground and American Augers maintain excellent relationships with suppliers and have experienced minimal turnover. The purchasing group has developed partnering relationships with many of the company's key vendors to improve "just-in-time" delivery when feasible and thus lower inventory; however, some steel is bought and occasionally inventoried. Steel is the predominant raw material used to manufacture the products of the Underground Group, and is normally readily available. Components used in the manufacturing process include engines, hydraulic pumps and motors, gearboxes, power transmissions and electronic systems.
The Underground Group segment faces strong competition in price, service and product performance and competes with both large publically held companies with resources significantly greater than those of the Company and with various smaller manufacturers. Competition for trenching, excavating, auger boring, vertical and directional drilling and fluid/mud equipment includes Charles Machine Works (Ditch Witch), Tesmec, Vermeer, Atlas-Copco, Schramm, Prime Drilling GmbH, The Robins Company, Herrenknecht, AG and other smaller custom manufacturers.
At December 31, 2009, the Underground Group segment employed 256 individuals, of which 174 were engaged in manufacturing, 36 in engineering and 46 in selling, general and administrative functions.
The backlog for the Underground Group segment at December 31, 2009 and 2008 was approximately $1,898,000 and $12,118,000, respectively. Management expects all current backlogs to be filled in 2010.
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, 2009, these other operating units included Peterson Pacific Corp. (“Peterson”), Astec Australia Pty Ltd (“Astec Australia”), Astec Insurance Company and the Company. Peterson designs, engineers, manufactures and distributes whole-tree pulpwood chippers, horizontal grinders and blower trucks. Astec Australia was formed in October 2008 and is the sole distributor of many of the company’s product lines in Australia and New Zealand. Astec Australia sells, installs, services and provides parts support for many of the products produced by the Company’s Asphalt, Mobile Asphalt Paving and Underground groups and most recently the Aggregate and Mining Group.
The primary markets served by Peterson are the wood grinding, chipping and blower truck markets. Peterson produces two models of whole-tree pulpwood chippers ranging from 765 to 1200 horsepower, one flail debarker, one drum chipper, nine models of horizontal grinders, two models of blower trucks and self contained blower trailers ranging from 45 to 90 cubic yards.
Peterson introduced three new products in 2009, a 765 hp drum chipper for the biomass fuel chip market, a 2700C trailer version grinder that is a 475 to 580 hp machine designed for lower volume grinder needs and a DS6162 track mounted, 130 hp deck screen manufactured by JCI. Peterson offers its horizontal grinders in four size ranges to fit any application: 475 to 580 hp, 700 to 765 hp, 950 to 1050 hp and 1050 to 1200 hp. Most grinders are also available in trailer mount and track versions with diesel engine or electric power options.
Since its inception, Astec Australia sells relocatable and portable asphalt plants and components produced by Astec, Heatec and CEI, asphalt paving equipment and components produced by Roadtec and Carlson as well as trenching equipment produced by Astec Underground. In 2009, Astec Australia added equipment manufactured by the Company’s Aggregate & Mining Group to its product offerings. In addition to selling equipment, Astec Australia also installs, services and provides spare parts support for the equipment it sells and for other equipment its customers carry in their fleets.
Peterson markets its machines and spare parts both domestically and internationally in the wood grinding, chipping and blower truck industries. Its line of blower trucks serves the mulch compost and erosion control markets. Domestic sales are accomplished through a combination of 13 domestic independent distributors and 10 direct sales employees. International sales are through 8 independent distributors plus direct sales to customers. The principle purchasers of Peterson products are independent contractors in the wood grinding, chipping and blower truck businesses. Municipal governments are also customers for waste wood grinders.
Astec Australia has historically enjoyed its strong partnerships with key large corporate customers but has expanded its customer base by actively marketing products and services to a broader range of customers. Astec Australia plans to focus on growing its existing business operations by identifying areas of competitive advantage. Management believes that these opportunities will have a direct exposure to infrastructure development, particularly in aggregate and mining sectors. The gradual addition of additional Company product lines will allow Astec Australia to access market segments not previously serviced. Management believes that Astec Australia has the organizational structure (sales professionals, construction personnel, service technicians and administrative personnel) and operating systems – which are well established – that will allow the business to continue to grow and expand the number of business locations, sales volume, product offerings and geographical dispersion of equipment sold. Australia and New Zealand are expected to remain the company’s key markets; however, opportunities in other areas of the Pacific Rim and in Southeast Asia will also be pursued.
Raw materials used in the manufacture of products 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 bought and occasionally inventoried. Purchased components used in the manufacturing process include engines, gearboxes, power transmissions and electronic control systems.
Peterson has strong competitors based on product performance, price and service. The principal competitors in North America for high speed grinders are Morbark, Vermeer, Bandit, Diamond Z and CBI with other smaller competitors. Internationally, Doppstadt, Jenz and other smaller companies compete in the grinder segment. Mobile chipper competitors include Morbark, Precision, Doppstadt and other smaller companies. The principal competitors in the blower truck business are Finn and Express Blower (a division of Finn).
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, underground equipment and aggregate and mining equipment are primarily overseas manufacturers who are therefore subject to the same importing issues as Astec Australia. The price impact of competition (European product versus American versus Asian) is dependent primarily on the relationship between the US dollar and the Euro exchange rate as compared to the Australian dollar.
At December 31, 2009, the Other Business Units segment employed 213 individuals of which 156 were employed by Peterson and 22 were employed by Astec Australia. Peterson has 89 employees engaged in manufacturing, 17 in engineering and 50 in selling and general and administrative functions. Astec Australia has 10 employees engaged in service and installation work and 12 in selling and general and administrative functions. The remaining 35 employees are engaged in general and administrative functions at the parent company.
The backlog for the Other Business Units segment, all of which is attributable to Peterson and Astec Australia, at December 31, 2009 and 2008 was approximately $6,199,000 and $6,780,000, respectively. Management expects all current backlogs to be filled in 2010.
Common to All Operating Segments
Although the Company has four reportable business segments, the following information applies to all operating segments of the Company.
Steel is a major component in the Company’s equipment. Early in 2009 steel prices declined significantly from historically high 2008 levels and remained relatively flat during the first 10 months of 2009. Beginning in November 2009, market prices for most steel products rose modestly due to shortages in the scrap steel market. The Company was able to offset the majority of these increases with existing steel contracts and advanced steel purchases. The increases have continued into 2010 and we expect market prices to rise moderately as U.S. scrap availability shows no sign of improving during the first quarter of 2010. Most of this impact will continue to be mitigated in the first half of 2010 by our current steel purchasing contracts which allow us to avoid much of the market volatility. The Company will be reviewing the situation as we progress toward the second half of 2010 and establishing future contract pricing accordingly.
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, OSHA, 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 materially 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 that the Company's products meet all material requirements of such regulations and of 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 capital expenditures, earnings, or the Company's competitive position within the market.
At December 31, 2009, the Company and its subsidiaries employed 3,137 individuals, of which 2,116 were engaged in manufacturing, 311 in engineering, including support staff, and 710 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, there are no other collective bargaining agreements applicable to the Company. The Company considers its employee relations to be good.
The Company manufactures many of the component parts and related equipment for its products, while several large components of their 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 2009 took place at 18 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 2009, approximately 475 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 2009, service training seminars were also held at the Roadtec facility for approximately 350 customer representatives and an additional six remote seminars were conducted at other locations throughout the country. Telsmith conducted 2 technical seminars for approximately 58 customer and dealer representatives during 2009 at its facility in Mequon, Wisconsin. Osborn conducted two seminars for customers at which 25 customer personnel attended. KPI, JCI and AMS jointly conduct an annual dealer event called NDC (National Dealers Conference). The event offers the entire dealer network a preview of future product, marketing and promotional programs to help dealers operate successful businesses. Along with this event, the companies provide local, regional and national sales and service dealer training programs throughout the year.
Astec Underground hosted sales training for its dealers at the ICUEE show in October 2009. Additional field product training was also hosted at 3 dealer locations during 2009. Over 70 people received technical and operational training at these product training events.
In addition to seminars, the Company publishes a number of technical bulletins and information bulletins detailing various technological and business issues relating to the asphalt industry.
Patents and Trademarks
The Company seeks to obtain patents to protect the novel features of its products. The Company's subsidiaries hold 101 United States patents and 36 foreign patents. There are 53 United States and foreign patent applications pending.
The Company and its subsidiaries have approximately 80 trademarks registered in the United States, including logos for American Augers, Astec, Astec Underground, Carlson Paving, CEI, Heatec, JCI, Peterson Pacific, Roadtec, Telsmith and Trencor, and the names AMERICAN AUGERS, ASTEC, CARLSON, HEATEC, JCI, KOLBERG PIONEER, PETERSON, ROADTEC, TELSMITH and TRENCOR as well as a number of other product names. The Company also has 42 trademarks registered in foreign countries, including Australia, Brazil, Canada, China, France, Germany, Great Britain, India, Italy, Mexico, South Africa, Thailand, Vietnam and the European Union. The Company and its subsidiaries have 7 United States and foreign trademark applications pending.
Engineering and Product Development
The Company dedicates substantial resources to engineering and product development. At December 31, 2009, the Company and its subsidiaries had 311 full-time individuals employed in engineering and design capacities.
Seasonality and Backlog
Generally, revenues are strongest during the first three quarters of the year with the fourth quarter consistently being the weakest of the quarters. The Company’s revenues did not adhere to this norm in 2009 due to the economic downturn; however we expect future operations to be more typical of historical trends. Operations during the entire year in 2009 were significantly impacted by the various economic factors discussed in the following paragraphs.
As of December 31, 2009, the Company had a backlog for delivery of products at certain dates in the future of approximately $135,090,000. At December 31, 2008, the total backlog was approximately $193,316,000. The Company's contracts reflected in the backlog are not, by their terms, subject to termination. Management believes that the Company is in substantial compliance with all manufacturing and delivery timetables.
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 generally 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. Astec, Inc. introduced a new concrete plant to the market in 2009.
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, or furnished, to the Securities and Exchange Commission.
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:
Downturns in the general economy and restrictions in the credit markets may negatively impact our earnings, cash flows and/or financial position andaccess to financing sources by the Company and our customers.>
Worldwide economic conditions and the international credit markets have recently significantly deteriorated and will possibly 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 further deterioration of our creditors' financial condition could adversely affect the Company's ability to draw on its revolving credit facility. The restrictions in the credit markets could make it more difficult or expensive for us to replace our current 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 substantially 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 revenues and profits to decrease. Federal government funding of infrastructure projects is usually accomplished through bills, which establish funding over a multi-year period. In August 2005, President Bush signed into law the Safe Accountable, Flexible and Efficient Transportation Equity Act - A Legacy for Users ("SAFETEA-LU"), which authorized the appropriation of $286.5 billion in guaranteed funding for federal highway, transit and safety programs through September 30, 2009. President Bush signed into law on September 30, 2008 a funding bill under SAFETEA-LU for the 2009 fiscal year, which fully funded the highway program at $41.2 billion through September 30, 2009. SAFETEA-LU funding expired on September 30, 2009 and federal transportation funding is operating on a month by month appropriation at the most recent approved funding levels through February 2010. On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (“ARRA”). ARRA appropriated approximately $27.5 billion for highway and bridge construction, which was in addition to amounts that were approved under SAFETEA-LU. Although ARRA guaranteed federal funding at certain minimum levels, ARRA and other infrastructure funding legislation may be revised in future congressional sessions and federal funding of infrastructure may be decreased in the future. In addition, Congress could pass legislation in future sessions that would allow for the diversion of 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 is 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 our products. This would likely cause our revenues and profits to decrease. Rising gasoline, diesel fuel and liquid asphalt prices will also likely significantly 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 and delays in purchasing capital equipment.
Early in 2009 steel prices declined significantly from historically high 2008 levels and remained relatively flat during the first 10 months of 2009. Beginning in November 2009, market prices for most steel products rose modestly due to shortages in the scrap steel market. The Company was able to offset the majority of these increases with existing steel contracts and advanced steel purchases. The increases have continued into 2010 and we expect market prices to rise moderately as US scrap availability shows no sign of improving during the first quarter of 2010. Most of this impact will continue to be mitigated in the first half of 2010 by our current contracts which allow us to avoid much of the market volatility. The Company will be reviewing the situation as we progress toward the second half of 2010 and establishing future contract pricing accordingly. If steel price increases more than we anticipate and if we are not able to pass these higher costs to our customers, the Company’s margins may be negatively impacted.
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 Peterson in 2007, the acquisition of Dillman in 2008 and the acquisition of certain of the assets of Q-Pave in 2008 and certain assets and technology of Industrial Mechanical & Integration in 2009. 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:
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 national 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.
Dr. J. Don Brock, our Chairman and President, is of significant importance to our business and operations. The loss of his 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 2009, international sales represented approximately 36.9% of our total sales. We plan to continue our growth 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:
We may be unsuccessful in complying with the financial ratio covenants or other provisions of our amended credit agreement.
As of December 31, 2009, we were in compliance with the financial covenants contained in our Credit Agreement, as amended, with Wachovia Bank, National Association. 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, 2009, the Company had no outstanding borrowings but did have $11,634,000 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 may fall below the expectations of securities analysts and investors in some quarters, which could result in a decrease in the market price of our common stock. The reasons our quarterly results may fluctuate include:
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, and 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 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 asphalt and aggregate industries, 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.
Our Articles of Incorporation, Bylaws, 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, 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:
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. Unresolved Staff Comments
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:
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, and 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.
The Company has received notice that Johnson Crushers International, Inc. is subject to an enforcement action brought by the U.S. Environmental Protection Agency and the Oregon Department of Environmental Quality related to an alleged failure to comply with federal and state air permitting regulations. Each agency is expected to seek sanctions that will include monetary penalties. No penalty has yet been proposed. The Company believes that it has cured the alleged violations and is cooperating fully with the regulatory agencies. At this stage of the investigations, the Company is unable to predict the outcome and the amount of any such sanctions.
The Company has also 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.
The name, title, ages and business experience of the executive officers of the Company are listed below.
J. Don Brock, Ph.D., has been President and a Director of the Company since its incorporation in 1972 and assumed the additional position of Chairman of the Board in 1975. He was the Treasurer of the Company from 1972 until 1994. From 1969 to 1972, Dr. Brock was President of the Asphalt Division of CMI Corporation. He earned his Ph.D. degree in mechanical engineering from the Georgia Institute of Technology. Dr. Brock is the father of Benjamin G. Brock, President of Astec, Inc., and Dr. Brock and Thomas R. Campbell, Group Vice President - Mobile Asphalt Paving and Underground, are first cousins. He is 71.
F. McKamy Hall, a Certified Public Accountant, became Chief Financial Officer during 1998 and has served as Vice President and Treasurer since 1997. He previously served as Corporate Controller of the Company since 1987. Mr. Hall has an undergraduate degree in accounting and a Master of Business Administration degree from the University of Tennessee at Chattanooga. He is 67.
W. Norman Smith was appointed Group Vice President-Asphalt in 1998 and additionally served as President of Astec, Inc. from 1994 until October 2006. He formerly served as President of Heatec, Inc. from 1977 to 1994. From 1972 to 1977, Mr. Smith was a Regional Sales Manager with the Company. From 1969 to 1972, Mr. Smith was an engineer with the Asphalt Division of CMI Corporation. Mr. Smith has also served as a director of the Company since 1982. He is 70.
Thomas R. Campbell was appointed Group Vice President - Mobile Asphalt Paving & Underground in November 2001. He served as President of Roadtec, Inc. from 1988 to 2004. He has served as President of Carlson Paving Products and American Augers since November 2001 until December 2006. He served as President of Astec Underground, Inc. from 2001 to May 2005. From 1981 to 1988, he served as Operations Manager of Roadtec. Mr. Campbell and J. Don Brock, President of the Company, are first cousins. He is 60.
Richard A. Patek was appointed Group Vice President-Aggregate & Mining Group in March of 2008. He has also served as President of Telsmith, Inc. since May of 2001. He served as President of Kolberg-Pioneer, Inc. from 1997 until May 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 is a graduate of the Milwaukee School of Engineering. He is 53.
Joseph P. Vig was appointed Group Vice President of the AggRecon Group in March 2008. He has also served as President of Kolberg-Pioneer, Inc., since May 2001. From 1994 until May 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 has a B.S. degree in civil engineering from the South Dakota School of Mines and Technology and is registered as a Professional Engineer. He is 60.
Richard J. Dorris was appointed President of Heatec, Inc. in April of 2004. 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. Mr. Dorris has a B.S. degree in mechanical engineering from the University of Tennessee. He is 49.
Frank D. Cargould was appointed President of Breaker Technology Ltd and Breaker Technology, Inc. on October 18, 1999. The Breaker Technology companies were formed on August 13, 1999 when the Company purchased substantially all of the assets of Teledyne Specialty Equipment's Construction and Mining business unit from Allegheny Teledyne Inc. From 1994 to 1999, he was Director of Sales - East for Teledyne CM Products, Inc. He is 67.
Jeffery J. Elliott was appointed President of Johnson Crushers, Inc. in December 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 56.
Timothy Gonigam was appointed President of Astec Mobile Screens, Inc., in October 2000. From 1995 to 2000, Mr. Gonigam held the position of Sales Manager of Astec Mobile Screens, Inc. He is 47.
Tom Kruger was appointed Managing Director of Osborn Engineered Products SA (Pty) Ltd on February 1, 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 52.
Jeffrey L. Richmond, Sr. was appointed President of Roadtec, Inc. in April 2004. From 1996 until April 2004, he held the positions of Sales Manager, Vice President of Sales and Marketing and Vice President/General Manager of Roadtec, Inc. He is 54.
Joe K. Cline was appointed President of Astec Underground, Inc. in February 2008. Previously he held numerous manufacturing positions with the Company since 1982 including the Company’s Corporate Manufacturing Manager/Safety Champion beginning in July 2007 and Manufacturing Manager for Mobile Asphalt & Underground Groups from 2003 to mid 2007. He is 53.
Michael A. Bremmer was appointed President of CEI Enterprises, Inc. in January 2006. From January 2003 until January 2006, he held the position of Vice President and General Manager of CEI Enterprises, Inc. From January 2001 until January 2003, he held the position of Director of Engineering of CEI Enterprises, Inc. He is 54.
Benjamin G. Brock was appointed President of Astec, Inc. in November 2006. From January 2003 until October 2006 he held the position of Vice President - Sales of Astec, Inc. and Vice President/General Manager of CEI Enterprises, Inc. from 1997 until December 2002. Mr. Brock's career with Astec began as a salesman in 1993. Mr. Brock has a B.S. in Economics with a minor in Marketing from Clemson University. Mr. Brock is the son of J. Don Brock, President of the Company. He is 39.
David L. Winters was appointed President of Carlson Paving Products in January 2007 after previously serving as its Vice President and General Manager from March 2002 until December 2006. Mr. Winters also served as Quality Assurance Manager, Manufacturing Manager and Service Manager for Roadtec from August 1997 to February 2002. From 1977 to 1997 he held various positions in maintenance management with the Tennessee Valley Authority. Mr. Winters is 60.
James F. Pfeiffer was appointed President of American Augers, Inc. in January 2007 after previously serving as its Vice President and General Manager from March 2005 until December 2006. Prior to joining Astec, Mr. Pfeiffer was Vice President and General Manager of Daedong USA from April 2004 to October 2004 and Vice President of Marketing for Blount, Inc. from April 2002 to April 2004. Previously he held numerous positions with Charles Machine Works over a nineteen year period. Mr. Pfeiffer holds a bachelors degree in Agriculture from Oklahoma State University. Mr. Pfeiffer is 52.
Stephen C. Anderson was appointed Secretary of the Company in January 2007 and assumed the role of Director of Investor Relations in 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 November 1999 to December 2002. Prior to this Mr. Anderson spent a combined fourteen years in Commercial Banking with AmSouth and SunTrust Banks. He has a B.S. degree in Business Management from the University of Tennessee at Chattanooga and is a graduate of the Stonier Graduate School of Banking. He is 46.
David C. Silvious, a Certified Public Accountant, was appointed Corporate Controller in 2005. He previously served as Corporate Financial Analyst since 1999. Mr. Silvious earned his undergraduate degree in accounting from Tennessee Technological University and his Masters of Business Administration from the University of Tennessee at Chattanooga. He is 42.
Larry R. Cumming was appointed President of Peterson Pacific Corp. in August 2007. He joined the company in 2003 and held the earlier 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. Mr. Cumming is a graduate mechanical engineer from Cornell University with additional senior management courses from INSEAD in France. He is a registered professional engineer in the Province of Ontario. Mr. Cumming is 61.
David H. Smale was appointed General Manager of Astec Australia Pty Ltd in October 2008 upon the inception of the company’s operations. 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 has completed various business management courses including the Macquire University Graduate School of Management and Bond University Senior Executive Development Program. Mr. Smale is 54.
Item 4. Reserved
Item 5. Market for Registrant's Common Equity; Related Stockholder Matters and Issuer Purchases
of Equity Securities
The Company's Common Stock is traded in the Nasdaq National Market under the symbol "ASTE." The Company has never paid any cash dividends on its Common Stock and the Company does not intend to pay dividends on its Common Stock in the foreseeable future.
The high and low sales prices of the Company's Common Stock as reported on the Nasdaq National Market for each quarter during the last two fiscal years are as follows:
As of February 16, 2010 there were approximately 8,700 holders of the Company's Common Stock.
We maintain the following stock incentive plans: (i) 1998 Long-term Incentive Plan and (ii) 1998 Non-Employee Director Stock Incentive Plan. No additional options can be granted under these plans; however previously granted options are still available for exercising under each plan. Additionally, common shares or deferred shares may continue to be issued to directors in payment of their annual Board retainer under the 1998 Non-Employee Director Stock Incentive Plan. We also maintain the 2006 Incentive Plan for the awarding of stock to key management based upon achieving profitability goals. Information regarding these plans may be found in Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters” of this Report.
Item 6. Selected Financial Data
Selected financial data appears in Appendix "A" of this Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's discussion and analysis of financial condition and results of operations appears in Appendix "A" of this Report.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Information appearing under the caption "Market Risk and Risk Management Policies" appears in Appendix "A" of this report.
Item 8. Financial Statements and Supplementary Data
Financial statements and supplementary financial information appear in Appendix "A" of this Report.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors as appropriate to allow timely decisions regarding required disclosure.
Based on their evaluation as of December 31, 2009, the principal executive officer and principal financial officer of the Company have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective.
Management’s Report on Internal Control Over Financial Reporting
Management’s report set forth in Appendix A is incorporated herein by reference.
Changes in Internal Controls
There have been no changes in our internal control over financial reporting during the fourth quarter of the year ended December 31, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Information regarding the Company's directors, executive officers, director nominating process, audit committee, and audit committee financial expert is included under the captions "Certain Information Concerning Nominees and Directors" and “Corporate Governance” in the Company's definitive Proxy Statement to be delivered to the shareholders of the Company in connection with the Annual Meeting of Shareholders to be held on April 23, 2010, which is incorporated herein by reference. Information regarding compliance with Section 16(a) of the Exchange Act is also included under "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement, which is incorporated herein by reference.
The Company's Board of Directors has approved a Code of Conduct and Ethics that applies to the Company's employees, directors and officers (including the Company's principal executive officer, principal financial officer and principal accounting officer). The Code of Conduct and Ethics is available on the Company's website at www.astecindustries.com/investors/.
Item 11. Executive Compensation
Information included under the captions "Compensation Discussion and Analysis", "Executive Compensation", “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” in the Company's definitive Proxy Statement to be delivered to the shareholders of the Company in connection with the Annual Meeting of Shareholders to be held on April 23, 2010 is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Information included under the caption "Stock Ownership of Certain Beneficial Owners and Management" in the Company's definitive Proxy Statement to be delivered to the shareholders of the Company in connection with the Annual Meeting of Shareholders to be held on April 23, 2010 is incorporated herein by reference.
Equity Compensation Plan Information
The following table provides information about the Common Stock that may be issued under all of the Company's existing equity compensation plans as of December 31, 2009.
Equity Compensation Plans Not Approved by Shareholders
Our 1998 Non-Employee Directors Stock Incentive Plan provides that annual retainers payable to our non-employee directors will be paid in the form of cash, unless the director elects to receive the annual retainer in the form of common stock, deferred stock or stock options. If the director elects to receive Common Stock, whether on a current or deferred basis, the number of shares to be received is determined by dividing the dollar value of the annual retainer by the fair market value of the Common Stock on the date the retainer is payable. If the director elects to receive stock options, the number of options to be received is determined by dividing the dollar value of the annual retainer by the Black-Scholes value of an option on the date the retainer is payable.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information included under the captions “Corporate Governance: Independent Directors” and “Transactions with Related Persons” in the Company’s definitive Proxy Statement to be delivered to the shareholders of the Company in connection with the Annual Meeting of Shareholders to be held on April 23, 2010 is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
Information included under the caption “Audit Matters” in the Company’s definitive Proxy Statement to be delivered to the shareholders of the Company in connection with the Annual Meeting of Shareholders to be held on April 23, 2010 is incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules
(a)(1) The following financial statements and other information appear in Appendix “A” to this Report and are filed as a part hereof:
(a)(2) Other than as described below, Financial Statement Schedules are not filed with this Report because the Schedules are either inapplicable or the required information is presented in the Financial Statements or Notes thereto. The following Schedule appears in Appendix “A” to this Report and is filed as a part hereof:
ANNUAL REPORT ON FORM 10-K
ITEMS 6, 7, 7a, 8, 9a and 15(a)(1), (2)and (3),and 15(b) and 15(c)
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
ASTEC INDUSTRIES, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except as noted*)
Certain amounts for 2008, 2007, 2006, and 2005 have been reclassified to conform with the 2009 presentation.
SUPPLEMENTARY FINANCIAL DATA
(in thousands, except as noted*)
The Company’s common stock is traded on the National Association of Securities Dealers Automated Quotation (NASDAQ) National Market under the symbol ASTE. Prices shown are the high and low bid prices as announced by NASDAQ. The Company has never paid dividends on its common stock and does not intend to pay dividends on its common stock in the foreseeable future. As determined by the proxy search on the record date, the number of common shareholders is approximately 8,700.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding forward-looking statements, see “Forward-looking Statements” on page A-20.
Astec Industries, Inc., (“the Company”) is a leading manufacturer and marketer of road building equipment. The Company’s businesses:
The Company has 14 manufacturing companies, 13 of which fall within four reportable operating segments, which include the Asphalt Group, the Aggregate and Mining Group, the Mobile Asphalt Paving Group and the Underground Group. The business units in the Asphalt Group design, manufacture and market a complete line of asphalt plants and related components, heating and heat transfer processing equipment and storage tanks for the asphalt paving and other unrelated industries including energy production. In early 2009, this segment introduced a new line of concrete mixing plants. The business units in the Aggregate and Mining Group design, manufacture and market equipment for the aggregate, metallic mining and recycling industries. In September 2009 this segment acquired a small company with unique machine technology being developed to make wood pellets. The Company began production of the new pellet production equipment in January 2010. The business units in the Mobile Asphalt Paving Group design, manufacture and market asphalt pavers, material transfer vehicles, milling machines, stabilizers and screeds. The business units in the Underground Group design, manufacture and market a complete line of trenching equipment, directional drills and auger boring machines for the underground construction market as well as vertical drills for gas and oil field development. The Company also has one other category that contains the business units that do not meet the requirements for separate disclosure as an operating segment. The business units in the Other category include Peterson Pacific Corp. (Peterson), Astec Australia Pty Ltd (Astec Australia), Astec Insurance Company (“Astec Insurance” or “the captive”) and Astec Industries, Inc., the parent company. Peterson designs, manufactures and markets whole-tree pulpwood chippers, horizontal grinders and blower trucks. Astec Australia is the Australian and New Zealand distributor of equipment manufactured by Astec Industries, Inc. Astec Insurance is a captive insurance company.
The Company’s financial performance is affected by a number of factors, including the cyclical nature and varying conditions of the markets it serves. Demand in these markets fluctuates in response to overall economic conditions and is particularly sensitive to the amount of public sector spending on infrastructure development, privately funded infrastructure development, changes in the price of crude oil, which affects the cost of fuel and liquid asphalt, and changes in the price of steel.
In August 2005, President Bush signed into law Safe, Accountable, Flexible and Efficient Transportation Equity Act - A Legacy for Users (“SAFETEA-LU”), which authorized appropriation of $286.5 billion in guaranteed federal funding for road, highway and bridge construction, repair and improvement of the federal highways and other transit projects for federal fiscal years October 1, 2004 through September 30, 2009. The Company believes that federal highway funding such as SAFETEA-LU significantly influences the purchasing decisions of the Company’s customers who are more comfortable making purchasing decisions with such legislation in place. Federal funding provides for approximately 25% of all highway, street, roadway and parking construction put in place in the United States.
SAFETEA-LU funding expired on September 30, 2009 and federal transportation funding is currently operating on short term appropriations at the most recent approved funding levels through February 2010. The current bill marks the third continuation of federal government funding at last year’s levels, a move made necessary as Congress has still been unable to complete its appropriations work from fiscal 2009. Congress is currently considering a proposal to extend the authorization for the highway program through December 2010 at the current 2009 funding levels. Although this proposed funding bill would help stabilize the federal highway program and instill a minimum level of confidence in the Company’s customers, the Company believes a new multi-year highway program would have the greatest positive impact on the road construction industry and allow its customers to plan and execute longer term construction projects.
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act, which authorized the expenditure of approximately $27.5 billion in federal funding for highway and bridge construction activities. These funds were in addition to the $41.2 billion apportioned to the federal highway program under SAFETEA-LU for fiscal year 2009. The measure required the funding to be apportioned to the states within 21 days of the bill’s enactment. Half of the funds were required to be obligated by the states within 120 days with the remaining portion required to be under contract one year after the bill’s enactment. The bill also provided for favorable tax policies regarding the deduction of certain expenses relating to the purchase of business equipment.
Several other countries have also implemented infrastructure spending programs to stimulate their economies. The Company believes these spending programs will have a positive impact on its financial performance; however, the magnitude of that impact cannot be determined.
The public sector spending described above is needed to fund road, bridge and mass transit improvements. The Company believes that increased funding is unquestionably needed to restore the nation’s highways to a quality level required for safety, fuel efficiency and mitigation of congestion. In the Company’s opinion, amounts needed for such improvements are significantly greater than amounts approved to date, and funding mechanisms such as the federal usage fee per gallon of gasoline, which has not been increased in 16 years, would likely need to be increased along with other measures to generate the funds needed.
In addition to public sector funding, the economies in the markets the Company serves, the price of oil and its impact on customers’ purchase decisions and the price of steel may each affect the Company’s financial performance. Economic downturns, like the one experienced from 2001 through 2003, and the current downturn that began in late 2008, generally result in decreased purchasing by the Company’s customers, which, in turn, causes reductions in sales and increased pricing pressure on the Company’s products. Rising interest rates typically negatively impact customers’ attitudes toward purchasing equipment. The Federal Reserve has maintained historically low interest rates in response to the current economic downturn, and the Company expects only slight changes, if any, in interest rates in the near term; however, management believes that upward pressure is building on long-term interest rates.
Significant portions of the Company’s revenues relate to the sale of equipment involved in the production, handling and installation of asphalt mix. Asphalt is a by-product of oil production. An increase in the price of oil increases the cost of asphalt, which is likely to decrease demand for asphalt and therefore decrease demand for certain Company products. While increasing oil prices may have a negative financial impact on the Company’s customers, the Company’s equipment can use a significant amount of recycled asphalt pavement, thereby mitigating the final cost of asphalt for the customer. The Company continues to develop products and initiatives to reduce the amount of oil and related products required to produce asphalt mix. Oil price volatility makes it difficult to predict the costs of oil-based products used in road construction such as liquid asphalt and gasoline. The Company’s customers appear to be adapting their prices in response to the fluctuating oil prices, and the fluctuations did not appear to significantly impair equipment purchases in 2008 and 2009. The Company expects oil prices to continue to fluctuate in 2010 but does not believe the fluctuation will have a significant impact on customers’ buying decisions.
Contrary to the negative impact of higher oil prices on many of the Company’s products as discussed above, sales of several of the Company’s products, including products manufactured by the Underground segment which are used to drill for oil and natural gas and install oil and natural gas pipelines, would benefit from higher oil and natural gas prices, to the extent that such higher prices lead to further development of oil and natural gas production.
Steel is a major component in the Company’s equipment. Steel prices increased significantly during the first eight months of 2008, and the Company increased sales prices during 2008 to offset these rising steel costs. Late in the third quarter of 2008, steel prices began to retreat from their 2008 highs. Steel pricing declined sharply in the fourth quarter of 2008 and into 2009. Favorable pricing continued through 2009 causing steel mills to reduce production to match reduced demand. The Company believes many steel customers worked through their excess inventories of steel during 2009 and will begin to buy steel again in 2010, albeit at reduced levels. This potential increase in demand coupled with the reduced production from the steel mills could combine to produce moderate increases in steel prices during 2010. Although the Company would institute price increases in response to rising steel and component prices, the Company may not be able to raise the prices of its products enough to cover increased costs, resulting in the Company’s financial results being negatively affected. If the Company sees increases in upcoming steel prices, it will take advantage of buying opportunities to offset such future pricing where possible.
In addition to the factors stated above, many of the Company’s markets are highly competitive, and its products compete worldwide with a number of other manufacturers and distributors that produce and sell similar products. During most of 2008, the reduced value of the dollar relative to many foreign currencies and the positive economic conditions in certain foreign economies had a positive impact on the Company’s international sales. During the latter months of 2008, the dollar began to strengthen as the current economic recession began to have an impact around the world. During the first quarter of 2009, the dollar stabilized somewhat but at a stronger position than in the first nine months of 2008. This had a negative impact on the Company’s international sales during the first half of 2009 even though the dollar began to weaken in the second quarter of 2009 and has remained relatively weak compared to other major currencies through 2009. The Company expects the dollar to fluctuate but remain relatively weak through 2010.
In the United States and internationally, the Company’s equipment is marketed directly to customers as well as through dealers. During 2009, approximately 75% to 80% of equipment sold by the Company was sold directly to the end user. The Company expects this ratio to remain relatively consistent through 2010.
The Company is operated on a decentralized basis and there is a complete management team for each operating subsidiary. Finance, insurance, legal, shareholder relations, corporate accounting and other corporate matters are primarily handled at the corporate level (i.e., Astec Industries, Inc., the parent company). The engineering, design, sales, manufacturing and basic accounting functions are all handled at each individual subsidiary. Standard accounting procedures are prescribed and followed in all reporting.
The non-union employees of each subsidiary have the opportunity to earn bonuses in the aggregate up to 10% of each subsidiary’s after-tax profit if such subsidiary meets established goals. These goals are based on the subsidiary’s return on capital employed, cash flow on capital employed and safety. The bonuses for subsidiary presidents are normally paid from a separate corporate pool.
Results of Operations: 2009 vs. 2008
Net sales decreased $235,606,000 or 24.2%, from $973,700,000 in 2008 to $738,094,000 in 2009. Sales are generated primarily from new equipment purchases made by customers for use in construction for privately funded infrastructure and public sector spending on infrastructure. The overall decline in sales for 2009 compared to 2008 is reflective of the weak overall economic conditions, both domestic and international. Domestic sales for 2009 were $465,473,000 or 63.1% of consolidated net sales compared to $620,987,000 or 63.8% of consolidated net sales for 2008, a decrease of $155,514,000 or 25.0%.
International sales for 2009 were $272,621,000 or 36.9% of consolidated net sales compared to $352,713,000 or 36.2% of consolidated net sales for 2008, a decrease of $80,092,000 or 22.7%. The overall decrease in international sales for 2009 compared to 2008 is due to weak economic conditions in the international markets the company serves as well as volatility in the U.S. dollar during 2009.
Parts sales as a percentage of consolidated net sales increased 340 basis points from 21.0% in 2008 to 24.4% in 2009. In dollar terms, parts sales decreased 12.0% from $204,912,000 in 2008 to $180,332,000 in 2009.
Consolidated gross profit as a percentage of sales decreased 330 basis points to 20.7% in 2009 from 24.0% in 2008. The primary reason for the overall decrease in gross margin as a percent of sales is reduced plant utilization due to lower production volumes resulting from weak domestic and foreign economies. In addition, the Company has experienced some pricing pressures in certain markets, further impacting gross margin.
Selling, General and Administrative Expense
Selling, general and administrative expenses for 2009 were $107,455,000, or 14.6% of net sales, compared to $122,621,000, or 12.6% of net sales, for 2008, a decrease of $15,166,000, or 12.4%. The decrease was primarily due to a reduction in payroll and related expenses of $4,387,000 resulting from a reduction of 10.2% in employee headcount during 2009. In addition, profit sharing expense decreased $4,207,000 due to a reduction in subsidiary performance which determines this formula-driven amount. In 2008, the Company incurred expenses related to the triennial ConExpo trade show of $3,631,000 which were not incurred in 2009. Commissions expense decreased $3,506,000 and travel expense decreased $1,729,000.
Research and Development
Research and Development expenses decreased $892,000 or 4.7%, from $18,921,000 in 2008 to $18,029,000 in 2009. Although sales decreased 24.2% during 2009, the Company remained committed to new product development and current product improvement.
Intangible Asset Impairment Charges
During the fourth quarter of 2009, the Company recorded non-cash intangible asset impairment charges of $17,036,000. These charges consisted of an impairment charge to goodwill of $16,716,000 and an impairment charge to other intangible assets of $320,000. These impairment charges were the result of the Company’s annual intangible asset impairment review in the fourth quarter, which coincides with the annual budgeting process.
Interest expense in 2009 decreased $314,000, or 36.9%, to $537,000 from $851,000 in 2008. The decrease in interest expense in 2009 compared to 2008 related primarily to interest on state tax settlements incurred in 2008.
Interest income decreased $154,000 or 17.3% from $888,000 in 2008 to $734,000 in 2009. The primary reason for the decrease in interest income is a decrease in amounts invested in 2009 due to cash paid for acquisitions in late 2008.
Other income (expense), net was $1,137,000 in 2009 compared to $6,255,000 in 2008, a decrease of $5,118,000. The primary reason for the decrease was a gain of $6,195,000 recognized in 2008 on the sale of certain equity securities. The primary component of the current year income amount is $615,000 of investment income from the investment portfolio at Astec Insurance.
Income tax expense for 2009 was $8,135,000, compared to income tax expense of $34,766,000 for 2008. The effective tax rates for 2009 and 2008 were 72.4% and 35.5%, respectively. The primary reason for the significant increase in the effective tax rate from 2008 to 2009 is nondeductible intangible asset impairment charges in 2009.
The Company had net income attributable to controlling interest of $3,068,000 in 2009 compared to $63,128,000 in 2008, a decrease of $60,060,000, or 95.1%. Earnings per diluted share were $0.14 in 2009 compared to $2.80 in 2008, a decrease of $2.66 or 95.0%. Diluted shares outstanding at December 31, 2009 and 2008 were 22,715,780 and 22,585,775, respectively. The increase in shares outstanding is primarily due to the exercise of stock options by employees of the Company.
The backlog of orders at December 31, 2009 was $135,090,000 compared to $193,316,000 at December 31, 2008, a decrease of $58,226,000, or 30.1%. The decrease in the backlog of orders was almost evenly split between a decrease in domestic backlog of $32,775,000 or 31.0% and a decrease in international backlog of $25,451,000 or 29.0%. The decrease in backlog occurred in each of the Company’s segments except for the Mobile Asphalt Paving Group which experienced an increase in backlog of $754,000 or 26.4%. The Company is unable to determine whether the decline in backlogs was experienced by the industry as a whole; however, the Company believes the decreased backlog reflects the current economic conditions the industry is experiencing.
Net Sales (in thousands)
Asphalt Group: Sales in this group remained relatively flat at $258,527,000 in 2009 compared to $257,336,000 in 2008, an increase of $1,191,000. Domestic sales for the Asphalt Group decreased 7.8% in 2009 compared to 2008. The Company believes this segment was the beneficiary of federal stimulus spending under the ARRA of 2009, which provided $27.5 billion of funding for transportation construction projects. International sales for the Asphalt Group increased 15.8% in 2009 compared to 2008. This increase was primarily in Canada and the Middle East. Parts sales for the Asphalt Group increased 4.7% in 2009.
Aggregate and Mining Group: Sales in this group were $218,332,000 in 2009 compared to $350,350,000 in 2008, a decrease of $132,018,000 or 37.7%. Domestic sales for the Aggregate and Mining Group decreased 37.6% in 2009 compared to 2008. The primary driver of this decrease was the weak domestic residential and commercial construction markets during 2009. International sales for the Aggregate and Mining Group decreased 34.0% in 2009 compared to 2008. This decrease was also due to weakness in the construction market globally. The decrease in international sales occurred primarily in Asia, Canada, Africa and the Middle East. Parts sales for the Aggregate and Mining Group decreased 21.1% in 2009 compared to 2008.
Mobile Asphalt Paving Group: Sales in this group were $136,836,000 in 2009 compared to $150,692,000 in 2008, a decrease of $13,856,000 or 9.2%. Domestic sales for the Mobile Asphalt Paving Group increased 2.0% in 2009 over 2008. The Company believes this segment was also the beneficiary of federal stimulus spending under the ARRA of 2009. International sales for the Mobile Asphalt Paving Group decreased 37.3% in 2009 compared to 2008. The decrease internationally occurred primarily in Europe and Australia but was offset by an increase in Canada, which also passed stimulus spending legislation that benefited the transportation industry. Parts sales for this group increased 2.7% in 2009
Underground Group: Sales in this group were $67,353,000 in 2009 compared to $135,152,000 in 2008, a decrease of $37,799,000 or 50.2%. Domestic sales for the Underground Group decreased 61.8% in 2009 compared to 2008. The primary reason for this decline is the weak domestic residential and commercial construction markets. International sales for the Underground Group decreased 35.8% in 2009 compared to 2008. The decrease in international sales occurred in Asia, Australia, Europe, South America, Central America and the Middle East. Parts sales for the Underground Group decreased 32.4% in 2009.
Other Group: Sales for the Other Group were $57,046,000 in 2009 compared to $80,170,000 in 2008, a decrease of $23,124,000 or 28.8%. Domestic sales for the Other Group, which are generated by Peterson Pacific Corp. for this group, decreased 51.5% in 2009 compared to 2008. This decrease is due to the weak domestic construction market. International sales for the Other Group increased 19.0% in 2009 over 2008. This increase occurred primarily in Australia due to the acquisition of Astec Australia in the fourth quarter of 2008. This increase was partially offset by a decrease in sales to Canada. Parts sales for the Other Group increased 5.3% in 2009.
Segment Profit (in thousands):
Asphalt Group: Profit for this group was $33,455,000 for 2009 compared to $40,765,000 for 2008, a decrease of $7,310,000 or 17.9%. The primary reason for the decline in profit is a $4,095,000 reduction in gross profit for this group. Although the Asphalt Group’s sales for 2009 were practically the same as 2008, its capacity increased significantly in late 2008 with the addition of Dillman resulting in an increase in unabsorbed overhead of $3,504,000 in 2009 over 2008 levels. Increased research and development expense of $2,171,000, due to the development in 2009 of a new concrete plant, also contributed to the decrease in profit in 2009.
Aggregate and Mining Group: This group had a loss of $172,000 in 2009 compared to profit of $37,032,000 in 2008, a decrease of $37,204,000 or 100.5%. This group had a decrease of $36,483,000 in gross profit during 2009 from the significant drop in sales. Also affecting gross profit was an increase in unabsorbed overhead of $3,754,000 during 2009. The group incurred an intangible asset impairment charge of $10,909,000 which is reflected in intangible asset impairment charges in the consolidated statement of operations for 2009.
Mobile Asphalt Paving Group: Profit for this group was $13,374,000 in 2009 compared to profit of $15,087,000 in 2008, a decrease of $1,713,000 or 11.4%. The primary reason for the decrease in profit is a reduction in sales of 9.2% during 2009. This resulted in an increase in unabsorbed overhead of $1,608,000 year over year.
Underground Group: This group had a loss of $14,560,000 in 2009 compared to profit of $12,510,000 in 2008 for a decrease of $27,070,000 or 216.4%. Gross profit for this group decreased $29,601,000 in 2009, primarily due to the 50.2% decrease in sales year over year. The Underground Group’s gross profit was also negatively impacted by an increase in unabsorbed overhead of $2,625,000 in 2009 compared to 2008. Charges to reduce the value of inventory in 2009 were $2,339,000 in excess of 2008 levels. These expenses were offset by a reduction in selling, general and administrative expenses of $2,000,000 in 2009.
Other Group: The Other Group had a loss of $29,614,000 in 2009 compared to a loss of $41,153,000 in 2008, an improvement of $11,539,000 or 28%. The profit in this group is significantly impacted by federal income tax expense which is recorded at the parent company only. Income tax expense in this group decreased $21,132,000 in 2009 compared to 2008. Gross profit for this group decreased $6,535,000 in 2009 compared to 2008. This was a result of the decrease in sales of $23,124,000 in this group. The decrease in sales was partially offset by a decrease in unabsorbed overhead of $1,219,000 in 2009 compared to 2008. In addition, this segment incurred non-cash intangible asset impairment charges of $5,841,000 in 2009 which is reflected in intangible asset impairment charges in the consolidated statement of operations.
Results of Operations: 2008 vs. 2007
Net sales for 2008 were $973,700,000, an increase of $104,675,000, or 12.0%, compared to net sales of $869,025,000 in 2007. The increase in net sales in 2008 occurred in both domestic and international sales and was primarily due to the continued weakness of the dollar against foreign currencies and strong economic conditions internationally during most of 2008.
In 2008, international sales increased $74,377,000, or 26.7%, to $352,713,000 compared to international sales of $278,336,000 in 2007. International sales increased the most in Asia, followed by Canada, Africa, South America and Central America. These increases are due primarily to continued weakness of the dollar against these currencies and strong local economic conditions in these geographic areas during most of 2008.
In 2008, domestic sales increased $30,297,000 or 5.1%, to $620,987,000 compared to domestic sales of $590,690,000 in 2007. Domestic sales are primarily generated from equipment purchases made by customers for use in construction for privately funded infrastructure development and public sector spending on infrastructure development.
Parts sales were $204,912,000 in 2008 compared to $186,146,000 in 2007 for an increase of 10.1%. The increase of $18,766,000 was generated mainly by the Underground Group and the Asphalt Group. The increase was primarily due to strong economic conditions both domestically and abroad, increased parts marketing efforts and growth in the active machine population.
Gross profit increased from $209,176,000 in 2007 to $233,311,000 in 2008. The gross profit as a percentage of net sales decreased 10 basis points from 24.1% in 2007 to 24.0% in 2008. The primary factor that caused this decrease in gross profit as a percentage of net sales was an increase in overhead of $5,520,000 in 2008 as compared to 2007. The increase in overhead is due primarily to manufacturing process improvement projects, as well as the impact of slowing economic activity during the second half of the year resulting in lower absorption of overhead. As these improvement projects occurred, the flow of production was disrupted and certain production resources were used to complete the projects, thus creating inefficiencies which resulted in excess production costs. Steel and component cost increases were offset by sales price increases, redesign of the product, and improvements in the manufacturing process.
Selling, General and Administrative Expense
In 2008, selling, general and administrative (“SG&A”) expenses increased $15,021,000 or 14.0% to $122,621,000, or 12.6% of 2008 net sales, from $107,600,000, or 12.4% of net sales, in 2007. The increase in SG&A in 2008 compared to 2007 was primarily due to increases in personnel related expenses of $7,790,000, sales commissions of $1,424,000, and health insurance of $2,911,000. In addition, ConExpo costs of $3,594,000 were expensed in 2008.
Research and Development Expense
Research and development expenses increased by $3,472,000, or 22.5%, from $15,449,000 in 2007 to $18,921,000 in 2008. The increase is related to the development of new products and improvement of current products.
Interest expense for 2008 remained flat at $851,000 from $853,000 in 2007. This equates to 0.1% of net sales in both 2008 and 2007.
Interest income decreased $1,845,000, or 67.5%, to $888,000 in 2008 from $2,733,000 in 2007. The decrease is primarily due to a reduction in cash available for investment due to business acquisitions in mid 2007 and 2008.
Other income (expense), net was income of $6,255,000 in 2008 compared to income of $399,000 in 2007. The net change in other income from 2007 to 2008 was due primarily to gains on the sale of certain equity securities in 2008.
For 2008, the Company had an overall income tax expense of $34,766,000, or 35.5% of pre-tax income compared to the 2007 tax expense of $31,398,000, or 35.5% of pre-tax income.
The Company generated net income attributable to controlling interest for 2008 of $63,128,000, or $2.80 per diluted share, compared to net income attributable to controlling interest of $56,797,000, or $2.53 per diluted share, in 2007. The weighted average number of diluted common shares outstanding at December 31, 2008 was 22,585,775 compared to 22,444,866 at December 31, 2007.
Earnings per share for 2008 were $2.80 per diluted share compared to $2.53 per diluted share for 2007, a 10.7% increase.
The backlog at December 31, 2008 was $193,316,000 compared to $280,923,000, including the backlogs of Dillman and Astec Australia, at December 31, 2007, a 31.2% decrease. The international backlog at December 31, 2008 was $87,693,000 compared to $88,842,000 at December 31, 2007, a decrease of $1,149,000 or 1.3%. The domestic backlog at December 31, 2008 was $105,623,000 compared to $192,081,000 at December 31, 2007, a decrease of $86,458,000 or 45.0%. The backlog decreased $47,691,000 in the Aggregate and Mining Group, followed by a decrease of $27,135,000 in the Asphalt Group. The Company is unable to determine whether this backlog effect was experienced by the industry as a whole; however, the Company believes the decreased backlog reflects the current economic conditions the industry is experiencing.
Asphalt Group: During 2008, this segment had sales of $257,336,000 compared to $240,229,000 for 2007, an increase of $17,107,000, or 7.1%. Asphalt Group sales increased both domestically and internationally. International sales increased primarily in Canada and Central America. Segment profits for 2008 were $40,765,000 compared to $37,707,000 for 2007, an increase of $3,058,000, or 8.1%. The focus on product improvement and cost reduction through the Company’s focus group initiative as well as price increases and increased international sales impacted gross profits and segment income during 2008.
Aggregate and Mining Group: During 2008, sales for this segment increased $12,167,000, or 3.6%, to $350,350,000 compared to $338,183,000 for 2007. The primary increase in sales was attributable to increased international sales in Asia, Africa and South America. Domestic sales for the Aggregate and Mining Group were down 12.3% compared to 2007. Segment profits for 2008 decreased $1,860,000, or 4.8%, to $37,032,000 from $38,892,000 for 2007. The primary reasons for the decrease in segment profits were ConExpo expenses of $1,578,000 in 2008 and weakening sales volume and gross profit in the fourth quarter of 2008.
Mobile Asphalt Paving Group: During 2008, sales for this segment increased $4,203,000, or 2.9%, to $150,692,000 from $146,489,000 in 2007. The increase in sales in 2008 compared to 2007 was attributable to international sales. International sales increased in Europe, Canada and South America. Domestic sales decreased slightly year over year. Segment profits for 2008 decreased $2,798,000, or 15.6%, to $15,087,000 from $17,885,000 for 2007. The decrease in segment profits was primarily due to increased research and development costs, ConExpo expenses of $665,000 in 2008 and weakening sales volume and gross profit in the fourth quarter of 2008.
Underground Group: During 2008, sales for this segment increased $20,774,000, or 18.2%, to $135,152,000 from $114,378,000 for 2007. International sales for this group increased in South America, Africa, China, Japan and Korea. Segment profits for 2008 increased $5,163,000 from $7,348,000 in 2007 to $12,511,000 in 2008. The sales and profit increase is primarily due to market acceptance of new products.
Other Group: During 2008, sales for this segment increased $50,424,000, or 169.5%, to $80,170,000 from $29,746,000 in 2007. $42,337,000 of this increase is due to the acquisitions of Peterson and Astec Australia.
Liquidity and Capital Resources
The Company’s primary sources of liquidity and capital resources are its cash on hand, investments, borrowing capacity under a $100 million revolving credit facility and cash flows from operations. The Company had $40,429,000 of cash available for operating purposes at December 31, 2009. In addition, the Company had no borrowings outstanding under its credit facility with Wachovia Bank, National Association (“Wachovia”) at December 31, 2009 as discussed further below. Net of letters of credit of $11,634,000, the Company had borrowing availability of $88,366,000 under the credit facility.
During April 2007, the Company entered into an unsecured credit agreement with Wachovia whereby Wachovia has extended to the Company an unsecured line of credit of up to $100,000,000 including a sub-limit for letters of credit of up to $15,000,000.
The Wachovia credit facility had an original term of three years with two one-year extensions available. Early in 2010, the Company exercised the final extension bringing the new loan maturity date to May 2012. The interest rate for borrowings is a function of the Adjusted LIBOR Rate or Adjusted LIBOR Market Index Rate, as defined, as elected by the Company, plus a margin based upon a leverage ratio pricing grid ranging between 0.5% and 1.5%. As of December 31, 2009, the applicable margin based upon the leverage ratio pricing grid was equal to 0.5%. The unused facility fee is 0.125%. The Wachovia credit facility requires no principal amortization and interest only payments are due, in the case of loans bearing interest at the Adjusted LIBOR Market Index Rate, monthly in arrears and, in the case of loans bearing interest at the Adjusted LIBOR Rate, at the end of the applicable interest period. The interest rate was 0.73% and 0.94% at December 31, 2009 and 2008, respectively. The Wachovia credit agreement contains certain financial covenants including a minimum fixed charge coverage ratio, minimum tangible net worth and maximum allowed capital expenditures. The Company was in compliance with the covenants under its credit facility as of December 31, 2009.
The Company’s South African subsidiary, Osborn Engineered Products SA (Pty) Ltd, (Osborn) has available a credit facility of $7,429,000 (ZAR 55,000,000) to finance short-term working capital needs, as well as to cover letter of credit performance, advance payment and retention guarantees. As of December 31, 2009, Osborn had no outstanding borrowings under the credit facility, but $4,422,000 in performance, advance payment and retention bonds were issued under the facility. The facility is secured by Osborn’s buildings and improvements, accounts receivable and cash balances (cash balances up to $2,701,000) and a $2,000,000 letter of credit issued by the parent company. As of December 31, 2009, Osborn had available credit under the facility of $3,007,000. The facility has an ongoing, indefinite term subject to annual reviews by the bank. The agreement has an unused facility fee of 0.793%.
The Company’s Australian subsidiary, Astec Australia Pty Ltd (“Astec Australia”) has an available credit facility to finance short-term working capital needs of $2,511,000 (AUD 2,800,000), to finance foreign exchange dealer limit orders of $2,242,000 (AUD 2,500,000) and to provide bank guarantees to others of $179,000 (AUD 200,000). The facility is secured by a $2,500,000 letter of credit issued by the Company. No amounts were outstanding under the credit facility at December 31, 2009; however, $22,000 in performance bonds were guaranteed under the facility.
Cash Flows from Operating Activities (in thousands):
Net cash provided by operating activities increased $39,163,000 in 2009 compared to 2008. The primary reasons for the increase in operating cash flows in 2009 compared to 2008 are a decrease in inventory in 2009 of $36,570,000 compared to an increase in inventory in 2008 of $70,790,000. The Company made a substantial effort in 2009 to reduce inventory through reduced purchasing of raw materials and purchased parts. This effort was in response to decreased sales volume and reduced production resulting in lower finished goods. This increase in cash from inventory was offset by a decrease in net income of $60,189,000 as well as an increase in cash used by accounts payable and customer deposits in 2009 compared to 2008 totaling $28,555,000.
Cash Flows from Investing Activities (in thousands):
Net cash used by investing activities in 2009 decreased $23,784,000 compared to 2008 due to reductions in cash used for capital expenditures of $22,469,000 and cash used for business acquisitions of $17,808,000. These amounts were offset by a reduction in cash proceeds from the sale of securities of $16,500,000 in the fourth quarter of 2008.
Cash Flows from Financing Activities (in thousands):
Financing activities used cash of $3,210,000 in 2009 while in 2008 financing activities provided cash of $7,626,000 for a net change of $10,836,000. Fewer stock options were exercised in 2009 reducing the cash proceeds from the issuance of common stock by $3,789,000. Also during 2009, the Company repaid the outstanding balance of $3,427,000 that was borrowed against its revolving line of credit during 2008.
Capital expenditures for 2010 are forecasted to total $15,291,000. The Company expects to finance these expenditures using currently available cash balances, internally generated funds and available credit under the Company’s credit facility. Capital expenditures are generally for machinery, equipment and facilities used by the Company in the production of its various products.
The Company believes that its current working capital, cash flows generated from future operations and available capacity under its credit facilities will be sufficient to meet the Company’s working capital and capital expenditure requirements through December 31, 2010.
The Company’s current assets decreased to $384,365,000 at December 31, 2009 from $395,099,000 at December 31, 2008, a decrease of $10,734,000, or 2.7%. The decrease is primarily attributable to a decrease in inventory of $37,269,000 and a decrease in trade receivables of $5,292,000 offset by an increase in cash of $30,755,000. The Company made a substantial effort in 2009 to reduce inventory through reduced purchasing of raw materials and purchased parts. This effort was in response to decreased sales volume and reduced production requirements which also resulted in lower finished goods. Trade receivables decreased primarily due to reduced sales volumes in 2009 as compared to 2008.
Goodwill decreased $15,752,000 in 2009 primarily due to non-cash impairment charges of $16,716,000 recognized in the fourth quarter based on the Company’s review of the fair value of goodwill and other intangible assets. The remaining change in goodwill is due to the translation impact on goodwill at foreign subsidiaries.
In late 2009 the Company reviewed and adjusted its internal five-year projections as part of its normal annual budgeting procedures. These revised projections were used in the annual valuations performed to determine if an impairment charge to goodwill should be recorded. The valuations performed in 2009 indicated possible impairment in two of the Company’s reporting units which necessitated further testing to determine the amount of impairment. As a result of the additional testing, 100% of the goodwill in the two reporting units was determined to be impaired.
The valuation performed for 2009 included a combination of discounted cash flows and market approaches to determine the fair value of the Company’s reporting units. Weighted average cost of capital assumptions used in the calculations ranged from 13% to 22%. A terminal growth rate of 3% was also assumed. The $16,716,000 goodwill im