Item 1. Business
General
Astec Industries, Inc. (the "Company") is a Tennessee corporation which was incorporated in 1972. The Company designs, engineers, manufactures and markets equipment and components used primarily in road building and related construction activities as well as other products discussed below. The Company's products are used in each phase of road building, from quarrying and crushing the aggregate to application of the road surface. The Company also manufactures certain equipment and components unrelated to road construction, including equipment for the mining, quarrying, construction and demolition industries; gas and oil drilling rigs; water well and geothermal drilling rigs; industrial heat transfer equipment; whole-tree pulpwood chippers; horizontal grinders; and blower trucks. The Company also manufactures a line of multiple use plants for cement treated base, roller compacted concrete and ready-mix concrete. The Company is developing and marketing pelletizing equipment used to compress wood and other products into dense pellets for the renewable energy market among other applications. The Company's subsidiaries hold 83 United States patents and 40 foreign patents with 73 patent applications pending and have been responsible for many technological and engineering innovations in the industries in which they operate. The Company's products are marketed both domestically and internationally. In addition to equipment sales, the Company manufactures and sells replacement parts for equipment in each of its product lines and replacement parts for some competitors' equipment. The distribution and sale of replacement parts is an integral part of the Company's business.
The Company's fifteen manufacturing subsidiaries are: (i) Breaker Technology Ltd/Inc., which designs, engineers, manufactures and markets rock breaking systems in addition to processing equipment and utility vehicles for the mining and quarrying industries; (ii) Johnson Crushers International, Inc., which designs, engineers, manufactures and markets portable and stationary aggregate and ore processing equipment; (iii) Kolberg-Pioneer, Inc., which designs, engineers, manufactures and markets aggregate processing equipment for the crushed stone, gravel, manufactured sand, recycle, top soil and remediation markets; (iv) Osborn Engineered Products SA (Pty) Ltd, which designs, engineers, manufactures and markets a complete line of bulk material handling and minerals processing plant and equipment used in the aggregate, mineral mining, metallic mining and recycling industries; (v) Astec Mobile Screens, Inc. which designs, engineers, manufactures and markets mobile screening plants, portable and stationary structures and vibrating screens for the aggregate, recycle and material processing industries; (vi) Telsmith, Inc., which designs, engineers, manufactures and markets aggregate processing and mining equipment for the production and classification of sand, gravel, crushed stone and minerals used in road construction and other applications; (vii) Astec, Inc., which designs, engineers, manufactures and markets hot-mix asphalt plants, concrete mixing plants and related components of each; (viii) CEI Enterprises, Inc., which designs, engineers, manufactures and markets thermal fluid heaters, storage tanks, hot-mix asphalt plants, rubberized asphalt and polymer blending systems; (ix) Heatec, Inc., which designs, engineers, manufactures and markets thermal fluid heaters, process heaters, waste heat recovery equipment, liquid storage systems and polymer and rubber blending systems; (x) Astec Underground, Inc., which designs, engineers, manufactures and markets high pressure diesel powered pump trailers used for fracking and cleaning oil and gas wells and the four track surface miner as well as functioning as a contract manufacturer for other companies, both inside and outside the Astec family of companies; (xi) Carlson Paving Products, Inc., which designs, engineers, manufactures and markets asphalt paver screeds, a commercial paver and a windrow pickup machine; (xii) Roadtec, Inc., which designs, engineers, manufactures and markets asphalt pavers, material transfer vehicles, milling machines and a line of asphalt reclaiming and soil stabilizing machinery; (xiii) Peterson Pacific Corp., which designs, engineers, manufactures and markets whole-tree pulpwood chippers, horizontal grinders and blower trucks; (xiv) GEFCO, Inc., which was acquired in October 2011 and which designs, engineers, manufactures and markets portable drilling rigs and related equipment for the water well, environmental, groundwater monitoring, construction, geothermal, mining and shallow oil and gas exploration and production industries; and (xv) Astec Mobile Machinery GmbH, which is located in Hameln, Germany, and which began operations in the third quarter of 2011 upon the Company’s acquisition of existing businesses. The company designs, manufactures and markets asphalt rollers and screeds and a road widener attachment and distributes products produced by other Company subsidiaries, primarily Roadtec, Inc. The Company also has a subsidiary in Australia, Astec Australia Pty Ltd, that markets and installs equipment and services and provides parts in the region for many of the products produced by the Company’s manufacturing companies. In addition, the Company entered into an agreement with a Brazilian company in late 2011 to form a company in Brazil with 75% ownership retained by the Company. The jointly owned company began constructing a manufacturing facility during 2012 and expects to begin producing equipment by early 2014 to supply the South American market with various Company products for the aggregate and mining industries.
The Company's strategy is to be the industry's most cost-efficient producer in each of its product lines while continuing to develop innovative new products and provide first class service for its customers. Management believes that the Company is the technological innovator in the markets in which it operates and is well positioned to capitalize on the need to rebuild and enhance roadway and utility infrastructure as well as in other areas in which it offers products and services, both in the United States and abroad.
Segment Reporting
The Company's business units have their own decentralized management teams and offer different products and services. The business units have been aggregated into four reportable business segments based upon the nature of the product or services produced, the type of customer for the products, the similarity of economic characteristics, the manner in which management reviews results and the nature of the production process, among other considerations. The reportable business segments are (i) Asphalt Group, (ii) Aggregate and Mining Group, (iii) Mobile Asphalt Paving Group and (iv) Underground Group. All remaining companies, including the Company, Astec Insurance Company, Peterson Pacific Corp. and Astec Australia Pty Ltd, as well as U.S. federal income tax expenses for all business segments, are included in the "Other Business Units" category for reporting.
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, Operations by Industry Segment and Geographic Area, to "Notes to Consolidated Financial Statements” presented in Appendix A of this report.
Asphalt Group
The Asphalt Group segment is made up of three business units: Astec, Inc. ("Astec"), Heatec, Inc. ("Heatec") and CEI Enterprises, Inc. ("CEI"). These business units design, engineer, manufacture and market a complete line of asphalt plants, concrete mixing plants, wood pellet plants, and related components of each, heating and heat transfer processing equipment and storage tanks for the asphalt paving and other non-related industries.
Products
Astec designs, engineers, manufactures and markets a complete line of portable, stationary and relocatable hot-mix asphalt plants and related components under the ASTEC® trademark as well as a line of concrete mixing plants introduced by Astec in 2009. An asphalt mixing plant typically consists of heating and storage equipment for liquid asphalt (manufactured by CEI or Heatec); cold feed bins for blending aggregates; a counter-flow continuous type unit (Astec Double Barrel) for drying, heating and mixing; a baghouse composed of air filters and other pollution control devices; hot storage bins or silos for temporary storage of hot-mix asphalt; and a control house. Astec introduced the concept of high plant portability in 1979. Its current generation of portable asphalt plants is marketed as the Six 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 reduce the viscosity of the asphalt mix coating on the rock, thereby allowing the mix to be handled and worked at lower temperatures.
The components in Astec's asphalt mixing plants are fully automated and use both microprocessor-based and programmable logic control systems for efficient operation. The plants are manufactured to meet or exceed federal and state clean air standards. Astec also builds batch type asphalt plants and has developed specialized asphalt recycling equipment for use with its hot-mix asphalt plants.
Astec’s concrete production equipment is designed to be easy to operate and maintain. Materials are managed with continuous blending using belt scales and variable frequency conveyor drives. Shaft-driven mixers with high-torque folding action deliver a uniform concrete mix. Astec’s tower plants, which are designed in modular configurations for either dry or wet arrangements, provide an exciting new alternative in vertical stationary concrete plants.
Astec has nearly completed the R&D phase for its pellet plants. Once completed, Astec expects to be the world’s first and only provider of turnkey wood pellet production plants.
Certain of Astec’s products are also available through licensing agreements with TIL, Ltd. in India and CCCC Xi’an Road Construction Co. Ltd. in China.
Heatec designs, engineers, manufactures and markets a variety of thermal fluid heaters, process heaters, waste heat recovery equipment, liquid storage systems and polymer and rubber blending systems under the HEATEC® trademark. For the construction industry, Heatec manufactures a complete line of asphalt heating and storage equipment to serve the hot-mix asphalt industry and water heaters for concrete plants. In addition, Heatec builds a wide variety of industrial heaters to fit a broad range of applications, including heating equipment for marine vessels, roofing material plants, refineries, oil sands, energy related processing, chemical processing, rubber plants and 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 10,000,000 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.
Marketing
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, is sold directly to the customers through Astec's domestic and international sales departments, although independent agents are also used to market asphalt plants and their components in international markets.
Heatec and CEI equipment is marketed through both direct sales and dealer sales. Manufacturers' representatives sell heating products for applications in several industries other than the asphalt industry.
In total, the products of the Asphalt Group segment are marketed by approximately 51 direct sales employees, 18 domestic independent distributors and 53 international independent distributors.
Raw Materials
Raw materials used in the manufacture of products include carbon steel, pipe and various types of alloy steel, which are normally purchased from distributors. Raw materials for manufacturing are normally readily available. Most steel is delivered on a "just-in-time" arrangement from the supplier to reduce inventory requirements at the manufacturing facilities, but some steel is bought and occasionally inventoried.
Competition
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 Gencor Industries, Inc., American Heating, Pearson Heating Systems, Reliable Asphalt Products and Meeker. Competitors for the industrial product line of heating equipment include Sigma Thermal, Fulton Thermal Corporation and Vapor Power International.
Employees
At December 31, 2012, the Asphalt Group segment employed 1,116 individuals, of which 792 were engaged in manufacturing, 144 in engineering and 180 in selling, general and administrative functions.
Backlog
The backlog for the Asphalt Group at December 31, 2012 and 2011 was approximately $139,828,000 and $115,775,000, respectively. Management expects substantially all current backlogs to be filled in 2013.
Aggregate and Mining Group
The Company's Aggregate and Mining Group is comprised of seven business units focused on the aggregate, metallic mining, quarrying and recycling markets. These business units achieve their strength by distributing products into niche markets and drawing on the advantages of brand recognition in the global market. These business units are Telsmith, Inc. ("Telsmith"), Kolberg-Pioneer, Inc. ("KPI"), Astec Mobile Screens, Inc. ("AMS"), Johnson Crushers International, Inc. ("JCI"), Breaker Technology Ltd/Breaker Technology Inc. ("BTI"), Osborn Engineered Products, SA (Pty) Ltd ("Osborn") and Astec Agregados E Mineracao Do Brasil LTDA (“Astec Brazil”).
Products
Founded in 1906, Telsmith is the oldest subsidiary of the group. The primary markets served under the TELSMITH® trade name are the aggregate, metallic mining and recycling industries.
Telsmith’s core products are jaw, cone and impact crushers, as well as vibrating feeders and inclined and horizontal screens. Telsmith also provides consulting and engineering services to provide complete “turnkey” processing systems. Both portable and modular plant systems are available in production ranges from 300 tph to 1500 tph.
Telsmith maintains an ISO 9001:2008 certification, an internationally recognized standard of quality assurance. In addition, Telsmith has achieved CE designation (a standard for quality assurance and safety) on its jaw crusher, cone crusher and vibrating screen products marketed into European Union countries.
Telsmith recently introduced new equipment models and enhancements to existing equipment offerings in several of its product lines. Telsmith’s new track-mounted mobile screening plant was designed to provide improved serviceability and increased reliability by incorporating fewer hydraulic cylinders and also provides an improved anti-spin feature and a unique hybrid bearing feature. Telsmith also recently developed a new portable crushing plant for the company’s licensee in India, and it modified other existing products to provide additional and improved features and to reduce manufacturing costs.
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 KPI-JCI product brand name. 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 and AMS dealers.
KPI products include a complete line of primary, secondary, tertiary and quaternary crushers, including jaw, 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 KPI 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 the highly-portable Fast Pack ® System, featuring quick setup and teardown, thereby maximizing production time and minimizing downtime. Also included in the portable line is the fully self-contained and self-propelled Fast Trax ® track-mounted jaw and horizontal shaft crushers in six different models, which are ideal for either recycle or hard rock applications, allowing the producer to move the equipment to the material. KPI is offering a newly expanded Global Trax line of these track-mounted crushers to focus more specifically on the global market and meet the needs for that type of equipment in more countries.
KPI sand classifying and washing equipment is designed to clean, separate and re-blend deposits to meet the size specifications for critical applications. KPI products include fine and coarse material washers, log washers, blade mills and sand classifying tanks. KPI also offers additional portable and stationary plants to handle the growing needs in specialty sands and fines recovery. Screening plants are available in both stationary and highly portable models and are complemented by a full line of radial stacking and overland belt conveyors.
KPI conveying equipment is designed to move or store aggregate and other bulk materials in radial cone-shaped or windrow stockpiles. The SuperStacker telescoping conveyor and its Wizard Touch® automated controls are designed to add efficiency and accuracy to whatever the stockpile specifications require. High capacity rail and barge loading/unloading material handling systems are an important part of the product segment.
The KPI-JCI product line was recently expanded to include a new fine recovery plant which was designed for aggregate producers requiring a mobile fines recovery plant to support their existing operations by reducing the volume of fine material in their settling ponds without the use of flocculants. The new model can be configured to be completely self-contained, eliminating the need for external equipment during plant set-up and tear-down.
JCI designs, engineers, manufactures and distributes portable and stationary aggregate and ore processing equipment. This equipment is used in the aggregate, mining and recycling 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 manually adjusted models. Horizontal screens are low-profile machines for use in both portable and stationary applications. JCI incline screens are available for both standard duty and heavy duty applications, primarily in stationary applications. JCI also manufactures the Combo Screen, a combination of an incline feed section and a horizontal discharge section. The Combo Screen utilizes an oval stroke impulse mechanism, and offers increased throughput capacity in scalping applications where the removal of fines is desired.
Portable plants combine various configurations of cone crushers, horizontal screens, combo screens and conveyors, mounted on tow away chassis. Due to high transportation costs of construction materials, many producers use portable equipment to produce the materials they need close to their job sites. Portable plants allow aggregate producers the ability to quickly and efficiently move their equipment from one location to another as their jobs necessitate.
Track plants combine various configurations of cone crushers, horizontal screens, incline screens and conveyors, mounted on track chassis. These units are fully self-contained and allow operators be producing materials within minutes of driving the equipment off of their transport trucks. The introduction of track mounted crushing and screening plants has enabled contractors to perform jobs that in the past were not economically feasible. JCI's track product line is also a valuable tool for our dealers, allowing them to compete in the large track mounted rental market, which had previously not been available to our dealers.
JCI introduced several new portable and stationary plant models in 2012, which helped JCI’s portable plant business grow substantially in 2012. Additionally, a number of new screen models have been introduced in 2012, including bare units and units for portable or stationary plants. Design and manufacturing was completed on a new larger cone crusher during 2012, and the first customer unit was installed and prepared for start-up in early 2013. This new model incorporates many of the proven features found on other JCI cones, but it was designed to enable JCI to compete in higher tonnage applications in both the portable and stationary plant markets, as well as the global mining markets.
AMS designs, engineers, manufactures and markets mobile screening plants, portable and stationary screen structures and vibrating screens designed for the recycle, crushed stone, sand and gravel, industrial and general construction industries. These screening plants include the AMS Vari-Vibe and Duo-Vibe high frequency screens and a new multi-frequency screen. The AMS high frequency screens are used for chip sizing, sand removal and sizing recycled asphalt where conventional screens are not ideally suited. Certain of AMS products are also available through licensing agreements with TIL, Ltd. in India.
During 2012, AMS bolstered its mobile screening line with the addition of a new competitively priced 5' x 20' mobile screen with the primary target markets being sand and gravel, crushed stone, recycle, and organic screening applications. AMS also added to its recycle line with the addition of new model originally designed primarily for use in the RAP market, specifically fractionating; however, this new model will also allow us to expand into concrete, crushed stone and sand and gravel applications.
BTl designs, engineers, manufactures and markets a complete line of stationary rockbreaker systems for the mining, quarry and recycling industries, and it provides large-scale stationary rockbreakers for open pit mining, as well as mid-sized stationary rock breakers for underground applications. BTl also designs, engineers, manufactures and markets a complete line of four wheel drive articulated production and utility vehicles for underground mining.
In addition to supplying equipment for the mining and quarry industries, BTl also designs, manufactures and markets a complete line of hydraulic breakers, compactors and demolition attachments for the North American construction and demolition markets.
BTl maintains ISO9001:2008 and 14001:2004 certifications, internationally recognized standards of quality and environmental assurance. BTl offers an extensive aftermarket sales and service program through a highly qualified and trained dealer network.
Recent or planned additions to the BTI product line include a new stationary rockbreaking system, as well as new models in other product lines including a new hammer scaler, a new multi-purpose mine utility vehicle and a new turntable boom. The new stationary rockbreaker system is believed to be the largest in the world and was designed to work on vibratory crusher installations in strip mining applications. Four models of this series are planned with 48 foot, 54 foot, 58 foot and 64 foot reach and the series is capable of handling 8,500 to 20,000 FT LB class breakers. A new hammer scaler was introduced in 2011 and is a cost-effective mobile underground scaling machine, which complements the existing BTI scaler product line and competes better with less expensive units for smaller heading and less demanding applications. BTI's new multi-purpose mine utility vehicle is a four wheel drive, hydraulic power train, 4 ton capacity supervisor vehicle/utility vehicle and is slated for manufacturing in the first quarter of 2013. A new turntable boom was developed with a new light duty swing post for the aggregate market. The design will include a turntable bearing allowing for more compact mounting, a greater range of motion and increased swing torque. BTI is also modifying its series of turntable booms for use in the waste transfer industry.
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 products pursuant to licenses from American Pulverizer (USA) and Mogensen (UK) and has an in-house brand, Hadfields. Osborn also offers the following equipment: mineral sizers, single and double-toggle jaw crushers; core crushers; rotary breakers; roll crushers; rolling ring crushers; mills; apron feeders; out-of-balance or exciter-driven screens and feeders; modular crushing and screening plants; and a full range of idlers.
Osborn has recently added a number of new products to its product offerings, including a 300 HP gyratory crusher for secondary applications, horizontal shaft impactors, a new out-of-balance exciter gearbox, a new range of double roll crushers, and numerous modernizations and updates to its existing product lines.
Astec Brazil is in the process of constructing a manufacturing facility in Brazil. To date, limited site preparation has been performed; however the 15,000 square-meter facility is scheduled to open in late 2013. Manufacturing operations are expected to commence in January 2014. The facility is being built on a 59,140 square-meter property located in Vespasiano, Minas Gerais, Brazil located in the southeastern part of the country. Manufacturing operations, sales, distribution and product support will be located within the new facility which is expected to employee approximately 120 employees at full capacity. The new facility will initially manufacture stationary jaw and cone crushers, vibrating feeders, screens and track-mounted crushing units, representing the brands of AMS, KPI-JCI, and Telsmith. The Company also plans to manufacture other product lines at the facility in the future, such as BTI products for underground mining. Once fully funded, Astec Brazil is expected to be 75% owned by the Company, with the other 25% being owned by MDE, a recognized leader in providing material handling solutions to the Brazilian market.
Prior to completion of the facility, Astec Brazil is operating as a distributor for other Astec Aggregate and Mining companies in the South American market.
Marketing
Aggregate processing and mining equipment is marketed by approximately 105 direct sales employees, 126 domestic independent distributors and 143 international independent distributors. The principal purchasers of aggregate processing equipment include highway and heavy equipment contractors, open mine operators, quarry operators and foreign and domestic governmental agencies.
Raw Materials
Raw materials used in the manufacture of products include carbon steel and various types of alloy steel, which are normally purchased from distributors. Raw materials for manufacturing are normally readily available. BTI purchases hydraulic breakers under a purchasing arrangement with a South Korean supplier. The Company believes the South Korean supplier has sufficient capacity to meet the Company's anticipated demand; however, alternative suppliers exist for these components should any supply disruptions occur.
Competition
The Aggregate and Mining Group faces strong competition in price, service and product performance. Aggregate and Mining equipment competitors include Metso, Cedarapids, Powerscreen and Finlay, Pegson, Jacques, subsidiaries of Terex Corporation, Deister, F. L. Smith, McLanahan, Sandvik, and other smaller manufacturers, both domestic and international.
Employees
At December 31, 2012, the Aggregate and Mining Group segment employed 1,599 individuals, of which 1,125 were engaged in manufacturing, 135 in engineering and engineering support functions and 341 in selling, general and administrative functions.
Telsmith has a labor agreement covering approximately 192 manufacturing employees which expires on September 17, 2013. None of Telsmith's other employees are covered by a collective bargaining agreement. Approximately 125 of Osborn's manufacturing employees are members of two national labor unions with labor agreements that expire on June 30, 2014.
Backlog
At December 31, 2012 and 2011, the backlog for the Aggregate and Mining Group was approximately $88,123,000 and $98,262,000, respectively. Management expects all current backlogs to be filled in 2013.
Mobile Asphalt Paving Group
The Mobile Asphalt Paving Group is comprised of Roadtec, Inc. ("Roadtec"), Carlson Paving Products, Inc. ("Carlson") and Astec Mobile Machinery GmbH (“Astec Mobile Machinery”), which began operations in the third quarter of 2011 in Hameln, Germany. Roadtec designs, engineers, manufactures and markets asphalt pavers, material transfer vehicles, milling machines and a line of asphalt reclaiming and soil stabilizing machinery. Carlson designs, engineers and manufactures asphalt paver screeds that attach to 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. Astec Mobile Machinery serves as a distributor for Roadtec’s products in Europe and also designs, manufactures and markets screeds primarily for road construction markets outside the United States as well as a small road widener attachment.
Products
Roadtec's Shuttle Buggy® is a mobile, self-propelled material transfer vehicle which allows continuous paving by separating truck unloading from the paving process while remixing the asphalt. A typical asphalt paver must stop paving to permit truck unloading of asphalt mix. By permitting continuous paving, the Shuttle Buggy® allows the asphalt paver to produce a smoother road surface, while reducing the time required to pave the road surface and reducing the number of haul trucks required. As a result of the pavement smoothness achieved with this machine, certain states now require the use of the Shuttle Buggy®. Studies using infrared technology have revealed problems caused by differential cooling of the hot-mix during hauling. The Shuttle Buggy® remixes the material to a uniform temperature and gradation, thus eliminating these problems.
Asphalt pavers are used in the application of hot-mix asphalt to the road surface. Roadtec pavers have been designed to minimize maintenance costs while exceeding road surface smoothness requirements. Roadtec also manufactures a paver model designed for use with the material transfer vehicle described above. This paver model is designed to carry and spray tack coat directly in front of the hot mix asphalt in a single process.
Roadtec manufactures milling machines designed to remove old asphalt from the road surface before new asphalt mix is applied. Roadtec's milling machine lines, for larger jobs, are manufactured with a simplified control system, wide conveyors, direct drives and a wide range of horsepower and cutting capabilities to provide versatility in product application. In addition to its larger half-lane and up highway class milling machines, Roadtec also manufactures a smaller, utility class machine for 2 ft. to 4ft. cutting widths. In addition, two new models of cold planers will be introduced in 2013: a dedicated one meter (40”) cutting width machine and a smaller 12” to 24” utility class cold plane, both mounted on wheels.
Roadtec will produce 3 soil stabilizers in 2013 at configurations of 440HP, 625HP and 755HP. These machines double as asphalt reclaiming machines for road rehabilitations in addition to their primary purpose of stabilizing soil sub-grades with additives to provide an improved base on which to pave. One additional model is being developed for production beginning in late 2013.
Carlson's patented screeds are part of the asphalt paving machine that places 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. A generator is also available to power tools or lights for night paving. Carlson offers options which allow extended paving widths and the addition of a curb on the road edge. Carlson’s commercial class 8 ft. paver fills the void between competitors commercial pavers, which tend to be lighter and less robust machines and Roadtec’s highway class paver line.
Astec Mobile Machinery is functioning primarily as a distributor for Roadtec products in Europe. Additionally, it designs and manufactures screeds and a small road widener attachment designed to meet the unique needs of the European market. An additional tamper bar screed is being developed for introduction into the European market in 2013.
Marketing
The Mobile Asphalt Paving Group equipment is marketed both domestically and internationally to highway and heavy equipment contractors, utility contractors and foreign and domestic governmental agencies. Mobile construction equipment and factory authorized machine rebuild services are marketed both directly and through dealers. This segment employs 39 direct sales staff, 74 domestic independent distributors and 17 international independent distributors including Astec-owned distributors in Australia and Germany.
Raw Materials
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 occasionally inventoried after purchase. Components used in the manufacturing process include engines, gearboxes, power transmissions and electronic systems.
Competition
The Mobile Asphalt Paving Group faces strong competition in price, service and performance. Paving equipment and screed competitors include Weiler, 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.
Employees
At December 31, 2012, the Mobile Asphalt Paving Group segment employed 509 individuals, of which 331 were engaged in manufacturing, 40 in engineering and engineering support functions and 128 in selling, general and administrative functions.
Backlog
The backlog for the Mobile Asphalt Paving Group segment at December 31, 2012 and 2011 was approximately $4,265,000 and $6,149,000, respectively. Management expects all current backlogs to be filled in 2012. This segment typically operates with a smaller backlog in relation to sales than the Company’s other segments as many customers expect immediate delivery due to the types of products being sold and the lead times typically available on competitors’ equipment sold through dealers.
Underground Group
During most of 2012 the Underground Group consisted of three manufacturing companies, Astec Underground, Inc. ("Astec Underground"), American Augers, Inc. ("American Augers") and GEFCO, Inc. (“GEFCO”) which was acquired by the Company in October 2011. During late 2012, the Company sold American Augers and the large trencher product line of Astec Underground. GEFCO designs, engineers and manufactures a complete line of drilling rigs for the oil and gas, geothermal and water well industries as well as its line of King Oil tools. Astec Underground continues to produce high pressure diesel powered pump trailers used for fracking and cleaning oil and gas wells, in addition to the four track surface miner. Astec Underground also serves as a contract manufacturer for other companies, both inside and outside the Astec family of companies.
Products
Astec Underground’s four track surface miner is a maneuverable 1,650-horsepower miner that can cut through rock ten feet wide and up to twenty-six inches deep in a single pass. When equipped with a GPS unit and an automatic grade and slope system, the surface miner allows road construction contractors to match the exact specifications of a survey plan.
In 2012, Astec Underground began manufacturing and selling a trailer mounted double fluid pumper for use in the hydraulic fracturing and the oil and gas extraction industries. The unit comes complete with engines, transmissions, gearboxes, application specific cooling packages, displacement tank, plumbing and all related controls.
GEFCO, which began operations in 1931, manufactures portable drilling rigs and related equipment for the water well, environmental, groundwater monitoring, construction, mining and shallow oil and gas exploration and production industries. GEFCO’s EarthPro® Geothermal Drill, introduced in 2009, features a heavy-duty mast with a dual rack and pinion drive system. Other features distinguishing this drill from its competitors are 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 operated by one person versus the usual three person operation.
During 2012, GEFCO’s manufacturing facilities were extensively upgraded and modernized to prepare GEFCO for its expected growth and to improve manufacturing efficiencies.
Marketing
Astec Underground typically distributes its pump trailers and surface miner products directly to the end users. GEFCO primarily markets its products domestically and internationally directly to the end users utilizing a combination of employee and independent sales agents. This segment employs a total of 22 direct sales staff.
Raw Materials
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 occasionally inventoried after purchase. Components used in the manufacturing process include engines, hydraulic pumps and motors, gearboxes, power transmissions and electronic systems.
Competition
The Underground Group segment faces strong competition in price, service and product performance and competes with both large companies with resources significantly greater than those of the Company and with various smaller manufacturers. Major competitors include Versa Drill, Schramm, Atlas Copco, National Oil Well, Blohm & Vos, Oil Country, BVM, NOV/Rolligon, Stewart & Stevenson and Dragon.
Employees
At December 31, 2012, the Underground Group segment employed 351 individuals, of which 277 were engaged in manufacturing, 23 in engineering and 51 in selling, general and administrative functions. Included in the totals are 190 employees of GEFCO. GEFCO has a collective bargaining agreement in place for approximately 80 manufacturing employees. The current agreement expires on April 20, 2013.
Backlog
The backlog for the Underground Group segment at December 31, 2012 and 2011 was approximately $13,904,000 and $21,342,000, respectively. The amount for 2011 has been adjusted to exclude the American Augers backlog for presentation purposes as the company was sold during 2012. Management expects all current backlogs to be filled in 2013.
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, 2012, these other operating units included Peterson Pacific Corp. (“Peterson”), Astec Australia Pty Ltd (“Astec Australia”), Astec Insurance Company and Astec Industries, Inc., the parent company. Peterson designs, engineers, manufactures and distributes whole-tree pulpwood chippers, biomass chippers, horizontal grinders and blower trucks. Astec Australia was formed in October 2008 and is the sole distributor of many of the company’s product lines in Australia and New Zealand. As a distributor, Astec Australia sells, installs, services and provides parts support for many of the products produced by the Company’s manufacturing companies. Astec Insurance Company is a captive insurance company.
Products
The primary markets served by Peterson are the wood grinding, chipping and blower truck markets. Peterson produces 3 models of whole-tree pulpwood chippers ranging from 765 to 1200 horsepower, 2 flail delimbers, 2 drum chipper models, 9 horizontal grinder models, 2 blower truck models and 2 self-contained blower trailers. A deck screen model is produced for Peterson by JCI. The horizontal grinders range from 475 to 1200 HP. Peterson has granted rights under a licensing agreement to Morbark, USA, whereby Morbark may produce and sell certain grinder equipment covered by a Peterson patent. Peterson introduced a new track chipper model in 2012.
Since its inception, Astec Australia has marketed relocatable and portable asphalt plants and components produced by Astec, Heatec and CEI, asphalt paving equipment and components produced by Roadtec and Carlson, and 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.
Marketing
Peterson markets its machines and spare parts both domestically and internationally in the wood grinding, chipping and blower truck industries. The disc chippers and debarkers primarily serve the pulp and paper industry. The drum chippers primarily serve the biomass energy market. The grinders serve the compost, mulch, biomass energy and construction and demolition recycling markets. Blower trucks and trailers are used primarily in landscape and erosion control markets. Domestic sales are accomplished through a combination of 16 independent distributors and 9 direct sales and support personnel. The international market is served with 10 independent distributors plus direct sales to customers in some countries. The principal customers of Peterson products are independent contractors who supply the markets listed above. Municipal governments also purchase waste grinders.
Astec Australia continues to enjoy strong partnerships with key large corporate customers, but it 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 provide additional exposure to infrastructure development as well as in the aggregate and mining sectors. The continuing gradual addition of other 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, the company also plans to pursue opportunities in other areas of the Pacific Rim and in Southeast Asia. Astec Australia opened a new office in Tullamarine, Australia in 2012, which gives the company representation on both the east and west coasts of Australia.
Raw Materials
Raw materials used in the manufacture of products include carbon steel and various types of alloy steel, which are normally purchased from distributors and other sources. Raw materials for manufacturing are normally readily available. Most steel is delivered on a "just-in-time" arrangement from the supplier to reduce inventory requirements at the manufacturing facilities, but some steel is occasionally inventoried after purchase. Purchased components used in the manufacturing process include engines, gearboxes, power transmissions and electronic control systems.
Competition
Peterson 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, along 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 importation issues as Astec Australia. The price impact of competition between European, American and Asian products is dependent primarily on the relationship between the US dollar and the Euro exchange rate as compared to the Australian dollar.
Employees
At December 31, 2012, the Other Business Units segment employed 285 individuals, of which 200 were employed by Peterson and 46 were employed by Astec Australia. Peterson has 111 employees engaged in manufacturing, 31 in engineering and 58 in selling and general and administrative functions. Astec Australia has 22 employees engaged in service and installation work and 24 in selling and general and administrative functions. The remaining 39 employees are engaged in selling and general and administrative functions at the parent company.
Backlog
The backlog for the Other Business Units segment, all of which is attributable to Peterson and Astec Australia, at December 31, 2012 and 2011 was approximately $17,671,000 and $27,090,000, respectively. Management expects all current backlogs to be filled in 2013.
Common to All Operating Segments
Although the Company has four reportable business segments, the following information applies to all operating segments of the Company.
Raw Materials
Steel is a major component in the Company’s equipment. Moderate steel price increases occurred during the fourth quarter of 2012. Steel demand appears relatively weak for the first quarter of 2013 with short mill lead times for most products. Management expects demand to strengthen ahead of the second quarter, and in balance with this trend, expects steel prices to increase moderately as mill lead times return to more seasonably normal levels. It is uncertain, however, if these trends will continue throughout the remainder of 2013. The Company continues to utilize forward-looking contracts coupled with advanced steel purchases to minimize the impact of the price increases. The Company will review the trends in steel prices as we progress toward the second half of 2013 and establish future contract pricing accordingly.
Government Regulations
The Company is subject to various laws and governmental regulations concerning environmental matters and employee safety and health in the United States and other countries. The Environmental Protection Agency, the Occupational Safety & Health Administration, other federal agencies and certain state agencies have the authority to promulgate regulations that have an effect on the Company’s operations. Many of these federal and state agencies may seek fines and penalties for violations of these laws and regulations. The Company has been able to operate under these laws and regulations without any 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 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.
Employees
At December 31, 2012, the Company and its subsidiaries employed 3,860 individuals, of which 2,658 were engaged in manufacturing, 373 in engineering, including support staff, and 829 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 and the GEFCO labor agreement described under the Employee subsection of the Underground Group, there are no other collective bargaining agreements applicable to the Company. The Company considers its employee relations to be good.
Manufacturing
The Company manufactures many of the component parts and related equipment for its products, while several large components of its products are purchased "ready-for-use". Such items include engines, axles, tires and hydraulics. In many cases, the Company designs, engineers and manufactures custom component parts and equipment to meet the particular needs of individual customers. Manufacturing operations during 2012 took place at 20 separate locations. The Company's manufacturing operations consist primarily of fabricating steel components and the assembly and testing of its products to ensure that the Company achieves quality control standards.
Seminars and Technical Bulletins
The Company periodically conducts technical and service seminars, which are primarily for dealer representatives, contractors, owners, employees and other users of equipment manufactured by the Company. In 2012, approximately 455 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 2012, seven service training seminars were held at the Roadtec facility for approximately 710 customer representatives, and four remote seminars were conducted at other locations for approximately 200 additional customer personnel. Telsmith conducted three technical seminars for approximately 116 customer and dealer representatives during 2012 at its facility in Mequon, Wisconsin. KPI, JCI and AMS jointly conduct NDC (National Dealers Conference), an annual dealer event. The event offers the entire dealer network a preview of future products, marketing and promotional programs to help dealers operate successful businesses. In addition to this event, the companies also provide factory customer and dealer training and on-site local, regional and national sales training programs throughout the year.
In addition to seminars, the Company publishes a number of technical bulletins and information bulletins detailing various technological and business issues relating to the asphalt industry.
Patents and Trademarks
The Company seeks to obtain patents to protect the novel features of its products and processes. The Company's subsidiaries hold 83 United States patents and 40 foreign patents. There are 73 United States and foreign patent applications pending.
The Company and its subsidiaries have 82 trademarks registered in the United States, including logos for Astec, Astec Dillman, Astec Underground, Carlson Paving, CEI, Gefco, Heatec, JCI, Peterson Pacific, Roadtec, and Telsmith, and the names ASTEC, CARLSON, HEATEC, JCI, KOLBERG PIONEER, PETERSON, ROADTEC and TELSMITH, as well as a number of other product names. The Company also has 53 trademarks registered in foreign jurisdictions, including Australia, Brazil, Canada, China, France, Germany, Great Britain, India, Italy, Mexico, South Africa, South Korea, Thailand, Vietnam and the European Union. The Company and its subsidiaries have 47 United States and foreign trademark registration applications pending.
Engineering and Product Development
The Company dedicates substantial resources to engineering and product development. At December 31, 2012, the Company and its subsidiaries had 373 full-time individuals employed in engineering and design capacities.
Seasonality and Backlog
Revenues for recent years, adjusted for acquisitions, have been strongest during the first half of the year, with the second half of the year consistently being weaker. We expect future operations in the near term to be typical of this historical trend.
As of December 31, 2012, the Company had a backlog for delivery of products at certain dates in the future of approximately $263,791,000. At December 31, 2011, the total backlog was approximately $268,618,000, as adjusted to exclude the American Augers backlog. The Company's contracts reflected in the backlog are not, by their terms, subject to termination. Management believes the Company is in substantial compliance with all manufacturing and delivery timetables.
Competition
Each business segment operates in domestic markets that are highly competitive regarding price, service and product quality. While specific competitors are named within each business segment discussion above, imports do not generally constitute significant competition for the Company in the United States, except for milling machines and track mounted crushers. In international sales efforts, however, the Company many times competes with foreign manufacturers that may have a local presence in the market the Company is attempting to penetrate.
In addition, asphalt and concrete are generally considered competitive products as a surface choice for new roads and highways. A portion of the interstate highway system is paved in concrete, but over 90% of all surfaced roads in the United States are paved with asphalt. Although concrete is used for some new road surfaces, asphalt is used for most resurfacing.
Available Information
The Company’s internet website can be found at www.astecindustries.com. We make available, free of charge on or through our internet website, access to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is filed with, or furnished to, the Securities and Exchange Commission. Information contained in our website is not part of, and is not incorporated into, this Annual Report on Form 10-K.
Item 1A.
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:
·
declining economy domestically and internationally;
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rising gas and fuel oil prices;
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rising interest rates;
·
inclement weather; and
Downturns in the general economy and restrictions in the credit markets may negatively impact our earnings, cash flows and/or financial position and access to financing sources by the Company and our customers.
Worldwide economic conditions and the international credit markets have significantly deteriorated in recent years and 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 deterioration of our creditors' financial condition, could adversely affect the Company's ability to draw on its revolving credit facility. The Company’s current credit facility expires in April 2017, and the restrictions in the credit markets could make it more difficult or expensive for us to replace our current credit facility, enter into a new credit facility or obtain additional financing.
A decrease or delay in government funding of highway construction and maintenance may cause our revenues and profits to decrease.
Many of our customers depend on government funding of highway construction and maintenance and other infrastructure projects. Any decrease or delay in government funding of highway construction and maintenance and other infrastructure projects could cause our net sales and profits to decrease. Historically, federal government funding of infrastructure projects has typically been accomplished through bills that establish funding over a multi-year period, such as the Safe, Accountable, Flexible and Efficient Transportation Equity Act - A Legacy for Users (“SAFETEA-LU”), which provided $286.5 billion to fund federal transit projects from 2004 to 2009. SAFETEA-LU funding expired on September 30, 2009, and federal transportation funding has operated on a number of shorter term appropriations since that date. The most recent funding legislation, commonly referred to as Map-21, was passed in July 2012 and funds federal transportation expenditures through September 30, 2014.
With the current political environment in Washington, the level of funding for federal highway projects is uncertain. Although continued funding is expected, it may be at lower levels than in the past, and Congress may not enact long-term funding acts in the near future. In addition, Congress could pass legislation in future sessions that would allow for the diversion of previously appropriated highway funds for other national purposes, or it could restrict funding of infrastructure projects unless states comply with certain federal policies.
The cyclical nature of our industry and the customization of the equipment we sell may cause adverse fluctuations to our revenues and operating results.
We sell equipment primarily to contractors whose demand for equipment depends greatly upon the volume of road or utility construction projects underway or to be scheduled by both government and private entities. The volume and frequency of road and utility construction projects 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 many of our products. This would likely cause our revenues and profits to decrease. Rising gasoline, diesel fuel and liquid asphalt prices will also adversely impact the operating and raw material costs of our contractor and aggregate producer customers, and if such customers do not properly adjust their pricing, they could experience reduced profits resulting in possible delays in purchasing capital equipment.
Steel is a major component in the Company’s equipment. Steel prices fluctuate routinely and are expected to increase during 2013. Our reliance on third-party suppliers for steel and other raw materials exposes us to volatility in the prices and availability of these materials. Price increases or a decrease in the availability of these raw materials could increase our operating costs and adversely affect our financial results.
Acquisitions that we have made in the past and future acquisitions involve risks that could adversely affect our future financial results.
We have completed several acquisitions in the past, including the acquisition of the GEFCO division of Blue Tee Corp. and the businesses now operating as Astec Mobile Machinery GmbH in 2011. We may acquire additional businesses in the future. We may be unable to achieve the benefits expected to be realized from our acquisitions. In addition, we may incur additional costs and our management's attention may be diverted because of unforeseen expenses, difficulties, complications, delays and other risks inherent in acquiring businesses, including the following:
·
acquisitions may divert management's attention from our existing operations;
·
we may have difficulty in competing successfully for available acquisition candidates, completing future acquisitions or accurately estimating the financial effect of any businesses we acquire;
·
we may not be able to retain key employees necessary to continue the operations of the acquired business;
·
we may choose to acquire a company that is less profitable or has lower profit margins than our company;
·
we may incur domestic or international economic declines that impact our acquired companies.
Competition could reduce revenue from our products and services and cause us to lose market share.
We currently face strong competition in product performance, price and service. Some of our domestic and international competitors have greater financial, product development and marketing resources than the Company has. 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 Chief Executive Officer, 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 2012, international sales represented approximately 39.3% of our total sales as compared to 41.3% in 2011. 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:
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the burden of complying with a wide variety of foreign laws and regulations;
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political and economic instability of governments;
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fluctuating strengths or weakness of the dollar, which can impact net sales or the cost of purchased products.
We may be unsuccessful in complying with the financial ratio covenants or other provisions of our credit agreement.
As of December 31, 2012, we were in compliance with the financial covenants contained in our credit agreement with Wells Fargo Bank, N.A.. However, in the future we may be unable to comply with the financial covenants in our credit facility or to obtain waivers with respect to such financial covenants. If such violations occur, the Company’s creditors could elect to pursue their contractual remedies under the credit facility, including requiring immediate repayment in full of all amounts then outstanding. As of December 31, 2012, the Company had no outstanding borrowings but did have $13,113,000 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:
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delays in, or uneven timing in, the delivery of customer orders;
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the introduction of new products by us or our competitors;
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reduced demand due to adverse weather conditions.
Period-to-period comparisons of such items should not be relied on as indications of future performance.
We may face product liability claims or other liabilities due to the nature of our business. If we are unable to obtain or maintain insurance or if our insurance does not cover liabilities, we may incur significant costs which could reduce our profitability.
We manufacture heavy machinery, which is used by our customers at excavation and construction sites and on high-traffic roads. Any defect in or improper operation of our equipment can result in personal injury and death, and damage to or destruction of property, any of which could cause product liability claims to be filed against us. The amount and scope of our insurance coverage may not be adequate to cover all losses or liabilities we may incur in the event of a product liability claim. We may not be able to maintain insurance of the types or at the levels we deem necessary or adequate or at rates we consider reasonable. Any liabilities not covered by insurance could reduce our profitability or have an adverse effect on our financial condition.
If we are unable to protect our proprietary technology from infringement or if our technology infringes technology owned by others, then the demand for our products may decrease or we may be forced to modify our products, which could increase our costs.
We hold numerous patents covering technology and applications related to many of our products and systems as well as numerous trademarks and trade names registered with the U.S. Patent and Trademark Office and in foreign countries. Our existing or future patents or trademarks may not adequately protect us against infringements, and pending patent or trademark applications may not result in issued patents or trademarks. Our patents, registered trademarks and patent applications, if any, may not be upheld if challenged, and competitors may develop similar or superior methods or products outside the protection of our patents. This could reduce demand for our products and materially decrease our revenues. If our products are deemed to infringe upon the patents or proprietary rights of others, we could be required to modify the design of our products, change the name of our products or obtain a license for the use of some of the technologies used in our products. We may be unable to do any of the foregoing in a timely manner, upon acceptable terms and conditions, or at all, and the failure to do so could cause us to incur additional costs or lose revenues.
If we become subject to increased governmental regulation, we may incur significant costs.
Our hot-mix asphalt plants contain air pollution control equipment and several of our other products contain engines that must comply with performance standards promulgated by the Environmental Protection Agency. These performance standards may increase in the future. Changes in these requirements could cause us to undertake costly measures to redesign or modify our equipment or otherwise adversely affect the manufacturing processes of our products. Such changes could have a material adverse effect on our operating results.
Also, due to the size and weight of some of the equipment that we manufacture, we often are required to comply with conflicting state regulations on the maximum weight transportable on highways and roads. In addition, some states regulate the operation of our component equipment, including asphalt mixing plants and soil remediation equipment, and most states regulate the accuracy of weights and measures, which affect some of the control systems we manufacture. We may incur material costs or liabilities in connection with the regulatory requirements applicable to our business.
As an innovative leader in the industries in which we operate, we occasionally undertake the engineering, design, manufacturing and construction of equipment systems that are new to the market. Estimating the cost of such innovative equipment can be difficult and could result in our realization of significantly reduced or negative margins on such projects.
In the past, we have experienced negative margins on certain large, specialized aggregate systems projects. These large contracts included both existing and innovative equipment designs, on-site construction and minimum production levels. Since it can be difficult to achieve the expected production results during the project design phase, field testing and redesign may be required during project installation, resulting in added cost. In addition, due to any number of unforeseen circumstances, which can include adverse weather conditions, projects can incur extended construction and testing delays which can cause significant cost overruns. We may not be able to sufficiently predict the extent of such unforeseen cost overruns and may experience significant losses on specialized projects. Additionally, the Company typically incurs substantial research and development costs each year and has historically received significant research and development tax credits due to these expenditures. While these tax credits have been approved through 2013, they may not be approved for future years.
Our Articles of Incorporation, Bylaws and Rights Agreement and Tennessee law may inhibit a takeover, which could delay or prevent a transaction in which shareholders might receive a premium over market price for their shares.
Our charter and bylaws and Tennessee law contain provisions that may delay, deter or inhibit a future acquisition or an attempt to obtain control of us. This could occur even if our shareholders are offered an attractive value for their shares or if a substantial number or even a majority of our shareholders believe the takeover is in their best interest. These provisions are intended to encourage any person interested in acquiring us or obtaining control of us to negotiate with and obtain the approval of our Board of Directors in connection with the transaction. Provisions that could delay, deter or inhibit a future acquisition or an attempt to obtain control of us include the following:
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requiring a two-thirds vote of the total number of shares issued and outstanding to remove directors other than for cause;
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limiting the right of shareholders to call a special meeting of shareholders;
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being governed by the Tennessee Control Share Acquisition Act.
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.
Item 1B. Unresolved Staff Comments
None.
Item 2.
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. Additionally, management considers the terms under which it leases facilities to be reasonable.
Item 3.
Item 3. Legal Proceedings
The Company is currently a party to various claims and legal proceedings that have arisen in the ordinary course of business. If management believes that a loss arising from such claims and legal proceedings is probable and can reasonably be estimated, the Company records the amount of the loss (excluding estimated legal costs), or the minimum estimated liability when the loss is estimated using a range and no point within the range is more probable than another. As management becomes aware of additional information concerning such contingencies, any potential liability related to these matters is assessed and the estimates are revised, if necessary. If management believes that a material loss arising from such claims and legal proceedings is either (i) probable but cannot be reasonably estimated or (ii) reasonably possible but not probable, the Company does not record the amount of the loss, but does make specific disclosure of such matter. Based upon currently available information and with the advice of counsel, management believes that the ultimate outcome of its current claims and legal proceedings, individually and in the aggregate, will not have a material adverse effect on the Company's financial position, cash flows or results of operations. However, claims and legal proceedings are subject to inherent uncertainties and rulings unfavorable to the Company could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse effect on the Company's financial position, cash flows or results of operations.
During 2004 the Company received notice from the Environmental Protection Agency that it may be responsible for a portion of the costs incurred in connection with an environmental cleanup in Illinois. The discharge of hazardous materials and associated cleanup relate to activities occurring prior to the Company’s acquisition of Barber Greene in 1986. The Company believes that over 300 other parties have received similar notice. At this time, the Company is unable to predict whether the EPA will seek to hold the Company liable for a portion of the cleanup costs or the amount of any such liability.
Item 4.
Item 4. Mine Safety Disclosures
None.
Executive Officers
The name, title, ages and business experience of the executive officers of the Company are listed below.
J. Don Brock, Ph.D., served as President of the Company since its incorporation in 1972 until August 2012 and assumed the additional position of Chairman of the Board in 1975. Coincident with the promotion of W. Norman Smith to President in August 2012, Dr. Brock resigned from his position as President; however he continues to serve as the Company’s Chief Executive Officer. 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, Group VP-Asphalt and President of Astec, Inc., and Dr. Brock and Thomas R. Campbell, Group Vice President - Mobile Asphalt Paving and Underground, are first cousins. He is 74.
David C. Silvious, a Certified Public Accountant, was appointed Vice President, Chief Financial Officer and Treasurer of the Company in August 2011. He previously served as Corporate Controller of the Company since 2005 and as Corporate Financial Analyst from 1999 to 2005. Mr. Silvious also serves as Treasurer of each of the Company’s U.S. operating subsidiaries and Vice President of Astec Insurance Company. 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 45.
W. Norman Smith was appointed President and Chief Operating Officer of the Company in August 2012 after having served as Group Vice President-Asphalt since 1998. Previously, he 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 73.
Thomas R. Campbell has served as Group Vice President-Mobile Asphalt Paving & Underground since 2001 and also assumed the role of Managing Director of Astec Mobile Machinery GmbH upon its inception in 2011. He also currently serves as President of Astec Underground. He served as President of Roadtec, Inc. from 1988 to 2004. He has served as President of Carlson Paving Products and American Augers since 2001 to 2006. He served as President of Astec Underground, Inc. from 2001 to 2005. From 1981 to 1988, he served as Operations Manager of Roadtec. Mr. Campbell and J. Don Brock, Chief Executive Officer of the Company, are first cousins. He is 63.
Richard A. Patek has served as Group Vice President-Aggregate & Mining Group since 2008 and as President of Telsmith, Inc. from May 2001 until February 13, 2013. He served as President of Kolberg-Pioneer, Inc. from 1997 until 2001. From 1995 to 1997, he served as Director of Materials of Telsmith, Inc. From 1992 to 1995, Mr. Patek was Director of Materials and Manufacturing of the former Milwaukee plant location. From 1978 to 1992, he held various manufacturing management positions at Telsmith. Mr. Patek also serves as a Corporate Board Member for the Milwaukee School of Engineering. He was elected 1st Chair to Associated Equipment Manufacturers (AEM) for calendar year 2013. Mr. Patek is a graduate of the Milwaukee School of Engineering. He is 56.
Joseph P. Vig has served as Group Vice President of the AggRecon Group since 2008 and as President of Kolberg-Pioneer, Inc., since 2001. From 1994 until 2001, he served as Engineering Manager of Kolberg-Pioneer, Inc. From 1978 to 1993 he was Director of Engineering with Morgen Mfg. Co., and then Engineering Manager of Essick-Mayco in 1993-94. Mr. Vig 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 63.
Stephen C. Anderson was appointed Vice President of Administration in August 2011, Secretary of the Company in January 2007 and 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 1999 to 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 and a MBA from the University of Tennessee at Chattanooga and is a graduate of the Stonier Graduate School of Banking. He is 49.
Robin A. Leffew was appointed Corporate Controller in August 2011 and also serves as Secretary of Astec Insurance Company. She previously served as the Company’s Director of Internal Audit since 2005 and Controller of Astec, Inc. from 1990 to 2005. Prior to 1990, she served as Corporate Financial Analyst for the Company since 1987. Mrs. Leffew earned her degree in Finance from Tennessee Technological University. She is 51.
Richard J. Dorris has served as Group Vice President-Energy since August 2012 and as President of Heatec, Inc. since 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 52.
Frank D. Cargould was appointed President of Breaker Technology Ltd and Breaker Technology, Inc. in 1999. The Breaker Technology companies were formed in 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 70.
Jeffery J. Elliott was appointed President of Johnson Crushers, Inc. in 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 59.
Timothy Gonigam was appointed President of Astec Mobile Screens, Inc., in 2000. From 1995 to 2000, Mr. Gonigam held the position of Sales Manager of Astec Mobile Screens, Inc. He is 50.
Tom Kruger was appointed Managing Director of Osborn Engineered Products SA (Pty) Ltd in 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 55.
Jeffrey L. Richmond, Sr. was appointed President of Roadtec, Inc. in 2004. From 1996 until 2004, he held the positions of Sales Manager, Vice President of Sales and Marketing and Vice President/General Manager of Roadtec, Inc. He is 57.
Michael A. Bremmer was appointed President of CEI Enterprises, Inc. in 2006. From 2003 until 2006, he held the position of Vice President and General Manager of CEI Enterprises, Inc. From 2001 until 2003, he held the position of Director of Engineering of CEI Enterprises, Inc. He is 57.
Benjamin G. Brock has served as Group Vice President-Asphalt since August 2012 and as President of Astec, Inc. since 2006. From 2003 until 2006 he held the position of Vice President - Sales of Astec, Inc. and Vice President/General Manager of CEI Enterprises, Inc. from 1997 until 2002. Mr. Brock's career with Astec began as a salesman in 1993. Mr. Brock has a B.S. in Economics with a minor in Marketing from Clemson University. Mr. Brock is the son of J. Don Brock, Chief Executive Officer of the Company. He is 42.
Chris Colwell was appointed President of Carlson Paving Products in May 2011. Prior to joining Astec, Mr. Colwell held the position of Regional Operations Manager for Alta Equipment Company from 2010 to 2011. From 2008 to 2010 he served as Vice President-Asphalt Division for Wolverine Tractor and Equipment Company. From 1999 to 2008 Mr. Colwell served as President of Colwell Equipment Company Incorporated where he previously served in various positions since 1985 including General Manager, Director of Management Information Systems, Assistant Controller and Product Support Manager. Mr. Colwell is 47.
Aaron Harmon was appointed President of GEFCO, Inc. upon its acquisition by the Company in October 2011. He previously served as President of the GEFCO Division of Blue Tee Corp. since 2005. Mr. Harmon joined GEFCO in 1995 and has served in several capacities within the organization including V. P. of North American Sales and Operations Manager. Mr. Harmon holds a Bachelors of Science degree in Business Administration from Phillips University. Mr. Harmon is 40.
Matthew B. Haven was promoted to President of Telsmith, Inc. on February 13, 2013 and served as Executive Vice President and General Manager of Telsmith from January 2012 to February 2013 and as its Vice President from 2008 to 2011. Mr. Haven joined Telsmith in 1997 and served as Chief Engineer, Research and Development and Director of Engineering prior to his appointment as Vice President. Prior to joining Telsmith, Mr. Haven served as Chief Engineer, Product Design and Development of Cedarapids, Inc. Mr. Haven is a 1984 graduate of the University of Northern Iowa. He is 51.
Larry R. Cumming was appointed President of Peterson Pacific Corp. in 2007. He joined the company in 2003 and served as 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 64.
David H. Smale was appointed General Manager of Astec Australia Pty Ltd in 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 57.
PART II
Item 5.
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 paid a special, one-time cash dividend of $1.00 per share on its Common Stock in the fourth quarter of 2012. The Company has never paid any other cash dividends.
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 15, 2013 there were approximately 300 record holders of the Company's Common Stock.
Item 6.
Item 6. Selected Financial Data
Selected financial data appears in Appendix "A" of this Report.
Item 7.
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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Information regarding the Company’s market risk appears in Appendix "A" of this Report under the heading "Market Risk and Risk Management Policies."
Item 8.
Item 8. Financial Statements and Supplementary Data
Financial statements and supplementary financial information appear in Appendix "A" of this Report.
Item 9.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
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, 2012, 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 appears in Appendix A of this Report.
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, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Information regarding the Company's directors, 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 Proxy Statement to be delivered to the shareholders of the Company in connection with the Annual Meeting of Shareholders to be held on April 25, 2013, 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 2013 Proxy Statement, which is incorporated herein by reference. Information with respect to our executive officers is set forth in Part I of this Report under the caption “Executive Officers.”
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.
Item 11. Executive Compensation
Information included under the captions "Compensation Discussion and Analysis", "Executive Compensation", “Director Compensation”, “Corporate Governance-Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” in the Company's 2013 Proxy Statement is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Equity Compensation Plan Information
The following table provides information as of December 31, 2012 regarding compensation plans under which the Company’s equity securities are authorized for issuance.
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.
Information included under the caption "Stock Ownership of Certain Beneficial Owners” in the Company's 2013 Proxy Statement is incorporated herein by reference.
Item 13.
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 2013 Proxy Statement is incorporated herein by reference.
Item 14.
Item 14. Principal Accounting Fees and Services
Information included under the caption “Audit Matters” in the Company’s 2013 Proxy Statement is incorporated herein by reference.
PART IV
Item 15.
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) 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.
(a)(3) The following Exhibits* are incorporated by reference into or are filed with this Report:
The Exhibits are numbered in accordance with Item 601 of Regulation S-K. Inapplicable Exhibits are not included in the list.
APPENDIX "A"
to
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.
A-1
FINANCIAL INFORMATION
A-2
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except as noted*)
2011 Gross profit includes charges of $2,162,000 related to sale of utility product line assets in the Underground Group.
2011 Selling, general and administrative expenses include an impairment charge of $2,304,000 related to aviation equipment classified as held for sale during 2011.
2009 includes impairment charges, primarily goodwill, of $17,036,000, or $15,022,000 after tax.
During 2008, the Company sold certain equity securities for a pre-tax gain of $6,195,000.
A-3
SUPPLEMENTARY FINANCIAL DATA
(in thousands, except as noted*)
The Company sold American Augers, Inc. on November 30, 2012. The results of operations and the gain on the sale of American Augers are presented as discontinued operations for all periods presented. As a result, the quarterly financial data varies from the amounts previously reported on the Form 10-Qs filed for such quarters. See Note 21, Discontinued Operations, for additional information regarding the sale of American Augers.
Impairment charges of $2,170,000 in the second quarter of 2011 and $134,000 in the fourth quarter of 2011 were included in selling and general administrative expense related to aviation equipment classified as available for sale.
Gross profit in the fourth quarter of 2011 includes charges of $2,162,000 related to sale of the utility product line in the Underground Group.
The Company’s common stock is traded in the Nasdaq National Market under the symbol ASTE. Prices shown are the high and low bid prices as announced by the Nasdaq National Market. The Company paid a special one-time dividend of $1.00 per share on its common stock in 2012. As determined by the proxy search on the record date, the number of holders of record is approximately 300.
A-4
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-21.
Overview
Astec Industries, Inc. (the “Company”) is a leading manufacturer and seller of equipment for road building, aggregate processing, geothermal, water and oil and gas drilling and wood processing. The Company’s businesses:
• design, engineer, manufacture and market equipment that is used in each phase of road building, including quarrying and crushing the aggregate to producing asphalt or concrete, recycling old asphalt or concrete and applying the asphalt;
• design, engineer, manufacture and market additional equipment and components, including geothermal drilling, oil and natural gas drilling, industrial heat transfer, wood chipping and grinding, wood pellet processing; and
• manufacture and sell replacement parts for equipment in each of its product lines.
The Company has 15 manufacturing companies, 14 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, concrete mixing plants and wood pellet processing equipment. The business units in the Aggregate and Mining Group design, manufacture and market equipment for the aggregate, metallic mining and recycling industries. The business units in the Mobile Asphalt Paving Group design, manufacture and market asphalt pavers, material transfer vehicles, milling machines, stabilizers and screeds. The business units in the Underground Group design, manufacture and market portable drilling rigs and related equipment for the water well, environmental, groundwater monitoring, construction, geothermal, mining and shallow oil and gas exploration and production industries. 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 markets and installs equipment, services and provides parts for many of the products produced by the Company’s manufacturing companies. Astec Insurance is a captive insurance company.
The Company’s financial performance is affected by a number of factors, including the cyclical nature and varying conditions of the markets it serves. Demand in these markets fluctuates in response to overall economic conditions and is particularly sensitive to the amount of public sector spending on infrastructure development, privately funded infrastructure development, changes in the price of crude oil, which affects the cost of fuel and liquid asphalt, and changes in the price of steel.
In August 2005, President Bush signed into law the Safe, Accountable, Flexible and Efficient Transportation Equity Act - A Legacy for Users (“SAFETEA-LU”), which authorized appropriation of $286.5 billion in guaranteed federal funding for road, highway and bridge construction, repair and improvement of the federal highways and other transit projects for federal fiscal years October 1, 2004 through September 30, 2009. The Company believes that federal highway funding such as SAFETEA-LU influences the purchasing decisions of the Company’s customers who are more comfortable making purchasing decisions with such legislation in place. Federal funding provides for approximately 25% of all highway, street, roadway and parking construction in the United States.
SAFETEA-LU funding expired on September 30, 2009 and federal transportation funding operated on short-term appropriations through March 17, 2010. On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment (HIRE) Act. This law extended authorization of the surface transportation programs previously funded under SAFETEA-LU through December 31, 2010 at 2009 levels. In addition, the HIRE Act authorized a one-time transfer of $19.5 billion from the general fund to the highway trust fund related to previously foregone interest payments. It also shifted the cost of fuel tax exemptions for state and local governments from the highway trust fund to the general fund, which is estimated to generate an anticipated $1.5 billion annually, and allows the highway trust fund to retain interest earned on future unexpended balances. The U.S. Congress funded federal transportation expenditures for the fiscal year ending September 30, 2011 at the 2010 level of $41.1 billion, and it approved short-term funding of federal transportation expenditures for the six-month period ending on March 31, 2012 at the same levels.
A-5
In July 2012, President Obama signed into law the “Moving Ahead for Progress in the 21st Century Act” (“Map-21”), which authorizes $105 billion of federal spending on highway and public transportation programs through fiscal year 2014. Map-21 is the first long-term highway legislation enacted since 2005 and continues federal highway and transit funding at 2012 levels with modest increases for inflation. Although the Company believes Map-21 will help stabilize the federal highway program in the near term, the Company believes a longer 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 projects. The level of future federal highway construction is uncertain and any future funding may be at lower levels than in the past.
Several other countries have implemented infrastructure spending programs to stimulate their economies. The Company believes these spending programs have had 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 20 years, would likely need to be increased along with other measures to generate the funds needed.
In addition to public sector funding, the economies in the markets the Company serves, the price of oil and its impact on customers’ purchasing decisions and the price of steel may each affect the Company’s financial performance. Economic downturns generally result in decreased purchasing by the Company’s customers, which, in turn, causes reductions in sales and increased pricing pressure on the Company’s products. Rising interest rates also typically negatively impact customers’ attitudes toward purchasing equipment. The Federal Reserve has maintained historically low interest rates in response to the current economic downturn; however interest rates may increase in 2013.
Significant portions of the Company’s revenues relate to the sale of equipment involved in the production, handling, recycling or installation of asphalt mix. Liquid asphalt is a by-product of oil production. An increase in the price of oil increases the cost of asphalt, which is likely to decrease demand for asphalt and therefore decrease demand for certain Company products. While increasing oil prices may have a negative financial impact on many of the Company’s customers, the Company’s equipment can use a significant amount of recycled asphalt pavement, thereby mitigating the effect of increased oil prices on 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 2012. The Company expects oil prices to continue to fluctuate in 2013. Minor fluctuations in oil prices should not have a significant impact on customers’ buying decisions. However, political uncertainty in oil producing countries, interruptions in oil production due to disasters, whether natural or man-made, or other economic factors could significantly impact oil prices which could negatively impact demand for the Company’s products.
Contrary to the negative impact of higher oil prices on many of the Company’s products as discussed above, sales of several of the Company’s products, including products manufactured by the Underground Group, which are used to drill for oil and natural gas, would benefit from higher oil and natural gas prices, to the extent that such higher prices lead to further development of oil and natural gas production. The Company believes further development of domestic oil and natural gas production capabilities is needed and would positively impact the domestic economy and the Company’s business.
Steel is a major component in the Company’s equipment. Moderate steel price increases occurred during the fourth quarter of 2012. Steel demand appears relatively weak for the first quarter of 2013 with short mill lead times for most products. Management expects demand to strengthen ahead of the second quarter, and as a result of this trend, expects steel prices to increase moderately as mill lead times return to more seasonably normal levels. It is uncertain, however, if these trends will continue throughout the remainder of 2013. The Company continues to utilize forward-looking contracts coupled with advanced steel purchases to minimize the impact of increased steel prices. The Company will continue to review the trends in steel prices in future months and establish future contract pricing accordingly.
A-6
In addition to the factors stated above, many of the Company’s markets are highly competitive, and its products compete worldwide with a number of other manufacturers and dealers that produce and sell similar products. During 2010, 2011 and a portion of 2012 a weak dollar, combined with improving economic conditions in certain foreign economies, had a positive impact on the Company’s international sales. The Company expects the dollar to remain weak in the near-term relative to most foreign currencies; however, increasing domestic interest rates or weakening economic conditions abroad could cause the dollar to strengthen, which could negatively impact the Company’s international sales.
In the United States and internationally, the Company’s equipment is marketed directly to customers as well as through dealers. During 2012, 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 2013.
The Company is operated on a decentralized basis and there is a complete management team for each operating subsidiary. Finance, insurance, legal, shareholder relations, corporate accounting and other corporate matters are primarily handled at the corporate level (i.e., Astec Industries, Inc., the parent company). The engineering, design, sales, manufacturing and basic accounting functions are all handled at each individual subsidiary. Standard accounting procedures are prescribed and followed in all reporting.
The non-union employees of each subsidiary have the opportunity to earn profit-sharing incentives in the aggregate of up to 10% of each subsidiary’s after-tax profit if such subsidiary meets established goals. These goals are based on the subsidiary’s return on capital employed, cash flow on capital employed and safety. The profit-sharing incentives for subsidiary presidents are normally paid from a separate corporate pool.
Results of Operations: 2012 vs. 2011
The following discussion and analysis refers to amounts as presented in the accompanying consolidated statements of income. The Company sold substantially all the assets and liabilities of American Augers, Inc. on November 30, 2012. The results of operations attributable to American Augers and the related gain on its sale (net of tax) are presented as discontinued operations and are excluded from all other categories on the consolidated statements of income. In our comparison between 2012 and 2011, statement of income amounts for 2011 have been restated to exclude the operating results of American Augers.
Net Sales
Net sales increased $27,632,000 or 3.0%, from $908,641,000 in 2011 to $936,273,000 in 2012. 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 as well as equipment for the aggregate, mining, quarrying and recycle markets and the oil and gas and geothermal industries. The overall increase in sales for 2012 compared to 2011 reflects the strengthening economic conditions in domestic markets.
Domestic sales for 2012 were $572,522,000 or 61.1% of consolidated net sales compared to $543,527,000 or 59.8% of consolidated net sales for 2011, an increase of $28,995,000 or 5.3%. The overall increase in domestic sales for 2012 compared to 2011 reflects the strengthening economic conditions for the Company’s products in the domestic market.
International sales for 2012 were $363,751,000 or 38.9% of consolidated net sales compared to $365,114,000 or 40.2% of consolidated net sales for 2011, a decrease of $1,363,000 or 0.4%. International sales remained relatively flat but still strong as a percentage of 2012 total sales due to strong economic conditions in the international markets the Company serves as well as the continued efforts of the Company to grow its international business.
Parts sales as a percentage of consolidated net sales increased 210 basis points to 26.3% in 2012 from 24.2% in 2011. In dollars, parts sales increased 11.8% to $245,851,000 in 2012 from $219,963,000 in 2011.
A-7
Gross Profit
Consolidated gross profit as a percentage of sales decreased 110 basis points to 22.1% in 2012 from 23.2% in 2011. The decrease in gross margin is partially due to the costs associated with the redesign of certain of our products as a result of the switch to Tier 4 engines mandated by the federal government as well as increased production costs associated with new products recently introduced to the market along with underutilization of plant capacity at certain of our facilities. Sales price increases lagging behind raw material price increases on the aged backlog of equipment orders and competitive pricing pressures also contributed to the decrease in gross profit as a percent of sales.
Selling, General and Administrative Expense
Selling, general and administrative expenses for 2012 were $136,323,000 or 14.6% of net sales, compared to $132,371,000 or 14.6% of net sales for 2011, an increase of $3,952,000 or 3.0%. The increase was primarily due to an increase in payroll and related expenses of $6,638,000, an increase in travel expenses of $1,501,000, and an increase in health insurance of $4,125,000. These expenses were offset by a decrease in expenses related to the triennial Con-Expo Show which took place in 2011 of $3,159,000, profit sharing expense of $1,911,000, the write down of aviation assets held for sale of $2,304,000 (2011 only) and stock based compensation expense of $1,548,000.
Research and Development
Research and development expenses decreased $244,000 or 1.2% to $20,520,000 in 2012 from $20,764,000 in 2011. During 2012 and 2011 the Company invested heavily in research and development across all segments for numerous new equipment offerings, including the continued development of a wood pellet processing plant.
Interest Expense
Interest expense in 2012 increased $149,000, or 78.4%, to $339,000 from $190,000 in 2011. The increase in interest expense in 2012 compared to 2011 related primarily to the increase in bank fees related to the Company’s new line of credit agreement with Wells Fargo.
Interest Income
Interest income increased $262,000 or 29.7% to $1,145,000 in 2012 from $883,000 in 2011. The increase in interest income resulted from an increase in amounts invested in 2012 compared to 2011 and interest earned on notes receivable from customers.
Other Income (Expense), Net
Other income (expense), net was $1,783,000 in 2012 compared to $1,082,000 in 2011, an increase of $701,000 or 64.8% due to increased licensing fee income.
Income Tax
Income tax expense for 2012 was $22,892,000, compared to income tax expense of $19,281,000 for 2011. The effective tax rates for 2012 and 2011 were 36.2% and 32.5%, respectively. The primary reason for the increase in the effective tax rate from 2011 to 2012 is the unavailability of the research and development tax credit for 2012. Tax legislation passed in early 2013 will allow the Company to obtain a tax credit in 2013 based upon amounts expensed for research and development in 2012 in addition to the research and development costs expensed in 2013.
Net Income Attributable To Controlling Interest
The Company had net income attributable to controlling interest of $40,207,000 in 2012 compared to $39,918,000 in 2011 for an increase of $289,000, or 0.7%. Earnings per diluted share remained constant in 2012 and 2011 at $1.74. Weighted average diluted shares outstanding for the years ended December 31, 2012 and 2011 were 23,051,000 and 22,984,000, respectively. The increase in shares outstanding is primarily due to the vesting of restricted stock units and the exercise of stock options by employees of the Company.
Backlog
The backlog of orders at December 31, 2012 was $263,791,000 compared to $268,618,000 (adjusted for discontinued operations) at December 31, 2011, a decrease of $4,827,000, or 1.8%. The decrease in the backlog of orders was due to an increase in domestic backlog of $11,578,000 or 8.0% offset by a decrease in international backlog of $16,405,000 or 13.3%. The Asphalt Group backlog increased $24,053,000 or 20.8% from 2011. The Asphalt Group increase was domestic order related and is due to an order for a wood pellet processing plant. The Aggregate and Mining Group backlog decreased $10,139,000 or 10.3%. The decrease in backlog for the Aggregate and Mining Group occurred in both domestic and international orders. The Underground Group backlog decreased $7,438,000 or 34.8% from 2011 due to the decreased demand for units for the oil and gas industry in the latter part of 2012. The Mobile Asphalt Paving Group backlog decreased $1,884,000 or 30.6%. The Mobile Asphalt Paving Group typically operates with a smaller backlog than the other segments due to the nature of their products. The Company is unable to determine whether the decrease in backlogs was experienced by the industry as a whole.
A-8
Net Sales by Segment (in thousands)
Asphalt Group: Sales in this group decreased to $234,562,000 in 2012 compared to $260,404,000 in 2011, a decrease of $25,842,000 or 9.9%. Domestic sales for the Asphalt Group decreased 8.9% in 2012 compared to 2011 due primarily to delayed approval of a federal long-term highway funding bill, which impacted orders that typically require a long production lead time, in addition to state budgetary concerns. The federal highway funding was passed in July 2012 but was well after most states let their jobs for construction in 2012. International sales for the Asphalt Group decreased 12.4% in 2012 compared to 2011. The decrease in international sales occurred primarily in Europe, the Middle East, post-Soviet States and South America. Parts sales for the Asphalt Group remained flat in 2012 compared to 2011.
Aggregate and Mining Group: Sales in this group were $355,428,000 in 2012 compared to $333,278,000 in 2011, an increase of $22,150,000 or 6.6%. Domestic sales for the Aggregate and Mining Group increased 16.2% in 2012 compared to 2011 primarily due to improving economic conditions and improved demand related to infrastructure, particularly in the oil and gas producing regions of the country. International sales for the Aggregate and Mining Group decreased 1.3% in 2012 compared to 2011. The decrease in international sales occurred primarily in South America, Africa, and the Middle East. Parts sales for the Aggregate and Mining Group increased 7.6% in 2012 compared to 2011.
Mobile Asphalt Paving Group: Sales in this group were $158,115,000 in 2012 compared to $187,988,000 in 2011, a decrease of $29,873,000 or 15.9%. Domestic sales for the Mobile Asphalt Paving Group decreased 15.3% in 2012 over 2011. Domestic sales of equipment for this Group were negatively affected by the federal government mandated switch to Tier IV engines as well as increased competition from international manufacturers that had a longer transition time to implement the Tier IV engines on their imports to the U.S. market. The decrease in domestic sales for the Mobile Asphalt Paving Group is also due in part to the increase of available rental units in the market. International sales for the Mobile Asphalt Paving Group decreased 18.7% in 2012 compared to 2011. The decrease internationally occurred primarily in Canada, South America and Mexico. Parts sales for this group increased 4.5% in 2012.
Underground Group: Sales in this group were $82,802,000 in 2012 compared to $37,683,000 in 2011, an increase of $45,119,000 or 119.7%. Domestic sales for the Underground Group increased 177.4% in 2012 compared to 2011. International sales for the Underground Group increased 33.1% in 2012 compared to 2011. The increase in international sales occurred in Asia, South America, and Australia. Parts sales for the Underground Group increased 148.5% in 2012. GEFCO, which was acquired by the Company in the fourth quarter of 2011, accounted for $34,643,000 of the increase in the Underground Group’s sales and positively impacted both domestic and international sales, including parts sales, of this Group.
Other Group: Sales for the Other Group were $105,366,000 in 2012 compared to $89,288,000 in 2011, an increase of $16,078,000 or 18.0%. Domestic sales for the Other Group, which are generated by Peterson Pacific Corp., increased 13.3% in 2012 compared to 2011. International sales for the Other Group, which are generated primarily by Astec Australia, increased 20.6% in 2012 compared to 2011. Astec Australia functions as a dealer for the Company’s other subsidiaries and has increased its focus to sell, install and service equipment for the asphalt, aggregate and mining, mobile asphalt and underground construction markets of Australia. Parts sales for the Other Group increased 4.2% in 2012.
A-9
Segment Profit (Loss) (in thousands)
Asphalt Group: Profit for this group was $21,018,000 for 2012 compared to $29,310,000 for 2011, a decrease of $8,292,000 or 28.3%. This group had a decrease of $7,683,000 in gross profit compared to 2011 as a result of the $25,842,000 decrease in sales.
Aggregate and Mining Group: Profit for this group was $34,687,000 in 2012 compared to $31,493,000 in 2011, an increase of $3,194,000 or 10.1%. This group had an increase of $7,165,000 in gross profit during 2012 as a result of the $22,150,000 increase in sales. This gross profit increase was offset by increases of $3,761,000 in selling, general and administrative expenses, including payroll related expenses, travel expense, sales commission expense, and research and development expenses.
Mobile Asphalt Paving Group: Profit for this group was $10,721,000 in 2012 compared to profit of $26,485,000 in 2011, a decrease of $15,764,000 or 59.5%. This group had a decrease of $15,235,000 in gross profit during 2012 as a result of the $29,873,000 decrease in sales and also due to the costs associated with the redesign of certain products as a result of the switch to Tier 4 engines mandated by the federal government. This group had an increase in selling, general and administrative expenses of $747,000, which was primarily attributed to payroll related expense, travel expense, sales commission expense and research and development expenses.
Underground Group: This group had a loss of $2,238,000 in 2012 compared to a loss of $7,318,000 in 2011 for an improvement of $5,080,000 or 69.4%. This group had an increase of $9,386,000 in gross profit during 2012 driven by the $45,119,000 increase in sales. Selling, general and administrative expenses increased $4,391,000 due primarily to increases in payroll related expenses, bad debt expense, exhibit expense and research and development expenses. These results included GEFCO, Inc. results for the entire year of 2012 compared to three months of 2011.
Other Group: The Other Group had a loss of $30,080,000 in 2012 compared to a loss of $38,229,000 in 2011, an improvement of $8,149,000 or 21.3%. Gross profit for this group increased $2,814,000 or 18.1% year over year due in part to $16,078,000 in increased sales for this group. The results for this group were positively impacted by the decrease in selling, general and administrative expense of $3,500,000 that resulted from decreases in profit sharing and stock based compensation expenses. In addition, the write down of aviation assets held for sale of $2,304,000 only occurred in 2011. The profit in this group was also significantly impacted by U.S. federal income tax expense, which is recorded at the parent company. Income tax expense in this group increased $1,639,000 in 2012 compared to 2011.
Results of Operations: 2011 vs. 2010
The Company sold substantially all the assets and liabilities of American Augers, Inc. on November 30, 2012. Amounts shown in the Consolidated Statement of Income for 2011 and 2010 have been restated to exclude the results of American Augers. The amounts discussed in this comparison of 2011 vs. 2010 have also been restated to exclude American Augers’ results.
Net Sales
Net sales increased $171,557,000 or 23.3%, from $737,084,000 in 2010 to $908,641,000 in 2011. 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. In February 2012, the Company sold the Underground Group’s utility product line. Sales of equipment and parts in this product line totaled $18,389,000 and $16,148,000 in 2011 and 2010, respectively. The overall increase in sales for 2011 compared to 2010 reflects the strengthening economic conditions, in both foreign and domestic markets.
A-10
Domestic sales for 2011 were $543,527,000 or 59.8% of consolidated net sales compared to $462,167,000 or 62.7% of consolidated net sales for 2010, an increase of $81,360,000 or 17.6%. The overall increase in domestic sales for 2011 compared to 2010 reflects the strengthening economic conditions for the Company’s products in the domestic market.
International sales for 2011 were $365,114,000 or 40.2% of consolidated net sales compared to $274,917,000 or 37.3% of consolidated net sales for 2010, an increase of $90,197,000 or 32.8%. The overall increase in international sales for 2011 compared to 2010 is due to strong economic conditions in the international markets the Company serves as well as the increased efforts of the Company to grow its international business.
Parts sales as a percentage of consolidated net sales decreased 100 basis points to 24.2% in 2011 from 25.2% in 2010. In dollars, parts sales increased 18.4% to $219,963,000 in 2011 from $185,848,000 in 2010.
Gross Profit
Consolidated gross profit as a percentage of sales decreased 50 basis points to 23.2% in 2011 from 23.7% in 2010. The decrease in gross margin is partially due to certain sales price increases lagging behind raw material price increases on the aged backlog of equipment orders and parts sales, which typically yield a higher gross margin, decreased as a percentage of total sales year over year, as described above. Gross profit was also negatively impacted by charges of $2,162,000 related to the sale of the Underground Group’s utility product line assets.
Selling, General and Administrative Expense
Selling, general and administrative expenses for 2011 were $132,371,000 or 14.6% of net sales, compared to $109,354,000 or 14.8% of net sales, for 2010, an increase of $23,017,000 or 21.0%. The increase was primarily due to an increase in payroll and related expenses of $8,412,000, an increase in travel expenses of $1,099,000, an increase in sales commissions of $2,723,000, expenses related to the triennial Con-Expo show of $2,925,000, an increase in legal and professional expense of $2,111,000 and the write down of aviation assets held for sale of $2,304,000.
Research and Development
Research and development expenses increased $4,777,000 or 29.9% to $20,764,000 in 2011 from $15,987,000 in 2010. During 2011 the Company invested heavily in research and development across all segments for numerous new equipment offerings including the development of a wood pellet processing plant.
Interest Expense
Interest expense in 2011 decreased $149,000, or 44.0%, to $190,000 from $339,000 in 2010. The decrease in interest expense in 2011 compared to 2010 related primarily to the decrease in interest paid on state tax settlements incurred in 2011 over 2010 levels.
Interest Income
Interest income decreased $73,000 or 7.6% to $883,000 in 2011 from $956,000 in 2010. The decrease in interest income resulted from a decrease in amounts invested in 2011 compared to 2010.
Other Income (Expense), Net
Other income (expense), net was $1,082,000 in 2011 compared to $632,000 in 2010, an increase of $450,000 or 71.2% due to an increase in licensing fee income of $219,000 in 2011 compared to 2010.
Income Tax
Income tax expense for 2011 was $19,281,000, compared to income tax expense of $16,131,000 for 2010. The effective tax rates for 2011 and 2010 were 32.5% and 33.1%, respectively. The primary reason for the decrease in the effective tax rate from 2010 to 2011 is the increased research and development tax credits and the qualified production activity deductions in 2011 compared to 2010.
Net Income Attributable To Controlling Interest
The Company had net income attributable to controlling interest of $39,918,000 in 2011 compared to $32,430,000 in 2010 for an increase of $7,488,000, or 23.1%. Earnings per diluted share were $1.74 in 2011 compared to $1.42 in 2010, an increase of $0.32 or 22.5%. Weighted average diluted shares outstanding for the years ended December 31, 2011 and 2010 were 22,984,000 and 22,830,000, respectively. The increase in shares outstanding is primarily due to the exercise of stock options by employees of the Company.
A-11
Backlog
The backlog of orders at December 31, 2011 was $268,618,000 compared to $231,268,000, adjusted for acquisitions, at December 31, 2010, an increase of $37,350,000, or 16.2%. The increase in the backlog of orders was due to an increase in domestic backlog of $34,535,000 or 31.3% and an increase in international backlog of $2,815,000 or 2.3%. The increase in backlog occurred in each of the Company’s segments except for the Mobile Asphalt Paving Group, which typically operates with a smaller backlog than the other segments due to the nature of their products. The Mobile Asphalt Paving Group’s backlog returned to a more normal level at December 31, 2011, a decrease of $8,960,000 or 59.3%, after an unusual increase in December 2010 due to temporary delays in fulfilling customer orders. The Asphalt Group backlog increased $6,984,000 or 6% from 2010. The Asphalt Group increase was domestic order related and is due to an increase in component sales for retro-fit asphalt plant equipment and the receipt of a contract to supply asphalt plants to the US Army. The Aggregate and Mining Group increased $16,304,000 or 20% with $13,322,000 or 81.7% of the increase in domestic orders. The Company attributes the increase in the Aggregate and Mining Group’s domestic backlog to customers replacing older equipment and stronger dealer stock orders due to strengthening economic conditions. The Underground Group backlog increased $1,857,000 or 9.5% from 2010 and is attributed to domestic orders for equipment to service the oil and gas industry. The Company is unable to determine whether the increase in backlogs was experienced by the industry as a whole; however, the Company believes the increased backlog reflects the current economic conditions the industry is experiencing.
Net Sales by Segment (in thousands)
Asphalt Group: Sales in this group increased to $260,404,000 in 2011 compared to $226,419,000 in 2010, an increase of $33,985,000 or 15.0%. Domestic sales for the Asphalt Group increased 9.8% in 2011 compared to 2010 primarily due to improving economic conditions. International sales for the Asphalt Group increased 30.2% in 2011 compared to 2010 resulting from increased efforts by the Company to grow its international business. The increase in international sales occurred primarily in Europe, Canada, India and South America. Parts sales for the Asphalt Group increased 13.2% in 2011.
Aggregate and Mining Group: Sales in this group were $333,278,000 in 2011 compared to $256,400,000 in 2010, an increase of $76,878,000 or 30.0%. Domestic sales for the Aggregate and Mining Group increased 32.6% in 2011 compared to 2010 primarily due to improving economic conditions. International sales for the Aggregate and Mining Group increased 27.9% in 2011 compared to 2010. This increase in international sales reflect the increased efforts by the Company to grow its international business, improved economic conditions and significant weakness in the dollar compared to many of the markets the Company serves. The increase in international sales occurred primarily in South America, Africa, Asia, Europe and China. Parts sales for the Aggregate and Mining Group increased 18.2% in 2011 compared to 2010.
Mobile Asphalt Paving Group: Sales in this group were $187,988,000 in 2011 compared to $166,436,000 in 2010, an increase of $21,552,000 or 12.9%. Domestic sales for the Mobile Asphalt Paving Group increased 14.5% in 2011 over 2010. The Company believes this increase was due to improved economic conditions and the impact of short term federal funding bills passed by Congress. International sales for the Mobile Asphalt Paving Group increased 6.6% in 2011 compared to 2010. International sales for this group increased due to increased efforts to market products internationally as well as a weak dollar. The increase internationally occurred primarily in Russia, the Middle East and South America. Parts sales for this group increased 17.3% in 2011.
Underground Group: Sales in this group were $37,683,000 in 2011 compared to $25,854,000 in 2010, an increase of $11,829,000 or 45.8%. Domestic sales for the Underground Group increased 60.0% in 2011 compared to 2010. The primary reason for this increase is the acquisition of GEFCO which occurred in the fourth quarter of 2011 and accounted for $10,886,000 of sales. International sales for the Underground Group increased 28.5% in 2011 compared to 2010. The increase in international sales occurred in Mexico, Canada, Australia and Africa. Parts sales for the Underground Group increased 45.5% in 2011.
A-12
Other Group: Sales for the Other Group were $89,288,000 in 2011 compared to $61,975,000 in 2010, an increase of $27,313,000 or 44.1%. Domestic sales for the Other Group, which are generated by Peterson Pacific Corp., remained flat in 2011 compared to 2010 due to continuing weak domestic construction activities in the markets they serve. International sales for the Other Group, which are generated primarily by Astec Australia increased 91.0% in 2011 over 2010 and was primarily in the Australian market. Astec Australia functions as a dealer for the Company’s other subsidiaries and has increased its focus to sell, install and service equipment for the asphalt, aggregate and mining, mobile asphalt and underground construction markets of Australia. Parts sales for the Other Group increased 23.4% in 2011.
Segment Profit (Loss) (in thousands)
Asphalt Group: Profit for this group was $29,310,000 for 2011 compared to $28,672,000 for 2010, an increase of $638,000 or 2.2%. This group had an increase of $5,088,000 in gross profit over 2010 which was driven by the $33,985,000 increase in sales. Segment profits were negatively impacted by an increase in research and development expense $2,467,000 for 2011 over 2010 as well as certain sales price increases lagging behind raw material price increases on the aged backlog of equipment orders.
Aggregate and Mining Group: Profit for this group was $31,493,000 in 2011 compared to $16,578,000 in 2010, an increase of $14,915,000 or 90.0%. This group had an increase of $22,673,000 in gross profit during 2011 which was driven by the $76,878,000 increase in sales and increased efficiency in plant utilization in 2011, which improved operating margins by $7,197,000. This gross profit increase was offset by increases in selling, general and administrative expenses and research and development expenses of $9,413,000 including payroll related expenses, travel expense and sales commission expense.
Mobile Asphalt Paving Group: Profit for this group was $26,485,000 in 2011 compared to profit of $23,234,000 in 2010, an increase of $3,251,000 or 14.0%. This group had an increase of $5,382,000 in gross profit during 2011 driven by the $21,552,000 increase in sales. Also positively affecting gross profit was increased plant utilization of $2,040,000 during 2011 compared to 2010. This group had an increase in selling, general and administrative expenses of $3,906,000 primarily driven by payroll related expenses, travel expense and sales commission expense.
Underground Group: This group had a loss of $7,318,000 in 2011 compared to a loss of $6,382,000 in 2010, a decrease of $936,000 or 14.7%. This group had an increase of $476,000 in gross profit during 2011 driven by the $11,829,000 increase in sales. The gross profit for the Underground Group was negatively impacted by charges of $2,162,000 related to the sale of the utility product line assets. Selling, general and administrative expenses increased $426,000 due primarily to increases in payroll related expenses, exhibit expense and the acquisition of GEFCO in the fourth quarter of 2011.
Other Group: The Other Group had a loss of $38,229,000 in 2011 compared to a loss of $27,579,000 in 2010, a decrease of $10,650,000 or 38.6%. Gross profit for this group increased $2,288,000 or 17.3% year over year due in part to $27,313,000 in increased sales for this group. The increased sales were offset by an increase in payroll and related expenses of $1,937,000 and the write down of aviation assets held for sale of $2,304,000. The profit in this group is also significantly impacted by U.S. federal income tax expense which is recorded at the parent company. Income tax expense in this group increased $3,859,000 in 2011 compared to 2010.
A-13
Liquidity and Capital Resources
The Company’s primary sources of liquidity and capital resources are its cash on hand, investments, borrowing capacity under a $100,000,000 revolving credit facility and cash flows from operations. The Company had $80,929,000 of cash available for operating purposes at December 31, 2012. In addition, the Company had no borrowings outstanding under its credit facility with Wells Fargo Bank, N.A. (“Wells Fargo”) at any time during the year ended December 31, 2012. The Company had outstanding letters of credit of $13,113,000 and borrowing availability of $86,887,000 under the credit facility as of December 31, 2012.
During April 2007, the Company entered into an unsecured credit agreement with Wachovia Bank, National Association (“Wachovia”) whereby Wachovia extended to the Company an unsecured line of credit of up to $100,000,000 including a sub-limit for letters of credit of up to $15,000,000. Wachovia has subsequently been acquired by Wells Fargo Bank, N.A. (“Wells Fargo”) and therefore the credit agreement was transferred to Wells Fargo. The credit facility had an original term of three years with two one-year extensions available. The Company exercised the final extension in 2010 which extended the loan maturity date to May 2012. On April 12, 2012, the Company and certain of its subsidiaries entered into a new amended and restated credit agreement with Wells Fargo whereby Wells Fargo extended to the Company an unsecured line of credit of up to $100,000,000, including a sub-limit for letters of credit of up to $25,000,000. The new amended and restated credit agreement replaced the expiring $100,000,000 credit facility between the Company and Wells Fargo. The new amended and restated agreement has a five-year term expiring in April 2017. Borrowings under the agreement are subject to an interest rate equal to the daily one-month LIBOR rate plus a 0.75% margin, which was equal to 0.96% at December 31, 2012. The unused facility fee is 0.175%. Interest only payments are due monthly. The new amended and restated credit agreement contains certain financial covenants, including provisions concerning required levels of annual net income, minimum tangible net worth and maximum allowed capital expenditures. The Company was in compliance with these covenants as of December 31, 2012.
The Company’s South African subsidiary, Osborn Engineered Products SA (Pty) Ltd (“Osborn”), has a credit facility of $8,837,000 (ZAR 75,000,000) to finance short-term working capital needs, as well as to cover performance letters of credit, advance payment and retention guarantees. As of December 31, 2012, Osborn had no outstanding borrowings under the credit facility, but $3,388,000 in performance, advance payment and retention guarantees were issued under the facility. The facility is unsecured. As of December 31, 2012, Osborn had available credit under the facility of $5,449,000. The facility has an ongoing, indefinite term subject to periodic reviews by the bank. The interest rate is 0.25% below the South Africa prime rate, which was 8.5% at December 31, 2012.
The Company’s Australian subsidiary, Astec Australia Pty Ltd (“Astec Australia”), has a credit facility to finance short-term working capital needs of $104,000 (AUD 100,000) as well as a bank guarantee facility of $1,350,000 (AUD 1,300,000) to cover letters of credit. Additional banking arrangements are in place to finance foreign exchange dealer limit orders of up to $3,894,000 (AUD 3,750,000), secured by cash balances in the amount of $779,000 (AUD 750,000) and a $1,600,000 letter of credit issued by the parent Company. As of December 31, 2012, no amounts were outstanding under the credit facility, but $1,209,000 of letters of credit were outstanding under the bank guarantee facility. The interest rate is the Australian adjusted Bank Business Rate plus a margin of 1.05%. The interest rate was 11.17% at December 31, 2012.
A-14
Cash Flows from Operating Activities (in thousands)
Net cash provided by operating activities decreased $3,674,000 in 2012 compared to 2011. The primary reasons for the decrease in operating cash flows are increases in cash used to fund increases in inventory of $8,116,000 and prepaid expenses of $1,905,000, the gain on the sale of subsidiary of $5,358,000 and a use of cash relating to accounts payable of $15,427,000. These negative cash changes were offset by increases in cash from accounts receivable of $32,109,000 and deferred taxes of $8,132,000. These changes in operating cash flows reflect increased sales and production activity during 2012 compared to 2011 as well as planned inventory purchases made to fulfill the Company’s backlog.
Cash Flows from Investing Activities (in thousands)
Net cash used by investing activities in 2012 increased $86,074,000 compared to 2011 due primarily to a decrease in cash used for capital expenditures of $10,112,000, the use of cash in 2011 for business acquisitions of $33,407,000 and proceeds from the sale of subsidiary of $42,940,000 in 2012.
Cash Flows from Financing Activities (in thousands)
A-15
Financing activities used cash of $22,472,000 in 2012 while in 2011 financing activities provided cash of $885,000 for a net change of $23,357,000 due primarily to the payment of a special one-time $1.00 per common share dividend in December 2012.
Capital expenditures for 2013, excluding those by the Company’s Brazilian operations, are forecasted to total $31,455,000. The Company expects to finance these expenditures using currently available cash balances, internally generated funds and available credit under the Company’s new credit facility. Capital expenditures are generally for machinery, equipment and facilities used by the Company in the production of its various products. The Company plans to construct a manufacturing facility in Brazil in 2013 with an expected cost of $20,000,000 and plans to fund the costs of the plant and equipment with borrowings from a local Brazilian bank. The Company believes that its current working capital, cash flows generated from future operations and available capacity under its credit facility will be sufficient to meet the Company’s working capital and capital expenditure requirements through December 31, 2013.
The Company sold American Augers, Inc. on November 30, 2012. Cash flows from the operations of American Augers are reflected in the statements of cash flows through the date of sale. Cash flows from the operations of American Augers were not material during the periods presented, and the absence of cash flows related to American Augers is not expected to impact the Company’s future liquidity or capital resources. See Note 21, Discontinued Operations, for additional information regarding the sale of American Augers.
Financial Condition
The Company’s current assets increased to $499,866,000 at December 31, 2012 from $485,554,000 at December 31, 2011, an increase of $14,312,000, or 2.9%. The increase is primarily attributable to increases in inventory of $9,557,000 and cash of $23,424,000, offset by a decrease in trade receivables of $12,346,000 and deferred income tax asset of $6,871,000.
The Company’s current liabilities decreased to $144,369,000 at December 31, 2012 from $154,022,000 at December 31, 2011, a decrease of $9,653,000. The decrease is primarily attributable to decreases in accounts payable of $8,960,000, accrued payroll and related liabilities of $2,307,000 and accrued product warranty of $1,611,000.
Market Risk and Risk Management Policies
The Company is exposed to changes in interest rates, primarily from its revolving credit agreements. A hypothetical 100 basis point adverse move (increase) in interest rates would not have materially affected interest expense for the year ended December 31, 2012, since there were no amounts outstanding on the revolving credit agreements during the year. The Company does not hedge variable interest.
The Company is subject to foreign exchange risk at its foreign operations. Foreign operations represent 16.3% and 14.6% of total assets at December 31, 2012 and 2011, respectively, and 14.4% and 12.7% of total revenue for the years ended December 31, 2012 and 2011, respectively. Each period the balance sheets and related results of operations of the Company’s foreign subsidiaries are translated from their functional foreign currency into U.S. dollars for reporting purposes. As the dollar strengthens against those foreign currencies, the foreign denominated net assets and operating results become less valuable in the Company’s reporting currency. When the dollar weakens against those currencies, the foreign denominated net assets and operating results become more valuable in the Company’s reporting currency. At each reporting date, the fluctuation in the value of the net assets and operating results due to foreign exchange rate changes is recorded as an adjustment to other comprehensive income in equity. The Company views its investments in foreign subsidiaries as long-term and does not hedge the net investments in foreign subsidiaries.
From time to time the Company’s foreign subsidiaries enter into transactions not denominated in their functional currency. In these situations, the Company evaluates the need to hedge those transactions against foreign currency rate fluctuations. When the Company determines a need to hedge a transaction, the subsidiary enters into a foreign currency exchange contract. The Company does not apply hedge accounting to these contracts and, therefore, recognizes the fair value of these contracts in the consolidated balance sheets and the change in the fair value of the contracts in current earnings.
Due to the limited exposure to foreign exchange rate risk, a 10% fluctuation in the foreign exchange rates at December 31, 2012 or 2011 would not have a material impact on the Company’s consolidated financial statements.
A-16
Contractual Obligations
Contractual obligations and the period in which payments are due as of December 31, 2012 are as follows (in thousands):
The above table excludes our liability for unrecognized tax benefits, which totaled $771,000 at December 31, 2012, since we cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities.
In 2012, the Company made contributions of approximately $755,000 to its pension plan, compared to $483,000 in 2011. The Company estimates that it will contribute a total of $544,000 to the pension plan during 2013. The Company’s funding policy is to make the minimum annual contributions required by applicable regulations.
Contingencies
Management has reviewed all claims and lawsuits and has made adequate provision for any losses that can be reasonably estimated. Based upon currently available information and with the advice of counsel, management believes that the ultimate outcome of its current claims and legal proceedings, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position, cash flows or results of operations. However, claims and legal proceedings are subject to inherent uncertainties and rulings unfavorable to the Company could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse effect on the Company’s financial position, cash flows or results of operations.
Certain customers have financed purchases of the Company’s products through arrangements in which the Company is contingently liable for customer debt aggregating $2,091,000 and $3,537,000 at December 31, 2012 and 2011, respectively. These obligations have average remaining terms of 1.6 years. The Company has recorded a liability of $112,000 related to these guarantees at December 31, 2012.
The Company is contingently liable under letters of credit of approximately $17,710,000, primarily for performance guarantees to customers, banks or insurance carriers.
Off-balance Sheet Arrangements
As of December 31, 2012 the Company does not have off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.
Environmental Matters
During 2004, the Company received notice from the Environmental Protection Agency that it may be responsible for a portion of the costs incurred in connection with an environmental cleanup in Illinois. The discharge of hazardous materials and associated cleanup relate to activities occurring prior to the Company’s acquisition of Barber-Greene in 1986. The Company believes that over 300 other parties have received similar notice. At this time, the Company cannot predict whether the EPA will seek to hold the Company liable for a portion of the cleanup costs or the amount of any such liability. The Company has not recorded a liability with respect to this matter because no estimate of the amount of any such liability can be made at this time.
A-17
Critical Accounting Policies
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. Application of these principles requires the Company to make estimates and judgments that affect the amounts as reported in the consolidated financial statements. Accounting policies that are critical to aid in understanding and evaluating the results of operations and financial position of the Company include the following:
Inventory Valuation: Inventories are valued at the lower of cost or market. The most significant component of the Company’s inventories is steel. Open market prices, which are subject to volatility, determine the cost of steel for the Company. During periods when open market prices decline, the Company may need to reduce the carrying value of the inventory. In addition, certain items in inventory become obsolete over time, and the Company reduces the carrying value of these items to their net realizable value. These reductions are determined by the Company based on estimates, assumptions and judgments made from the information available at that time. The Company does not believe it is reasonably likely that the inventory values will materially change in the near future.
Self-Insurance Reserves: The Company insures the retention portion of workers’ compensation claims and general liability claims by way of a captive insurance company, Astec Insurance Company. The objectives of Astec Insurance are to improve control over and reduce retained loss costs; to improve focus on risk reduction with development of a program structure which rewards proactive loss control; and to ensure active management participation in the defense and settlement process for claims.
For general liability claims, the captive is liable for the first $1,000,000 per occurrence and $2,500,000 per year in the aggregate. The Company carries general liability, excess liability and umbrella policies for claims in excess of those covered by the captive.
For workers’ compensation claims, the captive is liable for the first $350,000 per occurrence and $3,000,000 per year in the aggregate. The Company utilizes a large national insurance company as third-party administrator for workers’ compensation claims and carries insurance coverage for claims liabilities in excess of amounts covered by the captive.
The financial statements of the captive are consolidated into the financial statements of the Company. The short-term and long-term reserves for claims and probable claims related to general liability and workers’ compensation under the captive are included in accrued loss reserves and other long-term liabilities, respectively, in the consolidated balance sheets depending on the expected timing of future payments. The undiscounted reserves are actuarially determined based on the Company’s evaluation of the type and severity of individual claims and historical information, primarily its own claims experience, along with assumptions about future events. Changes in assumptions, as well as changes in actual experience, could cause these estimates to change in the future. However, the Company does not believe it is reasonably likely that the reserve level will materially change in the near future.
At all but one of the Company’s domestic manufacturing subsidiaries, the Company is self-insured for health and prescription claims under its Group Health Insurance Plan. The Company carries reinsurance coverage to limit its exposure for individual health claims above certain limits. Third parties administer health claims and prescription medication claims. The Company maintains a reserve for the self-insured health plan which is included in accrued loss reserves on the Company’s consolidated balance sheets. This reserve includes both unpaid claims and an estimate of claims incurred but not reported, based on historical claims and payment experience. Historically the reserves have been sufficient to provide for claims payments. Changes in actual claims experience, or payment patterns, could cause the reserve to change, but the Company does not believe it is reasonably likely that the reserve level will materially change in the near future.
The remaining U.S. subsidiary is covered under a fully insured group health plan. Employees of the Company’s foreign subsidiaries are insured under health plans in accordance with their local governmental requirements. No reserves are necessary for these fully insured health plans.
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Product Warranty Reserve: The Company accrues for the estimated cost of product warranties at the time revenue is recognized. Warranty obligations by product line or model are evaluated based on historical warranty claims experience. For machines, the Company’s standard product warranty terms generally include post-sales support and repairs of products at no additional charge for periods ranging from three months to two years or up to a specified number of hours of operation. For parts from component suppliers, the Company relies on the original manufacturer’s warranty that accompanies those parts. Generally, fabricated parts are not covered by specific warranty terms. Although failure of fabricated parts due to material or workmanship is rare, if it occurs, the Company’s policy is to replace fabricated parts at no additional charge.
The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of component suppliers. Estimated warranty obligations are based upon warranty terms, product failure rates, repair costs and current period machine shipments. If actual product failure rates, repair costs, service delivery costs or post-sales support costs differ from estimates, revisions to the estimated warranty liability would be required. The Company does not believe it is reasonably likely that the warranty reserve will materially change in the near future.
Revenue Recognition: Revenue is generally recognized on sales at the point in time when persuasive evidence of an arrangement exists, the price is fixed or determinable, the product has been delivered or services have been rendered and there is reasonable assurance of collection of the sales proceeds. The Company generally obtains purchase authorizations from its customers for a specified amount of product at a specified price with specified delivery terms. A significant portion of the Company’s equipment sales represents equipment produced in the Company’s plants under short-term contracts for a specific customer project or equipment designed to meet a customer’s specific requirements. Most of the equipment sold by the Company is based on standard configurations, some of which are modified to meet customer needs or specifications. The Company provides customers with technical design and performance specifications and performs pre-shipment testing to ensure the equipment performs according to design specifications, regardless of whether the Company provides installation services in addition to selling the equipment.
Certain contracts include terms and conditions through which the Company recognizes revenues upon completion of equipment production, which is subsequently stored at the Company’s plant at the customer’s request. Revenue is recorded on such contracts upon the customer’s assumption of title and risk of ownership and when collectability is reasonably assured. In addition, there must be a fixed schedule of delivery of the goods consistent with the customer’s business practices, the Company must not have retained any specific performance obligations such that the earnings process is not complete and the goods must have been segregated from the Company’s inventory prior to revenue recognition.
The Company has certain sales accounted for as multiple-element arrangements, whereby revenue attributable to the sale of a product is recognized when it is shipped, and the revenue attributable to services provided with respect to the product (such as installation services) is recognized when the service is performed. Consideration is determined using the fair value method and approximates the sales price of the product shipped or services performed. The Company evaluates sales with multiple deliverable elements (such as an agreement to deliver equipment and related installation services) to determine whether revenue related to individual elements should be recognized separately, or as a combined unit. In addition to the previously mentioned general revenue recognition criteria, the Company only recognizes revenue on individual delivered elements when there is objective and reliable evidence that the delivered element has a determinable value to the customer on a standalone basis and there is no right of return.
Goodwill and Other Intangible Assets: Intangible assets are classified into three categories: (1) intangible assets with definite lives subject to amortization, (2) intangible assets with indefinite lives not subject to amortization, and (3) goodwill. Intangible assets with definite lives are tested for impairment if conditions exist that indicate the carrying value may not be recoverable. Risk factors that may be considered include an economic downturn in the general economy, a geographic market or the commercial and residential construction industries, a change in the assessment of future operations as well as the cyclical nature of our industry and the customization of the equipment we sell, each of which may cause adverse fluctuations in operating results. Other risk factors considered would be an increase in the price or a decrease in the availability of oil that could reduce the demand for our products in addition to the significant fluctuations in the purchase price of raw materials that could have a negative impact on the cost of production and gross margins as well as others more fully described in the Risk Factors section of our Form 10-K. An impairment charge is recorded when the carrying value of the definite lived intangible asset is not recoverable by the cash flows generated from the use of the asset. Some of the inputs used in the impairment testing are highly subjective and are affected by changes in business factors and other conditions. Changes in any of the inputs could have an effect on future tests and result in impairment charges.
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Intangible assets with indefinite lives and goodwill are not amortized. Intangible assets and goodwill are tested for impairment annually or more frequently if events or circumstances indicate that such intangible assets or goodwill might be impaired. See Note 1, Summary of Significant Accounting Policies, for a detailed description of testing performed by the Company to determine if the recorded value of intangible assets or goodwill has been impaired.
The useful lives of identifiable intangible assets are determined after considering the specific facts and circumstances related to each intangible asset. Factors considered when determining useful lives include the contractual term of any agreement, the history of the asset, the Company’s long-term strategy for the use of the asset, any laws or other local regulations which could impact the useful life of the asset, and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have definite lives are amortized, generally on a straight-line basis, over their useful lives, ranging from 5 to 15 years.
Stock-based Compensation: The Company currently has two types of stock-based compensation plans in effect for its employees and directors. The Company’s stock option plans have been in effect for a number of years; however, no options have been granted under the plans since 2006. The Company’s original five year stock incentive plan was put in place during 2006 for the years ended 2006 through 2011. The Company’s 2011 Incentive Plan was approved by the shareholders in their annual meeting held in April 2011. This plan operates in similar fashion to the Company’s 2006 Incentive Plan for each of the five years ending December 31, 2015. These plans are more fully described in Note 16, Shareholders’ Equity, to the consolidated financial statements. Restricted stock units (“RSU’s”) awarded under the Company’s stock incentive plans are granted shortly after the end of each year and are based upon the performance of the Company and its individual subsidiaries. Under the 2011 Incentive Plan, RSU’s can be earned for performance in each of the years from 2011 through 2015 with additional RSU’s available based upon cumulative five-year performance. The Company estimates the number of shares that will be granted for the most recent fiscal year and the five-year cumulative performance based on actual and expected future operating results. The compensation expense for RSU’s expected to be granted for the most recent fiscal year and the cumulative five-year based awards is calculated using the fair value of the Company stock at each period end and is adjusted to the fair value as of each future period end until granted. Generally, each award will vest on the earlier of the end of five years from the date of grant or at such time as the recipient retires after reaching age 65. Estimated forfeitures are based upon the expected turnover rates of the employees receiving awards under the plan.
Recent Accounting Pronouncements
There are no recently promulgated accounting pronouncements (either recently adopted or yet to be adopted) that are likely to have a material impact on the Company’s financial reporting in the foreseeable future. See Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements.
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Forward-Looking Statements
This annual report contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements contained anywhere in this Annual Report that are not limited to historical information are considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding:
•execution of the Company’s growth and operation strategy;
•plans for technological innovation;
•compliance with covenants in our credit facility;
•liquidity and capital expenditures;
• sufficiency of working capital, cash flows and available capacity under the Company’s credit facilities;
•compliance with government regulations;
•compliance with manufacturing and delivery timetables;
•forecasting of results;
•general economic trends and political uncertainty;
•government funding and growth of highway construction and commercial projects;
•taxes or usage fees;
•interest rates;
•integration of acquisitions;
•industry trends;
•pricing, demand and availability of oil and liquid asphalt;
•pricing, demand and availability of steel;
•development of domestic oil and natural gas production;
•condition of the economy;
•strength of the dollar relative to foreign currencies;
•the success of new product lines;
•presence in the international marketplace;
•suitability of our current facilities;
•future payment of dividends;
•competition in our business segments;
•product liability and other claims;
•protection of proprietary technology;
•demand for products;
•future fillings of backlogs;
•employees;
•the seasonality of our business;
•tax assets and reserves for uncertain tax positions;
•critical accounting policies and the impact of accounting changes;
•anticipated start-up dates for our Brazilian operations;
•our backlog;
•ability to satisfy contingencies;
•contributions to retirement plans and plan expenses;
•reserve levels for self-insured insurance plans and product warranties;
•construction of new manufacturing facilities;
•supply of raw materials; and
•inventory.
These forward-looking statements are based largely on management’s expectations, which are subject to a number of known and unknown risks, uncertainties and other factors discussed in this report and in documents filed by the Company with the Securities and Exchange Commission, which may cause actual results, financial or otherwise, to be materially different from those anticipated, expressed or implied by the forward-looking statements. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements to reflect future events or circumstances. You can identify these statements by forward-looking words such as “expect”, “believe”, “anticipate”, “goal”, “plan”, “intend”, “estimate”, “may”, “will”, “should” and similar expressions.
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In addition to the risks and uncertainties identified elsewhere herein and in documents filed by the Company with the Securities and Exchange Commission, the following factors should be carefully considered when evaluating the Company’s business and future prospects: changes or delays in highway funding; rising interest rates; changes in oil prices; changes in steel prices; changes in the general economy; unexpected capital expenditures and decreases in liquidity; the timing of large contracts; production capacity; general business conditions in the industry; non-compliance with covenants in the Company’s credit facilities; demand for the Company’s products; and those other factors listed from time to time in the Company’s reports filed with the Securities and Exchange Commission. Certain of the risks, uncertainties and other factors discussed or noted above are more fully described in the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
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ASTEC INDUSTRIES, INC.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Astec Industries, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Management, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on its assessment, management concluded that, as of December 31, 2012, the Company’s internal control over financial reporting was effective.
Ernst & Young LLP, the Company’s independent registered public accounting firm, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2012.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Astec Industries, Inc.
We have audited Astec Industries, Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Astec Industries, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Astec Industries, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012 based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Astec Industries, Inc. and the related consolidated statements of income, comprehensive income, equity and cash flows for the year ended December 31, 2012 and our report dated March 1, 2013 expressed an unqualified opinion thereon.
Chattanooga, Tennessee
March 1, 2013
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Astec Industries, Inc.
We have audited the accompanying consolidated balance sheets of Astec Industries, Inc. as of December 31, 2012 and 2011 and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Astec Industries, Inc. at December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Astec Industries, Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2013 expressed an unqualified opinion thereon.
Chattanooga, Tennessee
March 1, 2013
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CONSOLIDATED BALANCE SHEETS
(in thousands)
See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
See Notes to Consolidated Financial Statements
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
See Notes to Unaudited Condensed Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF EQUITY
For the Years Ended December 31, 2012, 2011 and 2010 (in thousands)
See Notes to Consolidated Financial Statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2012, 2011 and 2010
1.
Summary of Significant Accounting Policies
Basis of Presentation - The consolidated financial statements include the accounts of Astec Industries, Inc. and its domestic and foreign subsidiaries. The Company’s significant wholly-owned and consolidated subsidiaries at December 31, 2012 are as follows:
On November 30, 2012, the Company sold its former American Augers, Inc. subsidiary to The Charles Machine Works, Inc. American Augers’ results of operations have been reclassified as discontinued operations for all periods presented.
All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Actual results could differ from those estimates.
Foreign Currency Translation - Subsidiaries located in Australia, Brazil, Canada, Germany and South Africa operate primarily using local functional currencies. Accordingly, assets and liabilities of these subsidiaries are translated using exchange rates in effect at the end of the period, and revenues and costs are translated using average exchange rates for the period. The resulting adjustments are presented as a separate component of accumulated other comprehensive income. Foreign currency transaction gains and losses, net are included in cost of sales and amounted to gains of $273,000 and $346,000 in 2012 and 2011, respectively, and a loss of $450,000 in 2010.
Fair Value of Financial Instruments - For cash and cash equivalents, trade receivables, other receivables, revolving debt and accounts payable, the carrying amount approximates the fair value because of the short- term nature of those instruments. Trading equity investments are valued at their estimated fair value based on their quoted market prices and debt securities are valued based upon a mix of observable market prices and model driven prices derived from a matrix of observable market prices for assets with similar characteristics obtained from a nationally recognized third party pricing service.
Financial assets and liabilities are categorized as of the end of each reporting period based upon the level of judgment associated with the inputs used to measure their fair value. The inputs used to measure the fair value are identified in the following hierarchy:
Level 1 -
Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 -
Unadjusted quoted prices in active markets for similar assets or liabilities; or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable for the asset or liability.
Level 3 -
Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All financial assets and liabilities held by the Company at December 31, 2012 and 2011 are classified as Level 1 or Level 2 as summarized in Note 3, Fair Value Measurements.
Cash and Cash Equivalents - All highly liquid investments with an original maturity of three months or less when purchased are considered to be cash and cash equivalents.
Investments - Investments consist primarily of investment-grade marketable securities. Trading securities are carried at fair value, with unrealized holding gains and losses included in net income. Realized gains and losses are accounted for on the specific identification method. Purchases and sales are recorded on a trade date basis. Management determines the appropriate classification of its investments at the time of acquisition and reevaluates such determination at each balance sheet date.
Concentration of Credit Risk - The Company sells products to a wide variety of customers. Accounts receivable are carried at their outstanding principal amounts, less an allowance for doubtful accounts. The Company extends credit to its customers based on an evaluation of the customers’ financial condition generally without requiring collateral although the Company normally requires advance payments or letters of credit on large equipment orders. Credit risk is driven by conditions within the economy and the industry and is principally dependent on each customer’s financial condition. To minimize credit risk, the Company monitors credit levels and financial conditions of customers on a continuing basis. After considering historical trends for uncollectible accounts, current economic conditions and specific customer recent payment history and financial stability, the Company records an allowance for doubtful accounts at a level which management believes is sufficient to cover probable credit losses. Amounts are deemed past due when they exceed the payment terms agreed to by the customer in the sales contract. Past due amounts are charged off when reasonable collection efforts have been exhausted and the amounts are deemed uncollectible by management. As of December 31, 2012, concentrations of credit risk with respect to receivables are limited due to the wide variety of customers.
Allowance for Doubtful Accounts - The following table represents a rollforward of the allowance for doubtful accounts for the years ended December 31, 2012, 2011 and 2010 (in thousands):
Inventories - Inventory costs include materials, labor and overhead. Inventories (excluding used equipment) are stated at the lower of first-in, first-out cost or market. Used equipment inventories are stated at the lower of specific unit cost or market.
When the Company determines that the value of inventory has become impaired through damage, deterioration, obsolescence, changes in price levels, excessive levels of inventory or other causes, the Company reduces the carrying value to estimated market value based on estimates, assumptions and judgments made from the information available at that time. Abnormal amounts of idle facility expense, freight, handling cost and wasted materials are recognized as current period charges.
Property and Equipment - Property and equipment is stated at cost. Depreciation is calculated for financial reporting purposes using the straight-line method based on the estimated useful lives of the assets as follows: airplanes (20 years), buildings (40 years) and equipment (3 to 10 years). Both accelerated and straight-line methods are used for tax compliance purposes. Routine repair and maintenance costs and planned major maintenance are expensed when incurred.
Goodwill and Other Intangible Assets - The Company classifies intangible assets into three categories: (1) intangible assets with definite lives subject to amortization, (2) intangible assets with indefinite lives not subject to amortization, and (3) goodwill.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company tests intangible assets with definite lives for impairment if conditions exist that indicate the carrying value may not be recoverable. Such conditions may include an economic downturn in a geographic market or a change in the assessment of future operations. An impairment charge is recorded when the carrying value of the definite lived intangible asset is not recoverable by the future undiscounted cash flows generated from the use of the asset.
The Company determines the useful lives of identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors considered when determining useful lives include the contractual terms of agreements, the history of the asset, the Company’s long-term strategy for the use of the asset, any laws or other local regulations which could impact the useful life of the asset, and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have definite lives are amortized over their useful lives, ranging from 5 to 15 years.
Intangible assets with indefinite lives including goodwill are not amortized. The Company tests these intangible assets and goodwill for impairment annually or more frequently if events or circumstances indicate that such intangible assets or goodwill might be impaired. The Company performs impairment tests of goodwill using a two-step method at the reporting unit level and of other indefinite lived intangible assets at the asset level. The Company’s reporting units are typically defined as its subsidiaries as each subsidiary is a legal entity that is managed separately and manufactures and distributes distinct product lines.
In 2011, the Company early adopted, as permitted, new accounting guidance related to annual goodwill impairment testing. The guidance gives the Company the option to perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If the Company concludes that this is the case for a reporting unit, it would proceed to calculating the fair value for that reporting unit as described below. Otherwise, the Company would not be required to perform any further goodwill impairment testing for that reporting unit.
The first step of the goodwill impairment test compares book value of a reporting unit, including goodwill, with the unit’s fair value. In this first step, the Company estimates the fair values of each of its reporting units that have goodwill using the income approach.
The income approach uses a reporting unit’s projection of estimated future operating results and cash flows which are then discounted using a weighted average cost of capital determined based on current market conditions for the individual reporting unit. The projection uses management’s best estimates of cash flows over the projection period based on estimates of annual and terminal growth rates in sales and costs, changes in operating margins, selling, general and administrative expenses, working capital requirements and capital expenditures.
The Company typically estimates the fair value of the operating subsidiaries/reporting units that do not have goodwill using either the income or market approaches, depending on which approach is considered to be the most appropriate for each reporting unit. The Company typically estimates the fair value of the reporting units that serve operating units in supporting roles, such as the captive insurance company and the corporate reporting unit, using the cost approach. The Company then compares the sum of the fair values of all reporting units to its calculation of the fair value of the consolidated Company using the market approach, which is inferred from the market capitalization of the Company at the date of the valuation, to confirm that the Company’s estimation of the fair value of its reporting units is reasonable.
If the book value of a reporting unit exceeds its fair value, an indication of possible goodwill impairment, the second step of the impairment test must be performed to determine the amount, if any, of goodwill impairment. In this second step, the total implied fair value of the reporting unit’s goodwill is estimated by allocating the fair value of the reporting unit to all its assets, including any unrecognized intangible assets and liabilities other than goodwill. The difference between the total fair value of the reporting unit and the fair value of its assets and liabilities other than goodwill is the implied fair value of its goodwill. The amount of any impairment loss is equal to the excess, if any, of the book value of the goodwill over the implied fair value of its goodwill.
Determining the “step one” fair values of the Company’s reporting units involves the use of significant estimates and assumptions. Due to the inherent uncertainty involved in making these estimates and assumptions, actual results could differ materially from those estimates.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impairment of Long-lived Assets - In the event that facts and circumstances indicate the carrying amounts of long-lived assets may be impaired, an evaluation of recoverability is performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the carrying amount for each asset (or group of assets) to determine if a writedown is required. If this review indicates that the assets will not be recoverable, the carrying values of the impaired assets are reduced to their estimated fair value. Fair value is estimated using discounted cash flows, prices for similar assets or other valuation techniques.
Self-Insurance Reserves - The Company retains the risk for a portion of its workers’ compensation claims and general liability claims by way of a captive insurance company, Astec Insurance Company, (“Astec Insurance” or “the captive”). Astec Insurance is incorporated under the laws of the state of Vermont. The objectives of Astec Insurance are to improve control over and reduce the cost of claims; to improve focus on risk reduction with development of a program structure which rewards proactive loss control; and to ensure management participation in the defense and settlement process for claims.
For general liability claims, the captive is liable for the first $1,000,000 per occurrence and $2,500,000 per year in the aggregate. The Company carries general liability, excess liability and umbrella policies for claims in excess of those covered by the captive.
For workers’ compensation claims, the captive is liable for the first $350,000 per occurrence and $3,000,000 per year in the aggregate. The Company utilizes a large national insurance company as third party administrator for workers’ compensation claims and carries insurance coverage for claims liabilities in excess of amounts covered by the captive.
The financial statements of the captive are consolidated into the financial statements of the Company. The short-term and long-term reserves for claims and potential claims related to general liability and workers’ compensation under the captive are included in accrued loss reserves or other long-term liabilities, respectively, in the consolidated balance sheets depending on the expected timing of future payments. The undiscounted reserves are actuarially determined to cover the ultimate cost of each claim based on the Company’s evaluation of the type and severity of individual claims and historical information, primarily its own claims experience, along with assumptions about future events. Changes in assumptions, as well as changes in actual experience, could cause these estimates to change in the future. However, the Company does not believe it is reasonably likely that the reserve level will materially change in the foreseeable future.
At all but one of the Company’s domestic manufacturing subsidiaries, the Company is self-insured for health and prescription claims under its Group Health Insurance Plan. The Company carries reinsurance coverage to limit its exposure for individual health claims above certain limits. Third parties administer health claims and prescription medication claims. The Company maintains a reserve for the self-insured health plan which is included in accrued loss reserves on the Company’s consolidated balance sheets. This reserve includes both unpaid claims and an estimate of claims incurred but not reported, based on historical claims and payment experience. Historically the reserves have been sufficient to provide for claims payments. Changes in actual claims experience or payment patterns could cause the reserve to change, but the Company does not believe it is reasonably likely that the reserve level will materially change in the near future.
The remaining U.S. subsidiary is covered under a fully insured group health plan. Employees of the Company’s foreign subsidiaries are insured under separate health plans. No reserves are necessary for these fully insured health plans.
Revenue Recognition - Revenue is generally recognized on sales at the point in time when persuasive evidence of an arrangement exists, the price is fixed or determinable, the product has been delivered or services have been rendered and there is a reasonable assurance of collection of the sales proceeds. The Company generally obtains purchase authorizations from its customers for a specified amount of products at a specified price with specified delivery terms. A significant portion of the Company’s equipment sales represents equipment produced in the Company’s plants under short-term contracts for a specific customer project or equipment designed to meet a customer’s specific requirements. Most of the equipment sold by the Company is based on standard configurations, some of which are modified to meet customer needs or specifications. The Company provides customers with technical design and performance specifications and performs pre-shipment testing to ensure the equipment performs according to design specifications, regardless of whether the Company provides installation services in addition to selling the equipment.
A-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain contracts include terms and conditions pursuant to which the Company recognizes revenues upon completion of equipment production, which is subsequently stored at the Company’s plant at the customer’s request. Revenue is recorded on such contracts upon the customer’s assumption of title and risk of ownership and when collectability is reasonably assured. In addition, there must be a fixed schedule of delivery of the goods consistent with the customer’s business practices, the Company must not have retained any specific performance obligations such that the earnings process is not complete and the goods must have been segregated from the Company’s inventory prior to revenue recognition.
The Company accounts for certain sales as multiple-element arrangements, whereby the revenue attributable to the sale of a product is recognized when the product is shipped and the revenue attributable to services provided with respect to the product (such as installation services) is recognized when the service is performed. Consideration is determined using the fair value method and approximates sales price of the product shipped or service performed. The Company evaluates sales with multiple deliverable elements (such as an agreement to deliver equipment and related installation services) to determine whether revenue related to individual elements should be recognized separately, or as a combined unit. In addition to the previously mentioned general revenue recognition criteria, the Company only recognizes revenue on individual delivered elements when there is objective and reliable evidence that the delivered element has a determinable value to the customer on a standalone basis and there is no right of return.
The Company presents in the statements of income any taxes assessed by a governmental authority that are directly imposed on revenue-producing transactions between the Company and its customers, such as sales, use, value-added and some excise taxes, on a net (excluded from revenue) basis.
Advertising Expense - The cost of advertising is expensed as incurred. The Company incurred $4,223,000, $3,346,000, and $2,830,000 in advertising costs during 2012, 2011 and 2010, respectively, which is included in selling, general and administrative expenses.
Income Taxes - Income taxes are based on pre-tax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. The Company periodically assesses the need to establish valuation allowances against its deferred tax assets to the extent the Company no longer believes it is more likely than not that the tax assets will be fully utilized.
The Company evaluates a tax position to determine whether it is more likely than not that the tax position will be sustained upon examination, based upon the technical merits of the position. A tax position that meets the more-likely-than-not recognition threshold is subject to a measurement assessment to determine the amount of benefit to recognize and the appropriate reserve to establish, if any. If a tax position does not meet the more-likely-than-not recognition threshold, no benefit is recognized. The Company is periodically audited by U.S. federal and state as well as foreign tax authorities. While it is often difficult to predict final outcome or timing of resolution of any particular tax matter, the Company believes its reserve for uncertain tax positions is adequate to reduce the uncertain positions to the greatest amount of benefit that is more likely than not realizable.
Product Warranty Reserve - The Company accrues for the estimated cost of product warranties at the time revenue is recognized. Warranty obligations by product line or model are evaluated based on historical warranty claims experience. For machines, the Company’s standard product warranty terms generally include post-sales support and repairs of products at no additional charge for periods ranging from three months to two years or up to a specified number of hours of operation. For parts from component suppliers, the Company relies on the original manufacturer’s warranty that accompanies those parts. Generally, Company fabricated parts are not covered by specific warranty terms. Although failure of fabricated parts due to material or workmanship is rare, if it occurs, the Company’s policy is to replace fabricated parts at no additional charge.
The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers. Estimated warranty obligations are based upon warranty terms, product failure rates, repair costs and current period machine shipments. If actual product failure rates, repair costs, service delivery costs or post-sales support costs differ from our estimates, revisions to the estimated warranty liability would be required.
A-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pension and Retirement Plans - The determination of obligations and expenses under the Company’s pension plan is dependent on the Company’s selection of certain assumptions used by independent actuaries in calculating such amounts. Those assumptions are described in Note 12, Pension and Retirement Plans and include among others, the discount rate, expected return on plan assets and the expected mortality rates. In accordance with accounting principles generally accepted in the United States, actual results that differ from assumptions are accumulated and amortized over future periods and, therefore, generally affect the recognized expense in such periods. Significant differences in actual experience or significant changes in the assumptions used may materially affect the pension obligations and future expenses.
The Company recognizes as an asset or liability the overfunded or underfunded status of its pension plan. Actuarial gains and losses, amortization of prior service cost (credit) and amortization of transition obligations are recognized through other comprehensive income in the year in which the changes occur. The Company measures the funded status of its pension plan as of the date of the Company’s fiscal year-end.
Stock-based Compensation - The Company currently has two types of stock-based compensation plans in effect for its employees and directors. The Company’s stock option plans have been in effect for a number of years; however, no options have been granted under the plans since 2006. The Company’s stock incentive plans were put in place during 2006 and will continue through 2015. These plans are more fully described in Note 16, Shareholders’ Equity. The Company recognizes the cost of employee services received in exchange for equity awards in the financial statements based on the grant date calculated fair value of the awards. The Company recognizes stock-based compensation expense over the period during which an employee is required to provide service in exchange for the award (the vesting period).
Restricted stock units (“RSU’s”) awarded under the Company’s 2006 Incentive Plans were granted shortly after the end of each year through 2010 based upon the performance of the Company and its individual subsidiaries. RSU’s were granted for performance in each of the years from 2006 through 2010 with additional RSU’s granted based upon cumulative five-year performance. Upon the expiration of the 2006 Incentive Plan, the Company adopted a 2011 Incentive Plan which operates similar to the 2006 Incentive Plan for each of the five years ending December 31, 2015. The Company estimates the number of shares that will be granted for the most recent fiscal year end and the five-year cumulative performance based on actual and expected future operating results. Compensation expense for RSU’s expected to be granted for the most recent fiscal year and the cumulative five-year based awards is calculated using the fair value of the Company stock at each period end and is adjusted to the fair value as of each future period-end until granted.
Earnings Per Share - Basic earnings per share is based on the weighted average number of common shares outstanding and diluted earnings per share includes potential dilutive effects of options, restricted stock units and shares held in the Company’s supplemental executive retirement plan.
The following table sets forth a reconciliation of the number of shares used in the computation of basic and diluted earnings per share (in thousands):
For the years ended December 31, 2012, 2011 and 2010, antidilutive options totaled 885, 885 and 1,000, respectively. Antidilutive options were not included in the diluted EPS computation for the years presented.
A-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivatives and Hedging Activities - The Company recognizes all derivatives in the consolidated balance sheets at their fair value. Derivatives that are not hedges are adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through income or recognized in other comprehensive income until the hedged item is recognized in income. The ineffective portion of a derivative’s change in fair value is immediately recognized in income. From time to time the Company’s foreign subsidiaries enter into foreign currency exchange contracts to mitigate exposure to fluctuation in currency exchange rates. See Note 13, Derivative Financial Instruments, regarding foreign exchange contracts outstanding at December 31, 2012 and 2011.
Shipping and Handling Fees and Cost - The Company records revenues earned for shipping and handling as revenue, while the cost of shipping and handling is classified as cost of goods sold.
Litigation Contingencies - In the normal course of business in the industry, the Company is named as a defendant in a number of legal proceedings associated with product liability and other matters. See Note 15, Contingent Matters for additional discussion of the Company’s legal contingencies.
Business Combinations - The Company accounts for business combinations using the acquisition method. Accordingly, intangible assets are recorded apart from goodwill if they arise from contractual or legal rights or if they are separable from goodwill. Related third party acquisition costs are expensed as incurred and contingent consideration is booked at its fair value as part of the purchase price.
Subsequent Events Review - Management has evaluated events occurring between December 31, 2012 and the date these financial statements were filed with the Securities and Exchange Commission for proper recording or disclosure therein.
Recent Accounting Pronouncements - In May 2011, the FASB issued Accounting Standards Update No.
2011-04, “Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS” which results in common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. While the FASB stated that for many of the requirements it did not intend for the amendments in the update to result in a change in the application of the requirements of Topic 820, some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. Additionally, other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The update is effective for interim and annual periods beginning after December 15, 2011 and its amendments must be applied prospectively. The Company adopted its provisions effective January 1, 2012. The adoption of this pronouncement did not have a significant impact on the Company’s financial statements.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Comprehensive Income (Topic 220), Presentation of Comprehensive Income” which changes the way companies present other comprehensive income and its components in financial statements. The new standards require that companies present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted the provisions of this update in 2012. The adoption of this update did not have an impact on the Company’s financial position or results of operations.
In December 2011, the FASB issued Accounting Standards Update No. 2011-11, “Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities” which describes when it is appropriate to offset financial assets and liabilities on the balance sheet. Companies will now have to disclose both gross and net information about instruments eligible for offset in the statement of financial position, instruments and transactions subject to an agreement similar to a master netting arrangement, and the collateral received in a master netting arrangement. The new disclosure will enable users of financial statements to understand significant quantitative differences in balance sheets prepared under US GAAP and IFRS related to the offsetting of financial instruments. The update is effective for annual and interim reporting periods beginning on or after January 1, 2013. Adopting this update is not expected to have an impact on the Company’s financial position or results of operations.
A-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
Inventories
Inventories consist of the following (in thousands):
3.
Fair Value Measurements
The Company has various financial instruments that must be measured at fair value on a recurring basis, including marketable debt and equity securities held by Astec Insurance Company (“Astec Insurance”), the Company’s captive insurance company, and marketable equity securities held in an unqualified Supplemental Executive Retirement Plan (“SERP”). The financial assets held in the SERP also constitute a liability of the Company for financial reporting purposes. The Company’s subsidiaries also occasionally enter into foreign currency exchange contracts to mitigate exposure to fluctuations in currency exchange rates.
For cash and cash equivalents, trade receivables, other receivables, revolving debt and accounts payable, the carrying amount approximates the fair value because of the short-term nature of these instruments. Investments are carried at their fair value based on quoted market prices for identical or similar assets or, where no quoted prices exist, other observable inputs for the asset. The fair values of foreign currency exchange contracts are based on quotations from various banks for similar instruments using models with market based inputs.
As indicated in the tables below, the Company has determined that its financial assets and liabilities at December 31, 2012 and 2011 are level 1 and level 2 in the fair value hierarchy (in thousands):
A-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4.
Investments
The Company’s trading securities consist of the following (in thousands):
Trading equity investments noted above are valued at their estimated fair value based on their quoted market prices and trading debt securities are valued based upon a mix of observable market prices and model driven prices derived from a matrix of observable market prices for assets with similar characteristics obtained from a nationally recognized third party pricing service. Additionally, a significant portion of the trading equity securities are in equity money market and mutual funds and also comprise a portion of the Company’s liability under its SERP. See Note 12, Pension and Retirement Plans, for additional information on these investments and the SERP.
Trading debt securities are comprised mainly of marketable debt securities held by Astec Insurance. Astec Insurance has an investment strategy that focuses on providing regular and predictable interest income from a diversified portfolio of high-quality fixed income securities. At December 31, 2012 and 2011, $1,334,000 and $1,324,000, respectively, of trading debt securities were due to mature within twelve months and, accordingly, are included in other current assets.
Net unrealized gains or (losses) incurred during 2012, 2011 and 2010 on investments still held as of the end of each reporting period, amounted to $173,000, ($77,000) and $219,000, respectively.
A-40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Current U.S. accounting guidance provides that goodwill and indefinite-lived intangible assets be tested for impairment at least annually. The Company performs the required valuation procedures each year as of December 31 after the following year’s forecasts are submitted and reviewed. The valuations performed in 2012, 2011 and 2010 indicated no impairment of goodwill.
The changes in the carrying amount of goodwill by reporting segment during the years ended December 31, 2012 and 2011 are as follows (in thousands):
6.
Long-lived and Intangible Assets
Long-lived assets, including finite-lived intangible assets, are reviewed for impairment when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Impairment losses for long-lived assets “held and used” and finite-lived intangible assets are recorded if the sum of the estimated future undiscounted cash flows used to test for recoverability is less than the carrying value.
As a result of certain aviation equipment being classified as held for sale in 2011, an impairment charge was recorded in the amount of $2,304,000 in selling, general and administrative expenses by the All Others Group to reduce the carrying value of the asset to its fair value as determined based upon the industry blue book valuations of used aircraft (level 3 in the fair value hierarchy). The $800,000 carrying value of these assets held for sale, which were sold in 2012, was included in other current assets in the Company’s December 31, 2011 consolidated balance sheet. Additional impairment charges of $394,000 were recorded in 2011 related to long-lived assets and other charges related to inventory valuation of $1,845,000 were included in cost of sales in the Underground Group due to the sale of the utility product line assets. An additional impairment charge of $26,000 was recorded in 2011 by the Asphalt Group related to long-lived assets.
Amortization expense on intangible assets was $1,855,000, $573,000 and $598,000 for 2012, 2011 and 2010, respectively. Intangible assets, which are included in other long-term assets on the accompanying consolidated balance sheets, consisted of the following at December 31, 2012 and 2011 (in thousands):
Intangible asset amortization expense is expected to be $1,109,000, $998,000, $926,000, $806,000 and $715,000 in the years ending December 31, 2013, 2014, 2015, 2016 and 2017, respectively, and $3,271,000 thereafter.
A-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7.
Property and Equipment
Property and equipment consist of the following (in thousands):
Depreciation expense was $20,945,000, $18,551,000 and $18,022,000 for the years ended December 31, 2012, 2011 and 2010, respectively.
8.
Leases
The Company leases certain land, buildings and equipment for use in its operations under various operating leases. Total rental expense charged to operations under operating leases was approximately $2,753,000, $2,472,000 and $2,343,000 for the years ended December 31, 2012, 2011 and 2010, respectively.
Minimum rental commitments for all noncancelable operating leases at December 31, 2012 are as follows (in thousands):
9.
Debt
During April 2007, the Company entered into an unsecured credit agreement with Wachovia Bank, National Association (“Wachovia”) whereby Wachovia extended to the Company an unsecured line of credit of up to $100,000,000 including a sub-limit for letters of credit of up to $15,000,000. Wachovia has subsequently been acquired by Wells Fargo Bank, N.A. (“Wells Fargo”) and therefore the credit agreement was transferred to Wells Fargo. The credit facility had an original term of three years with two one-year extensions available. The Company exercised the final extension in 2010 which extended the loan maturity date to May 2012. On April 12, 2012, the Company and certain of its subsidiaries entered into a new amended and restated credit agreement with Wells Fargo whereby Wells Fargo extended to the Company an unsecured line of credit of up to $100,000,000, including a sub-limit for letters of credit of up to $25,000,000. The new amended and restated credit agreement replaced the expiring $100,000,000 credit facility between the Company and Wells Fargo. There were no outstanding revolving or term loan borrowings under the credit facilities at the time of transition or as of December 31, 2012. Letters of credit totaling $13,113,000 were outstanding under the new agreement as of December 31, 2012, resulting in additional borrowing ability of $86,887,000 on the Wells Fargo credit facility as of December 31, 2012. The new amended and restated agreement has a five-year term expiring in April 2017. Borrowings under the agreement are subject to an interest rate equal to the daily one-month LIBOR rate plus a 0.75% margin. The unused facility fee is 0.175%. Interest only payments are due monthly. The new amended and restated credit agreement contains certain financial covenants, including provisions concerning required levels of annual net income, minimum tangible net worth and maximum allowed capital expenditures. The Company was in compliance with these covenants as of December 31, 2012.
A-42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s South African subsidiary, Osborn Engineered Products SA (Pty) Ltd (“Osborn”), has a credit facility of $8,837,000 (ZAR 75,000,000) to finance short-term working capital needs, as well as to cover performance letters of credit, advance payment and retention guarantees. As of December 31, 2012, Osborn had no outstanding borrowings under the credit facility, but $3,388,000 in performance, advance payment and retention guarantees were issued under the facility. The facility is unsecured. As of December 31, 2012, Osborn had available credit under the facility of $5,449,000. The facility has an ongoing, indefinite term subject to periodic reviews by the bank. The interest rate is 0.25% below the South Africa prime rate which was 8.5% at December 31, 2012.
The Company’s Australian subsidiary, Astec Australia Pty Ltd (“Astec Australia”), has a credit facility to finance short-term working capital needs of $104,000 (AUD 100,000) as well as a bank guarantee facility of $1,350,000 (AUD 1,300,000) to cover letters of credit. Additional banking arrangements are in place to finance foreign exchange dealer limit orders of up to $3,894,000 (AUD 3,750,000), secured by cash balances in the amount of $779,000 (AUD 750,000) and a $1,600,000 letter of credit issued by the parent Company. As of December 31, 2012, no amounts were outstanding under the credit facility, but $1,209,000 of letters of credit were outstanding under the bank guarantee facility. The interest rate is the Australian adjusted Bank Business Rate plus a margin of 1.05%. The interest rate was 11.17% at December 31, 2012.
10.
Product Warranty Reserves
The Company warrants its products against manufacturing defects and performance to specified standards. The warranty period and performance standards vary by product, but generally range from three months to two years or up to a specified number of hours of operation. The Company estimates the costs that may be incurred under its warranties and records a liability at the time product sales are recorded. The warranty liability is primarily based on historical claim rates, nature of claims and the associated costs.
Changes in the Company’s product warranty liability during 2012, 2011 and 2010 are as follows (in thousands):
11.
Accrued Loss Reserves
The Company accrues reserves for losses related to known workers’ compensation and general liability claims that have been incurred but not yet paid or are estimated to have been incurred but not yet reported to the Company. The undiscounted reserves are actuarially determined based on the Company’s evaluation of the type and severity of individual claims and historical information, primarily its own claim experience, along with assumptions about future events. Changes in assumptions, as well as changes in actual experience, could cause these estimates to change in the future. Total accrued loss reserves at December 31, 2012 were $7,315,000 compared to $8,692,000 at December 31, 2011, of which $4,094,000 and $4,913,000 was included in other long-term liabilities at December 31, 2012 and 2011, respectively.
12.
Pension and Retirement Plans
Prior to December 31, 2003, all employees of the Company’s Kolberg-Pioneer, Inc. subsidiary were covered by a defined benefit pension plan. After December 31, 2003, all benefit accruals under the plan ceased and no new employees could become participants in the plan. Benefits paid under this plan are based on years of service multiplied by a monthly amount. The Company’s funding policy for the plan is to make the minimum annual contributions required by applicable regulations.
The Company’s investment strategy for the plan is to earn a rate of return sufficient to match or exceed the long- term growth of pension liabilities. The investment policy states that the Plan Committee in its sole discretion shall determine the allocation of plan assets among the following four asset classes: cash equivalents, fixed-income securities, domestic equities and international equities. The Plan Committee attempts to ensure adequate diversification of the invested assets through investment in an exchange traded mutual fund that invests in a diversified portfolio of stocks, bonds and money market securities.
A-43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following provides information regarding benefit obligations, plan assets and the funded status of the plan (in thousands, except as noted *):
The measurement date used for the plan was December 31.
In determining the expected return on plan assets, the historical experience of the plan assets, the current and expected allocation of the plan assets and the expected long-term rates of return were considered.
All assets in the plan are invested in an exchange traded mutual fund. The allocation of assets within the mutual fund as of the measurement date (December 31) and the target asset allocation ranges by asset category are as follows:
A-44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net periodic benefit cost for 2012, 2011 and 2010 included the following components (in thousands, except as noted *):
The Company expects to contribute $544,000 to the plan during 2013.
Amounts in accumulated other comprehensive income expected to be recognized in net periodic benefit cost in 2013 for the amortization of a net loss is $536,000.
The following estimated future benefit payments are expected to be paid in the years indicated (in thousands):
The Company sponsors a 401(k) defined contribution plan to provide eligible employees with additional income upon retirement. The Company’s contributions to the plan are based on employee contributions. The Company’s contributions totaled $5,099,000, $4,515,000, and $3,866,000 in 2012, 2011 and 2010, respectively.
The Company maintains a Supplemental Executive Retirement Plan (“SERP”) for certain of its executive officers. The plan is a non-qualified deferred compensation plan administered by the Board of Directors of the Company, pursuant to which the Company makes quarterly cash contributions of a certain percentage of executive officers’ compensation. Investments are self-directed by participants and can include Company stock. Upon retirement, participants receive their apportioned share of the plan assets in the form of cash.
A-45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets of the SERP consist of the following (in thousands):
The Company periodically adjusts the deferred compensation liability such that the balance of the liability equals the total fair market value of all assets held by the trust established under the SERP. Such liabilities are included in other long-term liabilities on the consolidated balance sheets. The equity securities are included in investments in the consolidated balance sheets and classified as trading equity securities. See Note 4, Investments for additional information. The cost of the Company stock held by the plan is included as a reduction in shareholders’ equity in the consolidated balance sheets.
The change in the fair market value of Company stock held in the SERP results in a charge or credit to selling, general and administrative expenses in the consolidated statements of income because the acquisition cost of the Company stock in the SERP is recorded as a reduction of shareholders’ equity and is not adjusted to fair market value; however, the related liability is adjusted to the fair market value of the stock as of each period end. The Company recognized expense of $115,000 and $539,000 in 2012 and 2010, respectively, and income of $45,000 in 2011 related to the change in the fair value of the Company stock held in the SERP.
13.
Derivative Financial Instruments
The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is foreign currency risk. From time to time the Company’s foreign subsidiaries enter into foreign currency exchange contracts to mitigate exposure to fluctuations in currency exchange rates. The fair value of the derivative financial instrument is recorded on the Company’s balance sheet and is adjusted to fair value at each measurement date. The changes in fair value are recognized in the consolidated statements of income in the current period. The Company does not engage in speculative transactions nor does it hold or issue derivative financial instruments for trading purposes. The average U.S. dollar equivalent notional amount of outstanding foreign currency exchange contracts was $8,634,000 during 2012. At December 31, 2012, the Company reported $145,000 of derivative liabilities in other accrued liabilities. The Company reported $307,000 of derivative assets in other current assets and $50,000 of derivative liabilities in other current liabilities as of December 31, 2011. The Company recognized, as a component of cost of sales, net losses on the change in fair value of derivative instruments of $594,000, $144,000 and $1,473,000 for the years ended December 31, 2012, 2011 and 2010, respectively. There were no derivatives that were designated as hedges at December 31, 2012 or 2011.
14.
Income Taxes
For financial reporting purposes, income from continuing operations before income taxes includes the following components (in thousands):
A-46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income taxes consists of the following (in thousands):
The Company’s income tax provision is computed based on the domestic and foreign federal statutory rates and the average state statutory rates, net of related federal benefit.
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before income taxes. A reconciliation of the provision for income taxes at the statutory federal income tax rate to the amount provided is as follows (in thousands):
A-47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
As of December 31, 2012, the Company has state and foreign net operating loss carryforwards of $44,311,000 for tax purposes, which will be available to offset future taxable income. If not used, certain of these carryforwards will expire between 2013 and 2027. A significant portion of the valuation allowance for deferred tax assets relates to the future utilization of state and foreign net operating loss carryforwards. Future utilization of these net operating loss carryforwards is evaluated by the Company on a periodic basis and the valuation allowance is adjusted accordingly. In 2012, the valuation allowance on these carryforwards was increased by $1,040,000 due to uncertainty about whether certain entities will realize their state net operating loss carryforwards. The Company has also determined that the recovery of certain other deferred tax assets is uncertain. The valuation allowance for these deferred tax assets was decreased by $6,000.
Undistributed earnings of the Company’s Canadian subsidiary, Breaker Technology Ltd., are considered to be indefinitely reinvested; accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to Canada. There are no undistributed earnings applicable to Breaker Technology, Ltd. as of December 31, 2012.
The Company files income tax returns in the U.S. federal jurisdiction, and in various state and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by authorities for years prior to 2009. With few exceptions, the Company is no longer subject to state and local or non-U.S. income tax examinations by authorities for years prior to 2006.
The Company has a liability for unrecognized tax benefits of $771,000 and $749,000 (excluding accrued interest and penalties) as of December 31, 2012 and 2011, respectively. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The Company recognized tax costs of $82,000 and $118,000 in 2012 and 2011, respectively, for interest charges related to amounts of unrecognized tax benefits. The net total amount of unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate is $864,000 and $807,000 at December 31, 2012 and 2011, respectively. The Company does not expect a significant increase or decrease to the total amount of unrecognized tax benefits within the next twelve months.
A-48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the beginning and ending unrecognized tax benefits excluding interest and penalties is as follows (in thousands):
The December 31, 2012 balance of unrecognized tax benefits includes no tax positions for which the ultimate deductibility is highly certain but the timing of such deductibility is uncertain. Accordingly, there is no impact to the deferred tax accounting for certain tax benefits.
15.
Contingent Matters
Certain customers have financed purchases of Company products through arrangements in which the Company is contingently liable for customer debt of $2,091,000 and $3,537,000 at December 31, 2012 and 2011, respectively. At December 31, 2012, the maximum potential amount of future payments for which the Company would be liable is equal to $2,091,000. These arrangements also provide that the Company will receive the lender’s full security interest in the equipment financed if the Company is required to fulfill its contingent liability under one of these arrangements. The Company has recorded a liability of $112,000 related to these guarantees at December 31, 2012.
In addition, the Company is contingently liable under letters of credit issued by Wells Fargo totaling $13,113,000 as of December 31, 2012, including a $1,600,000 letter of credit issued on behalf of Astec Australia. The outstanding letters of credit expire at various dates through October 2013. As of December 31, 2012, Osborn and Astec Australia are contingently liable for a total of $3,388,000 and $1,209,000, respectively, in performance advance payment and retention guarantees. As of December 31, 2012, the maximum potential amount of future payments under these letters of credit and guarantees for which the Company could be liable is $17,710,000.
The Company is currently a party to various claims and legal proceedings that have arisen in the ordinary course of business. If management believes that a loss arising from such claims and legal proceedings is probable and can reasonably be estimated, the Company records the amount of the loss (excluding estimated legal fees), or the minimum estimated liability when the loss is estimated using a range, and no point within the range is more probable than another. As management becomes aware of additional information concerning such contingencies, any potential liability related to these matters is assessed and the estimates are revised, if necessary. If management believes that a material loss arising from such claims and legal proceedings is either (i) probable but cannot be reasonably estimated or (ii) reasonably possible but not probable, the Company does not record the amount of the loss, but does make specific disclosure of such matter. Based upon currently available information and with the advice of counsel, management believes that the ultimate outcome of its current claims and legal proceedings, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position, cash flows or results of operations. However, claims and legal proceedings are subject to inherent uncertainties and rulings unfavorable to the Company could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse effect on the Company’s financial position, cash flows or results of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2004, the Company received notice from the Environmental Protection Agency that it may be responsible for a portion of the costs incurred in connection with an environmental cleanup in Illinois. The discharge of hazardous materials and associated cleanup relate to activities occurring prior to the Company’s acquisition of Barber-Greene in 1986. The Company believes that over 300 other parties have received similar notice. At this time, the Company cannot predict whether the EPA will seek to hold the Company liable for a portion of the cleanup costs or the amount of any such liability. The Company has not recorded a liability with respect to the matter because no estimate of the amount of any such liability can be made at this time.
16.
Shareholders’ Equity
Under terms of the Company’s employee stock option plans, officers and certain other employees were granted options to purchase the Company’s common stock at no less than 100% of the market price on the date the option was granted. No additional options can be granted under these plans; however the Company has reserved unissued shares of common stock for exercise of the 17,862 unexercised and outstanding options as of December 31, 2012 under these employee plans. All options granted under these plans vested prior to 2007.
In addition, a Non-employee Directors Stock Incentive Plan has been established to allow non-employee directors to have a personal financial stake in the Company through an ownership interest. Directors may elect to receive their annual retainer in cash, common stock, deferred stock or stock options. Options granted under the Non-employee Directors Stock Incentive Plan vest and become fully exercisable immediately. All stock options have a 10-year term. The shares reserved under the 1998 Non-employee Directors Stock Plan total 129,604 as of December 31, 2012 of which 104,339 shares are available for future grants of stock or deferred stock to directors. No additional options can be granted under this plan. The fair value of stock awards granted to non-employee directors totaled $231,000, $239,000 and $189,000 during 2012, 2011 and 2010, respectively.
A summary of the Company’s stock option activity and related information for the year ended December 31, 2012 follows:
The total intrinsic value of stock options exercised during the years ended December 31, 2012, 2011 and 2010 was $515,000, $870,000 and $1,525,000, respectively. Cash received from options exercised during the years ended December 31, 2012, 2011 and 2010, totaled $514,000, $812,000 and $1,431,000, respectively and is included in the accompanying consolidated statements of cash flows as a financing activity. The excess tax benefit realized from the exercise of these options totaled $174,000, $310,000 and $579,000, respectively for the years ended December 31, 2012, 2011 and 2010. No stock options were granted or vested nor was any stock option expense recorded during the three years ended December 31, 2012. As of December 31, 2012, 2011 and 2010, there were no unrecognized compensation costs related to stock options previously granted.
In August 2006, the Compensation Committee of the Board of Directors implemented a five-year plan to award key members of management restricted stock units (“RSU’s”) each year. The details of the plan were formulated under the 2006 Incentive Plan approved by the Company’s shareholders in their annual meeting held in April 2006. The plan allowed up to 700,000 shares to be granted to employees. The number of RSU’s granted each year was determined based upon the performance of individual subsidiaries and consolidated annual financial performance. Additional RSU’s were granted in 2011 based upon cumulative five-year performance. Generally, each award vests at the end of five years from the date of grant, or at the time a recipient retires after reaching age 65, if earlier. No additional RSU’s are expected to be granted under the 2006 Incentive Plan. In early 2011, a subsequent plan was formulated under the Company’s 2011 Incentive Plan which was approved by the Company’s shareholders in their annual meeting held in April 2011. This plan also allows the Company to grant up to 700,000 RSU’s to employees and operates in a similar fashion to the 2006 Incentive Plan for each of the five years ending December 31, 2015. The fair value of the RSU’s that vested during 2012 and 2011 was $2,719,000 and $406,000, respectively. No RSU’s vested during 2010. The grant date tax benefit was reduced by $67,000 upon the vesting of RSUs in 2012.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RSU’s granted in 2007 through 2012, RSU’s expected to be granted in 2013, and RSU’s expected to be granted in 2016 for five-year cumulative performance are as follows:
Compensation expense of $1,054,000, $2,602,000, and $2,206,000 was recorded in the years ended December 31, 2012, 2011 and 2010, respectively, to reflect the fair value of the original RSU’s granted or anticipated to be granted less estimated forfeitures, amortized over the portion of the vesting period occurring during the period. Related income tax benefits of $387,000, $848,000 and $731,000 were recorded in 2012, 2011 and 2010, respectively. The fair value of the 57,092 RSU’s expected to be granted in February 2013 and 2016 was based upon the market value of the related stock at December 31, 2012 and will be adjusted to the fair value as of each period end until the actual grant dates. Based upon the fair value and net RSU’s shown above, it is anticipated that $3,646,000 of additional compensation costs will be recognized in future periods through 2021. The weighted average period over which this additional compensation cost will be expensed is 4.6 years. The RSU’s did not participate in the Company’s dividend paid in 2012.
Changes in restricted stock units during the year ended December 31, 2012 are as follows:
The grant date fair value of the restricted stock units granted during 2012, 2011 and 2010 was $1,303,000, $4,240,000 and $1,239,000, respectively.
A-51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has adopted an Amended and Restated Shareholder Protection Rights Agreement and declared a distribution of one right (the “Right”) for each outstanding share of Company common stock, par value $0.20 per share (the “Common Stock”). Each Right entitles the registered holder (other than the “Acquiring Person” as defined below) to purchase from the Company one one-hundredth of a share (a “Unit”) of Series A Participating Preferred Stock, par value $1.00 per share (the “Preferred Stock”), at a purchase price of $72.00 per Unit, subject to adjustment. The Rights currently attach to the certificates representing shares of outstanding Company Common Stock, and no separate Rights certificates will be distributed. The Rights will separate from the Common Stock upon the earlier of ten business days (unless otherwise delayed by the Board) following the: 1) public announcement that a person or group of affiliated or associated persons (the “Acquiring Person”) has acquired, obtained the right to acquire, or otherwise obtained beneficial ownership of fifteen percent (15%) or more of the then outstanding shares of Common Stock, or 2) commencement of a tender offer or exchange offer that would result in an Acquiring Person beneficially owning fifteen percent (15%) or more of the then outstanding shares of Common Stock. The Board of Directors may terminate the Rights without any payment to the holders thereof at any time prior to the close of business ten business days following announcement by the Company that a person has become an Acquiring Person. Once the Rights are separated from the Common Stock, then the Rights entitle the holder (other than the Acquiring Person) to purchase shares of Common Stock (rather than Preferred Stock) having a current market value equal to twice the Unit purchase price. The Rights, which do not have voting power and are not entitled to dividends, expire on December 22, 2015. In the event of a merger, consolidation, statutory share exchange or other transaction in which shares of Common Stock are exchanged, each Unit of Preferred Stock will be entitled to receive the per share amount paid in respect of each share of Common Stock.
17.
Operations by Industry Segment and Geographic Area
The Company has four reportable segments. These segments are combinations of business units that offer similar products and services. A brief description of each segment is as follows:
Asphalt Group - This segment consists of three business units that design, engineer, manufacture and market a complete line of portable, stationary and relocatable hot-mix asphalt plants and related components and a variety of heaters, heat transfer processing equipment, thermal fluid storage tanks and concrete plants. The principal purchasers of these products are asphalt producers, highway and heavy equipment contractors and foreign and domestic governmental agencies.
Aggregate and Mining Group - This segment consists of seven business units that design, engineer, manufacture and market a complete line of rock crushers, feeders, conveyors, screens and washing equipment. The principal purchasers of these products are open-mine and quarry operators.
Mobile Asphalt Paving Group - This segment consists of three business units that design, engineer, manufacture and market asphalt pavers, asphalt material transfer vehicles, milling machines and paver screeds. The principal purchasers of these products are highway and heavy equipment contractors and foreign and domestic governmental agencies.
Underground Group - This segment consists of two business units that design, engineer, manufacture and market a complete line of drilling rigs for the oil and gas, geothermal and water well industries, high pressure diesel pump trailers for fracking and cleaning oil and gas wells and a four-track surface miner. This segment previously included American Augers, Inc., which was sold in November 2012.
All Others - This category consists of the Company’s other business units, including Peterson Pacific Corp., Astec Australia Pty Ltd, Astec Insurance Company and the parent company, Astec Industries, Inc., that do not meet the requirements for separate disclosure as an operating segment.
The Company evaluates performance and allocates resources based on profit or loss from operations before U.S. federal income taxes and corporate overhead. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intersegment sales and transfers are valued at prices comparable to those for unrelated parties. For management purposes, the Company does not allocate U.S. federal income taxes or corporate overhead (including interest expense) to its business units. Revenues and expenses disclosed below have been adjusted to reflect American Augers, Inc.’s results as discontinued operations for all periods presented.
A-53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The totals of segment information for all reportable segments reconciles to consolidated totals as follows (in thousands):
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales into major geographic regions were as follows (in thousands):
Long-lived assets by major geographic region are as follows (in thousands):
18.
Accumulated Other Comprehensive Income
The balance of related after-tax components comprising accumulated other comprehensive income is summarized below (in thousands):
A-55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19.
Other Income (Expense) - Net
Other income (expense), net from continuing operations consists of the following (in thousands):
20.
Business Combinations
On August 10, 2011, the Company purchased substantially all of the assets of Protec Technology and Machinery GmbH (“Protec”), a German corporation; Construction Machinery GmbH (“Construction Machinery”), a German corporation; and Protec Technology Ltd. (“Protec, Ltd.”), a Hong Kong corporation, for $3,000,000. The Company formed a new subsidiary, Astec Mobile Machinery GmbH, located in Hameln, Germany, to operate the acquired businesses. The new Company designs, manufactures and markets asphalt rollers, screeds and a road widener attachment and distributes products produced by other Company subsidiaries, primarily Roadtec, Inc.
On October 1, 2011, the Company acquired the GEFCO division of Blue Tee Corp. for $30,407,000. The Company formed a new subsidiary, GEFCO, Inc., to operate the acquired business. This purchase resulted in the recognition of $3,877,000 of amortizable intangible assets which consist of trade names (15 year useful life) and customer relationships (8 year useful life). The effective date of the purchase was October 1, 2011, and the results of GEFCO Inc.’s operations have been included in the Company’s consolidated financial statements since that date. During January 2012, the purchase price allocation was finalized and funds previously held in escrow were distributed.
GEFCO (formerly known as George E. Failing Company) was established in 1931 and was a leading manufacturer of portable drilling rigs and related equipment for the water well, environmental, groundwater monitoring, construction, mining and shallow oil & gas exploration and production industries. GEFCO, Inc. will continue to manufacture Failing, SpeedStar and King Oil Tools equipment from its Enid, Oklahoma facilities.
The revenue and pre-tax income of Protec, Protec, Ltd., Construction Machinery and GEFCO were not significant in relation to the Company’s 2011 financial statements and would not have been significant on a pro forma basis to any earlier periods.
During the second quarter of 2012, the Company funded the first $5,000,000 of an expected $12,000,000 investment in Astec Agregados E Mineracao Do Brasil LTDA (“Astec Brazil”) located in Vespasiano, Minas Gerais, Brazil, a consolidated subsidiary of the Company. When fully funded by both the Company and a minority Brazil based shareholder, the Company anticipates a 75% ownership in Astec Brazil. To date, Astec Brazil has had only limited revenues and start-up related expenditures, but plans to construct a manufacturing facility in Brazil during 2013 with an expected cost of approximately $20,000,000. Astec Brazil plans to fund the acquisition costs of the plant and equipment with borrowings from a local Brazilian bank. The Company expects to increase its international market penetration in Brazil and Latin American countries with the aggregate and mining segment’s product lines to be produced in this facility.
A-56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21.
Discontinued Operations
In October 2012, the Company entered into an agreement to sell its American Augers, Inc. (“Augers”) subsidiary, as well as certain assets related to the Trencor large trencher product line of Astec Underground, Inc., to The Charles Machine Works, Inc. of Perry, Oklahoma. Augers and the Trencor large trencher product line were part of the Company’s Underground Group. The sale of Augers included substantially all the assets and liabilities of Augers and was completed on November 30, 2012 for $42,940,000, net of cash included in the sale and subject to closing adjustments. The Company retained the Augers vertical oil and gas drill rig product line and will relocate it to the GEFCO, Inc. subsidiary located in Enid, Oklahoma. The sale of the Trencor product line was immaterial to the transaction and is included in the Company’s consolidated financial statements in continuing operations. This divestiture, as well as the sale of the small utility trencher and drill line of products to Toro earlier in 2012, is part of the Company’s strategy to exit the cyclical underground sector.
The Company has calculated the post-closing adjustments to the sale price and has recorded the resulting $288,000 purchase price difference in other accrued liabilities in the December 31, 2012 consolidated balance sheet. The post closing adjustment is subject to review and potential negotiation with the seller.
The results of operations and the gain on the sale of Augers are presented as discontinued operations for all periods presented. Summarized financial information for Augers is below (in thousands):
The carrying amounts of the major classes of assets and liabilities disposed on November 30, 2012 were as follows (in thousands):
A-57
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
Performance Graph for Astec Industries, Inc.
Notes:
B.
Corporate Performance Graph with peer group uses peer group only performance(excludes only company).
D.
Calculated (or Derived) based from CRSP NYSE/AMEX/NASDAQ Stock Market (US Companies) Center for Research in Security Prices (CRSP®), Graduate School of Business, The University of Chicago.
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2012 Board of Directors
J. Don Brock, PhD
COMMITTEES
Chairman of the Board and Chief Executive Officer of Astec Industries, Inc.
Executive Committee:
J. Don Brock, PhD
W. Norman Smith
Daniel K. Frierson
President and Chief Operating Officer of Astec Industries, Inc.
W. Norman Smith
James B. Baker
Managing Partner of River Associates Investments, LLC
Nominating and Corporate Governance Committee:
William G. Dorey
Phillip E. Casey
Daniel K. Frierson
Former Chairman of the Board of Directors of Gerdau Ameristeel Corporation
William B. Sansom
Glen E. Tellock
William G. Dorey
Former CEO and President of Granite Construction Incorporated
Audit Committee:
James B. Baker
Phillip E. Casey
Daniel K. Frierson
William D. Gehl
Chairman of the Board and Chief Executive Officer of The Dixie Group, Inc.
William B. Sansom
Glen E. Tellock
William D. Gehl
Former Chairman of the Board and Chief Executive Officer of Gehl Company
Compensation Committee:
James B. Baker
Phillip E. Casey
William B. Sansom
William G. Dorey
Chairman and Chief Executive Officer of The H.T. Hackney Co.
William D. Gehl
Glen E. Tellock
Chairman, President and Chief Executive Officer of The Manitowoc Company, Inc.
A-59
CORPORATE EXECUTIVE OFFICERS
J. Don Brock, PhD
Robin A. Leffew
Benjamin G. Brock
Chairman of the Board and CEO
Corporate Controller
Group Vice President
Asphalt Group
W. Norman Smith
Thomas R. Campbell
Richard J. Dorris
President and Chief Operating Group Vice President
Group Vice President
Officer Mobile Asphalt Paving Energy Group
and Underground Groups
David C. Silvious, CPA
Vice President,
Richard A. Patek
CFO and Treasurer
Group Vice President
Aggregate and Mining Group
Stephen C. Anderson
V.P. of Administration,
Joseph P. Vig
Corporate Secretary and
Group Vice President
Director of Investor Relations
AggReCon Group
SUBSIDIARY OFFICERS
Michael A. Bremmer
Chris E. Colwell
Matthew B. Haven
President
President
President
CEI Enterprises, Inc.
Carlson Paving Products, Inc.
Telsmith, Inc.
Benjamin G. Brock
Larry R. Cumming
Tom Kruger
President
President
Managing Director
Astec, Inc.
Peterson Pacific Corp.
Osborn Engineered Products
SA (Pty) Ltd
Thomas R. Campbell
Richard J. Dorris
Managing Director
President
Jeffrey L. Richmond
Astec Mobile Machinery GmbH
Heatec, Inc.
President
and
Roadtec, Inc.
President
Jeffery J. Elliott
Astec Underground, Inc.
President
David H. Smale
Johnson Crushers International, Inc.
General Manager
Frank D. Cargould
Astec Australia Pty Ltd
President
Timothy D. Gonigam
Breaker Technology Ltd.
President
Joseph P. Vig
Breaker Technology, Inc.
Astec Mobile Screens, Inc.
President
Kolberg-Pioneer, Inc.
D. Aaron Harmon
President
GEFCO, Inc.
OTHER INFORMATION
Transfer Agent
Computershare
480 Washington Blvd., Jersey City, NJ 07310
800.617.6437, www.bnymellon.com/shareowner/equityaccess
Stock Exchange
NASDAQ, National Market - ASTE
Auditors
Ernst & Young LLP, Chattanooga, TN
General Counsel
Chambliss, Bahner & Stophel, P.C., Chattanooga, TN
and Litigation
Securities Counsel
Alston & Bird LLP, Atlanta, GA
Investor Relations
Stephen C. Anderson, Director, 423.553.5934
Corporate Office
Astec Industries, Inc., 1725 Shepherd Road, Chattanooga, TN 37421
Ph 423.899.5898, Fax 423.899.4456, www.astecindustries.com
The form 10-K, as filed with the Securities and Exchange Commission, may be obtained at no cost by any shareholder upon written request to Astec Industries, Inc., Attention Investor Relations.
The Company’s Code of Conduct is posted at www.astecindustries.com.
The Annual Meeting will be held on April 25, 2013 at 10:00 A.M., EST in the Training Center at Astec, Inc. located at 4101 Jerome Avenue, Chattanooga, TN 37407.
A-60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Astec Industries, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ASTEC INDUSTRIES, INC.
(Registrant)
BY: /s/ J. Don Brock
J. Don Brock, Chairman of
the Board and Chief Executive Officer
Date: March 1, 2013
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS FILED WITH ANNUAL REPORT
ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2012
ASTEC INDUSTRIES, INC.
1725 Shepherd Road
Chattanooga, Tennessee 37421
ASTEC INDUSTRIES, INC.
FORM 10-K
INDEX TO EXHIBITS