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SECURITIES & EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) ý For the quarterly period ended June 30, 2003. OR o For the Transition period from _______________ to _______________. Commission File Number 0-14714 Astec Industries, Inc. (Exact Name of Registrant as Specified in its Charter) Tennessee 62-0873631 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 1725 Shepherd Road, Chattanooga, Tennessee 37421 (Address of Principal Executive Offices) (Zip Code) (423) 899-5898 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. NO Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES NO Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding at August 4, 2003 Common Stock, par value $0.20 19,699,092 ASTEC INDUSTRIES, INC. INDEX Page Number PART I - Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 1 Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2003 and 2002 2 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002 3 Notes to Unaudited Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk 17 Item 4. Controls and Procedures 17 PART II - Other Information Item 1. Legal Proceedings 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 6. Exhibits and Reports on Form 8-K 18 PART I - FINANCIAL INFORMATION Astec Industries, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands) Account Description June 30, December 31, ASSETS Current Assets Cash and cash equivalents $ 11,280 $ 30,341 Trade receivables, net 55,180 48,965 Other receivables 2,429 27,484 Inventories 113,740 120,238 Prepaid expenses and other 23,204 22,847 Total current assets 205,833 249,875 Property and equipment - net 115,357 125,799 Goodwill 36,909 36,093 Other assets 5,431 4,736 Total assets $ 363,530 $ 416,503 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Notes payable and current maturities of long-term debt $ 9,555 $ 3,220 Accounts payable - trade 34,158 33,680 Accrued product warranty 3,739 3,646 Other accrued liabilities 34,929 36,105 Total current liabilities 82,381 76,651 Long-term debt, less current maturities 78,155 130,645 Other non-current liabilities 10,638 15,315 Minority interest in consolidated subsidiary 451 460 Total shareholders' equity 191,905 193,432 Total liabilities and shareholders' equity $ 363,530 $ 416,503 Astec Industries, Inc. and Subsidiaries Consolidated Statements of Operations (In thousands) (Unaudited) Three months ended June 30, Six months ended June 30, 2003 2002 2003 2002 Net sales $109,840 $126,669 $231,968 $249,111 Cost of sales 89,912 100,044 191,433 194,610 Gross profit 19,928 26,625 40,535 54,501 Selling, general, administrative and engineering expenses 18,488 20,358 39,898 39,936 Income from operations 1,440 6,267 637 14,565 Interest expense 2,097 2,939 4,438 5,162 Other income, net of expense 905 453 1,087 1,128 Senior note termination expense (3,837) - (3,837) - Income (loss) before income taxes (3,589) 3,781 (6,551) 10,531 Income taxes (1,387) 1,354 (2,540) 3,451 Minority interest in earnings 10 20 31 38 Net income (loss) $ (2,212) $ 2,407 $ (4,042) $ 7,042 Earnings (loss) per common share Basic $ (0.11) $ 0.12 $ (0.21) $ 0.36 Diluted $ (0.11) $ 0.12 $ (0.21) $ 0.35 Weighted average common shares outstanding Basic 19,686,539 19,660,976 19,682,161 19,639,122 Diluted 19,686,539 20,134,075 19,682,161 19,994,374 Consolidated Statements of Cash Flows (In thousands) (Unaudited) Six Months ended June 30, 2003 2002 Cash flows from operating activities: Net income (loss) $ (4,042) $ 7,042 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 7,232 6,507 Provision for doubtful accounts 120 211 Provision for inventory reserve 1,490 1,709 Provision for warranty reserve 2,016 2,626 Gain on sale and disposition of fixed assets (968) (271) Gain on sale of lease portfolio - (279) Minority interest in earnings of subsidiary (10) 9 (Increase) decrease in: Trade receivables (4,882) (9,691) Finance receivables - (7,259) Inventories 5,007 2,403 Prepaid expenses and other (1,208) 4,846 Other non-current assets (2,108) 661 Increase (decrease) in: Accounts payable 479 10,353 Accrued product warranty (1,923) (1,829) Other accrued liabilities (3,921) 8,848 Income taxes payable 828 (900) Other operating charges 206 949 Net cash provided by (used in) operating activities (1,684) 25,935 Cash flows from investing activities: Proceeds from sale of property and equipment 7,908 826 Proceeds from sale and repayment of lease portfolio 23,157 7,701 Expenditures for property and equipment (2,688) (3,908) Expenditures for equipment on operating lease - (14,092) Net cash provided (used) by investing activities 28,377 (9,473) Cash flows from financing activities: Net repayments under revolving credit agreement (83,154) (14,913) Net proceeds (repayments) under loan and note agreements 37,000 (356) Proceeds from issuance of common stock 99 444 Net cash used by financing activities (46,055) (14,825) Effect of exchange rate changes on cash 301 188 Net increase (decrease) in cash and cash equivalents (19,061) 1,825 Cash and cash equivalents at beginning of period 30,341 5,003 Cash and cash equivalents at end of period $11,280 $ 6,828 ASTEC INDUSTRIES, INC. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated under the Securities Act of 1933. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Certain reclassifications were made to the prior year presentation to conform to the current year presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in the Astec Industries, Inc. and subsidiaries annual report on Form 10-K for the year ended December 31, 2002. Note 2. Receivables Receivables are net of allowance for doubtful accounts of $2,708,000 and $2,775,000 for June 30, 2003 and December 31, 2002, respectively. Note 3. Inventories Inventories are stated at the lower of first-in, first-out cost or market and consist of the following: (in thousands) June 30, 2003 December 31, 2002 Raw Materials $48,792 $ 47,938 Work-in-Process 18,428 20,606 Finished Goods and Used Equipment 46,520 51,694 Total $113,740 $120,238
ý
Item 1. Financial Statements
2003
(Unaudited)
2002
(Note 1)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
Note 4. Property and Equipment
Property and equipment is stated at cost. Property and equipment is net of accumulated depreciation of $85,470,000 and $80,791,000 as of June 30, 2003 and December 31, 2002, respectively.
Note 5. Earnings Per Share
Basic and diluted earnings per share are calculated in accordance with SFAS No. 128. Basic earnings per share exclude any dilutive effects of options, warrants and convertible securities.
Notes to Unaudited Financial Statements - Continued
The following table sets forth the computation of basic and diluted earnings (loss) per share:
|
Three Months Ended |
Six Months Ended |
||
|
2003 |
2002 |
2003 |
2002 |
Numerator: |
|
|
|
|
Net income (loss) |
$ (2,212,000) |
$2,407,000 |
$ (4,042,000) |
$7,042,000 |
Denominator: |
|
|
|
|
Denominator for basic earnings per share |
19,686,539 |
19,660,976 |
19,682,161 |
19,639,122 |
|
|
|
|
|
Effect of dilutive securities: |
- |
473,099 |
- |
355,252 |
Denominator for diluted earnings per share |
19,686,539 |
20,134,075 |
19,682,161 |
19,994,374 |
Earnings per common share: |
$ (0.11) |
$ 0.12 |
$ (0.21) |
$ 0.36 |
Diluted |
$ (0.11) |
$ 0.12 |
$ (0.21) |
$ 0.35 |
Note 6. Comprehensive Income
Total comprehensive income for the three and six-month periods ended June 30, 2003 was a loss of $873,000 and $1,544,000, respectively. Comprehensive income for the three and six-month periods ended June 30, 2002 was $3,147,000 and $7,991,000 respectively.
The components of comprehensive income or loss for the periods indicated are set forth below:
|
(in thousands) |
|||
|
Three months ended June 30 |
Six months ended June 30 |
||
|
2003 |
2002 |
2003 |
2002 |
Net income (loss) |
$ (2,212) |
$2,407 |
$ (4,042) |
$7,042 |
Net decrease in accumulated fair value of derivative financial instruments |
(49) |
(158) |
(76) |
(59) |
Increase in foreign currency translation |
1,388 |
898 |
2,574 |
1,008 |
Total comprehensive income (loss) |
$ (873) |
$3,147 |
$ (1,544) |
$ 7,991 |
Note 7. Contingent Matters
Certain customers have financed purchases of Astec products through arrangements in which the Company is contingently liable for customer debt of approximately $21,714,000 and for residual value guarantees aggregating approximately $1,305,000 at June 30, 2003 and contingently liable for customer debt of approximately $14,749,000 at December 31, 2002. The General Electric Capital Corporation credit facility dated May 14, 2003 limits contingent liabilities or guaranteed indebtedness created after May 14, 2003 to an aggregate total of $5,000,000 at any time, or to $2,000,000 for any one customer. As of June 30, 2003, no new guaranteed indebtedness was created since May 14, 2003.
Management has reviewed all claims and lawsuits and, upon the advice of counsel, has made adequate provision for any estimable losses. However, the Company is unable to predict the ultimate outcome of the outstanding claims and lawsuits.
Notes to Unaudited Financial Statements - Continued
Note 8. Segment Information
|
|
|||||
|
(in thousands) |
|||||
|
Three months ended June 30, 2003 |
|||||
Asphalt |
Aggregate |
Mobile Asphalt |
Underground |
All |
Total |
|
Revenues from external customers |
$30,733 |
$46,133 |
$20,803 |
$11,933 |
$238 |
$109,840 |
Intersegment revenues |
2,467 |
2,891 |
(356) |
1,519 |
275 |
6,796 |
Gross profit |
3,544 |
10,166 |
4,418 |
1,792 |
8 |
19,928 |
Gross profit percent |
11.5% |
22.0% |
21.2% |
15.0% |
3.4% |
18.1% |
Segment profit (loss) |
$(511) |
$2,029 |
$946 |
$(1,115) |
$(4,053) |
$(2,704) |
|
|
|||||
|
(in thousands) |
|||||
|
Six months ended June 30, 2003 |
|||||
Asphalt |
Aggregate |
Mobile Asphalt |
Underground |
All |
Total |
|
Revenues from external customers |
$75,055 |
$90,446 |
$41,259 |
$24,439 |
$769 |
$231,968 |
Intersegment revenues |
4,588 |
6,159 |
85 |
1,519 |
1,465 |
13,816 |
Gross profit |
10,120 |
19,710 |
8,709 |
1,762 |
234 |
40,535 |
Gross profit percent |
13.5% |
21.8% |
21.1% |
7.2% |
30.4% |
17.5% |
Segment profit (loss) |
$1,573 |
$3,802 |
$2,134 |
$(4,149) |
$(7,872) |
$(4,512) |
|
|
|||||
|
(in thousands) |
|||||
|
Three months ended June 30, 2002 |
|||||
|
Asphalt |
Aggregate |
Mobile Asphalt |
Underground |
All |
Total |
Revenues from external customers |
$44,654 |
$54,539 |
$16,204 |
$10,443 |
$829 |
$126,669 |
Intersegment revenues |
4,777 |
4,594 |
7,719 |
254 |
1,237 |
18,581 |
Gross profit |
6,710 |
12,694 |
5,561 |
1,512 |
148 |
26,625 |
Gross profit percent |
15.0% |
23.3% |
34.3% |
14.5% |
17.9% |
21.0% |
Segment profit (loss) |
$2,426 |
$3,600 |
$2,220 |
$(1,037) |
$(3,940) |
$3,269 |
|
|
|||||
|
(in thousands) |
|||||
|
Six months ended June 30, 2002 |
|||||
|
Asphalt |
Aggregate |
Mobile Asphalt |
Underground |
All |
Total |
Revenues from external customers |
$94,768 |
$96,593 |
$33,861 |
$22,035 |
$1,854 |
$249,111 |
Intersegment revenues |
9,153 |
9,034 |
7,586 |
254 |
2,176 |
28,203 |
Gross profit |
16,124 |
23,097 |
10,503 |
4,323 |
454 |
54,501 |
Gross profit percent |
17.0% |
23.9% |
31.0% |
19.6% |
24.5% |
21.9% |
Segment profit (loss) |
$7,515 |
$6,244 |
$4,266 |
$(269) |
$(9,487) |
$8,269 |
Notes to Unaudited Financial Statements - Continued
Reconciliations of the reportable segment totals for profit or loss to the Company's consolidated totals are as follows:
|
(in thousands) |
|||
|
Three months ended June 30, |
Six months ended June 30, |
||
|
2003 |
2002 |
2003 |
2002 |
Profit: |
|
|
|
|
Total profit for reportable segments |
$1,349 |
$ 7,209 |
$3,360 |
$ 17,756 |
Other profit (loss) |
(4,053) |
(3,940) |
(7,872) |
(9,487) |
Minority interest in earnings |
(10) |
(20) |
(31) |
(38) |
Recapture (elimination) of intersegment profit |
502 |
(842) |
501 |
(1,189) |
Total consolidated net income (loss) |
$(2,212) |
$ 2,407 |
$(4,042) |
$ 7,042 |
Note 9. Legal Matters
There have been no material developments in legal proceedings previously reported. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contingencies" in Part I - Item 2 of this Report.
Note 10. Seasonality
Approximately 50% to 60% of the Company's business volume typically occur during the first six months of the year. During the usual seasonal trend, the first three quarters of the year are the Company's stronger quarters for business volume, with the fourth quarter normally being the weakest quarter.
Note 11. Financial Instruments
Effective January 1, 2001, the Company adopted SFAS No. 133, which requires the Company to recognize derivative instruments on the balance sheet at fair value. The statement also establishes new accounting rules for hedging instruments, which depend on the nature of the hedge relationship. Until its termination on May 13, 2003, the Company had a cash flow hedge, which required that the effective portion of the change in the fair value of the derivative instrument be recognized in Other Comprehensive Income (OCI), a component of Shareholders' Equity, and reclassified into earnings in the same period, or periods during which the hedged transaction affected earnings. The ineffective portion of the hedge, if any, was recognized in current operating earnings during the period of change in fair value.
The Company's former captive finance subsidiary, Astec Financial Services, Inc. ("AFS"), entered into an interest rate swap agreement on April 6, 2000, to fix interest rates on variable rate debt. The swap agreement, originally effective for five years with a notional amount of $7,500,000, was terminated on May 13, 2003, requiring a cash payment of $881,500. The objective of the hedge was to offset the variability of cash flows relating to the interest payments on the variable rate debt outstanding under the Company's revolving credit facility. The sole source of the variability in the hedged cash flows resulted from changes in the benchmark market interest rate, which was three-month London Interbank Offered Rate.
Under guidance of SFAS 133 amended by SFAS 138 for termination of a cash flow hedge, net derivative gain or loss related to a discontinued cash flow hedge, are to be accounted for prospectively. The Company continues to pay variable rate interest under its new debt agreement and ceased to record the fair value of the hedge in OCI, fixing the amount of OCI at the date of termination. The fixed amount in OCI at the swap termination date will be amortized into earnings through interest expense over the remaining life of the original hedge, provided the variable-rate interest obligations continue to exist. From the termination date of the swap agreement through June 30, 2003, the Company had OCI amortized through interest expense of approximately $57,000. Monthly amortization of OCI through interest expense is expected to approximate $38,000 through April 2005.
Note 12. Goodwill
Goodwill represents the excess of cost over the fair value of net identifiable assets acquired. Goodwill amounts were amortized using the straight-line method over 20 years through 2001. Effective January 1, 2002, in accordance with Statement of Financial Accounting Standards No. 142 (SFAS 142) "Goodwill and Other Intangible Assets," goodwill is no longer being amortized, but is tested for impairment at least annually. The Company measures goodwill impairment by comparing the carrying value of its operating units, including goodwill, with the fair value of the operating unit measured by determining the present value of future cash flows. Significant declines in estimated future cash flows could indicate potential impairment and trigger an impairment assessment. The Company completed the required impairment tests of goodwill during the first quarter of 2003 and noted no impairment of goodwill. At June 30, 2003 and December 31, 2002, the Company had unamortized goodwill in the amount of $36,909,000 and $36,093,000, respectively. Accumulated goodwill amortization was approximately $7,371,000 at June 30, 2003 and approximately $7,258,000 at December 31, 2002. The change in goodwill and accumulated amortization since December 31, 2002 relates to changes in foreign currency exchange rates since December 31, 2002 used to convert the foreign currency balance sheets to the reporting currency at the balance sheet date.
Note 13. Long-term Debt
On September 10, 2001, the Company and Astec Financial Services entered into a revolving credit facility with a syndicate of banks that was scheduled to expire on September 10, 2004 and an $80,000,000 note purchase agreement for senior secured notes, placed with private institutions. On May 14, 2003 the Company paid off the revolving credit facility and senior note agreement with proceeds from a new credit facility of up to $150,000,000 through General Electric Capital Corporation ("GECC") secured by the Company's assets. As reported on Form 8-K on May 19, 2003, related to the early payment of the senior note obligation, the Company issued to the former senior note holders subordinated convertible notes in the aggregate principal amount of $10,000,000 to satisfy "make-whole" obligations under the senior notes by reason of the prepayment. The subordinated convertible notes included an option whereby the Company could redeem the notes at a discount pursuant to an agreed upon schedule as set forth in the subordinated convertible notes. As of June 30, 2003 the Company expected to exercise the redemption option according to the discount schedule pursuant to the subordinated convertible notes and adjusted the related obligation and "make-whole" or termination expense to $3,837,000. On July 15, 2003, in accordance with the discount schedule, the Company exercised its right to redeem the subordinated convertible notes for $4,154,000, which included accrued interest through that date. As a result of this redemption, the Company has satisfied all of its obligations related to the early payoff and the "make-whole" provision of the senior note agreement.
As part of the GECC agreement, the Company entered into a term loan in the amount of $37,500,000 with an interest rate currently at one-percent above the Wall Street Journal prime rate. At a later date, the Company may elect an interest rate of three-percent above the London Interbank Offered Rate. The term loan requires quarterly principal payments of $1,339,286 on the first day of each quarter beginning July 1, 2003, with the final installment of the principal balance due on May 14, 2007.
The credit agreement also includes a revolving credit facility of up to $112,500,000, of which available credit under the facility is based on a percentage of the Company's eligible accounts receivable and inventories. Availability under the revolving facility is adjusted monthly and interest currently is paid in arrears at a rate of one-percent above Wall Street Journal prime. At a later date, the Company may elect an interest rate of three-percent above the London Interbank Offered Rate. The credit facility contains certain restrictive financial covenants relative to operating ratios and capital expenditures. The Company was in compliance with the financial covenants of the agreement as of June 30, 2003.
Note 14. Stock-based Compensation
The following summary presents the Company's net income (loss) and per share earnings (loss) that would have been reported had the Company determined stock compensation cost using the fair value method of accounting set forth under SFAS 123. There is no stock-based employee compensation cost in net income (loss) as reported. The pro forma impact on net income (loss) shown below may not be representative of future effects.
|
(in thousands, except per share amounts) |
|||
|
Three months ended June 30 |
Six months ended June 30 |
||
|
2003 |
2002 |
2003 |
2002 |
Net income (loss), as reported |
$(2,212) |
$2,407 |
$(4,042) |
$7,042 |
Stock compensation expense under SFAS 123, net of taxes |
(9) |
(471) |
(24) |
(942) |
Adjusted net income (loss) |
$(2,221) |
$1,936 |
$(4,066) |
$6,100 |
|
|
|
|
|
Basic earnings (loss) per share, as reported |
$(0.11) |
$0.12 |
$(0.21) |
$0.36 |
Stock compensation expense under SFAS 123, net of taxes |
- |
(0.02) |
- |
(0.05) |
$(0.11) |
$0.10 |
$(0.21) |
$0.31 |
|
|
|
|
|
|
Diluted earnings (loss) per share, as reported |
$(0.11) |
$0.12 |
$(0.21) |
$0.35 |
Stock compensation expense under SFAS 123, net of taxes |
- |
(0.02) |
- |
(0.05) |
Adjusted diluted earnings (loss) per share |
$(0.11) |
$0.10 |
$(0.21) |
$0.31 |
Note 15. Product Warranty Reserves
Changes in the Company's product warranty liability for the six months ended June 30, 2003 are as follows:
(in thousands) |
|
Reserve balance at beginning of period |
$3,715 |
Warranty liabilities accrued during the period |
2,016 |
Warranty liabilities settled during the period |
(1,992) |
Reserve balance at the end of the period |
$3,739 |
The Company warrants its products against manufacturing defects and performance to specified standards. The warranty period and performance standards vary by market and uses of its products. The Company estimates the costs that may be incurred under its warranties and records a liability at the time product sales are recorded. The warrant liability is primarily based on historical claim rates, nature of claims and the associated cost.
Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations
When used in this report, press releases and elsewhere by management or the Company from time to time, the words, "believes," "anticipates," and "expects" and similar expressions are intended to identify forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that involve certain risks and uncertainties. Statements in this Form 10-Q that are forward looking include, without limitation, statements regarding the Company's expected increase in net income in the current year, the impact on domestic sales by the general economic slowdown and continued delays in capital expenditures, expected sales during 2003, the Company's expected effective tax rates for 2003, the Company's expected capital expenditures in 2003, the expected benefit of financing arrangements, and the ability of the Company to meet its working capital and capital expenditure requirements through June 30, 2004. A variety of factors could cause actual results to differ mate rially from those anticipated in the Company's forward-looking statements, which include the risk factors that are discussed from time to time herein and in the Company's reports filed with the SEC, most recently in the Company's Annual Report on Form 10-K for the period ended December 31, 2002. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date such statements are made. The Company undertakes no obligations to update the forward-looking statements.
Results of Operations
For the three months ended June 30, 2003, net sales decreased $16,829,000, or 13%, to $109,840,000 from $126,669,000 for the three months ended June 30, 2002. Sales are generated primarily from new equipment purchases made by customers for use in construction for privately funded infrastructure development and public sector spending on infrastructure development. Asphalt Group sales decreased approximately $13,921,000 and Aggregate and Mining Group sales decreased approximately $8,406,000 for the second quarter of 2003 compared to the second quarter of 2002. Net sales for the Mobile Asphalt Group and the Underground Group increased $4,599,000 and $1,490,000, respectively, for the current quarter compared to the same prior year quarter.
For the six months ended June 30, 2003, net sales decreased $17,143,000, or 6.9%, to $231,968,000 from $249,111,000 for the six months ended June 30, 2002. Net sales for the Asphalt Group and the Aggregate and Mining Group decreased $19,713,000 and $6,147,000, respectively, for the six months ended June 30, 2003 compared to the same period of 2002. Net sales for the Mobile Asphalt Paving Group and the Underground Group increased $7,398,000 and $2,404,000, respectively, for the six months ended June 30, 2003 compared to the six months ended June 30, 2002.
For the quarter and the six months ended June 30 2003, compared to the same periods of 2002, the decrease in the Asphalt Group sales related primarily to decreased domestic market demand and related pricing pressure in the market. For the same periods of 2003 compared to 2002, the increase in Underground Group sales related primarily to sales from the new Case trencher line manufactured at the Loudon, Tennessee facility. The Case product line, acquired by the Company late in 2002, began being produced and marketed during 2003. The Aggregate and Mining Group had fewer aggregate "systems" projects during the quarter and the six months ended June 30, 2003 compared to 2002, resulting in decreased sales volume compared to the prior year. The increase in sales by the Mobile Asphalt Group for the quarter and the six-months ended June 30, 2003 compared to the same period of 2002 related primarily to increased equipment sales as opposed to operating lease arrangements through the Company's former c aptive finance company.
International sales for the second quarter of 2003 decreased $1,424,000, or 6.0%, to $22,141,000, compared to $23,565,000 for the second quarter of 2002. For the three months ended June 30, 2003 and 2002, international sales accounted for approximately 20.2% and 18.6% of net sales, respectively. Sales in Africa for the second quarter of 2003 increased approximately $2,000,000 over the same prior year period, but were offset by decreased sales in China, Japan and Central America during the same period.
International sales for the six months ended June 30, 2003 compared to the six months ended June 30, 2002 increased $3,455,000, or 8.2% to $45,775,000. A total increase of approximately $10,000,000 of sales in Africa and Europe was partially offset by decreased sales to Central America, China, Japan and the West Indies. The Company is unable to determine whether or not the increase in international sales volume for the six months ended June 30, 2003 compared to the same period of 2002 will be a trend or if the market as a whole experienced it.
Gross profit for the three months ended June 30, 2003 decreased $6,697,000, or 25.2%, to $19,928,000 from $26,625,000 for the three months ended June 30, 2002. Gross profit as a percentage of sales for the three months ended June 30, 2003 and 2002 was 18.1% and 21.0%, respectively. For the three months ended June 30, 2003 as compared to the same period of 2002, gross profit was negatively impacted by reduced sales volume, under-utilization of manufacturing capacity, negative margins on used equipment sales, expenses associated with first-time production of a high capacity double-barrel drum mixer and overall competitive price pressure.
Gross profit for the six months ended June 30, 2003 decreased $13,966,000, or 25.6%, to $40,535,000 from $54,501,000 for the six months ended June 30, 2002. Gross profit as a percentage of sales for the six months ended June 30, 2003 and 2002 was 17.5% and 21.9%, respectively. The decrease in sales volume of the Asphalt Group and related market price pressures, and expenses related to the startup of the Loudon, Tennessee facility were the primary reasons for the decrease in gross margins for the six months ended June 30, 2003 compared to the same period of 2002. To a lesser extent the decrease in gross margin for the first half of 2003 compared to the first half of 2002, related to under-utilization of production capacity, losses on the sale of used equipment, cost related to first-time production of a high capacity double barrel drum mixer and overall competitive price pressure.
Selling, general, administrative and engineering expenses for the three months ended June 30, 2003 were $18,488,000 or 16.8% of net sales, compared to $20,358,000 or 16.1% of net sales for the three months ended June 30, 2002, a decrease of $1,870,000 or 9.2%. Selling, general, administrative and engineering expenses for the six months ended June 30, 2003 were $39,898,000 or 17.2% of net sales, compared to $39,936,000 or 16.0% of net sales for the same period of 2002. The decrease in selling, general, administrative and engineering expenses for the second quarter and the six months ended June 30, 2003, compared to the same period of 2002, related primarily to cost reduction efforts, which included headcount reductions and related expenses. The expense reductions realized during the second quarter were partially offset by legal and professional fees of approximately $369,000 incurred in negotiating with the prior lenders, primarily regarding the payoff of the senior notes and the related ma ke-whole provision. In addition, for the six months ended June 30, 2003, compared to the six months ended June 30, 2002, savings resulting from the Company's various expense reduction efforts were partially offset by non-recurring expenses of approximately $2,153,000 related to refinancing the former lending arrangements. Non-recurring expenses included legal and professional fees related to negotiations as described above, financial consultants required under the former lending arrangement and real estate recording fees.
For the quarter ended June 30, 2003 compared to the quarter ended June 30, 2002, interest expense decreased $842,000, or 28.6%, to $2,097,000 from $2,939,000. Interest expense as a percentage of net sales was 1.9% and 2.3% for the quarters ended June 30, 2003 and 2002, respectively. Interest expense for the six months ended June 30, 2003 compared to the same period of 2002, decreased to $4,438,000 from $5,162,000, or 14.0%. The decrease in interest expense for the three and six months ended June 30, 2003 compared to the same periods of 2002 related primarily to the decrease in outstanding debt. The decreased interest rate on outstanding debt under the current lending arrangement compared to the previous lending arrangement also contributed to the reduced interest expense for the three and six months ended June 30, 2003 compared to the same periods of 2002.
Other income, net of other expense, was $905,000 for the quarter ended June 30, 2003, compared to $453,000 for the quarter ended June 30, 2002, an increase of $452,000. For the three months ended June 30, 2003, compared to the three months ended June 30, 2002, the increase in other income, net of other expense, related primarily to the gain on the sale of fixed assets of approximately $946,000. The gain was partially offset by the decline of approximately $501,000 in gain on sale of lease portfolios during the current quarter compared to the same prior year quarter.
For the six months ended June 30, 2003, other income, net of other expense, decreased $41,000 to $1,087,000 from $1,128,000 for the six months ended June 30, 2002. The decrease related primarily to decreased gain on lease portfolio sales for 2003 compared to 2002, offset primarily by the gain on sale of fixed assets of approximately $968,000. The gain on the sale of fixed assets during the second quarter of 2003 was generated by the sale of the Company's large tractor-trailers used primarily for the delivery of its Asphalt Group equipment, to a local trucking company. In the future, the Company plans to contract to outside trucking companies substantially all of its equipment delivery.
As reported on Form 8-K on May 19, 2003, the Company issued to the former senior note holders subordinated convertible notes in the aggregate principal amount of $10,000,000 to satisfy "make-whole" obligations under the senior notes by reason of the prepayment. The subordinated convertible notes included an option whereby the Company could redeem the notes at a discount pursuant to an agreed upon schedule as set forth in the subordinated convertible notes. As of June 30, 2003 the Company expected to exercise the redemption option according to the discount schedule pursuant to the subordinated convertible notes and adjusted the related obligation and "make-whole" or termination expense to $3,837,000. On July 15, 2003, in accordance with the discount schedule, the Company exercised its right to redeem the subordinated convertible notes for $4,154,000, which included accrued interest through that date. As a result of this redemption, the Company has satisfied all of its obligations related to the early payoff and the "make-whole" provision of the senior note agreement.
For the three months ended June 30, 2003 the Company recorded an income tax benefit of $1,387,000, compared to income tax expense of $1,354,000 for the three months ended June 30, 2002. For the six months ended June 30, 2003 the Company recorded an income tax benefit of $2,540,000, compared to income tax expense of $3,451,000 for the three months ended June 30, 2002. The consolidated effective tax rate for the three and six months ended June 30, 2003 and 2002 includes foreign tax expense for South Africa at an effective tax rate of approximately 33%.
The Company expects the effective tax rate for 2003 to be comparable to historical effective rates.For the three months ended June 30, 2003 the Company had a net loss of $2,212,000 compared to net income of $2,407,000 for the three months ended June 30, 2002. For the six months ended June 30, 2003 the Company had a net loss of $4,042,000 compared to net income of $7,042,000 for the six months ended June 30, 2002. Net loss per share for the three months ended June 30, 2003 was $.11 per share and earnings per share for the three months ended June 30, 2002 was $0.12 per diluted share, based on 19,686,539 and 20,134,075 weighted average shares outstanding, respectively.
Backlog of orders at June 30, 2003 was $43,067,000, compared to $88,030,000 at June 30, 2002, a decrease of $44,963,000 or 51.1%. The decrease in the backlog of orders at June 30, 2003 compared to June 30, 2002 related primarily to domestic orders of approximately $32,620,000 for equipment of the Company's Aggregate and Mining Group. The decrease for this operating segment related to fewer aggregate systems jobs scheduled as of June 30, 2003 compared to June 30, 2002. Compared to that of June 30, 2002, the backlog of orders as of June 30, 2003 decreased by $14,169,000 for the Asphalt Group, increased by $2,236,000 for the Mobile Asphalt Paving Group and decreased $410,000 for the Underground Group. The Company is unable to determine whether the overall decrease in backlog was experienced by the industry as a whole.
Liquidity and Capital Resources
On May 14, 2003 the Company refinanced its revolving credit facility and senior note agreement with new credit facilities of up to $150,000,000 through GECC secured by the Company's assets. As part of refinancing agreement, the Company entered into a term loan in the amount of $37,500,000 with an interest rate currently at one- percent above the Wall Street Journal prime rate. At a later date, the Company may elect an interest rate of three-percent above the London Interbank Offered Rate. The term loan requires quarterly principal payments of $1,339,286 on the first day of each quarter beginning July 1, 2003, with the final installment of the principal balance due on May 14, 2007.
The credit agreement also includes a revolving credit facility of up to $112,500,000, of which available credit under the facility is based on a percentage of the Company's eligible accounts receivable and inventories. Availability under the revolving facility is adjusted monthly and interest currently is paid in arrears at a rate of one-percent above Wall Street Journal prime. At a later date, the Company may elect an interest rate of three-percent above the London Interbank Offered Rate. The credit facility contains certain restrictive financial covenants relative to operating ratios and capital expenditures. Principal covenants under the loan agreement include the maintenance of minimum levels of fixed charge coverage ratios and a 2003 limitation on capital expenditures of $6,250,000. The Company was in compliance with the financial covenants of the agreement as of June 30, 2003.
Total short-term borrowings, including current maturities of long-term debt, were $9,555,000 at June 30, 2003, compared to $3,220,000 at December 31, 2002. As of June 30, 2003, the current portion of long-term debt related primarily to the current portion of the GECC term loan totaling $5,357,000 and the debt and accrued interest related to the discounted subordinated convertible notes issued to the former senior note holders was $3,881,000.
As reported on Form 8-K on May 19, 2003, the Company issued to the former senior note holders subordinated convertible notes in the aggregate principal amount of $10,000,000 to satisfy "make-whole" obligations under the senior notes by reason of the prepayment. The subordinated convertible notes included an option whereby the Company could redeem the notes at a discount pursuant to an agreed upon schedule as set forth in the subordinated convertible notes. As of June 30, 2003 the Company expected to exercise the redemption option according to the discount schedule pursuant to the subordinated convertible notes and adjusted the related obligation and "make-whole" or termination expense to $3,837,000. On July 15, 2003, in accordance with the discount schedule, the Company exercised its right to redeem the subordinated convertible notes for $4,154,000, which included accrued interest through that date. As a result of this redemption, the Company has satisfied all of its obligations related to the early payoff and the "make-whole" provision of the senior note agreement.
At December 31, 2002, short-term borrowings consisted primarily of financed insurance premiums totaling $1,783,000, a financing agreement for imported, purchased inventory items of approximately $886,000 and the current portion of Industrial Development Revenue Bonds totaling $500,000. Net cash used by operating activities for the six months ended June 30, 2003 was $1,684,000 compared to net cash provided by operating activities of $25,935,000 for the six months ended June 30, 2002. The decrease in cash from operating activities is related primarily to the 2003 loss from operations and the increase of prepaid expenses and other assets during the six months ended June 30, 2003 compared to the six months ended June 30, 2002. Also, the 2002 cash provided by operating activities included a $19,400,000 increase in accounts payable and other accrued liabilities.
Long-term debt, less current maturities, decreased to $78,155,000 at June 30, 2003 from $130,645,000 at December 31, 2002. At June 30, 2003, $32,143,000 was outstanding under the long-term principal portion of the GECC term loan, $27,782,000 was outstanding under the GECC revolving credit facility and $18,200,000 was outstanding under the long-term principal portion of Industrial Revenue Bonds. For the six months ended June 30, 2003 compared to the same period of 2002, net reduction of debt under revolving credit facilities and credit agreements was approximately $61,000,000.
The Company's South African subsidiary, Osborn Engineered Products SA (Pty) Ltd., has available a credit facility of approximately $2,869,000 to finance short-term working capital needs, as well as to cover the short-term establishment of letter of credit performance guarantees. As of June 30, 2003, Osborn Engineered Products had no outstanding cash balance due under the credit facility, but had approximately $1,011,000 in performance and retention bonds guaranteed under the facility. The facility is secured by a cession of the Company's accounts receivable, retention and cash. The available facility fluctuates monthly based upon 50% of the Company's accounts receivables and retention and cash balance at the end of the prior month.The Company believes that its current working capital, cash flows generated from future operations and available capacity remaining under its credit facility will be sufficient to meet the Company's working capital and capital expenditure requirements through June 30, 2004.
Capital expenditures in 2003 are expected to total approximately $3,766,000. The Company expects to finance these expenditures using internally generated funds and amounts available from its credit facilities. Net cash provided by investing activities for the six months ended June 30, 2003 was approximately $28,377,000, compared to net cash used by investing activities of $9,473,000 for the six months ended June 30, 2002. Capital expenditures for the six months ended June 30, 2003 were $2,688,000, compared to $3,908,000 for the six months ended June 30, 2002. Proceeds from the sale and repayment of lease portfolios and loans was approximately $23,157,000 for the six months ended June 30, 2003, compared to proceeds from the sale and repayment of lease portfolios of $7,701,000 for the six months ended June 30, 2002. Since the closing of the Company's captive finance company effective December 31, 2002, it has not entered into new leasing arrangements. Expenditures for equipment on operat ing lease were approximately $14,092,000 for the six months ended June 30, 2002.
The following table discloses aggregate information about the Company's contractual obligations and the periods in which payments are due as of June 30, 2003:
|
Payments Due by Period |
||||
Contractual Cash Obligations |
Total |
Less Than |
2-3 Years |
4-5 Years |
After 5 Years |
|
|
|
(in thousands) |
|
|
Long-term debt |
|
|
|
|
|
Term loan |
$37,500 |
$5,357 |
$10,714 |
$10,714 |
$10,715 |
Revolving credit facility |
27,782 |
|
27,782 |
|
|
Industrial Development Revenue Bonds |
18,700 |
500 |
1,000 |
|
17,200 |
Other notes payable |
3,728 |
3,698 |
14 |
16 |
|
Operating leases |
4,797 |
2,345 |
2,382 |
70 |
|
Total contractual cash obligations |
$92,507 |
$11,900 |
$41,892 |
$10,800 |
$27,915 |
Contingencies
The Company is engaged in certain pending litigation involving claims or other matters arising in the ordinary course of business. Most of these claims involve product liability or other tort claims for property damage or personal injury against which the Company is insured. As a part of its litigation management program, the Company maintains adequate general liability insurance coverage for product liability and other similar tort claims. The coverage is subject to a substantial self-insured retention under the terms of which the Company has the right to coordinate and control the management of its claims and the defense of these actions.
Management has reviewed all claims and lawsuits and, upon the advice of its litigation counsel, has made provision for any estimable losses. Notwithstanding the foregoing, the Company is unable to predict the ultimate outcome of any outstanding claims and lawsuits.
Certain customers have financed purchases of the Company's products through arrangements in which the Company is contingently liable for customer debt of approximately $21,714,000 and for residual value guarantees of approximately $1,305,000 at June 30, 2003. These obligations range from 10 to 84 months in duration.
In addition, the Company is contingently liable under letters of credit of approximately $21,074,000 primarily related to Industrial Revenue Bonds.
Risk Factors
A decrease or delay in government funding of highway construction and maintenance may cause our revenues and profits to decrease.
Many of our customers depend substantially on government funding of highway construction and maintenance and other infrastructure projects. Any decrease or delay in government funding of highway construction and maintenance and other infrastructure projects could cause our revenues and profits to decrease. Federal government funding of infrastructure projects is usually accomplished through bills, which establish funding over a multi-year period. On July 24, 2003, the House Appropriations Committee approved the fiscal year 2004 Transportation, Treasury and Independent Agencies Appropriations Bill with a total proposed highway investment of $33.8 billion. Previously, on April 11, 2003, the House and Senate approved a non-binding budget resolution that assumes a minimum highway funding level of $218 billion for fiscal years 2004 through 2009, which would increase current funding levels. Nevertheless, this legislation may be revised in future congressional sessions and federal funding of infrastructure may be decreased in the future, especially in the event of an economic recession. In addition, Congress could pass legislation in future sessions, which would allow for the diversion of highway funds for other national purposes or could restrict funding of infrastructure projects unless states comply with certain federal policies.
The Company is contingently liable for certain customer debt. If the Company must repay a significant portion of the total contingent liability, it could adversely affect the available operating liquidity of the Company.
Certain customers have financed purchases of the Company's products through arrangements in which the Company is contingently liable for customer debt and for residual value guarantees. These obligations range from 10 to 84 months in duration. If our customers default on this debt, the Company will have to pay the agreed contingency to the lender on behalf of the customer. The financed equipment collateralizes the underlying debt and under contract terms can reduce the amount of the Company's contingent liability in the case of customer default. In the event of customer default, recovery from the lender from the sale of collateral may not be sufficient to repay amounts paid by the Company related to contingent liabilities. Significant cash payments for which the company is contingently liable could adversely affect the Company's available operating funds.
An increase in the price of oil or decrease in the availability of oil could reduce demand for our products.
A significant portion of our revenues relates to the sale of equipment that produces asphalt mix. A major component of asphalt is oil, and asphalt prices correlate with the price and availability of oil. A rise in the price of oil or a material decrease in the availability of oil would increase the cost of producing asphalt, which would likely decrease demand for asphalt, resulting in decreased demand for our products. This would likely cause our revenues and profits to decrease. In fact, rising gasoline, diesel fuel and liquid asphalt prices significantly increased the operating and raw material costs of our contractor and aggregate producer customers, reducing their profits and causing delays in some of their capital equipment purchases. These delays, along with the slowdown in the U.S. economy, decreased demand for several key categories of products in 2002 and continue to affect operations during 2003.
Downturns in the general economy or the commercial construction industry may adversely affect our revenues and operating results.
General economic downturns, including downturns in the commercial construction industry, could result in a material decrease in our revenues and operating results. In fact, we believe that the economic downturn and political uncertainty during 2002 and 2003 negatively affected our expected revenue growth, which has increased the competitive pricing pressure in the market. 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. We could face a downturn in the commercial construction industry based upon a number of factors, including:
Acquisitions that we have made in the past and future acquisitions involve risks that could adversely affect our future financial results.
We have completed numerous acquisitions since 1994 and may acquire additional businesses in the future. We may be unable to achieve the benefits expected to be realized from our acquisitions. In addition, we may incur additional costs and our management's attention may be diverted because of unforeseen expenses, difficulties, complications, delays and other risks inherent in acquiring businesses, including the following:
Competition could reduce revenue from our products and services and cause us to lose market share.
We currently face strong competition in product performance, price and service. Some of our national competitors have greater financial, product development and marketing resources than we have. If competition in our industry intensifies or if our current competitors enhance their products or lower their prices for competing products, we may lose sales or be required to lower the prices we charge for our products. This may reduce revenue from our products and services, lower our gross margins or cause us to lose market share. In fact, some key competitors slashed prices in 2002 in an effort to make sales as demand in our industry slowed. As a result, we experienced price erosion and lower gross margins.
As an innovative leader in the asphalt and aggregate industries, we occasionally undertake the engineering, design, manufacturing and construction of equipment systems that are new to the market. Estimating the cost of such innovative equipment can be difficult and could result in our realization of significantly reduced or negative margins on such projects.
During 2002 and 2003, the Company 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.
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.
Due to the cyclical nature of our industry, the necessity of government highway funding and the customization of the equipment we sell, we may not be able to accurately forecast our expected quarterly results.
The Company sells 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. Much of the customized equipment manufactured requires significant manufacturing lead-time and specific delivery dates, that allow the expected revenue stream to be included in the manufacturing backlog total. As a result, we may not be able to accurately forecast our expected quarterly results.
If we become subject to increased governmental regulation, we may incur significant costs.
Our hot-mix asphalt plants contain air pollution control equipment that must comply with performance standards promulgated by the Environmental Protection Agency. These performance standards may increase in the future. Changes in these requirements could cause us to undertake costly measures to redesign or modify our equipment or otherwise adversely affect the manufacturing processes of our products. Such changes could have a material adverse effect on our operating results.
Also, due to the size and weight of some of the equipment that we manufacture, we often are required to comply with conflicting state regulations on the maximum weight transportable on highways and roads. In addition, some states regulate the operation of our component equipment, including asphalt mixing plants and soil remediation equipment, and most states regulate the accuracy of weights and measures, which affect some of the control systems that we manufacture. We may incur material costs or liabilities in connection with the regulatory requirements applicable to our business.
If we are unable to protect our proprietary technology from infringement or if our technology infringes technology owned by others, then the demand for our products may decrease or we may be forced to modify our products, which could increase our costs.
We hold numerous patents covering technology and applications related to many of our products and systems, and numerous trademarks and trade names registered with the U.S. Patent and Trademark Office and in foreign countries. Our existing or future patents or trademarks may not adequately protect us against infringements and pending patent or trademark applications may not result in issued patents or trademarks. Our patents, registered trademarks and patent applications, if any, may not be upheld if challenged, and competitors may develop similar or superior methods or products outside the protection of our patents. This could reduce demand for our products and materially decrease our revenues. If our products are deemed to infringe upon the patents or proprietary rights of others, we could be required to modify the design of our products, change the name of our products or obtain a license for the use of some of the technologies used in our products. We may be unable to do any of the foregoing in a timely manner, upon acceptable terms and conditions, or at all, and the failure to do so could cause us to incur additional costs or lose revenues.
Our success depends on key members of our management and other employees.
Dr. J. Don Brock, our Chairman and President, is of significant importance to our business and operations. The loss of his services may adversely affect our business. In addition, our ability to attract and retain qualified engineers, skilled manufacturing personnel and other professionals, either through direct hiring or acquisition of other businesses employing such professionals, will also be an important factor in determining our future success.
Difficulties in managing and expanding in international markets could divert management's attention from our existing operations.
In 2002, international sales represented approximately 17% of our total sales. We plan to continue to increase our presence 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:
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:
Our Articles of Incorporation, Bylaws, Rights Agreement and Tennessee law may inhibit a takeover, which could delay or prevent a transaction in which shareholders might receive a premium over market price for their shares.
Our charter, bylaws and Tennessee law contain provisions that may delay, deter or inhibit a future acquisition or an attempt to obtain control of Astec. This could occur even if our shareholders are offered an attractive value for their shares or if a substantial number or even a majority of our shareholders believe the takeover is in their best interest. These provisions are intended to encourage any person interested in acquiring us or obtaining control of us to negotiate with and obtain the approval of our Board of Directors in connection with the transaction. Provisions that could delay, deter or inhibit a future acquisition or an attempt to obtain control of us include the following:
In addition, the rights of holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of our preferred stock that may be issued in the future and that may be senior to the rights of holders of our common stock. On December 22, 1995, our Board of Directors approved a Shareholder Protection Rights Agreement, which provides for one preferred stock purchase right in respect of each share of our common stock. These rights become exercisable upon a person or group of affiliated persons acquiring 15% or more of our then-outstanding common stock by all persons other than an existing 15% shareholder. 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 3. Quantitative and Qualitative Disclosures About Market Risk
We have no material changes to the disclosure on this matter made in our Annual Report on Form 10-K for the year ended December 31, 2002.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial officer, as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer evaluated, with the participation of management, the effectiveness of our disclosure controls and procedures. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective. There were no changes in our internal control over financial r eporting that occurred during the period covered by this report that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments in the legal proceedings previously reported by the registrant since the filing of its Annual Report on Form 10-K for the year ended December 31, 2002. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contingencies" in Part I - Item 2 of this Report.
Item 4. Submission of Matters to a Vote of Security holders
The Annual Meeting of the Shareholders was held on Thursday, May 15, 2003 in Chattanooga, Tennessee, at which the following matters were submitted to a vote of the shareholders:
a. Votes regarding the election of three Directors for a term expiring in 2005 were as follows:
Term Expiring in 2003 |
FOR |
WITHHELD |
Daniel K. Frierson |
17,359,653 |
99,776 |
Robert G. Stafford |
17,358,907 |
100,522 |
Robert H. West |
17,369,687 |
89,742 |
Additional Directors, whose terms of office as Directors continued after the meeting, are as follows:
Term Expiring in 2004 |
Albert E. Guth |
W. Norman Smith |
William B. Sansom |
J. Don Brock |
Term Expiring in 2005 |
William D. Gehl |
Ronald W. Dunmire |
Ronald F. Green |
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. |
Description |
3.1 |
Restated Charter of the Company (incorporated by reference to the Company's Registration Statement on Form S-1, effective June 18, 1986, File No. 33-5348). |
|
|
3.2 |
Articles of Amendment to the Restated Charter of the Company, effective |
|
|
3.3 |
Articles of Amendment to the Restated Charter of the Company, effective June 8, 1989 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, File No. 0-14714). |
|
|
3.4 |
Articles of Amendment to the Restated Charter of the Company, effective January 15, 1999 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, File No. 0-14714). |
|
|
3.5 |
Amended and Restated Bylaws of the Company, adopted March 14, 1990 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, File No. 0-14714). |
|
|
4.1 |
Trust Indenture between City of Mequon and FirstStar Trust Company, as Trustee, dated as of February 1, 1994 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 0-14714). |
|
|
4.2 |
Indenture of Trust, dated April 1, 1994, by and between Grapevine Industrial Development Corporation and Bank One, Texas, NA, as Trustee (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 0-14714). |
4.4 |
Shareholder Protection Rights Agreement dated December 22, 1995 (incorporated by reference to the Company's Current Report on Form 8-K dated December 22, 1995, File No. 0-14714). |
|
|
10.50 |
Credit Agreement, dated as of May 14, 2003, among Astec Industries, Inc. and its individual named subsidiaries and General Electric Capital Corporation (incorporated by reference to the Company's Current Report on Form 8-K dated May 19, 2003, File No. 0-14714). |
|
|
10.51 |
Credit Agreement, dated as of May 14, 2003, between Breaker Technology Ltd. And General Electric Capital Corporation (incorporated by reference to the Company's Current Report on Form 8-K dated May 19, 2003, File No. 0-14714). |
|
|
10.52 |
Form of Subordinated Convertible Note issued to each of the following former senior note holders: American Life Insurance Company; United of Omaha Life Insurance Company; Companion Life Insurance Company; The Guardian life Insurance Company of America; The Guardian Insurance & Annuity Company, Inc.; Fort Dearborn life Insurance Company; National Life Insurance Company; Nationwide Life Insurance Company; Nationwide life and Annuity Insurance Company; Unum Life Insurance Company; Teachers Insurance and Annuity Association of America; Life Insurance Company of the Southwest; Berkshire Life Insurance Company of America (incorporated by reference to the Company's Current Report on Form 8-K dated May 19, 2003, File No. 0-14714). |
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31.1 |
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 |
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32* |
Certification pursuant to 18 U.SC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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(b) |
Reports on Form 8-K: |
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On May 19, 2003 the Registrant filed a Current Report on Form 8-K for the purpose of disclosing material contracts under credit facilities with General Electric Capital Corporation on May 14, 2003. |
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On July 17,2003 the Registrant filed a Currrent Report on Form 8-K for the purpose of furnishing the press release announcing its earnings for the second quarter of 2003. |
______________________
The Exhibits are numbered in accordance with Item 601 of Regulation S-K. Inapplicable Exhibits are not included in the list.
* In accordance with Release No. 34-47986, this exhibit is hereby furnished to the SEC as an accompanying document and is not deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933.
SIGNATURES |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. |
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ASTEC INDUSTRIES, INC. |
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(Registrant) |
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Date 8/14/2003 |
/s/ J. Don Brock |
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J. Don Brock Chairman of the Board and President |
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Date 8/14/2003 |
/s/ F. McKamy Hall |
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F. McKamy Hall Vice President, Chief Financial Officer and Treasurer |
EXHIBIT INDEX |
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|
|
31.1 |
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
31.2 |
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32* |
Certification pursuant to 18 U.SC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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Exhibit 31.1
CERTIFICATION PURSUNAT OT RULE 13a-14(a) / 15d-14(a)
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dr. J. Don Brock, CEO, certify that:
Date 8/14/2003 /s/ J. Don Brock
J. Don Brock
Chairman of the Board, CEO and President
Exhibit 31.2
CERTIFICATION PURSUNAT OT RULE 13a-14(a) / 15d-14(a)
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, F. McKamy Hall, CFO, certify that:
Date 8/14/2003 /s/ F. McKamy Hall
F. McKamy Hall
CFO, Vice President and Treasurer
Exhibit 32
STATEMENT OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF ASTEC INDUSTRIES, INC.
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
This certificate is being delivered pursuant to the requirements of Section 1350 of Chapter 63 (Mail Fraud) of Title 18 (Crimes and Criminal Procedures) of the United States Code and shall not be relied on by any person for any other purpose.
The undersigned, who are the Chief Executive Officer and Chief Financial Officer, respectively, of Astec Industries, Inc. (the "Company"), hereby each certify that, to the undersigned's knowledge:
The Quarterly Report on Form 10-Q of the Company (the "Report"), which accompanies this Certification, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and all information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated this 14th day of August, 2003.
/s/ J. Don Brock
Chairman of the Board and President
(Chief Executive Officer)
/s/ F. McKamy Hall
Vice President & Chief Financial Officer