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SECURITIES AND EXCHANGE COMMISSION
For the quarterly period ended September 30, 2004.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _______________ to _______________.
Commission File Number 0-14714
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
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|
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1725 Shepherd Road, Chattanooga, Tennessee |
37421 |
(Address of principal executive offices) |
(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.
ý |
NO o |
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES ý |
NO o |
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class |
Outstanding at October 29, 2004 |
Common Stock, par value $0.20 |
19,974,903 |
ASTEC INDUSTRIES, INC.
|
INDEX |
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Page Number |
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PART I - Financial Information |
|
||
Item 1. Financial Statements |
|
||
|
Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003 |
1 |
|
|
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2004 and 2003 |
2 |
|
|
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003 |
3 |
|
|
Notes to Unaudited Consolidated Financial Statements |
4 |
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
10 |
||
Item 3. Quantitative and Qualitative Disclosures about Market Risk |
20 |
||
Item 4. Controls and Procedures |
20 |
||
PART II - Other Information |
|
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Item 1. Legal Proceedings |
21 |
||
Item 4. Submission of Matters to a Vote of Security Holders |
21 |
||
Item 6. Exhibits and Reports on Form 8-K |
21 |
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|
|
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Astec Industries, Inc. and Subsidiaries |
||
Consolidated Balance Sheets |
||
(In thousands) |
||
Account Description |
September 30, |
December 31, |
ASSETS |
||
Current Assets: |
||
Cash and cash equivalents |
$ 11,562 |
$ 9,735 |
Trade receivables, net |
45,628 |
44,764 |
Other receivables |
2,763 |
1,254 |
Inventories |
114,343 |
110,234 |
Prepaid expenses and other |
9,017 |
18,166 |
Total current assets |
183,313 |
184,153 |
Property and equipment - net |
94,989 |
105,182 |
Goodwill |
18,585 |
20,887 |
Assets held for sale |
4,981 |
5,751 |
Other assets |
4,480 |
4,983 |
Total assets |
$ 306,348 |
$ 320,956 |
LIABILITIES AND SHAREHOLDERS' EQUITY |
||
Current Liabilities: |
||
Revolving credit loan |
$ 656 |
$ 27,997 |
Notes payable and current maturities of long-term debt |
3,310 |
8,689 |
Accounts payable - trade |
35,640 |
28,956 |
Accrued product warranty |
5,466 |
3,613 |
Other accrued liabilities |
41,020 |
33,897 |
Total current liabilities |
86,092 |
103,152 |
Long-term debt, less current maturities |
26,560 |
38,696 |
Other non-current liabilities |
4,107 |
11,101 |
Minority interest in consolidated subsidiary |
443 |
490 |
Total shareholders' equity |
189,146 |
167,517 |
Total liabilities and shareholders' equity |
$306,348 |
$320,956 |
See Notes to Consolidated Financial Statements
Astec Industries, Inc. and Subsidiaries |
||||
Consolidated Statements of Operations |
||||
(In thousands) |
||||
(Unaudited) |
||||
Three months ended |
Nine months ended |
|||
September 30, |
September 30, |
|||
2004 |
2003 |
2004 |
2003 |
|
Net sales |
$111,718 |
$101,090 |
$393,383 |
$319,612 |
Cost of sales |
89,294 |
84,287 |
311,493 |
266,179 |
Gross profit |
22,424 |
16,803 |
81,890 |
53,433 |
Selling, general, administrative and engineering expenses |
20,705 |
16,985 |
60,491 |
54,969 |
Income (loss) from operations |
1,719 |
(182) |
21,399 |
(1,536) |
Interest expense |
(877) |
(1,544) |
(3,028) |
(5,979) |
Other income, net of expense |
303 |
(66) |
963 |
992 |
Senior note termination expense |
- |
- |
- |
(3,837) |
Income (loss) from continuing operations before income taxes |
1,145 |
(1,792) |
19,334 |
(10,360) |
Income taxes on continuing operations |
413 |
(698) |
7,428 |
(4,011) |
Minority interest in earnings |
1 |
7 |
47 |
39 |
Income (loss) from continuing operations |
731 |
(1,101) |
11,859 |
(6,388) |
Income from discontinued operations |
- |
513 |
2,307 |
2,530 |
Income taxes on discontinued operations |
- |
197 |
888 |
971 |
Gain on disposal of discontinued operations (net of tax of $4,970) |
- |
- |
5,507 |
- |
Net income (loss) |
$ 731 |
$ (785) |
$18,785 |
$(4,829) |
Earnings per common share |
||||
Basic |
$0.04 |
$(0.06) |
$0.60 |
$(0.32) |
Diluted |
$0.04 |
$(0.06) |
$0.59 |
$(0.32) |
Income from discontinued operations: |
||||
Basic |
$ - |
$0.02 |
$0.35 |
$0.08 |
Diluted |
$ - |
$0.02 |
$0.34 |
$0.08 |
Net income (loss): |
$0.04 |
$(0.04) |
$0.95 |
$(0.25) |
Diluted |
$0.04 |
$(0.04) |
$0.93 |
$(0.25) |
Weighted average common shares outstanding |
||||
Basic |
19,763,373 |
19,698,817 |
19,698,731 |
19,687,774 |
Diluted |
20,247,798 |
19,698,817 |
20,121,283 |
19,687,774 |
See Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows |
||
(In thousands) |
||
(Unaudited) |
||
Nine months ended September 30, |
||
2004 |
2003 |
|
Cash flows from operating activities: |
||
Net income (loss) |
$ 18,785 |
$ (4,829) |
Adjustments to reconcile net income (loss) to net cash provided by |
||
Depreciation and amortization |
8,247 |
10,541 |
Provision for doubtful accounts |
557 |
339 |
Provision for inventory reserve |
2,623 |
3,768 |
Provision for warranty reserve |
6,846 |
5,665 |
Deferred tax benefit |
4,803 |
- |
Gain on disposal of discontinued operations, net of tax |
(5,507) |
- |
Gain on sale and disposition of fixed assets |
(125) |
(1,045) |
Minority interest in earnings of subsidiary |
(46) |
15 |
(Increase) decrease in: |
||
Trade and other receivables |
(6,611) |
(7,378) |
Inventories |
(9,468) |
7,539 |
Prepaid expenses and other |
3,092 |
2,402 |
Other non-current assets |
(1,385) |
(2,699) |
Increase (decrease) in: |
||
Accounts payable |
9,747 |
(4,731) |
Accrued product warranty |
(4,837) |
(5,470) |
Other accrued liabilities |
2,287 |
(7,339) |
Income taxes payable |
(3,896) |
567 |
Net cash provided (used) by operating activities |
25,112 |
(2,655) |
Cash flows from investing activities: |
||
Proceeds from sale of property and equipment - net |
1,047 |
7,908 |
Proceeds from sale and repayment of lease portfolio |
72 |
25,539 |
Proceeds from disposal of discontinued operations, net |
23,614 |
- |
Repayments on notes receivable |
67 |
- |
Expenditures for property and equipment |
(5,593) |
(3,836) |
Net cash provided by investing activities |
19,207 |
29,611 |
Cash flows from financing activities: |
||
Net repayments under revolving credit agreement |
(27,341) |
(74,435) |
(Repayments) borrowings under loan and note agreements |
(17,478) |
27,661 |
Purchase of Company shares by supplemental executive retirement plan |
(175) |
- |
Proceeds from issuance of common stock |
2,393 |
99 |
Net cash used by financing activities |
(42,601) |
(46,675) |
Effect of exchange rate changes on cash |
109 |
1,988 |
Net increase (decrease) in cash and cash equivalents |
1,827 |
(17,731) |
Cash and cash equivalents at beginning of period |
9,735 |
30,341 |
Cash and cash equivalents at end of period |
$ 11,562 |
$ 12,610 |
See Notes to Consolidated Financial Statements
ASTEC INDUSTRIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated under the Securities Act of 1933. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.
The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.
Certain reclassifications were made to the prior year presentation to conform to the current year presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in the Astec Industries, Inc. and subsidiaries annual report on Form 10-K for the year ended December 31, 2003.
Note 2. 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 |
Nine months ended |
||
|
September 30, |
September 30, |
||
|
2004 |
2003 |
2004 |
2003 |
Net income (loss), as reported |
$731 |
$(785) |
$18,785 |
$(4,829) |
Stock compensation expense under SFAS 123, net of taxes |
(23) |
(3) |
(63) |
(27) |
Adjusted net income (loss) |
$708 |
$(788) |
$18,722 |
$(4,856) |
|
|
|
|
|
Basic earnings (loss) per share, as reported |
$0.04 |
$(0.04) |
$0.95 |
$(0.25) |
Stock compensation expense under SFAS 123, net of taxes |
- |
- |
- |
- |
Adjusted basic earnings (loss) per share |
$0.04 |
$(0.04) |
$0.95 |
$(0.25) |
|
|
|
|
|
Diluted earnings (loss) per share, as reported |
$0.04 |
$(0.04) |
$0.93 |
$(0.25) |
Stock compensation expense under SFAS 123, net of taxes |
- |
- |
- |
- |
Adjusted diluted earnings (loss) per share |
$0.04 |
$(0.04) |
$0.93 |
$(0.25) |
Note 3. Receivables
Receivables are net of allowances for doubtful accounts of $2,205,000 and $1,752,000 for September 30, 2004 and December 31, 2003, respectively.
Note 4. Inventories
Inventories are stated at the lower of first-in, first-out cost or market and consist of the following:
|
(in thousands) |
|
|
September 30, 2004 |
December 31, 2003 |
Raw Materials |
$ 52,521 |
$ 49,277 |
Work-in-Process |
29,515 |
26,113 |
Finished Goods and Used Equipment |
32,307 |
34,844 |
Total |
$ 114,343 |
$ 110,234 |
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.
The following table sets forth the computation of basic and diluted earnings (loss) per share:
|
Three Months Ended |
Nine Months Ended |
||
|
2004 |
2003 |
2004 |
2003 |
Numerator: |
|
|
|
|
Income (loss) from continuing operations |
$ 731,000 |
$ (1,101,000) |
$11,859,000 |
$ (6,388,000) |
Income from discontinued operations |
- |
$ 316,000 |
$ 6,926,000 |
$ 1,559,000 |
Net income (loss) |
$ 731,000 |
$ (785,000) |
$18,785,000 |
$(4,829,000) |
|
|
|
|
|
Denominator: |
19,763,373 |
19,698,817 |
19,698,731 |
19,687,774 |
Effect of dilutive securities: |
|
|
|
|
Employee stock options |
374,585 |
- |
316,165 |
- |
Supplemental Executive Retirement Plan |
109,840 |
- |
106,387 |
- |
Denominator for diluted earnings per share |
20,247,798 |
19,698,817 |
20,121,283 |
19,687,774 |
Income (loss) from continuing operations: |
|
|
|
|
Basic |
$ 0.04 |
$ (0.06) |
$ 0.60 |
$ (0.32) |
Diluted |
$ 0.04 |
$ (0.06) |
$ 0.59 |
$ (0.32) |
Income from discontinued operations: |
|
|
|
|
Basic |
- |
$ 0.02 |
$ 0.35 |
$ 0.08 |
Diluted |
- |
$ 0.02 |
$ 0.34 |
$ 0.08 |
Net income (loss): |
|
|
|
|
Basic |
$ 0.04 |
$ (0.04) |
$ 0.95 |
$ (0.25) |
Diluted |
$ 0.04 |
$ (0.04) |
$ 0.93 |
$ (0.25) |
For the three and nine months ended September 30, 2004, options of approximately 1,082,000 and 1,636,000, respectively were antidilutive and were not included in the diluted EPS computation. For the three and nine months ended September 30, 2003, options of approximately 2,829,000 and 2,839,000, respectively, were antidilutive and were not included in the diluted EPS computation.
Note 6. Property and Equipment
Property and equipment is stated at cost. Property and equipment is net of accumulated depreciation of $89,223,000 and $87,022,000 as of September 30, 2004 and December 31, 2003, respectively.
Note 7. Comprehensive Income
Total comprehensive income for the three and nine-month periods ended September 30, 2004 was $1,245,000 and $19,411,000, respectively. Comprehensive income for the three and nine-month periods ended September 30, 2003 was a loss of $298,000 and $1,844,000 respectively.
The components of comprehensive income or loss for the periods indicated are set forth below:
|
(in thousands) |
|||
|
Three months ended |
Nine months ended |
||
|
2004 |
2003 |
2004 |
2003 |
Net income (loss) |
$ 731 |
$ (785) |
$18,785 |
$ (4,829) |
Net decrease in accumulated fair value of derivative financial instruments |
73 |
48 |
216 |
124 |
Increase in foreign currency translation |
441 |
439 |
410 |
2,861 |
Total comprehensive income (loss) |
$1,245 |
$ (298) |
$19,411 |
$ (1,844) |
Note 8. Contingent Matters
Certain customers have financed purchases of Astec products through arrangements in which the Company is contingently liable for customer debt of approximately $16,583,000 and for residual value guarantees aggregating approximately $1,305,000 at September 30, 2004 and contingently liable for customer debt of approximately $19,820,000 and for residual value guarantees aggregating approximately $1,305,000 at December 31, 2003. 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 September 30, 2004, guaranteed indebtedness created subject to the current loan agreement dated May 14, 2003 was $343,000. At September 30, 2004, the maximum potential amount of future payments for which the Company would be liable is equal to $18,231,000. Because the Company does not believe it will be called o n to fulfill any of these contingencies, the carrying amounts on the consolidated balance sheets of the Company for these contingent liabilities are zero.
In addition, the Company is contingently liable under the General Electric Capital Corporation credit agreement for letters of credit of approximately $16,401,000, of which $9,338,000 is related to Industrial Revenue Bonds. Under the Company's credit facility, the terms of letters of credit are limited to one year. Under the credit facility of the Company's South African subsidiary, the Company is contingently liable for approximately $333,000 in performance and retention bonds. As of September 30, 2004, the maximum potential amount of future payments for which the Company would be liable is approximately $16,734,000, of which $9,200,000 is recorded as debt in the accompanying consolidated balance sheet.
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.
Note 9. Segment Information
|
(in thousands) |
|||||
|
Three months ended |
|||||
|
September 30, 2004 |
|||||
Asphalt |
Aggregate |
Mobile Asphalt |
Underground |
All |
Total |
|
Revenues from external customers |
$26,873 |
$47,448 |
$18,971 |
$18,426 |
$ 0 |
$111,718 |
Intersegment revenues |
1,169 |
1,304 |
57 |
67 |
0 |
2,597 |
Gross profit |
4,710 |
10,758 |
3,693 |
3,693 |
(430) |
22,424 |
Gross profit percentage |
17.5% |
22.7% |
19.5% |
20.0% |
0% |
20.1% |
Segment profit (loss) |
$ 772 |
$ 2,904 |
$ 370 |
$ 477 |
$(3,865) |
$ 658 |
(in thousands) |
||||||
|
Nine months ended |
|||||
|
September 30, 2004 |
|||||
Asphalt |
Aggregate |
Mobile Asphalt |
Underground |
All |
Total |
|
Revenues from external customers |
$114,461 |
$154,780 |
$69,621 |
$54,476 |
$ 45 |
$393,383 |
Intersegment revenues |
6,305 |
3,501 |
764 |
68 |
614 |
11,252 |
Gross profit |
22,678 |
36,078 |
15,852 |
8,754 |
(1,472) |
81,890 |
Gross profit percentage |
19.8% |
23.3% |
22.8% |
16.1% |
(3271.1%) |
20.8% |
Segment profit (loss) |
$10,035 |
$14,180 |
$ 5,878 |
$ 395 |
$(18,550) |
$ 11,938 |
|
(in thousands) |
|||||
|
Three months ended |
|||||
|
September 30, 2003 |
|||||
Asphalt |
Aggregate |
Mobile Asphalt |
Underground |
All |
Total |
|
Revenues from external customers |
$26,578 |
$38,453 |
$19,691 |
$15,290 |
$1,078 |
$101,090 |
Intersegment revenues |
1,329 |
1,127 |
(20) |
(2,389) |
(17) |
30 |
Gross profit |
4,104 |
7,362 |
4,311 |
999 |
27 |
16,803 |
Gross profit percentage |
15.4% |
19.1% |
21.9% |
6.5% |
2.5% |
16.6% |
Segment profit (loss) |
$203 |
$433 |
$1,340 |
$(1,670) |
$(1,411) |
$(1,105) |
|
(in thousands) |
|||||
|
Nine months ended |
|||||
|
September 30, 2003 |
|||||
Asphalt |
Aggregate |
Mobile Asphalt |
Underground |
All |
Total |
|
Revenues from external customers |
$101,633 |
$115,454 |
$60,950 |
$39,730 |
$1,845 |
$319,612 |
Intersegment revenues |
5,917 |
3,991 |
64 |
(870) |
1,448 |
10,550 |
Gross profit |
14,224 |
23,167 |
13,020 |
2,762 |
260 |
53,433 |
Gross profit percentage |
14.0% |
20.1% |
21.4% |
7.0% |
14.1% |
16.7% |
Segment profit (loss) |
$1,775 |
$2,295 |
$3,474 |
$(5,820) |
$(8,559) |
$(6,835) |
Reconciliation of the reportable segment totals for profit or loss to the Company's consolidated totals is as follows:
|
(in thousands) |
|||
|
Three months ended |
Nine months ended |
||
|
September 30, |
September 30, |
||
|
2004 |
2003 |
2004 |
2003 |
Profit: |
|
|
|
|
Total profit for reportable segments |
$ 4,523 |
$ 306 |
$30,488 |
$1,724 |
Other profit (loss) |
(3,865) |
(1,411) |
(18,550) |
(8,559) |
Total profit (loss) |
658 |
(1,105) |
11,938 |
(6,835) |
Minority interest in earnings |
(1) |
(7) |
(47) |
(39) |
Recapture (elimination) of intersegment profit |
74 |
11 |
(32) |
486 |
Income (loss) from continuing operations |
731 |
(1,101) |
11,859 |
(6,388) |
Income from discontinued operations, net of tax |
0 |
316 |
1,419 |
1,559 |
Gain on sale of discontinued operation, net of tax |
0 |
0 |
5,507 |
0 |
Consolidated net income (loss) |
$ 731 |
$ (785) |
$18,785 |
$(4,829) |
Note 10. Discontinued Operations
On June 30, 2004, the Company completed the sale and transfer of substantially all of the assets and substantially all of the liabilities of Superior Industries of Morris, Inc. The adjusted sales price at the closing date was approximately $23,600,000. Discontinued operations, after tax, are presented as discontinued operations in the Statements of Operations, as required by SFAS No. 144.
The carrying amounts of the major classes of assets and liabilities disposed on June 30, 2004 were as follows:
Assets: |
2004 |
|
|
Cash |
$ 118,000 |
|
Accounts receivable |
3,636,000 |
|
Inventory |
2,736,000 |
|
Prepaid and other assets |
32,000 |
|
Property and equipment |
8,154,000 |
|
Goodwill |
2,438,000 |
Total assets |
17,114,000 |
|
Liabilities: |
|
|
|
Accounts payable |
3,141,000 |
|
Other liabilities |
836,000 |
Total liabilities |
3,977,000 |
|
Net assets and liabilities |
$13,137,000 |
As of September 30, 2004 the Company retained on its books prepaid assets of $95,000 and accrued income taxes payable of $21,000, which relate to the operations of Superior Industries of Morris, Inc. prior to its disposition.
Note 11. 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 12. Seasonality
Approximately 75% to 80% of the Company's business volume typically occurs during the first nine months of the year. During the usual seasonal trend, the first three quarters of the year are the Company's stronger quarters for business volume, with the fourth quarter normally being the weakest quarter.
Note 13. Financial Instruments
For the three and six months ended September 30, 2004, the Company had Other Comprehensive Income ("OCI") amortized through interest expense of approximately $115,000 and $345,000, respectively. Monthly amortization of OCI through interest expense is expected to approximate $38,000 through April 2005.
Note 14. Goodwill
At September 30, 2004 and December 31, 2003 the Company had unamortized goodwill in the amount of $18,584,581 and $20,887,084, respectively.
The changes in the carrying amount of goodwill by operating segment for the quarter ended September 30, 2004 are as follows:
|
Aggregate and Mining Group |
Mobile |
|
|
|
Balance December 31, 2003 |
$ 1,156,818 |
$18,083,875 |
$ 1,646,391 |
$ - |
$20,887,084 |
Foreign currency translation |
135,599 |
135,599 |
|||
Sale of subsidiary |
(2,438,102) |
(2,438,102) |
|||
Balance September 30, 2004 |
$1,156,818 |
$15,781,372 |
$ 1,646,391 |
$ - |
$18,584,581 |
Note 15. Long-term Debt
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, secured by the Company's assets. The Company entered into a credit facility of up to $145,000,000 with General Electric Capital Corporation, while the Company and its Canadian subsidiary entered into a credit facility of up to $5,000,000 with General Electric Capital Canada, Inc. As part of the $145,000,000 GE Capital agreement, the Company entered into a term loan in the amount of $37,500,000 with an interest rate of one-percent (1%) above the higher of the Wall Street Journal prime rate and the Federal Funds Rate plus one-half of one percent (1/2%) or, at the election of the Company, three-percent (3%) above the London Interbank Offered Rate ("LIBOR"). The term loan maturity date is May 14, 2007.
The May 14, 2003 credit agreement also included a revolving credit facility of up to $107,500,000, 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 is due in arrears. The revolving credit facility has a maturity date of May 14, 2007 and at inception, the interest rate on the revolving credit loan was one-percent (1%) above the higher of the Wall Street Journal prime rate and the Federal Funds Rate plus one-half of one percent (1/2%) or, at the election of the Company, three-percent (3%) above LIBOR. The credit facility contains certain restrictive financial covenants relative to operating ratios and capital expenditures.
On September 30, 2003, related to the syndication of the loan by GE Capital, the Company entered into an amendment to the Credit Agreement that reduced the availability under the credit facility from $107,500,000 to $82,500,000. In addition, the amendment increased the interest rate on the term loan and the revolving facility to one and one-half (1.5%) percent above the higher of Wall Street Journal prime rate and the Federal Funds Rate plus one-half of one percent (1/2%) or, at the election of the Company, to three and one-half (3.5%) percent above LIBOR. The Company requested the reduction in the revolving credit facility to reduce the fees paid for the daily available, but unused portion of the revolving facility. As of September 30, 2004, available credit under the revolving facility was approximately $61,100,000.
The Company's Canadian subsidiary, Breaker Technology Ltd, has available a credit facility issued by General Electric Capital Canada, Inc. dated May 14, 2003 with a term of four years for $5,000,000 to finance short-term working capital needs, as well as to cover the short-term establishment of letter of credit guarantees. As of September 30, 2004, Breaker Technology Ltd had no outstanding cash balance due under the credit facility, but approximately $163,000 in letter of credit guarantees under the facility. The Company is the primary guarantor to GE Capital of payment and performance for this $5,000,000 credit facility. The term of the guarantee is equal to the related debt. The maximum potential amount of future payments the Company would be required to make under its guarantee at September 30, 2004 is $163,000. The Company was in compliance with the financial covenants under its credit facilities as of September 30, 2004.
The Company's South African subsidiary, Osborn Engineered Products SA (Pty) Ltd., has available a credit facility dated March 19, 2004 with Firstrand Bank Limited of approximately $3,087,000 to finance short-term working capital needs, as well as to cover the short-term establishment of letter of credit performance guarantees. The credit facility is has no maturity date. The interest rate on the facility is the variable prime rate, which currently is 11%. As of September 30, 2004, Osborn Engineered Products had no outstanding borrowings under the credit facility, but approximately $333,000 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 balance. The available facility fluctuates monthly based upon 50% of the Company's accounts receivables and retention at the end of the prior month. As of September 30, 2004, Osborn had available credit under the facility of approximately $2,3 00,000.
In accordance with Emerging Issues Task Force (EITF) Issue 95-22 Balance Sheet Classification of Borrowings Outstanding Under Revolving Credit Agreements That Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement, the Company classifies the revolving credit facility as a current liability in its financial statements.
Note 16. Product Warranty Reserves
Changes in the Company's product warranty liability for the nine months ended September 30, 2004 and 2003 are as follows:
|
(in thousands) |
|
|
2004 |
2003 |
Reserve balance at beginning of period |
$ 3,613 |
$ 3,646 |
Warranty liabilities accrued during the period |
6,846 |
5,665 |
Warranty liabilities settled during the period |
(4,993) |
(5,470) |
Reserve balance at the end of the period |
$ 5,466 |
$ 3,841 |
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 warranty liability is primarily based on historical claim rates, nature of claims and the associated cost.
Note 17. Assets Held for Sale
In 2002 the Company acquired a 300,000 square-foot manufacturing facility located on 108 acres in Loudon, Tennessee. Related to this transaction, the Trencor, Inc. manufacturing operations formerly located in Grapevine, Texas were relocated to the Loudon, Tennessee facility during the fourth quarter of 2002. A portion of the office space of the Grapevine, Texas facility is currently leased to an unrelated party. The Company continues to actively pursue a buyer for the Grapevine, Texas facility and believes it will be sold in 2005 for a gain. The carrying value of equipment, land and building totaling approximately $4,981,000 is classified as "assets held for sale" in the balance sheet and is included in the assets of the Underground Group segment.
Note 18. Post Retirement Benefits
The Company previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $1,400,000 to its pension plan and $62,000 in other benefits during 2004. As of September 30, 2004, $1,400,000 of the contributions had been made to the pension plan and approximately $124,000 was paid for other benefits. The Company presently anticipates contributing an additional $40,000 in 2004 for benefits during 2004.
The components of net periodic pension cost for the nine months ended September 30, 2004 and 2003 are as follows:
|
(in thousands) |
|||
|
Pension Benefit |
Other Benefits |
||
|
2004 |
2003 |
2004 |
2003 |
Service cost |
|
$ 274 |
$ 89 |
$ 86 |
Interest cost |
$401 |
455 |
81 |
80 |
Expected return on assets |
(362) |
(254) |
- |
- |
Amortization of prior service cost |
- |
- |
25 |
25 |
Amortization of net (gain) loss |
36 |
134 |
(20) |
(24) |
Net periodic benefit cost |
$ 75 |
$ 609 |
$ 175 |
$ 167 |
The Company's two post-retirement medical and life insurance plans provide prescription drug benefits that may be affected by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act"), signed into law in December 2003. In accordance with FASB Staff Position FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, the effects of the Act on the Company's medical plans have not been included in the measurement of the accumulated post-retirement benefit obligation or net periodic post-retirement benefit cost for 2003. Specific authoritative guidance from the FASB on the accounting for the federal subsidy is pending and that guidance, when issued, may require the Company to restate previously reported information.
Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements contained anywhere in this Quarterly Report on Form 10-Q that are not limited to historical information are considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are sometimes identified by the words, "believes," "anticipates,"
"intends," and "expects" and similar expressions. Such forward-looking stateme nts include, without limitation, statements regarding the Company's expected sales during 2004, the Company's expected effective tax rates for 2004, the Company's expected capital expenditures in 2004, the expected benefit of financing arrangements, the ability of the Company to meet its working capital and capital expenditure requirements through September 30, 2005, the impact of the enactment of the highway bill, the improving economic environment as it affects the Company, the timing and impact of the improving economy, the Company being called upon to fulfill certain contingencies, the timing and effects of the sale of the Grapevine, Texas facil ity, and the expected increase of the Company's presence in international markets.These forward-looking statements are based largely on management's expectations which are subject to a number of known and unknown risks, uncertainties and other factors discussed in this report and in other documents filed by the Company with the Securities and Exchange Commission, which may cause actual results, financial or otherwise, to be materially different from those anticipated, expressed or implied by the forward-looking statements. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements to reflect future events or circumstances.
In addition to the risks and uncertainties identified elsewhere herein and in other documents filed by the Company with the Securities and Exchange Commission, most recently in the Company
's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2004, the risk factors described in the section under the caption "Risk Factors" should be carefully considered when evaluating the Company's business and future prospects.design, engineer, manufacture and market equipment that is used in each phase of road building, from quarrying and crushing the aggregate to testing the mix for application of the road surface;
On June 30, 2004, the Company sold substantially all of the assets and liabilities of Superior Industries of Morris, Inc. (Superior) to Superior Industries, LLC. Superior was part of the Company's Aggregate and Mining Group. Superior's financial results are included in the income from discontinued operations line and are excluded from all other lines on the statement of operations.
Public sector spending at the federal, state and local levels has been driven in large part by federal spending under the six-year federal-aid highway program, the Transportation Equity Act for the 21st Century ("TEA-21"), enacted in June 1998. TEA-21 authorized the appropriation of $217 billion in federal aid for road, highway and bridge construction, repair and improvement and other federal highway and transit projects for federal fiscal years October 1, 1998 through September 30, 2003. A new appropriation was enacted setting funding at a level of $33.6 billion for October 1, 2003 through September 30, 2004, but authorizing payment of such funds through February 29, 2004. The date has been extended until May 31, 2005. A new six-year bill is under consideration. The amounts proposed by the U.S. Senate and the U.S. House of Representatives for funding under such long-term bills each exceed the amount of funding currently in place. However, President Bush has stated t hat he prefers that the amount of funding under the long-term legislation remain at its current level equal to $256 billion for the next six years. The Company does not know when the new highway funding bill will be enacted or the amount of funding that will be provided under such bill. The House and Senate members of the "conference committee" were instructed to present "compromise" proposals in an effort to reach an agreement on the overall funding level of a multi-year bill.
Results of Operations
For the three months ended September 30, 2004, net sales increased $10,628,000, or 10.5%, to $111,718,000 from $101,090,000 for the three months ended September 30, 2003. 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. For the third quarter of 2004 compared to the third quarter of 2003, net sales for the Aggregate and Mining Group increased approximately $8,995,000, Asphalt Group net sales increased approximately $295,000, Underground Group net sales increased approximately $3,136,000 and Mobile Asphalt Group sales decreased $720,000. For the third quarter of 2004 the All Others category had no net sales, as compared to the same period of 2003, net sales reported under the All Others category was $1,078,000.
For the nine months ended September 30, 2004, net sales increased $73,771,000, or 23.1%, to $393,383,000 from $319,612,000 for the nine months ended September 30, 2003. For the nine months ended September 30, 2004 compared to the same period of 2003, net sales for the Aggregate and Mining Group increased $39,326,000, Asphalt Group net sales increased $12,828,000, Underground Group sales increased approximately $14,746,000 and Mobile Asphalt Paving Group sales increased $8,671,000. For the nine months ended September 30, 2004 compared to the same period of 2003, net sales reported under the All Others category decreased $1,800,000. For the quarter and the nine months ended September 30, 2004, compared to the same periods of 2003, the Company believes that the increase in the sales for all business segments, except the Mobile Asphalt Group which had a decrease in sales for the quarter, related to a general improvement in the economy, increased market confidence of customers and dealers, and to a lesser extent the accelerated depreciation tax incentive. The decrease in sales in the All Others category for the nine months ended September 30, 2004 compared to the same period of 2003 related to the decreased lease portfolio income from the Company's former captive finance subsidiary. Net sales for the three and nine months ended September 30, 2003 exclude discontinued operations of Superior Industries of Morris, Inc.
International sales for the third quarter of 2004 increased $5,541,000, or 22.7%, to $29,943,000, compared to $24,402,000 for the third quarter of 2003. For the three months ended September 30, 2004 and 2003, international sales accounted for approximately 26.8% and 24.1% of net sales, respectively. International sales increased for the third quarter of 2004 compared to the same period of 2003 primarily in Europe and South America, followed by Asia and Africa. The Company believes the increase in international sales relates to the weakened US dollar compared to other foreign currencies.
International sales for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 increased $27,251,000, or 39.2% to $96,857,000. For the nine months ended September 30, 2004 and 2003, international sales accounted for approximately 24.6% and 21.8% of net sales, respectively. The increase in international sales for the first nine months of 2004 compared to sales for the same period of 2003 is due primarily to increased sales in Europe, Middle East and Asia. The Company is unable to determine whether or not the increase in international sales volume for the three and nine months ended September 30, 2004 compared to the same periods of 2003 will be a trend or if the market as a whole experienced it. International sales for the three and nine months ended September 30, 2003 exclude discontinued operations of Superior Industries of Morris, Inc.
Gross profit for the three months ended September 30, 2004 increased $5,621,000, or 33.5%, to $22,424,000 from $16,803,000 for the three months ended September 30, 2003. Gross profit as a percentage of sales for the three months ended September 30, 2004 and 2003 was 20.1% and 16.6%, respectively.
Gross profit for the nine months ended September 30, 2004 increased $28,457,000, or 53.3%, to $81,890,000 from $53,433,000 for the nine months ended September 30, 2003. Gross profit as a percentage of sales for the nine months ended September 30, 2004 and 2003 was 20.8% and 16.7%, respectively. The gross profit increase for the third quarter and nine months ended September 30, 2004 compared to the same period of 2003 related primarily to increased volume through the manufacturing facilities and greater utilization of manufacturing capacity, while the gross profit percentage was negatively impacted by increased steel and increased purchase parts prices.
Selling, general, administrative and engineering expenses for the three months ended September 30, 2004 were $20,705,000 or 18.5% of net sales, compared to $16,985,000 or 16.8% of net sales for the three months ended September 30, 2003, an increase of $3,720,000 or 21.9%. During the third quarter of 2004, the Company incurred an increase in health insurance expense due to claims experience, increased research and development expense, expense related to Sarbanes-Oxley compliance and increased recruitment and relocation expense compared to the same period of 2003.
Selling, general, administrative and engineering expenses for the nine months ended September 30, 2004 were $60,491,000 or 15.4% of net sales, compared to $54,969,000 or 17.2% of net sales for the nine months ended September 30, 2003, an increase of $5,522,000 or 10.0%. The increase in selling, general, administrative and engineering expenses for the three and nine months ended September 30, 2004 compared to the same periods of 2003 relate primarily to increased bonus accruals for subsidiary financial performance during the current year, increased health insurance expense due to claims experience and expense related to Sarbanes-Oxley compliance.
For the nine months ended September 30, 2003, the Company incurred non-recurring expenses of approximately $3,837,000 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 September 30, 2004 compared to the quarter ended September 30, 2003, interest expense decreased $667,000, or 43.2%, to $877,000 from $1,544,000. Interest expense as a percentage of net sales was 0.8% and 1.5% for the quarters ended September 30, 2004 and 2003, respectively.
For the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003, interest expense decreased $2,951,000, or 49.4%, to $3,028,000 from $5,979,000. Interest expense as a percentage of net sales was 0.8% and 1.9% for the nine months ended September 30, 2004 and 2003, respectively. The decrease in interest expense for the three and nine months ended September 30, 2004 compared to the same period of 2003 related primarily to the decrease in outstanding debt and the lower interest rate on debt under the current lending arrangement. The decrease in outstanding debt for the three months ended September 30, 2004 compared to the same period of 2003 resulted primarily from profitable operations and $23,600,000 of proceeds from the sale of Superior Industries of Morris, Inc. on June 30, 2004.
For the three months ended September 30, 2004, the Company recorded income tax expense on continuing operations of $413,000, compared to income tax benefit from continuing operations of $698,000 for the three months ended September 30, 2003. For the nine months ended September 30, 2004, the Company recorded income tax expense from continuing operations of $7,428,000, compared to an income tax benefit from continuing operations of $4,011,000 for the nine months ended September 30, 2003. The increase in tax expense for the three and nine months ended September 30, 2004 relates to the increase in taxable income for 2004 compared to the prior year. The Company expects the effective tax rate for continuing operations for 2004 to be comparable to historical effective rates.
For the three months ended September 30, 2004 the Company had income from continuing operations of $731,000 compared to a loss from continuing operations of $1,101,000 for the three months ended September 30, 2003. Income from continuing operations for the nine months ended September 30, 2004 was $11,859,000 compared to a loss from continuing operations of $6,388,000 for the nine months ended September 30, 2003.
For the three months ended September 30, 2003, the Company had income from discontinued operations, net of tax related to the sale of substantially all of the assets and liabilities of Superior Industries of Morris, Inc., of $316,000. For the nine months ended September 30, 2004 and 2003, income from discontinued operations, net of tax was $1,419,000 and $1,559,000, respectively. The effective tax rate for discontinued operations was comparable to historical effective tax rates for continuing operations.
At June 30, 2004, the Company recorded a gain on the disposal of discontinued operations, net of tax in the amount of $5,507,000. The tax expense recorded related to the gain on disposal at June 30, 2004 was $4,970,000. The higher effective tax rate (47%) of the net gain on disposition was the result of goodwill on the books of Superior Industries, which is not deductible in the calculation of the tax expense.
For the three months ended September 30, 2004 the Company had net income of $731,000 compared to a net loss of $785,000 for the three months ended September 30, 2003. Earnings per diluted share for the three months ended September 30, 2004 were $0.04 compared to a net loss per share for the quarter ended September 30, 2003 of $0.04. Diluted shares outstanding for the three months ended September 30, 2004 and 2003 were 20,247,798 and 19,698,817, respectively.
For the nine months ended September 30, 2004, net income was $18,785,000, compared to a net loss of $4,829,000 for the nine months ended September 30, 2003. Earnings per diluted share for the nine months ended September 30, 2004 were $0.93 compared to a net loss per share for the nine months ended September 30, 2003 of $0.25. Diluted shares outstanding for the nine months ended September 30, 2004 and 2003 were 20,121,283 and 19,687,774, respectively.
Backlog of orders for continuing operations at September 30, 2004 was $66,762,000, compared to $40,832,000 at September 30, 2003, an increase of $25,930,000 or 64%. The September 30, 2003 backlog has been restated to exclude the discontinued operations of Superior Industries of Morris, Inc. The increase in the backlog of orders at September 30, 2004 compared to September 30, 2003 related to increased domestic orders totaling approximately $16,245,000 and increased international orders of approximately $9,685,000. The increase in domestic and international orders at September 30, 2004 related primarily to increased orders for the Company's Asphalt Group, which increased approximately $16,337,000 and $1,017,000, respectively. The backlog of domestic and international orders for the Aggregate and Mining Group increased $4,197,000 and $6,871,000, respectively. The increase in domestic backlog of orders at September 30, 2004 compared to the same date of 2003 was offset somewhat by decreased domestic backlog of orders of the Underground Group. The Company is unable to determine whether the increase 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, secured by the Company's assets. The Company entered into a credit facility of up to $145,000,000 with General Electric Capital Corporation ("GECC"), while the Company and its Canadian subsidiary entered into a credit facility of up to $5,000,000 with General Electric Capital Canada, Inc. As part of the $145,000,000 GE Capital agreement, the Company entered into a term loan in the amount of $37,500,000 with an interest rate of one-percent (1%) above the higher of the Wall Street Journal prime rate and the Federal Funds Rate plus one-half of one percent (1/2%) or, at the election of the Company, three-percent (3%) above the London Interbank Offered Rate ("LIBOR"). The term loan maturity date is May 14, 2007. The term loan requires quarterly principal payments of $1,339,286 on the first day of each quarter beginning July 1, 2003, and a fina l payment of the principal balance due on May 14, 2007.
The May 14, 2003 credit agreement also included a revolving credit facility of up to $107,500,000, 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 is due in arrears. The revolving credit facility has a maturity date of May 14, 2007 and at inception, the interest rate on the revolving credit loan was one-percent (1%) above the higher of the Wall Street Journal prime rate and the Federal Funds Rate plus one-half of one percent (1/2%) or, at the election of the Company, three-percent (3%) above LIBOR. The credit facility contains certain restrictive financial covenants relative to operating ratios and capital expenditures. As of September 30, 2004, the Company was in compliance with the financial covenants of the agreement.
On September 30, 2003, related to the syndication of the loan by GE Capital, the Company entered into an amendment to the Credit Agreement that reduced the availability under the credit facility from $107,500,000 to $82,500,000. In addition, the amendment increased the interest rate on the term loan and the revolving facility to one and one-half (1.5%) percent above the higher of Wall Street Journal prime rate and the Federal Funds Rate plus one-half of one percent (1/2%) or, at the election of the Company, to three and one-half (3.5%) percent above LIBOR. The Company requested the reduction in the revolving credit facility to reduce the fees paid for the daily available, but unused portion of the revolving facility. As of September 30, 2004, available credit under the revolving credit facility was approximately $61,100,000.
On October 29, 2003, related to the syndication of the loan by GE Capital, the Company amended its credit agreement to, among other things: 1) raise the threshold of required lender approval to at least eighty-one percent (81%) for certain material amendments to the credit agreement; and 2) require any over-advances (over the borrowing base formula contained therein) be repaid, at the latest, within sixty (60) days. On March 3, 2004, the Company amended its credit facility to revise the fixed charge coverage ratio for the second, third and fourth quarters of 2004.
On June 30, 2004, the Company completed the sale and transfer of substantially all of the assets and substantially all of the liabilities of Superior Industries of Morris, Inc. The adjusted sales price was $23,600,000. A portion of the proceeds of the sale were used to pay the outstanding revolving credit facility with GE Capital at June 30, 2004, which totaled approximately $13,000,000. In addition, on June 30, 2004, $4,500,000 of the sale proceeds was used to pay down the GE Capital term loan.
Total short-term borrowings, including current maturities of long-term debt, were $3,966,000 at September 30, 2004, compared to $36,686,000 at December 31, 2003. As of September 30, 2004, short-term borrowings included the current portion of the GECC term loan totaling $2,810,000, the current portion of Industrial Revenue Bonds totaling $500,000 and the Canadian subsidiary's portion of the GECC revolving credit facility totaling $656,000. The balance of the domestic portion of the GECC revolving credit facility at September 30, 2004 was zero. At December 31, 2003, short-term borrowings consisted primarily of the GECC revolving line of credit totaling $27,997,000, the current portion of the GECC term loan totaling $6,357,000, financed insurance premiums totaling $1,820,000 and the current portion of Industrial Revenue Bonds totaling $500,000.
Net cash provided by operating activities for the nine months ended September 30, 2004 was $25,112,000 compared to net cash used by operating activities of $2,655,000 for the nine months ended September 30, 2003. The increase in cash from operating activities for the nine months ended September 30, 2004 compared to the same period of 2003 related primarily to net income and increased accounts payable.
Long-term debt, less current maturities, decreased to $26,560,000 at September 30, 2004 from $38,696,000 at December 31, 2003. At September 30, 2004, $16,860,000 was outstanding under the long-term principal portion of the GECC term loan and $9,700,000 was outstanding under the long-term principal portion of Industrial Revenue Bonds. With the proceeds from the disposition of Superior Industries on June 30, 2004, the Company made a principal payment on the GECC term loan of $4,500,000 and paid the outstanding balance of the revolving credit facility of approximately $13,000,000 on that date.
The Company's South African subsidiary, Osborn Engineered Products SA (Pty) Ltd., has available a credit facility dated March 19, 2004 with Firstrand Bank Limited of approximately $3,087,000 to finance short-term working capital needs, as well as to cover the short-term establishment of letter of credit performance guarantees. The credit facility is has no maturity date. The interest rate on the facility is the variable prime rate, which currently is 11%. As of September 30, 2004, Osborn Engineered Products had no outstanding borrowings under the credit facility, but approximately $333,000 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 balance. The available facility fluctuates monthly based upon 50% of the Company's accounts receivables and retention at the end of the prior mo nth. As of September 30, 2004, Osborn had available credit under the facility of approximately $2,300,000.The Company believes that its current working capital, cash flows generated from future operations and available capacity remaining under its credit facility will be sufficient to meet the Company's working capital and capital expenditure requirements through September 30, 2005.
Capital expenditures for 2004 are forecasted to total approximately $8,450,000. 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 nine months ended September 30, 2004 was approximately $19,207,000, compared to net cash provided by investing activities of $29,611,000, for the nine months ended September 30, 2003. Capital expenditures for the nine months ended September 30, 2004 were $5,593,000, compared to $3,836,000 for the nine months ended September 30, 2003. Proceeds from the repayment of loans was approximately $72,000 for the nine months ended September 30, 2004, compared to proceeds from the sale and repayment of lease portfolios and finance receivables of $25,539,000 for the nine months ended September 30, 2003. Since the closing of the Company's captive finance company effective December 31, 2002, the Company has not enter ed into new leasing arrangements. For the nine months ended September 30, 2004, proceeds from the disposal of discontinued operations was approximately $23,482,000, which is net of cash of approximately $118,000 included in the assets disposed.
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.
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 September 30, 2003, the six-year federal-aid highway program, the Transportation Equity Act for the 21st Century ("TEA-21"), expired. Congress is currently negotiating a six-year TEA-21 reauthorization bill. As part of the fiscal year 2004 budget resolution, the Surface Transportation Extension Act of 2003 provided for $14.1 billion for road resurfacing. In addition, on September 30, 2003, President Bush signed legislation that extended the authority to distribute federal highway and transit funds until February 29, 2004. Fur ther legislation has been entered into to extend authorization of the funding through May 31, 2005. Short-term extensions are necessary to keep federal highway and transit funds flowing while Congress continues working to enact the six-year TEA-21 reauthorization measure. If the reauthorization measure is not enacted into law by the May 31 extension deadline and if further extensions are not entered into, highway funding may stop until such reauthorization bill or extensions are enacted. Even if entered into, the highway 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 1 to 81 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. 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 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 2003.
The Company was notified of and incurred steel price increases and steel surcharges beginning in early 2004. Factors contributing to the increased steel costs are: 1) China's strong economy and its increased steel consumption and purchase of U.S. scrap steel; 2) the weakened U.S. dollar's dissuasion of foreign steel exports to the U.S.; 3) shortages of coke and iron ore; and 4) increased demand for steel in Korea and the U.S. Some types of steel are currently only available on an allocation basis determined by prior year purchases. Although the Company is passing along a portion of the increased steel costs to its customers by way of surcharges and temporary price increases, continued significant steel cost increases to the Company, in addition to potential limitation of the steel supply by mills, could negatively impact the Company's gross margins and financial results.
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 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:
We may be unsuccessful in complying with the financial ratio covenants or other provisions of our amended credit agreement.
The Company was in compliance with financial covenants at March 31, June 30 and September 30, 2004. For the quarter ended December 31, 2003, the Company was not in compliance with one financial covenant contained in the credit agreement dated as of May 14, 2003, as amended. On March 3, 2004, the Company's lending syndicate waived the covenant violation and amended the covenant requirement through 2004 with an amendment effective December 31, 2003. The Company may be unable to comply with the amended covenant or the other financial covenants in the credit facility. If such violations occur, the lenders could elect to pursue their contractual remedies under the credit facility, including requiring immediate repayment in full of all amounts outstanding. The Company may also be unable to secure adequate or timely replacement of financing to repay its lenders in the event of an unanticipated repayment demand.
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.
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:
we may have difficulty integrating the financial and administrative functions of acquired businesses;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.
Our quarterly operating results are likely to fluctuate, which may decrease our stock price.
Our quarterly revenues, expenses and operating results have varied significantly in the past and are likely to vary significantly from quarter to quarter in the future. As a result, our operating results may fall below the expectations of securities analysts and investors in some quarters, which could result in a decrease in the market price of our common stock. The reasons our quarterly results may fluctuate include:
Period to period comparisons of such items should not be relied on as indications of future performance.
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, 2003.
Item 4. Controls and Procedures
The Company's management, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely making known to them material information relating to the Company and the Company's consolidated subsidiaries required to be disclosed in the Company's reports filed or submitted under the Exchange Act. There has been no change in the Company's internal control over financial reporting during the quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company's 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, 2003. 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
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. |
Description |
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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). |
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3.2 |
Articles of Amendment to the Restated Charter of the Company, effective |
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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). |
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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). |
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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). |
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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). |
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4.2 |
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). |
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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 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 |
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(b) Reports on Form 8-K: |
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On October 20, 2004, the Registrant filed a Current Report on Form 8-K for the purpose of furnishing a press release announcing its financial results for its quarter ended September 30, 2004. |
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On October 21, 2004, the Registrant filed a Current Report on Form 8-K for the purpose of correcting a typographical error in the October 20, 2004 press release announcing its financial results for the quarter ended September 30,2004. |
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______________________ |
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The Exhibits are numbered in accordance with Item 601 of Regulation S-K. Inapplicable Exhibits are not included in the list. |
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* In accordance with Release No. 34-47551, this exhibit is hereby furnished to the SEC as an accompanying document and is not to be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, 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, as amended. |
SIGNATURES
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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/s/ J. Don Brock |
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J. Don Brock |
Date 11/8/2004 |
Chairman of the Board and President |
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/s/ F. McKamy Hall |
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F. McKamy Hall |
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Vice President, Chief Financial |
Date 11/89/2004 |
Officer and Treasurer |
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EXHIBIT INDEX |
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 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 |
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Exhibit 31.1
CERTIFICATION PURSUNAT TO 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: November 8, 2004 |
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J. Don Brock |
Chairman of the Board, CEO and President |
Exhibit 31.2
CERTIFICATION PURSUNAT TO 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: November 8, 2004 |
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F. McKamy Hall |
CFO, Vice President and Treasurer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Astec Industries, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, J. Don Brock, Chief Executive Officer of the Company, and F. McKamy Hall, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
Chairman of the Board, Chief Executive Officer and President
Chief Financial Officer, Vice President and Treasurer