Astec Industries - 10-Q quarterly report FY

Indicate the number of shares outstanding of each of the registrant's classes of stock as of the latest practicable date.

ASTEC INDUSTRIES, INC.

INDEX

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 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)

The balance sheet at December 31, 2000 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, 2000.

Note 2. Receivables.

Receivables are net of allowance for doubtful accounts of $2,244,000 and $2,105,000 for March 31, 2001 and December 31, 2000, respectively.

Note 3. Inventories

Inventories are stated at the lower of first-in, first-out cost or market and consist of the following:

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 25% of the Company's business volume typically occurs during the first three months of the year.

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. The Company has two cash flow hedges which require 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 affects earnings.

The Company's 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 is effective for five years with a notional amount of $7,500,000. The objective of the hedge is 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 results from changes in the benchmark market interest rate, three-month U.S. Dollar LIBOR. Changes in the cash flows of the interest rate swap are expected to be highly effective at offsetting the changes in overall cash flows (i.e., changes in interest rate payments) attributable to fluctuations in the benchmark market interest rate on the variable rate debt being hedged.

Effective January 2, 2001 the Company entered into a one-year swap agreement with a notional amount of $40,000,000 to fix interest rates on variable rate debt. The objective of the hedge is to eliminate the variability of cash flows relating to the interest payments on $40,000,000 of the variable rate debt outstanding under the Company's revolving credit facility. The sole source of the variability in the hedged cash flows results from changes in the benchmark market interest rate, three-month U.S. Dollar LIBOR. Changes in the cash flows of the interest rate swap are expected to exactly offset the changes in cash flows (i.e., changes in interest rate payments) attributable to fluctuations in the benchmark market interest rate on the of the variable rate debt being hedged.

Notes to Unaudited Financial Statements - Continued

The cumulative effect of the SFAS No. 133 adjustments was an after-tax reduction of OCI of approximately $719,000 related to the change in the time value and fair value of interest rate swaps.

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. A variety of factors could cause actual results to differ materially from those anticipated in the Company's forward-looking statements, which include the risk factors that are discussed from time to time in the Company's reports filed with the SEC, most recently in the Company's 2000 Annual Report on Form 10-K. 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 publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date such statements are made or to reflect the occurrence of unanticipated events.

Results of Operations

For the three months ended March 31, 2001, net sales increased to $143,310,000 from $140,872,000 for the three months ended March 31, 2000, representing a 1.7% increase. Net sales for the quarter ended March 31, 2001 for companies acquired during the third quarter of 2000 account for $8,774,000 of the consolidated net sales for the first quarter of 2001. Excluding the net sales generated from those acquisitions, net sales for the first quarter of 2001 were $134,536,000, for a decrease of 4.6% from the same period in 2000. International sales for the first quarter of 2001 increased to $25,795,000 from $12,266,000 for the same period of 2000. Excluding the sales from 2000 acquisitions, international sales for the three months ended March 31, 2001 were $19,400,000.

Gross profit for the three months ended March 31, 2001 decreased to $31,323,000 from $33,758,000 for the three months ended March 31, 2000, while the gross profit percentage for the three months ended March 31, 2001 decreased to 21.9% from 24.0% for the same period of 2000. Decreased margins of both the Aggregate and Mining Group and the Underground Group primarily accounted for the decrease in gross profit for the first quarter of 2001 compared to the same period of 2000. For the three months ended March 31, 2001, the decreased margins for both of those industry segments related to reduced sales volumes resulting from economic uncertainty of customers, competitive price pressure and under utilization of capacity. The Underground Group also experienced a significant downturn in international sales volume for the first quarter of 2001 compared to the first quarter of 2000.

Selling, general and administrative expenses for the three months ended March 31, 2001 were $20,960,000 or 14.6% of net sales, compared to $18,255,000 or 13.0% of net sales for the three months ended March 31, 2000, an increase of $2,705,000. Approximately $1,296,000 of the increase in selling, general and administrative expenses for the three months ended March 31, 2001 compared to the same period in 2000 relates to acquisitions made during the last quarter of 2000. The remaining increase related mainly to an increase in sales and marketing personnel in the Underground Group.

Interest expense increased to $2,339,000 for the three months ended March 31, 2001 from $2,186,000 for the three months ended March 31, 2000. Interest expense as a percentage of net sales was approximately 1.6% for the three months ended March 31, 2001 and 2000. The increase in interest expense related primarily to borrowings required for 2000 acquisitions and for increased working capital.

Other income, net of other expense, was $644,000, or 0.5% of net sales for the quarter ended March 31, 2001, compared to $802,000, or 0.6% of net sales for the quarter ended March 31, 2000. The decrease in other income, net of other expense for the three months ended March 31, 2001 related primarily to increased goodwill amortization and a decrease in exchange rate gain of a foreign subsidiary compared to the same period in 2000.

Income tax expense for the first quarter of 2001 decreased to $3,337,000 from $5,492,000 for the quarter ended March 31, 2000, a decrease of $2,155,000, or 39.2%. Tax expense was 2.3% of net sales for the three months ended March 31, 2001 and 3.9% of net sales for the three months ended March 31, 2000. The effective tax rate for the three months ended March 31, 2001 was 38.5% and the effective tax rate for the three months ended March 31, 2000 was 38.9%.

Backlog of orders at March 31, 2001 was $74,342,000 compared to $118,610,000 at March 31, 2000, restated for acquisitions. With the exception of the Mobile Asphalt Paving Group, the backlog of confirmed orders at March 31, 2001 had declined in each of the Company's industry segments from the same period in 2000. Management believes that this decline is reflective of the current economic conditions in the United States and the hesitancy of the Company's customers to commit to capital equipment purchases. The Company is unable to determine whether this backlog effect was experienced by the industry as a whole.

Liquidity and Capital Resources

As of March 31, 2001, the Company had working capital of $171,350,000 compared to $155,736,000 at December 31, 2000. Total short-term borrowings, including current maturities of long-term debt, were $2,189,000 at March 31, 2001 compared to $1,987,000 at March 31, 2000. A financing agreement for imported, purchased inventory items accounts for $1,130,000 of the short-term borrowings at March 31, 2001, while outstanding Industrial Development Revenue Bonds accounted for $500,000 of the current maturities of long-term debt at March 31, 2001 and December 31, 2000. Net cash used by operating activities for the three months ended March 31, 2001 was $11,653,000 compared to net cash provided by operating activities of $893,000 for the three months ended March 31, 2000.

Long-term debt, less current maturities, increased to $127,780,000 at March 31, 2001 from $118,511,000 at December 31, 2000, an increase of $9,269,000. At March 31, 2001 debt of approximately $107,245,000 was outstanding under the revolving credit facility and $19,200,000 was the principal amount of Industrial Revenue Bonds outstanding. The increase in debt from December 31, 2000 related to the funding of working capital needs using the revolving credit facility.

Capital expenditures in 2001 for plant expansion and for further modernization of the Company's manufacturing processes are expected to be approximately $11,000,000. The Company expects to finance these expenditures using the revolving credit facility and internally generated funds. Capital expenditures for the three months ended March 31, 2001 were $2,311,000, compared to $5,627,000 at March 31, 2000.

The Company has an unsecured $150,000,000 revolving credit facility with a bank that expires on November 22, 2002. As part of the revolving credit facility, Astec Industries, Inc. may borrow up to $130,000,000, while Astec Financial Services, Inc. has a segregated portion of up to $50,000,000, the total borrowing limited to $150,000,000. At March 31, 2001, Astec Financial Services' portion of outstanding debt under the revolving credit facility was $20,645,000. Advances to Astec Financial Services, Inc. under this line of credit are limited to "Eligible Receivables" of Astec Financial Services, Inc. as defined in the credit agreement that governs the credit facility. The Company was in compliance with all financial covenants related to the line of credit at March 31, 2001.

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 general liability insurance covering product liability and other similar tort claims providing the Company coverage of $8,000,000 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.

Risk Factors

The information contained in this Form 10-Q is not a complete description of our business or the risks associated with an investment in us. Readers are referred to documents filed by Astec with the Securities and Exchange Commission, specifically our 2000 Form 10-K, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements, some of which include: uncertainty in the economy, rising oil and liquid asphalt prices, rising interest rates, decreased funding for highway projects, the timing of large contracts, production capacity, general business conditions in the industry, the ability to integrate acquisitions, demand for the Company's products, seasonality and cyclicality in operating results, seasonality of sales volumes, and competitive activity.