ASTEC INDUSTRIES INC - Quarter Report: 2016 September (Form 10-Q)

PART I -- FINANCIAL INFORMATION

See Notes to Unaudited Condensed Consolidated Financial Statements

See Notes to Unaudited Condensed Consolidated Financial Statements

See Notes to Unaudited Condensed Consolidated Financial Statements

See Notes to Unaudited Condensed Consolidated Financial Statements

See Notes to Unaudited Condensed Consolidated Financial Statements

ASTEC INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar and share amounts in thousands, except per share amounts, unless otherwise specified)

Note 1.  Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed 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 ("U.S. GAAP") 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, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.  It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Astec Industries, Inc. Annual Report on Form 10-K for the year ended December 31, 2015.

The unaudited condensed consolidated balance sheet as of December 31, 2015 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

Dollar and share amounts shown are in thousands, except per share amounts, unless otherwise specified.

Certain amounts previously reported for 2015 have been reclassified to conform with current year presentation.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)", which supersedes existing revenue guidance under U.S. GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The implementation of this new standard will require companies to use more judgment and to make more estimates than under current guidance. The standard is effective for public companies for annual periods beginning after December 15, 2017. The Company plans to adopt the new standard effective January 1, 2018. The Company has not yet determined what impact, if any, the adoption of this new standard will have on the Company's financial position or results of operations.

In July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory", which changes the measurement basis for inventory from the lower of cost or market to lower of cost and net realizable value and also eliminates the requirement for companies to consider replacement cost or net realizable value less an approximate normal profit margin when determining the recorded value of inventory. The standard is effective for public companies in fiscal years beginning after December 15, 2016, with early adoption permitted.  The Company expects to adopt the standard effective October 1, 2016. The Company does not expect the adoption of this new standard will have a material impact on its financial position or results of operations.

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments—Overall (Subtopic 825-10)", which requires, among other things, equity investments with readily determinable fair values, except those accounted for under the equity method of accounting or those that result in consolidation of the investee, to be measured at fair value with changes in fair value recognized in net income.  The standard is effective for public companies in fiscal years beginning after December 15, 2017, and the Company expects to adopt the standard effective January 1, 2018. The Company has not yet determined what impact, if any, the adoption of this new standard will have on the Company's financial position or results of operations.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)", which significantly changes the accounting for operating leases by lessees.  The accounting applied by lessors is largely unchanged from that applied under previous guidance.  The new guidance requires lessees to recognize lease assets and lease liabilities in the balance sheet, initially measured at the present value of the lease payments, for leases which were classified as operating leases under previous guidance.  Lease cost included in the statement of income will be calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis.  Lessees may make an accounting policy election to exclude leases with a term of 12 months or less from the requirement to record related assets and liabilities.  The new standard is effective for public companies for fiscal years beginning after December 15, 2018.  The Company plans to adopt the new standard effective January 1, 2019.  The Company has not yet determined what impact the adoption of this new standard will have on the Company's financial position or results of operations.

In March 2016, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606)", which does not change the core principles of ASU No. 2014-09 discussed above, but rather clarifies the implementation guidance in order to eliminate the potential for diversity in practice arising from inconsistent application of the principal versus agent guidance.  Under the new guidance, when an entity determines it is a principal in a transaction, the entity recognizes revenue in the gross amount of consideration; however in transactions where an entity determines it in an agent, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled.  The standard is effective for public companies for annual periods beginning after December 15, 2017. The Company plans to adopt the new standard effective January 1, 2018. The Company has not yet determined what impact, if any, the adoption of this new standard will have on the Company's financial position or results of operations.

In March 2016, the FASB issued ASU No. 2016-09, "Compensation—Stock Compensation (Topic 718)", as part of its Simplification Initiative.  The standard's provisions impact several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification in the statement of cash flows.  The standard is effective for public companies for annual periods beginning after December 15, 2016, with early adoption permitted. The Company adopted the new standard effective January 1, 2016 and has recorded a cumulative effect adjustment in retained earnings as of January 1, 2016 of $95, net of tax, related to the adoption of the new provisions allowing for restricted stock unit forfeitures to be accounted for at the time they occur as opposed to being estimated during the vesting period.  Additionally, income tax benefits of $209, which would have been recorded in additional paid-in capital under prior guidance, have been recorded in the first quarter of 2016 consolidated income statements related to excess tax benefits resulting from the vesting of restricted stock units in 2016.  As allowed under the provision's guidelines, amounts for 2015 have not been restated in the accompanying financial statements.

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments".  The standard changes how credit losses are measured for most financial assets and certain other instruments that currently are not measured through net income.  The standard will require an expected loss model for instruments measured at amortized cost as opposed to the current incurred loss approach.  In valuing available for sale debt securities, allowances will be required to be recorded, rather than the current approach of reducing the carrying amount, for other than temporary impairments. A cumulative adjustment to retained earnings is to be recorded as of the beginning of the period of adoption to reflect the impact of applying the provisions of the standard.  The standard is effective for public companies for periods beginning after December 15, 2019 and the Company expects to adopt the new standard as of January 1, 2020. The Company has not yet determined what impact, if any, the adoption of this new standard will have on the Company's financial position or results of operations.

In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) which clarifies how certain cash receipts and cash payments should be presented on the statement of cash flows.  The statement also addresses how the predominance principle should be applied when cash payments have aspects of more than one class of cash flows.  The standard is effective for public companies in fiscal years beginning after December 15, 2017, and the Company expects to adopt the standard effective January 1, 2018. The Company has not determined the impact, if any, the adoption of this new standard will have on the Company's statement of cash flows.

Note 2.  Earnings per Share

Basic earnings per share are determined by dividing earnings by the weighted average number of common shares outstanding during each period.  Diluted earnings per share include the potential dilutive effect of options, restricted stock units and shares held in the Company's Supplemental Executive Retirement Plan.

The following table sets forth the computation of net income attributable to controlling interest and the number of basic and diluted shares used in the computation of earnings per share:

Note 3.  Receivables

Receivables are net of allowances for doubtful accounts of $1,573 and $1,837 as of September 30, 2016 and December 31, 2015, respectively.

Note 4.  Inventories

Inventories consist of the following:

Raw materials and parts inventory is comprised of purchased steel and other purchased items for use in the manufacturing process or held for sale in the Company's after-market parts business. The category also includes the manufacturing cost of completed equipment sub-assemblies produced for either integration into equipment manufactured at a later date or for sale in the Company's after-market parts business.

Work-in-process inventory consists of the value of materials, labor and overhead incurred to date in the manufacturing of incomplete equipment or incomplete equipment sub-assemblies being produced.

Finished goods inventory consists of completed equipment manufactured for sale to customers.

Used inventory consists of equipment accepted in trade or purchased on the open market. The category also includes equipment rented to prospective customers on a short-term or month-to-month basis. Used equipment is valued at the lower of acquired or trade-in cost or market determined on each separate unit.  Each unit of rental equipment is valued at its original manufacturing cost and is reduced by an appropriate reserve each month during the period of time the equipment is rented.

Inventories are valued at the lower of cost (first-in, first-out) or market, which requires the Company to make specific estimates, assumptions and judgments in determining the amount, if any, of reductions in the valuation of inventories to their net realizable values. The net realizable values of the Company's products are impacted by a number of factors, including changes in the price of steel, competitive sales pricing, quantities of inventories on hand, the age of the individual inventory items, market acceptance of the Company's products, the Company's normal gross margins, actions by the Company's competitors, the condition of the Company's used and rental inventory and general economic factors. Once an inventory item's value has been deemed to be less than cost, a net realizable value allowance is calculated and a new "cost basis" for that item is effectively established. This new cost is retained for that item until such time as the item is disposed of or the Company determines that an additional write-down is necessary. Additional write-downs may be required in the future based upon changes in assumptions due to general economic downturns in the markets in which the Company operates, changes in competitor pricing, new product design or other technological advances introduced by the Company or its competitors and other factors unique to individual inventory items.

The most significant component of the Company's inventory is steel. A significant decline in the market price of steel could result in a decline in the market value of the equipment or parts the Company sells. During periods of significant declining steel prices, the Company reviews the valuation of its inventories to determine if reductions are needed in the recorded value of inventory on hand to its net realizable value.

The Company reviews the individual items included in its finished goods, used equipment and rental equipment inventory on a model-by-model or unit-by-unit basis to determine if any item's net realizable value is below its carrying value each quarter. This analysis is expanded to include items in work-in-process and raw material inventory if factors indicate those items may also be impacted. In performing this review, judgments are made and, in addition to the factors discussed above, additional consideration is given to the age of the specific items of used or rental inventory, prior sales offers or lack thereof, the physical condition of the specific items and general market conditions for the specific items. Additionally, an analysis of raw material inventory is performed each quarter to calculate any valuation write-downs needed for obsolete inventory based upon quantities of items on hand, the age of those items and their recent and expected future usage or sale.

When the Company determines that the value of inventory has become impaired through damage, deterioration, obsolescence, changes in price levels, excessive levels of inventory or other causes, the Company reduces the carrying value to estimated market value based on estimates, assumptions and judgments made from the information available at that time.

Abnormal amounts of idle facility expense, freight, handling cost and wasted materials are recognized as current period charges.

Note 5.  Property and Equipment

Property and equipment is stated at cost, less accumulated depreciation of $216,588 and $203,471 as of September 30, 2016 and December 31, 2015, respectively.

Note 6.  Fair Value Measurements

The Company has various financial instruments that must be measured at fair value on a recurring basis, including marketable debt and equity securities held by Astec Insurance Company ("Astec Insurance"), the Company's captive insurance company, and marketable equity securities held in an unqualified Supplemental Executive Retirement Plan ("SERP").  The obligations of the Company associated with the financial assets held in the SERP also constitute a liability of the Company for financial reporting purposes and are included in other long-term liabilities in the accompanying balance sheets.  The Company's subsidiaries also occasionally enter into foreign currency exchange contracts to mitigate exposure to fluctuations in currency exchange rates.

The carrying amount of cash and cash equivalents, trade receivables, other receivables, revolving debt, accounts payable and long-term debt approximates their fair value because of their short-term nature and/or interest rates associated with the instruments.  Investments are carried at their fair value based on quoted market prices for identical or similar assets or, where no quoted prices exist, other observable inputs for the asset.  The fair values of foreign currency exchange contracts are based on quotations from various banks for similar instruments using models with market based inputs.

Financial assets and liabilities are categorized based upon the level of judgment associated with the inputs used to measure their fair value.  The inputs used to measure the fair value are identified in the following hierarchy:

As indicated in the tables below (which excludes the Company's pension assets), the Company has determined that all of its financial assets and liabilities as of September 30, 2016 and December 31, 2015 are Level 1 and Level 2 in the fair value hierarchy as defined above:

The Company reevaluates the volume of trading activity for each of its investments at the end of each quarter and adjusts the level within the fair value hierarchy as needed.  There were no investments that changed levels within the hierarchy during the quarter ended September 30, 2016.

The trading equity investments noted above are valued at their fair value based on their quoted market prices, and the debt securities are valued based upon a mix of observable market prices and model driven prices derived from a matrix of observable market prices for assets with similar characteristics obtained with the assistance of a nationally recognized third party pricing service.  Additionally, a significant portion of the SERP's investments in trading equity securities are in money market and mutual funds.  As these money market and mutual funds are held in a SERP, they are also included in the Company's liability under its SERP.

Trading debt securities are comprised of marketable debt securities held by Astec Insurance. Astec Insurance has an investment strategy that focuses on providing regular and predictable interest income from a diversified portfolio of high-quality fixed income securities.

Net unrealized gains or losses incurred on investments held as of September 30, 2016 and December 31, 2015 amounted to a net gain of $94 and a net loss of $429, respectively.

Note 7.  Debt

On April 12, 2012, the Company and certain of its subsidiaries entered into an amended and restated credit agreement whereby Wells Fargo extended to the Company an unsecured line of credit of up to $100,000, including a sub-limit for letters of credit of up to $25,000. There were no borrowings outstanding under the agreement at any time during the nine-month period ended September 30, 2016.  Letters of credit totaling $15,196, including $11,874 of letters of credit issued to banks in Brazil to secure the local debt of Astec do Brasil Fabricacao de Equipamentos Ltda. ("Astec Brazil"), were outstanding under the credit facility as of September 30, 2016, resulting in additional borrowing ability of $84,804 under the credit facility. The credit agreement has a five-year term expiring in April 2017. Borrowings under the agreement are subject to an interest rate equal to the daily one-month LIBOR rate plus a 0.75% margin, resulting in a rate of 1.29% as of September 30, 2016. The unused facility fee is 0.175%. Interest only payments are due monthly. The amended and restated credit agreement contains certain financial covenants, including provisions concerning required levels of annual net income, minimum tangible net worth and maximum allowed capital expenditures. The Company was in compliance with these covenants as of September 30, 2016.

The Company's South African subsidiary, Osborn Engineered Products SA (Pty) Ltd ("Osborn"), has a credit facility of $6,920 with a South African bank to finance short-term working capital needs, as well as to cover performance letters of credit, advance payment and retention guarantees. As of September 30, 2016, Osborn had $1,911 in performance, advance payment and retention guarantees outstanding under the facility. The facility has been guaranteed by Astec Industries, Inc., but is otherwise unsecured. A 0.75% unused facility fee is charged if less than 50% of the facility is utilized. As of September 30, 2016, Osborn had available credit under the facility of $5,009. The interest rate is 0.25% less than the South Africa prime rate, resulting in a rate of 10.5% as of September 30, 2016.

The Company's Brazilian subsidiary, Astec Brazil, has outstanding working capital loans totaling $5,639 from Brazilian banks with interest rates ranging from 10.4% to 11.0%.  The loans' maturity dates range from November 2018 to April 2024 and the debts are secured by Astec Brazil's manufacturing facility.  Additionally, Astec Brazil has various 5-year equipment financing loans outstanding with Brazilian banks in the aggregate of $1,301 as of September 30, 2016 that have interest rates ranging from 3.5% to 16.3%.  These equipment loans have maturity dates ranging from September 2018 to April 2020.  Astec Brazil's loans are included in the accompanying balance sheets as current maturities of long-term debt ($2,159) and long-term debt ($4,781). A portion of the Astec Brazil debt is also secured by letters of credit totaling $11,874 issued by Astec Industries, Inc.

Note 8.  Product Warranty Reserves

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, but generally range from three months to one year or up to a specified number of hours of operation. The Company estimates the costs that may be incurred under its warranties and records a liability at the time product sales are recorded.  The product warranty liability is primarily based on historical claim rates, nature of claims and the associated cost.

Changes in the Company's product warranty liability for the three and nine-month periods ended September 30, 2016 and 2015 are as follows:

Note 9.  Accrued Loss Reserves

The Company records reserves for losses related to known workers' compensation and general liability claims that have been incurred but not yet paid or are estimated to have been incurred but not yet reported to the Company.  The undiscounted reserves are actuarially determined based on the Company's evaluation of the type and severity of individual claims and historical information, primarily its own claims experience, along with assumptions about future events.  Changes in assumptions, as well as changes in actual experience, could cause these estimates to change in the future.  Total accrued loss reserves were $8,514 as of September 30, 2016 and $7,663 as of December 31, 2015, of which $5,301 and $4,825 were included in other long-term liabilities as of September 30, 2016 and December 31, 2015, respectively.

Note 10.  Income Taxes

The Company's combined effective income tax rates were 41.5% and 52.5% for the three-month periods ended September 30, 2016 and 2015, respectively.  The Company's combined effective income tax rates were 37.6% and 38.8% for the nine-month periods ended September 30, 2016 and 2015, respectively.  The Company's effective tax rates for the three and nine-month periods ended September 30, 2016 include the effect of state income taxes and other discrete items as well as a benefit for research and development credits.  The Company's effective tax rates for the three and nine-month periods ended September 30, 2015 include the effect of state income taxes and other discrete items but does not include benefits for the research and development credits as legislation extending the research and development credit for 2015 was not enacted by Congress until the fourth quarter of 2015.

The Company's recorded liability for uncertain tax positions as of September 30, 2016 has decreased by approximately $241 as compared to December 31, 2015 as the result of federal and state tax audit settlements related to tax years 2011 and 2012.

Note 11.  Segment Information

The Company has three reportable segments, each of which is comprised of multiple business units that offer similar products and services and meet the requirements for aggregation. A brief description of each segment is as follows:

Infrastructure Group - This segment consists of five business units, three of which design, engineer, manufacture and market a complete line of portable, stationary and relocatable hot-mix asphalt plants, wood pellet plants, asphalt pavers, material transfer vehicles, milling machines and paver screeds. The other two business units in this segment primarily operate as Company-owned dealers in the foreign countries in which they are domiciled.  These two business units sell, service and install products produced by the manufacturing subsidiaries of the Company, and a majority of their sales are to customers in the infrastructure industry.  The principal purchasers of the products produced by this group are asphalt producers, highway and heavy equipment contractors, wood pellet processors and foreign and domestic governmental agencies.

Aggregate and Mining Group - This segment consists of eight business units that design, engineer, manufacture and market a complete line of jaw crushers, cone crushers, horizontal shaft impactors, vertical shaft impactors, material handling, roll rock crushers and stationary rockbreaker systems, vibrating feeders and high frequency vibrating screens, conveyors, inclined, vertical and horizontal screens and sand classifying and washing equipment. The principal purchasers of products produced by this group are distributors, open mine operators, quarry operators, port and inland terminal operators, highway and heavy equipment contractors and foreign and domestic governmental agencies.

Energy Group - This segment consisted of five business units through May 2015, four from June 2015 through July 2016, and five thereafter, that design, engineer, manufacture and market a complete line of drilling rigs for the oil and gas, geothermal and water well industries, high pressure diesel pump trailers for fracking and cleaning oil and gas wells, a variety of industrial heaters to fit a broad range of applications including heating equipment for refineries, oil sands and energy related processing, heat transfer processing equipment, thermal fluid storage tanks, waste heat recovery equipment, whole-tree pulpwood, biomass chippers, horizontal grinders and beginning in August 2016, gas, oil and combination gas/oil burners and combustion control systems designed for commercial, industrial and process applications primarily sold to boiler manufacturers or related manufacturing representatives.  The principal purchasers of products produced by this group are oil, gas and water well drilling industry contractors, processors of oil, gas and biomass for energy production and contractors in the construction and demolition recycling markets.  Effective May 31, 2015, the Company's Astec Underground, Inc. business unit in Loudon, Tennessee ceased operations and responsibility for its product lines was transferred to the Company's GEFCO, Inc. subsidiary in Enid, Oklahoma.  The Loudon facility was sold in October 2015.  Effective August 1, 2016, the Company acquired substantially all of the assets and certain liabilities of Power Flame Incorporated based in Parsons, Kansas.  See Note 16 for further information concerning this acquisition.

 

Corporate - This category consists of business units that do not meet the requirements for separate disclosure as an operating segment or inclusion in one of the other reporting segments and includes the Company's parent company, Astec Industries, Inc., and Astec Insurance Company, a Company-owned captive insurance company. The Company evaluates performance and allocates resources to its operating segments based on profit or loss from operations before U.S. federal income taxes and corporate overhead and thus these costs are included in the Corporate category.

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment sales and transfers are valued at prices comparable to those for unrelated parties.

Segment Information:

A reconciliation of total segment profits to the Company's consolidated totals is as follows:

Note 12.  Contingent Matters

Certain customers have financed purchases of Company products through arrangements in which the Company is contingently liable for customer debt of $1,945 as of September 30, 2016.  The maximum potential amount of future payments for which the Company would be liable was equal to $1,945 as of September 30, 2016.  These arrangements also provide that the Company will receive the lender's full security interest in the equipment financed if the Company is required to fulfill its contingent liability under these arrangements.  The Company has recorded a liability of $153 related to these guarantees as of September 30, 2016.

In addition, the Company is contingently liable under letters of credit issued by Wells Fargo totaling $15,196 as of September 30, 2016, including $11,874 of letters of credit that guarantee certain Astec Brazil bank debt.  The outstanding letters of credit expire at various dates through March 2019.  As of September 30, 2016, Osborn is contingently liable for a total of $1,911 in performance letters of credit, advance payments and retention guarantees.  The maximum potential amount of future payments under these letters of credit and guarantees for which the Company could be liable is $17,107 as of September 30, 2016.

The Company is currently a party to various claims and legal proceedings that have arisen in the ordinary course of business.  If management believes that a loss arising from such claims and legal proceedings is probable and can reasonably be estimated, the Company records the amount of the loss (excluding estimated legal fees) or the minimum estimated liability when the loss is estimated using a range and no point within the range is more probable than another.  As management becomes aware of additional information concerning such contingencies, any potential liability related to these matters is assessed and the estimates are revised, if necessary.  If management believes that a loss arising from such claims and legal proceedings is either (i) probable but cannot be reasonably estimated or (ii) reasonably possible but not probable, the Company does not record the amount of the loss, but does make specific disclosure of such matter.  Based upon currently available information and with the advice of counsel, management believes that the ultimate outcome of its current claims and legal proceedings, individually and in the aggregate, will not have a material adverse effect on the Company's financial position, cash flows or results of operations.  However, claims and legal proceedings are subject to inherent uncertainties and rulings unfavorable to the Company could occur.  If an unfavorable ruling were to occur, there exists the possibility of a material adverse effect on the Company's financial position, cash flows or results of operations.

During 2004, the Company received notice from the Environmental Protection Agency ("EPA") that it may be responsible for a portion of the costs incurred in connection with an environmental cleanup in Illinois. The discharge of hazardous materials and associated cleanup relate to activities occurring prior to the Company's acquisition of Barber-Greene in 1986. The Company believes that over 300 other parties have received similar notices. At this time, the Company cannot predict whether the EPA will seek to hold the Company liable for a portion of the cleanup costs or the amount of any such liability.  The Company has not recorded a liability with respect to this matter because no estimate of the amount of any such liability can be made at this time.

Note 13.  Shareholders' Equity

Under the Company's long-term incentive plans, key members of management may be issued restricted stock units ("RSUs") each year based upon the annual financial performance of the Company and its subsidiaries. The number of RSUs granted each year is determined based upon the performance of individual subsidiaries and consolidated annual financial performance.  Generally, for RSUs granted through February 2016, each award will vest at the end of five years from the date of grant, or at the time a recipient retires after reaching age 65, if earlier. Future awards will vest at the end of three years from the date of grant or at the time a recipient retires after reaching age 65, if earlier.

A total of 77 and 66 RSUs vested during the nine-month periods ended September 30, 2016 and 2015, respectively.  The Company withheld 24 and 14 shares due to statutory payroll tax withholding requirements upon the vesting of the RSUs in the first nine months of 2016 and 2015, respectively, and used Company funds to remit the related required minimum withholding taxes to the various tax authorities.  The vesting date fair value of the RSUs that vested during the first nine months of 2016 and 2015 was $3,289 and $2,785, respectively.  Compensation expense of $769 and $38 was recorded in the three-month periods ended September 30, 2016 and 2015, respectively, to reflect the fair value of RSUs granted (or anticipated to be granted for 2016 performance) amortized over the portion of the vesting period occurring during the periods.  Compensation expense of $1,697 and $778 was recorded in the nine-month periods ended September 30, 2016 and 2015, respectively, to reflect the fair value of RSUs granted (or anticipated to be granted for 2016 performance) amortized over the portion of the vesting period occurring during the periods.

Note 14.  Other Income, Net of Expenses

Other income, net of expenses for the three and nine-month periods ended September 30, 2016 and 2015 is presented below:

Note 15.  Derivative Financial Instruments

The Company is exposed to certain risks related to its ongoing business operations. The primary risk managed by using derivative instruments is foreign currency risk.  From time to time the Company's foreign subsidiaries enter into foreign currency exchange contracts to mitigate exposure to fluctuations in currency exchange rates.  The fair value of the derivative financial instruments is recorded on the Company's balance sheet and is adjusted to fair value at each measurement date.  The changes in fair value are recognized in the consolidated statements of income in the current period.  The Company does not engage in speculative transactions nor does it hold or issue financial instruments for trading purposes.  The average U.S. dollar equivalent notional amount of outstanding foreign currency exchange contracts was $12,118 during the nine-month period ended September 30, 2016. The Company reported $592 of derivative liabilities in other current liabilities at September 30, 2016. At December 31, 2015, the Company reported $935 of derivative assets in other current assets, $330 of derivative assets in other long-term assets and $22 of derivative liabilities in other current liabilities.  The Company recognized, as a component of cost of sales, a net loss of $383 and a net gain $419 on the changes in fair value of derivative financial instruments in the three-month periods ended September 30, 2016 and 2015, respectively. The Company recognized, as a component of cost of sales, a net loss of $897 and a net gain of $1,227 on the changes in fair value of derivative financial instruments in the nine-month periods ended September 30, 2016 and 2015, respectively.  There were no derivatives that were designated as hedges at September 30, 2016.

Note 16.  Business Acquisition

In August 2016, the Company acquired substantially all of the assets and certain liabilities of Power Flame Incorporated ("PFI") located in Parsons, Kansas.  The Company paid a purchase price, after preliminary adjustments, of $39,614, which is subject to certain additional post-closing adjustments, from available cash balances in early August 2016.  $5,000 of the purchase price will be held in escrow for up to two years pending the final resolution of any post-closing adjustments and any indemnification claims.  The Company's preliminary allocation of the purchase price resulted in the recognition of $13,076 of goodwill and $17,407 of other intangible assets consisting of technology (19 year life), trade name (15 year life) and customer relationships (18 year life).  Approximately $159 of acquisition related costs have been expensed by the Company in the nine-month period ended September 30, 2016.  The Company does not expect PFI's revenues or profits to be material to the Company's 2016 operating results.

PFI, which began operations in 1948, manufactures and sells gas, oil and combination gas/oil burners and combustion control systems designed for commercial, industrial and process applications.

Forward-Looking Statements

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 "will," "would," "should," "could," "may," "believes," "anticipates," "intends," "forecasts" and "expects" and similar expressions.  Such forward-looking statements include, without limitation, statements regarding the Company's expected sales and results of operations during 2016, the Company's expected capital expenditures in 2016, the expected benefit and impact of financing arrangements, the ability of the Company to meet its working capital and capital expenditure requirements through September 30, 2017, the amount and impact of any current or future state or federal funding for transportation construction programs, the need for road improvements, the amount and impact of other public sector spending and funding mechanisms, changes in the economic environment as it affects the Company, the market confidence of customers and dealers, the Company being called upon to fulfill certain contingencies, the expected dates of granting of restricted stock units, changes in interest rates and the impact of such changes on the financial results of the Company, changes in the prices of steel and oil and the impact of such changes generally and on the demand for the Company's products, customer's buying decisions, the Company's business, the ability of the Company to offset future changes in prices in raw materials, the change in the strength of the dollar and the level of the Company's presence and sales in international markets, the impact that further development of domestic oil and natural gas production capabilities would have on the domestic economy and the Company's business, the seasonality of the Company's business, the Company's investments, the percentage of the Company's equipment sold directly to end users, the amount or value of unrecognized tax benefits, the impact of IRS tax regulations, payment of dividends by the Company and the ultimate outcome of the Company's current claims and legal proceedings.

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.

The risks and uncertainties identified herein under the caption "Item 1A. Risk Factors" in Part II of this Report, elsewhere herein and in other documents filed by the Company with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015, should be carefully considered when evaluating the Company's business and future prospects.

The Company is a leading manufacturer and seller of equipment for the road building, aggregate processing, mining, geothermal, water, oil and gas, and wood processing industries. The Company's businesses:

 

 

Astec Industries, Inc. currently consists of 20 companies: 16 manufacturing companies, 2 companies that operate as dealers for the manufacturing companies, a captive insurance company and the parent company.  The companies fall within three reportable operating segments:

Infrastructure Group – This segment consists of five business units, three of which design, engineer, manufacture and market a complete line of portable, stationary and relocatable hot-mix asphalt plants, asphalt pavers, material transfer vehicles, milling machines, paver screeds and wood pellet plants. The other two business units in this segment operate as Company-owned dealers in the foreign countries in which they are domiciled.  These two business units sell, service and install products produced by the manufacturing subsidiaries of the Company, and a majority of their sales are to customers in the infrastructure industry. The principal purchasers of the products produced by this group are asphalt producers, highway and heavy equipment contractors, foreign and domestic governmental agencies and wood pellet processors.

Aggregate and Mining Group – This segment consists of eight business units that design, engineer, manufacture and market a complete line of jaw crushers, cone crushers, horizontal shaft impactors, vertical shaft impactors, material handling systems, roll rock crushers and stationary rockbreaker systems, vibrating feeders and high frequency vibrating screens, conveyors, inclined, vertical and horizontal screens and sand classifying and washing equipment. The principal purchasers of products produced by this group are distributors, open mine operators, quarry operators, port operators, highway and heavy equipment contractors and foreign and domestic governmental agencies.

Energy Group – This segment consisted of five business units through May 2015, four from June 2015 through July 2016, and five thereafter, that design, engineer, manufacture and market a complete line of drilling rigs for the oil and gas, geothermal and water well industries, high pressure diesel pump trailers for fracking and cleaning oil and gas wells, a variety of industrial heaters to fit a broad range of applications including heating equipment for refineries, oil sands and energy related processing, heat transfer processing equipment, thermal fluid storage tanks, waste heat recovery equipment, and whole-tree pulpwood and biomass chippers, horizontal grinders and, beginning in August 2016, gas, oil and combination gas/oil burners and combustion control systems designed for commercial, industrial and process applications, primarily sold to boiler manufacturers or related manufacturing representatives. The principal purchasers of products produced by this group are oil, gas and water well drilling industry contractors, processors of oil, gas and biomass for energy production and contractors in the construction and demolition recycling markets. Effective May 31, 2015, the Company's Astec Underground, Inc. business unit in Loudon, Tennessee ceased operations and responsibility for its product lines was transferred to the Company's GEFCO, Inc. subsidiary in Enid, Oklahoma. The Company sold the Loudon, Tennessee facility in October 2015.

Individual Company subsidiaries included in the composition of the Company's segments are as follows:

1.	Infrastructure Group – Astec, Inc., Roadtec, Inc., Carlson Paving Products, Inc., Astec Australia Pty Ltd and Astec Mobile Machinery GmbH.

2.	Aggregate and Mining Group – Telsmith, Inc., Kolberg-Pioneer, Inc., Johnson Crushers International, Inc., Osborn Engineered Products SA (Pty) Ltd, Breaker Technology, Inc., Astec Mobile Screens, Inc., Astec do Brasil Fabricacao de Equipamentos LTDA and Telestack Limited.

3.	Energy Group – Heatec, Inc., CEI Enterprises, Inc., GEFCO, Inc., Peterson Pacific Corp., Power Flame Incorporated (beginning in August 2016) and Astec Underground, Inc. (through May 2015)

The Company has two other business units that do not meet the requirement for separate disclosure as an operating segment: the Company's parent company, Astec Industries, Inc., and Astec Insurance Company, a Company-owned captive insurance company. The Company evaluates performance and allocates resources to its operating segments based on profit or loss from operations before U.S. federal income taxes and corporate overhead and thus these costs are included in the Corporate category.

The Company's financial performance is affected by a number of factors, including the cyclical nature and varying conditions of the markets it serves. Demand in these markets fluctuates in response to overall economic conditions and is particularly sensitive to the amount of public sector spending on infrastructure development, the amount of privately funded infrastructure development, changes in the price of crude oil, which affects the cost of fuel and liquid asphalt, and changes in the price of steel.

In July 2012, the "Moving Ahead for Progress in the 21st Century Act" ("Map-21") was approved by the U.S. federal government, which authorized $105 billion of federal spending on highway and public transportation programs through fiscal year 2014. In August 2014, the U.S. government approved short-term funding of $10.8 billion through May 2015. Federal transportation funding operated on short-term appropriations until December 4, 2015 when the Fixing America's Surface Transportation Act ("FAST Act") was signed into law. The $305 billion FAST Act approved funding for highways of approximately $205 billion and transit projects of approximately $48 billion for the five-year period ending September 30, 2020. The Company believes multi-year highway programs (such as the FAST Act) have the greatest positive impact on the road construction industry and allow its customers to plan and execute longer-term projects, but given the inherent uncertainty in the political process, the level of governmental funding for federal highway projects will similarly continue to be uncertain. Governmental funding that is committed or earmarked for federal highway projects is always subject to repeal or reduction. Although continued funding under the FAST Act is expected, it may be at lower levels than originally approved. In addition, Congress could pass legislation in future sessions that would allow for the diversion of previously appropriated highway funds for other purposes, or it could restrict funding of infrastructure projects unless states comply with certain federal policies. The level of future federal highway construction is uncertain and any future funding may be at levels lower than those currently approved or that have been approved in the past.

The public sector spending described above is needed to fund road, bridge and mass transit improvements. The Company believes that increased funding is unquestionably needed to restore the nation's highways to a quality level required for safety, fuel efficiency and mitigation of congestion. In the Company's opinion, amounts needed for such improvements are significantly greater than amounts approved to date, and funding mechanisms such as the federal usage fee per gallon of gasoline, which is currently still at the 1993 level of 18.4 cents per gallon, would likely need to be increased along with other measures to generate the funds needed.

In addition to public sector funding, the economies in the markets the Company serves, the price of oil and its impact on customers' purchasing decisions and the price of steel may each affect the Company's financial performance. Economic downturns generally result in decreased purchasing by the Company's customers, which, in turn, causes reductions in sales and increased pricing pressure on the Company's products. Rising interest rates also typically negatively impact customers' attitudes toward purchasing equipment. The Federal Reserve has maintained historically low interest rates in response to the recent economic downturn; however, interest rates may increase during the remainder of 2016 and thereafter.

Significant portions of the Company's revenues relate to the sale of equipment involved in the production, handling, recycling or installation of asphalt mix. Liquid asphalt is a by-product of oil production. An increase in the price of oil increases the cost of asphalt, which is likely to decrease demand for asphalt and therefore decrease demand for certain Company products. While increasing oil prices may have a negative financial impact on many of the Company's customers, the Company's equipment can use a significant amount of recycled asphalt pavement, thereby mitigating the effect of increased oil prices on the final cost of asphalt for the customer. The Company continues to develop products and initiatives to reduce the amount of oil and related products required to produce asphalt mix. Oil price volatility makes it difficult to predict the costs of oil-based products used in road construction such as liquid asphalt and gasoline. The Company's asphalt producers and road building customers appear to be adapting their prices in response to the fluctuating oil prices, and the fluctuations did not appear to significantly impair equipment purchases in 2015 or the first nine months of 2016. The Company expects oil prices to continue to fluctuate during the remainder of 2016 and thereafter.  Minor fluctuations in oil prices should not have a significant impact on customers' buying decisions pertaining to asphalt and road building products. However, political uncertainty in oil producing countries, interruptions in oil production due to disasters, whether natural or man-made, or other economic factors could significantly impact oil prices, which could negatively impact demand for the Company's products.

Contrary to the negative impact of higher oil prices on many of the Company's products as discussed above, sales of several of the Company's products, including products manufactured by the Energy Group, which are used to drill for or extract oil and natural gas, have suffered due to the recent reduction in the price of oil and would benefit from higher oil and natural gas prices, to the extent that such higher prices lead to further development of oil and natural gas production. The Company believes further development of domestic oil and natural gas production capabilities is needed and would positively impact the domestic economy and the Company's business.

Steel is a major component in the Company's equipment. Steel prices increased during the first half of 2016 but declined slightly in the third quarter of 2016. We expect prices to increase slightly in the remainder of 2016 and into 2017. The Company continues to utilize forward-looking contracts that contain fixed pricing (with no minimum or specified quantity guarantees) coupled with advanced steel purchases to minimize the impact of future price increases.  The Company will review the trends in steel prices in the last quarter of 2016 and establish future contract pricing accordingly.

In addition to the factors stated above, many of the Company's markets are highly competitive, and its products compete worldwide with a number of other manufacturers and dealers that produce and sell similar products. A weak dollar, combined with improving economic conditions in certain foreign economies, had a positive impact on the Company's international sales in 2010 through mid-2012. The strengthening of the U.S. dollar against many foreign currencies during the later portion of 2012 through the nine months of 2016 has negatively impacted pricing and the Company's backlog at September 30, 2016 in certain foreign markets.  Increasing domestic interest rates or weakening economic conditions abroad could cause the dollar to further strengthen, which could negatively impact the Company's international sales.

In the United States and internationally, the Company's equipment is marketed directly to customers as well as through dealers. In recent years, approximately 75% to 80% of equipment sold by the Company was sold directly to the end user. The Company expects this ratio to remain relatively consistent through the end of 2016.

The Company is operated on a decentralized basis, and each operating subsidiary has a complete management team with oversight by Company Group Presidents.  Finance, insurance, legal, shareholder relations, corporate accounting and other corporate matters are primarily handled at the corporate level (i.e., Astec Industries, Inc., the parent company). The engineering, design, sales, manufacturing and basic accounting functions are handled at each individual subsidiary. Standard accounting procedures are prescribed and followed in all financial reporting.

The non-union employees of each subsidiary have the opportunity to earn profit-sharing incentives in the aggregate of up to 10% of each subsidiary's after-tax profit if such subsidiary meets established goals. These goals are based on the subsidiary's return on capital employed, EBITDA as a percent of sales and safety. The profit-sharing incentives for subsidiary presidents are normally paid from a separate corporate pool.

Results of Operations

Net Sales

Net sales for the third quarter of 2016 were $247,752 compared to $211,350 for the third quarter of 2015, an increase of $36,402 or 17.2%. Sales are generated primarily from new equipment and parts sales to domestic and international customers.  Sales increased $23,602 in the Infrastructure Group, $7,530 in the Energy Group and $5,270 in the Aggregate and Mining Group.  Domestic sales in the Infrastructure group continue to be positively impacted by effects of the long-term federal highway bill enacted in December 2015 and pellet plant sales; however, sales of the Company's other groups are being negatively impacted by low oil prices, the strong U.S. dollar and the continuing downturn in the mining sector.  Sales reported by the Company's foreign subsidiaries in U.S. dollars for the third quarter of 2016 would have been reported $1,989 higher had 2016 foreign exchange rates been the same as 2015 rates.

Net sales for the first nine months of 2016 were $820,868 compared to $768,141 for the first nine months of 2015, an increase of $52,727 or 6.9%. Sales are generated primarily from new equipment and parts sales to domestic and international customers.  Increased sales of $78,049 in the Infrastructure Group were offset by decreased sales of $8,397 in the Aggregate and Mining Group and $16,925 in the Energy Group.  Domestic sales in the Infrastructure group are continuing to be positively impacted by effects of the long-term federal highway bill enacted in December 2015 and pellet plant sales; however, sales of the Company's other groups are being negatively impacted by low oil prices, the strong U.S. dollar and the continuing downturn in the mining sector.  Sales reported by the Company's foreign subsidiaries in U.S. dollars for the first nine months of 2016 would have been reported $9,482 higher had 2016 foreign exchange rates been the same as rates during 2015.

Domestic sales for the third quarter of 2016 were $199,851 or 80.7% of consolidated net sales compared to $156,333 or 74.0% of consolidated net sales for the third quarter of 2015, an increase of $43,518 or 27.8%. Domestic sales for the third quarter of 2016 as compared to the third quarter of 2015 increased $28,976 in the Infrastructure Group, $9,862 in the Energy Group and  $4,680 in the Aggregate and Mining Group.

Domestic sales for the first nine months of 2016 were $676,310 or 82.4% of consolidated net sales compared to $562,006 or 73.2% of consolidated net sales for the first nine months of 2015, an increase of $114,304 or 20.3%. Domestic sales for the first nine months of 2016 as compared to the first nine months of 2015 increased $104,500 in the Infrastructure Group and $12,512 in the Aggregate and Mining Group, but decreased $2,708 in the Energy Group.

International sales for the third quarter of 2016 were $47,901 or 19.3% of consolidated net sales compared to $55,017 or 26.0% of consolidated net sales for the third quarter of 2015, a decrease of $7,116 or 12.9%. International sales decreased $5,374 in the Infrastructure Group and $2,332 in the Energy Group and increased $590 in the Aggregate and Mining Group.  The decreases in international sales occurred primarily in Canada, Africa, Brazil and other South American countries, Asia and the Middle East, partially offset by increases in sales in Australia, Mexico and other Central American countries, West Indies and Europe.  International sales volumes continue to be negatively impacted by the strength of the U.S. dollar as compared to the currencies in many of the countries in which the Company operates, as well as low oil and gas pricing and the continuing downturn in the mining and oil and gas sectors.

International sales for the first nine months of 2016 were $144,558 or 17.6% of consolidated net sales compared to $206,135 or 26.8% of consolidated net sales for the first nine months of 2015, a decrease of $61,577 or 29.9%. International sales decreased $26,451 in the Infrastructure Group, $20,909 in the Aggregate and Mining Group and $14,217 in the Energy Group.  The decreases in international sales occurred primarily in Canada, Africa, the Middle East, Brazil and other South American countries, Europe, Post-Soviet States, Australia, Russia, and Asia, partially offset by smaller increases in sales in Japan, China, Mexico and the West Indies.  International sales volumes continue to be negatively impacted by the strength of the U.S. dollar as compared to the currencies in many of the countries in which the Company operates, as well as low oil and gas pricing and the continuing downturn in the mining and oil and gas sectors.

Parts sales for the third quarter of 2016 were $63,082 compared to $62,022 for the third quarter of 2015, an increase of $1,060 or 1.7%.  Parts sales as a percentage of consolidated net sales decreased 380 basis points from 29.3% for the third quarter of 2015 to 25.5% for the third quarter of 2016.  Parts sales increased in the Energy and Infrastructure Groups but decreased in the Aggregate and Mining Group.

Parts sales for the first nine months of 2016 were $200,974 compared to $202,527 for the first nine months of 2015, a decrease of $1,553 or 0.8%.  Parts sales as a percentage of consolidated net sales decreased 190 basis points from 26.4% for the first nine months of 2015 to 24.5% for the first nine months of 2016.  Parts sales increased in the Infrastructure Groups but decreased in the Aggregate and Mining Group and the Energy Group.

Gross Profit

Consolidated gross profit increased $10,251 or 22.7% to $55,389 for the third quarter of 2016 compared to $45,138 for the third quarter of 2015.  Gross profit as a percentage of sales increased 100 basis points to 22.4% for the third quarter of 2016 compared to 21.4% for the third quarter of 2015.  The increased gross margin percentage is due primarily to improved margins achieved in the Infrastructure Group associated with increased volumes due primarily to pellet plant sales in the third quarter of 2016 with no similar sales in the third quarter of 2015.

Consolidated gross profit increased $27,380 or 15.8% to $200,797 for the first nine months of 2016 compared to $173,417 for the first nine months of 2015.  Gross profit as a percentage of sales increased 190 basis points to 24.5% for the first nine months of 2016 compared to 22.6% for the first nine months of 2015.  The increased gross margin percentage is due primarily to improved margins achieved in the Infrastructure Group associated with increased volumes due primarily to pellet plant and parts sales in the first nine months of 2016.  Additionally, non-recurring expenses totaling $999 related to the closing of the Company's Astec Underground facility in Loudon, Tennessee and relocating the related equipment and inventory to the Company's GEFCO subsidiary were incurred in early 2015.

Selling, General, Administrative and Engineering Expenses

Selling, general, administrative and engineering expenses increased $2,927 or 7.1% to $43,950 for the third quarter of 2016 compared to $41,023 for the third quarter of 2015 due primarily to increased payroll/commissions of $1,667, profit sharing expense of $1,366 associated with improved earnings, SERP expense of $783 due to the impact of stock price increases on Company stock held by the SERP and restricted stock unit expense of $731, offset by reduced repairs to airplanes of $1,556.

Selling, general, administrative and engineering expenses increased $4,580 or 3.6% to $132,716 for the first nine months of 2016 compared to $128,136 for the first nine months of 2015 due primarily to increased payroll/commissions of $2,296, profit sharing expense of $2,643 associated with improved earnings, SERP expense of $1,482 due to the impact of stock price increases on Company stock held by the SERP, restricted stock unit expense of $919, offset by reduced repairs to airplanes of $1,556 and expenses of $824 relating to computer services.

Interest Expense

Interest expense for the third quarter of 2016 decreased $241 to $264 from $505 for the third quarter of 2015.

Interest expense for the first nine months of 2016 decreased $165 to $1,057 from $1,222 for the first nine months of 2015.

Other Income, Net of Expenses

Other income, net of expenses was $505 for the third quarter of 2016 compared to $510 for the third quarter of 2015, a slight decrease of $5 or 0.1%.  See Note 14 to the unaudited condensed consolidated financial statements for a summary of items included in other income.

Other income, net of expenses was $1,324 for the first nine months of 2016 compared to $2,543 for the first nine months of 2015, a decrease of $1,219 due primarily to $1,204 of key-man life insurance proceeds recorded in the first nine months of 2015.  See Note 14 to the unaudited condensed consolidated financial statements for a summary of items included in other income.

Income Tax Expense

The Company's combined effective income tax rate was 41.5% for the third quarter of 2016 compared to 52.5% for the third quarter of 2015.  The continuing high tax rate in each period is due primarily to the Company's inability to recognize tax benefits on losses in certain of the Company's foreign companies and increased state effective tax rates.  The tax rate for 2015 does not include a benefit for research and development tax credits as legislation extending the credit for 2015 was not enacted by Congress until the fourth quarter of 2015.

The Company's combined effective income tax rate was 37.6% for the first nine months of 2016 compared to 38.8% for the first nine months of 2015.  The continuing high tax rate in each period is due primarily to the Company's inability to recognize tax benefits on losses in certain of the Company's foreign companies and increased state effective tax rates. The tax rate for 2015 does not include a benefit for research and development tax credits as legislation extending the credit for 2015 was not enacted by Congress until the fourth quarter of 2015.

Net Income

The Company had net income attributable to controlling interest of $6,838 for the third quarter of 2016 compared to $2,292 for the third quarter of 2015, an increase of $4,546 or 198.3%. Net income attributable to controlling interest per diluted share was $0.30 for the third quarter of 2016 compared to $0.10 for the third quarter of 2015, an increase of $0.20.  Diluted shares outstanding for the quarters ended September 30, 2016 and 2015 were 23,145 and 23,121, respectively.

The Company had net income attributable to controlling interest of $42,773 for the first nine months of 2016 compared to $29,201 for the first nine months of 2015, an increase of $13,572 or 46.5%. Net income attributable to controlling interest per diluted share was $1.85 for the first nine months of 2016 compared to $1.26 for the first nine months of 2015, an increase of $0.59.  Diluted shares outstanding for the nine-month periods ended September 30, 2016 and 2015 were 23,138 and 23,118, respectively.

Dividends

In February 2013, the Company's Board of Directors approved a dividend policy pursuant to which the Company began paying a quarterly $0.10 per share dividend on its common stock beginning in the second quarter of 2013.  The actual amount of future quarterly dividends, if any, will be based upon the Company's financial position, results of operations, cash flows, capital requirements and restrictions under the Company's existing credit agreement, among other factors.  The Board retained the power to modify, suspend or cancel the Company's dividend policy in any manner and at any time it deems necessary or appropriate in the future.  The Company paid quarterly dividends of $0.10 per common share to shareholders in each quarter of 2015 and the first three quarters of 2016.

Backlog

The backlog of orders as of September 30, 2016 was $389,260 compared to $251,775 as of September 30, 2015, an increase of $137,485 or 54.6%. Domestic backlogs increased $132,453 or 68.6% while international backlogs increased $5,032 or 8.6%.  The September 30, 2016 backlog was comprised of 83.6% domestic orders and 16.4% international orders, as compared to 76.7% domestic orders and 23.3% international orders as of September 30, 2015.  Included in the September 30, 2016 and 2015 backlogs is approximately $60,000 for a three line pellet plant from one customer under a Company financed arrangement whereby the Company will record the related revenues when payment is received, which is expected in 2017.  Additionally, the Company received an unrelated $30,000 pellet plant order in the third quarter of 2015 which was increased by $122,500 in the first quarter of 2016 of which approximately $74,100 is included in the September 30, 2016 backlog.  The Company is unable to determine whether the changes in backlogs were experienced by the industry as a whole; however, the Company believes the changes in backlogs reflect the current economic conditions the industry is experiencing.

Segment Net Sales-Quarter:

Infrastructure Group: Sales in this group were $109,227 for the third quarter of 2016 compared to $85,625 for the same period in 2015, an increase of $23,602 or 27.6%.  Domestic sales for the Infrastructure Group increased $28,976 or 42.2% for the third quarter of 2016 compared to the same period in 2015 due primarily to increased sales of asphalt plants and mobile asphalt equipment (impacted by the passage of a new long-term Federal highway bill in December 2015) and pellet plant sales of $18,141 in the third quarter of 2016 (part of the $122,500 order discussed in the backlog section above).  International sales for the Infrastructure Group decreased $5,374 or 31.7% for the third quarter of 2016 compared to the same period in 2015 due primarily to reduced sales across most product lines resulting from the continued strength of the U.S. dollar compared to many local foreign currencies.  Sales decreases in South America, Canada and the Middle East were partially offset by increases in sales in the West Indies and Central America (excluding Mexico). Parts sales for the Infrastructure Group increased 1.0% for the third quarter of 2016 compared to the same period in 2015 due primarily to improved sales of parts for mobile asphalt equipment.

Aggregate and Mining Group: Sales in this group were $85,819 for the third quarter of 2016 compared to $80,549 for the same period in 2015, an increase of $5,270 or 6.5%.  Domestic sales for the Aggregate and Mining Group increased $4,680 or 8.9% for the third quarter of 2016 compared to the same period in 2015 due primarily to the sale of a Company-owned distributor for the KPI/JCI/AMS product lines and all of its inventory (which resulted in equipment sales of $7,984).  This increase was partially offset by a decline in sales in the Group's mining industry product lines.  International sales for the Aggregate and Mining Group increased $590 or 2.1% in the third quarter of 2016 compared to the same period in 2015.  International sales increases in Mexico, South America and Europe were partially offset by decreased sales in Africa, Brazil and Canada.  The Group's U.S. based subsidiaries that sell into the mining industry achieved modest growth in international sales due to pent up demand notwithstanding the continued strength of the U.S. dollar compared to many local foreign currencies.  The Company's subsidiaries based in South Africa, Canada and Northern Ireland each experienced increases in international sales while its South Africa and Brazil based subsidiaries experienced a decline in international sales.  Parts sales for this group decreased 1.1% for the third quarter of 2016 compared to the same period in 2015.

Energy Group: Sales in this group were $52,706 for the third quarter of 2016 compared to $45,176 for the same period in 2015, an increase of $7,530 or 16.7%.  Domestic sales for the Energy Group increased $9,862 or 28.0% for the third quarter of 2016 compared to the same period in 2015 due to sales by Power Flame Incorporated ("Power Flame"), which was acquired as of August 1, 2016 and increased sales of concrete plants and wood chippers/grinders.  International sales for the Energy Group decreased $2,332 or 23.6%.  Sales decreases in South America, Canada and Asia were partially offset by increased sales in Australia.    International sales continue to be negatively impacted due to the strength of the U.S. dollar compared to many local foreign currencies and continuing low oil and gas prices.  Parts sales for this group increased 11.1% for the third quarter of 2016 compared to the same period in 2015 due primarily to the acquisition of Power Flame and improved sales to customers in the water well drilling industry.

Segment Net Sales-Nine Months:

Infrastructure Group: Sales in this group were $414,817 for the first nine months of 2016 compared to $336,768 for the same period in 2015, an increase of $78,049 or 23.2%.  Domestic sales for the Infrastructure Group increased $104,500 or 38.6% for the first nine months of 2016 compared to the same period in 2015 due primarily to increased sales of asphalt plants, mobile asphalt equipment (positively impacted by the passage of a new long-term Federal highway bill in December 2015) and pellet plant sales.  International sales for the Infrastructure Group decreased $26,451 or 39.9% for the first nine months of 2016 compared to the same period in 2015 due to reduced sales across most product lines resulting from the continued strength of the U.S. dollar compared to many local foreign currencies.  Sales decreases in Canada, Europe, the Middle East, South America and post-Soviet States were partially offset by increases in sales in China and the West Indies. Parts sales for the Infrastructure Group increased 6.5% for the first nine months of 2016 compared to the same period in 2015 due primarily to improved sales of parts for asphalt plants.

Aggregate and Mining Group: Sales in this group were $277,393 for the first nine months of 2016 compared to $285,790 for the same period in 2015, a decrease of $8,397 or 2.9%.  Domestic sales for the Aggregate and Mining Group increased $12,512 or 6.9% for the first nine months of 2016 compared to the same period in 2015 due primarily to increased sales of aggregate processing equipment offset by a decline in sales into the U.S. mining market.  International sales for the Aggregate and Mining Group decreased $20,909 or 20.2% in the first nine months of 2016 compared to the same period in 2015.  International sales decreases in Africa, Canada, Brazil and other South American countries, the Middle East, India and post-Soviet States were partially offset by increased sales in Mexico, Japan and other Asian countries.  International sales by the Company's subsidiaries based in Canada and Northern Ireland increased while the Company's U.S., South Africa and Brazil based subsidiaries experienced declines in sales.  International sales continue to be negatively impacted by the reduced customer demand for equipment in the mining sector and pricing issues in many foreign countries due to the strength of the U.S. dollar compared to many local foreign currencies.  Parts sales for this group decreased 7.5% for the first nine months of 2016 compared to the same period in 2015 due primarily to reduced sales into the international mining sector.

Energy Group: Sales in this group were $128,658 for the first nine months of 2016 compared to $145,583 for the same period in 2015, a decrease of $16,925 or 11.6%.  Domestic sales for the Energy Group decreased $2,708 or 2.5% for the first nine months of 2016 compared to the same period in 2015 due primarily to a lack of demand across most product lines impacted by the continuing low oil and gas prices, offset by sales increases in wood chippers/grinders, concrete plants and sales by Power Flame which was acquired August 1, 2016.  International sales for the Energy Group decreased $14,217 or 38.9% across all product lines. International sales decreased in Russia, Australia, the Middle East, Asia and Africa. International sales continue to be negatively impacted due to the strength of the U.S. dollar compared to many local foreign currencies and continuing low oil and gas prices.  Parts sales for this group decreased 4.6% for the first nine months of 2016 compared to the same period in 2015 due primarily to reduced sales of parts for drilling rig equipment.

Segment Profit (Loss)-Quarter:

Infrastructure Group: Segment profit for this group was $9,858 for the third quarter of 2016 compared to $2,116 for the same period in 2015, an increase of $7,742 or 365.9%.  This group had an increase in gross profit of $8,825 resulting from increased sales of $23,602 as described above.  Gross margins increased 400 basis points due to a more favorable product mix in the third quarter of 2016 as compared to the third quarter of 2015, and a reduction in underabsorbed overhead of $2,005. 

Aggregate and Mining Group: Segment profit for this group was $7,651 for the third quarter of 2016 compared to $3,790 for the same period in 2015, an increase of $3,861 or 101.9%.  This group had an increase in gross profit of $1,709 resulting from gross profits on the increase in sales of $5,270 described above and the recapture of intercompany profit previously deferred of $649 while gross margins percentages remained relatively constant between periods.  Additionally, selling expenses declined by $1,391 (primarily driven by a decline in sales promotion expenses of $1,125) for the third quarter of 2016 as compared to the third quarter of 2015, and major airplane repairs of $608 incurred in the third quarter of 2015 were not repeated in 2016.

Energy Group: Segment profit for this group was $805 for the third quarter of 2016 compared to $1,941 for the third quarter of 2015, a decrease of $1,136 or 58.5%.  This group had a decrease in gross profit of $321, although sales increased by $7,530 as described above, as gross margins decreased 370 basis points.  The decrease in gross margins is due to pricing pressures from the continuing downturn in the oil and gas market and an increase of $625 in unabsorbed overhead between periods.  Additionally, the third quarter of 2016 included $1,081 of selling, general, administrative and engineering expenses of Power Flame including $410 of intangible asset amortization.

Corporate: The Corporate Group had a net loss of $11,610 for the third quarter of 2016 compared to a net loss of $6,853 for the third quarter of 2015, an unfavorable increase of $4,757 or 69.4% due primarily to an increase of $2,202 in income taxes related to improved consolidated profits, increased profit sharing expense of $1,366, increased SERP expense of $783 (due primarily to the increase in the Company's stock price) and increased restricted stock unit expense of $731.  The cost increases were partially offset by a reduction of $954 in airplane repairs expense.

Segment Profit (Loss)-Nine Months:

Infrastructure Group: Segment profit for this group was $51,394 for the first nine months of 2016 compared to $29,472 for the same period in 2015, an increase of $21,922 or 74.4%.  The group had an increase in gross profit of $27,057 resulting from gross profits on the increased sales between periods of $78,049 described above and a 230 basis point increase in gross margins partially due to a $3,030 improvement in absorption variances between periods, margins on a 6.5% increase in parts sales and increased sales of equipment with higher-than-average margins.  The improved gross profit was partially offset by a $2,044 increase in foreign and state income taxes on the improved earnings, and a $2,299 increase in selling expenses (primarily wages/commission and sales promotions/advertising).

Aggregate and Mining Group: Segment profit for this group was $28,135 for the first nine months of 2016 compared to $25,441 for the same period in 2015, an increase of $2,694 or 10.6%.  The increase in profit primarily resulted from a 140 basis points increase and a $2,042 net increase in gross profits.  The gross profit improvement resulted from favorable change in foreign exchange translation/transaction gains/losses of $1,231, reduced factory indirect wages of $615, reduced health insurance costs of $446 and reduced warranty expenses of $549.

Energy Group: Segment profit for this group was $3,237 for the first nine months of 2016 compared to $2,805 for the first nine months of 2015, an increase $432 or 15.4%.  Profit for the segment was negatively impacted by a $1,843 reduction in gross profit resulting from a $16,925 decline in sales between periods, partially offset by a 110 basis point increase in gross margin due to a $1,513 reduction in underabsorbed overhead and a $963 reduction in warranty expenses between periods.  The improved overhead absorption was due partially to the closing the Astec Underground facility in Loudon, Tennessee in May 2015.  Additionally, margins for the nine months ended September 30, 2015 were negatively impacted by the one-time costs incurred at the Company's GEFCO subsidiary to absorb the Loudon production lines into its operations and to transfer the Loudon equipment and inventory to its facility.  Segment profits were further improved by a reduction in foreign and state income taxes of $434 and a $1,557 reduction in selling, general, administrative and engineering expenses between periods (primarily related to the closing of the Underground facility).

Corporate: The Corporate Group had a loss of $40,745 for the first nine months of 2016 compared to a loss of $29,154 for the first nine months of 2015, an unfavorable increase of $11,591 or 39.8% due to an increase of $5,703 in income taxes related to improved consolidated profits, increased profit sharing expenses of $2,922, SERP expense of $1,483 and restricted stock expense of $919 offset by a reduction in airplane repairs of $948.  Additionally, the Company recorded non-recurring income from key-man life insurance proceeds of $1,204 in the first nine months of 2015.

Liquidity and Capital Resources

The Company's primary sources of liquidity and capital resources are its cash on hand, borrowing capacity under a $100,000 revolving credit facility and cash flows from operations. The Company had $52,474 of cash available for operating purposes as of September 30, 2016, of which $15,065 was held by the Company's foreign subsidiaries. While the Company has no plans to transfer the cash held by its foreign subsidiaries to the U.S. in the foreseeable future, to the extent foreign earnings are eventually repatriated, such amounts may be subject to income tax liabilities, both in the U.S. and in various applicable foreign jurisdictions. At September 30, 2016 and at all times during the first nine months of 2016, the Company had no borrowings outstanding under its credit facilities with Wells Fargo Bank, N.A. Net of letters of credit totaling $15,196, the Company had borrowing availability of $84,804 under the credit facility as of September 30, 2016.

The Wells Fargo credit facility is a five-year agreement that was entered into in April 2012.  The amended and restated credit agreement with Wells Fargo continued the Company's previous $100,000 revolving credit facility and includes a sub-limit for letters of credit of $25,000.  Borrowings under the agreement are subject to an interest rate equal to the daily one month LIBOR rate plus a 0.75% margin, resulting in a rate of 1.29% as of September 30, 2016.  Interest only payments are due monthly. The unused facility fee is 0.175%.  The amended and restated credit agreement contains certain financial covenants, including provisions concerning required levels of annual net income, minimum tangible net worth and maximum allowed capital expenditures.  The Company was in compliance with these covenants as of September 30, 2016.

The Company's South African subsidiary, Osborn Engineered Products SA (Pty) Ltd ("Osborn"), has a credit facility of $6,920 with a South African bank to finance short-term working capital needs, as well as to cover performance letters of credit, advance payment and retention guarantees. As of September 30, 2016, Osborn had $1,911 in performance, advance payment and retention guarantees outstanding under the facility. The facility has been guaranteed by Astec Industries, Inc., but is otherwise unsecured. A 0.75% unused facility fee is charged if less than 50% of the facility is utilized. As of September 30, 2016, Osborn had available credit under the facility of $5,009. The interest rate is 0.25% less than the South Africa prime rate, resulting in a rate of 10.5% as of September 30, 2016.

The Company's Brazilian subsidiary, Astec Brazil, has outstanding working capital loans totaling $5,639 from Brazilian banks with interest rates ranging from 10.4% to 11.0%.  The loans' maturity dates range from November 2018 to April 2024 and the debts are secured by Astec Brazil's manufacturing facility.  Additionally, Astec Brazil has various 5-year equipment financing loans outstanding with Brazilian banks in the aggregate of $1,301 as of September 30, 2016 that have interest rates ranging from 3.5% to 16.3%.  These equipment loans have maturity dates ranging from September 2018 to April 2020.  A portion of the Astec Brazil debt is also secured by letters of credit totaling $11,874 issued by Astec Industries, Inc.

Cash Flows from Operating Activities:

Net cash from operating activities increased by $74,629 for the first nine months of 2016 as compared to the first nine months of 2015 due primarily to cash from earnings, growth in customer deposits on large orders included in the Company's backlog and increases in accounts payable associated with increased manufacturing activity.  These increases were partially offset by an increase in the growth of accounts receivables and inventory due to increased sales and backlogs.

Cash Flows from Investing Activities:

Net cash used by investing activities increased by $42,295 for the first nine months of 2016 as compared to the same period in 2015 due primarily to the acquisition of Power Flame in August 2016.

Total capital expenditures for 2016 are forecasted to be approximately $23,000. The Company expects to finance these expenditures using currently available cash balances, internally generated funds and available credit under the Company's credit facilities.  Capital expenditures are generally for machinery, equipment and facilities used by the Company in the production of its various products.  The Company believes that its current working capital, cash flows generated from future operations and available capacity under its credit facility will be sufficient to meet the Company's working capital and capital expenditure requirements through September 30, 2017.

Cash Flows from Financing Activities:

Cash used by financing activities increased by $7,115 for the first nine months of 2016 compared to the same period in 2015 due primarily to net repayments on bank loans by the Company's Brazilian subsidiary. In addition, cash from financing activities for the first nine months of 2015 were positively affected by cash received from the sale of Company shares held in participants' SERP accounts in 2015, partially due to the payout of the Company's former CEO's account to his beneficiary in 2015.

Financial Condition

The Company's current assets increased to $590,567 as of September 30, 2016 from $541,797 as of December 31, 2015, an increase of $48,770 or 9.0% due primarily to an increases in cash of $27,412, trade receivables of $9,571 and inventory of $14,942 during the first nine months of 2016.

The Company's current liabilities increased to $190,206 as of September 30, 2016 from $142,012 as of December 31, 2015, an increase of $48,194 or 33.9%. The increase is primarily due to increases in customer deposits of $35,685 on large orders in the Company's backlog, accounts payable of $5,111 and accrued product warranties of $2,407.

Market Risk and Risk Management Policies

We have no material changes to the disclosure on this matter made in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

Off-balance Sheet Arrangements

As of September 30, 2016, the Company does not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.

Contractual Obligations

During the nine months ended September 30, 2016, there were no substantial changes in the Company's commitments or contractual liabilities.

The Company has no material changes to the disclosure on this matter made in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

The Company's management, under the supervision and with the participation of the Company's principal executive officer and principal financial officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company's principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective.

There have been no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the nine months ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

The Company is involved from time to time in legal actions arising in the ordinary course of its business. Other than as set forth in Part I, "Item 3. Legal Proceedings" in the Company's Annual Report on Form 10-K for the year ended December 31, 2015, the Company currently has no pending or threatened litigation that the Company believes will result in an outcome that would materially affect the Company's business, financial position, cash flows or results of operations. Nevertheless, there can be no assurance that future litigation to which the Company becomes a party will not have a material adverse effect on its business, financial position, cash flows or results of operations.

In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2015, which could materially affect the Company's business, financial condition or future results. There have been no material changes in the Company's risk factors from those disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.  The risks described in the Company's Annual Report on Form 10-K for the year ended December 31, 2015 and in this Quarterly Report on Form 10-Q are not the only risks facing our Company.  Additional risks and uncertainties not currently known to management or that management currently deems to be immaterial also may materially adversely affect the Company's business, financial condition or operating results.

The exhibits are numbered in accordance with Item 601 of Regulation S-K.  Inapplicable exhibits are not included in the list.

* In accordance with Release No. 34-47551, 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.

Items 2, 3, 4 and 5 are not applicable and have been omitted.

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.