Astec Industries Inc (ASTE) 2009 Q4 法說會逐字稿

Greetings and welcome to the Astec Industries fourth quarter 2009 results. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Steve Anderson, Director of Investor Relations for Astec Industries. Thank you, Mr. Anderson. You may begin.

Thank you, Claudia. Good morning and welcome to our conference call for the fourth quarter and fiscal year year end December 31, 2009. As Claudia mentioned, my name is Steve Anderson and I'm the corporate secretary and director of investor relations for the Company. Also on today's call are Dr. J. Don Brock, our Chairman and Chief Executive Officer, and McKamy Hall, our Chief Financial Officer. In just a moment I'll turn the call over to McKamy to summarize our financial results and to Don to review our business activity in 2009 and also to provide some comments on 2010.

Before we begin, I'll remind you that our discussion this morning may contain forward-looking statements related to the future performance of the Company. These statements are intended to qualify for the Safe Harbor liability established by the Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance. Factors that could influence our results are highlighted in today's financial news release and others are contained in our annual report and our filings with the SEC. As usual, we ask you to familiarize yourself with those factors. At this point I'll turn the call over to McKamy to summarize our financial results for the fourth quarter and full year 2009.

Thanks, Steve. We appreciate each of you joining us this morning. We are disappointed with the results. However, in these unprecedented economic times, we have maintained a disciplined approach to managing the business as is reflected in the strength of our balance sheet. In the quarter, net sales were $177.9 million compared to $195.5 in the same quarter 2008 for a decrease of 9% or $17.6 million. The failure of Congress to renew the highway bill on a timely basis dampens the interest of our customers in making large capital expenditure commitments when the government had not committed to support the federal highway program which had been in effect since 1956. The state of the domestic economy is resulting in reduced state and federal revenue collections for the highway trust funds.

Customers are making their purchases that they really need, but are hesitant to make long-term commitments or improvements. In international sales we had $74.8 million for the quarter, that is compared to $65 million for the fourth quarter of 2009 for an increase of 15.1% or $9.8 million. This took us over the 40% mark for our quarter for the first time in that international sales were 42% of the fourth quarter sales in 2009. International sales were 33.2% of total sales in the fourth quarter of 2008. International sales are being assisted by stimulus programs in foreign countries which are more focused on roads than our domestic stimulus package.

The increase of sales for the fourth quarter centered in Canada, Middle East, Australia and South America. The segments where we had increases were the asphalt group, the other group and the mobile group. Our domestic sales for the quarter were $103.1 million versus $130.5 million, or a 21% decrease over the prior year. Part sales were at $44.1 million versus $47 million, that is a 6.2% decrease or $2.9 million, 24.8% of our quarterly sales in 2009 versus 24% in 2008 were parts. Our underground group had the largest decrease followed by the aggregate mining group, asphalt group, mobile group and other group.

Of the total revenues for the fourth quarter for 2009, and this is attached to your press release, the segment -- asphalt segment provided 34.4% of our total sales, aggregate 31.2%, mobile 17.9% other 9.2% and underground 7.3%. For the year, our sales were $738.1 million versus $973.7 million for a decrease of 24.2 % or $235.6 million. Our international sales for the year were at $272.6 million versus $352.7 million for a decrease of 22.7% or $80.1 million. The decrease in dollars for international sales occurred mainly in central America, Europe, Asia, Africa, South America, China, Canada, Australia and the Middle East. International sales were 36.9% of net sales in 2009 compared to 36.2% from 2008.

The segments aggregate, underground, mobile decreased in international sales. The asphalt group and other group increased for the year in international sales. Our domestic sales were $465.5 million compared to $621.1 million for a decrease of $155.5 million or 25% in sales dollars. Our domestic sales were 63.1% of total sales in 2009 versus 63% of total sales in 2008.

Transportation, construction was plummeting in January through April as state and local governments cut back highway and related spending in response to the economic recession. The stimulus program started to turn the market around in May. A record $56.2 billion of construction work was performed on highway pavement related products, up 7.3% from 52.3% in 2008. (inaudible) to suggest that without the stimulus transportation, construction would have been down $1.5 billion or more. Part sales for 2009 were $180.3 million versus $204.9 million for a decrease of 12% or $24.6 million. Part sales were 24.4% of total sales versus 21% of total sales in 2008, and I think all of you are well aware that the gross margin on parts is certainly much better than equipment. So the reduced gross margin on parts volume heavily impacted or 2009 results. The sales by segment for 2009 are asphalt 35% of sales, aggregate and mining 29.6%, mobile 18.5%, underground 9.1%, and other 7.8%.

On the consolidated gross profit for the quarter it was at $31.2 million versus $41.8 million, a decrease of $10.7 million. Volume is the primary factor in the sales in the gross margin. The gross profit percentage declined 390 basis points for the quarter to 17.5% for 2009 from 29.4% in 2008. We did move some equipment either at a loss or at a reduced sales price that needed to be moved. We had underabsorbed overhead that basically was not a factor in the quarter and basically this is one good negative good use in that the underabsorbed overhead basically for the quarter was flat. So we had reduced our manufacturing expenses and manufacturing overhead to the point that we did not have any more underabsorption by the time we reached the fourth quarter than we did in the prior year.

On the consolidated gross profit, we were at $152.4 million versus $233.3 or a 34.7% decrease of $80.9 million. Again, volume is a very important factor. Our margin reduced 330 basis points or decreased 330 basis points. Our underabsorbed overhead increased by $10.3 million from the prior year. Our manpower comparing 12/31/09 to 12/31/08 we reduced 21%. Our hours worked on direct labor reduced 31.6% and in spite of the fact that we reduced our manufacturing expenses almost $60 million, our unabsorbed overhead for the year still increased by $10 million. Our gross profit percentage, by segment, as is attached to your press release, shows your asphalt group at 24.5%, mobile at 23.1%, aggregate at 21.3%, other at 14.7% and underground at 3.8%. Part of our gross margin, I think I mentioned earlier, is due to some erosion from competitive pricing and discounts as well as moving equipment that needed to be moved.

Our SG&A and engineering, we separated on a separate line in the financial statements an impairment charge of $17.036 million or $17.0 million on a separate line. By segment, this was in aggregate in mining at $10.9 million and the other at $5.8 million and underground at $0.3 million. The main component of those write-downs were goodwill. In the SGA&E for the quarter, our SGA&E was at $32 million for the quarter compared to $34.9 million last year or a reduction of $2.9 million. These decreases were primarily payroll and the related expenses. For the year, the SG&A decreased $16 million and, again, the primary decreases were payroll, payroll related expenses, Con Expo which is the major trade show that's every three years, and travel expenses.

At the income from operations line, we had a loss for the quarter of $17.9 million versus a profit of $6.9 million for the prior year. Excluding the impairment that would have been $0.8 million loss versus last year's profit of $6.9 million or a decrease of $7.7 million. For the year, income from operations was at $9.9 million versus $91.8 million for the prior year. Excluding the as it impairment that would have been $26.9 million versus $91.8 million for the prior year. The pre-federal tax by segment is attached and I won't read all those, but is attached to your press release.

In the other income and interest income, the other income decreased compared to the sale of investments that we had in 2008. On the effective tax rate, the tax rate was at 11.6% for 2009 for the quarter versus 32.6% and on the annual rate we were at a 72.4% versus 35.5% and this gets quite complex, but I'll just mention that obviously the reduction in income is a major factor. We had reduced R&D credit. We had reduced domestic productivity -- domestic production activity deductions. We had a greater state tax burden. We had the non-ductibility of goodwill on the impairment charge. So all of those are part of the mix impacting our effective tax rate.

In 2010, the domestic activity production tax will increase or credit will increase 50%. The R&D has not been extended as usual, but that will usually come in the fourth quarter, and then the changes in combined tax rates for states to increase their tax revenue continues to be an increase and of course the level of sales. Our best estimate at this point, and it's very difficult to give you a good estimate, but we think we will be in the 38% to 40% range.

When we come to the net income attributable controlling interest line, in Q4 we had a net loss of $15.5 million compared to Q4 of 2008 a net income of $8.6 million. For the quarter we had a loss per diluted share of $0.69 versus earnings per share of $0.38 in Q4 2008. Without the intangible asset impairment charge, the Q4 loss diluted share would have been $0.08. Now attached to your press release is a reconciliation explaining that and reconciling it to GAAP.

On a year to date net income, we had $3.1 million versus prior year of $63.1 million for a decrease of $60 million in net income attributable to the controlling interest. The diluted earnings per share was $0.14 versus prior year of $2.80. Without the intangible as it impairment charge, the year to date earnings would have been $73 versus the prior year $2.80.

On the backlog, which is also on your press release attachment, at December 31, we were at $135.1 million compared to $193.3 million last year. That's a 30.1% decrease. The international backlog, at 12/31/09 was $62.2 million compared to $87.8 million at December 31, 2008 for a 29% decrease. The domestic backlog at 2009 decreased from $105.6 million to $72.8 million for a 31% decrease. So the relativity is staying fairly constant there. The backlog is attached, as I mentioned, to your press release and I won't read those numbers to you.

The asphalt mobile paving segment had the only increase in backlog over the prior year at 12/31, and the 12/3/09 backlog is $135 million compared to the September backlog of $144 million. So we have about a $9 million decrease or about a 6% decrease from the prior quarter. The incoming orders for machines and equipment was 40% better than the incoming in 2009 -- December 2009 than in December 2008. Incoming orders for parts in December was a decrease of 7.7% compared to the prior year.

Our balance sheet is very strong. The strength of the balance sheet allows us to evaluate strategic opportunities and be prepared to service our customers when this economy does turn around. Our days outstanding, we have very proudly maintained that at 35.5 days compared to 34.4 days for the prior year. So in a tough economic time, that credit situation has not -- has been controlled. The inventory is at $248.5 million compared to $285.8 million, and we're very pleased with a decrease of $37.3 million. The inventory classification -- all of the inventory classifications decreased, raw materials, work in process, finished goods and used equipment. We owe nothing on our $100 million credit facility. We have $40 million in cash equivalence. We are utilizing the facility for $11.6 million of letters of credit which leaves our borrowing availability at $88.4 million.

Our capital expenditures for the year were $17.5 million. Our depreciation for the year was $17.8 million as well. The cash flow will be attached to the 10-Q -- actually the 10-K filing on March 1. We feel that all of our subsidiaries have attempted to right-size their operations that control their cost. Obviously biggest need is sales volume. We have cut our SG&A. We have cut our manufacturing overhead. We have reduced our inventory. We've kept our days flat. We have no debt.

We have maintained -- when you receive your annual report, you'll see that we have maintained our commitment to R&D, and we have maintained our commitment to selling expense and service expense. So we are poised to take advantage of any opportunities that arise as well as to continue to provide our customers with the quality products or service that the Astec name presents. And that concludes my comments, and I'll be glad to answer any other questions after Don gives his comments.

Thank you, McKamy. Dr. Don Brock will now discuss Astec's business operations for 2009. Will make some general observations regarding 2010. Don.

Thank you, Steve. It'd be nice to really find a way to make the fourth quarter in 2009 look good but, unfortunately, there's no way. A drop in our top line of 40% to 50% in nearly hype of the 16 companies is certainly not pretty. Fortunately, the asphalt and the mobile business were helped by particularly on asphalt plants entering the year with a strong backlog and primarily the stimulus package certainly helped the mobile side of the business. When combined we were down, as McKamy said, 24.2% in revenues for the year and 9% for the quarter. However, I would point out in the fourth quarter of 2008 was the beginning of the severe downturn, so it was not a very difficult comparison to make. Without the impairment charge of $17 million, our 2009 earnings would have been approximately $17 million or 73% less.

During the quarter, we reduced our inventory $15 million. We also experienced very high absorptions during the quarter caused by the inventory reductions and due to Thanksgiving, Christmas, New Year's holidays plus the longer than normal plant shut-downs in many of our companies. Fortunately, we entered the downturn, as McKamy said, with a strong balance sheet and no debt. For this reason, we made a conscientious decision to do a number of things that were detrimental to our short-term performance, but should be beneficial to our long-term performance.

Number one, we did not reduce employment until we converted raw and purchase components to finish components, increasing our finished goods inventory which positioned us well to be able to make quick deliveries. Number two, we did not reduce our sales forces. We actually increased by adding a mining sales force and increase the number of feet on the ground in our part sales forces. Thirdly, we did not reduce our engineering forces. Instead, we increased product development. As a result, we introduced a new line of unique concrete plants, a line of geothermal drill rigs, a new drum hold-free chipper, a new unique pellet press, a new package asphalt terminal, a package emulsion plant, a new line of wood processing screens. We also enhanced many of our existing products through our focus group efforts and we continue to develop a line of energy products with parabolic solar panels, a burner that will burn wood pellets for large utility power plants and a complete wood pellet plant that processes whole trees into wood pellets. In addition. many other product enhancements.

As the recession persisted and Washington continued to fumble around, we were required to reduce our employment from the middle of 2008 of 4,300 people on a pro forma basis to 3,100 people at present. On a pro forma basis, our man hours are down year over year of about 33% and, as a result, we have had high absorptions as McKamy mentioned. Our costs were helped by a substantial drop in steel prices during the year but hurt by the underabsorption and more competitive prices.

During the year, we completed a number of capital projects that were started in 2008. The new modern plant for building oil drilling rigs at American Augers was finished by mid year as our order backlog basically dried up. We also completed the installation of a number of new automated machine tools, robotic welders in our crushing companies. And as McKamy mentioned, our CapEx ending the year was $17.5 million versus $40 million in 2008. We will continue to restrain capital expenditures until we see a significant recovery in the market. Our facilities and equipment are in excellent position to increase volumes significantly when the market recovers. During the year, we signed a joint venture/lasting agreement to build and market asphalt plants in both India and China. In February of 2010, we reached a similar agreement in India to manufacture our crushing equipment.

Looking forward to 2010, as we enter the year we saw the asphalt and mobile business remaining about the same as 2009. I might point out the mobile business basically died the first quarter of last year but picked up after the stimulus was passed in April and mobile is much stronger this year in the first quarter than it was last year. Customers continue to be very cautious, only buying what they need. We see more purchases from the private-owned family companies than in the larger public companies which are considerably more cautious, and from what we've seen in most of the public companies, they cut capital expenditures due to about high depreciation. We believe, over this period of time, we have increased market share in most of our segments, and we believe that we will be able to maintain this additional market share.

We see slight improvements in the underground, energy and mining bills. In the early 2009 hike for the drill rigs for natural gas were idle and most of those are back to work at this time, and our order -- basically our quoting is up significantly on the energy side of the business. Our reductions in the third and fourth quarter of 2009 have gotten many of our companies right-sized for the available revenues that are available that we can sell.

On the mobile equipment side of the business, during this year, most of our engineering efforts will be dedicated to modifying our machinery and increasing the size to accept the new tier-4 engines which are about 50% larger than the tier 3s. This is required by January 1, 2011. We believe, during the third and fourth quarter, we will see an increase in volume in all of the businesses that use diesel engines since many of our customers are concerned about the tier-4 engines and will be buying machinery with tier-3 equipment.

Our new products will begin to add volume during the year. We also expect to see a continuing improvement in international sales due to the dollar remaining weak as compared to what it was 18 months ago. Our present Congress is obviously dysfunctional. Fortunately, they did pass the closure vote last night that will allow us to have an extension of the highway bill through the end of this year, and will backfill the shortfall and the highway trust fund.

We see a continuing delay in passing a new highway bill. Hopefully by the end of the year this should happen. The uncertainty of the direction of the cap and trade and energy bills and the proposed changes in our taxes causes a paralysis in the decision-making of many of our customers. We see our customers with generally particularly the privately-owned companies with excess cash they're ready to spend, but they want to see a direction before they turn the money loose.

With all of this said, we expect 2010 to be slightly better than 2009. We expect international sales to continue to improve. We've seen recently a significant pick up in our parts business. We have positioned our Company to be able to respond quickly when demand does increase with the new highway bill with products in all segments of the energy business regardless of the direction of the new energy bill we think we are prepared to benefit when this happens. I guess the one good thing I can say is there is build up of pent up demand that is occurring so when everything does turn loose, we think we will be well positioned when the dam finally breaks. With that, I'll stop and be glad to answer any questions.

Ladies and gentlemen, we will now be conducting the question-and-answer session. (Operator Instructions) Our first question is coming from Rich Wesolowski with Sidoti & Company.

Morning, Rich.

Morning. How are you, Don? Would you comment on the difference this quarter and last versus 2009 that prompted the margin to drop -- the gross margin to drop on pretty comparable sales volume?

Rich, I guess there's two or three things. As number one we, did have a $15 million reduction in inventory, and we intentionally tried to do that in many of the companies. Most of that reduction was in the weaker performing companies, the ones that we are seeing the most downturn and we had a significant increase in underabsorption in the fourth quarter due to the that and due to the number of plant shut-downs and the holidays that we had. So that affected the margin, I guess the three things was the underabsorption, the reduction in inventory, and the price competition is tough right now.

Okay. So the underabsorption McKamy had mentioned I believe in his prepared remarks that it was flat the year ago, but year ago was a very low comparable?

I think it was flat through the first three quarters. The fourth quarter got -- we had quite a bit more in the fourth quarter.

Okay. And then last quarter you had cited I think it was $35 million or $40 million of completed asphalt plants and inventory that were sold but not yet shipped. Did you, indeed, ship all those in the fourth quarter?

We shipped those, but we had a comparable back -- the same thing in the fourth quarter. Again, delays due to permits or delays due to people not being ready. I've gotten to where I just don't even want to talk about it because we seem to be delayed every quarter.

Right, right. Lastly, all the new stuff you have, the gas, the geothermal rigs, pellet plants, concrete plants, how much inventory represents those items?

There's not a huge amount in those items but I would have to say the first of all of these are low margin and it probably -- we probably have sold three or four of the geothermal rigs. No profits on the first ones. A real good acceptance in the field and we see a continuation of that but it will be probably third quarter before we start seeing the margins where they should be on most of this new equipment, but we don't have a huge amount of backlog. Most everything we've developed in these concrete plants is sold and have a lot of prospects for that. In the pellet press side of it, we sold three of those units and are delivering them, and really would not try to push until we get it out and get some hours on them. The complete pellet plant, we have not sold one at this time. We have quoted four or five of them, but have not sold one at this time.

Excellent. Thank you.

Our next question is coming from David Wells with Thompson Research.

Good morning, everyone.

Good morning, David.

Just to jump back up to the discussion about margins? I guess maybe some additional color. If you look at the asphalt group, you saw sales up 37% from Q3 but then saw 200 basis points of deleverage. That's been a segment that has performed better up to this point in this year relative to maybe underground business. So is that Delta primarily from pricing? Any color on maybe the quality of pricing for the units that are still sitting in backlog right now?

David, it is some pricing. The other thing it is is the parts business last year was down in all of the companies and parts, as McKamy mentioned, has a much higher margin. The margins that you see in the report is a combination of both parts and new equipment. We have seen some substantial pickup in the parts business which will help us to overcome that. But price competition is tough right now.

I mean in terms of the pricing environment, are you seeing anyone step up and hold the line or are there some folks who are more egregious offenders in terms of cutting price? What are you seeing in the marketplace? Is there a bottom forming?

I think there's a bottom forming, but it's a low bottom, put it that way. Everybody is trying to feed their plants is what it amounts to. And I see that's the same thing that's happening with our customers. I talk to an average of five to ten customers a day and many of them -- we've sold five or six asphalt plants in the last three weeks, and I met with many of them, and many of them say we've got plenty of work, but it's cheap. And, again, these are predominantly the private companies and they also take the attitude that, we're not going to lay our people off, and so we might as well keep them busy even if we don't make any money. So there's kind of that attitude in the marketplace and concurrent with that attitude is we want to buy a new piece of equipment, but we realize everybody is slow like the market is, and we're going to get the best price, so it's -- I think we reached bottom in that. I think any pickup will help that, but it still is very tough.

That's helpful. And then, looking at SG&A in the quarter, down on a year over year basis, but up a little bit from Q3, was there some end of the year incentive comp or some items flowing through that that would explain the Delta there?

I guess that one catches me a little bit, but no. There would have been two or three things, I guess, have come up . We did continue to do some reductions, early retirement things like that to try to reduce SG&A going forward and, as a result, there was some severance packages that were offered for early retirement and some things like that that would have increased it, but it should not have been very much.

All right. I'll go back in the queue. Thanks.

Okay. Our next question is coming from Arnold Ursaner with CJS Securities. Please state your question.

Good morning, Arnie.

Actually, [Jason] calling in for Arnie. But good morning, guys.

Morning, David.

With the highway bill reauthorization, kind of feels like we're stuck at a standstill with a lot of people calling for dramatically more funding, and some asking where is the funding coming from? But focusing on the bigger picture, even if we got a strong renewal today, how incremental do you think it would be at this point given kind of where our state budget deficits are?

Well, again, for the market to really get good, the economy needs to improve and state revenues need to come in. Most of the states do have a dedicated highway fund like the federal fund, but they do have creative ways of reaching and getting that money. A number of them are pulling out of the highway fund to pay for the highway patrol, for example, things like that. The federal money historically has only been about 30% of the money spend for roads, but the states usually use what money they have to match that federal money. What we see on the federal level is probably the fix that's going on this week that should pass, there is -- the trust fund will run out of money in July if they don't mix it. They're putting $19.5 billion into the trust fund which is supposedly from unpaid interest in the past on the trust fund when it had an excess in it and then there was a [resention] that started back under President Bush of where they held back $8 billion and they're turning that back loose. So there should be around $41 billion, $42 billion spent this year from federal money plus the rest of the stimulus that is out there. A lot of the stimulus has been left to work, but it hasn't been spent. So this year is okay.

Going forward, we expect or hopefully this summer they will take up the highway bill again and look at it. I don't think they will touch it because there's not any money to pay for it and I suspect the best time for that to happen is after the elections. But whatever is done, they've got to have more revenues and the only way they can get that is increase the gas tax, and nobody seems to have the courage to do that right now.

Years.

Yes. It hasn't been increased since 1993. The worry about all of that, though, I mean, in going forward is our customers still are going to be reluctant and the states will not do any big projects until they see that six-year bill in place. So this year, the funding is going to be all right but our customers will remain cautious.

Even if they found kind of that creative way to fund it, do you really think states wouldn't kind of use it to essentially replace funds on their own balance sheet or do you see that matching in the marketplace?

I see probably -- what you're saying is partially correct, David. There's probably half of the states using the federal money just to backfill. The problem you've got with that though, there's 165,000 miles of roads in the national highway system and that's the only place the federal money can be used. You have got an additional 2.2 million miles of paved roads that are state, city and counties that are going to go all to pieces if they don't take care of them. So they can't use the federal money in the places that they probably need to use them, and the roads that have been most neglected. So they'll have to come up with -- the states will have to come up with funding and they continue to increase gas taxes at state level more than they do at the federal level.

And then, obviously visibility is pretty limited right now, but you mentioned the pent-up demand. So how do recovery trends feel coming out of the recession compared to previous ones? Is it fuel like normal hesitance from customers just from these Washington-related problems or is it really more of a fundamental outlook that it's slower coming outing out of it?

I would think -- when I'm talking about the pent-up demand is the thing we're seeing with the privately-owned companies, they have -- a lot of them have cash sitting on the side lines. A lot of them need to improve their equipment to run more recycle to do the warm mix, to do a number of things to make them more competitive and yet they're just cautious. Once you get anything that will give them encouragement, I think they will -- it will turn it loose.

Okay. Thanks a lot for taking my questions.

Yes, sir. Thank you.

Our next question is coming from Walter Liptak with Barrington Research.

Hi, thanks. Good morning, guys. I guess one of the questions I have is on the pricing environment. Have you talked about your raw material costs and what that's going to mean, I guess, in the first half if you've got material costs coming up in continuation with a difficult pricing?

We see steel -- they're trying to push steel up a little bit. It's at a pretty low level as compared to what we saw in 2007 and 2008. There's been a slight increase in steel. We see generally component pricing is still staying fairly, fairly stable. A little bit of an increase, but I'm talking a very, very small amount as compared to what we saw when we added the inflation in early 2008. The push-back on the pricing on selling on that is it is certainly going to be there and it's competitive. We are fortunate, with our market share about 80% of our business is repeat customers and while they push back on the prices some, generally we do have -- we're fortunate that we have the most modern equipment. We have a lot of things our competitors don't have and we are the most vertically integrated which givers us real advantages there.

Okay. And at the end of your commentary, you mentioned on the outlook, that you thought that 2010 would be up from 2009. I wonder if you could provide a little more color on the first half versus the second half. Are you talking about revenue or EPS? How should we think about the decent outlook that you put out there?

I guess the thing, Walt, on that, the companies that were so bad last year, Petersen, the underground companies and some of our aggregate companies that were really all 40% to 50%, we have seen an improvement. Not a big improvement, but an improvement in their incoming orders in each of those I see a slight improvement in those. In the mobile equipment side, road tech and Carlson, their business has been very good this quarter, and we see that as continuing to be strong. I think we've gained some market share there. The asphalt plant side of it, I worry a little about. We've got backlogs out in to the middle of the second there. It, really in the first quarter last year was what was carrying us and it is strong right now. I can't see very far out. I wish I could see a little more domestic business. We see most of the business in that in international. Of the plants we've sold in the last three weeks it's about half international, half domestic. So if I got any uncomfortable level, it's whether or not the asphalt plant business will sustain like it did last year but I see the increases in some of those that were the weakest.

Okay. Thanks for that commentary. You mentioned tier-4 engines and kind of -- and I think suggested that there might be a pre-buy. Are costs -- how much are the engine prices going up for tier-4 and how much are equipment prices going up in 2011 and are you thinking it might be a pre-buy?

We see the tier-4 engines. It's kind of one of those GOK -- God only knows what it's going to be. They're licking their chops, but we're seeing pricing increases in the engines of 40% to 50%, and it's really a shame because we're really not going to -- we're going to burn more fuel in them. They take up about 50% more space. What we've seen in the past, when there's a major change like this from tier 3 to tier 4, the change from tier 2 to tier 3 was not that much, and it didn't take any more space, so it didn't require the change. We're actually having to expand the length and the height of some of the machines to be able to get the bigger engine in there. The engine itself is not any bigger. It's all of the attachments to it, the cooling packages and all of that, but we've seen customers in the past, and many of them have talked to me, they're going to buy ahead, because, number one, are concerned about the reliability of the tier-4s for a while. There's always some bugs in them. And, secondly, as the tier 3, they're more comfortable with. Tier 4 has to have an ultra low sulfur fuel oil. We will not be able to sell tier-4s in most of the areas of the world except the US and Europe because they don't have the ultra low-sulfur fuel, so we'll continue to supply tier 3s and tier 4s. But I get that from the feel of the customers that a lot of them saying we're going to buy in the fourth quarter, and not wait until you put the tier 4s in there.

Okay. Thanks very much.

Our next question is coming from Jack Kasprzak with BB&T Capital Markets.

Good morning, Jack.

Good morning, Don. You talk about revenue in 2010, but I just wanted to ask along the same lines, your backlog entering 2009 was down about 31% and sales in 2009 ended up being down 24%, not terribly dissimilar. 2010 we enter the year with backlog down 30% and yet sort of -- I guess you're clearly saying sales could be more or less flat. What would the difference be?

I think, Jack, the difference is, right now, I mean, everything we're selling is kind of built to order and it's just -- the difference I see right now, the first half of last year the dollar was so strong it killed our international sales for the first six months. We enter this year with a cheap dollar and so we see an improvement in international sales for this year due to the weaker dollar. Some of the areas of the world -- it seems to be, again, where there's mining or oil, there continues to be good markets internationally. Some of their stimulus packages are (inaudible). I guess what I see right now, I think domestic business will be probably flat to down a little bit and international will be up a little bit.

Okay.

And that's -- again, most of the stuff. The backlogs, with we generally have big backlogs, last year we entered -- we had $101 million backlog in asphalt plants, and it dropped down to about $75 million and -- which is not uncomfortable, but we had really -- in 2008 we couldn't make deliver residents, we were really backed up. Now it's very comfortable. We're making deliver residents. We are beginning to work some overtime again on asphalt plants. Everybody buys them wants them tomorrow. There are not any long-range purchases. So that kind of screws up what your backlog looks like.

I was going to ask, too, about the domestic market. You say maybe flat to down some a little bit. We have the stimulus dollars reported most of it yet to kick in, I guess, in terms of being spent. I guess that's pretty clear. But is the situation you guys see when talking to your customers still one of virtually no private work, price competition so even with stimulus kicking in it's not -- it's just not going to be a year where you gain a lot of traction. Is that kind of the summary?

That pretty well sums it up. There's just absolutely no commercial or private work out there. And, as a result, the people are now going after the state jobs and we have customers that there used to be, say, three bids on a state job and now there's 15. The unfortunate thing too, Jack, a lot of those small guys who have historically done commercial work, there is work that they are going to lose their shirt on because they don't know all the traps you're going to run into. So I think you're going to see a shake-out in the marketplace place of some of the small producers. The more healthy, larger family owned companies, though, many of them have taken an aggressive approach that we are going to get the business. They've got cash. They're well positioned, and so we see them having work, but having cheap work.

Are there one or two of your segments that are more highly levered to the international business?

Historically , the busiest was the underground and certain part of the crushing business were. We have, in the last few years, really done well on the asphalt side of it has increased their business internationally. The other thing we acquired is in October of 2008 we acquired a company in Australia that was our dealer. They have -- they are doing quite well for us. We begin to -- they've started to distribute our crushing equipment over there and have obtained orders, and we're still pretty positive that we'll grow quite a bit in Australia with all of the companies.

Okay. Thanks very much.

Thank you, Jack.

Our next question is coming from Chris Weltzer with Robert W. Baird.

Good morning, guys.

Hey, Chris.

Hey a question on the inventory reduction in the quarter. Do you feel now that you've gotten inventories to a place where you're comfortable with or should we expect a similar sort of impact in the first quarter?

Chris, the only way I can answer that very well is like having one foot in boiling water and one foot in freezing water, the average temperature is comfortable, but you're not necessarily. The inventory is no problem at Astec. Roadtec had a significant reduction last year. The underground American Augers is okay. The trenchers and some of that still have work to go and that's the one that probably will suffer a little bit. Again, they lack orders and are trying to reduce inventory this year while we are real skinny on orders. Their business, though, has picked up this year, some from last year from extremely low it's picked up some. The orders in the -- at Petersen -- the backlog at Petersen has improved some, but primarily where our inventory problems would be is still in the companies that have the biggest downturn.

Got it. Okay. Thank you. And then, I mean, your head count is down considerably year over year. It's not free to do that, and you have been just sort of eating that cost to other companies that call it out as non-recurring restructuring.

Right.

Is there any way that you can sort of size the total cost this year of severance and employee separation costs that presumably won't happen again next year, or this year, 2010?

Oh, I would say it's probably $10 million to $15 million in that, and that's me pulling it out of my -- McKamy is going to pucker over here, but I'd say at least that, and there's been -- a lot of our senior people that were close to retirement where we encouraged some of that, so -- and I might say most of that did occur in the last six months of the year. So we think that we're down-sized where we need to be in most of the companies. Still, the underground businesses are, too, we've got some work to do that we cut their employment just basically in half, but we're still struggling with revenues there.

Got it. Okay. And then, maybe from the other direction, I mean, I presume you've taken some sort of -- or several types of cost-reduction actions this year that might be considered sort of temporary, lack of bonuses, furloughs, things like that. I mean, what's your plan for some of those costs in 2010, and how big of a headwind do you think you might face there?

Well, none of the senior management at corporate had any bonuses this year. And, again, if you don't perform, you don't get them. But I expect we won't have any impairment going forward. We only have about $13 million in goodwill left. And I think, and this is just a gut feeling, I think that probably by mid year you're going to see the general economy starting to pick up which probably helps as much as anything and an improvement in attitude. If we can get people's attitude to improve a little bit, they start spending money. We think we have done -- we have really cut as much as we need to cut. If that persisted from then on, we would have more SG&A we would have to cut, but I don't see that. I don't think it is going to get any deeper than it is now.

Okay. That's helpful. From those comments, would it be fair to assume that in an environment where you would have flat to up revenue, you could also then have EPS flat to up as well?

Yes, Chris. As I go around, it's miserable to go through the quarterly reviews in a market like this, but I'm thinking as we went through the plants in the fourth quarter we could basically just about double our volume with the facilities we've got right now without huge -- I mean, the upside side is good when it comes back. If we can get the revenues, you will see our margins improve significantly.

Okay. But not comfortable calling EPS up or down in 2010 at this point?

Oh, I think we're going to be where we did, because we're not going to have this impairment, but I think even without that we're going to be up slightly, yes.

Okay. Yes. That's very helpful. And can you talk a little bit more about the underground business? I mean, this is -- you've always had sort of challenges in the small trencher side of things, I mean, what's -- is this a case where we need a longer-term solution where we need to add something on to it to help volumes or something that can be considered noncore at some point?

The small utility line is basically why we don't like to talk about it much. It is driven by commercial and home building. All of those go inside city limits, and we've got two real tough competitors that are equally suffering in that business. So it's a tough business and basically we are sizing that thing and positioning it to where we're going to make money or we just won't sell. We'll try to backfill there with the geothermal rigs which is more of a $600,000 to $700,000 machine. The pipeline business, the big trenchers, we've gotten some orders -- they're better margins, but they are cyclic, very cyclic depending on where pipelines are going around the world. So we're trying to position it to be less dependent on the little stuff, to answer your question.

Okay. Thank you.

Our next question is coming from Tom Hayes with Piper Jaffray.

Morning, Tom.

Good morning, guys. Don, I'm just wondering if you can provide a little more color because I it seems like a fantastic opportunity on the China and India side as far as what they could bring to the table not only this year but over the next couple of years?

Well, China was a good market for us for asphalt plants for -- we put probably 60 plants in there over the last 10 to 15 years but about five years ago they basically -- they copy what you do and then they put a tariff on it, and they've got an import duty that makes it awful hard to import. As long as we can build here and ship, that's what we prefer to do. We reached the point where that what we were selling over there we were subcontracting about half of it. We entered into an agreement with a very good company over there that historically had worked with one of the German manufacturers on batch plants, saw the change and came to us, more interested in the double barrels and that type of plant, so for the two or three years they will build probably about 70% of it there and we will ship the high tech pieces from here and eventually they'll build all of it. But we have a royalty agreement with them and we hope to continue to be able to, for some period of time, ship components out of the US.

A similar situation in India. It's a very good company over there and, again, there is a little difference in all of these markets that what we have in the states here they don't necessarily need it just like it over there. So it requires some difference in and also basically what we build today we hope we'll be improving on in the future and the improvements don't necessarily go over there immediately. So we have some ways of differentiating ourselves to protect ourselves as we go along.

Okay. Great. Lastly, maybe you can provide a little bit of detail on the write-offs as far as which acquisitions those related to and does that exhaust the goodwill related to those acquisitions?

There's one -- I believe I mentioned there's one in the aggregate segment and one in the other segment and, yes, for those two that does exhaust it, and I believe Don mentioned we have $13 million left company-wide in goodwill after those write-offs.

Most of that, Tom, is spread to between some of the stronger companies, like [Coburn], Pioneer. I think we still have $2 million in it. And Astec Dillman, we have some at Dillman that we have but we don't see impairment even close on any of those. The impairment is kind of a crazy deal anymore. We wrote off American Augers in 1979 and the year before last they made $13 million. So it's -- all they have to have is a down year. We probably could have argued a little on that, but our Board said write it all off, we could where we don't have to (inaudible) it.

I guess just lastly, as far as for modeling purposes, since 2004 the first half of the year, the stronger half averaging between 51% and 57% total revenue, are those dynamics still in place? Should we expect the first half to be a little stronger?

Yes. That's typically -- the only difference, a little bit, if our domestic -- typically, historically the domestic sales were about 60/40, 60 in the first half, 40 in the back half. As we get more international, depending on where south of the equator, their season is opposite of ours, so as we add more international, it tends to flatten it.

Thanks. Good luck next year.

Thank you.

Our next question is coming from Morris Ajzenman with Griffin Securities. Please state your question.

Good morning. Just a further question on the gross margin inventory in the quarter. You highlighted gross margin reduction of 190 basis points year over year. Then you spoke about the reduction in inventory. You also mentioned early in the call about moving equipment at a loss. Can you put a number on what that loss moving equipment was in the quarter?

Some of that equipment was in the underground utility line that was getting to be aged, and we took it to auctions and made some special deals, and we were looking probably at $2 million to $3 million in that. Major -- a major occurrence that really played havoc with the margins was the high amount of underabsorption.

Okay. So you had about a $2 million to $3 million in loss of equipment and then you spoke about a reduction in inventory being $15 million.

Right.

If we put this all together, if you had -- the 290 basis-point reduction in gross margin, can you give us some sort of approximation of how much was that to underabsorption, how much was to inventory reduction, price competition? Can you give us some sort of feel for how that played out and then we can kind of make our guess going forward on what's recurring and what isn't?

When you take $15 million in inventory reduction, it's about -- excuse me -- comes out to be about 62,000 man hours and on our absorption free taxes, about $3.25 million.

What Don is talking about is the loss of absorption.

You had to reduce the workweek, do everything else, because you're selling products you have in inventory and not generating the man hours you need in the plant. That's kind of -- it's pretty significant really significant when you start reduce --

So basically gross profits were down $10 million year over year. $2 million to $3 million of that, I presume that is in the gross profit line was from sale of equipment, $3 million plus from underabsorption. So you have another $3 million or $4 million.

No. That was just from the.

I understanding, in the quarter, and the other $3 million to $4 million, what would you attribute it to?

Mainly the underabsorption due to the fact that the fourth quarter has an inordinate amount of holidays. In addition to that, we work short weeks and we shut some of the plants down between Christmas and New Year's and even one other two of the plants the week of Thanksgiving just completely shut it down.

So that should not be peaking first or second quarter then?

No.

I appreciate the color.

Our last question is coming from [Ryan Reynolds] with Canaccord Adams. Please state your question.

Hi. Good morning.

Good morning.

It just had a quick question on your gross margins going forward into the first quarter of next year. Do you see the fourth quarter's margins as sort of being the bottom of the cycle going forward?

Yes, I do, but I'll -- we're not going to have as much an absorption problem in the first two quarters because we are back working in most of the plants, not all of them, but in some of them we're even working overtime, so we're not going to have near the underabsorption problem that we've had in the past. I would caution, though, that it's price-competitive right now, but that is the bottom, I think, the fourth quarter you'll see the bottom.

Perfect. Thank you very much.

Thank you. (Operator Instructions) Our next question is coming from Alan Brochstein with AV Analytical Services.

Hey, Dr. Don. As always, I want to thank you for taking my call, and also to congratulate you. I think you guys had a great year, notwithstanding what you were dealt with. And I commend you for taking the longer view.

Thank you.

I have a couple questions, very briefly today because of another call. First of all, last quarter, I asked you about whether or not you guys would take inventory reduction actions, which I think is good, but you said at the time, you didn't believe you had to do a fire sale, now I know you're doing it. Just curious what changed in your mind as to what prompted your change in mind.

The only place that we've had a fire sale has been on the utility side of the underground and we basically try to keep very conservative books. If we have something that hasn't sold in two years, we start writing it down.

Yes.

When you start writing it down, you might as well take the hit. So we had some finished goods on some of the very small trenchers that were that way and so as a percentage of our total inventory, it's rather insignificant, but that was the point I was making and, overall, if you look at the major amount of our inventory, it's all very active, and we don't see any write-downs there, but the worst problems that we have with inventory is in those businesses that are off over 50%.

So are you saying that prefer to have sold at these prices, but you took a look and you were kind of forced to take the inventory -- is that what you're saying?

Basically any parts that we have or any major equipment after two years, we write it down a third, three years, two-thirds and four years is written off. Okay.

And maybe that's a little aggressive, but that's our policy, and when we try to keep our inventory active, but we had some equipment like that and you're either going to write it down or move it on. Okay. Sounds good. Thanks for that color. Also, just following up from last quarter. Your guidance was very similar, the exact same thing as what you were seeing last quarter about R&D what it would be and I'm just wondering if you could update that. Is there any change in terms of you guys have been investing heavily you closed your remarks with. Is that the case going forward, or is that the case where you don't have to continue to invest as many dollars?

We won't invest as many this year as we did last year and, again, it kind of goes from the equipment to the development to building it and selling it, and we're right in the building and selling right now. So, no, we won't spend as much this year on R&D.

Okay. And then my last question is kind of a real easy one but you guys have a lot of exciting products. I know times have been tough. You've been cutting back, but is this a time to maybe invest in hosting an analyst day so that maybe everybody can hear a little more about that, set aside some time and learn more about what I think are exciting products, but everybody buries them in what is going on in the asphalt business and, I guess, mining.

Yes. We'd be happy to do that . I'll let Steve handle that.

Yes. Alan, give me a call, and we can work on setting something up.

Sounds great. Good luck with the coming year.

This brings us to the end of the Q&A session. I'd now like to turn the floor back over to management for any closing comments.

Thank you, Claudia. We appreciate your participation on the fourth quarter and year end conference call 2009 and thank you for your interest in Astec. As our news release indicates today's conference call has been recorded. A replay of the conference call will be available through March 9, 2010, and an archived webcast will be available for 90 days. The transcript will be available under the investor relations section of the Astec industries website in the next seven days. All of that information is contained in the news release we sent out earlier today. We appreciate your time for the call today. Have a good day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and we thank you for your participation.