Astec Industries Inc (ASTE) 2011 Q3 法說會逐字稿

Greetings, and welcome to the Astec Industries third quarter 2011 results. (Operator Instructions). It is now my pleasure to introduce your host, Steve Anderson, Vice President of Administration. Thank you, Mr. Anderson, you may begin.

Thank you, Latanya. Good morning, and welcome to the Astec Industries conference call for the third quarter of 2011. As Latanya mentioned, my name is Steve Anderson, and I am the Vice President of Administration, as well as the Director of Investor Relations for the Company. Also on today's call are Dr. J. Don Brock, our Chairman and Chief Executive Officer, and David Silvious, Vice President and Chief Financial Officer. In just a moment I will turn the call over to David to summarize our financial results and then to Don to discuss our business operations and market environment.

In the way of disclosures I will note our discussion this morning may contain forward-looking statements that relate 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 and are subject to certain risks, uncertainties, assumptions, and other factors, some of which are beyond the Company's control. Some of those factors that could influence our results are highlight in today's financial news release, and others are contained in our annual report and our quarterly and annual filings with the SEC. As usual, we urge you to familiarize yourself with those factors.

At this point I will turn things over to David to summarize our financial results.

Alright. Thanks, Steve, and good morning, everyone.

Net sales for the quarter were $214.6 million in Q3 of 2011 versus $177.9 million in Q3 of 2010. That's an increase of 20.6% quarter-over-quarter, or $36.7 million.

Now, domestic and international sales both increased for the quarter compared to the same quarter last year. Also, sales in each of our segments increased. International sales were $87.3 million this year versus $79.3 million for the same quarter last year, an increase of 10.1% or $8 million.

International sales represented 40.7% of the Q3 2011 sales, compared to 44.6% of Q3 2010. The increase in the international sales for the third quarter of 2011 compared to the same period last year occurred mainly in Europe, South America, China, Africa, and India.

Domestic sales for Q3 of 2011, $127.3 million compared to $98.6 million in Q3 of 2010, an increase of 29.1% or $28.7 million. Domestic sales represented 59.3% of sales for the quarter this year, compared to 55.4% of the quarter last year. Part sales for Q3 of 2011 are $58.8 million compared to $49.2 million in Q3 of 2010 for a 19.5% increase or $9.6 million increase.

Part sales were 27.4% of Q3 2011 sales, compared to 27.7% of Q3 2010 sales.

The Aggregate and Mining Group had the largest dollar increase in part sales followed by the Mobile Asphalt Paving Group, Asphalt Group, and the other group -- the Underground Group had a decrease in parts sales. Segment revenues for the third quarter and the year-to-date periods are attached to your press release, along with some other segment analysis there. Looking at those segments, if we rank them as a percent and what they contributed to total sales for the quarter, the Aggregate and Mining Group is 38.8%, Asphalt Group 23.5%, the Mobile Asphalt Paving Group contributed 18.2%, Underground Group contributed 11.1%, the other group contributed 8.4%.

For the third quarter of 2011 compared to the third quarter of 2010, net sales increased in each segment. On a year-to-date basis sales were $692.6 million in 2011 compared to $580.6 million in 2010, an increase of 19.3% or $112 million.

International sales were $278.3 million on a year-to-date basis in 2011, compared to $223.2 million in 2010. That's an increase of 24.7% or $55.1 million. The increases occurred on a year-to-date basis primarily South America, Europe, Australia, Africa, Russia, and China.

International sales were 40.2% of our year-to-date 2011 sales, compared to 38.4% of year-to-date 2010 sales. Year-to-date international sales increased for all segments, except for the Asphalt Group.

Domestic sales on a year-to-date basis in 2011 were $414.3 million compared to $357.4 million in 2010. That's an increase of $56.9 million, or 15.9% increase in domestic sales. Year-to-date in 2011 domestic sales are 59.8% of the total sales, and 61.6% of total sales for year-to-date 2010.

Part sales year-to-date in 2011 are $174.6 million, compared to $149.7 million year-to-date in 2010. That's an increase of 16.6%, or $24.9 million. Part sales were 25.2% of total sales in the current year, compared to 25.8% of total sales in 2010.

Again, the sales by the segment and other segment profits are attached to your press release. If we rank them on a year-to-date basis, based on the contribution total sales, the Aggregate and Mining Group comes out on top again at 35.9%, Asphalt Group at 27.8%, Mobile Asphalt Paving at 20.6%, Underground Group at 8.4%, and the other group is at 7.3%.

The consolidated gross profit for the quarter -- for the third quarter of 2011 is at $46.4 million, compared to $41.9 million for the third quarter of 2010. It is an increase of $4.5 million, or 10.8% increase in the gross margin dollars.

The gross profit percentage, however, decreased 200 basis points for the quarter to 21.6% in 2011 compared, to 23.6% in 2010. If we rank the segments by their gross profit for the quarter, Mobile Asphalt Paving Group comes out on top with 25.8% gross profit percentage, Aggregate and Mining Group's at 24.8%, Underground Group's at 17.2%, the Asphalt Group at 16.9%, and the other group is also at 16.9%.

If we look at that same item, gross profit, on a year-to-date basis in 2011, it is $163.1 million, compared to $134.8 million in the prior year. That's a 21% increase, or $28.3 million. On a year-to-date basis for 2011 the gross profit percentage is 23.5%, compared to 23.2% in the prior year. That's 30 basis points increase.

During 2011 our plant utilization has improved relative to 2010, and that certainly has had an impact on a year-to-date basis. If we ranked them on a year-to-date basis by segment, the gross profit percentage, the Mobile Asphalt Paving Group is at 27.5%, Aggregate and Mining Group at 24.9%, Asphalt Group at 23.1%, other group 18.7%, and the Underground Group at 13.9%.

Moving on down the income statement, we look at SGA&E, and for the quarter of Q3 of 2011 it was $37.4 million,or 17.4% of sales, compared to $31.8 million in 2010 or 17.9% of sales. That's an increase in SGA&E of $5.6 million. The primary drivers of that increase are payroll and related costs and research and development that has occurred during the quarter and we'll discuss that, Don will discuss that in just a few minutes.

On a year-to-date basis, SGA&E is $115.6 million or 16.7% of sales, compared to $95.4 million or 16.4% of sales in the prior year. It is an increase of $20.2 million. The drivers behind that increase are also payroll and related costs and research and development.

We also had, if you will recall, CONEXPO earlier in the year, and we also have had increases in commissions. Now, these increases in costs were offset by a decrease in our health insurance costs. Operating income for the quarter decreased from $10.1 million in the prior year to a $9 million in Q3 of 2011. That's a decrease of $1.1 million or 10.9%.

On a year-to-date basis our operating income was $45.3 million versus $39.4 million in the prior year. That's an increase of 5.9% -- $5.9 million, or 15%. The income by segment is also attached to your press release and you can see how those would rank.

On a consolidated basis, the other income is primarily generated from investments in our captive insurance company, and for the quarter it was $264,000, compared to $492,000 last year, and for the year-to-date $1 million this year, compared to $1.1 million in the prior year.

The effective tax rate for this quarter is 16.2% compared to an effective tax rate of 30.2% in the prior year, and the primary reason that it is so low is that in December of 2010, Congress renewed the R&D credit which was retroactively renewed for 2010 for prospectively renewed for 2011. Therefore, the Q3 2011 tax provision, tax expense, it includes R&D credit where as the Q3 2010 tax expense did not include R&D credit that we had incurred up to that point. We actually took it in the fourth quarter as Congress had renewed it.

Tax rate for the year is 30.6% compared to 34% in the prior year. Again, the R&D credits in the current year have driven the effective tax rate down including the as well as the domestic production activity deduction which is driven by both profitability and manufacturing volume which are up this year.

Bottom line, net income attributable to controlling interest in Q3 of 2011 is $7.7 million, compared to $7.4 million in Q3 of 2010. It is a 4.1% increase. Earnings per share for the quarter $0.34, compared to $0.32 per share in Q3 of 2010, an increase of 6.3%.

Year-to-date basis net income attributable to controlling interest, $32 million, compared to $26.5 million in the prior year. It is $5.5 million increase or 20.8% increase, and the earnings per share on a year-to-date basis are $1.39 compared to $1.16 last year. It is a 19.9% increase in earnings per share.

The backlog is also attached to your press release on that segment page, and September 30 of 2011 our backlog was $221.5 million, compared to the prior year backlog at September 30, $145.6 million, that's a $75.8 million increase, or 52.1% increase.

The international backlog in the current year, September 30 of 2011, was $121 million compared to $68.1 million at September 30 of 2010. That's an increase of $52.9 million or 77.7% increase in international backlog.

Domestic backlog was $100.5 million at September 30 of 2011, compared to $77.6 million at September 30 of 2010. It is an increase of $22.9 million or 29.5%.

Move on now to the balance sheet, our balance sheet remains very strong. We're happy to have such a strong balance sheet. It gives us certainly an opportunity to make a strategic acquisitions where we see them and where they would fit the Company.

Our receivables are sitting at $101.2 million at September 30 of 2011, compared to $88.3 million September 30 of 2010. That's 43.4 days outstanding in the current year, versus 45.7 days outstanding in the prior year.

Inventories at $290.5 million at September 30 of 2011, compared to 242.1 million at September 30 of 2010, that's an increase of $48.4 million. Returning that inventory 2.5 times in the current year, compared to 2.4 turns in the prior year.

We owe nothing on our $100 million credit facility, and at September 30, we have $51.7 million in cash and cash equivalents. Obviously that has gone down some since the acquisition of GEFCO early in October of the fourth quarter. Letters of credit are outstanding now at $9.2 million. Our borrowing availability then is at $90.8 million on that credit line. Capital expenditures year-to-date are $29 million.

Depreciation is running $13.8 million on a year-to-date basis. We budgeted that to be $18.8 million and $19 million in that range. So we're right on target there. A cash flow will be attached to the 10-Q filing as usual, and have a lot more detail on the cash flow there.

We're certainly proud of where we stand at the end of the third quarter, and we have a strong backlog, and that concludes my remarks on the financials. I am certainly glad to answer any questions you may have later in the call, and we certainly do appreciate your interest in Astec Industries.

Thank you, David. At this time, Dr. Don Brock will review Astec's business operations and market conditions during the third quarter. Don.

Thank you, Steve.

Our third quarter was one of the busiest and most unusual in my career. The revenues were, as David said, $214 million versus $178 for an increase of 20.6%. Our earnings increased from $7.3 million to $7.7 million, or 4.1%. However, our performance was much better than the numbers indicate.

We had a large number of one-time and unusual items that occurred during the quarter. We completed the acquisition of PROTEC in Germany. We acquired a new larger facility for PROTEC in Germany. We acquired a new, larger facility for Astec Australia. We completed the acquisition of GEFCO and its divisions, King Oil Tools and [Sealco] in early October. We completed a joint venture agreement with MDE in Brazil. All of these legal expenses related the acquisition and the acquiring of property reduced our earnings approximately $0.01 a share.

Over the last couple of years, we conscientiously plan to develop a large number of new products to expand the product lines of our company and other industries and to grow in the infrastructure side. We felt like with the cash we had in the down economy, it was the right time to do it.

During the quarter, we had a large number of these [pictures] being finished, tested and debugged, resulting in very heavy R&D expenses. During the quarter our expenses for R&D was $3.3 million and $2.4 million above last year's third quarter. We have expensed approximately $7 million in R&D expenses year-to-date. The highest prior R&D expense we had for the entire year was in 2005 of $6.3 million. This equaled or equates to approximately $0.10 a share for the quarter.

The large expenses were related to developing a line of wood pellet presses, developing a new wood pellet plant, the complete plant, a new line of cone crushers, a line of water heaters and fracking pump trailers and tank trailers for the fracking industry in the oil fields, a new line of microchippers, larger flails, debarkers, and a larger disk chipper at Peterson.

We developed a new stabilizer and a power broom line at Roadtec. We continued to develop and add to the product -- concrete product line that we developed in the last eighteen months.

Our international sales were 40% of our revenues. In June our backlog was 57% international, today it is 55% of international. As I mentioned in the past, these sales tend to be lumpy. At the end of the quarter we had $9.7 million in inner company sales, and $1.9 million in inner company profits related to international sales. This is versus $7.6 million in sales and $221,000 in inner company profit in the third quarter of last year.

We had two asphalt plants plus a number of crushing plants that were in transit to our Australian subsidiary but could not be invoiced or counted until they were installed and delivered in Australia. This affected our earnings by approximately $0.06 per share.

Other delays in international shipments directly from the US resulted in over $24 million in equipment that was ready to ship but was not shipped due to logistics, financing, or the customers not being ready. We usually have about $12 million on the bubble at quarter end.

However, this was an unusually high quarter due to the large backlog that we have had in international shipments or in international sales. During the quarter we saw poorer results in the Asphalt Group due to the higher R&D expenses, and weakened, very competitive asphalt plant sales, plus a large number of delayed or inner company shipments.

On the positive side we have received -- we received an $89 million order from the US Army for 24 asphalt plants in September. We expect to ship [$13 million] of these in 2012. We saw good improvement in the performance of the Underground Group during the quarter, and we saw continuing growth in our parts sales. Our backlog ended the quarter, as David said, at [$221 million versus $145 million] in the third quarter of last year. We have only added [$13 million] to the backlog on the Army order, since this is all that we are actually assured of getting on a year to year basis.

In the fourth quarter we entered the -- looking forward to the fourth quarter, we entered the quarter with a good backlog, very strong in some companies and weaker in others.

In the Asphalt Group we saw a very strong pickup of orders during the early October and very pleased to see their volume of business pick up. With revenues and inner company profits that shipped -- slipped into the fourth quarter from the third quarter, we expect fourth quarter to be slightly better than the third quarter. We hope to finish testing of our prototype pellet plant, and to start taking orders for this equipment during the fourth quarter.

We expect Congress to finally reach some resolution on either a two-year bill, highway bill, or a six year highway bill. All indicators are that a six year bill would be in the $350 million range. It is difficult to predict what Congress might do, however. In the last six year highway bill, there was 21 months of extensions, so -- and they really included from when the previous bill expired, if they did the same thing this year, it would only be a 3.5 year bill versus a six year bill. The other question remains is how much will go into transit. The big question in all of this is where will the money come from for the additional funding that's needed?

We expect our mining, energy, and international infrastructure initiatives to continue to see improvement in sales. We also will add revenues and profits from our recent acquisitions. With these efforts we expect 2012 to see revenue growth in the 10% to 15% range over 2011.

Our balance sheet remains strong and positions us to take advantage of any opportunities that may occur. Although our R&D expenses have been very heavy and have hurt our short-term performance, we expect the products developed from these efforts will add greatly to our revenues and profits in the future.

With that, I will be glad to answer any questions.

Thank you. We will now be conducting a Question and Answer Session. (Operator Instructions). Our first question comes from Rich Wesolowski with Sidoti and Company. Please proceed with your question.

Thanks. Good morning.

Good morning, Rich.

Can I confirm where exactly on the income statement the $3.3 million in R&D was housed?

That's in SG&A expense.

Okay. So, Don, I take that out and saying that doesn't happen every quarter, your operating margin would have been about flat with the year ago despite some 20% jump in sales. Can you discuss the interplay between the cost inflation you currently face and the product price hikes that you put forth in the first half?

We saw a lot of inflation in the first half, and we had a lot of that covered, and I think really the cost increases really have started to affect us in the third quarter, Rich. We see the new orders coming in being at higher prices which should temper that in the future, but we suffered really the main thing was probably lower volumes. A lot of the man hours went into a lot of R&D products that we obviously didn't sell or ship, and the inner company was unusual.

Typically our inner company sales and profits are maybe from a US company to another company where we're packaging things. You might have a screen from JCI shipping to Telsmith, or someone like that, and that basically is a very low margin -- well, you make the margin at the division that built it, and the other one doesn't make it, so you don't have much. It -- it's a [fact] matter that one of them shipped it and the other one didn't. Going to Australia was quite different this year, in that there is a long delay between generally getting it here to there and then we do a lot of turnkey work in Australia, and that delays when we can invoice it, so a lot of the man-hours that were produced did not go to revenue jobs that we could count in this quarter.

So that would explain why, in the Asphalt Group specifically, you had about 10% sales growth and your margin was down?

That's correct.

Okay. Last quarter, many capital equipment makers cited environment where customers readily understood the need for price increases. Has that conversation with you and your customers changed at all in the last three months?

No, but it is still a very competitive market domestically, particularly there is just not -- we still remain in this uncertain condition and people are reluctant to buy until they absolutely need it, and our competitors are needing orders just as we do, and so domestically it is a very tough environment. And I don't see that changing until we get some direction out of Washington of where it will go. Fortunately we've got a lot of international sales, and that tends to help. But I don't see the competitive environment changing a lot as we go forward here until we get some resolutions to some of these things.

Okay. Then lastly, how much backlog would you expect GEFCO added in the fourth quarter?

They're typically running around $10 to $15 million backlog. They're operating at about a $55 to $60 million level of business.

Appreciate it. Thank you.

Our next question comes from Robert McCarthy with Robert W. Baird. Please proceed with your question.

Good morning, Rob.

Good morning, Don. I am sorry, I want to just probe a little bit more on gross margin in the Asphalt Group. Do I understand correctly that part of your issue here is that you had bought well ahead on a lot of materials, the inventory of which you basically ran through in the second quarter, and so you had more exposure to that first half inflation in the third quarter?

I think that's true, but the rest of the story, Rob, is that the basically the market is extremely competitive, and to try to keep business going you take cheap deals sometimes, and that's the other side of it.

I appreciate that, Don, but I mean this is the lowest gross margin you put up in this segment since I think like 2004.

Right.

So you have had competitive markets for a long time, right?

Generally we have had higher volumes going through the plant. I guess I am pleased we got a large international order this week for three plants going to eastern Europe. We got quite a bit of volume, and I told Ben that it would be lovely to see this place running six days a week instead of 4.5.

Yeah.

It is really been under utilization as much as anything. It is competitive market and under utilization.

Okay. And I just want to make sure I understand in terms of the higher product development costs that you are absorbing, is all of it really in R&D or -- I sort of caught a flavor of it might be also pulling manufacturing man-hours out of the Asphalt Group.

It is that, and these facilities when you got a major project like this pellet plant, sometimes they tend to charge man-hours -- I accuse them of charging more to R&D than they do to the manufacturing, but what we basically do on this prototype plant that we are building, the changes on it, obviously, we write those off as they occur. We basically determine what we will sell the plant for later, and anything above the gross margin that we would expect to get, we write off. That's -- we've had a lot of changes on the equipment. We're pretty excited that it is -- we're getting close to the end of it, but it has been more expensive than I anticipated frankly.

Yeah. And -- and I am glad you brought up the mill. Are we expecting to finish testing in the fourth quarter and ship it, or are we finishing testing in booking and order and shipping it in the first, or -- what's our timeline here?

Timeline, as I see is right now, we expect to receive orders in the fourth quarter. Frankly, there is probably $100 million worth of orders that we could reach out and get if I had the courage to do it right now. I want to make sure it is finished and ready. It -- this particular plant we will probably continue to run it here for extended period of time after we are comfortable making white or green wood pellets, we intend to do a lot of fortification pellet studies, and that will probably run it on in at least three to six months next year. The orders we receive will be for larger plants. We're working on a couple of them in the $40 million, $45 million range that they're ready to order when we're ready to say we'll build the plant.

And you think you will be at that point during the fourth quarter?

Yes, sir.

Okay. Sorry to be a hog, but one last one before I get back in line. Your international backlog, of course, is at tremendous levels, but if you back into an order number, orders have been sort of flattish now for two quarters in a row, and I wonder if you can speak to deceleration somewhere? Is there something that you perceive that's changed, or do you just think we're up against tough comps and next quarter could be up significantly because, for example, you booked three plants in eastern Europe?

I guess I have been pleased and surprised the last three weeks we have gotten pretty strong order income, much stronger than we expected. One of the problems we have that makes it very lumpy, is Australia will probably do more in the fourth quarter than they have done in the first three quarters. They have a lot of volume, but they have to ship it and put it in and it is mainly -- there again their cycle is opposite of ours. I mean it's -- It's basically spring over there, and so they will have a very strong fourth quarter. A lot of the equipment is on the water between here and there as we speak. But we haven't obviously -- Europe is in -- somewhat in disarray, but we are still getting orders out of Europe.

It seems to be the whole world with the exception of probably South America are ordering what they have to order, not necessarily there is not a lot of places where people are optimistic, but they do have work and have to have the equipment. If we can level out the uncertainty factor, I think things would pick up a bunch. But right now it is more projects they're working on where they actually need the equipment .

Thanks, Don.

Thank you.

Our next question is from Jason Ursaner with CJS Securities. Please proceed with your question.

Good morning.

Good morning, Jason.

Staying with the Asphalt Group, I have a question on inflation first and then the utilization. What was the average price of discrete plate that flowed through COGS in Q3, and how did that compare relative to the first half or the current spot?

I would say on discrete plate, and on (Inaudible) that you probably saw a flow through of close to 15% to 20%. It was a -- we didn't have much increases up through June, and we started to see them flow through. They have leveled off, leveled off at a higher number. We're not seeing the increases at this point. We also probably saw increases of, year-to-date, I think we're looking at other components of 5% to 7%, the effect in the third quarter was probably more like 3%.

Okay. And in terms of what's in inventory now, is it pretty comparable to Q3 or still --

It is pretty comparable to Q3. We're -- even though the inventory is fairly high, it is most of our purchase components are -- I wouldn't say they're completely just in time but close to that.

Okay. And then you also mentioned the competitive pricing and utilization. If I look at asphalt sequentially, even with the impact of the discreet plate and inflation, is 40% to 50% incremental gross profit and operating profit margin the right way to be thinking about it, given where utilization is running?

Yeah, it is more in the 30%, I would say, 30%, 35% range there. I think don't look at one quarter. I think you will see the Asphalt Group look pretty good as the year to year comparison by the end of the fourth quarter. They're scheduled to have a pretty strong fourth quarter.

And then, was there a benefit from SERP expense in the quarter since the stock, I guess, declined between the end of June and September?

Yes, there was.

Can you quantify what the benefit was?

Yes, we can. It is about $800,000.

Okay. You mentioned outlook for enhanced six year bill, and I think you gave a number to it, but assuming enhance is higher authorization, do you still see this being a revenue bill and how in your mind could a higher authorization be funded?

There is a couple of bills out that make a lot of sense. One of them that I read the other day, one of our customers sent to me to critique, but basically it is talking about connecting more drilling in the US to both offshore here in the US and in Alaska with the lease revenues of that coming from -- going into the trust fund. It would allow the sale of bonds and the bonds would be paid off by the revenues from drilling. And that would bring about, you know, about $25 billion a year they estimate the income would come from, that would go into the trust fund. There is in so many things in those bills just exactly how the distribution of the money would go to roads versus transit versus some of these other things is questionable, but assuming they use the same ratios they are now, it would be 25% to 30% increase over the existing bill.

The way it stands right now, the House is talking about a $350 billion bill. I don't know whether that is $350 billion divided by the six years, or where it would be a new six year bill going forward. It would give us about a 20% increase but the revenue coming in is $236 billion so you're looking at $120 billion shortfall to make that happen. The funding from that drilling would be a very positive thing, and that would be what would fill that gap. The House bill -- I mean the Senate bill still seems to be talking about a two-year bill that will run $109 billion. Again, there is about a $12 billion shortfall on that. So it is just -- I am not sure which way they will go. We're sitting here with another six months extension, and --

I appreciate the commentary. Anyone talking about raising the fuel tax potentially to pay for the shortfalls.

They won't touch that. There is some talk beginning to occur on vehicle miles traveled which is the ultimate solution, I think, for a good user fee, but I don't know. Raising the fuel tax seems to be out of the question.

Thanks a lot. I will jump back in the queue.

Okay.

Our next question comes from David Wells with Thompson Research Group. Please proceed with your question.

Good morning, everyone.

Hi, David.

First up, can you give us an update what you're seeing at American Augers, in terms of demand there?

We have seen theirs pick up very good. We're pleased with that. They're back running strong. You know -- frankly, in a number of our companies, the business has picked up rather quickly, and now we face delivery times. Astec, as bad as the quarter was, their deliveries are stretching out right now, which is a little concerning, and our management is very reluctant to bring back people although we're back up with the addition of some of these other companies we're back up to about 3,800 employees now, but in each individual company, they're still reluctant to bring people in, but American Augers has picked up a lot and Underground has picked up somewhat, not near as well as Augers has. We think the -- we have combined, with GEFCO and American Augers, their international sales. They have a lot of commonality there. There is some equipment that GEFCO bills that American Augers uses, such as the road rejoints that feed the drilling fluid down into this -- into the drill pipe, the mud systems and American Augers bill will have GEFCO which they don't bill those, so there is synergies between those two companies that we believe is going to help our sales and our volume in both of them.

That's helpful. And then looking at the intercompany revenue in the quarter, if -- if the, I guess the $0.06 impact, $1.9 millionon profit, what was the sales figure that corresponds to that?

It is between $9 million, $10 million, closer to $10 million.

Okay, and that's -- I understand that that's primarily coming through the Asphalt Group.

It is about I would say two-thirds of it through the Asphalt Group. You know, if we'd had those sales and some of the others shipped, our revenues would probably been $20 million, $24 million above what they were, and we'd probably have been pretty close to everybody's estimate. That -- between that and R&D is the two big hits we had.

Okay. I appreciate that. Last quarter you talked about the small trencher business and some thoughts about what to do with that. Any updates there or is that a 2011 type event or maybe 2012?

We have a serious company looking at it. We have -- we've had some others look at it. We're prepared to continue to run it if we need to, but we probably will come to some resolution on that in the fourth quarter.

Okay, great. That takes care of it for me. Thanks.

Our next question comes from Ted Grace with Susquehanna International. Please proceed with your question.

Thanks, guys. I was hoping to come back to Don's comments on the fourth quarter. Don, if I heard you correctly, you kind of like -- you thought the fourth quarter results would be pretty similar to the third quarter, slightly better I think was the quote.

Right.

Given the fact that you recognize a lot of those costs, particularly in asphalt and Mobile Asphalt Paving Group in the third quarter and get more of the rev in the fourth quarter, I am just wondering how you kind of calibrate our expectations for margins, because I am assuming we should see a pretty wide swing from sharp detrimentals to very positive incrementals?

Yeah, I think the margins -- I think the margins year-to-date would probably match what we get in the fourth quarter, there'd be more -- where the third quarter was down.

So you're going to have the benefit a lot of that revenue slippage in the fourth quarter, right? I mean, if there is $12 million in the bubble, and you had $24 million this quarter, then you're going to have, [let's just say we] normalize to $12 million catch up, plus your normal seasonality, right?

I think we will see from $12 million to $20 million that slipped from the third to the fourth. My reluctance to get too optimistic on that is from about the first of December to the end of the year, things sure slow down worldwide, and getting people to take shipments in the fourth quarter is sometimes difficult in the late fourth quarter or year end, and we always have some slippage there. Typical slippage every quarter is about $12 million, though, and we had an unusual quarter this quarter. The other thing I think all of the intercompany that we won't have anything like we had intercompany this time. I mean, there was just a large amount of stuff going to Australia that I don't anticipate that at the end of the fourth quarter.

Okay. And that -- of that incremental sales that hit the bubble, could you just break it down what was Asphalt Group versus the Mobile Paving Group?

Well, going to Australia it was about probably two-thirds asphalt. Most of the other international that didn't ship would be more in the other groups, primarily in the Aggregate Mining.

That was less of a dynamic in the Mobile Paving Group, correct?

That's correct. The mobile paving group doesn't do as much internationally as the others, so less dynamics in that.

So, if we look at the number in particular in the third quarter, you know, up 7% year-over-year, kind of a market deceleration on a pretty easy comp, was that in line with your plan or it does that number disappoint relative to expectations?

On the Mobile Group?

Yeah.

No. I feel like both of those are doing pretty darn well in this economy, and in particularly since most of their volume is in the US, the bigger part of their volume is in the US, I am very pleased with both of those companies and we did have pretty strong R&D expense in the Roadtec operation, but I would have to say they're doing quite well.

Okay. And then in terms of just your 2012 outlook, I know you said revenue of 10% to 15%. Would you be willing to give us some, call it field goals on by segment or geography, however you're thinking about it?

I would think it is pretty well across the board. We would probably see better improvement in the Underground because they're starting from so far behind, but we have an internal goal always to grow organically at 10% a year. These acquisitions that we made will certainly add to that. That's where I came to the 15%. That's our -- that's basically our goal to grow at that, and from what we're seeing from budgets coming in and those things, that's where about what it looks like.

The wild card would be if we get any kind of stimulus that would help the infrastructure side of it or if we get -- if we could get some resolution on the highway bill, it would change the optimism and the buying of that type of equipment by our customers. A lot of them need to spend. A lot of them got the money to spend, but they're reluctant until they see a five or six year bill.

That's understandable. The last thing I was hoping to run by you, any chance anybody has cash from operations, cash from investing and cash from financing at their finger tips?

The amount that's -- (multiple speakers)

No, no, from the cash flow, no, we don't have that put together yet. It will be in the Q.

Okay. Got it. Best of luck this quarter, guys.

Thank you.

Our next question comes from Walt Liptak with Barrington Research. Please proceed with your question.

Good morning, Walt.

Good morning. Thanks. Just to get some clarity on the tax rate, what's the full year number that you are looking for? I guess what kind of fourth quarter tax rate?

David, I will let you.

It is probably going to be in the 30% about where it is running on year-to-date basis right now which was 30.6% or thereabouts.

Okay. And the R&D expenses that you had this quarter, does some of that reoccur again, or are we done now with, I guess especially with some of the --

My estimate it will be considerably less than that for the fourth quarter, Walt. I think we had the major expense during the third quarter.

Okay. And I wonder if you can help with just the gross margin and the Asphalt Group one more time and, because of the way the order activity -- I guess the order activity looks good and you mentioned at lower margins. Are we going to permanently be at this lower margin rate until we see something like with the highway bill, or because of lower raw material costs do we see the gross margin maybe stabilize from this low?

I think you will see improvement in the fourth quarter. I think it is an unusually tough quarter for them, and they're a pretty good group at adjusting pretty quickly. I really think our problem is just due to the low volume through the facility, the productivity -- your productivity goes down, and I think you will see a good improvement in the fourth quarter.

Okay. And if I could just get some clarity, too, on another comment that you made about the sequential improvement. We have that slippage that sounds like it will give your fourth quarter a lift in terms of revenue sequentially given the seasonality. Would we see the same sort of improvement on the gross margin sequentially?

I think you will see the gross margins for the quarter being closer to what our year-to-date is right now. I think that's probably my best estimate, which is a lot better than the quarter, but I think our year-to-date gross margins are probably going to be, you know, will be more in line with what the quarter will be.

Okay. Got it. Okay. Thanks very much for the help.

Thank you.

Our next question comes from Larry De Maria with William Blair. Please proceed with your question.

Good morning, Larry.

Hi, good morning, guys. A couple quick questions. You answered a lot of those. GEFCO closed in October, and you mentioned strategic acquisitions. Can you discuss the current cash balance ifit's obviously less than that it closed the quarter at, and how big of an appetite we should think about, and GEFCO margins. You mentioned I think $50 million, $60 million top line fair number, but what kind of margins should we look at for GEFCO?

Their margins are about like our other businesses. They are fortunate that they have -- one thing that helps them a lot is they've got about 40% of their business is parts. We see a lot of potential to grow that company, very good employee base there, and good management team. They just, over the years, not had any capital investments in it, and we think we can -- they've outsourced a lot of stuff. We think we can pull that back in. Your other question on that?

Was the cash balance.

Yeah, our cash balance right now is around $20 million, $21 million, $22 million. We see that improvement between now and the quarter end we have a lot of receivables out there and we're pretty strong on inventory, but we reward our managers on cash flow, too, and they get more serious in the fourth quarter than they do in the first two.

And therefore, you mentioned strategic acquisitions. Does that imply that we're looking at bigger than normal stuff now?

Not necessarily. I mean, we really are looking at a few, but there is not as -- I guess the ones we've looked at there is -- we're seeing, I guess in a lot of the companies that some of them the banks are about to choke them to death. There is some of those out there. There is two or three that we're still looking at, none of them real big to answer your question. We have the appetite to do something much larger. We have the credit available to do it, but we haven't really seen anything. We're not going to go off into something we don't know anything about. We're a manufacturing company and that's what we're going to stay in.

Okay. Thanks. And then just finally, assuming -- I think you basically clarified it, that your 2012 outlook does not assume any change to the run rate from how we spending in the US. If we do get the six year deal, I guess that will impact your second half more so than the first half. And how do you think about the impact obviously the optimism gets better and is that your 15% go to maybe 20% or just any color on that would be helpful.

Yeah. I think you can see it go to 20% -- to at least 20% if we saw some strong decent highway bill. But really, we are trying very diligently to diversify the business to where we are more in the energy and mining. The mining is still strong. We won't see any benefits from our investment in Brazil probably to late next year. We're putting $12 million down there. There will be a lot more really in the facilities and equipment that will go into that as we crank up that company. But I guess highway bill would be important to us since about half -- 40% to 50% of our volume is directly related to asphalt, it would certainly help that side of it. I don't want to get too optimistic because I can't see where the money is coming from from the government, and I think $350 billion bill would sure turn loose some pent-up demand that's out there, Larry.

Okay. Thank you very much.

Our next question is from Eric Prouty with Canaccord. Please proceed with your question.

Thanks.

Hey, Eric.

Good morning. Just a couple numbers -- questions out there. For SG&A and engineering, can we assume given a lot of the one-time nature of the expenses in September that we should see a decent sequential drop into December?

Yes. Our R&D all falls into the SG&A or engineering side of it, so we see that dropping off.

Okay. Now I know it's a ways out, but same question when we look at 2011 we had some of the expenses this quarter. We had the expo expense in the March quarter. Can SG&A and engineering be held basically flat in 2012 even though it is off a higher revenue rate given all the one-time expenses we had in 2011?

Yeah. I think that's a reasonable expectation. The only variable in that is there are commissions that obviously go up with revenues and that we have to factor that in, but that's not unreasonable, Eric. We, I guess, sometimes I think on the R&D that we've let our -- I've let our mouth overload our rear end sometimes, and we're going to -- we're going to slow down next year and digest what we're doing. So we won't be doing near as much R&D next year.

Sure. And then just finally, tax rate for 2012. Are we going to be getting back to more 35% normalized rate?

I would think so.

I think it is going to be below 35%, but I think it will be -- certainly be more than this year's. I would probably say in the 33.5%, 34% range.

Great. Okay. Thanks a lot, guys.

Thank you.

Our next question is a follow-up question from Robert McCarthy with Robert W. Baird. Please proceed with your question.

Thanks. I just had a couple cleanup items as well. First in backlog. I want to make sure that I understood correctly. Is it none of the Army order, or only $13 million of it that was in the September 30 backlog?

Only $13 million, Rob.

Okay. But it is in the backlog numbers in the press release.

Yeah, that -- there is $13 million in that number, yeah.

Okay. And did PROTEC add anything to your backlog?

No. It came towards the end of the quarter, that's correct.

And does it come in -- what do we assume for a revenue run rate there, something like $5 million?

Yeah, $5 million to $10 million, in that range. It is basically going to be -- we're doing two things there. It will be somewhat of a model of Australia, particularly for the mobile end of it, Roadtec basically in that group is looking after that operation, and it will also we will be manufacturing high-density screens there. Our Roadtec pavers, it is interesting that at Carlson we supply about 60% of the screens in the country for some of our competitors as well as Roadtec yet the American screed, the Europeans will have to buy our screeds because they can't sell the high-density type screed or tamper bar screed in the US.

We, conversely, can't sell the vibratory screed in Europe, so some of the European markets for us to really be successful on the pavers, we have to have a high density screed, and that will be one of their products. The other product that they have is a widening machine that they do fairly well in. The second, the third line, though, is they have a very modern line of rollers that they have developed for compaction equipment we intend within the next twelve months to start building here in the states.

I'm looking forward to hearing more about that. David, I missed earlier on the call, can you again give me the capital spending number for the quarter and depreciation if you have it?

Yeah. We did $29 million year-to-date in CapEx.

That's fine. Okay.

And depreciation on a year-to-date basis is $13.8 million.

$13.8 million. And, GEFCO, coming in as a brand new acquisition and facing things like inventory step up, are we likely to even see any positive operating income out of that business in the fourth quarter?

You will see just a little bit. I think they're sand bagging on their forecast. They will be profitable the fourth quarter. We're hoping. Yes, they've got a couple of large drill rigs that, if they get those shipped and get the order -- really get the orders and shipment, it could be a pretty good fourth quarter for them, but right now they're showing a profitable quarter, but, you know, not anything that would really significantly affect us, Rob.

Okay. But enough to cover the purchase accounting issues?

Yes.

And you're going to show this in the you Underground segment, right?

That's correct.

Okay. That does me. Thank you very much.

Thank you.

Our next question is another follow-up question from Walt Liptak with Barrington Research. Please proceed with your question.

Thanks. I want to just follow up on some of the GEFCO questions. You mentioned -- I think you mentioned a run rate on revenue of $45 million to $65 million, is that right?

Yeah, it is $55 million to about $55 million to $60 million, Walt. In their peak out there in 2007, they did about $85 million, in 2008 they did around $70 million, $75 million, and then they like our Underground companies, fell off a Cliff, dropped down in the $35 million to $40 million range, remained profitable during that period of time which is excellent, but they're running at a run rate today of around $55 million to $60 million range.

That would be like the LTM number.

Right.

Okay. And is there -- you mentioned some of these large drilling rigs that could ship. Is -- you're expecting growth in 2012 on that base?

Yes, we're expecting growth in 2012, some just organic. Big part of their business, it is -- part of it is in the oil drilling and part of it is in the water well side and they're very, very strong in the water well drilling and truck mounted rigs and that business has really just been in the tank. They went with homebuilding, and as homebuilding comes back, we'll see a resurgence of water well drills. We also are moving a line of geothermal rigs we had in the Astec Underground operation that we developed in the last couple of years, The water well guys tend to be the ones that go into the geothermal end of it, an we're transferring that product line out to them.

Okay. Got it. You mentioned earlier about the margin in this business being similar to Astec, but did you mean similar to all other group.

Really to the other group and what I really meant by that is a consolidated company, their margins are similar to what we have consolidated.

I don't know if there was -- if you run the numbers or made comments on 2012 accretion from the deal. I wonder if it is possible to boil it down to EPS number.

I can tell you it would be accretive, kind of helps when we refine it with -- buying it can cash.

Turned out to be accretive.

It is going to be accretive. As a per share, they will make this year probably $5 million run rate pretax and I expect next year to be that or better.

Thank you.

We have another question from Jason Ursaner with CJS Securities. Please proceed with your question.

Hi, Don. Just a quick follow-up. If I am looking at the Highway Bill and we talked about potentially larger bill, even if the Highway Bill portion is increased and they can find funds for a $350 billion bill, you're going to add about $12 billion at the federal level, but if you look at the (Inaudible) funds for 2010 and 2011 and state budgets, do you still need state budgets and private contractors to offset the stimulus funds taking off?

Yeah. You really -- Jason, this business will really get strong again when we start just recovery in the general economy and particularly in housing and homebuilding and commercial building. Our customers make more money in the commercial and residential type work than they do in the state jobs, so there is no question that their profit margins will go better. There has been a lot of shakeout in the business, though, during this period, and I see other people coming back into it as the volume improves, so the other thing is we are increasing the amount of recycle we run, and we're doing things to make the energy or the industry more efficient, and hopefully as we go forward we'll get more miles for less dollars, and that demands a lot of them upgrade their equipment to be able to be competitive in that situation.

Okay. Thanks a lot.

Thank you.

I would like to turn the floor back over to management for closing comments at this time.

Okay. Thank you, Latanya. We appreciate everyone's participation on our third quarter conference call, 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 November 6, 2011, an archived webcast will be available for 90 days. A transcript will be available under the Investor Relations section in the Astec Industries website within the next seven days. All of that information is also contained in the news release that was sent out earlier today. With that, we will conclude our call. Thank you. Have a good day.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.