Astec Industries, Inc. (ASTE) Q3 2013 Earnings Report, Transcript and Summary

Greetings, and welcome to the Astec Industries Third Quarter 2013's Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Steve Anderson. Thank you. You may begin.

Good morning, and welcome to the Astec Industries conference call for the third quarter ended September 30, 2013. As Rob mentioned, my name is Steve Anderson, and I'm the Vice President of Administration, Secretary, Director of Investor Relations for the company. Also on today's call are Dr. J. Don Brock, our Chairman and Chief Executive Officer; Ben Brock, Vice President of our Asphalt Group and President of Astec Inc.; and David Silvious, our Chief Financial Officer. In just a moment, I'll turn the call over to David to summarize our financial results, and then to Don and Ben to review business activity during the third quarter. Before we begin, I'll remind you that our discussion this morning may contain forward-looking statements that relate to the future performance of the company, and that 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, certain uncertainties and assumptions. Factors that can 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 that you familiarize yourself with those factors. At this point, I'll turn the call over to David to summarize our financial results for the third quarter of 2013. David?

All right. Thank you, Steve, and good morning, everyone. Net sales for the quarter were $213.2 million versus $218.4 million in the Q3 of '12, that's a decrease of 2.4% or $5.2 million. International sales for the third quarter of '13 were $80.8 million compared to $84.4 million for the third quarter of '12. That's a decrease of 4.3% or $3.6 million. International sales represented 37.9% of Q3 '13 sales compared to 38.6% of Q3 '12 sales. The decrease in international sales for Q3 compared to Q3 of '12 occurred primarily in Europe, Canada, South America, including Brazil, and Africa and the Middle East. These decreases were offset primarily by increases in the post-Soviet states. Domestic sales for the third quarter of '13 was $132.4 million compared to $134 million in Q3 of '12. That's a decrease of 1.2% or $1.6 million. Domestic sales were 62.1% of Q3 '13 sales compared to 61.4% of Q3 '12 sales. Parts sales for Q3 of '13 were $59.4 million compared to $54.8 million for Q3 of '12. That's an 8.4% increase or $4.6 million. Parts sales were 27.9% of the quarterly sales in Q3 of '13 versus 25.1% of the quarterly sales for Q3 of '12. In parts sales, Aggregate and Mining Group had the largest dollar increase, followed by the Mobile Asphalt Paving Group for the quarter. The Asphalt Group and the Underground Group had small decreases. Segment revenues for the third quarter of '13 are attached to your press release. Net sales on a year-to-date basis were $709.1 million compared to $708.6 million for 2012. That's an increase of just 0.1% or $0.5 million. International sales were $252.5 million on a year-to-date basis in '13 compared to $265.1 million in 2012. That is a decrease of 4.8% or $12.6 million. Decreases in dollars for the international sales occurred primarily in Canada, Australia, South America, including Brazil, and Europe. And these were offset by increases in Africa, the post-Soviet states, Russia, the West Indies and Mexico. International sales were 35.6% of net sales year-to-date '13 compared to 37.4% year-to-date 2012. 2013 segments, if you look at international sales on a year-to-date basis, international sales decreased for all segments across-the-board except for the Underground Group. Domestic sales on a year-to-date basis were $456.6 million compared to year-to-date 2012. Domestic sales of $443.5 million, that's a $13.1 million increase or a 3% increase. Year-to-date 2013 domestic sales are 64.4% of 2013's total sales compared to 62.6% of total sales for year-to-date 2012. Parts sales on a year-to-date basis were $190.2 million as compared to $187.7 million on a year-to-date basis last year. It's an increase of 1.3% or $2.5 million. Parts sales in '13 on a year-to-date basis represented 26.8% of total sales compared to 26.5% year-to-date in 2012. Our sales by segment for the year-to-date in the quarter are all attached to your press release. Gross profit for the quarter in '13 was $45.8 million compared to $47.3 million last year. That is a decrease of $1.5 million or 3.2%. The gross profit percentage for the quarter was 21.5% compared to 21.7% for the same quarter in '12. We did have a negative change in the absorption variance. Our negative impact from underabsorbed overhead was about $2 million during the quarter compared to Q2 of -- Q3, sorry, of 2012. On a year-to-date basis, consolidated gross profit was $159.8 million compared to $159.6 million last year, which was relatively flat. Gross profit percentage on a year-to-date basis was 22.5% compared to the same number in 2012, 22.5%. So that was flat as well. On a year-to-date basis, our unabsorbed overhead increased $15 million from year-to-date 2012 through September 30 to the same period in 2013, so we're -- we've got a negative variance there as well on a year-to-date basis. Gross profit by segment is also attached to your press release on that segment page. SG&A and Engineering for the quarter was $36.6 million or 17.2% of sales compared to $38.4 million or 17.6% of sales in Q3 of 2012. That's a decrease of $1.8 million or a decrease of 40 basis points as a percentage of sales. The primary decrease and driver of that decrease during the quarter was a decrease in research and development expense. On a year-to-date basis, SGA&E was $114.8 million or 16.2% of sales compared to $117 million in the prior year or 16.5% of sales in that year to $2.2 million decrease. And again, the primary driver on a year-to-date basis of the decrease there is a decrease in research and development expense. Operating income increased to $9.2 million in Q3 of '13 from $8.9 million in Q3 of '12. That's a $300,000 increase or 3.4%. On a year-to-date basis, operating income was $45 million compared to $42.6 million in 2012, $2.4 million increase or 5.6% increase. Again, income by that segment is on that segment page that is attached to your press release. And the tax rate for the quarter, the effective tax rate on continuing operations is 34.7% compared to an effective tax rate in the quarter last year of 30.8% on continuing operations. It's a strange comparative because 2012's Q3 includes some positive true-ups, which reduced the tax rate, positive true-ups and the provision to return. We filed our returns during the third quarter. And so we trued to that return and that impacted the tax rate driving it down during the third quarter of 2012. Q3 of '13 included some true-ups in the other direction, which made the rate increase slightly. And that -- those true-ups were related to the reduced R&D expense that we've incurred this year relative to the estimates that we've been using to drive the provision. The tax rate for the year is 33.5% in 2013 compared to 36% in 2012, and the reason for that change, primarily, is due to the fact that in 2012, we did not have the R&D tax credit available to us. If you recall, that was passed in January of '13, and so we were able to use both the 2012 and 2013 estimated R&D tax credit going forward in '13, but it was not there in 2012. Net income from continuing operations for the third quarter of '13 is $6.5 million. That's compared to $6.6 million, a 1.5% decrease versus 2012, Q3 of '12. EPS for the quarter, net income from continuing operations per diluted share of $0.28 versus $0.29 per share for Q3 of '12, that's a decrease of 3.4%. On a year-to-date basis, net income from continuing operations was $30.8 million compared to $28.5 million last year. That's an increase of $2.3 million or 8.1%, driving EPS to $1.33 this year compared to $1.24 last year for a 7.3% increase. Net income attributable to controlling interest. This is the very bottom line after you've call American Augers is represented as a discontinued operation in the prior year numbers. And so in Q3 of 2013, we're at $6.5 million compared to $6.9 million in Q3 of '12, that's a 5.8% decrease. EPS on that net income attributable to controlling interest is $0.28 for the third quarter of '13 compared to $0.30 for the third quarter of '12, a 6.7% decrease. Net income for the year-to-date 2013 period is $30.8 million compared to the year-to-date 2012 period of $29.9 million, a $900,000 increase or 3%. And the related EPS is $1.33 in 2013 compared to $1.30 in '12, that's a 2.3% increase. The backlog at September 30 is $228.5 million compared to $230.7 million the same date last year. That backlog has been adjusted for discontinued operations, so the backlog of American Augers has been removed from the prior year number. It's a $2.2 million decrease or a 1% decrease. International backlog at September 30 of '13 was $95.7 million compared to $120.1 million at September 30 of '12. That's a $24.4 million decrease or 20.3%. Domestic backlog for those same dates was $132.8 million this year compared to $110.6 million last year at 9/30. That is an increase of $22.2 million or a 20.1% increase. Gross backlog by segment is also attached as an addenda to your press release. Our balance sheet continues to be very strong. Our receivables are sitting at $97.3 million compared to $109.3 million at September 30 of 2012. Our days outstanding are 41.8 compared to 43.3 last year at this time. Our inventory is at $339.8 million for September 30 of 2013 compared to $344.8 million for September 30 of '12, that's a decrease of about $5 million. Our inventory turns are 2.3 compared to 2.5 last year. We have no debt. We owe nothing on our $100 million credit facility. We have -- at 9/30, we have $46 million in cash and cash equivalents, plus we have about $16.3 million in investments on the balance sheet. Our letters of credit outstanding are at $6.9 million. Our borrowing availability, therefore, is at $93.1 million. Capital expenditures for the quarter are $6.9 million. And on the year-to-date basis, we're at $22.1 million. We've had a budget of $43.6 million in capital expenditures, but our run rate just tells us we're not going to achieve that number. We will probably wind up around $30 million in capital expenditures for the year 2013. Depreciation for the quarter was $5.3 million, and on a year-to-date basis, it's $15.7 million. Again, that budget has not changed, that forecasted number for depreciation is still right at $22 million. Well, that concludes my prepared remarks on the financial details. And I'll turn it back over to Steve.

Thank you, David. Don will now provide some comments regarding the third quarter for this year's operations and will offer some thoughts going forward. Don?

Well, as can be seen, our numbers were, in my opinion, were somewhat disappointing. Here in the quarter, we've continued to experience flat revenues. Our profits for the quarter from continued operations were up about 5.3% but essentially flat. Likewise, the backlog was basically flat at around $229 million. During the third quarter, we continued to see an extension of the wet weather end of July and early August in many areas of the country, and many of our contractor customers were unable to get work started. They've had stronger Augusts and Septembers, and we've experienced dry periods in most of the south in recent months. However, the sales were extremely weak during this period. People's attitude didn't make them want to buy anything when they weren't running what -- the equipment that they had. And so it's been a slow construction season for our customers. During the quarter, we shipped the first large pellet plant to Hazlehurst, Georgia. And at this point, it is about 75% to 80% erected. We expect it to be producing product before the end of the year. Due to the fact that this was the first of its type in the world, we did not book the sale of this plant during the quarter, and hopefully, we'll include it in the revenues for the fourth quarter. Due to the weak volume of business in the third quarter, our underabsorption, as David said, was high, but we were able to reduce SG&A with less R&D expenditures to neutralize the underabsorption problem. We continue to see a downturn in international business, particularly in Canada, which has been strong for us for the past 3 years, but other parts of the world have picked up some of that weakness, but not enough to increase our overall international sales. For the 9 months, we had sales that were flat of around $710 million. Earnings for the 9 months were up 8% from $28.5 million to $30.8 million. Looking forward to the fourth quarter and to next year, we see the fourth quarter not a lot different from the third quarter. We did last year have an unusual expenditure -- I mean, unusual income from the sale of Trencor and American Augers that won't be included in this year. We would expect earnings from operations to be similar to last year, negative or taking out the income that we had from American Augers and Trencor. During the first quarter of next year, we will have the large ConExpo show in Las Vegas, and we anticipate slow incoming orders until after that show is over, due to the fact that we're introducing and our competitors are introducing a lot of new versions of equipment that will be shown at that show. We did increase -- or we did see a very positive pickup in sales in early October in the Aggregate Group. Half of our companies did okay or well in the third quarter. Half of them that depended on international sales, Telsmith, BTI, Osborn were weak and had very weak third quarters. And so the numbers tend to reflect the negative of those 3 companies. But in early October, we've got some large international orders for all 3 of those companies. We believe that we'll continue to see in the fourth quarter and next year a slow improvement in the private market, with the help of asphalt -- which will help asphalt, concrete and water well business. With the dysfunctionality in our Congress, we don't see much hope for a strong Highway Bill in the near future. All of the politicians agree that we need to improve our infrastructure. It continues to deteriorate, but no one wants to touch the gas tax, and that seems to be the only point of raising revenues at this time. Some states like Oregon have successfully tried to use a vehicle mile of traveling -- traveled revenue and that has shown positive increases in revenues for them, and we think eventually, that will be the way of collecting taxes. But right now, and at least for the foreseeable future, we can't see the politicians doing much to help the Federal Highway Bill. On another negative side, we see banks continue to be more aggressive against our customers who generally have strong balance sheets, but who have not made profits in the last couple of years. The regulators appear to be very aggressive, enforcing banks to take drastic action against what I consider good contractors with strong balance sheets but who have not demonstrated profitability. Historically, this did not occur. This also makes contractors reluctant or unable to spend money to upgrade their equipment. We continue to grow slowly in the oil and gas business. Most of our prospects in that business are for our higher technology drill rigs and equipment for frac-ing or oil service business and most of those prospects are international. As I said earlier, we expect the fourth quarter to be similar to last year with the removal of the gains that we received from the Underground business sales. As we look forward for the next couple of years, our management team, as we've set down the plan for the next year or so, basically, are in agreement that we see basically a generally flat market with little increase in revenues in the market generated by the market itself. In order to grow our businesses, however, we're looking at each company more individually for what opportunities for specific growth each of them have. Some of the companies have great opportunity to grow their parts business, some have opportunities to grow their competitive parts business since many of their competitors have exited the business. Some of the companies can expand their international sales. While a number of our companies have grown international sales, some have not. We expect to continue to build our product offerings and expand our product offerings in the oil and gas business, with supporting equipment that goes with the drill rigs, as frac-ing and oil service equipment. We have an opportunity in some of our smaller companies to grow market share in the U.S., as well as international. We see a large potential for the pellet plants for Astec, Inc. and installing these plants in Southeastern U.S. and other areas of the wood basket in the U.S. for shipment overseas. It seems that the entire market is watching the first plant that we are presently building and waiting on the success of that plant. While we expect the U.S. economy to remain somewhat stagnant over the next couple of years, we're optimistic about the opportunities of our company. Our new management team is young, aggressive and looking for ways to grow our business even in flat markets. Our technology is leading-edge and we continue to look for opportunities. We're improving our products, making them more competitive and giving our customers an opportunity to reduce their costs in a competitive market by utilizing our equipment. Our balance sheet is strong and gives us a lot of flexibility, and we continue to look at acquisitions that would be accretive and fit with the company's structure and markets that we presently serve. We're glad to answer any questions.

[Operator Instructions] Our first question comes from Mig Dobre from Robert W. Baird and Company, Inc. Brian D. Brophy - Robert W. Baird & Co. Incorporated, Research Division: This is Brian Brophy, on for Mig. I was wondering if you could give us some color on what drove the decline in Mining and Aggregate orders during the quarter. We've seen you've gained some share in spite of weak mining CapEx in the past. So what changed here?

We seem to be getting -- or we are growing our business in Australia in Aggregate and Mining. We've got one project that was fairly substantial that will show up in the fourth quarter in the Aggregate and Mining. Overall, what we've seen is the big projects have slowed down, smaller projects are still okay. There seems to be a lot of requirements that you -- if you have leases on mining properties that you do a minimum amount of mining. That helps some of our small track-mounted equipment. But in general, we have seen a slowdown in the market. One thing that helps us is we've got low market share in that area and we do have the ability to continue to grow that even in a down market. Brian D. Brophy - Robert W. Baird & Co. Incorporated, Research Division: Got it. And then you mentioned in your comments that you're expecting flat, maybe slightly higher in '14 with some opportunities to grow in certain segments. I guess, which segments do you see the best opportunities to experience growth next year?

Brian, it's a different bag or a different mix with each company. And as we've spent a couple of days in our management planning session, we look at them. If you look at Astec, Inc., probably growth in Asphalt is not going to happen. But growth in the pellet business looks very opportunistic. It looks very good. The British are going to burn wood pellets and there is a big demand for pellet plants and we see in that particular subsidiary, their growth is going to be in the renewable energy or wood pellet business. Some of the companies, Roadtec probably has the greatest opportunity to grow internationally. We have increased market share domestically. It's a very competitive market for our mobile equipment, but we've been able to maintain or grow market share there. Some of the businesses have an opportunity to grow their parts businesses more and to go after the competitors' parts business. In the Aggregate and Mining business, we think we can increase market share in the mining side of the business. We think we've got an opportunity to really grow our parts business, both our parts business and our competitive parts business. Some of our competitors have gone out of business or are not doing a very good job. So in those, it's niche growth. In the oil and gas side of it, we're getting very good acceptance of our vertical drilling rigs, but there's an opportunity there to take a $4 million to $5 million drill rig and get a $15 million sale by building all of the equipment around it. Some of it is relatively low-tech equipment, but it's -- it adds hours to our facilities and it gives us opportunities, particularly international, to offer complete packages. Likewise, in the frac-ing side of it, we're building the trailers for oil service and for frac-ing. The vans that feed this frac sand in, we have the technology and have, in the past, built those as a subcontractor for some of the big guys. We have the opportunity to build the mixers that go with it. So we have the potential to build in the entire frac-ing system. And then particularly, the international people want to buy the whole package. So each of the companies have a little different opportunity, and that's what we basically try to look at is how do we grow these businesses in a flat market. Brian D. Brophy - Robert W. Baird & Co. Incorporated, Research Division: Got it. That's really helpful. And just one quick housekeeping item. The $6 million army plant order, was that recognized in the quarter?

No. And it's probably going to be in the next year. Ben, you may want to comment.

The Army is maybe a little bit slower than we would like, and it just continues to be slower. But essentially, we have one lift test left to pass, and we've been told that we're in the queue for the lift in January. We are on the waitlist to move ahead of that, and that's in Aberdeen, Maryland for the lift. So that's where we are. If it gets lifted and we pass, then we could take it in the quarter. But the likelihood is that's going to be second quarter. I mean, first quarter next year. I'm sorry, first quarter next year. Brian D. Brophy - Robert W. Baird & Co. Incorporated, Research Division: Excellent.

At the speed of our government.

Our next question comes from Morris Ajzenman with Griffin Securities.

Let me play devil's advocate here. You're looking out to 2014 with kind of a lethargic environment. Revenues still have difficult time expanding. And, I guess, well, they're clearly being predicated on infrastructure spending, still being weak for whatever reasons that you articulated in the past and today. If I look at your total asset base, $750 million, your return on total assets, probably going to be at just mid-single digit, maybe a little higher this year. Based on that outlook, is Astec overassetized? Is there -- unless a rebound does happen in the Eurozone, is the asset base too large based on the environment we're in?

As far as the number of facilities that we have, we certainly are -- we're running right now, Morris, at about 65% to 70% capacity. So we have some room to grow, but it's a matter of keeping the shops full, which definitely affects the absorption, as you've seen in this quarter. I think going forward, we continue to take a look at the facilities that we have. But certainly, a fair question in the current environment but we have a little bit more of a long-term perspective on it.

I think to add to Steve's comment too, part of that is the cash and the investments that we would certainly love to put to work. It's not earning all that much. So I think that's a chunk of it and our inventory. Our inventory to us, in the sort of corporate management group, is always too high and at the subsidiaries, it's never enough. So there's that constant struggle as well. But we think there's some money tied up in inventory, but we've done that on purpose. We've put some overseas, we've stocked Australia, we've stocked some in Germany to try to spur some business in those foreign areas as well.

I think the question you end up with is, it's extremely competitive market. In general, most of our companies sell direct. We have to compete with -- we are competing with competitors that stock their dealers, and their dealers have the inventory to make quick deliveries. Our Roadtec operation, if they sell -- they can go into a month with a $2 million backlog and do $15 million in sales. And when somebody buys something from them, they want it right now. So we have not been as aggressive as we could be on trying to reduce inventory just to be able to generate sales in a weak market. And in regard to the capacity, we are over. We have more facilities than we have volume right now. There's no question about that.

One unrelated question. The pellet, the Georgia facility, revenue to be booked in the fourth quarter. How much can we expect in the fourth quarter from the -- on the pelletization plants?

It's about $20 million to $22 million. We expect, as soon as they sign the contract for -- with the utility in Europe or in England, they've been negotiating this contract for months, but they're down to the final thing. But they will add 2 more lines to it, which will up it to $50 million, $55 million.

And with $20 million to $22 million being booked in the fourth quarter, you're still sticking with the fourth quarter being the same as the third quarter? Top line?

Yes, we are. We've not totally factored that in towards our internal forecast, but we're expecting to get it.

Okay. And any sort of number you want to throw out on what the revenues can be for the pellet division in 2014 based on what you're seeing in hand? Potentially, what numbers we should think is billable?

I'm going to bounce that over to Ben.

Morris, I think right now, it might be a little too early to call on that, but with the things that he -- that Dr. Brock mentioned, I think we will be up slightly next year.

Last question, I'll get in queue. I think you said this most recent quarter, I have been doing the calculation, gross margin is 21.5% or thereabouts. Should we expect the same sort of gross margins in the fourth quarter? Any changes in absorption et cetera, et cetera?

We kind of expect the fourth quarter to be flat on margins, revenue and earnings. Very similar profile.

Our next question comes from Jason Ursaner from CJS Securities.

I just want to clarify on the wood pellet question. If it is up and running before the end of the year, you wouldn't need to meet any minimum production requirements before you were able to recognize that revenue?

Jason, this is Ben. We factored that in. We know we have a run rate we have to meet on the production tons per hour. And so we have that factored in trying to hit this year.

Our major problem there is the guy sitting next to us over here, David, is pretty conservative, but we guarantee in this particular plant, 15 tons an hour on this first line and we've designed it for 22. And we feel like we're pretty conservative on that. The pellet presses have the ability to run up to 25 tons an hour. The driver obviously depends on the moisture in the material and that. But based on the factors we have in it, we feel like we're very conservative and we expect it to perform without any glitches. We did -- we probably never built a product we tested as much as we have the pellet plant.

Got it. I guess, I'm less concerned on hitting the minimum than the timing of recognition for Q4, that there wouldn't be a delay.

Yes, I think our biggest problem is -- kind is out of our control. The purchaser is handling the -- we're handling the mechanical installation, they're handling the electrical and the site preparation and all of that and the delay in this thing has been on their side due to the extreme wet weather we had earlier in the year.

Okay. And just overall in terms of seasonality of orders. As you start to look out to next year for the asphalt business, I guess, in particular, when do orders typically need to come in by to really start filling the order book and at what point do you start to lose any flexibility on adjusting planned man-hours to match the orders coming in?

I think that we have seen a pretty good inrush of orders in the last -- during the early part of October here, both domestically and internationally. We got a couple of big orders internationally that have been very helpful. We are out in delivery, out into the first quarter of the year, and we went from, frankly, nothing to a bunch here just in the last few weeks. So I guess, if it weren't for just looking at the overall economy, I think we would be a little bit more optimistic. But to answer your question, I think the inrush of orders, generally, is in the fourth quarter and up through February.

Okay. And just, I guess, it may have been asked [indiscernible], I jumped on late. Is that included, the $15 million project in Kazakhstan?

Yes. And frankly, there was about -- 9 to 10 of that were just priced through. The customer over there wanted to buy our oil rig -- our drill rig, but he wanted all of the surrounding components included in it. And we outsourced all of those, and they were very low with no margin. So it was just the money we made on it was on the vertical rig that we've built. And that will not happen in the future, I mean, the future package is we hope to build the whole thing ourselves. It was included in September.

Our next question comes from Ted Grace with Susquehanna International Group.

So I want to come back to the orders. And, Don, it sounds like you've seen somewhat of an inflection kind of month-to-date. But I was curious if you could maybe just walk through the order progression through the third quarter. I know on the revenue side, you've mentioned that July was tough and then you saw a sequential improvement into August and then September. But could you maybe just -- from your tone, it's hard not to think your customers are generally conservative regardless of what's going on with the weather, the timing of ConExpo. But could you maybe just walk through the quarterly progression of orders and just maybe flesh out sentiment more broadly?

July was awful, August was awful and September got quite a bit better and October's been better than that. And the -- our customers are fighting. They fought the weather in the first part of the year, and I hate to talk about the weather. We can't do nothing about that. But that was one thing. The second thing that they're fighting is these regulators and the banks that are on their tail, and that's a -- it's -- I've vested with a number of them. I've had a number of them come in to see me for advice. I had one recently that has a -- does $300 million a year, has a net worth of $130 million, he owes the bank $30 million, and he's lost a little money in the last couple of years and they've got him in the workout group. It's just absolutely ridiculous. And so they're having to refinance and some of them are just not going to make it because the banks are insistent that they pay off the debt. And so they're having to do distress sales. And that's not good long range, it's going to lead to a heck of a consolidation in the market. But with the inability to borrow, the tough construction season and just the lack of work and it being extremely competitive, it's a tough market out there. It's a -- and the outlook of what they're going to do in Washington don't give us a whole lot of positive going forward. I hate to be -- last thing I want to be is negative, but we have to -- this is the market we're in, and the thing we're looking at is how do we continue to grow some in this market and continue to make money in this market. We think we can do that, but it's a little different from what we've done in the past.

I think that sentiment is probably shared by quite a few of your peer CEOs, so that itself is not too surprising. So one of the things you've mentioned is you're encouraged by some of the up-and-coming management team members, been trying new initiatives more aggressively to drive sales. Could you maybe walk through some of those? And then, on a related basis, you guys have a wonderful balance sheet, an excess capital position. Is there any thought to using the balance sheet to potentially fund dealers and/or customers, and I'm not suggesting maybe you'll set up a captive finance business, but could that be a competitive disadvantage that you don't have one if the banks are pulling back from lending to your customers and how do you offset that?

Well, the first thing, I guess, in our management group, they're younger, they're more progressive and not afraid to try some things that maybe I'm a little more -- Norm and I are a little more cautious. One of the things we are doing is we are doing some -- basically, with some of our dealers, some consignment inventory within our own company, with Australia. The other subsidiaries are consigning equipment to Australia to have it available, which they end up taking it on their capital employed at the manufacturer subsidiary, but they help Australia, and again, to be able to move equipment. I think that's the main thing we try to do. We have done some financing of strong customers that could not get financing. We've looked at their balance sheets, and we're doing some things like that, that we feel like are -- we don't want to be in the finance business, but we will do -- give them extended terms. Even some of the big guys that have got capital restraints, we're doing some extended terms in order to get deals and in order to get them the equipment that they need. We feel like this builds some loyalty and it helps them, and we have the ability to do that and it helps us move the equipment.

Okay. That's helpful. And then the last thing I'll ask before I jump back in queue. It sounded like maybe R&D was pulled back in the quarter, just given the broader environment. Was that transient? Does that come back in the fourth quarter? I know you talked about flat margins, and so we can do the math, it's pretty simple. But how should we think about R&D in the fourth quarter and then looking forward to '14? And, I guess, could you -- my recollection is the last, kind of exposed $3.5 million amount -- is that the kind of number we should be thinking about this March?

Yes, I think that's probably the number, and we have -- how many new pieces of equipment we have, Ben?

37.

37 new pieces of equipment going to ConExpo. And so we do not see R&D being more similar to what it's been this year.

Right. We've talked in the past on the call and to some folks individually, the run rate for R&D in the past and in the most recent past year, say, '11 and '10, especially within that $9 million to $10 million -- it was around $9 million, I guess. We're sitting right now about $4 million of R&D compared to a 6 -- a hair over $6 million last year. So you can see that, that number has come down a little bit, and that would project out to about a $6 million run rate for this year, which is where we have said R&D would head back toward and normalize. Our 10-year average, if you take out the pellet plant anomaly of R&D, then you wind up in that sort of $4 million to $5 million R&D range, and we're headed back down towards that direction.

Our next question comes from Nick Coppola with Thompson Research Group.

Looking for a little more color on Aggregate and Mining revenue in the quarter, and it sounds from some of the opening remarks that the businesses that depend on international markets performed not quite as well. How do you segment that out, and really, how are sales domestically, particularly, in Aggregate and Mining? Is there any way to quantify that or talk about what you're seeing?

Yes, you can -- it's a little bit in product mix. The companies that did very well were the companies that build track-mounted equipment, smaller crushers, those that go out, some of them go out on rental and then are converted, but it's more of the smaller, gravel-type crushing equipment, and recycle-type crushing equipment. The bigger plants, that Telsmith and DTI and Hollister build are, basically, were the ones that were really down. And -- but fortunately, those are the ones that we got some substantial orders in. 1 week at Telsmith in October, we picked up $20 million in orders, in 2 orders. And we've got another deal, it's about -- I think they've closed, it's another $15 million order. So some of those big orders just take a long time to close. But it's -- we did well in the third quarter, to answer your question, in the smaller equipment, track-mounted, self-contained units and less good in the bigger stationary units.

To give you just a number on that, the domestic sales for Aggregate and Mining, on both a quarter and year-to-date basis, is relatively flat. It's the international sales that's driving the decrease, the part sales in that group were up in sort of the high-single digits for both of the comparative periods. So it's all international.

Okay. That's very helpful. And then, as a second question here, I heard as well that CapEx in '13 is going to be lower than initially budgeted. Can you talk about the components of that? Is it -- has to do with progress of the manufacturing facility in Brazil? Or what are the drivers there?

I think the facility in Brazil, we've run into some smaller problems where we're putting the plant and a number of things that have delayed that. It's probably going to be the end of the year or the first quarter before we're operating there. And that's been the biggest slowdown. Some of the other is -- as the market has slowed, I think, we've just -- basically, the managers have decided to pull back a little bit. So that's -- it's been both Brazil and just the lack of having the stomach to spend the money when things are not great.

Sure, sure. Okay. And last question for me, Asphalt Group saw, I think it was 540 basis points of improvement in gross margins year-over-year on really very modest kind of flattish revenues. Can you talk a little bit about the mix there or some of the reasons for any improvement in margin?

This is Ben. We have a few things that happened. One, our parts business was up a little bit and not as far as the margin itself. And then, our -- a couple of the bigger orders we had, had some hard deadlines on them to get out in September. And that always helps us to get the run rate through when we -- on our margin side. So those are a couple of big things that happened to us and not only were they bigger projects, they were just core product, good product mix. I know we've mentioned that a couple of times today, but that really did help us on the Asphalt side.

I think the other thing, is you make comparison with the early quarters. We made the conscientious decision of not cutting back as much as we probably should in a number of our facilities, and particularly at Astec, Inc., they have gone through a lot of plant rearrangement to go to more continuous-type manufacturing, which in the first 2 quarters had a lot of indirect labor and less direct labor. And that affected their margins in a negative way, the first 2 quarters. They finished those projects in the third quarter. And I think that made them -- that added probably 200 basis points of that swing.

Our next question comes from Larry De Maria with William Blair. Lawrence T. De Maria - William Blair & Company L.L.C., Research Division: Okay. I'm just curious what you guys think about the impact of session 179 on your business, how important it is and what your thoughts are as far as whether it comes back next year. I'm really just curious about that, first.

My personal opinion, Larry, is that it's been -- they've worn it out. Put it that way. People -- our customers are going to buy if they need the equipment but it -- initially, doing that for a year or 2, it's helpful, it's lasted so long that we're not -- and our customers have had a tough time making money. So I would say its impact is much less than it normally would have been. Lawrence T. De Maria - William Blair & Company L.L.C., Research Division: Okay. And any thoughts on whether or not it comes back? Or, I guess, is your point is it's felt to be irrelevant? And then, particularly, you talked a few times on this but just the timing effect of ConExpo. Usually, you guys have a very strong fourth and first quarter from an order perspective even in ConExpo years. So just trying to understand how big the impact might be and if it's just really nominal impact and on the margin on the seasonal basis.

If I understand what you're asking, Larry, I think that the last ConExpo is probably the first one in my career that we really received a lot of orders. Typically, we didn't. We had a lot of tire kickers and people looking and you'd want to come back and double the size of the factory but then you start looking for the orders to come in and they didn't come in. We did get a lot of orders at the last one, which makes us optimistic that we might get a lot -- it's more of an international show than it historically had been. I think a lot of the orders that you get internationally are from South America and Latin America, and that market continues to be one of the better markets now. Ben, do you want to make any other comment?

I would agree with that. I think it's interesting that being at Bauma, which is typically an order show, that became more of a looking show with orders later. And so if it holds true to last year, we could see some orders at ConExpo this year. And our sales guys, was within this morning that we have them here, they tend to think that, that could be the case, too.

Our next question comes from Dan Walker with Heartland Advisors.

So I had a question on the backlog in the Asphalt Group. If I look at the last 4 years, the backlog in the third quarter has gone from 74 to 95 to 103, and now they're 120. And so you had 17% improvement year-over-year in the Asphalt Group backlog. And I think I heard you say, Don, that you're not expecting improvement in 2014 there. We know about the funding situation, we know about the confidence, but given that you've seen that backlog growth, why do you think you won't see improvement in '14?

$20 million of that backlog is a pellet plant, and I think the growth that we will have next year -- Ben, you can comment, but I think the growth will be strictly in pellets.

Yes, I would agree with that. The pellets are really where the growth would be in the Asphalt, particularly, Astec, Inc. And if it leads there, I mean, their association meeting is this coming Sunday through Wednesday, but like was mentioned earlier in the call, there's a lot of our customers are for that plant that are watching what's going on at Hazlehurst. And a successful start-up there will really be a key to how we proceed in the next year. But that's where the growth would come. We see the plant as being flat relative to this year.

The other thing that we struggle with, that we confuse you guys a little bit on is Heatec, is Rick Dorris is sitting across from me here, but probably 60% of their business is oil and gas, and they sold 9 heaters yesterday and I don't think a single one of them were construction heaters. So it, basically, the energy side -- the Asphalt business is part energy and part asphalt when you really look at it, and that's what we want from a diversification standpoint. But we've gotten orders from all over for big heaters going into oil and gas for gas platforms, for processing plants, for all kinds of things. And what were those heaters on yesterday?

5 were gas processing and 4 were for heating fracks [ph].

Okay. So all of it, again, is in the energy business.

Our final question comes from Brian Rafn with Morgan Dempsey Capital Management.

Give me a sense -- Don, you talked about your kind of a tepid outlook. How do you guys look at the R&D and the CapEx for designing new products? You're bringing, I think you said, 37 new products to the ConExpo. How does that over the next couple of years with flat markets, do you look at product development being less radical, more slight extensions or design iterations? Or do you really try to create demand by coming out with brand new kind of cutting edge technology designs?

Probably 80% of them are just product improvements, Brian, as they're -- and we don't -- when we talk about spending $5 million, $6 million, we don't capture all of that product improvement. Generally, they're just niche improvements in the equipment. So in the wood pellet plant, the vertical oil drilling rigs, the water heaters for frac-ing and some of those that are just totally different products, we do capture the R&D related to that. But as you make improvements on the first of those units, we generally don't capture the R&D.

Okay, okay. Fair enough. You also made a good statement. Given, historically, the road-building cyclicality, the weather, the Highway Bill, the competitive margin structure, the shift from private construction to the public projects, how do you look at the compression from the Washington-driven regulating on the banks? Would you say that credit problem is as large or more onerous than some of the normal cyclicality?

It's more onerous than I've ever seen it. I mean, as I've talked to our customers, Brian, Norman, 3 other guys and I started Astec, and I did all of the borrowing of the money and the selling and I can tell you, we could not start this company today like we did 40 years ago. We had a local bank that trusted us and loaned us the money, and today, the regulators are ridiculous. A con artist can borrow more money than a legitimate contractor that really knows how to build projects and to do it. And generally, a lot of our customers are unsophisticated borrowers. They -- the thing that seems to happen is -- and I advise most of our customers, don't get all your eggs in one basket. If you buy an asphalt plant, get it financed with a different company, not your local bank, if you can, and let it stand on its own. If you buy a paver, go get it financed somewhere else. And what happens is that over the years, you got a friendly banker, and he says we'll just do everything and then, they end up there with collateral of $100 million and $20 million in debt. And the bank's got them tied up in a knot because they say pay off the $20 million. And that's a real dilemma. It's -- they strictly, the regulators, are looking at earnings. And in this kind of a climate we're in, they've got to be awful lucky to not break even or just to break even in a down market. And when they're looking at strictly earnings and not assets, it puts them in a terrible position.

Yes, okay. Are you seeing any differences as with the contracts? Are you seeing any changes in purchasing, a shorter cycle, as you mentioned in the past, but some of the road builders wanting to have the best, state-of-the-art new equipment? Are you seeing any changes between purchase and rental given this kind of difficult market?

Yes, there is much more demand for rental. If they could, they'll rent if they can. And that has another negative effect in that you can have a lot of companies that really don't have many assets, and if they can rent sufficient fleet of equipment to build a job, they can go in and do it with all rental equipment, and the guy that's sitting there with an established fleet that's nearly paid for is really at a disadvantage. So yes. And you see it more in the big ones. Some of our bigger competitors, they're not even spending CapEx. Most of them are spending less than high for CapEx, and their poor operating guys have got to have the equipment, so they want to rent. They're doing a lot more rental.

Okay. You also talked about, by business line, looking at some ways to grow revenue. You mentioned Roadtec, I think, going a little more international. As you look at the international markets, be it South America or Europe, I think Europe's -- a lot of their roads tend to be built on old Roman road beds, they're much deeper, so you do have some differences in the markets versus the old legacy U.S. Is the function of Roadtec doing business internationally significantly different than it is in the U.S.? Or is it pretty homogenous across the world?

It's different in each one. If you go to South America, their roads are basically -- typically, started out as -- in Australia and New Zealand and South Africa. The African countries started out as tip seals. They probably were better at making good bases out of the local material that they had than we were. So it's generally a smaller tonnage per hour, smaller paving machines, not as much demand for milling machines because they don't have as much asphalt down there. They don't have it to recycle. Countries like Russia are there, they're spec-ing in a lot of our modern equipment like our Shuttle Buggies. Same way with Germany, they've spec-ed in certain parts of Germany. We've opened that branch over there, and they're requiring the Shuttle Buggy on a lot of the work. The European roads are more like the American roads, probably do a little better job than we do of putting down thicker pavements and things like that. The Russian roads are -- got a long way to go with their pattern and theirs more like ours. But to answer your question, it does require us to reconfigure the equipment, less features on it, less sophistication and it's required us to -- the same way on an asphalt plant, is to build a less -- a stripped down plant to go into a lot of these markets. It's not exactly what they want in the U.S.

Yes. Okay. When you talked, Don, you also mentioned [indiscernible]. I think, you were talking about selling some turnkey packages on the frac-ing side. You mentioned the trailers and sand bins and mixers. Is there much margin in those ancillary? I know you're trying to drive, certainly, absorption and capacity utilization for your plants. But are you getting any margin on some of the extra stuff for the whole package?

As you know, for the whole package, you can get them -- you can get a margin. If you got cherry picked on skid-mounted air compressors and skid-mounted tanks and a few things like that, no, there wouldn't be a lot of margin. But what we look at it is internationally, we see people that come in and give us a package. And you can get them -- that is our way of getting some margin. If you were trying to go out and just compete with the little shops in South Texas building skid-mounted air compressor, forget it. But offering the whole entire package, that is already piped [ph] up together and everything is there, you can get the margin out of it.

Okay. And then just one final. You guys, the cash balance is obviously not real accretive to the ROE, but where do you have your cash invested?

We have our cash invested, we have certainly some just in the regular accounts, overnight sweeps, money markets, things like that. We have some invested in some blue-chip mutual funds and some fixed income portfolio as well.

Okay. And did you guys mention CapEx for next year, 2014?

Yes, we -- no, we didn't mention CapEx for 2014, we did for 2013. We said '13 would be about $30 million, but we did not mention '14.

There are no further questions at this time. I would like to turn the floor back over to Mr. Steve Anderson for closing comments.

All right. Thank you, Ron. 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 5, 2013, 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 within the next 7 days. All of that information is contained in the news release that we sent out earlier today. This will conclude our call. Thank you, and have a good week.

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