In July 2012, the "Moving“Moving Ahead for Progress in the 21st Century Act" ("Map-21"Act” (“Map-21”) was approved by the U.S. federal government, which authorized $105 billion of federal spending on highway and public transportation programs through fiscal year 2014. In August 2014, the U.S. government approved short-term funding of $10.8 billion through May 2015. Federal transportation funding operated on short-term appropriations until December 4, 2015 when the Fixing America'sAmerica’s Surface Transportation Act ("(“FAST Act"Act”) was signed into law. The $305 billion FAST Act approved funding for highways of approximately $205 billion and transit projects of approximately $48 billion for the five-year period ending September 30, 2020.
The Company believes a multi-year highway program (such as the FAST Act) has awill have the greatest positive impact on the road construction industry and allows public transportation agencies and contractorsits customers to plan and execute longer-term projects. Given the inherent uncertainty in the political process, the level of governmental funding for federal highway projects will similarly continue to be uncertain. Since elected in late 2016, the current executive branch of the federal government has stressed that one of its priorities is a new infrastructure bill including increased funding for roads, bridges, tunnels, airports, railroads, ports and waterways, pipelines, clean water infrastructure, energy infrastructure and telecommunication needs. Proposals being considered may rely in part on direct federal spending as well as increased private sector funding in exchange for federal tax credits. Governmental funding that is committed or earmarked for federal highway projects is always subject to repeal or reduction. Although continued funding under the FAST Act, or additional funding under future legislationof a bill passed by the federal governmentnew administration is expected, it may be at lower levels than originally approved or anticipated. In addition, Congress could pass legislation in future sessions that would allow for the diversion of previously appropriated highway funds for other purposes, or it could restrict funding of infrastructure projects unless states comply with certain federal policies. The level of future federal highway construction is uncertain and any future funding may be at levels lower than those currently approved or that have been approved in the past.
The public sector spending described above is needed to fund road, bridge and mass transit improvements. The Company believes that increased funding is necessaryunquestionably needed to restore the nation'snation’s highways to thea quality level required for safety, fuel efficiency and mitigation of congestion. In the Company'sCompany’s opinion, amounts needed for such improvements are significantly greater than amounts approved to date, and funding mechanisms such as the federal usage fee per gallon of gasoline, which remainsis still at the 1993 level of 18.4 cents per gallon, would likely need to be increased along with other measures to generate the funds needed.
In addition to public sector funding, the economies in the markets the Company serves, the price of liquid asphalt, the price of oil and its impact on customers' purchasing decisionsnatural gas, and the price of steel may each affect the Company'sCompany’s financial performance. Economic downturns generally result in decreased purchasing by the Company'sCompany’s customers, which, in turn, causes reductions in sales and increased pricing pressure on the Company'sCompany’s products. Rising interest rates also typically negatively impact customers'customers’ attitudes toward purchasing equipment. The Federal Reserve has maintained historically low interest rates in response to the economic downturn which began in 2009; however, the Federal Reserve has increased the Federal Funds Rate several times in recent quarters, beginning in December 2016, and future rate increases are expected; however, thewith a 0.2570 decrease occuring in July 2019. The current Federal Funds Rate is still considered in the historically low range.range and future rate changes may occur.
Significant portions of the Company'sCompany’s revenues from the Infrastructure Group relate to the sale of equipment involved in the production, handling, recycling or application of asphalt.asphalt mix. Liquid asphalt is a by-product of oil refining. An increase or decrease in the price of oil impacts the cost of asphalt, which couldis likely to alter demand for asphalt production and application, and therefore affect demand for certain Company products. While increasing oil prices may have a negative financial impact on many of the Company'sCompany’s customers, the Company'sCompany’s equipment can use a significant amount of recycled asphalt pavement, thereby partially mitigating the effect of increased oil prices on the final cost of asphalt for the customer. The Company continues to develop products and initiatives to reduce the amount of oil and related products required to produce asphalt. Oil price volatility makes it difficult to predict the costs of oil-based products used in road construction such as liquid asphalt and gasoline. Oil prices began risinghave routinely fluctuated in early 2016recent years and have continued their upward trend during much of 2017 and 2018, and fluctuations are expected to continue to fluctuate in the future. Minor fluctuations in oil prices should not have a significant impact on customers'customers’ buying decisions. Other factors such as political uncertainty in oil producing countries, interruptions in oil production due to disasters, whether natural or man-made, or other economic factors could significantly impact oil prices, which could negatively impact demand for the Company'sCompany’s products. The Company believes the continued funding of the FAST Act federal highway bill passed in December 2015, hastogether with the prospect of potential replacement funding, have a greater potential to impact the buying decisions of the Company'sCompany’s customers than does the fluctuation of oil prices in 2018.2019.
Contrary to the impact of oil prices on many of the Company'sCompany’s Infrastructure Group products as discussed above, the products manufactured by the Energy Group, which are used in drilling for oil and natural gas, in heaters for refineries and oil sands, and in double fluid pump trailers for fracking and oil and gas extraction, would benefit from higher oil and natural gas prices, to the extent that such higher prices lead to increased development in the oil and natural gas production industries. The Company believes further development of domestic oil and natural gas production capabilities is needed and would positively impact the demand for the Company'sCompany’s oil and gas related products.
Steel is a major component in the Company'sCompany’s equipment. Steel prices, rose substantially duringwhich declined slightly in the first halfsix months of 2018 but have stabilized since June 2018.2019, are expected to remain stable for the third quarter of 2019. The Company expects any near-termmoderate steel price increases to be relatively small asin the effectsfourth quarter of the 232 tariffs have largely been realized. Based on this and the Company's forward-looking contracts currently in place, the Company expects pricing to remain at current levels through the remainder of 2018.2019. The Company believes modest price increases are likely in early 2019 as mill orders activity remains strong. The Company continueswill continue to utilize forward-lookingforward looking contracts when it deems conditions are appropriate (with no minimum or specified quantity guarantees) coupled with advanced steel purchases to minimize the impact of any price increases. The Company will continue to review the trends in steel prices during the final quarter of 2018in 2019 and 2019 establish future contract pricing accordingly.
In addition to the factors stated above, many of the Company'sCompany’s markets are highly competitive, and its products compete worldwide with a number of other manufacturers and dealers that produce and sell similar products. From 2010 through mid-2012, a weak U.S. dollar, combined with improving economic conditions in certain foreign economies, had a positive impact on the Company'sCompany’s international sales. From mid-2012 through the third quarter of 2018, the strongThe continued strengthened U.S. dollar since mid-2012 has negatively impacted pricing in certain foreign markets the Company serves. The Company expects the U.S. dollar to remain strong as compared to historical rates in the near term relative to most foreign currencies. Increasing domestic interest rates or weakening economic conditions abroad could cause the U.S. dollar to further strengthen, above current values, which could negatively impact the Company'sCompany’s international sales.
In the United States and internationally, the Company'sCompany’s equipment is marketed directly to customers as well as through dealers. During 2017,2018, approximately 65% 60%of the Company'sCompany’s sales were to the end user. The Company expects this ratio to be between 60% and 70% for 2018.2019.
The Company is operated on a centrally led, but decentralized basis,, with a complete operating management team for each operating subsidiary. Finance, insurance, legal, shareholder relations, corporate accounting and other corporate matters are primarily managed at the corporate level (i.e., Astec Industries, Inc., the parent company). The engineering, design, sales, manufacturing and basic accounting functions are the responsibility of each individual subsidiary. Standard accounting procedures are prescribed and followed in all reporting.
The Company’s current profit sharing plans allow corporate officers, subsidiary presidents and other key management employees at each subsidiary have the opportunity to earn profit sharing incentives based upon the Company'sCompany’s and/or the individual groups or subsidiaries'subsidiaries’ return on capital employed, EBITDA margin and safety. Corporate officers'officers’ and subsidiary presidents'presidents’ awards, when calculated at targeted performance, are between 35% and 100% of their base salary, depending upon their responsibilities, and the plans allow for awards of up to 200% of target incentive compensation. Each subsidiary also has the opportunity to earn up to 10% of its after-tax profit as a profit-sharing incentive award to be paid to its non-management employees.
Under the Company'sThe Company’s current long-term incentive plans allow corporate officers, subsidiary presidents and other corporate or subsidiary management employees willto be awarded Restricted Stock Units ("RSUs"(“RSUs”) if certain goals are met based upon the Company'sCompany’s Total Shareholder'sShareholder’s Return ("TSR"(“TSR”) as compared to a peer group and the Company'sCompany’s pretax profit margin. The grant date value of corporate officers'officers’ and subsidiary presidents'presidents’ awards, when calculated at targeted performance, are between 20% and 100% of their base salary, depending upon their responsibilities, and the plans allow for awards of up to 200% of target incentive compensation. Additional RSUs may be granted to other key subsidiary management employees based upon individual subsidiary profits.
28Beginning in 2018 and continuing through mid-2019, the Company retained the services of a specialized consulting firm to assist with the accumulation of company-wide purchasing data and a system for maintaining similar data in the future for management to utilize in negotiations with suppliers or potential suppliers in order to obtain reduced prices on raw materials and equipment components purchased. The firm also assisted with the development of sales and operational planning procedures designed to achieve significant reductions in inventory levels maintained for normal production needs and to reduce existing excess inventories. The Company expects the results of these efforts to positively impact its gross margins and inventory levels in the remainder of 2019 and thereafter.
Results of Operations
Georgia Pellet Plant Agreement (Q2 2019)
The Company'sCompany manufactured its first wood pellet plant for a customer under a Company-financed arrangement whereby the Company deferred the recognition of revenue as payment under the arrangement was not assured. After considering the uncertainty of completing the sale to the customer due to its inability to obtain financing; the lack of success in attempting to market the plant to other pellet plant operators; the cost of repossessing the plant; and the Company’s decision to exit the pellet plant business line, the pellet plant inventory’s net realizable value was written down to zero in the fourth quarter of 2018. The Company ultimately sold the pellet plant to the original customer at a discounted sales price of $20,000 at the end of the second quarter of 2019. The sales agreement also included provisions to release the Company from any further financial obligations related to the plant. Sales related to this pellet plant sale are included in the results of operations for the three and six-month periods ending June 30, 2019 and are non-recurring. This pellet plant sale is referred to in this Quarterly Report as the Georgia Pellet Plant Sale.
Arkansas Pellet Plant Agreement (Q2 2018)
The Company’s sales contract with the purchaser of a large wood pellet plant in Arkansas, on which $143,300 of cumulative revenue (prior to the $75,315 charge discussed below) was recorded through the first six months ofJune 30, 2018 (2018 revenues were not material) based on the over-time method, contained certain production output and operational provisions, which if not timely met, could have resulted in the Company having to refund the purchase price to the customer. Additional contract provisions required the Company to compensate the customer for production shortfalls caused by the Company and other potential costs (depending on the market price of wood pellets). As the plant did not meet the production output and operational specifications by the deadline set forth in the contract (June 29, 2018), the Company entered into an agreement with the customer on July 20, 2018, whereby the Company agreed to paypaid its customer $68,000 over 120 days following execution of the agreement and to forgiveforgave $7,315 in accounts receivables to obtain a full release of all the Company'sCompany’s contractual obligations under the sales contract. The terms of the pellet plant agreement resulted in the Company'sCompany’s Infrastructure Group recording charges against sales of $75,315 and gross margins of $71,029 in the second quarter of 2018. The Company paidSuch charges are non-recurring and are referred to in this Quarterly Report as the scheduled $51,000 of the aforementioned $68,000 during the three months ended September 30, 2018, leaving a remaining liability of $17,000, which is scheduled to be paid in the fourth quarter of 2018. The pellet plant agreement also stipulates that the customer will pay the Company $7,000 if the wood pellet plant's performance satisfies certain emissions targets prior to May 1, 2019.Arkansas Pellet Plant Charges.
Net Sales
Net sales for the thirdsecond quarter of 2019 were $304,802 compared to $272,528 for the second quarter of 2018, were $256,613 compared to $252,054 for the third quarter of 2017, an increase of $4,559$32,274 or 1.8%11.8%. Sales are generated primarily from new equipment and parts sales to domestic and international customers. Sales forincreased in the thirdInfrastructure Group (due primarily to the Georgia Pellet Plant Sale in the second quarter of 2019 and the non-recurrence of the Arkansas Pellet Plant Charges from the second quarter of 2018 as compared to the third quarter of 2017 increaseddiscussed above) but decreased in the Aggregate and Mining Group and the Energy Group but decreased in the Infrastructure Group. Sales by RexCon, Inc., which was added to the Energy Group in October 2017, were $6,722Domestic sales for the three-month period ended September 30, 2018. During the thirdsecond quarter of 2017, the Company identified significant design issues at its customers' Georgia and Arkansas wood pellet plants. Due to the identification of these design issues, the Company increased its estimate of the remaining costs to complete each pellet plant order. As revenue on the Arkansas order was being recorded on the over-time method, the identification of the additional costs resulted in negative $13,405 pellet plant revenue being recorded in the third quarter of 2017. No pellet plant revenue was recorded in the third quarter of 2018. Domestic sales declined by 1.2% in the third quarter of 20182019 as compared to the thirdsecond quarter of 2017, with increased domestic sales2018 were negatively impacted by weakening demand and price competition for many of the Energy Group but decreased domestic sales byCompany’s products, especially in the Infrastructure Grouppaving, oil and the Aggregategas and Mining Group.aggregate markets. International sales in the thirdsecond quarter of 2018 increased 12.4%2019 decreased 15.3% as compared to the thirdsecond quarter of 2017, with increased international sales in the Infrastructure Group and the Aggregate and Mining Group but decreased international sales by the Energy Group. The Company's international backlog increased by 12.4% from September 30, 2017 to September 30, 2018, reflecting the continuing improvement in the Company's overall international business. This increased international order activity is attributable to improved global market conditions, the stabilization of the U.S. dollar in certain foreign markets in late 2017 and early 2018 and a slight recovery in the mining and oil and gas sectors, coupled with the Company's strategy of keeping its sales and service structure in place in international markets where future growth is anticipated. Parts sales for the third quarter of 2018 as compared to the third quarter of 2017 increased by 8.0% with growth in each of our reporting segments.2018. Sales reported by the Company'sCompany’s foreign subsidiaries in U.S. dollars for the thirdsecond quarter of 20182019 would have been $1,667$2,715 higher had second quarter 2019 foreign exchange rates for the third quarter of 2018 been the same as the thirdsecond quarter of 2017.2018 rates.
Net sales for the first ninesix months of 2019 were $630,582 compared to $597,981 for the first six months of 2018, were $854,595 compared to $872,364 for the first nine monthsan increase of 2017, a decrease of $17,769$32,601 or 2.0%5.5%. Sales are generated primarily from new equipment and parts sales to domestic and international customers. Sales forincreased in the first nine monthsInfrastructure Group (due primarily to the Georgia Pellet Plant Sale in the second quarter 2019 and the non-recurrence of the Arkansas Pellet Plant Charges from the second quarter of 2018 as compared to the first nine months of 2017 increaseddiscussed above) but decreased in the Aggregate and Mining Group and the Energy Group and decreased in the Infrastructure Group due primarily to the $75,315 charge against sales as a result of the pellet plant agreement discussed above. Pellet plantGroup. Domestic sales for the ninefirst six months ended September 30, 2017 were $2,370. Sales by RexCon, Inc., which was added to the Energy Group in October 2017, were $22,774 for the nine-month period ended September 30, 2018. Year to date domestic sales not related to pellet plants grew 6.8% in 2018of 2019 as compared to the prior year and continue to be positivelyfirst six months of 2018 were negatively impacted by the strong domestic economy, the effectsweakening demand and price competition for many of the long-term federal highway bill enactedCompany’s products, especially in December 2015the paving, oil and other stategas and local funding mechanisms.aggregate markets as well as weather related delays experienced by our customers at many of their job sites. International sales in the first ninesix months of 2018 grew a modest 0.8%2019 decreased 2.4% as compared to the first ninesix months of 2017. The Company's international backlog increased by 12.4% from September 30, 2017 to September 30, 2018, reflecting the continuing improvement in the Company's overall international business. This increased order activity is attributable to improved global market conditions, the stabilization of the U.S. dollar in certain foreign markets in late 2017 and early 2018 and a slight recovery in the mining and oil and gas sectors, coupled with the Company's strategy of keeping its sales and service structure in place in international markets where future growth is anticipated. Parts sales for the first nine months of 2018 as compared to the first nine months of 2017 increased 10.3%.2018. Sales reported by the Company'sCompany’s foreign subsidiaries in U.S. dollars for the first ninesix months of 20182019 would have been $1,639 lower$6,114 higher had thefirst six months 2019 foreign exchange rates for the first nine months of 2018 been the same as the first ninesix months of 2017.2018 rates.
Domestic sales for the thirdsecond quarter of 20182019 were $194,166$246,213 or 75.7%80.8% of consolidated net sales compared to $196,478$203,386 or 78.0%74.6% of consolidated net sales for the thirdsecond quarter of 2017, a decrease2018, an increase of $2,312$42,827 or 1.2%21.1%. Domestic sales for the thirdsecond quarter of 20182019 as compared to the thirdsecond quarter of 20172018 increased by $16,202 in the Energy Group but decreased $15,878$54,907 in the Infrastructure Group (including the results of the Georgia Pellet Plant Sale and $2,636the non-recurrence of the Arkansas Pellet Plant Charges discussed above) but decreased $9,553 in the Aggregate and Mining Group. Domestic sales byGroup and $2,527 in the Energy Group include $6,713 of sales by RexCon, which was acquired in October 2017.Group.
Domestic sales for the first ninesix months of 20182019 were $667,630$509,042 or 78.1%80.7% of consolidated net sales compared to $686,883$473,464 or 78.7%79.2% of consolidated net sales for the first ninesix months of 2017, a decrease2018, an increase of $19,253$35,578 or 2.8%7.5%. Domestic sales for the first ninesix months of 20182019 as compared to the first ninesix months of 20172018 increased by $16,202$50,966 in the Infrastructure Group (including the results of the Georgia Pellet Plant Sale and the non-recurrence of the Arkansas Pellet Plant Charges discussed above) and $2,287 in the Energy Group but decreased $17,675 in the Aggregate and Mining Group.
International sales for the second quarter of 2019 were $58,589 or 19.2% of consolidated net sales compared to $69,142 or 25.4% of consolidated net sales for the second quarter of 2018, a decrease of $10,553 or 15.3%. International sales for the second quarter of 2019 as compared to the second quarter of 2018 increased $93 in the Aggregate and Mining Group but decreased by $5,772 in the Energy Group and $4,874 in the Infrastructure Group. Decreases in international sales in Canada, Central America, South America, Africa, the Middle East and China/Japan/Korea were partially offset by increases in sales in Europe and Asia.
International sales for the first six months of 2019 were $121,540 or 19.3% of consolidated net sales compared to $124,517 or 20.8% of consolidated net sales for the first six months of 2018, a decrease of $2,977 or 2.4%. International sales for the first six months of 2019 as compared to the first six months of 2018 decreased $5,623 in the Energy Group and $4,321 in the Aggregate and Mining Group but increased by $6,967 in the Infrastructure Group. Decreases in international sales in Africa, South America, Central America, China/Japan/Korea and the Middle East were partially offset by increases in sales in Asia, Australia and Canada.
Parts sales for the second quarter of 2019 were $74,081 compared to $78,719 for the second quarter of 2018, a decrease of $4,638 or 5.9%. Parts sales decreased $3,609 in the Infrastructure Group, $1,007 in the Energy Group and $22 in the Aggregate and Mining Group.
Parts sales for the first six months of 2019 were $166,682 compared to $166,804 for the first six months of 2018, a decrease of $122 or 0.1%. Parts sales decreased $1,320 in the Infrastructure Group but increased $1,192 in the Aggregate and Mining Group and $39,408 in the Energy Group but decreased $74,861 in the Infrastructure Group (after giving effect to the $75,315 charge against sales due to the pellet plant agreement discussed above). Domestic sales by the Energy Group include $22,467 of sales by RexCon, which was acquired in October 2017.
International sales for the third quarter of 2018 were $62,447 or 24.3% of consolidated net sales compared to $55,576 or 22.0% of consolidated net sales for the third quarter of 2017, an increase of $6,871 or 12.4%. International sales for the third quarter of 2018 as compared to the third quarter of 2017 increased by $4,897 in the Aggregate and Mining Group and $4,265 in the Infrastructure Group, but decreased $2,291 in the Energy Group. Increases in international sales in South America, Canada, Australia, the Middle East and Mexico were partially offset by decreases in sales in Brazil, Post-Soviet States, Asia and China.
International sales for the first nine months of 2018 were $186,965 or 21.9% of consolidated net sales compared to $185,481 or 21.3% of consolidated net sales for the first nine months of 2017, an increase of $1,484 or 0.8%. International sales for the first nine months of 2018 as compared to the first nine months of 2017 decreased $14,805 in the Infrastructure Group but increased $13,693 in the Aggregate and Mining Group and $2,594 in the Energy Group. Increases in international sales in South America, the Middle East, Canada and Africa were partially offset by decreases in sales in Russia, Asia, China, Post-Soviet States and Brazil.
Parts sales for the third quarter of 2018 were $69,420 compared to $64,299 for the third quarter of 2017, an increase of $5,121 or 8.0%. Parts sales as a percentage of net sales increased 160 basis points to 27.1% in the third quarter of 2018 compared to 25.5% in the third quarter of 2017. Parts sales increased $874 in the Infrastructure Group, $2,512 in the Aggregate and Mining Group and $1,735$6 in the Energy Group.
Parts sales for the first nine months of 2018 were $236,224 compared to $214,083 for the first nine months of 2017, an increase of $22,141 or 10.3%. Parts sales as a percentage of net sales increased 310 basis points to 27.6% in the first nine months of 2018 compared to 24.5% in the first nine months of 2017. Parts sales increased $8,934 in the Aggregate and Mining Group, $7,392 in the Energy Group and $5,815 in the Infrastructure Group.
Gross Profit
Consolidated gross profit increased $19,200 or 49.1% to $58,284 for the thirdsecond quarter of 2019 was $83,450 compared to $1,108 for the second quarter of 2018, compared to $39,084 foran increase of $82,342. Second quarter 2019 gross profit was impacted by the thirdGeorgia Pellet Plant Sale, which resulted in $20,000 of gross margin in the quarter as the related inventory values had been written off in 2018 as discussed above. Second quarter 2018 gross profit was impacted by the Arkansas Pellet Plant Charges discussed above, which resulted in a decline in gross profit of 2017.$71,029. Gross marginprofit as a percentage of sales increased 720 basis points to 22.7%27.4% for the thirdsecond quarter of 2019 compared to 0.4% for the second quarter of 2018 compareddue primarily to 15.5% for the thirdeffects of the Georgia Pellet Plant Sale in the second quarter of 2017. During2019 and the third quarter of 2017, the Company identified significant design issues at its customers' Georgia and Arkansas wood pellet plants. Due to the identification of the design issues, the Company increased its estimate of the remaining costs to complete both plants which resulted in negative $22,738 gross margin being recorded on the two ordersPellet Plant Charges in the third quarter of 2017. RexCon, Inc. contributed $1,183 of gross profit in the thirdsecond quarter of 2018.
Consolidated gross profit decreased $42,981 or 23.8% to $137,398 for the first ninesix months of 2019 was $159,976 compared to $79,113 for the first six months of 2018, compared to $180,379 for thean increase of $80,863. The first ninesix months of 2017. Gross margin as a percentage of sales decreased 460 basis points to 16.1% for the first nine months of 2018 compared to 20.7% for the first nine months of 2017. Gross2019 gross profit for the first nine months of 2018 was impacted by the $75,315 charge to sales due toGeorgia Pellet Plant Sale, which resulted in $20,000 of gross margin in the pellet plant agreementperiod as the related inventory values had been written off in 2018 as discussed above. The first six months of 2018 gross profit was impacted by the Arkansas Pellet Plant Charges discussed above, which resulted in a decreasedecline in gross profit of $71,029. Due Gross profit as a percentage of sales increased to the issues discussed above and cost overruns on the construction portion of the Arkansas order during the second quarter of 2017, gross margin on pellet plant orders25.4% for the first ninesix months of 2017 were negative $27,098. RexCon, Inc. contributed $4,8652019 compared to 13.2% for the first six months of gross profit2018 due primarily to the effects of the Georgia Pellet Plant Sale in the first ninesix months of 2019 and the Arkansas Pellet Plant Charges in the first six months of 2018.
Selling, General, Administrative and Engineering Expenses
Selling, general, administrative and engineering expenses increased $5,560 to $51,054 or 19.9%was $52,969 for the second quarter of net sales2019 compared to $45,494 or 18.0% of net sales$51,263 for the thirdsecond quarter of 2017.2018, an increase of $1,706 or 3.3%. The overall increase is due primarilywas attributable to a $1,081 increase in selling expense (primarily increased wages ($651) and commissions ($683)), a $5,110$3,211 increase in general and administrative expensesexpense (primarily increaseddue to a $1,998 increase in consulting and fees/outside services, fees ($2,003),including the procurement and inventory level consulting services mentioned above; a $618 increase in legal and professional fees ($1,121), airplanefees; an increase of $561 in annual incentive and stock incentive plan expense; an increase of $465 in bad debt expense; and an increase of $268 in corporate procurement expenses; partially offset by a $696 reduction in plane maintenance costs ($656),costs) and reductions in selling expenses of $867 (primarily due to reductions in employee wages ($463) and accounting fees ($786))commissions) and a reduction in engineering expenses of $631. RexCon, which was acquired in October 2017, incurred $974 of selling, general, administrative and engineering$638. The above described expenses infor the thirdsecond quarter of 2018.2019 includes $657 of expenses incurred by the Company’s start-up sales operations in Chile.
Selling, general, administrative and engineering expenses increased $11,560 to $154,396 or 18.1% of net sales (or 16.6% of net sales excluding the impact of the $75,315 pellet plant agreement charge against sales)was $111,316 for the first ninesix months of 2019 compared to $103,341 for the first six months of 2018, compared to $142,836an increase of $7,975 or 16.4% of net sales for the first nine months of 2017.7.7%. The overall increase is due primarilywas attributable to a $1,189 increase in selling expense (primarily increased wages ($1,143), exhibit costs ($1,323), amortization ($733) and commissions of ($1,360) partially offset by a reduction in ConExpo related costs ($4,365)), a $10,956$9,438 increase in general and administrative expensesexpense (primarily increaseddue to a $5,085 increase in consulting and fees/outside services, fees ($2,976),including the procurement and inventory level consulting services mentioned above; a $1,396 increase in legal and professional fees ($2,351)fees; a $925 increase in annual incentive and stock incentive plan expense; a $688 increase in bad debt expense; a $433 increase in T&E expense and a $396 increase in recruitment and relocation expenses), airplane maintenance costs ($1,491), wages ($2,257), accounting fees ($2,033) and depreciation ($657)which were partially offset by a $1,103 reduction in employee incentive benefits ($1,147))selling expenses (primarily a $949 decrease in T&E and a $528 reduction in legal and professional fees) and a $360 reduction in engineering expenses. The above described expenses for the second quarter of $585. RexCon, which was acquired2019 includes $1,218 of expenses incurred by the Company’s start-up sales operations in October 2017, incurred $2,866 of selling, general, administrative and engineering expenses in the first nine months of 2018.Chile.
Interest Expense
Interest expense for the thirdsecond quarter of 2019 was $484 as compared to $168 for the second quarter of 2018, decreased $18 to $170 from $188 for the third quarter of 2017, primarily due to a reduction in interest at the Company's Brazilian subsidiary, partially offset by an increase inof $316, due primarily to interest on increased borrowings on the Company'sCompany’s domestic line of credit.
Interest expense for the first ninesix months of 2019 was $1,131 as compared to $318 for the first six months of 2018, decreased $150 to $488 from $638 for the first nine months of 2017, primarily due to a reduction in interest at the Company's Brazilian and South African subsidiaries, partially offset by an increase inof $813, due primarily to interest on increased borrowings on the Company'sCompany’s domestic line of credit.
Other Income, Net of Expenses
Other income, net of expenses was $23$372 for the thirdsecond quarter of 2019 compared to $1,052 for the second quarter of 2018, compared to $1,113 for the third quarter of 2017, a decrease of $1,090$680, primarily due primarily to a $510 reduction$635 insurance recovery in interest income and $506 related to license fee income which was included in other income in 2017 but included in net sales in 2018 due to the adoptionsecond quarter of ASU No. 2014-09 regarding revenue recognition.2018.
Other income, net of expenses was $1,536$839 for the first ninesix months of 2019 compared to $1,513 for the first six months of 2018, compared to $1,886 for the first nine months of 2017, a decrease of $350. The decrease was$674, primarily due primarily to a $389 reduction in interest income and the reclassification of license fee income from this category in 2017 to net sales in 2018, partially offset by a $635 insurance recovery duringin the first nine monthssecond quarter of 2018.
Income Tax Expense
The Company'sCompany’s combined effective income tax rate was 2.5%23.1% for the thirdsecond quarter of 20182019 compared to 50.7%17.3% for the thirdsecond quarter of 2017.2018. The tax rate for 2019 returned to a more normalized rate as compared to the third quarter ofrates in 2018, was favorablywhich were impacted by the passagelarge operating loss resulting primarily from the Arkansas Pellet Plant Charges and the initial booking of the provisions of the Tax Cuts and Jobs Act of 2017 (which we refer to as the Tax Act) which lowered the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. The Tax Act also contained provisions partially offsetting the tax rate decline including the elimination of the Domestic Production Activities Deduction and a new territorial tax on foreign earnings. The tax rate for the third quarter of 2018 includes benefits identified during the gathering of information coincident with the filing of the Company's 2017 tax return and tax planning efforts related to research and development tax credits. The unusually high tax rate for the third quarter of 2017 is due to the high percentage (as compared to the pretax loss for the third quarter of 2017) impact of the Company's federal domestic production activities deductions, research and development tax credits and a favorable U.S. federal return to book adjustment on the Company's 2016 return. See Note 10, Income Taxes, of the Notes to Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information.2017.
The Company'sCompany’s combined effective income tax rate was 14.4%22.3% for the first ninesix months of 20182019 compared to 31.1%10.8% for the first ninesix months of 2017.2018. The decline in tax rates is duerate for 2019 returned to a more normalized rate as compared to the passagerates in 2018 which were impacted by the large operating loss resulting primarily from the Arkansas Pellet Plant Charges and the initial booking of the provisions of the Tax Cuts and Jobs Act which lowered the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, favorable benefits recognized in the third quarter of 2018 related to benefits identified during the gather of information coincident with the filing of the Company's 2017 tax return and tax planning efforts related to the research and development tax credits discussed above. The Tax Act also contained provisions partially offsetting the tax rate decline including the elimination of the Domestic Production Activities Deduction and a new territorial tax on foreign earnings. See Note 10,2017.
Net Income Taxes of the Notes to Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information.
Net Income
The Company had net income attributable to controlling interest of $6,995$23,377 for the thirdsecond quarter of 20182019 compared to a net loss attributable to controlling interest of $2,667$40,674 for the third quarter of 2017, an improvement of $9,662. Net income (loss) attributable to controlling interest per diluted share was $0.30 for the thirdsecond quarter of 2018, compared to $(0.12) for the thirdan increase of $64,051. The second quarter of 2017,2019 includes an improvement in earnings per shareafter tax income of $0.42. Diluted shares outstanding for$15,273 related to the quarters ended September 30, 2018 and 2017 were 23,084 and 23,029, respectively.
The Company had a net loss attributable to controlling interest of $13,411 forGeorgia Pellet Plant Sale while the first nine months of 2018 compared to net income attributable to controlling interest of $26,873 for the first nine months of 2017, a decline in earnings of $40,284. The nine monthsecond quarter 2018 net loss includes an after-tax charge of $57,182 due to the pellet plant agreementArkansas Pellet Plant Charges, as discussed above. Net income (loss) attributable to controlling interest per diluted share was $(0.58)$1.03 for the first nine monthssecond quarter of 20182019 compared to $1.16 for the first nine months of 2017, a decline in earningsnet loss per share of $1.74.$1.76 for the second quarter of 2018, an increase of $2.79. Diluted shares outstanding for the ninequarters ended June 30, 2019 and 2018 were 22,667 and 23,061, respectively.
The Company had net income attributable to controlling interest of $37,651 for the first six months of 2019 compared to a net loss attributable to controlling interest of $20,407 for the first six months of 2018, an increase of $58,058. The first six months of 2019 includes an after tax income of $15,273 related to the Georgia Pellet Plant Sale while the net loss for the first six months of 2018 includes an after-tax charge of $57,182 due to the Arkansas Pellet Plant Charges, as discussed above. Net income attributable to controlling interest per diluted share was $1.66 for the first six months of 2019 compared to a net loss per share of $0.89 for the first six months of 2018, an increase of $2.55. Diluted shares outstanding for the six months ended SeptemberJune 30, 2019 and 2018 were 22,656 and 2017 were 23,009 and 23,180,23,053, respectively.
Dividends
In February 2013, the Company'sCompany’s Board of Directors approved a dividend policy pursuant to which the Company began paying a quarterly $0.10 per share dividend on its common stock beginning in the third quarter of 2013. In July 2018, the Company'sCompany’s Board of Directors approved a revised quarterly dividend of $0.11 per share, a 10% increase. The actual amount of future quarterly dividends, if any, will be based upon the Company'sCompany’s financial position, results of operations, cash flows, capital requirements and restrictions under the Company'sCompany’s existing credit agreement, among other factors. The Board retained the power to modify, suspend or cancel the Company'sCompany’s dividend policy in any manner and at any time it deems necessary or appropriate in the future. The Company paid quarterly dividends of $0.11 per common share to shareholders in the first and second quarters of 2019 and paid quarterly dividends of $0.10 per common share to shareholders in each quarter of 2017, $0.10 in each of the first twoand second quarters of 2018 and $0.11 in the third quarter of 2018.
Stock Buy Back Program
On July 29, 2018, the Company's Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $150,000 of its common stock. Under the share repurchase plan, the Company may purchase common stock in open market transactions, block or privately negotiated transactions, and may from time to time purchase shares pursuant to a trading plan in accordance with Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934, as amended, or by any combination of such methods. The number of shares to be purchased and the timing of the purchases are based on a variety of factors. Through September 30, 2018, the Company has repurchased 297 shares of its stock at total cost of $13,914 under this program. No time limit was set for completion of repurchases under the authorization and the program may be suspended or discontinued at any time.
Backlog
The backlog of orders as of SeptemberJune 30, 20182019 was $308,582$246,092 compared to $386,471 (adjusted for the acquisition of Rex-Con)$302,892 as of SeptemberJune 30, 2017,2018, a decrease of $77,889$56,800 or 20.2%18.8%. Domestic backlogs decreased $87,282$56,311 or 28.1%25.8% while international backlogs increased $9,393decreased $489 or 12.4%0.6%. The September 30, 2018decline in backlog was comprisedexperienced by each of 72.3% domestic orders and 27.7% international orders, as compared to 80.3% domestic orders and 19.7% international orders as of September 30, 2017. Includedthe segments ($11,033 in the September 30, 2017 backlog is approximately $60,000 for a three-line pellet plant from one customer under a Company-financed arrangement whereby the Company expected to record the related revenues when payment became assured. While the plant is currently operational, the customer has expressed its desire to further modify its obligations under the arrangement. As a result, the Company removed the order from its backlogInfrastructure Group; $40,438 in the second quarter of 2018Aggregate and Mining Group; and $5,329 in the parties are jointly marketing the plant to new potential buyers.
Energy Group). The Company is unable to determine whether the changes in backlogs (ignoring the impact of the removal of the $60,000 pellet plant order discussed above) were experienced by the industry as a whole; however, the Company believes the changes in backlogs reflect the current economic conditions the industry is experiencing.
Employees
Due to the recent reductions in backlogs and manufacturing activity, the Company made employee headcount reductions during the first six months of 2019 (from 4,401 employees at December 31, 2018 to 4,183 at June 30, 2019) and will continue to evaluate future staffing needs as sales and production levels dictate.
Segment Net Sales-Quarter:
| | | Three Months Ended
September 30, | | | | | | Three Months Ended June 30, | | | | |
| | | 2018 | | | 2017 | | | $ Change | | | % Change | | | 2019 | | | 2018 | | | $ Change | | | % Change | |
| Infrastructure Group | | $ | 87,063 | | | $ | 98,676 | | | $ | (11,613 | ) | | | (11.8 | )% | | $ | 133,235 | | | $ | 83,202 | | | $ | 50,033 | | | | 60.1 | % |
| Aggregate and Mining Group | | | 101,735 | | | | 99,474 | | | | 2,261 | | | | 2.3 | % | | | 106,837 | | | | 116,297 | | | | (9,460 | ) | | | (8.1 | )% |
| Energy Group | | | 67,815 | | | | 53,904 | | | | 13,911 | | | | 25.8 | % | | | 64,730 | | | | 73,029 | | | | (8,299 | ) | | | (11.4 | )% |
| | | | | | | | | | | | | | | | | | |
Infrastructure Group:Group: Sales in this group were $87,063$133,235 for the thirdsecond quarter of 20182019 (including $20,000 from the Georgia Pellet Plant Sale discussed above) compared to $98,676$83,202 (after the $75,315 reduction due to the Arkansas Pellet Plant Charges discussed above) for the same period in 2017, a decrease2018, an increase of $11,613$50,033 or 11.8%60.1%. Domestic sales for the Infrastructure Group decreased $15,878increased $54,907 or 19.0%84.4% for the thirdsecond quarter of 20182019 compared to the same period in 20172018. Excluding the impacts of the Georgia Pellet Plant Sale and the Arkansas Pellet Plant Charges (which are included in domestic sales), domestic sales declined by $40,408 for the second quarter of 2019 as compared to the second quarter of 2018 due to reduced volumes on bothsignificant volume reductions in asphalt plantsplant and mobile asphalt equipment. Duringequipment sales. The Company believes the third quarter of 2017, the Company identified significant design issues at its customers' Georgia and Arkansas wood pellet plants. No revenues have been recorded on the Georgia plant to date; however, the Company recorded revenue on the Arkansas plant order under the over-time method. Duereduction in domestic sales is due to the identificationlack of Congressional action on a highway funding bill to extend or replace the design issuesFast Act which provides federal funding through September 2020; competitive pricing pressures in the third quarter of 2017, the Company increased its estimate of the remaining costsmarket; and customers postponing orders due to complete the Arkansas pellet plant order, which resultedweather related delays in negative $13,405 pellet plant revenue for the third quarter of 2017. No pellet plant sales were recorded in the third quarter of 2018. early 2019 at customer job sites. International sales for the Infrastructure Group increased $4,265decreased $4,874 or 28.2%26.9% for the thirdsecond quarter of 20182019 compared to the same period in 20172018 due primarily to an increasea decline in asphalt plant sales. The group's international backlog remained relatively flat from September 30, 2017 to September 30, 2018. The Company's internationaldecline in sales efforts are continuing to benefit from improved highway building activities and global market conditions in certain foreign countries, while still being hampered by the continuing strong U.S. dollar, freight costs on overseas shipments and increased raw material prices in the United States. Sales increases between periods occurred primarily in Mexico, Canada and Australia, offset in part by decreased sales in the Middle East, Asia and Japan.Canada. Parts sales for the Infrastructure Group increased 3.3%decreased 10.7% for the thirdsecond quarter of 20182019 as compared to the same period in 2017.2018.
Aggregate and Mining Group:Group: Sales in this group were $101,735$106,837 for the thirdsecond quarter of 20182019 compared to $99,474$116,297 for the same period in 2017, an increase2018, a decrease of $2,261$9,460 or 2.3%8.1%. Domestic sales for the Aggregate and Mining Group decreased by $2,636$9,553 or 3.9%12.1% for the thirdsecond quarter of 20182019 compared to the same period in 20172018 due primarily to decreased sales into the Company’s traditional rock quarry markets resulting from decreased rental activity (which typically results in subsequent equipment sales) by many of the Company's larger aggregate processing equipment lines along withour distributors and a small decrease in miningshortened construction period due to weather related sales.issues. International sales for the Aggregate and Mining Group increased $4,897remained constant with a minor increase of $93 or 15.5%0.2% in the thirdsecond quarter of 20182019 compared to the same period in 2017 due to improved economies in many international markets and improvements in the mining sector, coupled with the Company's continued international sales efforts and improved sales by the Company's Northern Ireland subsidiary.2018. International sales increases between periods in the Middle East, South America (excluding Brazil) and Europe were partially offset by sales decreasesdeclines in Post-Soviet states, AsiaCentral America, South America and Brazil.the Middle East. Parts sales for this group increased 9.2%remained constant for the thirdsecond quarter of 20182019 compared to the same period in 2017.2018 with a minor decrease of $22.
Energy Group:Group: Sales in this group were $67,815$64,730 for the thirdsecond quarter of 20182019 compared to $53,904$73,029 for the same period in 2017, an increase2018, a decrease of $13,911$8,299 or 25.8%11.4%. Domestic sales for the Energy Group increased $16,202decreased $2,527 or 36.0%4.3% for the thirdsecond quarter of 20182019 compared to the same period in 2017. Domestic2018 due primarily to decreased sales were favorably impacted by the $6,713 of domesticwood chipper sales by RexCon, Inc. (which was acquiredPeterson as well as decreased industrial boiler sales by Heatec due to a slowdown in October 2017)the asphalt and improved sales of industrial heaters/boilers and double pumpers for the oil and gas industries and wood chippers and grinders.industries. These reduced sales were partially offset by increased concrete plant accessories sales by RexCon. International sales for the Energy Group decreased $2,291$5,772 or 25.6% for the third quarter of 2018 as42.4% when compared to the thirdsecond quarter of 2017 due primarily to decreased sales of industrial burners.2018. Sales decreases occurred primarily in China, the Middle EastChina/Japan/Korea, South America and Brazil.Africa. Parts sales for this group increased 16.8%decreased 6.8% for the thirdsecond quarter of 20182019 compared to the same period in 2017, with 66.2% of the increase attributable2018 due primarily to decreased sales by RexCon, Inc.the Company’s GEFCO subsidiary, which was impacted by a large parts order to one customer during the second quarter of 2018.
Segment Net Sales-NineSales-Six Months:
| | | Nine Months Ended
September 30, | | | | | | Six Months Ended June 30, | | | | |
| | | 2018 | | | 2017 | | | $ Change | | | % Change | | | 2019 | | | 2018 | | | $ Change | | | % Change | |
| Infrastructure Group | | $ | 317,359 | | | $ | 407,025 | | | $ | (89,666 | ) | | | (22.0 | )% | | $ | 288,229 | | | $ | 230,296 | | | $ | 57,933 | | | | 25.2 | % |
| Aggregate and Mining Group | | | 337,100 | | | | 307,205 | | | | 29,895 | | | | 9.7 | % | | | 213,368 | | | | 235,364 | | | | (21,996 | ) | | | (9.3 | )% |
| Energy Group | | | 200,136 | | | | 158,134 | | | | 42,002 | | | | 26.6 | % | | | 128,985 | | | | 132,321 | | | | (3,336 | ) | | | (2.5 | )% |
| | | | | | | | | | | | | | | | | | |
Infrastructure Group:Group: Sales in this group were $317,359$288,229 for the first ninesix months of 20182019 (including $20,000 from the Georgia Pellet Plant Sale discussed above) compared to $407,025$230,296 (after the $75,315 reduction due to the Arkansas Pellet Plant Charges discussed above) for the same period in 2017, a decrease2018, an increase of $89,666$57,933 or 22.0%25.2%. Domestic sales for the Infrastructure Group decreased $74,861increased $50,966 or 21.9%25.5% for the first ninesix months of 20182019 compared to the same period in 2017 due to a one-time $75,315 charge against2018. Excluding the impact of the Georgia Pellet Plant Sale and the Arkansas Pellet Plant Charges (which are included in domestic sales), domestic sales resulting from the pellet plant agreement discussed above. Pellet plant sales for 2017 were $2,370declined by $44,349 for the first ninesix months of 2017.2019 as compared to the first six months of 2018 due to significant volume reductions in asphalt plant and mobile asphalt equipment sales. The Company believes the reduction in domestic sales is due to the lack of Congressional action on a highway funding bill to extend or replace the Fast Act which provides federal funding through September 2020; competitive pricing pressures in the market; and customers postponing orders due to weather related delays in early 2019 on customer job sites. International sales for the Infrastructure Group decreased $14,805increased $6,967 or 22.8%22.7% for the first ninesix months of 20182019 compared to the same period in 20172018 due primarily to decreasesincreases in mobile asphalt equipment and asphalt plant sales. International sales partially offset by increased sales by the Company-owned dealership in Australia. Mobile equipment sales for the first nine months of 2017 were favorably impacted by initial purchases from new Company dealers added in certain foreign territories as the Company modified its sales strategy from a direct sales model to selling its mobile equipment through dealers in select territories where historical direct sales efforts had yielded less than desired volumes. While first nine months international sales declined year over year, the group's international backlog remained relatively flat from September 30, 2017 to September 30, 2018. The Company's international sales efforts continue to benefit from improved highway building activities and improved global market conditions in certain foreign countries. Future international sales, which may be adversely impacted by raw material price increases in the United States, are expected to be favorably impacted by equipment modifications currently being designed to better meet the needs of certain foreign markets. Sales decreases between periods occurred primarily in Russia,Central America, Canada, MexicoAustralia and the West Indies and were partially offset by improveda reduction in sales in Australia.into Europe. Parts sales for the Infrastructure Group increased 5.7%decreased 1.7% for the first ninesix months of 20182019 compared to the same period in 2017.2018 due primarily to a reduction in asphalt plant related parts.
Aggregate and Mining Group:Group: Sales in this group were $337,100$213,368 for the first ninesix months of 20182019 compared to $307,205$235,364 for the same period in 2017, an increase2018, a decrease of $29,895$21,996 or 9.7%9.3%. Domestic sales for the Aggregate and Mining Group increaseddecreased by $16,202$17,675 or 7.6%10.9% for the first ninesix months of 20182019 compared to the same period in 20172018 due primarily to increaseddecreased sales into the Company'sCompany’s traditional rock quarry markets as well as improved sales into the mining sector, partially offsetresulting from decreased rental activity (which typically results in subsequent equipment sales) by many of our distributors and a reduction in the Company's larger aggregate processing equipment.shortened construction period due to weather related issues. International sales for the Aggregate and Mining Group increased $13,693decreased $4,321 or 14.4%5.9% in the first ninesix months of 20182019 compared to the same period in 2017 due to improved sales of the Company's equipment for both the aggregate processing and mining industries as a result of improved economies in many international markets, improvement in the mining sector, the Company's continued international sales efforts and improved sales by the Company's Northern Ireland subsidiary.2018. International sales increasesdecreases between periods occurred primarily in SouthCentral America, Africa, and the Middle East Mexico, Africa, Europe and Russia were partially offset by sales decreasesincreases in Asia and Post-Soviet States.Canada. Parts sales for this group increased 11.2%2.0% for the first ninesix months of 20182019 compared to the same period in 2017.2018.
Energy Group:Group: Sales in this group were $200,136$128,985 for the first ninesix months of 20182019 compared to $158,134$132,321 for the same period in 2017, an increase2018, a decrease of $42,002$3,336 or 26.6%2.5%. Domestic sales for the Energy Group increased $39,408$2,287 or 29.6%2.1% for the first ninesix months of 20182019 compared to the same period in 2017. Domestic sales were favorably impacted by the $22,467 of domestic2018 due primarily to increased equipment sales by RexCon, Inc. (which was acquired in October 2017)GEFCO and improved sales of industrial heaters/boilers and double pumpers for the oil and gas industries,Heatec, partially offset by a reduction in wood chippers and grinderequipment sales in early 2018 related to the required conversion from Tier II to Tier IV engines.by Peterson. International sales for the Energy Group increased $2,594decreased $5,623 or 10.3% due primarily26.6% when compared to increases in salesthe first six months of industrial heaters/boilers and other equipment for the oil and gas industries and wood chipping and grinding equipment, partially offset by a reduction in sales of industrial burners.2018. Sales increases occurringdecreases occurred primarily in Canada and South America (excluding Brazil) were partially offset by decreased sales in Australia, China, Brazil and the Middle East.Africa. Parts sales for this group increased 22.3%remained relatively flat for the first ninesix months of 20182019 compared to the same period in 2017,2018, with 57.2%a minor decrease of the growth being from sales by RexCon, Inc.$121.
Segment Profit (Loss)-Quarter:-Quarter:
| | | Three Months Ended
September 30, | | | | | | Three Months Ended June 30, | | | | |
| | | 2018 | | | 2017 | | | $ Change | | | % Change | | | 2019 | | | 2018 | | | $ Change | | | % Change | |
| Infrastructure Group | | $ | 4,761 | | | $ | (12,529 | ) | | $ | 17,290 | | | | 138.0 | % | | $ | 24,445 | | | $ | (62,734 | ) | | $ | 87,179 | | | | 139.0 | % |
| Aggregate and Mining Group | | | 9,011 | | | | 9,565 | | | | (554 | ) | | | (5.8 | )% | | | 8,489 | | | | 12,548 | | | | (4,059 | ) | | | (32.3 | )% |
| Energy Group | | | 3,318 | | | | 4,460 | | | | (1,142 | ) | | | (25.6 | )% | | | 3,138 | | | | 8,477 | | | | (5,339 | ) | | | (63.0 | )% |
| Corporate | | | (9,778 | ) | | | (2,975 | ) | | | (6,803 | ) | | | (228.7 | )% | | | (13,220 | ) | | | 596 | | | | (13,816 | ) | | | (2,318.1 | )% |
Infrastructure Group:Group: Segment profit for the Infrastructure Group was $4,761income of $24,445 for the thirdsecond quarter of 20182019 compared to a segment loss of $12,529$62,734 for the same period in 2017,2018, an improvementincrease in earnings of $17,290. During the third quarter of 2017, the Company identified significant design issues at its customers' Georgia and Arkansas wood pellet plants. No revenues have been recorded to date related to the Georgia plant order; however, the Company recorded revenue on the Arkansas plant order under the over-time method. Due to the identification of the design issues in the third quarter of 2017, the Company increased its estimate of the remaining costs to complete the orders for both pellet plants which resulted in negative $22,738 pellet plant$87,179 or 139.0%. The segment gross profit for the thirdsecond quarter of 2017. Excluding2019 includes $20,000 from the impact of pellet plant sales and margins in 2017,Georgia Pellet Plant Sale while the segment gross margins remained relatively constant between years at 21.4%loss for the thirdsecond quarter of 2018 includes a $71,029 charge against gross profit due to the Arkansas Pellet Plant Charges, as compared to 21.9%discussed above. Gross margins for the thirdsegment’s non-pellet related sales increased from 14.6% for the second quarter of 2017. Total segment profits were negatively2018 to 19.9% in the second quarter of 2019. Segment profit between periods was also impacted by the $11,613 reduction in sales between periodsincreased state income tax expense ($3,091) due to increased earnings and an increase in selling,increased general and administrative expenses of $788. Engineering expenses declined by $732 in the third quarter of 2018 as compared to the same period in 2017.($1,046).
Aggregate and Mining Group:Group: Segment profit for the Aggregate and Mining Group was $9,011$8,489 for the thirdsecond quarter of 20182019 compared to $9,565$12,548 for the same period in 2017,2018, a decrease of $554$4,059 or 5.8%32.3%. Gross margins remained relatively constant between periods at 23.9% for the third quarter of 2018 as compared to 24.0% for the third quarter of 2017. The slight declinedecrease in segment profits between years isperiods resulted from a decrease in gross profit of $3,549 due primarily to decreased sales of $9,460 between periods. Gross margins dropped 110 basis points to 23.9% for the second quarter of 2019 compared to 25.0% for the second quarter of 2018 due primarily to overhead absorption issues related to the reduced production volume. Segment profits were also negatively impacted by an $800 increase in selling, general and administrative expenses offset by a $292 reduction in engineering expenses and gross profits on the $2,261 increase in sales between periods.($1,009).
Energy Group:Group: Segment profit for the Energy Group was $3,318$3,138 for the thirdsecond quarter of 20182019 compared to $4,460$8,477 for the same period in 2017,2018, a decrease of $1,142$5,339 or 25.6%63.0%. The Energy Group's gross profit increased $1,860 between periods due to profits on a $13,911 increase in sales, offset by a 240 basis point decrease in gross margins. The decline in gross margins between periods was primarily due to a $1,795 increase in unabsorbed overhead for the third quarter of 2018 as compared to the third quarter of 2017. Segment profits were negatively impacted by a $4,621 decrease in gross profit between periods from decreased sales of $8,299 along with the impact of a 360 basis point decrease in gross margin. The reduction in gross margins from 27.1% for the second quarter of 2018 to 23.5% for the second quarter of 2019 was primarily due to overhead absorption issues related to the reduced production volume. Total selling, general, administrative and engineering expenses remained relatively flat between periods with increases in selling, general and administrative expenses of $2,267 (of which $915 was incurred by RexCon)($701) and engineering expenses of $393.($149) offset by decreased selling expenses ($788).
Corporate:Corporate: Corporate operations resulted inhad a loss of $9,778$13,220 for the thirdsecond quarter of 2019 compared to income of $596 for the second quarter of 2018, a decrease in earnings of $13,816. The reduced earnings are due primarily to increases in income tax expense ($12,872), interest expense ($370) and costs related to the new start-up sales operation in Chile ($657).
Segment Profit (Loss)-Six Months:
| | | Six Months Ended June 30, | | | | |
| | | 2019 | | | 2018 | | | $ Change | | | % Change | |
| Infrastructure Group | | $ | 39,683 | | | $ | (47,882 | ) | | $ | 87,565 | | | | 182.9 | % |
| Aggregate and Mining Group | | | 17,166 | | | | 25,658 | | | | (8,492 | ) | | | (33.1 | )% |
| Energy Group | | | 6,532 | | | | 13,088 | | | | (6,556 | ) | | | (50.1 | )% |
| Corporate | | | (26,690 | ) | | | (10,652 | ) | | | (16,038 | ) | | | (150.6 | )% |
Infrastructure Group: Segment profit for the Infrastructure Group was income of $39,683 for the first six months of 2019 compared to a loss of $2,975 for the third quarter of 2017, an increase in the loss between periods of $6,803 or 228.7%. The additional losses included in the Corporate category for the third quarter of 2018 as compared to the third quarter of 2017 is due to a $4,446 increase in income taxes and a $2,336 increase in general and administrative expenses (primarily accounting fees, airplane maintenance and consulting fees/outside services fees).
Segment Profit (Loss)-Nine Months:
| | | Nine Months Ended
September 30, | | | | |
| | | 2018 | | | 2017 | | | $ Change | | | % Change | |
| Infrastructure Group | | $ | (43,121 | ) | | $ | 15,545 | | | $ | (58,666 | ) | | | (377.4 | )% |
| Aggregate and Mining Group | | | 34,669 | | | | 29,360 | | | | 5,309 | | | | 18.1 | % |
| Energy Group | | | 16,406 | | | | 10,355 | | | | 6,051 | | | | 58.4 | % |
| Corporate | | | (20,428 | ) | | | (27,666 | ) | | | 7,238 | | | | 26.2 | % |
Infrastructure Group: Segment loss for the Infrastructure Group was $43,121 for the first nine months of 2018 compared to $15,545$47,882 for the same period in 2017, a decrease2018, an increase in earnings of $58,666. Gross profits declined by $62,289 between periods due primarily to significant pellet plant related charges during both periods. Segment$87,565 or 182.9%. The segment gross profit for the ninefirst six months ended Septemberof 2019 includes $20,000 from the Georgia Pellet Plant Sale while the segment loss for the first six months of 2018 was negatively impacted byincludes a $71,029 charge against gross profit due to the pellet plant agreementArkansas Pellet Plant Charges, as discussed above. Segment profit between periods was also impacted by a $1,703 increase in gross profits on non-pellet plant sales as the reduction in gross profit due to the $37,382 reduction in non-pellet plant sales between periods was offset by a 320 basis point increase in gross margins from 18.5% for the ninefirst six months ended September 30, 2017 was negatively impacted dueof 2018 to identification21.7% for the first six months of significant design issues at its customers' Georgia and Arkansas wood pellet plants in the third quarter of 2017. No revenues have been recorded on the Georgia order; however, the Company recorded revenue on the Arkansas plant order under the over-time method. Due to the identification of the design issues in the third quarter of 2017, the Company increased its estimate of the remaining costs to complete the orders for both pellet plants which resulted in negative $22,738 pellet plant gross profit in the third quarter of 2017. Margins on pellet plants2019. Segment profits were also negatively impacted by installation cost overruns during the second quarter of 2017, resulting in total gross profits on pellet plant sales of negative $27,098 for the nine months ended September 30, 2017. Gross margins for the nine months ended September 30, 2018 as compared to the same period in the prior year were also negatively impacted by a $10,297 change in overabsorbed/unabsorbed overhead between periods and an $11,981 reduction in net sales, excluding pellet plant revenue. Segment profit for the first nine months of 2018 as compared to the same period in 2017 was also negatively impacted by an $871 increase in selling, general and administrative expenses (primarily wages/benefits, accounting fees, legal fees($2,084) and consultant fees/outside services fees,an increase in intercompany profit eliminations ($1,687), which were partially offset by a reductiondecreases in ConExpo related costs)selling expenses ($838) and engineering expenses ($549). Segment profit was positively impacted by a $4,688 reduction in income taxes for the first nine months of 2018 as compared to the same period in 2017.
Aggregate and Mining Group:Group: Segment profit for the Aggregate and Mining Group was $34,669$17,166 for the first ninesix months of 20182019 compared to $29,360$25,658 for the same period in 2017, an increase2018, a decrease of $5,309$8,492 or 18.1%33.1%. The increasedecrease in segment profits between periods is due to an increaseresults from a decrease in gross profit of $7,973$7,293 due primarily to increaseddecreased sales of $29,895 between periods. Gross margins improved slightly$21,996 between periods at 24.5% and 24.3%a gross margin decrease of 90 basis points to 23.9% for the first ninesix months of 2018 and 2017, respectively. Improved gross2019 from 24.8% for the first six months of 2018. Segment profits were partially offsetalso negatively impacted by an increase in general and administrative expenses of $2,968 (primarily wages/benefits, accounting fees, consulting fees/outside services fees and legal fees($2,300), partially offset by a reduction in ConExpo related costs) and a $1,211 reduction indecreased engineering expenses for the first nine months of 2018 as compared to the same period in the prior year. Income taxes increased by $984 for the first nine months of 2018 as compared to the same period in 2017.($492).
Energy Group:Group: Segment profit for the Energy Group was $16,406$6,532 for the first ninesix months of 20182019 compared to $10,355$13,088 for the same period 2017, an increasein 2018, a decrease of $6,051$6,556 or 58.4%50.1%. The Energy Group'sSegment profits were negatively impacted by a $4,429 decrease in gross profit increased $11,203 between periods due primarily toresulting from a $42,002 increasedecrease in sales between periods andof $3,336 along with the a 40270 basis point increasedecrease in gross margins. The improved gross profitsGross margins between periods were partially offsetalso negatively impacted by an increase in selling expensesunabsorbed overhead variances of $2,704 (primarily wages/benefits, advertising, exhibit costs and amortization), and$3,815. Segment profits were also impacted by increases in general and administrative expenses of $1,691 (primarily wages/benefits, consulting fees/outside services fees and accounting fees). Selling, general, administrative($656) and engineering expenses of $2,866 were incurred at RexCon, Inc.($681), partially offset by a decrease in the first nine months of 2018. Income taxes increased by $453 for the first nine months of 2018 as compared to the same period in 2017.selling expenses ($787).
Corporate:Corporate: Corporate operations had a loss of $20,428$26,690 for the first ninesix months of 20182019 compared to a loss of $27,666$10,652 for the first ninesix months of 2017,2018, a favorable changedecrease in earnings of $7,238$16,038 or 26.2%,150.6%. The reduced earnings are due primarily to reductionsincreases in income taxes of $11,106, which were partially offset by an increasetax expense ($11,451), interest expense ($907), costs related to the new start-up sales operation in Chile ($1,218) and other general and administrative expenseexpenses not related to Chile ($2,713).
Goodwill Review
The Company’s annual test of $3,959goodwill for possible impairment, performed as of October 31, 2018, indicated that the first nine monthsgoodwill at the Company’s Power Flame subsidiary (which is included in the Energy Group) was partially impaired and the impairment charge recorded in the fourth quarter of 2018 reduced its net goodwill to $4,929 as comparedof December 31, 2018. The Company reviews goodwill for impairment concerns each quarter and no impairment charges were recorded during the six-month period ended June 30, 2019; however, the Company will continue to review Power Flame’s business projections during the remainder of 2019, and it is possible additional impairment charges may be necessary prior to the first nine monthsend of 2017 (primarily related to increases in wages/benefits, accounting fees, plane maintenance and consulting fees/outside services fees, partially offset by a reduction in employee annual incentive costs).2019 since the Power Flame reporting unit had no excess fair value as of October 31, 2018.
Liquidity and Capital Resources
The Company's primary sources of liquidity and capital resources are its cash on hand, borrowing capacity under a $100,000$150,000 revolving credit facility and cash flows from operations. The Company had $25,674$24,905 of cash available for operating purposes as of SeptemberJune 30, 2018,2019, of which $22,526$21,425 was held by the Company's foreign subsidiaries. The transition of U.S. international taxation from a worldwide tax system to a territorial system, as provided under the Tax Act passed in December 2017, willshould greatly reduce, or eliminate, any additional taxes on these funds should the Company decide to repatriate these funds to the United States. At SeptemberJune 30, 2019 and December 31, 2018, respectively, the Company had $25,553 in$28,057 and $58,778 borrowings outstanding under its revolving credit facility. The highest borrowing amount outstanding at any time under the credit facility during the nine month period ended September 30, 2018 was $29,445. Net of borrowings and letters of credit totaling $9,546,$8,630, the Company had borrowing availability of $64,901$113,313 under the revolving credit facility as of SeptemberJune 30, 2018.2019. The revolving credit facility agreement contains certain financial covenants, including provisions concerning required levels of annual net income and minimum tangible net worth. The Company was in compliance with the financial covenants of the agreement at SeptemberJune 30, 2018.2019.
The Company'sCompany’s South African subsidiary, Osborn Engineered Products SA (Pty) Ltd ("Osborn"(“Osborn”), has a credit facility of $6,709$6,706 with a South African bank to finance short-term working capital needs, as well as to cover performance letters of credit, advance payment and retention guarantees. As of SeptemberJune 30, 2019 and December 31, 2018, Osborn had no outstanding borrowings but had $576$1,222 in performance, advance payment and retention guarantees outstanding under the facility.facility as of June 30, 2019. The facility has been guaranteed by Astec Industries, Inc., but is otherwise unsecured. A 0.75% unused facility fee is charged if less than 50% of the facility is utilized. As of SeptemberJune 30, 2018,2019, Osborn had available credit under the facility of $6,133.$5,484.
The Company'sCompany’s Brazilian subsidiary, Astec Brazil, has outstandinghad a working capital loans totaling $1,529loan outstanding of $1,052 and $1,207 as of SeptemberJune 30, 2019 and December 31, 2018, respectively, from a Brazilian banks.bank. The loans' maturity dates range from November 2018 toloan’s final monthly payment is due in April 2024 and the debts aredebt is secured by Astec Brazil'sBrazil’s manufacturing facility and also by letters of credit totaling $3,200 issued by Astec Industries, Inc. Additionally, Astec Brazil hasha various five-year equipment financing loans outstanding with Brazilian banks in the aggregate of $217$18 and $137 as of SeptemberJune 30, 2018.2019 and December 31, 2018, respectively. These equipment loans have maturity dates ranging from JanuaryJuly 2019 to April 2020. Astec Brazil's loans are included in the accompanying unaudited condensed consolidated balance sheets as current maturities of long-term debt ($793) and long-term debt ($953) as of September 30, 2018.
Cash Flows from Operating Activities:
| | Six Months Ended June 30, | | | Increase | |
| | | 2019 | | | 2018 | | | (Decrease) | |
| Net income (loss) | | $ | 37,579 | | | $ | (20,552 | ) | | $ | 58,131 | |
| Depreciation and amortization | | | 13,139 | | | | 13,880 | | | | (741 | ) |
| Provision for warranties | | | 4,496 | | | | 7,529 | | | | (3,033 | ) |
| Deferred income tax provision (benefit) | | | 8,412 | | | | (121 | ) | | | 8,533 | |
| Changes in working capital: | | | | | | | | | | | | |
| Trade and other receivables | | | (6,719 | ) | | | (24,219 | ) | | | 17,500 | |
| Inventories | | | (5,240 | ) | | | (3,410 | ) | | | (1,830 | ) |
| Prepaid expenses and other assets | | | 564 | | | | (1,361 | ) | | | 1,925 | |
| Accounts payable | | | (2,006 | ) | | | 4,181 | | | | (6,187 | ) |
| Customer deposits | | | (13,025 | ) | | | (4,163 | ) | | | (8,862 | ) |
| Product warranty accruals | | | (5,287 | ) | | | (11,482 | ) | | | 6,195 | |
| Prepaid and income taxes payable, net | | | 7,669 | | | | (9,141 | ) | | | 16,810 | |
| Accrued pellet plant agreement costs | | | – | | | | 68,000 | | | | (68,000 | ) |
| Other, net | | | 3,289 | | | | (720 | ) | | | 4,009 | |
| Net cash provided by operating activities | | $ | 42,871 | | | $ | 18,421 | | | $ | 24,450 | |
| | | Nine Months Ended
September 30, | | | Increase | |
| | | 2018 | | | 2017 | | | (Decrease) | |
| Net income (loss) | | $ | (13,649 | ) | | $ | 26,736 | | | $ | (40,385 | ) |
| Depreciation and amortization | | | 20,755 | | | | 19,253 | | | | 1,502 | |
| Provision for warranties | | | 10,115 | | | | 11,842 | | | | (1,727 | ) |
| Changes in working capital: | | | | | | | | | | | | |
| Trade and other receivables | | | (7,512 | ) | | | 766 | | | | (8,278 | ) |
| Inventories | | | (37,841 | ) | | | (39,332 | ) | | | 1,491 | |
| Prepaid expenses | | | 796 | | | | 4,601 | | | | (3,805 | ) |
| Accounts payable | | | 14,047 | | | | 2,820 | | | | 11,227 | |
| Customer deposits | | | 2,895 | | | | 11,040 | | | | (8,145 | ) |
| Product warranty accruals | | | (14,480 | ) | | | (11,072 | ) | | | (3,408 | ) |
| Prepaid and income taxes payable, net | | | (11,055 | ) | | | (16,246 | ) | | | 5,191 | |
| Accrued pellet plant agreement costs | | | 17,000 | | | | -- | | | | 17,000 | |
| Other, net | | | (1,605 | ) | | | 341 | | | | (1,946 | ) |
| Net cash provided (used) by operating activities | | $ | (20,534 | ) | | $ | 10,749 | | | $ | (31,283 | ) |
Net cash from operating activities declinedimproved by $31,283$24,450 for the first ninesix months of 20182019 as compared to the first ninesix months of 20172018 due primarily to a reduction in earnings between periodsthe impact of $40,385 (includingnet income ($58,131), trade and other receivables ($17,500), and the timing of tax payments versus when they were owed ($8,533 and $16,810). These increases were partially offset due to the timing of the $68,000 to be paid in cash related topayment required under the Arkansas pellet plant settlement agreement, discussed above, of which $51,000 was paidrecognized in the thirdsecond quarter of 2018), an increase2018 but not paid until later in 2018. The increases were also partially offset by a reduction in the growth of accounts receivable of $8,278, a decline in the growthimpact of customer deposits of $8,145 partially offset by an increase in the growth of accounts payable of $11,227. A significant portion of cash used in operations in the nine months ended September 30, 2018 and 2017 relates to the growth of inventory levels between periods.($8,862).
Cash Flows from Investing Activities:Activities:
| | Six Months Ended June 30, | | | Increase | |
| | | 2019 | | | 2018 | | | (Decrease) | |
| Expenditures for property and equipment | | $ | (8,657 | ) | | $ | (8,719 | ) | | $ | 62 | |
| Other | | | 569 | | | | 338 | | | | 231 | |
| Net cash used by investing activities | | $ | (8,088 | ) | | $ | (8,381 | ) | | $ | 293 | |
| | | Nine Months Ended
September 30, | | | Increase | |
| | | 2018 | | | 2017 | | | (Decrease) | |
| Expenditures for property and equipment | | $ | (17,518 | ) | | $ | (13,920 | ) | | $ | (3,598 | ) |
| Other | | | 413 | | | | (243 | ) | | | 656 | |
| Net cash used by investing activities | | $ | (17,105 | ) | | $ | (14,163 | ) | | $ | (2,942 | ) |
Net cash used by investing activities increaseddeclined by $2,942$293 for the first ninesix months of 20182019 as compared to the same period in 2017 due primarily to increased capital expenditures in the first nine months of 2018 as compared to the first nine months of 2017.2018.
Total capital expenditures for 20182019 are forecasted to be approximately $23,000.$25,000. The Company expects to finance these expenditures using currently available cash balances, internally generated funds and available credit under the Company'sCompany’s credit facilities. Capital expenditures are generally for machinery, equipment and facilities used by the Company in the production of its various products. The Company believes that its current working capital, cash flows generated from future operations and available capacity under its credit facility will be sufficient to meet the Company'sCompany’s working capital and capital expenditure requirements through November 2019.August 2020.
Cash Flows from Financing Activities:Activities:
| | Six Months Ended June 30, | | | Increase | |
| | | 2019 | | | 2018 | | | (Decrease) | |
| Payment of dividends | | $ | (4,956 | ) | | $ | (4,618 | ) | | $ | (338 | ) |
| Net change in borrowings from banks | | | (31,014 | ) | | | (1,105 | ) | | | (29,909 | ) |
| Other, net | | | 62 | | | | (180 | ) | | | 242 | |
| Net cash used by financing activities | | $ | (35,908 | ) | | $ | (5,903 | ) | | $ | (30,005 | ) |
| | | Nine Months Ended
September 30, | | | Increase | |
| | | 2018 | | | 2017 | | | (Decrease) | |
| Payment of dividends | | $ | (7,149 | ) | | $ | (6,920 | ) | | $ | (229 | ) |
| Net change in borrowings from banks | | | 23,782 | | | | (6,583 | ) | | | 30,365 | |
| Stock buy-back purchases | | | (13,914 | ) | | | -- | | | | (13,914 | ) |
| Other, net | | | (213 | ) | | | (406 | ) | | | 193 | |
| Net cash provided (used) by financing activities | | $ | 2,506 | | | $ | (13,909 | ) | | $ | 16,415 | |
Net cash fromCash used by financing activities improvedincreased by $16,415$30,005 for the first ninesix months of 20182019 compared to the same period in 20172018 due primarily to the net changes inCompany reducing the Company's bank borrowings between periods partially offsetamount owed on its domestic line of credit during the first six months of 2019 by cash expenditures under the Company's stock buy-back program initiated in the third quarter of 2018.$30,721.
Financial Condition
The Company'sCompany’s total current assets increased to $624,362remained relatively flat at $557,535 as of SeptemberJune 30, 2018 from $602,9692019 compared to $560,991 as of December 31, 2017, an increase of $21,393 or 3.5%, due primarily to increases in receivables of $7,069, inventories of $37,841 and prepaid income taxes of $14,140 during the first nine months of 2018 offset by a decrease in cash and cash equivalents of $36,606.2018.
The Company'sCompany’s total current liabilities increased to $206,953were $173,936 as of SeptemberJune 30, 2018 from $179,1462019 compared to $189,231 as of December 31, 2017, an increase2018, a decrease of $27,807$15,295 or 15.5%8.1% due primarily to a $68,000 liability incurred during 2018 under the pellet plant settlement agreement discussed above, of which $17,000 remains outstanding at September 30, 2018,decreases in customer deposits ($13,025) and an increase in accounts payable of $14,002.accrued payroll and related liabilities ($2,807).
Market Risk and Risk Management Policies
We have no material changes to the disclosure on this matter made in the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2017.2018.
Contingencies
The Company's sales contract with the purchaser of a large wood pellet plant, on which $143,300 of cumulative revenue (prior to the $75,315 charge discussed below) has been recorded through September 30, 2018 based on the over-time method, contained certain production output and operational provisions, which if not timely met, could have resulted in the Company having to refund the purchase price to the customer. Additional contract provisions required the Company to compensate the customer for production shortfalls caused by the Company and other potential costs (depending on the market price of wood pellets). As the plant did not meet the production output and operational specifications by the deadline set forth in the contract (June 29, 2018), the Company entered into an agreement with the customer on July 20, 2018, whereby the Company agreed to pay its customer $68,000 over 120 days following execution of the agreement (of which $51,000 was paid by the Company in the third quarter of 2018) and to forgive $7,315 in accounts receivables to obtain a full release of all the Company's contractual obligations under the sales contract. The terms of the pellet plant agreement resulted in the Company recording charges against sales of $75,315 and gross margins of $71,029 in the third quarter of 2018. The Company expects to pay the remaining $17,000 to the customer in the fourth quarter of 2018, as scheduled. The pellet plant agreement also stipulates that the customer will pay the Company $7,000 if the wood pellet plant's performance satisfies certain emissions targets prior to May 1, 2019.
The Company manufactured a largeits first wood pellet plant for a customer located in Georgia under a Company-financed arrangement whereby the Company deferred the recognition of revenue as payment under the arrangement was not assured. WhileAfter considering the plant, with a September 30, 2018 inventory value onuncertainty of completing the Company's bookssale to the existing customer due to their unsuccessful attempts to obtain financing; the lack of $59,522, is currently operational, the customer expressed its desiresuccess in attempting to further modify its obligations under the arrangement. As a result, the parties have agreed to jointly market the plant to other pellet plant operators; the cost of repossessing the plant; and the Company’s decision to exit the pellet plant business line, the pellet plant inventory’s net realizable value was written down to zero in the fourth quarter of 2018. The sale of the Georgia pellet plant was ultimately recognized at the end of the second quarter of 2019 upon the receipt of the discounted $20,000 sales price.
The Company and certain of its current and former executive officers have been named as defendants in a new buyer.putative shareholder class action lawsuit filed on February 1, 2019, in the United States District Court for the Eastern District of Tennessee. The action is styled City of Taylor General Employees Retirement System v. Astec Industries, Inc., et al., Case No. 1:19-cv-00024-PLR-CHS. The complaint generally alleges that the defendants violated the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements and that the individual defendants are control person under Section 20(a) of the Exchange Act. The complaint was filed on behalf of shareholders who purchased shares of the Company’s stock between July 26, 2016 and October 22, 2018 and seeks monetary damages on behalf of the purported class. The Company disputes these allegations and intends to defend this lawsuit vigorously. The Company is currently in discussions with potential purchasersunable to estimate the possible loss or range of the plant; however, the timing and terms of such a sale, if any, including the sales price, are uncertain. Depending on the ultimate sales price, future inventory reserves or losses upon the ultimate sale of the plant may occur. As required by the arrangement with the customer, the Company is currently funding the operation of the plant and may be responsible for operational losses should they occur prior to the ultimate sale of the plant. If the sale of the plant does not occur prior to the maturity date of the note in December 2018, the customer may default on its obligations and the Company may, as a result, retake possession of the plant. Ifloss at this occurs, the Company anticipates that it would operate the plant for some period and may incur operating losses and may be required to make additional investments in the plant and its operations.time.
Off-balance Sheet Arrangements
As of SeptemberJune 30, 2018,2019, the Company does not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.
Contractual Obligations
During the ninesix months ended SeptemberJune 30, 2018,2019, there were no substantial changes in the Company'sCompany’s commitments or contractual liabilities.
Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company has no material changes to the disclosure on this matter made in the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2017.2018.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC'sSEC’s rules and forms, and that such information is accumulated and communicated to the Company'sCompany’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
The Company'sCompany’s management, under the supervision and with the participation of the Company'sCompany’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Company'sCompany’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company'sCompany’s principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company'sCompany’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective.not effective due to material weaknesses in the Company’s internal control over financial reporting that were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.
Internal Control over Financial Reporting
ThereOther than the remediation efforts discussed below, there have been no changes in the Company'sCompany’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the threesix month period ended SeptemberJune 30, 20182019 that have materially affected, or are reasonably likely to materially affect, the Company'sCompany’s internal control over financial reporting.
Remediation
As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2018, we began implementing a remediation plan to address the material weaknesses mentioned above. The weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings The Company is involved from time to time in legal actions arising in the ordinary course of its business. Other than as set forth in Note 14, Contingent Matters, to the accompanying unaudited condensed financial statements and Part I, "Item“Item 3. Legal Proceedings"Proceedings” in the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2017,2018, the Company currently has no pending or threatened litigation that the Company believes will result in an outcome that would materially affect the Company'sCompany’s business, financial position, cash flows or results of operations. Nevertheless, there can be no assurance that future litigation to which the Company becomes a party will not have a material adverse effect on its business, financial position, cash flows or results of operations.
In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Part I, "Item“Item 1A. Risk Factors"Factors” in the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2017,2018, which could materially affect the Company'sCompany’s business, financial condition or future results. There have been no material changes in the Company'sCompany’s risk factors from those disclosed in the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2017.2018. The risks described in the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 20172018 and in this Quarterly Report on Form 10-Q are not the only risks facing our Company. Additional risks and uncertainties not currently known to management or that management currently deems to be immaterial also may materially adversely affect the Company'sCompany’s business, financial condition or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES (1)
(,000 omitted)
| Period | | Total
Number
of Shares
Purchased (2) | | | Average
Price
Paid per
Share | | | Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs (2) | | | Approximate
Dollar Value
of Shares That
May Yet Be
Purchased Under
the Plans
or Programs | |
| July 1 to July 31, 2018 | | | -- | | | | N/A | | | | -- | | | $ | 150,000 | |
| August 1 to August 31, 2018 | | | 297 | | | $ | 46.91 | | | | 297 | | | | 136,086 | |
| September 1 to September 30, 2018 | | | -- | | | | N/A | | | | -- | | | | 136,086 | |
| Total | | | 297 | | | $ | 46.91 | | | | 297 | | | $ | 136,086 | |
1)On July 29, 2018, the Company'sCompany’s Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $150,000 of its common stock. Through September 30,December 31, 2018, the Company hashad repurchased 297582 shares of its stock at total cost of $13,914$24,149 under this program. Under the share repurchase plan, the Company may purchase common stock in open market transactions, block or privately negotiated transactions, and may from time to time purchase shares pursuant to a trading plan in accordance with Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934, as amended, or by any combination of such methods. The number of shares to be purchased and the timing of the purchases are based on a variety of factors. No time limit was set for completion of repurchases under the authorization and the program may be suspended or discontinued at any time. No additional shares were repurchased under this plan during the first six months of 2019.
(2) All shares acquired were purchased in open market transactions.
The exhibits are numbered in accordance with Item 601 of Regulation S-K. Inapplicable exhibits are not included in the list.
* In accordance with Release No. 34-47551, this exhibit is hereby furnished to the SEC as an accompanying document and is not to be deemed "filed"“filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended.
Items 3, 4 and 5 are not applicable and have been omitted.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.