Trade receivables and contract assets are net of allowances for credit losses of $1,891$2.1 million and $1,416$1.4 million as of March 31,June 30, 2020 and December 31, 2019, respectively.
Note 5. Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation of $266,010$266.5 million and $267,719$267.7 million as of March 31,June 30, 2020 and December 31, 2019, respectively.
Note 6. Fair Value Measurements
The Company has various financial instruments that must be measured at fair value on a recurring basis, including marketable debt and equity securities held by Astec Insurance Company (“Astec Insurance”), the Company’s captive insurance company; marketable equity securities held in an unqualified Supplemental Executive Retirement Plan (“SERP”); and a money market fund held by a foreign subsidiary. The obligations of the Company associated with the financial assets held in the SERP also constitute a liability of the Company for financial reporting purposes and are included in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets. The Company’s subsidiaries also occasionally enter into foreign currency exchange contracts to mitigate exposure to fluctuations in currency exchange rates.
The carrying amount of cash and cash equivalents, trade receivables and contract assets, other receivables, accounts payable, short-term debt and long-term debt approximates their fair value because of their short-term nature and/or interest rates associated with the instruments. Investments are carried at their fair value based on quoted market prices for identical or similar assets or, where no quoted prices exist, other observable inputs for the asset. The fair values of foreign currency exchange contracts are based on quotations from various banks for similar instruments using models with market based inputs.
Financial assets and liabilities are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The inputs used to measure the fair value are identified in the following hierarchy:
| | | | | |
| Level 1 - | Unadjusted quoted prices in active markets for identical assets or liabilities. |
| Level 2 - | Unadjusted quoted prices in active markets for similar assets or liabilities; or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable for the asset or liability. |
| Level 3 - | Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. |
The Company reevaluates the volume of trading activity for each of its investments at the end of each quarter and adjusts the level within the fair value hierarchy as needed. As indicated in the tables below (which excludes the Company’s pension assets), the Company has determined that all of its financial assets and liabilities as of March 31,June 30, 2020 and December 31, 2019 are Level 1 and Level 2 in the fair value hierarchy as defined above:
10
| | March 31, 2020 | |
| | | Level 1 | | | Level 2 | | | Total | |
| Financial Assets: | | | | | | | | | |
| Trading equity securities: | | | | | | | | | |
| SERP money market fund | | $ | 227 | | | $ | – | | | $ | 227 | |
| SERP mutual funds | | | 3,612 | | | | – | | | | 3,612 | |
| Preferred stocks | | | 259 | | | | – | | | | 259 | |
| Money market fund | | | 211 | | | | – | | | | 211 | |
| Trading debt securities: | | | | | | | | | | | | |
| Corporate bonds | | | 5,425 | | | | – | | | | 5,425 | |
| Municipal bonds | | | – | | | | 1,147 | | | | 1,147 | |
| Floating rate notes | | | 332 | | | | – | | | | 332 | |
| U.S. government securities | | | 2,082 | | | | – | | | | 2,082 | |
| Asset backed securities | | | – | | | | 2,548 | | | | 2,548 | |
| Other | | | 201 | | | | 1,364 | | | | 1,565 | |
| Derivative financial instruments | | | – | | | | 466 | | | | 466 | |
| Total financial assets | | $ | 12,349 | | | $ | 5,525 | | | $ | 17,874 | |
| | | | | | | | | | | | | |
| Financial Liabilities: | | | | | | | | | | | | |
| SERP liabilities | | $ | – | | | $ | 5,552 | | | $ | 5,552 | |
| Total financial liabilities | | $ | – | | | $ | 5,552 | | | $ | 5,552 | |
11 | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | |
| (in thousands) | Level 1 | | Level 2 | | Total |
| Financial Assets: | | | | | |
| Trading equity securities: | | | | | |
| SERP money market fund | $ | 229 | | | $ | — | | | $ | 229 | |
| SERP mutual funds | 4,391 | | | — | | | 4,391 | |
| Preferred stocks | 268 | | | — | | | 268 | |
| | | | | |
| Trading debt securities: | | | | | |
| Corporate bonds | 5,581 | | | — | | | 5,581 | |
| Municipal bonds | — | | | 1,147 | | | 1,147 | |
| Floating rate notes | 356 | | | — | | | 356 | |
| U.S. government securities | 2,078 | | | — | | | 2,078 | |
| Asset backed securities | — | | | 2,394 | | | 2,394 | |
| Other | — | | | 1,362 | | | 1,362 | |
| | | | | |
| Total financial assets | $ | 12,903 | | | $ | 4,903 | | | $ | 17,806 | |
| | | | | |
| Financial Liabilities: | | | | | |
| Derivative financial instruments | $ | — | | | $ | 365 | | | $ | 365 | |
| SERP liabilities | — | | | 6,708 | | | 6,708 | |
| Total financial liabilities | $ | — | | | $ | 7,073 | | | $ | 7,073 | |
| | December 31, 2019 | |
| | | Level 1 | | | Level 2 | | | Total | |
| Financial Assets: | | | | | | | | | |
| Trading equity securities: | | | | | | | | | |
| SERP money market fund | | $ | 208 | | | $ | – | | | $ | 208 | |
| SERP mutual funds | | | 4,419 | | | | – | | | | 4,419 | |
| Preferred stocks | | | 282 | | | | – | | | | 282 | |
| Trading debt securities: | | | | | | | | | | | | |
| Corporate bonds | | | 5,117 | | | | – | | | | 5,117 | |
| Municipal bonds | | | – | | | | 1,154 | | | | 1,154 | |
| Floating rate notes | | | 535 | | | | – | | | | 535 | |
| U.S. government securities | | | 2,035 | | | | – | | | | 2,035 | |
| Asset backed securities | | | – | | | | 2,316 | | | | 2,316 | |
| Other | | | 473 | | | | 1,112 | | | | 1,585 | |
| Derivative financial instruments | | | – | | | | 4 | | | | 4 | |
| Total financial assets | | $ | 13,069 | | | $ | 4,586 | | | $ | 17,655 | |
| | | | | | | | | | | | | |
| Financial Liabilities: | | | | | | | | | | | | |
| Derivative financial instruments | | $ | – | | | $ | 49 | | | $ | 49 | |
| SERP liabilities | | | – | | | | 6,645 | | | | 6,645 | |
| Total financial liabilities | | $ | – | | | $ | 6,694 | | | $ | 6,694 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | |
| (in thousands) | Level 1 | | Level 2 | | Total |
| Financial Assets: | | | | | |
| Trading equity securities: | | | | | |
| SERP money market fund | $ | 208 | | | $ | — | | | $ | 208 | |
| SERP mutual funds | 4,419 | | | — | | | 4,419 | |
| Preferred stocks | 282 | | | — | | | 282 | |
| | | | | |
| Trading debt securities: | | | | | |
| Corporate bonds | 5,117 | | | — | | | 5,117 | |
| Municipal bonds | — | | | 1,154 | | | 1,154 | |
| Floating rate notes | 535 | | | — | | | 535 | |
| U.S. government securities | 2,035 | | | — | | | 2,035 | |
| Asset backed securities | — | | | 2,316 | | | 2,316 | |
| Other | 473 | | | 1,112 | | | 1,585 | |
| Derivative financial instruments | — | | | 4 | | | 4 | |
| Total financial assets | $ | 13,069 | | | $ | 4,586 | | | $ | 17,655 | |
| | | | | |
| Financial Liabilities: | | | | | |
| Derivative financial instruments | $ | — | | | $ | 49 | | | $ | 49 | |
| SERP liabilities | — | | | 6,645 | | | 6,645 | |
| Total financial liabilities | $ | — | | | $ | 6,694 | | | $ | 6,694 | |
The trading equity securities noted above are valued at their fair value based on their quoted market prices, and the trading debt securities are valued based upon a mix of observable market prices and model driven prices derived from a matrix of observable market prices for assets with similar characteristics obtained with the assistance of a nationally recognized third-party pricing service. Additionally, a significant portion of the SERP’s investments in trading equity securities are in money market and mutual funds. As these money market and mutual funds are held in a SERP, they are also included in the Company’s liability under its SERP.
Trading debt securities are comprised of marketable debt securities held by Astec Insurance. Astec Insurance has an investment strategy that focuses on providing regular and predictable interest income from a diversified portfolio of high-quality fixed income securities.
The Company has $103.5 million in a government money market fund at June 30, 2020, which is included in cash and cash equivalents in the accompanying unaudited condensed consolidated balance sheet.
Note 7. Goodwill
The Company tests goodwill and indefinite-lived intangible assets for impairment during the fourth quarterannually, as of each year,October 31, or more frequently should circumstances change or events occur that would more likely than not reduce the fair value of a reporting unit below its carrying value. During the first quarter of 2020, the Company’s reporting units producing products for the mobile asphalt equipment industry performed at well below previous expectations. The COVID-19 pandemic will likely have a negative impact on results for the second quarter of 2020 and perhaps for the remainder of 2020 and longer.
As of the most recent annual goodwill impairment testing date (October 31, 2019), the Company’s testing indicated that the business enterprise value for the mobile asphalt equipment reporting unit exceeded its carrying value by approximately 22%. Sensitivity analysis performed on uncertain assumptions included in the testing in 2019 further reduced the excess of fair value over the reporting unit’s carrying value, but still indicated its goodwill was not impaired. As a result, inIn the first quarter of 2020, as part of the Company’s ongoing assessment to consider whether events or circumstances had occurred that could more likely than not reduce the fair value of a reporting unit below its carrying value, the Company performed an interim goodwill impairment test as of March 31, 2020 over the mobile asphalt equipment reporting unit. Based on the results of this testing, the Company recorded a $1,646$1.6 million pre-tax non-cash impairment charge (in the Infrastructure Solutions segment) to fully impair the mobile asphalt equipment reporting unit’s goodwill in the first quarter of 2020. This charge was included along with other restructuring and asset impairment charges in the accompanying unaudited condensed statement of income for six months ended June 30, 2020. NaN impairment was recorded during the three months ended March 31,June 30, 2020.
After evaluating and weighing all relevant events and circumstances, and considering the substantial excess fair values for the other reporting units, we concluded that it is not more likely than not that the fair values of these reporting units were less than their carrying values. Consequently, we determined that it was not necessary to perform an interim impairment test for the other reporting units.
The only other change to goodwill from values reported as of December 31, 2019 was the impact of foreign exchange rate changes on certain goodwill in the Materials Solutions segment also referred to herein as the Materials Solutions Group, during the first quartersix months ended June 30, 2020.
The carrying value of 2020.goodwill at June 30, 2020 and December 31, 2019 was $30.6 million and $33.2 million, respectively.
Note 8. Debt
In February 2019, the Company and certain of its subsidiaries entered into an amended and restated credit agreement whereby the lender extended to the Company an unsecured line of credit of up to $150,000,$150.0 million, including a sub-limit for letters of credit of up to $30,000$30.0 million and extended the maturity date to December 29, 2023. Other significant terms were left unchanged. There were 0 borrowings outstanding under the agreement as of March 31,June 30, 2020, December 31, 2019 or at any time during the threesix months ended March 31,June 30, 2020. Letters of credit totaling $7,877,$8.8 million, including $3,200$3.2 million of letters of credit issued to banks in Brazil to secure the local debt of Astec do Brasil Fabricacao de Equipamentos Ltda. (“Astec Brazil”), were outstanding under the credit facility as of March 31,June 30, 2020. Additional borrowing available under the credit facility was $142,123$141.2 million as of March 31,June 30, 2020. Borrowings under the agreement are subject to an interest rate equal to the daily one-month LIBOR rate plus a 0.75% margin, resulting in a rate of 1.74% as of March 31, 2020.margin. The unused facility fee is 0.125%. Interest only payments are due monthly. The amended and restated credit agreement contains certain financial covenants, including provisions concerning required levels of annual net income and minimum tangible net worth.
The Company’s South African subsidiary, Osborn Engineered Products SA (Pty) Ltd (“Osborn”), has a credit facility of $5,338$5.5 million 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 March 31,June 30, 2020, Osborn had 0 outstanding borrowings but had $883$0.9 million in performance, advance payment and retention guarantees outstanding under the facility. The facility has been guaranteed by Astec Industries, Inc., but is otherwise unsecured. A 0.75% unused facility fee is charged if less than 50% of the facility is utilized. As of March 31,June 30, 2020, Osborn had available credit under the facility of $4,455.$4.6 million. The interest rate is 0.25% less than the South Africa prime rate, resulting in a rate of 8.5% as of March 31, 2020.
The Company’s Brazilian subsidiary, Astec Brazil, had a $667$0.6 million and $897$0.9 million working capital loan outstanding as of March 31,June 30, 2020 and December 31, 2019, respectively, from a Brazilian bank with an interest rate of 10.4%. The loan’s final monthly payment is due in April 2024 and the debt is secured by Astec Brazil’s manufacturing facility and also by letters of credit totaling $3,200 issued by Astec Industries, Inc.facility. Astec Brazil’s debt is included in the accompanying unaudited condensed consolidated balance sheets as current maturities of long-term debt ($1740.2 million and $209)$0.2 million) and long-term debt ($4930.4 million and $690)$0.7 million) as of March 31,June 30, 2020 and December 31, 2019, respectively. Additionally, as of March 31,June 30, 2020 and December 31, 2019, respectively, Astec Brazil had $504$0.2 million and $1,130$1.1 million outstanding under order anticipation agreements with a local bank with maturity dates through September 2020,, which are included as short-term debt in the accompanying unaudited condensed consolidated balance sheets. These loans are drawn under credit facilities with local Brazilian banks secured by letters of credit totaling $3.2 million issued by Astec Industries, Inc.
The Company’s U.K. subsidiary, Telestack, had a $0.8 million and $0.0 million working capital loan outstanding as of June 30, 2020 and December 31, 2019, respectively, from a U.K. bank with an annual interest rate of 2.60% as of June 30, 2020. The $3.1 million credit facility size against which these drawings are outstanding is scheduled to decrease to $0.3 million on December 31, 2020 and Telestack is currently working with the bank on an extension. This credit facility is secured by a parent guarantee from Astec Industries, Inc. and certain Telestack assets. Telestack’s cash drawings against this credit facility are included in the accompanying unaudited condensed consolidated balance sheets as short-term debt as of June 30, 2020. Additionally, as of June 30, 2020 and December 31, 2019, respectively, Telestack had $1.5 million and $1.2 million outstanding under performance bonds and advance payment guarantees with the same U.K. bank with maturity dates through December 2021, which are contingent liabilities.
Note 9. Product Warranty Reserves
The Company warrants its products against manufacturing defects and performance to specified standards. The warranty period and performance standards vary by market and uses of its products, but generally range from three months to two years or up to a specified number of hours of operation. The Company estimates the costs that may be incurred under its warranties and records a liability at the time product sales are recorded. The product warranty liability is primarily based on historical claim rates, nature of claims and the associated cost.
Changes in the Company’s product warranty liability for the three-monththree and six-month periods ended March 31,June 30, 2020 and 2019 are as follows:
| | | Three Months Ended March 31, | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2020 | | | 2019 | | | Three Months Ended
June 30, | | | Six Months Ended
June 30, | |
| (in thousands) | | (in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
| Reserve balance, beginning of the period | | $ | 10,261 | | | $ | 10,928 | | Reserve balance, beginning of the period | $ | 10,652 | | | $ | 11,051 | | | $ | 10,261 | | | $ | 10,928 | |
| Warranty liabilities accrued | | | 2,732 | | | | 2,746 | | Warranty liabilities accrued | 2,405 | | | 1,750 | | | 5,137 | | | 4,496 | |
| Warranty liabilities settled | | | (2,129 | ) | | | (2,643 | ) | Warranty liabilities settled | (2,409) | | | (2,644) | | | (4,538) | | | (5,287) | |
| Other | | | (212 | ) | | | 20 | | Other | 43 | | | (40) | | | (169) | | | (20) | |
| Reserve balance, end of the period | | $ | 10,652 | | | $ | 11,051 | | Reserve balance, end of the period | $ | 10,691 | | | $ | 10,117 | | | $ | 10,691 | | | $ | 10,117 | |
Note 10. Accrued Loss Reserves
The Company records reserves for losses related to known workers’ compensation and general liability claims that have been incurred but not yet paid or are estimated to have been incurred but not yet reported to the Company. The undiscounted reserves are actuarially determined based on the Company’s evaluation of the type and severity of individual claims and historical information, primarily its own claims experience, along with assumptions about future events. Changes in assumptions, as well as changes in actual experience, could cause these estimates to change in the future. Total accrued loss reserves were $6,777$6.7 million and $6,817$6.8 million as of March 31,June 30, 2020 and December 31, 2019, respectively, of which $4,327$4.3 million and $4,518$4.5 million were included in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets as of March 31,June 30, 2020 and December 31, 2019, respectively.
Note 11. Leases
The Company leases certain real estate, computer systems, material handling equipment, offices, automobiles and other equipment. The Company determines if a contract is a lease (or contains an embedded lease) at the inception of the agreement. The Company adopted ASU No. 2016-02,2016-2, Leases, on January 1, 2019 using the effective date method. Upon adoption, right-of-use (“ROU”) assets totaling $4,993$5.0 million were recorded on the Company’s consolidated balance sheet. Incremental borrowing rates used in the calculation of the ROU asset, when not apparent in the lease agreements, were estimated based upon secured borrowing rates quoted by the Company’s banks for loans of various lengths ranging from one year to 20 years. Operating leases with original maturities less than one year in duration were excluded. The calculation of the ROU asset considered lease agreement provisions concerning termination, extensions, end of lease purchase and whether or not those provisions were reasonably certain of being exercised. Certain agreements contain lease and non-lease components, which are accounted for separately. No cumulative effect adjustment was necessary at the time of adoption. Based upon a contract review and related calculations, none of the Company’s leases were deemed to be financing leases.
Other information concerning the Company’s operating leases accounted for under ASC 842 guidelinesand the related expense, assets and liabilities follow:
| | | | | | | | | | | |
| Three Months Ended | | |
| (in thousands) | June 30, 2020 | | June 30, 2019 |
| Operating lease expense | $ | 502 | | | $ | 651 | |
| Cash paid for operating leases included in operating cash flows | 537 | | | 696 | |
| | | |
| Six Months Ended | | |
| (in thousands) | June 30, 2020 | | June 30, 2019 |
| Operating lease expense | $ | 1,165 | | | $ | 1,252 | |
| Cash paid for operating leases included in operating cash flows | 1,234 | | | 1,341 | |
| | Three Months Ended | |
| | | March 31, 2020 | | | March 31, 2019 | |
| Operating lease expense | | $ | 663 | | | $ | 601 | |
| Cash paid for operating leases included in operating cash flows | | | 697 | | | | 645 | |
| | March 31, 2020 | | | December 31, 2019 | |
| Operating lease right-of-use asset | | $ | 3,481 | | | $ | 3,853 | |
| Operating lease short-term liability included in other current liabilities | | | 1,449 | | | | 1,846 | |
| Operating lease long-term liability included in other long-term liabilities | | | 2,025 | | | | 2,020 | |
| Weighted average remaining lease term (in years) | | | 5.13 | | | | 4.66 | |
| Weighted average discount rate used in calculating right-of-use asset | | | 3.72 | % | | | 3.56 | % |
| | | | | | | | | | | |
| (in thousands) | June 30, 2020 | | December 31, 2019 |
| Operating lease right-of-use asset | $ | 3,760 | | | $ | 3,853 | |
Operating lease short-term liability included in other current liabilities | 1,768 | | | 1,846 | |
Operating lease long-term liability included in other long-term liabilities | 2,031 | | | 2,020 | |
| Weighted average remaining lease term (in years) | 4.57 | | 4.66 |
| Weighted average discount rate used in calculating right-of-use asset | 3.89 | % | | 3.56 | % |
Future annual minimum lease payments as of March 31,June 30, 2020 are as follows:
| | | Amount | | | | | |
| (in thousands) | | (in thousands) | Amount |
| Remainder of 2020 | | $ | 1,290 | | Remainder of 2020 | $ | 1,074 | |
| 2021 | | | 731 | | 2021 | 1,265 | |
| 2022 | | | 458 | | 2022 | 540 | |
| 2023 | | | 303 | | 2023 | 316 | |
| 2024 | | | 200 | | 2024 | 209 | |
| 2025 and thereafter | | | 784 | | 2025 and thereafter | 786 | |
| Total | | | 3,766 | | Total | 4,190 | |
| Less interest | | | (292 | ) | Less interest | (380) | |
| Present value of lease liabilities | | $ | 3,474 | | Present value of lease liabilities | $ | 3,810 | |
Note 12. Income Taxes
The Company's combined effective income tax rates were (33.5)%16.7% and 21.0%23.1% for the three-month periods ended March 31,June 30, 2020 and 2019,, respectively. The Company's combined effective tax rates were (12.4)% and 22.3% for the six-month periods ended June 30, 2020 and 2019, respectively. The Company's effective tax rate for both periodsJune 30, 2020 includes the effect of state income taxes, benefitsa benefit for federal and state research and development credits, a net benefitsbenefit for international provisions of US tax reform that became effective in 2018, and various discrete items. Additionally,items with the tax provisionlargest being a benefit for the three months ended March 31, 2020 includes a $9,532 tax benefit resulting from provisions of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act enacted on March 27, 2020. Among other provisions, the CARES Act modified the net operating loss (“NOL”)NOL carryback provisions, which allowed the Company to carryback its 2018 NOL to prior tax years. This change not only favorably impacted the timing of the NOL benefit, but also increased the tax benefit amount as the federal tax rates in the prior years (35%) were higher than the current federal tax rate (21%).
The Company's recorded liability for uncertain tax positions as of March 31,June 30, 2020 has increased by $125,approximately $0.6 million, as compared to December 31, 2019 due to exposure related to federal and state credits, plus additional taxes and interest on existing reserves.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into law. Certain provisions of the CARES Act impact the 2020 income tax provision computations of the Company and are reflected in the period ended June 30, 2020. The CARES Act contains modifications to Net Operating Loss (“NOL”) carryback provisions, which will allow the Company to carryback its 2018 NOL recorded at a 21% statutory tax rate to prior tax years. This carryback to tax years with a higher statutory rate (35)% results in a net discrete tax benefit of $9.5 million for the year-to-date period.
Note 13. Revenue Recognition:
The following tables disaggregate our revenue by major source for the three-monththree and six-month periods ended March 31,June 30, 2020 and 2019 (excluding intercompany sales):
| | | Three Months Ended March 31, 2020 | |
| | | Infrastructure Solutions | | | Materials Solutions | | | Total | |
| Net Sales-Domestic: | | | | | | | | | |
| Equipment sales | | $ | 100,419 | | | $ | 41,297 | | | $ | 141,716 | |
| Parts and component sales | | | 52,641 | | | | 18,476 | | | | 71,117 | |
| Service and equipment installation revenue | | | 6,762 | | | | 427 | | | | 7,189 | |
| Used equipment sales | | | 7,160 | | | | – | | | | 7,160 | |
| Freight revenue | | | 6,048 | | | | 1,309 | | | | 7,357 | |
| Other | | | (185 | ) | | | (472 | ) | | | (657 | ) |
| Total domestic revenue | | | 172,845 | | | | 61,037 | | | | 233,882 | |
| | | | | | | | | | | | | |
| Net Sales-International: | | | | | | | | | | | | |
| Equipment sales | | | 19,424 | | | | 14,440 | | | | 33,864 | |
| Parts and component sales | | | 8,334 | | | | 9,257 | | | | 17,591 | |
| Service and equipment installation revenue | | | 842 | | | | 220 | | | | 1,062 | |
| Used equipment sales | | | 606 | | | | 746 | | | | 1,352 | |
| Freight revenue | | | 566 | | | | 343 | | | | 909 | |
| Other | | | 1 | | | | 187 | | | | 188 | |
| Total international revenue | | | 29,773 | | | | 25,193 | | | | 54,966 | |
| | | | | | | | | | | | | |
| Total net sales | | $ | 202,618 | | | $ | 86,230 | | | $ | 288,848 | |
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | | | | | |
| (in thousands) | Infrastructure
Solutions | | Materials
Solutions | | | | Total |
| Net Sales-Domestic: | | | | | | | |
| Equipment sales | $ | 104,640 | | | $ | 43,243 | | | | | $ | 147,883 | |
| | | | | | | |
| Parts and component sales | 35,860 | | | 17,739 | | | | | 53,599 | |
| Service and equipment installation revenue | 6,181 | | | 398 | | | | | 6,579 | |
| Used equipment sales | 7,148 | | | 413 | | | | | 7,561 | |
| Freight revenue | 4,578 | | | 1,413 | | | | | 5,991 | |
| Other | 55 | | | (149) | | | | | (94) | |
| Total domestic revenue | 158,462 | | | 63,057 | | | | | 221,519 | |
| | | | | | | |
| Net Sales-International: | | | | | | | |
| Equipment sales | 15,565 | | | 12,436 | | | | | 28,001 | |
| | | | | | | |
| Parts and component sales | 5,902 | | | 6,889 | | | | | 12,791 | |
| Service and equipment installation revenue | 668 | | | 495 | | | | | 1,163 | |
| Used equipment sales | 814 | | | 285 | | | | | 1,099 | |
| Freight revenue | 378 | | | 246 | | | | | 624 | |
| Other | 62 | | | 40 | | | | | 102 | |
| Total international revenue | 23,389 | | | 20,391 | | | | | 43,780 | |
| | | | | | | |
| Total net sales | $ | 181,851 | | | $ | 83,448 | | | | | $ | 265,299 | |
| | | | | | | |
| Six Months Ended June 30, 2020 | | | | | | |
| (in thousands) | Infrastructure
Solutions | | Materials
Solutions | | | | Total |
| Net Sales-Domestic: | | | | | | | |
| Equipment sales | $ | 205,059 | | | $ | 84,540 | | | | | $ | 289,599 | |
| | | | | | | |
| Parts and component sales | 88,501 | | | 36,215 | | | | | 124,716 | |
| Service and equipment installation revenue | 12,943 | | | 825 | | | | | 13,768 | |
| Used equipment sales | 14,308 | | | 413 | | | | | 14,721 | |
| Freight revenue | 10,626 | | | 2,722 | | | | | 13,348 | |
| Other | (130) | | | (621) | | | | | (751) | |
| Total domestic revenue | 331,307 | | | 124,094 | | | | | 455,401 | |
| | | | | | | |
| Net Sales-International: | | | | | | | |
| Equipment sales | 34,989 | | | 26,876 | | | | | 61,865 | |
| | | | | | | |
| Parts and component sales | 14,236 | | | 16,146 | | | | | 30,382 | |
| Service and equipment installation revenue | 1,510 | | | 715 | | | | | 2,225 | |
| Used equipment sales | 1,420 | | | 1,031 | | | | | 2,451 | |
| Freight revenue | 944 | | | 589 | | | | | 1,533 | |
| Other | 63 | | | 227 | | | | | 290 | |
| Total international revenue | 53,162 | | | 45,584 | | | | | 98,746 | |
| | | | | | | |
| Total net sales | $ | 384,469 | | | $ | 169,678 | | | | | $ | 554,147 | |
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | | | | | |
| (in thousands) | Infrastructure
Solutions | | Materials
Solutions | | | | Total |
| Net Sales-Domestic: | | | | | | | |
| Equipment sales | $ | 106,332 | | | $ | 46,887 | | | | | $ | 153,219 | |
| Pellet plant sales | 20,000 | | | — | | | | | 20,000 | |
| Parts and component sales | 35,862 | | | 18,921 | | | | | 54,783 | |
| Service and equipment installation revenue | 6,436 | | | 2,431 | | | | | 8,867 | |
| Used equipment sales | 3,390 | | | — | | | | | 3,390 | |
| Freight revenue | 4,707 | | | 1,801 | | | | | 6,508 | |
| Other | 146 | | | (700) | | | | | (554) | |
| Total domestic revenue | 176,873 | | | 69,340 | | | | | 246,213 | |
| | | | | | | |
| Net Sales-International: | | | | | | | |
| Equipment sales | 10,435 | | | 24,416 | | | | | 34,851 | |
| | | | | | | |
| Parts and component sales | 7,860 | | | 11,438 | | | | | 19,298 | |
| Service and equipment installation revenue | 2,089 | | | 308 | | | | | 2,397 | |
| Used equipment sales | 191 | | | 371 | | | | | 562 | |
| Freight revenue | 496 | | | 762 | | | | | 1,258 | |
| Other | 21 | | | 202 | | | | | 223 | |
| Total international revenue | 21,092 | | | 37,497 | | | | | 58,589 | |
| | | | | | | |
| Total net sales | $ | 197,965 | | | $ | 106,837 | | | | | $ | 304,802 | |
| | | | | | | |
| Six Months Ended June 30, 2019 | | | | | | |
| (in thousands) | Infrastructure
Solutions | | Materials
Solutions | | | | Total |
| Net Sales-Domestic: | | | | | | | |
| Equipment sales | $ | 225,428 | | | $ | 102,091 | | | | | $ | 327,519 | |
| Pellet plant sales | 20,000 | | | — | | | | | 20,000 | |
| Parts and component sales | 90,360 | | | 38,080 | | | | | 128,440 | |
| Service and equipment installation revenue | 11,210 | | | 3,056 | | | | | 14,266 | |
| Used equipment sales | 6,153 | | | 413 | | | | | 6,566 | |
| Freight revenue | 10,107 | | | 3,396 | | | | | 13,503 | |
| Other | 729 | | | (1,981) | | | | | (1,252) | |
| Total domestic revenue | 363,987 | | | 145,055 | | | | | 509,042 | |
| | | | | | | |
| Net Sales-International: | | | | | | | |
| Equipment sales | 31,849 | | | 43,465 | | | | | 75,314 | |
| | | | | | | |
| Parts and component sales | 16,626 | | | 21,616 | | | | | 38,242 | |
| Service and equipment installation revenue | 3,485 | | | 700 | | | | | 4,185 | |
| Used equipment sales | 301 | | | 837 | | | | | 1,138 | |
| Freight revenue | 918 | | | 1,430 | | | | | 2,348 | |
| Other | 48 | | | 265 | | | | | 313 | |
| Total international revenue | 53,227 | | | 68,313 | | | | | 121,540 | |
| | | | | | | |
| Total net sales | $ | 417,214 | | | $ | 213,368 | | | | | $ | 630,582 | |
| | | Three Months Ended March 31, 2019 | |
| | | Infrastructure Solutions | | | Materials Solutions | | | Total | |
| Net Sales-Domestic: | | | | | | | | | |
| Equipment sales | | $ | 119,095 | | | $ | 55,204 | | | $ | 174,299 | |
| Parts and component sales | | | 54,499 | | | | 19,159 | | | | 73,658 | |
| Service and equipment installation revenue | | | 4,774 | | | | 625 | | | | 5,399 | |
| Used equipment sales | | | 2,763 | | | | 413 | | | | 3,176 | �� |
| Freight revenue | | | 5,400 | | | | 1,595 | | | | 6,995 | |
| Other | | | 583 | | | | (1,281 | ) | | | (698 | ) |
| Total domestic revenue | | | 187,114 | | | | 75,715 | | | | 262,829 | |
| | | | | | | | | | | | | |
| Net Sales-International: | | | | | | | | | | | | |
| Equipment sales | | | 21,414 | | | | 19,049 | | | | 40,463 | |
| Parts and component sales | | | 8,765 | | | | 10,178 | | | | 18,943 | |
| Service and equipment installation revenue | | | 1,397 | | | | 391 | | | | 1,788 | |
| Used equipment sales | | | 110 | | | | 466 | | | | 576 | |
| Freight revenue | | | 423 | | | | 668 | | | | 1,091 | |
| Other | | | 26 | | | | 64 | | | | 90 | |
| Total international revenue | | | 32,135 | | | | 30,816 | | | | 62,951 | |
| | | | | | | | | | | | | |
| Total net sales | | $ | 219,249 | | | $ | 106,531 | | | $ | 325,780 | |
Sales into major geographic regions were as follows:
| | | Three Months Ended March 31, | |
| | | 2020 | | | 2019 | |
| United States | | $ | 233,882 | | | $ | 262,829 | |
| Canada | | | 14,664 | | | | 22,993 | |
| Australia | | | 5,795 | | | | 8,813 | |
| Africa | | | 6,631 | | | | 7,091 | |
| South America | | | 8,796 | | | | 7,054 | |
| Europe | | | 9,375 | | | | 6,490 | |
| Central America | | | 1,390 | | | | 3,549 | |
| China, Japan & Korea | | | 2,270 | | | | 2,140 | |
| Asia (excl. China, Japan & Korea) | | | 435 | | | | 2,131 | |
| West Indies | | | 4,756 | | | | 1,378 | |
| Middle East | | | 849 | | | | 851 | |
| Other | | | 5 | | | | 461 | |
| Total foreign | | | 54,966 | | | | 62,951 | |
| Total consolidated sales | | $ | 288,848 | | | $ | 325,780 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | | | Six Months Ended
June 30, | | |
| (in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
| United States | $ | 221,519 | | | $ | 246,213 | | | $ | 455,401 | | | $ | 509,042 | |
| Canada | 12,997 | | | 14,020 | | | 27,661 | | | 37,013 | |
| Australia | 5,540 | | | 7,156 | | | 11,335 | | | 15,969 | |
| Africa | 4,168 | | | 8,827 | | | 10,799 | | | 15,918 | |
| South America | 11,164 | | | 7,581 | | | 19,960 | | | 14,635 | |
| Europe | 4,831 | | | 12,982 | | | 14,206 | | | 19,472 | |
| Central America | 917 | | | 2,602 | | | 2,307 | | | 6,152 | |
| China, Japan & Korea | 1,777 | | | 440 | | | 4,047 | | | 2,580 | |
| Asia (excl. China, Japan & Korea) | 1,159 | | | 2,816 | | | 1,594 | | | 4,947 | |
| West Indies | 56 | | | 188 | | | 4,812 | | | 1,566 | |
| Middle East | 1,167 | | | 925 | | | 2,016 | | | 1,776 | |
| Other | 4 | | | 1,052 | | | 9 | | | 1,512 | |
| Total foreign | 43,780 | | | 58,589 | | | 98,746 | | | 121,540 | |
| Total consolidated sales | $ | 265,299 | | | $ | 304,802 | | | $ | 554,147 | | | $ | 630,582 | |
Revenue is generally recognized when obligations under the terms of a contract are satisfied and generally occurs with the transfer of control of the product or services at a point in time. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. The Company generally obtains purchase authorizations from its customers for a specified amount of products at a specified price with specific delivery terms. A significant portion of the Company’s equipment sales represents equipment produced in the Company’s manufacturing facilities under short-term contracts for a customer’s project or equipment designed to meet a customer’s requirements. Most of the equipment sold by the Company is based on standard configurations, some of which are modified to meet customer’s needs or specifications. The Company provides customers with technical design and performance specifications and typically performs pre-shipment testing, when feasible, to ensure the equipment performs according to the customer’s need, regardless of whether the Company provides installation services in addition to selling the equipment. Significant down payments are required on many equipment orders with other terms allowing for payment shortly after shipment, typically 30 days. Taxes assessed by a governmental authority that are directly imposed on revenue-producing transactions between the Company and its customers, such as sales, use, value-added and some excise taxes, are excluded from revenue. Expected warranty costs for our standard warranties are expensed at the time the related revenue is recognized. Costs of obtaining sales contracts with an expected duration of one year or less are expensed as incurred. As contracts are typically fulfilled within one year from the date of the contract, revenue adjustments for a potential financing component or the costs to obtain the contract are not made. As of March 31,June 30, 2020, the Company had contract assets of $1,244, primarily related to billings on one large ($7,085) order in the Material Solutions group,$25 thousand, and contract liabilities of $5,258,$5.1 million, including $3,368$3.4 million of deferred revenue related to extended warranties. As of December 31, 2019, the Company had contract assets of $4,660,$4.7 million, primarily related to billings on one large ($7,249)7.2 million) order in the Infrastructure Solutions group,segment, and contract liabilities of $6,511,$6.5 million, including $3,536$3.5 million of deferred revenue related to extended warranties.
Depending on the terms of the arrangement with the customer, recognition of a portion of the consideration received may be deferred and recorded as a contract liability if we have to satisfy a future obligation, such as to provide installation assistance, service work to be performed in the future without charge, floor plan interest to be reimbursed to our dealer customers, payments for extended warranties, for annual rebates given to certain high volume customers or for obligations for future estimated returns to be allowed based upon historical trends.
Certain contracts include terms and conditions pursuant to which the Company recognizes revenues upon the completion of production, and the equipment is subsequently stored at the Company’s plant at the customer’s request. Revenue is recorded on such contracts upon the customer’s assumption of title and risk of ownership, which transfers control of the equipment, and when collectability is reasonably assured. In addition, there must be a fixed schedule of delivery of the goods consistent with the customer’s business practices, the Company must not have retained any specific performance obligations such that the earnings process is not complete and the goods must have been segregated from the Company’s inventory prior to revenue recognition.
Service and Equipment Installation Revenue – Purchasers of certain of the Company’s equipment often contract with the Company to provide installation services. Installation is typically separately priced in the contract based upon observable market prices for stand-alone performance obligations or a cost plus margin approach when one is not available. The Company may also provide future services on equipment sold at the customer’s request, which may be for equipment repairs after the warranty period expires. Service is billed on a cost plus margin approach or at a standard rate per hour.
Used Equipment Sales – Used equipment is obtained by trade-in on new equipment sales, as a separate purchase in the open market or from the Company’s equipment rental business. Revenues from the sale of used equipment are recognized upon transfer of control to the customer at agreed upon pricing.
Freight Revenue – Under a practical expedient allowed under ASU No. 2014-09,2014-9, the Company records revenues earned for shipping and handling as revenue at the time of shipment, regardless of whether or not it is identified as a separate performance obligation. The cost of shipping and handling is classified as cost of goods sold concurrently.
Other Revenues – Miscellaneous revenues and offsets not associated with one of the above classifications primarily include rental revenues, extended warranty revenues, early pay discounts and floor plan interest reimbursements.
The Company currently monitors credit levels and financial conditions of customers on a continuing basis. After considering historical trends for uncollectible accounts, current economic conditions and specific customer recent payment history and financial stability, each business unit records an allowance for doubtful accounts at a level which management believes is sufficient to cover all probable future credit losses as of the balance sheet date. The current policy for calculating the reserve uses the rolling twelve-month bad debt write-offs, net of recoveries, divided by the rolling twelve-month average accounts receivable balance. The Company believes the twelve-month “look-back” is most representative of current credit worthiness of the customer. After adjustments for credit balances, that percentage is then applied to the current month end accounts receivable balance to arrive at the amount to reserve. Once the reserve is calculated, each business unit reviews their accounts receivable for any known customer accounts that should be added to the reserve based on their expectation of future economic conditions that might impact the customer, which would currently include the impact of COVID-19. At a minimum, the reserve balance should equal the calculated amount before specifically reserved items.Thus, each business unit records their accounts receivable at an amount expected to be collected and, therefore, incorporates expected credit losses.
Note 14. Segment Information
During the first quarter of 2020, the Company completed an internal reorganization of its reportable segments from 3 to 2 reportable segments (plus Corporate) and such segments are organized, operated and managed based on the products and services offered by the business units included in each segment. Amounts previously reported under the previous segment structure have been restated to conform to the new segment structure.
The Company did not see a significant impact to sales and profit results by reporting segments in the first quarter of 2020 as a result of COVID-19. However, the Company expects that its results of operations in the second quarter of 2020 may reflect an increase in the severity of the impact of the effects of COVID-19, as well as negative impacts to subsequent periods. The Company continues to monitor the effects of COVID-19 on its reported sales and profit and has taken steps to ensure employee and visitor safety, adequate liquidity and business continuity during this pandemic.
A brief description of each of the Company’s segments is as follows:
Infrastructure Solutions - The Infrastructure Solutions segment, also referred to herein as the Infrastructure Solutions Group, is comprised of 13 business units. These business units include Astec, Inc. (“CHA-Jerome Ave”), Roadtec, Inc. (“CHA-Manufacturers Rd”), Carlson Paving Products, Inc. (“Tacoma”), Heatec, Inc. (“CHA-Wilson Rd”), CEI Enterprises, Inc. (“Albuquerque”), GEFCO, Inc. (“Enid”), Peterson Pacific Corp. (“EUG-Airport Rd”), Power Flame Incorporated (“Parsons”), RexCon, Inc. (“Burlington”), Astec Mobile Machinery GmbH (“AMM”), Astec Australia Pty Ltd (“Australia”), Astec LatAm (“LatAm”), and Astec Thailand (“Thailand”). Products designed, engineered, manufactured and marketed by this group include a complete line of asphalt plants and their related components, asphalt pavers, screeds, milling machines, material transfer vehicles, stabilizers and related ancillary equipment, concrete plants, water well drilling rigs, wood chippers, wood grinders, heaters, commercial burners and industrial burners. The principal purchasers of the segment’s products are asphalt producers, highway and heavy equipment contractors, foreign and domestic governmental agencies, processors of oil, gas and biomass for energy production, ready mix concrete producers and contractors in the construction and demolition recycling markets.
In 2018, the Company decided to close and cease operations at AMM, located in Germany, and its land and buildings were sold in January 2020. In late 2019, the Company announced the closing of its Albuquerque site due to market conditions and underutilization of the manufacturing facility. Responsibilities for manufacturing and marketing of Albuquerque product lines were transferred to other Company facilities within the Infrastructure Solutions segment in late 2019 and early 2020. The Albuquerque site was closed as of March 31,June 30, 2020 and its land and buildings are currently accounted for as held for sale. In late 2019, the Company impaired and discontinued Enid’s oil and gas product lines and is in the process of disposing of the related oil and gas inventory. The Company is also currently marketing its Enid production facilities and remaining water well product line of the business for sale.
Materials Solutions– The Materials Solutions segment is comprised of 10 business units which are focused on designing and manufacturing heavy processing equipment, as well as servicing and supplying parts for the aggregate, metallic mining, recycling, ports and bulk handling markets. These business units are Telsmith, Inc. (“Mequon”), Kolberg-Pioneer, Inc. (“Yankton”), Astec Mobile Screens, Inc. (“Sterling”), Johnson Crushers International, Inc. (“EUG-Franklin Blvd”), Breaker Technology Ltd/Breaker Technology, Inc. (“Thornbury”), Osborn Engineered Products, SA (Pty) Ltd (“Johannesburg”), Astec do Brasil Fabricacao de Equipamentos Ltda. (“Belo Horizonte”), Telestack Limited (“Omagh”), Astec India (“India”) and Astec AME (“AME”). The principal purchasers of products produced by this group are distributors, open mine operators, quarry operators, port and inland terminal operators, highway and heavy equipment contractors and foreign and domestic governmental agencies.
Corporate - This category consists of business units that do not meet the requirements for separate disclosure as an operating segment or inclusion in one of the other reporting segments and includes the Company’s parent company and Astec Insurance Company (“Astec Insurance”), a captive insurance company. Certain start-up costs related to foreign sales offices are also included in Corporate’s operating results. The Company evaluates performance and allocates resources to its operating segments based on profit or loss from operations before U.S. federal income taxes, state deferred taxes and corporate overhead and, thus, these costs are included in the Corporate category.
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment sales and transfers are valued at prices comparable to those for unrelated parties.
Segment Information:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | | | | | |
| (in thousands) | Infrastructure Solutions | | Materials Solutions | | Corporate | | Total |
| Net sales to external customers | $ | 181,851 | | | $ | 83,448 | | | $ | — | | | $ | 265,299 | |
| Intersegment sales | 12,340 | | | 6,822 | | | — | | | 19,162 | |
| Gross profit | 38,290 | | | 21,214 | | | 111 | | | 59,615 | |
| Gross profit percent | 21.1 | % | | 25.4 | % | | — | % | | 22.5 | % |
| Segment profit (loss) | $ | 14,215 | | | $ | 8,469 | | | $ | (13,605) | | | $ | 9,079 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2020 | | | | | | |
| (in thousands) | Infrastructure Solutions | | Materials Solutions | | Corporate | | Total |
| Net sales to external customers | $ | 384,469 | | | $ | 169,678 | | | $ | — | | | $ | 554,147 | |
| Intersegment sales | 18,281 | | | 15,096 | | | — | | | 33,377 | |
| Gross profit | 91,213 | | | 42,219 | | | 204 | | | 133,636 | |
| Gross profit percent | 23.7 | % | | 24.9 | % | | — | % | | 24.1 | % |
| Segment profit (loss) | $ | 31,435 | | | $ | 14,504 | | | $ | (16,528) | | | $ | 29,411 | |
| | | Three Months Ended March 31, 2020 | |
| | | Infrastructure Solutions | | | Materials Solutions | | | Corporate | | | Total | |
| Net sales to external customers | | $ | 202,618 | | | $ | 86,230 | | | $ | – | | | $ | 288,848 | |
| Intersegment sales | | | 5,941 | | | | 8,274 | | | | – | | | | 14,215 | |
| Gross profit | | | 52,923 | | | | 21,005 | | | | 93 | | | | 74,021 | |
| Gross profit percent | | | 26.1 | % | | | 24.4 | % | | | 0.0 | % | | | 25.6 | % |
| Segment profit (loss) | | $ | 17,220 | | | $ | 6,035 | | | $ | (2,923 | ) | | $ | 20,332 | |
19
| | | Three Months Ended March 31, 2019 | |
| | | Infrastructure Solutions | | | Materials Solutions | | | Corporate | | | Total | |
| Net sales to external customers | | $ | 219,249 | | | $ | 106,531 | | | $ | – | | | $ | 325,780 | |
| Intersegment sales | | | 9,092 | | | | 4,757 | | | | – | | | | 13,849 | |
| Gross profit (loss) | | | 51,309 | | | | 25,545 | | | | (4 | ) | | | 76,850 | |
| Gross profit percent | | | 23.4 | % | | | 24.0 | % | | | 0.0 | % | | | 23.6 | % |
| Segment profit (loss) | | $ | 18,070 | | | $ | 8,678 | | | $ | (12,908 | ) | | $ | 13,840 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | | | | | |
| (in thousands) | Infrastructure
Solutions | | Materials
Solutions | | Corporate | | Total |
| Net sales to external customers | $ | 197,965 | | | $ | 106,837 | | | $ | — | | | $ | 304,802 | |
| Intersegment sales | 6,944 | | | 5,782 | | | — | | | 12,726 | |
| Gross profit | 57,743 | | | 25,493 | | | 81 | | | 83,317 | |
| Gross profit percent | 29.2 | % | | 23.9 | % | | — | % | | 27.3 | % |
| Segment profit (loss) | $ | 26,926 | | | $ | 8,489 | | | $ | (12,563) | | | $ | 22,852 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 | | | | | | |
| (in thousands) | Infrastructure Solutions | | Materials Solutions | | Corporate | | Total |
| Net sales to external customers | $ | 417,214 | | | $ | 213,368 | | | $ | — | | | $ | 630,582 | |
| Intersegment sales | 16,036 | | | 10,539 | | | — | | | 26,575 | |
| Gross profit | 109,053 | | | 51,038 | | | 76 | | | 160,167 | |
| Gross profit percent | 26.1 | % | | 23.9 | % | | — | % | | 25.4 | % |
| Segment profit (loss) | $ | 44,996 | | | $ | 17,166 | | | $ | (25,471) | | | $ | 36,691 | |
A reconciliation of total segment profit to the Company’s consolidated totals is as follows:
| | | Three Months Ended March 31, | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2020 | | | 2019 | | | Three Months Ended
June 30, | | | Six Months Ended
June 30, | |
| (in thousands) | | (in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
| Total profit shown above | | $ | 20,332 | | | $ | 13,840 | | Total profit shown above | $ | 9,079 | | | $ | 22,852 | | | $ | 29,411 | | | $ | 36,691 | |
| Recapture of intersegment profit | | | 151 | | | | 377 | | Recapture of intersegment profit | 226 | | | 509 | | | 377 | | | 888 | |
| Net income | | | 20,483 | | | | 14,217 | | Net income | 9,305 | | | 23,361 | | | 29,788 | | | 37,579 | |
| Net loss attributable to non-controlling interest in subsidiaries | | | 161 | | | | 57 | | |
| Net (income) loss attributable to non-controlling interest in subsidiaries | | Net (income) loss attributable to non-controlling interest in subsidiaries | (47) | | | 16 | | | 114 | | | 72 | |
| Net income attributable to controlling interest | | $ | 20,644 | | | $ | 14,274 | | Net income attributable to controlling interest | $ | 9,258 | | | $ | 23,377 | | | $ | 29,902 | | | $ | 37,651 | |
Note 15. Contingent Matters
Certain customers have financed purchases of Company products through arrangements in which the Company is contingently liable for customer debt of $1,828$1.7 million and $1,466$1.5 million at March 31,June 30, 2020 and December 31, 2019, respectively. These arrangements expire at various dates through December 2023March 2024 and provide that the Company will receive the lender's full security interest in the equipment financed if the Company is required to fulfill its contingent liability under these arrangements. Additionally, the Company is also potentially liable for 1.75% of the unpaid balance, determined as of December 31st31 of the prior year, on certain past customer equipment purchases that were financed by an outside finance company (the maximum exposure for the Company in 2020 is $584)$0.6 million). The Company has recorded a liability of $1,498$2.1 million related to these guarantees as of March 31,June 30, 2020.
The Company reviews off balance sheet guarantees individually, and at the loss pool level based on one agreement. Prior history is considered in regard to the Company having to perform on any off balance sheet guarantees, as well as future projections of individual customer credit worthiness. During the three and six months ended June 30, 2020, the Company considered the implications of COVID-19 in regard to assessing credit losses related to off balance sheet guarantees.
In addition, the Company is contingently liable under letters of credit issued by a domestic lender totaling $7,877$8.8 million as of March 31,June 30, 2020, including $3,200$3.2 million of letters of credit guaranteeing certain Astec Brazil bank debt. The outstanding letters of credit expire at various dates through April 2021.June 2023. As of March 31,June 30, 2020, the Company’s foreign subsidiaries are contingently liable for a total of $2,321$2.7 million in performance letters of credit, advance payments and retention guarantees. The maximum potential amount of future payments under these letters of credit and guarantees for which the Company could be liable is $10,198$11.5 million as of March 31,June 30, 2020.
The Company and certain of its current and former executive officers have been named as defendants in a putative shareholder class action lawsuit filed on February 1, 2019, as amended on August 26, 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 and has filed a motion to dismiss the lawsuit on October 25, 2019. The Company is unable to determine whether or nothas accrued a future loss will be incurred due to this litigation, or estimate a range$0.6 million liability as of loss, if any, at this time.June 30, 2020.
The Company's GEFCOGEFCO subsidiary has been named a defendant in a lawsuit originally filed on August 16, 2018 with an amended complaint filed on January 25, 2019, in the United States District Court for the Western District of Oklahoma. The action is styled VenVer S.A. and Americas Coil Tubing LLP v. GEFCO, Inc., Case No. CIV-18-790-SLP. The complaint alleges breaches of warranty and other similar claims regarding equipment sold by GEFCO in 2013. In addition to seeking a rejection (rescission) of the purchase contract, the plaintiff is seeking special and consequential damages. The purchase contract contains an exclusion of consequential damages. The original purchase price of the equipment was approximately $8,500.$8.5 million. GEFCO disputes the plaintiff’s allegations and intends to defend this lawsuit vigorously. The Company is unable to determine whether or not a future loss will be incurred due to this litigation or estimate a range of loss, if any, at this time.
The Company is currently a party to various claims and legal proceedings that have arisen in the ordinary course of business. If management believes that a loss arising from such claims and legal proceedings is probable and can reasonably be estimated, the Company records the amount of the loss (excluding estimated legal fees) or the minimum estimated liability when the loss is estimated using a range and no point within the range is more probable than another. As management becomes aware of additional information concerning such contingencies, any potential liability related to these matters is assessed and the estimates are revised, if necessary. If management believes that a loss arising from such claims and legal proceedings is either (i) probable but cannot be reasonably estimated or (ii) reasonably possible but not probable, the Company does not record the amount of the loss, but does make specific disclosure of such matter. Based upon currently available information and with the advice of counsel, management believes that the ultimate outcome of its current claims and legal proceedings, individually and in the aggregate, will not have a material adverse effect on the Company's financial position, cash flows or results of operations. However, claims and legal proceedings are subject to inherent uncertainties and rulings unfavorable to the Company could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse effect on the Company's financial position, cash flows or results of operations.
Note 16. Shareholders’ EquityShare-Based Compensation
Under the Company’s long-term incentive plans, key members of management may be issued restricted stock units (“RSUs”) each year based upon the financial performance of the Company and its subsidiaries. The number of RSUs granted to employees each year is determined based upon the performance of individual subsidiaries and consolidated financial performance. Generally, for RSUs granted through 2016, each award will vest at the end of five years from the date of grant, or at the time a recipient retires after reaching age 65, if earlier. Awards granted in 2017 and 2018 will vest at the end of three years from the date of grant or at the time a recipient retires after reaching age 65, if earlier. Awards granted in 2019 and thereafter will vest ratably, at the end of each year from the date of grant, over a three-year period. Awards granted through February 2020 were granted based upon past performance and were typically granted each year, shortly after the end of the year. Beginning in March 2020, the incentive plan was modified to award a combination of RSUs and Performance Stock Units (“PSUs”) which are granted in March each year based upon performance targets for the next three years, as approved by the Company’s board of directors. Fifty50% percent of the awards granted are time based vesting RSUs and the other fifty50% percent are performance based awards granted at the plan’s targeted performance. The actual number of PSUs ultimately vesting can vary from 0 to 200% of target, based upon the Company performance. Additional RSUs are granted to the Company’s outside directors under the Company’s Non-Employee Directors Compensation Plan with a one-year vesting period.
A total of 47 and 13 RSUs vested duringDuring the three-month periodssix months ended March 31,June 30, 2020 and 2019, respectively. The Company withheld 15 and 4 shares due to statutory payroll tax withholding requirements upon the vesting of the RSUs during each of the first three-month periods in 2020 and 2019, respectively, and used Company funds to remit the related required minimum withholding taxes to the various tax authorities. The vesting date fair value of the RSUs that vested during the first three months of 2020 and 2019 was $1,804 and $509, respectively. The grant date fair value of the RSUs granted based upon past performance duringwas $3.2 million and $2.1 million, respectively. During the first threesix months ofended June 30, 2020, and 2019 was $3,176 and $1,448, respectively. Thethe grant date fair value of the RSUs and PSUs granted in the first three months of 2020 based upon targeted future performance and granted to our non-employee directors was $5,688. Compensation$6.1 million and $1.0 million, respectively.
The total stock-based compensation expense of $933was $1.6 million and $887 was recorded in$2.5 million for the three-monththree and six months periods ended March 31,June 30, 2020, respectively, and $0.5 million and $1.4 million for the three and six month periods ended June 30, 2019, respectively, to reflect the fair value of RSUs granted to employees amortized over the portion of the vesting period occurring during the periods.
| | | | | | | | | | | |
| 2020 | | |
| Units | | Weighted Average Grant Date Fair Value |
| Outstanding January 1, | 187,646 | | | $ | 45.78 | |
| Granted | 298,725 | | | 34.51 | |
| Vested | (73,228) | | | 49.97 | |
| Forfeited | (8,316) | | | 43.84 | |
| Outstanding, June 30, | 404,827 | | | $ | 36.75 | |
Note 17. Other Income, Net of Expenses
Other income, net of expenses for the three-monththree and six-month periods ended March 31,June 30, 2020 and 2019 isare presented below:
| | | Three Months Ended March 31, | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2020 | | | 2019 | | | Three Months Ended
June 30, | | | Six Months Ended
June 30, | |
| (in thousands) | | (in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
| Interest income | | $ | 220 | | | $ | 275 | | Interest income | $ | 198 | | | $ | 295 | | | $ | 418 | | | $ | 569 | |
| Gain (loss) on investments | | | (65 | ) | | | 149 | | |
| Gain on investments | | Gain on investments | 172 | | | 49 | | | 107 | | | 198 | |
| Other | | | 79 | | | | 44 | | Other | 64 | | | 28 | | | 143 | | | 72 | |
| Total | | $ | 234 | | | $ | 468 | | Total | $ | 434 | | | $ | 372 | | | $ | 668 | | | $ | 839 | |
Note 18. Derivative Financial Instruments
The Company is exposed to certain risks related to its ongoing business operations. The primary risk managed by using derivative instruments is foreign currency risk. From time to time, the Company’s foreign subsidiaries enter into foreign currency exchange contracts to mitigate exposure to fluctuations in currency exchange rates. The fair value of the derivative financial instruments is recorded on the Company’s unaudited condensed consolidated balance sheets and is adjusted to fair value at each measurement date. The changes in fair value are recognized in the accompanying unaudited condensed consolidated statements of income in the current period. The Company does not engage in speculative transactions nor does it hold or issue financial instruments for trading purposes. The average U.S. dollar equivalent notional amount of outstanding foreign currency exchange contracts was $8,332$8.7 million during the three-monthsix-month period ended March 31, 2020.June 30, 2020. The Company reported $466 and $4of derivative assets in other current assets at March 31, 2020 and December 31, 2019, respectively and $49$0.4 million of derivative liabilities in other current liabilities at June 30, 2020. At December 31, 2019.2019, the Company reported $4 thousand of derivative assets in other current assets and $49 thousand of derivative liabilities in other current liabilities. The Company recognized, as a component of cost of sales, a net gainloss of $1,865$837 thousand and a net lossgain of $76$62 thousand on the changes in fair value of derivative financial instruments in the three-month periods ended March 31,June 30, 2020 and 2019,, respectively. The Company recognized, as a component of cost of sales, net gain of $1.0 million and net loss of $14 thousand on the changes in fair value of derivative financial instruments in the six-month periods ended June 30, 2020 and 2019, respectively. There were no derivatives that were designated as hedges at June 30, 2020.
March 31, 2020
.
Note 19. Restructuring and Asset Impairment Charges
During the first three months of 2020, the Company incurred $2,711 of restructuringRestructuring and asset impairment charges comprised of goodwillfor the three and six-month periods ended June 30, 2020 are presented below (in thousands):
| | | | | | | | | | | |
| Three Months Ended
June 30, 2020 | | Six Months Ended
June 30, 2020 |
| Impairment of a Company plane and costs associated with repairs | $ | 2,612 | | | $ | 2,612 | |
| Goodwill impairment related to mobile asphalt equipment operations | — | | | 1,646 | |
| Closing operations at the Mequon site and moving operations - principally severance | 1,389 | | | 1,389 | |
| Severance pay associated with workforce reductions at multiple sites | 742 | | | 1,464 | |
| Closing operations at the Albuquerque site and moving operations | 750 | | | 1,093 | |
| Final stages of closing AMM operations in Germany | 285 | | | 285 | |
| Abandoned projects and other restructuring charges | 216 | | | 216 | |
| Restructuring and asset impairment charges | $ | 5,994 | | | $ | 8,705 | |
Restructuring and asset impairment charges of $1,646 due to a 100% impairment of goodwill related to its mobile asphalt equipment operations included infor the Infrastructure Solutions segment; $344 of costs associated with the closing of its Albuquerque sitethree and moving its operations to other Company locations; $251 of severance pay associated with exiting the oilsix months ended June 30, 2019 were $44 thousand and gas line of business at its Enid site; and $470 of severance pay associated with work force reductions at other locations. $556 thousand, respectively.
Restructuring charges accrued, but not paid, were $2.2 million as of March 31, 2020 was $663.June 30, 2020. Restructuring costs accrued, but not paid as of December 31, 2019 were not significant.
Note 20. Subsequent Event
Con-e-Co Acquisition — The Company isentered into a Stock Purchase Agreement, dated as of July 20, 2020, by and between Oshkosh Corporation — (“Oshkosh”) for the purchase of the Con-e-Co concrete equipment company in Nebraska for the final stagepurchase price of completing its closing$13.7 million after adjustments and was paid in cash. The purchase was consummated on July 20, 2020. The Company has not yet completed their business combination purchase price analysis. The Company expects goodwill, if any, to be nondeductible for income tax purposes. The results of its AMM operations will be included from the date of acquisition.
BMH Systems Acquisition — The Company entered into a Share Purchase Agreement, dated as of August 3, 2020, by and between BMH Systems — for the purchase of the concrete equipment company in Germany which beganMontreal, Canada. The purchase was $15.7 million after adjustments and was paid in late 2018 andcash. The purchase was consummated on August 3, 2020. The Company has not yet completed their business combination purchase price analysis. The Company expects goodwill, if any, to be nondeductible for income tax purposes. The results of operations will be included from the site’s real estate was sold in early 2020. Related restructuring charges totaling $512 were incurred in the first three monthsdate of 2019.
Item 2. Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements contained anywhere in this Quarterly Report on Form 10-Q that are not limited to historical information are considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are sometimes identified by the words “will,” “would,” “should,” “could,” “may,” “believes,” “anticipates,” “intends,” “forecasts” and “expects” and similar expressions. Such forward-looking statements include, without limitation, statements regarding the Company’s expected sales and results of operations during 2020, the Company’s expected capital expenditures in 2020, the ability of the Company to meet its working capital and capital expenditure requirements through MayAugust 2021, the amount and impact of any current or future state or federal funding for transportation construction programs, the need for road improvements, the amount and impact of other public sector spending and funding mechanisms, changes in the economic environment as it affects the Company, the Company being called upon to fulfill certain contingencies, the granting of restricted stock units and other incentive awards, changes in interest rates and the impact of such changes on the financial results of the Company, changes in the prices of steel and oil and the impact of such changes generally and on the demand for the Company’s products, customer’s buying decisions, the Company’s business, the ability of the Company to offset future changes in prices in raw materials, the change in the strength of the dollar and the level of the Company’s presence and sales in international markets, the impact that further development of domestic oil and natural gas production capabilities would have on the domestic economy and the Company’s business, the percentage of the Company’s equipment sold directly to end users, the impact of IRS tax regulations, payment of dividends by the Company, the impact of the Company’s efforts to impact its gross margins and inventory levels, the restructuring/relocation of Albuquerque’s operations and the ultimate sale of the Albuquerque facilities, the exiting of Enid’s oil and gas business, the disposal of the related oil and gas inventory, the marketing for sale of Enid’s production facilities and remaining water well line of business, the closure of the Mequon location and associated efficiencies, the possibility of future goodwill impairment charges, the ultimate outcome of the Company’s current claims and legal proceedings and the continued impact of the novel coronavirus (“COVID-19”) pandemic on the Company’s business.
These forward-looking statements are based largely on management’s expectations, which are subject to a number of known and unknown risks, uncertainties and other factors discussed in this Reportreport and in other documents filed by the Company with the Securities and Exchange Commission, which may cause actual results, financial or otherwise, to be materially different from those anticipated, expressed or implied by the forward-looking statements. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements to reflect future events or circumstances.
The risks and uncertainties identified herein under the caption “Item 1A. Risk Factors” in Part II of this Report, elsewhere herein and in other documents filed by the Company with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, should be carefully considered when evaluating the Company’s business and future prospects.
Overview
The Company is a leading manufacturer and seller of equipment for the road building, aggregate processing, geothermal, water, oil and gas, and wood processing industries. The Company’s businesses:
•design, engineer, manufacture and market equipment used in each phase of road building, including mining, quarrying and crushing the aggregate, mobile bulk and material handling solutions, producing asphalt or concrete, recycling old asphalt or concrete and applying the asphalt;
•design, engineer, manufacture and market additional equipment and components, including equipment for geothermal drilling, industrial heat transfer, wood chipping and grinding, commercial and industrial burners, combustion control systems; and
•manufacture and sell replacement parts for equipment in each of its product lines.
The Company, as we refer to it herein, consists of a total of 25 companies that are consolidated in our consolidated financial statements. The companies include manufacturing companies, companies that operate as dealers for the manufacturing companies, a captive insurance company and the parent company. During the first quarter of 2020, the Company completed an internal reorganization of its reportable segments from three to two reportable segments (plus Corporate) and such segments are organized, operated and managed based on the products and services offered by the business units included in each segment.
Amounts previously reported under the previous segment structure have been restated to conform to the new segment structure. Additionally, in both internal and external communications, the Company is transitioning references to each individual business unit by a name associated with its location, as compared to previous references to the subsidiary company names. A brief description of each segment is as follows:
Infrastructure Solutions - The Infrastructure Solutions segment, also referred to herein as the Infrastructure Solutions Group, is comprised of 13 business units. These business units include Astec, Inc. (“CHA-Jerome Ave”), Roadtec, Inc. (“CHA-Manufacturers Rd”), Carlson Paving Products, Inc. (“Tacoma”), Heatec, Inc. (“CHA-Wilson Rd”), CEI Enterprises, Inc. (“Albuquerque”), GEFCO, Inc. (“Enid”), Peterson Pacific Corp. (“EUG-Airport Rd”), Power Flame Incorporated (“Parsons”), RexCon, Inc. (“Burlington”), Astec Mobile Machinery GmbH (“AMM”), Astec Australia Pty Ltd (“Australia”), Astec LatAm (“LatAm)LatAm"), and Astec Thailand (“Thailand”). Products designed, engineered, manufactured and marketed by this group include a complete line of asphalt plants and their related components, asphalt pavers, screeds, milling machines, material transfer vehicles, stabilizers and related ancillary equipment, concrete plants, water well drilling rigs, wood chippers, wood grinders, heaters, commercial burners and industrial burners. The principal purchasers of the segment’s products are asphalt producers, highway and heavy equipment contractors, foreign and domestic governmental agencies, processors of oil, gas and biomass for energy production, ready mix concrete producers and contractors in the construction and demolition recycling markets.
In 2018, the Company decided to close and cease operations at AMM, located in Germany, and its land and buildings were sold in January 2020. In late 2019, the Company announced the closing of its Albuquerque site due to market conditions and underutilization of the manufacturing facility. Responsibilities for manufacturing and marketing of Albuquerque product lines were transferred to other Company facilities within the Infrastructure Solutions segment in late 2019 and early 2020. The Albuquerque site was closed as of March 31, 2020 and its land and buildings are currently accounted for as held for sale. In late 2019, the Company impaired and discontinued Enid’s oil and gas product lines and is in the process of disposing of the related oil and gas inventory. The Company is also currently marketing its Enid production facilities and remaining water well line of business for sale.
Materials Solutions– The Materials Solutions segment, also referred to herein as the MaterialMaterials Solutions Group is comprised of 10 business units which are focused on designing and manufacturing heavy processing equipment, as well as servicing and supplying parts for the aggregate, metallic mining, recycling, ports and bulk handling markets. These business units are Telsmith, Inc. (“Mequon”), Kolberg-Pioneer, Inc. (“Yankton”), Astec Mobile Screens, Inc. (“Sterling”), Johnson Crushers International, Inc. (“EUG-Franklin Blvd”), Breaker Technology Ltd/Breaker Technology, Inc. (“Thornbury”), Osborn Engineered Products, SA (Pty) Ltd (“Johannesburg”), Astec do Brasil Fabricacao de Equipamentos Ltda. (“Belo Horizonte”), Telestack Limited (“Omagh”), Astec India (“India”) and Astec AME (“AME”). The principal purchasers of products produced by this group are distributors, open mine operators, quarry operators, port and inland terminal operators, highway and heavy equipment contractors and foreign and domestic governmental agencies.
Corporate - This category consists of business units that do not meet the requirements for separate disclosure as an operating segment or inclusion in one of the other reporting segments and includes the Company’s parent company and Astec Insurance Company (“Astec Insurance”), a captive insurance company. Certain start-up costs related to foreign sales offices are also included in Corporate’s operating results. The Company evaluates performance and allocates resources to its operating segments based on profit or loss from operations before U.S. federal income taxes, state deferred taxes and corporate overhead and, thus, these costs are included in the Corporate category.
The Company’s financial performance is affected by a number of factors, including the cyclical nature and varying conditions of the markets it serves. Demand in these markets fluctuates in response to overall economic conditions and is particularly sensitive to the amount of public sector spending on infrastructure development, privately funded infrastructure development, changes in the prices of liquid asphalt, oil and natural gas and steel.
Federal funding provides a significant portion of all highway, street, roadway and parking construction in the United States. The Company believes that federal highway funding influences the purchasing decisions of the Company’s customers, who are typically more comfortable making capital equipment purchases with long-term federal legislation in place.
In July 2012, the “Moving Ahead for Progress in the 21st Century Act” (“Map-21”) was approved by the U.S. federal government, which authorized $105 billion of federal spending on highway and public transportation programs through fiscal year 2014. In August 2014, the U.S. government approved short-term funding of $10.8 billion through May 2015. Federal transportation funding operated on short-term appropriations until December 4, 2015 when the Fixing America’s Surface Transportation Act (“FAST Act”) was signed into law. The $305 billion FAST Act approved funding for highways of approximately $205 billion and transit projects of approximately $48 billion for the five-year period ending September 30, 2020.
The Company believes a multi-year highway program (such as the FAST Act) will have the greatest positive impact on the road construction industry and allows its 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. 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 funding of a bill passed by the new 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 diversion of previously appropriated highway funds for other purposes, or it could restrict funding of infrastructure projects unless states comply with certain federal policies. The level of future federal highway construction is uncertain and any future funding may be at levels lower than those currently approved or that have been approved in the past.
The public sector spending described above is needed to fund road, bridge and mass transit improvements. The Company believes that increased funding is unquestionably needed to restore the nation’s highways to a quality level required for safety, fuel efficiency and mitigation of congestion. In the Company’s opinion, amounts needed for such improvements are significantly greater than amounts approved to date, and funding mechanisms such as the federal usage fee per gallon of gasoline, which is 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 natural gas, and the price of steel may each affect the Company’s financial performance. Economic downturns generally result in decreased purchasing by the Company’s customers, which, in turn, causes reductions in sales and increased pricing pressure on the Company’s products. Rising interest rates also typically negatively impact customers’ attitudes toward purchasing equipment. The Federal Reserve has maintained historically low interest rates in response to the economic downturn which began in 2009 with several rate adjustments (both up and down) in recent years. The current Federal Funds Rate is considered in the historically low range and future rate changes may occur.
Significant portions of the Company’s revenues from the Infrastructure Solutions Group relate to the sale of equipment involved in the production, handling, recycling or application of 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 is likely to alter demand for asphalt and, therefore, affects demand for certain Company products. While increasing oil prices may have a negative financial impact on many of the Company’s customers, the Company’s equipment can use a significant amount of recycled asphalt pavement, thereby 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. While current oil prices are at recent record lows, oil prices have routinely fluctuated in recent years and are expected to continue to fluctuate in the future. Minor fluctuations in oil prices should not have a significant impact on 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’s products. The Company believes the continued funding of the FAST Act federal highway bill passed in December 2015, together with the prospect of potential replacement funding, have a greater potential to impact the buying decisions of the Company’s customers than does the fluctuation of oil prices in 2020 and 2021.
Contrary to the impact of oil prices on many of the asphalt related Infrastructure Solutions Group products as discussed above, other products manufactured by the Company, which are used in heaters for refineries and oil sands, 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 demand for the Company’s oil and gas related products.
Steel is a major component in the Company’s equipment. Steel prices remained leveldeclined during the firstsecond quarter of 2020 but began a decline in April 2020 due to the unprecedented fall in demand as a result of the effects of COVID-19. Mills have responded and shuttered much ofby adjusting their production.production capacity to meet lower demand. Prices are expected to remainremained stable at these lower levels as supply andwas balanced to demand. Steel outlook is expected to remain stable during the third quarter of 2020 with no change to demand moves toward balance.drivers. The Company will continue to utilize forward looking contracts when it deems conditions are appropriate (with no minimum or specified quantity guarantees) to minimize the impact of any price increases. We will continue to monitor trends in steel prices in 2020 and establish future contract pricing accordingly.
In addition to the factors stated above, many of the Company’s markets are highly competitive, and its products compete worldwide with a number of other manufacturers and dealers that produce and sell similar products. 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’s international sales. The continued strengthened U.S. dollar since mid-2012, including significant strengthening in the first quarter of 2020, has negatively impacted pricing in certain foreign markets the Company serves. The Company expects the U.S. dollar to remain strong in the near term relative to most foreign currencies. Domestic interest rates rising in the future or weakening economic conditions abroad could cause the U.S. dollar to further strengthen, which could negatively impact the Company’s international sales.
In the United States and internationally, the Company’s equipment is marketed directly to customers as well as through dealers. During 2019, approximately 60% of the Company’s sales were to the end user. The Company expects this ratio to be between 60% and 70% for 2020.
As mentioned above, the Company has recently transitioned from a decentralized management structure to a matrix organizational management structure with major directives and decisions being made at the segment and/or parent company level. Subsidiary president positions, with responsibility for the performance of all aspects of their local company, have been eliminated. Performance is now evaluated at the consolidated and separate segment levels. Performance of individual subsidiaries/sites is the responsibility of segment senior managers and segment functional team leaders under their direction. Senior 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). Standard accounting procedures are prescribed and followed in all reporting.
The Company’s current profit sharing plans allow corporate officers and other key management participants the opportunity to earn profit sharing incentives based upon the Company’s and/or the individual group’s working capital turnover, adjusted EBITDA margin and safety. Executive and senior leadership team members, when calculated at targeted performance, are between 15% and 100% of their base salary, depending upon their responsibilities, and the plans allow for awards of up to double the target incentive compensation for executive team members. Other salaried employees have the ability to earn profit sharing incentives of up to 5% of their annual salary and non-union hourly employees can earn between $0 and $750 each.
The Company’s current long-term incentive plans allow corporate officers and other key management participants to be awarded a 50/50 combination of service awards, Restricted Stock Units (“RSUs”), and performance awards, Performance Stock Units (“PSU”). Service awards are granted at target performance and vest in three equal annual installments beginning on the first anniversary of the grant date, subject to continued employment. Performance awards are granted at target performance, and are earned based upon the achievement of two equally rated performance metrics (return on invested capital (“ROIC”) and total shareholder return (“TSR”)). Total awards range from 20% to 150% of participants’ annual salaries at target and participants may earn up to 200% of their PSU award.
During 2018 through mid-2019, the Company retained the services of a specialized consulting firm to assist with the accumulation of company-wide purchasing data including a system for maintaining the data 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 infor the remainder of 2020 and thereafter.
Results of Operations
Impact of COVID-19
The COVID-19 outbreak has caused significant disruptions to national and global economies. Our U.S. based businesses are designated as “Critical Manufacturing” infrastructure companies by the U.S. Department of Homeland Security and, as such, have remained open. Two of our foreign operations in the MaterialMaterials Solutions segment,Group, located in Northern Ireland and South Africa, as dictated by their local governments, temporarily ceased manufacturing activities in late March 2020. The South Africa site reopened on May 4, 2020 and are expected to remain closed at least until sometime inthe Northern Ireland facility reopened on May 11, 2020. The Company's top priority is to protect its employees and their families, its customers and suppliers and its operations from any adverse impacts by taking precautionary measures as directed by health authorities and local governments. In early March 2020, the Company formed a COVID-19 task force, which continually monitors information from government agencies, our sites, customers, suppliers and other sources. The Company has enacted several policies to combat the spread of the virus and keep our employees and visitors safe, including work at home initiatives, limits on employee travel, visitors policies, cleaning and disinfecting procedures and mandated temperature checks for visitors and employees. We are utilizing technology to hold meetings virtually as business permits. During the firstsecond quarter of 2020, the impact on our sales and financial results was minimal with identified delayed shipments totaling $8,766 and canceled orders of $331. Additionally, customers attributed delays in remitting payments to us totaling $3,638largely driven by the international site closures due to the impact of COVID-19 on their businesses.COVID-19. No significant additional costs to our business were identified in the firstsecond quarter of 2020. WeDetermining the extent of variances and fluctuations from COVID-19 has been difficult because there have been no easily discernible trends or patterns to our business. However, we expect an increase in the impact from COVID-19 to our business in the secondthird quarter and possibly thereafter. While we expect this situation to be temporary, any longer-term impact to our business is currently unknown due to the uncertainty around the outbreak’s duration and its broader impact. As part of our strategic planning, management has prepared several fluid business models including specific actions to take in the future, depending on the magnitude of the virus on our business levels. For a more detailed description of the risks our business faces as a result of COVID-19, please see Part II – Item 1.A. (“Risk Factors”) below. The Company’s strong balance sheet, including $43,854$119.8 million of cash on hand, no borrowings under its domestic $150,000$150.0 million bank line of credit, only $1,171$1.5 million of debt outstanding on its foreign banking arrangements and $25,672$25.7 million of cash expected to be received (included in cash on hand) from the U.S. tax refund request filed due to changes in net operating loss (“NOL”) carryback rules under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act,, will aid the Company in withstanding possible future negative impacts of COVID-19. As discussed elsewhere in this report, as part of the Company’s management transition from a decentralized management model to a matrix organizational management structure, the Company has taken numerous steps to right size itincrease the efficiency in its operations. While COVID-19 did not have a material impact on the Company’s firstsecond quarter 2020 operations, management has prepared several scenarios of possible future impacts and related costs and cash savings action steps to take as the circumstances dictate. See the Liquidity and Capital Resources section below for addition information concerning the Company’s liquidity.
Restructuring Charges
During the first three months of 2020, the Company incurred $2,711 ($2,679 in the Infrastructure Solutions segment and $32 in the Materials Solutions segment) of restructuringRestructuring and asset impairment charges comprised of goodwill impairment charges of $1,646 due to a 100% impairment of goodwill related to its mobile asphalt equipment operations included for the three and six-month periods ended June 30, 2020 are presented below (in the Infrastructure Solutions segment; $344 of costs associated with the closing of its Albuquerque site and moving its operations to other Company locations; $251 of severance pay associated with exiting the oil and gas line of business at its Enid site; and $470 of severance pay associated with work force reductions at other locations.thousands):
The Company is in the final stage of completing its closing of its AMM operations in Germany which began in late 2018 and the site’s real estate was sold in early 2020. Related restructuring charges totaling $512 were incurred in the first three months of 2019. | | | | | | | | | | | |
| Three Months Ended
June 30, 2020 | | Six Months Ended
June 30, 2020 |
| Impairment of a Company plane and costs associated with repairs | $ | 2,612 | | | $ | 2,612 | |
| Goodwill impairment related to mobile asphalt equipment operations | — | | | 1,646 | |
| Closing operations at the Mequon site and moving operations - principally severance | 1,389 | | | 1,389 | |
| Severance pay associated with workforce reductions at multiple sites | 742 | | | 1,464 | |
| Closing operations at the Albuquerque site and moving operations | 750 | | | 1,093 | |
| Final stages of closing AMM operations in Germany | 285 | | | 285 | |
| Abandoned projects and other restructuring charges | 216 | | | 216 | |
| Restructuring and asset impairment charges | $ | 5,994 | | | $ | 8,705 | |
Net Sales
Net sales for the firstsecond quarter of 2020 were $288,848$265.3 million compared to $325,780$304.8 million for the firstsecond quarter of 2019, a decrease of $36,932$39.5 million or 11.3%13.0%. Sales are generated primarily from new equipment and parts sales to domestic and international customers. Sales decreased in both the Infrastructure Solutions and Material Solutions Groups. The decrease of sales in the Infrastructure Solutions Group was driven by the non-recurring Georgia Pellet Plant sale in the second quarter of 2019 for $20.0 million. The decrease of sales in the Material Solutions Group was driven by COVID-19 plant shutdowns, as well as lower sales related to its crushing and screening projects. Domestic sales for the firstsecond quarter of 2020 as compared to the firstsecond quarter of 2019 declined by 11.0%, due primarily10.0%. International sales in the second quarter of 2020 decreased 25.3% as compared to reduced backlogs entering intothe second quarter of 2019, driven by COVID-19 related business disruptions, as well as the impact from the strong U.S. dollar causing Company products that are produced in the United States to be more expensive. Sales reported by the Company’s foreign subsidiaries in U.S. dollars for the second quarter of 2020 would have been $4.1 million higher had second quarter 2020 foreign exchange rates been the same as second quarter 2019 rates.
Net sales for the first six months of 2020 were $554.1 million compared to $630.6 million for the first six months of 2019, a decrease of $76.4 million or 12.1%. Sales are generated primarily from new equipment and parts sales to domestic and international customers. Sales decreased in both the Infrastructure Solutions and Material Solutions Groups. The decrease in sales for the Infrastructure Solutions Group was driven by the non-recurring Georgia Pellet Plant sale in the second quarter of 2019 for $20.0 million, as well as a lower order backlog entering the first quarter of 2020 compared to the first quarter of 2019. The decrease in sales for the Material Solutions Group was driven by COVID-19 plant shutdowns, as well as lower sales related to its crushing and screening projects. Domestic sales for the first six months of 2020 as compared to the first quartersix months of 2019.2019 declined by 10.5%. International sales in the first quartersix months of 2020 decreased 12.7%18.8% as compared to the first quartersix months of 2019, partially due todriven by COVID-19 related business disruptions, as well as the impact from the strong U.S. dollar causing Company products produced in the United States to be more expensive. Sales reported by the Company’s foreign subsidiaries in U.S. dollars for the first quartersix months of 2020 would have been $2,783$6.9 million higher had first quartersix months of 2020 foreign exchange rates been the same as first quartersix months of 2019 rates.
Domestic sales for the first quartersix months of 2020 were $233,882$455.4 million or 81.0%82.2% of consolidated net sales compared to $262,829$509.0 million or 80.7% of consolidated net sales for the first six months of 2019, a decrease of $53.6 million or 10.5%. Domestic sales for the first six months of 2020 as compared to the first six months of 2019 decreased by $32.7 million in the Infrastructure Solutions Group and $21.0 million in the Materials Solutions Group.
International sales for the second quarter of 2020 were $43.8 million or 16.5% of consolidated net sales compared to $58.6 million or 19.2% of consolidated net sales for the second quarter of 2019, a decrease of $28,947$14.8 million or 11.0%25.3%. DomesticInternational sales for the firstsecond quarter of 2020 as compared to the firstsecond quarter of 2019 decreased by $14,269increased $2.3 million in the Infrastructure Solutions Group and $14,678 in the Materials Solutions Group.
International sales for the first quarter of 2020 were $54,966 or 19.0% of consolidated net sales compared to $62,951 or 19.3% of consolidated net sales for the first quarter of 2019, a decrease of $7,985 or 12.7%. International sales for the first quarter of 2020 as compared to the first quarter of 2019 decreased $2,362 in the Infrastructure Solutions Group and $5,623$17.1 million in the Materials Solutions Group. Decreases in international sales in Canada, Australia, Africa, Europe, Central America, Asia and the West Indies were partially offset by increases in sales in South America, Japan & Korea and the Middle East.
International sales for the first six months of 2020 were $98.7 million or 17.8% of consolidated net sales compared to $121.5 million or 19.3% of consolidated net sales for the first six months of 2019, a decrease of $22.8 million or 18.8%. International sales for the first six months of 2020 as compared to the first six months of 2019 decreased $0.1 million in the Infrastructure Solutions Group and $22.7 million in the Materials Solutions Group. Decreases in international sales in Canada, Australia, MexicoAfrica, Europe, Central America and Asia were partially offset by increases in sales in Brazil,South America, China, Japan & Korea, the West Indies and Europe.
Parts sales for the firstsecond quarter of 2020 were $88,708$66.4 million compared to $92,601$74.1 million for the firstsecond quarter of 2019, a decrease of $3,893$7.7 million or 4.2%10.4%. Parts sales as a percentage of net sales increased 23070 basis points to 30.7%25.0% in the firstsecond quarter of 2020 compared to 28.4%24.3% in the firstsecond quarter of 2019. Parts sales decreased $2,289$2.0 million in the Infrastructure Solutions Group and $1,604$5.7 million in the Materials Solutions Group.
Gross Profit
Consolidated gross profit decreased $2,829$23.7 million or 3.7%28.4% to $74,021$59.6 million for the firstsecond quarter of 2020 compared to $76,850$83.3 million for the firstsecond quarter of 2019. Gross profit as a percentage of sales increased 200decreased 480 basis points to 25.6%22.5% for the firstsecond quarter of 2020 compared to 23.6%27.3% for the firstsecond quarter of 2019 due primarily to the non-recurring Georgia Pellet Plant sale, which resulted in $20.0 million of gross profit in the second quarter of 2019 as the related inventory values had been written off in 2018.
Consolidated gross profit decreased $26.5 million or 16.6% to $133.6 million for the first six months of 2020 compared to $160.2 million for the first six months of 2019. Gross profit as a percentage of sales decreased 130 basis points to 24.1% for the first six months of 2020 compared to 25.4% for the first six months of 2019 due to the non-recurring Georgia Pellet Plant sale, which resulted in $20.0 million of gross profit in the second quarter of 2019 as the related inventory values had been written off in 2018. This was offset by improved overhead absorption variances (partially resulting from the Company’s new capacitydriven by restructuring and load sharing between facilities as part of the Company’s restructuringright-sizing activities which began in late 2019), reduced manufacturing labor (partially due to the late 2019 and early 2020 Company’s efforts to right size its operations) and reduced material costs associated with the Company’s strategic procurement efforts.
Selling, General, Administrative and Engineering Expenses
Selling, general, administrative and engineering expenses decreased $1,993,$10.0 million, or 3.4%19.0%, to $56,167$42.8 million or 19.4%16.1% of net sales for the firstsecond quarter of 2020, compared to $58,160$52.8 million or 17.3% of net sales for the second quarter of 2019 primarily due to reductions in consulting fees, travel and employee expenses.
Selling, general, administrative and engineering expenses decreased $12.0 million, or 10.8%, to $98.9 million or 17.9% of net sales for the first quartersix months of 2020, compared to $111.0 million or 17.6% of net sales for the first six months of 2019 primarily due to a $3,034 decreasereductions in generalconsulting fees, travel and administrative expenses (primarily outside services and consultants ($2,650)), partially offset by a $1,616 increase in selling expenses (primarily increased exhibit costs associated with the once every three year ConExpo show ($4,182), partially offset by reduction in other exhibit costs ($1,369) and salaries and commissions ($1,142)).
Interest Expense
Interest expense for the firstsecond quarter of 2020 decreased $611$0.4 million to $37$0.1 million from $648$0.5 million for the firstsecond quarter of 2019 due primarily to the Company not having any loans outstanding on the Company’s domestic line of credit in the firstsecond quarter of 2020.
Interest expense for the first six months of 2020 decreased $0.9 million to $0.2 million from $1.1 million for the first six months of 2019 due primarily to the Company not having any loans outstanding on the Company’s domestic line of credit in the second quarter of 2020.
Other Income, Net of Expenses
Other income, net of expenses was $234$0.4 million for the firstsecond quarter of 2020 compared to $468$0.4 million for the second quarter of 2019.
Other income, net of expenses was $0.7 million for the first quartersix months of 2020 compared to $0.8 million for the first six months of 2019, a decrease of $234$0.1 million due primarily to reduced investment earnings.
Income Tax Expense
The Company’s income tax expense for the second quarter of 2020 was $1.9 million compared to income tax expense of $7.0 million for the second quarter of 2019. The Company’s combined effective income tax rate was 16.7% for the second quarter of 2020 compared to 23.1% for the second quarter of 2019. The tax rate for 2020 was lower compared to 2019 due to an increased research and development credit benefit for 2020 in combination with a lower comparative pre-tax book income to 2019, which included the $20.0 million sale of the Georgia Pellet Plant in the second quarter of 2019.
The Company’s income tax benefit for the first threesix months of 2020 was $5,143$3.3 million compared to income tax expense of $3,781$10.8 million for the first threesix months of 2019. The Company’s combined effective income tax rate was (33.5)(12.4)% for the first quartersix months of 2020 compared to 21.0%22.3% for the first quartersix months of 2019. The tax provision for the threesix months ended March 31,June 30, 2020 includes a $9,532, or $0.42 per diluted share,$9.5 million tax benefit resulting from provisions of the CARES Act enacted on March 27, 2020. Among other provisions, the CARES Act modified the NOL carryback provisions, which allowed the Company to carryback its 2018 NOL to prior tax years. This change not only favorably impacted the timing of the NOL benefit, but also increased the tax benefit amount as the federal tax rates in the prior years (35%) were higher than the current federal tax rate (21%).
Net Income
The Company’s net income attributable to controlling interest was $20,644$9.3 million for the firstsecond quarter of 2020 compared to $14,274$23.4 million for the firstsecond quarter of 2019, an decrease of $14.1 million or 60.4%, with the main drivers being the non-recurring Georgia Pellet Plant sale, which resulted in $20.0 million of gross margin in the second quarter of 2019 and a $5.9 million increase of $6,370 or 44.6%, primarily resulting from a $9,532 tax benefit from the provisions of the CARES act, partiallyin restructuring and impairment charges; offset by a pre-tax increasedecrease in selling, general, administrative and engineering expenses of $2,199 in restructuring and asset impairment charges between periods.$10.0. million. Net income attributable to controlling interest per diluted share was $0.91$0.41 for the firstsecond quarter of 2020 compared to $0.63$1.03 for the firstsecond quarter of 2019, an increasea decrease of $0.28.$0.62. Diluted shares outstanding for the quarters ended March 31,June 30, 2020 and 2019 were 22,71322,711,000 and 22,646,22,667,000, respectively.
The Company’s net income attributable to controlling interest was $29.9 million for the first six months of 2020 compared to $37.7 million for the first six months of 2019, a decrease of $7.7 million or 20.6%, with the main drivers being the non-recurring Georgia Pellet Plant sale, which resulted in $20.0 million of gross margin in the second quarter of 2019 and a $8.1 million increase in restructuring and impairment charges; offset by a decrease in selling, general, administrative and engineering expenses of $12.0 and a decrease of $14.1 million of income tax expense. Net income attributable to controlling interest per diluted share was $1.32 for the first six months of 2020 compared to $1.66 for the first six months of 2019, a decrease of $0.34. Diluted shares outstanding for the six months ended June 30, 2020 and 2019 were 22,714,702 and 22,656,000, respectively.
Dividends
In February 2013, the Company’s Board of Directors approved a dividend policy pursuant to which the Company began paying a quarterly $0.10 per share dividend on its common stock beginning in the third quarter of 2013. In July 2018, the Company’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’s financial position, results of operations, cash flows, capital requirements and restrictions under the Company’s existing credit agreement, among other factors. The Board retained the power to modify, suspend or cancel the Company’s dividend policy in any manner and at any time it deems necessary or appropriate in the future. The Company paid quarterly dividends of $0.11 per common share to shareholders in the first and second quarter of 2020 and 2019.
Backlog
The backlog of orders as of March 31,June 30, 2020 was $245,431$182.0 million compared to $236,548$246.1 million as of March 31,June 30, 2019, an increasea decrease of $8,883$64.1 million or 3.8%26.1%. Domestic backlogs increased $23,372 or 14.4% whileBoth domestic and international backlogs decreased $14,489$33.2 million or 19.4%.20.6% and $30.9 million or 36.6%, respectively. The backlog increased $25,351decreased $48.9 million in the Infrastructure Solutions Group and decreased $16,468$15.2 million in the Materials Solutions Group. The Company is unable to determine whether the changes in backlogsLower orders were experienceddriven 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 restructuring plans implemented by the Company in the last quarter of 2019 and the first quarterand second quarters of 2020, including its efforts to right-sizeincrease the efficiencies of its workforce considering current production requirements, the Company reduced its employee headcount 13.6%15.6% compared to March 31,June 30, 2019 (from 4,3444,183 employees at March 31,June 30, 2019 to 3,866 employees at December 31, 2019 to 3,7533,529 at March 31,June 30, 2020) and will continue to evaluate future staffing needs as sales and production levels dictate.
Segment Net SalesSales-Quarter:
| | Three Months Ended
March 31, | | | | |
| | | 2020 | | | 2019 | | | $ Change | | | % Change | |
| Infrastructure Solutions Group | | $ | 202,618 | | | $ | 219,249 | | | $ | (16,631 | ) | | | (7.6 | )% |
| Materials Solutions Group | | | 86,230 | | | | 106,531 | | | | (20,301 | ) | | | (19.1 | )% |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
June 30, 2020 | | | | | | |
| (in millions) | 2020 | | 2019 | | $ Change | | % Change |
| Infrastructure Solutions Group | $ | 181.9 | | | $ | 198.0 | | | $ | (16.1) | | | (8.1) | % |
| Materials Solutions Group | 83.4 | | | 106.8 | | | (23.4) | | | (21.9) | % |
Infrastructure Solutions Group: Sales in this group were $202,618$181.9 million for the firstsecond quarter of 2020 compared to $219,249$198.0 million for the same period in 2019, a decrease of $16,631$16.1 million or 7.6%8.1%. The group’s backlog at the end of the firstsecond quarter of 2020 as compared to the end of the firstsecond quarter of 2019 increased $25,351decreased $48.9 million or 19.1%30.9%. Domestic sales for the Infrastructure Solutions Group decreased $14,269$18.4 million or 7.6%10.4% for the firstsecond quarter of 2020 compared to the same period in 2019. The decrease in sales in the Infrastructure Solutions Group was driven by the non-recurring sale of the Georgia Pellet Plant in the second quarter of 2019 for $20.0 million. International sales for the Infrastructure Solutions Group increased $2.3 million or 10.9% for the second quarter of 2020 compared to the same period in 2019 primarily due to higher sales in Brazil. Parts sales for the Infrastructure Solutions Group decreased 4.5% for the second quarter of 2020 compared to the same period in 2019.
Materials Solutions Group: Sales in this group were $83.4 million for the second quarter of 2020 compared to $106.8 million for the same period in 2019, a decrease of $23.4 million or 21.9%. The group’s backlog at the end of the second quarter of 2020 as compared to the end of the second quarter of 2019 decreased $15.2 million or 17.3%. Domestic sales for the Materials Solutions Group decreased by $6.3 million or 9.1% for the second quarter of 2020 compared to the same period in 2019 due
primarily to
decreases in asphalt plantlower sales of its crushing and
mobile asphalt equipment sales, including $7,532 of orders whose shipment was delayed to COVID-19 issues. screening projects. International sales for the
InfrastructureMaterial Solutions Group decreased
$2,362$17.1 million or
7.4%45.6% for the
firstsecond quarter of 2020 compared to the same period in 2019 due
primarily to
decreasesCOVID-19 plant related shutdowns, as well as the impact from the strong U.S. dollar causing the Company's products produced in
asphalt plant sales. International sales decreases between periods occurred primarily in Canada, Australia and Mexico, partially offset by increases in sales into the
West Indies, Brazil and Europe.United States to be more expensive. Parts sales for
the Infrastructure Solutions Groupthis group decreased
3.6%18.9% for the
firstsecond quarter of 2020 compared to the same period in 2019.
28 | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended
June 30, 2020 | | | | | | |
| (in millions) | 2020 | | 2019 | | $ Change | | % Change |
| Infrastructure Solutions Group | $ | 384.5 | | | $ | 417.2 | | | $ | (32.7) | | | (7.8) | % |
| Materials Solutions Group | 169.7 | | | 213.4 | | | (43.7) | | | (20.5) | % |
Materials Solutions Group: Sales in this group were $86,230$169.7 million for the first quartersix months of 2020 compared to $106,531$213.4 million for the same period in 2019, a decrease of $20,301$43.7 million or 19.1%. The group’s backlog at the end of the first quarter of 2020 as compared to the end of the first quarter of 2019 decreased $16,468 or 15.9%20.5%. Domestic sales for the Materials Solutions Group decreased by $14,678$21.0 million or 19.4%14.5% for the first quartersix months of 2020 compared to the same period in 2019, which was driven by the lower sales of its crushing and screening projects. International sales for the Material Solutions Group decreased $22.7 million or 33.3% for the first six months of 2020 compared to the same period in 2019 due primarily to decreased sales intoCOVID-19 plant related shutdowns, as well as the Company’s traditional rock quarry markets. International sales forimpact from the Material Solutions Group decreased $5,623 or 18.2% forstrong U.S. dollar causing the first quarter of 2020 comparedCompany's products produced in the United States to the same period in 2019 due primarily to reductions in sales into the mining industry. International sales decreases between periods occurred primarily in South America, Canada and Asia, partially offset by sales increases in Brazil.be more expensive. Parts sales for this group decreased 5.5%12.3% for the first quartersix months of 2020 compared to the same period in 2019.
Segment Profit (Loss)-Quarter:
| | | Three Months Ended
March 31, | | | | |
| | | 2020 | | | 2019 | | | $ Change | | | % Change | |
| Infrastructure Solutions Group | | $ | 17,220 | | | $ | 18,070 | | | $ | (850 | ) | | | (4.7 | )% |
| Materials Solutions Group | | | 6,035 | | | | 8,678 | | | | (2,643 | ) | | | (30.5 | )% |
| Corporate | | | (2,923 | ) | | | (12,908 | ) | | | 9,985 | | | | 77.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
June 30, 2020 | | | | $ Change | | % Change |
| (in millions) | 2020 | | 2019 | | | | |
| Infrastructure Solutions Group | $ | 14.2 | | | $ | 26.9 | | | $ | (12.7) | | | (47.2) | % |
| Materials Solutions Group | 8.5 | | | 8.5 | | | — | | | — | % |
| Corporate | (13.6) | | | (12.6) | | | (1.0) | | | 8.3 | % |
Infrastructure Solutions Group: Segment profit for the Infrastructure Solutions Group was $17,220$14.2 million for the firstsecond quarter of 2020 compared to $18,070$26.9 million for the same period in 2019, a decrease of $850$12.7 million or 4.7%47.2%. SegmentThe decrease in segment profits were favorably impacted by an increaseresulted from a decrease in gross profit of $1,614$19.5 million due to a 270810 basis point increasedecrease in gross margins between periods (26.1%(21.1% and 23.4%29.2% for the firstsecond quarter of 2020 and 2019, respectively) and a. The reduction in generalgross margin percentage is due to the non-recurring sale of the Georgia Pellet Plant in the second quarter of 2019 for $20.0 million. General and administrative expenses of $1,169.decreased by $0.8 million and selling expenses decreased by $4.0 million driven by increasing efficiencies. The increases were offset by increases in selling expenses ($1,673) and restructuring and asset impairment charges of $2,679, including $1,646 of goodwill impairment related to the Company’s mobile asphalt equipment product lines.
Materials Solutions Group: Segment profit for the Materials Solutions Group was $6,035$8.5 million for the firstsecond quarter of 2020 compared to $8,678$8.5 million for the same period in 2019, a decrease of $2,643$20 thousand or 30.5%0.2%. The decrease in segment profits between periods resulted from a decrease in gross profit of $4,540$4.3 million due primarily to decreased sales of $20,301$23.4 million between periods. Gross margins remained relatively constant between periods at 24.4% and 24.0% for the first quarters of 2020 and 2019, respectively.Segment profits were partially offset by a 150 basis point increase in gross margins. Segment profits were positively impacted by decreases in general and administrative expenses ($1,084)of $0.3 million and selling expenses ($481).of $3.5 million due to increasing efficiencies.
Corporate: Corporate operations had a loss of $2,923$13.6 million for the firstsecond quarter of 2020 compared to a loss of $12,908$12.6 million for the second quarter of 2019, an increase of $1,042 thousand or 8.3%. The increase in expenses were driven by $2.5 million of asset impairment, $0.7 million of outside services and $0.8 million of SERP compensation expense. This was offset by a decrease of $3.9 million in income tax expense.
Segment Profit (Loss)-Six Months:
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended
June 30, 2020 | | | | $ Change | | % Change |
| (in millions) | 2020 | | 2019 | | | | |
| Infrastructure Solutions Group | $ | 31.4 | | | $ | 45.0 | | | $ | (13.6) | | | (30.1) | % |
| Materials Solutions Group | 14.5 | | | 17.2 | | | (2.7) | | | (15.5) | % |
| Corporate | (16.5) | | | (25.5) | | | 9.0 | | | (35.1) | % |
Infrastructure Solutions Group: Segment profit for the Infrastructure Solutions Group was $31.4 million for the first six months of 2020 compared to $45.0 million for the same period in 2019, a decrease of $13.6 million or 30.1%. Segment profits were unfavorably impacted by a decrease in gross profit of $17.8 million due to a 240 basis point decrease in gross margins between periods (23.7% and 26.1% for the first six months of 2020 and 2019, respectively). The reduction in gross margin percentage is due to the non-recurring sale of the Georgia Pellet Plant in the second quarter of 2019 for $20.0 million. Selling expenses decreased by $2.3 million driven by increasing efficiencies. The decreases in selling expenses were offset by increases in general and administrative expenses of $0.4 million and increases in restructuring and asset impairment charges of $4.2 million, including $1.6 of goodwill impairment related to the Company’s mobile asphalt equipment product lines.
Materials Solutions Group: Segment profit for the Materials Solutions Group was $14.5 million for the first six months of 2020 compared to $17.2 million for the same period in 2019, a decrease of $2.7 million or 15.5%. The decrease in segment profits between periods resulted from a decrease in gross profit of $8.8 million due primarily to decreased sales of $43.7 million between periods. Segment profits were positively impacted by an increase of 100 basis points in gross margins between periods. Segment profits were offset by decreases in general and administrative expenses of $1.4 million and selling expenses of $3.9 million due to right-sizing activities.
Corporate: Corporate operations had a loss of $16.5 million for the first six months of 2020 compared to a loss of $25.5 million for the first six months of 2019, a favorable change of $9,985$9.0 million or 77.4%35.1%, due primarily to reductions in income taxes ($9,069)of $13.1 million. This was offset by $2.5 million of asset impairment and interest expense ($548).$1.5 million of outside services.
Liquidity and Capital Resources
The Company's primary sources of liquidity and capital resources are its (1) cash on hand, (2) borrowing capacity under a $150,000$150.0 million revolving credit facility and (3) cash flows from operations, which may be negatively affected in the future as a result of COVID-19. The Company had $43,854$119.8 million of cash available for operating purposes as of March 31,June 30, 2020, of which $11,172$15.2 million was held by the Company's foreign subsidiaries. The Company used $29.4 million to complete two acquisitions subsequent to June 30, 2020. 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, greatly reduced any additional taxes on these funds should the Company decide to repatriate these funds to the United States. At March 31,June 30, 2020, or at any time during the first threesix months of 2020, the Company had no borrowings outstanding under its $150,000$150.0 million domestic revolving credit facility. Net of letters of credit totaling $7,877,$8.8 million, the Company had borrowing availability of $142,123$141.2 million under the revolving credit facility as of March 31,June 30, 2020. 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 March 31,June 30, 2020.
The Company’s South African subsidiary, Osborn Engineered Products SA (Pty) Ltd (“Osborn”), has a credit facility of $5,338$5.5 million 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 March 31,June 30, 2020, Osborn had no outstanding borrowings but had $883$0.9 million in performance, advance payment and retention guarantees outstanding under the facility. The facility has been guaranteed by Astec Industries, Inc., but is otherwise unsecured. A 0.75% unused facility fee is charged if less than 50% of the facility is utilized. As of March 31,June 30, 2020, Osborn had available credit under the facility of $4,455.$4.6 million. The interest rate is 0.25% less than the South Africa prime rate.
The Company’s Brazilian subsidiary, Astec Brazil, hashad a $667$0.6 million and $0.9 million working capital loan outstanding as of MarchJune 30, 2020 and December 31, 20202019, respectively, from a Brazilian bank with an interest rate of 10.4%. The loan’s final monthly payment is due in April 2024 and the debt is secured by Astec Brazil’s manufacturing facilityfacility. Astec Brazil’s debt is included in the accompanying unaudited condensed consolidated balance sheets as current maturities of long-term debt ($0.2 million and also by letters$0.2 million) and long-term debt ($0.4 million and $0.7 million) as of credit totaling $3,200 issued by Astec Industries, Inc.June 30, 2020 and December 31, 2019, respectively. Additionally, as of MarchJune 30, 2020 and December 31, 20202019, respectively, Astec Brazil had $504$0.2 million and $1.1 million outstanding under order anticipation agreements with a local bank with maturity dates through September 2020, which are included as short-term debt in the accompanying unaudited condensed unaudited consolidated balance sheets. These loans are drawn under credit facilities with local Brazilian banks secured by letters of credit totaling $3.2 million issued by Astec Industries, Inc.
The Company’s Australian subsidiary, Astec Australia, has credit facilities of $2.4 million with an Australian bank to finance short-term working capital needs, as well as to cover performance letters of credit, advance payment and retention guarantees. As of June 30, 2020, Astec Australia had no outstanding cash borrowings but had $0.3 million in performance, advance payment and retention guarantees outstanding under the facilities which are contingent liabilities. The facilities are secured by certain Astec Australia assets. A 1.35% unused facility fee is charged on unused portions of the $1.5 million portion which is a short-term working capital facility. As of June 30, 2020, Astec Australia had available credit under the short-term working capital facility of $1.5 million. The interest rate is the Westpac Business One Loan Rate without a margin.
Cash Flows from Operating Activities:
| | | Three Months Ended
March 31, | | | Increase | |
| | | 2020 | | | 2019 | | | (Decrease) | |
| Net income | | $ | 20,483 | | | $ | 14,217 | | | $ | 6,266 | |
| Depreciation and amortization | | | 6,328 | | | | 6,551 | | | | (223 | ) |
| Provision for warranties | | | 2,732 | | | | 2,746 | | | | (14 | ) |
| Deferred income tax provision | | | 13,494 | | | | 3,931 | | | | 9,563 | |
| Asset impairment charge | | | 1,646 | | | | -- | | | | 1,646 | |
| Changes in working capital: | | | | | | | | | | | | |
| Trade and other receivables | | | (16,644 | ) | | | (3,809 | ) | | | (12,835 | ) |
| Inventories | | | (315 | ) | | | (10,891 | ) | | | 10,576 | |
| Prepaid expenses and other assets | | | 2,495 | | | | 1,156 | | | | 1,339 | |
| Accounts payable | | | 7,792 | | | | 3,970 | | | | 3,822 | |
| Customer deposits | | | (5,154 | ) | | | (4,769 | ) | | | (385 | ) |
| Product warranty accruals | | | (2,129 | ) | | | (2,643 | ) | | | 514 | |
| Prepaid, refundable and income taxes payable, net | | | (18,469 | ) | | | 594 | | | | (19,063 | ) |
| Other, net | | | (6,698 | ) | | | 934 | | | | (7,632 | ) |
| Net cash provided by operating activities | | $ | 5,561 | | | $ | 11,987 | | | $ | (6,426 | ) |
| | | | | | | | | | | | | | | | | |
| Six Months Ended
June 30, | | | | Increase (Decrease) |
| (in millions) | 2020 | | 2019 | | |
| Net income | $ | 29.8 | | | $ | 37.6 | | | $ | (7.8) | |
| Depreciation and amortization | 12.6 | | | 13.1 | | | (0.5) | |
| Provision for warranties | 5.1 | | | 4.5 | | | 0.6 | |
| Deferred income tax provision | 13.4 | | | 8.4 | | | 5.0 | |
| Asset impairment charge | 4.1 | | | — | | | 4.1 | |
| Distributions to SERP participants | (0.4) | | | (1.0) | | | 0.6 | |
| Changes in working capital: | | | | | |
| Trade and other receivables | 5.4 | | | (6.7) | | | 12.1 | |
| Inventories | 31.4 | | | (5.2) | | | 36.6 | |
| Prepaid expenses and other assets | 2.7 | | | 0.6 | | | 2.1 | |
| Accounts payable | (7.7) | | | (2.0) | | | (5.7) | |
| Customer deposits | (20.1) | | | (13.0) | | | (7.1) | |
| Product warranty accruals | (4.5) | | | (5.3) | | | 0.8 | |
| Prepaid, refundable and income taxes payable, net | 10.6 | | | 7.7 | | | 2.9 | |
| Other, net | 2.4 | | | 4.2 | | | (1.8) | |
| Net cash provided by operating activities | $ | 84.8 | | | $ | 42.9 | | | $ | 41.9 | |
Net cash provided fromby operating activities decreasedincreased by $6,426$41.9 million for the first threesix months of 2020 as compared to the first threesix months of 2019 due primarily to increasesdecreases in the growth of receivables ($12,835)of $12.1 million and prepaid, refundable and income taxes payable, netinventories of ($19,063),$36.6 million, partially offset by an increasea decrease in net income $6,266, changes in the growth inventoriescustomer deposits of $10,576 and deferred income tax provision of $9,563.$7.1 million.
Cash Flows from Investing Activities:
| | | Three Months Ended
March 31, | | | Increase | |
| | | 2020 | | | 2019 | | | (Decrease) | |
| Expenditures for property and equipment | | $ | (5,774 | ) | | $ | (3,723 | ) | | $ | (2,051 | ) |
| Other | | | 1,726 | | | | (51 | ) | | | 1,777 | |
| Net cash used by investing activities | | $ | (4,048 | ) | | $ | (3,774 | ) | | $ | (274 | ) |
| | | | | | | | | | | | | | | | | |
| Six Months Ended
June 30, | | | | Increase (Decrease) |
| (in millions) | 2020 | | 2019 | | |
| Expenditures for property and equipment | $ | (7.4) | | | $ | (8.7) | | | $ | 1.3 | |
| Other | 1.8 | | | 0.6 | | | 1.2 | |
| Net cash used by investing activities | $ | (5.6) | | | $ | (8.1) | | | $ | 2.5 | |
Net cash used by investing activities increaseddecreased by $274$2.5 million for the first threesix months of 2020 as compared to the same period in 2019.
Total capital expenditures for 2020 are currently forecasted to be approximately $30,000.$20.0 million. The Company expects to finance these expenditures using currently available cash balances, internally generated funds and available credit under the Company’s credit facilities. Capital expenditures are generally for machinery, equipment and facilities used by the Company in the production of its various products. The Company believes that its current working capital, cash flows generated from future operations and available capacity under its credit facility will be sufficient to meet the Company’s working capital and capital expenditure requirements through MayAugust 2021.
Cash Flows from Financing Activities:
| | | Three Months Ended
March 31, | | | Increase | |
| | | 2020 | | | 2019 | | | (Decrease) | |
| Payment of dividends | | $ | (2,485 | ) | | $ | (2,478 | ) | | $ | (7 | ) |
| Net change in borrowings from banks | | | (696 | ) | | | (3,213 | ) | | | 2,517 | |
| Other, net | | | (603 | ) | | | 103 | | | | (706 | ) |
| Net cash used by financing activities | | $ | (3,784 | ) | | $ | (5,588 | ) | | $ | 1,804 | |
| | | | | | | | | | | | | | | | | |
| Six Months Ended
June 30, | | | | Increase (Decrease) |
| (in millions) | 2020 | | 2019 | | |
| Payment of dividends | $ | (5.0) | | | $ | (5.0) | | | $ | — | |
| Net change in borrowings from banks | (0.2) | | | (31.0) | | | 30.8 | |
| Other, net | (0.4) | | | 0.1 | | | (0.5) | |
| Net cash used by financing activities | $ | (5.6) | | | $ | (35.9) | | | $ | 30.3 | |
CashNet cash used by financing activities decreased by $1,804$30.3 million for the first threesix months of 2020 compared to the same period in 2019 due primarily to the Company having no borrowings or repayments under its domestic line of credit during the first threesix months of 2020.
Financial Condition
The Company’s total current assets increased to $534,182$530.4 million as of March 31,June 30, 2020 from $506,304$506.3 million as of December 31, 2019, an increase of $27,878$24.1 million or 5.5%4.8%, due primarily to increasesan increase in cash and cash equivalents of $70.9 million offset by a decrease of $5.4 million in trade receivables and contract assets, net, a decrease of $31.4 million in inventories and a decrease of $7.3 million in prepaid and refundable income taxes ($18,791) and trade receivables and contract assets ($16,439) offset by a decrease in cash and cash equivalents of ($5,003) during the first threesix months of 2020.
The Company’s total current liabilities decreased to $168,890$144.0 million as of March 31,June 30, 2020 from $172,767$172.8 million as of December 31, 2019, a decrease of $3,877,$28.8 million, or 2.2%16.6%, due primarily to an increase in accounts payable ($6,968) being offset by reductions in customer deposits ($5,154)of $20.1 million and accrued payroll and relatedaccounts payable of $8.9 million, offset by an increase in other current liabilities ($4,559).
Market Risk and Risk Management Policies
We have no material changes to the disclosure on this matter made in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Contingencies
Certain customers have financed purchases of Company products through arrangements in which the Company is contingently liable for customer debt of $1,828$1.7 million at March 31,June 30, 2020. These arrangements expire at various dates through December 2023March 2024 and provide that the Company will receive the lender's full security interest in the equipment financed if the Company is required to fulfill its contingent liability under these arrangements. Additionally, the Company is also potentially liable for 1.75% of the unpaid balance, determined as of December 31st of the prior year, on certain past customer equipment purchases that were financed by an outside finance company (the maximum exposure for the Company in 2020 is $584)$0.6 million). The Company has recorded a liability of $1,498$2.1 million related to these guarantees as of March 31,June 30, 2020.
In addition, the Company is contingently liable under letters of credit issued by a domestic lender totaling $7,877$8.8 million as of March 31,June 30, 2020, including $3,200$3.2 million of letters of credit guaranteeing certain Astec Brazil bank debt. The outstanding letters of credit expire at various dates through April 2021.June 2023. As of March 31,June 30, 2020, the Company’s foreign subsidiaries are contingently liable for a total of $2,321$2.7 million in performance letters of credit, advance payments and retention guarantees. The maximum potential amount of future payments under these letters of credit and guarantees for which the Company could be liable is $10,198$11.5 million as of March 31,June 30, 2020.
The Company and certain of its current and former executive officers have been named as defendants in a putative shareholder class action lawsuit filed on February 1, 2019, as amended on August 26, 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 and filed a motion to dismiss the lawsuit on October 25, 2019. The Company is unable to determine whether or nothas accrued a future loss will be incurred due to this litigation, or estimate a range$0.6 million liability as of loss, if any, at this time.
The Company's GEFCO subsidiary has been named a defendant in a lawsuit originally filed on August 16, 2018 with an amended complaint filed on January 25, 2019, in the United States District Court for the Western District of Oklahoma. The action is styled VenVer S.A. and Americas Coil Tubing LLP v. GEFCO, Inc., Case No. CIV-18-790-SLP. The complaint alleges breaches of warranty and other similar claims regarding equipment sold by GEFCO in 2013. In addition to seeking a rejection (rescission) of the purchase contract, the plaintiff is seeking special and consequential damages. The purchase contract contains an exclusion of consequential damages. The original purchase price of the equipment was approximately $8,500.$8.5 million. GEFCO disputes the plaintiff’s allegations and intends to defend this lawsuit vigorously. The Company is unable to determine whether or not a future loss will be incurred due to this litigation, or estimate a range of loss, if any, at this time.
The Company is currently a party to various claims and legal proceedings that have arisen in the ordinary course of business. If management believes that a loss arising from such claims and legal proceedings is probable and can reasonably be estimated, the Company records the amount of the loss (excluding estimated legal fees) or the minimum estimated liability when the loss is estimated using a range and no point within the range is more probable than another. As management becomes aware of additional information concerning such contingencies, any potential liability related to these matters is assessed and the estimates are revised, if necessary. If management believes that a loss arising from such claims and legal proceedings is either (i) probable but cannot be reasonably estimated or (ii) reasonably possible but not probable, the Company does not record the amount of the loss, but does make specific disclosure of such matter. Based upon currently available information and with the advice of counsel, management believes that the ultimate outcome of its current claims and legal proceedings, individually and in the aggregate, will not have a material adverse effect on the Company's financial position, cash flows or results of operations. However, claims and legal proceedings are subject to inherent uncertainties and rulings unfavorable to the Company could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse effect on the Company's financial position, cash flows or results of operations.
Off-balance Sheet Arrangements
As of March 31,June 30, 2020, 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 threesix months ended March 31,June 30, 2020, there were no material changes in the Company’s commitments or contractual liabilities disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Item 3. Quantitative and Qualitative Disclosures
aboutAbout Market Risk
The Company has no material changes to the disclosure on this matter made in Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
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’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
The Company’s management, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were 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, 2019.
Internal Control over Financial Reporting
Other than the remediation efforts discussed below, there have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the three-monthsix-month period ended March 31,June 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’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, 2019, 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 15, Contingent Matters, to the accompanying unaudited condensed financial statements and Part I, “Item 3. Legal Proceedings” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, the Company currently has no pending or threatened litigation that the Company believes will result in an outcome that would materially affect the Company’s business, financial position, cash flows or results of operations. Nevertheless, there can be no assurance that future litigation to which the Company becomes a party will not have a material adverse effect on its business, financial position, cash flows or results of operations.
In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, which could materially affect the Company’s business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, the Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and in this Quarterly Report on Form 10-Q are not the only risks facing our Company. Additional risks and uncertainties not currently known to management or that management currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition or operating results. The Company is adding the following risk factors to those disclosed in its Report on Form 10-K for the year ended December 31, 2019.
The Outbreak of the Novel Coronavirus (COVID-19) Pandemic
The spread of the novel coronavirus (COVID-19), declared a global pandemic by the World Health Organization in March 2020, has spread to many countries around the world and is impacting worldwide economic activity. Many governments have implemented policies intended to stop or slow the further spread of the disease, such as shelter-in-place orders, travel restrictions and quarantines, resulting in the temporary closure of schools and non-essential businesses, and these measures may remain in place for a significant period of time. Though the Company’s U.S. business has been deemed “Critical Manufacturing” by the U.S. Department of Homeland Security, and U.S. locations have remained open, two of our foreign businesses closed in March 2020 and are not expected to reopen until sometime in May. The Company has also experienced and may continue to experience disruptions that prevent it from meeting the demands of its sales force and customers, including disruptions to the manufacturing of its products and supply chain, disruptions to its distribution network, disruptions in or restrictions on the ability of its employees, contractors, sales force and other business partners to work effectively and disruptions in the shipment of its products. In addition, the Company’s increased use of remote work technology could increase our risk of cybersecurity breaches and related information technology threats. Further, the Company’s management team and members of the Company’s COVID-19 task force are committing increased resources to managing the Company’s response to the pandemic and such attention is being diverted from day-to-day Company operations, which could hinder the Company’s ability to implement new or innovative strategies. The COVID-19 pandemic and measures implemented to slow the spread of COVID-19 may also negatively impact the Company's ability to meet the financial covenants of its debt agreements with various banking institutions if the Company’s financial health declines. The impact of COVID-19 and measures implemented to slow the spread could also cause delay in, or limit the ability of, the Company’s customers to make timely payments to the Company. In addition, the pandemic has resulted in a widespread health crisis that is adversely affecting the economies and financial markets of many countries. During the COVID-19 pandemic and even after it has subsided, the Company may continue to experience adverse impacts to the Company’s business as a result of the pandemic’s global economic impact, including any recession, economic downturn, government spending cuts, tightening of credit markets or increased unemployment that has occurred or may occur in the future, which could cause its ultimate customers and potential customers to postpone or reduce spending on its products or put downward pressure on prices.
Individually and collectively, the consequences of the COVID-19 pandemic could adversely impact our business, financial condition, results of operations, cash flows and liquidity. The extent to which the COVID-19 pandemic ultimately impacts the Company’s business, financial condition, results of operations, cash flows, and liquidity may differ from management’s current estimates due to the inherent uncertainties regarding the duration and further spread of the outbreak, its severity, actions taken to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. The extent to which the COVID-19 pandemic adversely affects the Company’s business, financial condition, results of operations, and cash flows and liquidity may also have the effect of intensifying many of the other risks described in the “Risk Factors” section set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On July 29, 2018, the Company’s Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $150,000$150.0 million of its common stock. Through December 31, 2018, the Company had repurchased 582582,222 shares of its stock at total cost of $24,149$24.1 million 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 2019 or the first threesix months of 2020.
Items 3, 4 and 5 are not applicable and have been omitted.
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| Exhibit No. | Exhibit Description |
| |
| |
| |
| |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Taxonomy Extension Schema |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
| 104 | Cover Page Interactive Data File - (formatted as Inline XBRL and contained in Exhibit 101) |
The exhibits are numbered in accordance with Item 601 of Regulation S-K. Inapplicable exhibits are not included in the list.
* In accordance with Release No. 34-47551, this exhibit is hereby furnished to the SEC as an accompanying document and is not to be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | |
| ASTEC INDUSTRIES, INC.
(Registrant) |
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Date: May 11,August 10, 2020 | /s/ Barry A. Ruffalo |
| Barry A. Ruffalo
Chief Executive Officer and President
(Principal Executive Officer) |
| |
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Date: May 11,August 10, 2020 | /s/ Rebecca A. Weyenberg |
| Rebecca A. Weyenberg
Chief Financial Officer
(Principal Financial and Accounting Officer) |