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ASTEC INDUSTRIES INC - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q
 (Mark One)
☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019
OR
☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from                     to

Commission File Number                    001-11595

Astec Industries, Inc.
(Exact name of registrant as specified in its charter)

Tennessee
  
62-0873631
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
   
1725 Shepherd Road, Chattanooga, Tennessee
  
37421
(Address of principal executive offices)
  
(Zip Code)

(423) 899-5898
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:

Title of each Class
Trading Symbol
Name of each exchange on which registered
Common Stock
ASTE
The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large Accelerated Filer ☒
Accelerated Filer ☐
Non-accelerated filer ☐
Smaller Reporting Company ☐
 
Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐
No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class
Outstanding at July 25, 2019
Common Stock, par value $0.20
22,534,739


ASTEC INDUSTRIES, INC.
 INDEX
 
 
 
   
 
   
 
   
 
   
 
   
 
 
 
   
 
   
 
   
 
   
     
 
     
   
     
   
     
   
     
   


2
PART I – FINANCIAL INFORMATION
Item 1.  Financial Statements
Astec Industries, Inc.
Condensed Consolidated Balance Sheets
(in thousands) (unaudited)

  
June 30,
2019
    
December 31,
2018
  
ASSETS
            
Current assets:
            
Cash and cash equivalents
  
$
24,905
    
$
25,821
  
Investments
    
1,211
      
1,946
  
Trade receivables
    
135,969
      
130,569
  
Other receivables
    
3,227
      
3,409
  
Inventories
    
360,883
      
355,944
  
Prepaid income taxes
    
16,339
      
24,459
  
Prepaid expenses and other
    
15,001
      
18,843
  
Total current assets
    
557,535
      
560,991
  
Property and equipment, net
    
191,854
      
192,448
  
Investments
    
16,080
      
14,890
  
Operating lease right-of-use assets
    
4,075
      
–
  
Goodwill
    
32,628
      
32,748
  
Deferred income tax assets
    
18,992
      
27,490
  
Other long-term assets
    
27,391
      
26,890
  
Total assets
  
$
848,555
    
$
855,457
  
LIABILITIES AND EQUITY
                
Current liabilities:
                
Current maturities of long-term debt
  
$
236
    
$
413
  
Accounts payable
    
70,338
      
70,614
  
Customer deposits
    
35,044
      
48,069
  
Accrued product warranty
    
10,117
      
10,928
  
Accrued payroll and related liabilities
    
21,319
      
24,126
  
Accrued loss reserves
    
1,925
      
1,832
  
Other current liabilities
    
34,957
      
33,249
  
Total current liabilities
    
173,936
      
189,231
  
Long-term debt
    
28,891
      
59,709
  
Deferred income tax liabilities
    
935
      
1,020
  
Other long-term liabilities
    
24,185
      
20,207
  
Total liabilities
    
227,947
      
270,167
  
Shareholders’ equity
    
619,979
      
584,580
  
Non-controlling interest
    
629
      
710
  
Total equity
    
620,608
      
585,290
  
Total liabilities and equity
  
$
848,555
    
$
855,457
  
See Notes to Unaudited Condensed Consolidated Financial Statements

3

Astec Industries, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)

  
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
   
2019
    
2018
    
2019
    
2018
  
Net sales
  
$
304,802
    
$
272,528
    
$
630,582
    
$
597,981
  
Cost of sales
    
221,352
      
271,420
      
470,606
      
518,868
  
Gross profit
    
83,450
      
1,108
      
159,976
      
79,113
  
Selling, general, administrative and engineering expenses
    
52,969
      
51,263
      
111,316
      
103,341
  
Income (loss) from operations
    
30,481
      
(50,155
)
    
48,660
      
(24,228
)
Interest expense
    
(484
)
    
(168
)
    
(1,131
)
    
(318
)
Other income, net of expenses
    
372
      
1,052
      
839
      
1,513
  
Income (loss) from operations before income taxes
    
30,369
      
(49,271
)
    
48,368
      
(23,033
)
Income tax provision (benefit)
    
7,008
      
(8,503
)
    
10,789
      
(2,481
)
Net income (loss)
    
23,361
      
(40,768
)
    
37,579
      
(20,552
)
Net loss attributable to non-controlling interest
    
16
      
94
      
72
      
145
  
Net income (loss) attributable to controlling interest
  
$
23,377
    
$
(40,674
)
  
$
37,651
    
$
(20,407
)
                                 
Earnings (loss) per common share
                                
Net income (loss) attributable to controlling interest:
                                
Basic
  
$
1.04
    
$
(1.76
)
  
$
1.67
    
$
(0.89
)
Diluted
  
$
1.03
    
$
(1.76
)
  
$
1.66
    
$
(0.89
)
Weighted average number of common shares outstanding:
                                
Basic
    
22,509
      
23,061
      
22,503
      
23,053
  
Diluted
    
22,667
      
23,061
      
22,656
      
23,053
  
Dividends declared per common share
  
$
0.11
    
$
0.10
    
$
0.22
    
$
0.20
  

See Notes to Unaudited Condensed Consolidated Financial Statements

4

Astec Industries, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)

  
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
   
2019
    
2018
    
2019
    
2018
  
Net income (loss)
  
$
23,361
    
$
(40,768
)
  
$
37,579
    
$
(20,552
)
Other comprehensive income (loss):
                                
Foreign currency translation adjustments
    
(110
)
    
(8,021
)
    
853
      
(6,309
)
Change in unrecognized pension benefit cost
    
–
      
–
      
–
      
65
  
Other comprehensive income (loss)
    
(110
)
    
(8,021
)
    
853
      
(6,244
)
Comprehensive income (loss)
    
23,251
      
(48,789
)
    
38,432
      
(26,796
)
Comprehensive loss attributable to non-controlling interest
    
3
      
237
      
62
      
285
  
Comprehensive income (loss) attributable to controlling interest
  
$
23,254
    
$
(48,552
)
  
$
38,494
    
$
(26,511
)

See Notes to Unaudited Condensed Consolidated Financial Statements

5

Astec Industries, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

  
Six Months Ended
June 30,
  
   
2019
    
2018
  
Cash flows from operating activities:
            
Net income (loss)
  
$
37,579
    
$
(20,552
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                
Depreciation and amortization
    
13,139
      
13,880
  
Provision for doubtful accounts
    
806
      
148
  
Provision for warranties
    
4,496
      
7,529
  
Deferred compensation expense
    
144
      
99
  
Stock-based compensation
    
1,739
      
1,321
  
Deferred income tax provision (benefit)
    
8,412
      
(121
)
(Gain) loss on disposition of fixed assets
    
176
      
(183
)
Distributions to SERP participants
    
(1,007
)
    
(184
)
Change in operating assets and liabilities:
                
Sale (purchase) of trading securities, net
    
50
      
(336
)
Trade and other receivables
    
(6,719
)
    
(24,219
)
Inventories
    
(5,240
)
    
(3,410
)
Prepaid expenses
    
911
      
2,278
  
Other assets
    
(347
)
    
(3,639
)
Accounts payable
    
(2,006
)
    
4,181
  
Accrued pellet plant agreement costs
    
–
      
68,000
  
Accrued product warranty
    
(5,287
)
    
(11,482
)
Customer deposits
    
(13,025
)
    
(4,163
)
Prepaid and income taxes payable, net
    
7,669
      
(9,141
)
Other
    
1,381
      
(1,585
)
Net cash provided by operating activities
    
42,871
      
18,421
  
Cash flows from investing activities:
                
Expenditures for property and equipment
    
(8,657
)
    
(8,719
)
Proceeds from sale of property and equipment
    
136
      
243
  
Other
    
433
      
95
  
Net cash used by investing activities
    
(8,088
)
    
(8,381
)
Cash flows from financing activities:
                
Payment of dividends
    
(4,956
)
    
(4,618
)
Borrowings under bank loans
    
121,041
      
–
  
Repayments of bank loans
    
(152,055
)
    
(1,105
)
Sale of Company shares held by SERP
    
238
      
279
  
Withholding tax paid upon vesting of restricted stock units
    
(160
)
    
(432
)
Purchase of subsidiary shares
    
(16
)
    
(27
)
Net cash used by financing activities
    
(35,908
)
    
(5,903
)
Effect of exchange rates on cash
    
209
      
(1,211
)
Net change in cash and cash equivalents
    
(916
)
    
2,926
  
Cash and cash equivalents, beginning of period
    
25,821
      
62,280
  
Cash and cash equivalents, end of period
  
$
24,905
    
$
65,206
  

See Notes to Unaudited Condensed Consolidated Financial Statements

6

Astec Industries, Inc.
Condensed Consolidated Statements of Equity
For the Three and Six Months Ended June 30, 2019
(in thousands)
(unaudited)

For the Three Months Ended June 30, 2019
  
   
Common
Stock
Shares
    
Common
Stock
Amount
    
Additional
Paid-in-
Capital
    
Accum-
ulated
Other
Compre-
hensive
Loss
    
Company
Shares
Held
by SERP
    
Retained
Earnings
    
Non-
controlling Interest
    
Total
Equity
  
Balance, March 31, 2019
    
22,523
    
$
4,505
    
$
121,665
    
$
(33,641
)
  
$
(1,669
)
  
$
507,759
    
$
647
    
$
599,266
  
Net income (loss)
    
–
      
–
      
–
      
–
      
–
      
23,377
      
(16
)
    
23,361
  
Other comprehensive loss
    
–
      
–
      
–
      
(110
)
    
–
      
–
      
–
      
(110
)
Change in ownership percentage of subsidiary
    
–
      
–
      
–
      
–
      
–
      
–
      
(9
)
    
(9
)
Dividends declared
    
–
      
–
      
3
      
–
      
–
      
(2,481
)
    
–
      
(2,478
)
Stock-based compensation
    
1
      
–
      
596
      
–
      
–
      
–
      
–
      
596
  
RSU vesting
    
7
      
1
      
(1
)
    
–
      
–
      
–
      
–
      
–
  
SERP transactions, net
    
–
      
–
      
22
      
–
      
(47
)
    
–
      
–
      
(25
)
Other
    
–
      
–
      
–
      
–
      
–
      
–
      
7
      
7
  
Balance, June 30, 2019
    
22,531
    
$
4,506
    
$
122,285
    
$
(33,751
)
  
$
(1,716
)
  
$
528,655
    
$
629
    
$
620,608
  

For the Six Months Ended June 30, 2019
  
   
Common
Stock
Shares
    
Common
Stock
Amount
    
Additional
Paid-in-
Capital
    
Accum-
ulated
Other
Compre-
hensive
Loss
    
Company
Shares
Held
by SERP
    
Retained
Earnings
    
Non-
controlling Interest
    
Total
Equity
  
Balance, December 31, 2018
    
22,513
    
$
4,503
    
$
120,601
    
$
(33,883
)
  
$
(1,886
)
  
$
495,245
    
$
710
    
$
585,290
  
Net income (loss)
    
–
      
–
      
–
      
–
      
–
      
37,651
      
(72
)
    
37,579
  
Other comprehensive income
    
–
      
–
      
–
      
853
      
–
      
–
      
–
      
853
  
Change in ownership percentage of subsidiary
    
–
      
–
      
–
      
–
      
–
      
–
      
(9
)
    
(9
)
Dividends declared
    
–
      
–
      
6
      
–
      
–
      
(4,962
)
    
–
      
(4,956
)
Stock-based compensation
    
2
      
–
      
1,773
      
–
      
–
      
–
      
–
      
1,773
  
RSU vesting
    
16
      
3
      
(3
)
    
–
      
–
      
–
      
–
      
–
  
Withholding tax paid upon vesting of RSUs
    
–
      
–
      
(160
)
    
–
      
–
      
–
      
–
      
(160
)
Cumulative impact of ASU No. 2018-02
    
–
      
–
      
–
      
(721
)
    
–
      
721
      
–
      
–
  
SERP transactions, net
    
–
      
–
      
68
      
–
      
170
      
–
      
–
      
238
  
Balance, June 30, 2019
    
22,531
    
$
4,506
    
$
122,285
    
$
(33,751
)
  
$
(1,716
)
  
$
528,655
    
$
629
    
$
620,608
  

See Notes to Unaudited Condensed Consolidated Financial Statements

7
Astec Industries, Inc.
Condensed Consolidated Statements of Equity
For the Three and Six Months Ended June 30, 2018
(in thousands)
(unaudited)

For the Three Months Ended June 30, 2018
  
   
Common
Stock
Shares
    
Common
Stock
Amount
    
Additional
Paid-in-
Capital
    
Accum-
ulated
Other
Compre-
hensive
Loss
    
Company
Shares
Held
by SERP
    
Retained
Earnings
    
Non-
controlling Interest
    
Total
Equity
  
Balance, March 31, 2018
    
23,087
    
$
4,617
    
$
143,355
    
$
(22,466
)
  
$
(1,791
)
  
$
583,286
    
$
1,075
    
$
708,076
  
Net loss
    
–
      
–
      
–
      
–
      
–
      
(40,674
)
    
(94
)
    
(40,768
)
Other comprehensive loss
    
–
      
–
      
–
      
(8,021
)
    
–
      
–
      
–
      
(8,021
)
Change in ownership percentage of subsidiary
    
–
      
–
      
–
      
–
      
–
      
–
      
(66
)
    
(66
)
Dividends declared
    
–
      
–
      
2
      
–
      
–
      
(2,312
)
    
–
      
(2,310
)
Stock-based compensation
    
–
      
–
      
309
      
–
      
–
      
–
      
–
      
309
  
Stock issued under incentive plans
    
7
      
2
      
(2
)
    
–
      
–
      
–
      
–
      
–
  
Withholding tax paid upon vesting of RSUs
    
–
      
–
      
(68
)
    
–
      
–
      
–
      
–
      
(68
)
SERP transactions, net
    
–
      
–
      
–
      
–
      
(97
)
    
–
      
–
      
(97
)
Other
    
–
      
–
      
–
      
–
      
–
      
–
      
(74
)
    
(74
)
Balance, June 30, 2018
    
23,094
    
$
4,619
    
$
143,596
    
$
(30,487
)
  
$
(1,888
)
  
$
540,300
    
$
841
    
$
656,981
  

For the Six Months Ended June 30, 2018
  
   
Common
Stock
Shares
    
Common
Stock
Amount
    
Additional
Paid-in-
Capital
    
Accum-
ulated
Other
Compre-
hensive
Loss
    
Company
Shares
Held
by SERP
    
Retained
Earnings
    
Non-
controlling Interest
    
Total
Equity
  
Balance, December 31, 2017
    
23,070
    
$
4,614
    
$
141,931
    
$
(24,243
)
  
$
(1,960
)
  
$
565,330
    
$
1,093
    
$
686,765
  
Net loss
    
–
      
–
      
–
      
–
      
–
      
(20,407
)
    
(145
)
    
(20,552
)
Other comprehensive loss
    
–
      
–
      
–
      
(6,244
)
    
–
      
–
      
–
      
(6,244
)
Change in ownership percentage of subsidiary
    
–
      
–
      
–
      
–
      
–
      
–
      
(109
)
    
(109
)
Dividends declared
    
–
      
–
      
5
      
–
      
–
      
(4,623
)
    
–
      
(4,618
)
Stock-based compensation
    
–
      
–
      
1,890
      
–
      
–
      
–
      
–
      
1,890
  
Stock issued under incentive plans
    
24
      
5
      
(5
)
    
–
      
–
      
–
      
–
      
–
  
Withholding tax paid upon vesting of RSUs
    
–
      
–
      
(432
)
    
–
      
–
      
–
      
–
      
(432
)
SERP transactions, net
    
–
      
–
      
207
      
–
      
72
      
–
      
–
      
279
  
Other
    
–
      
–
      
–
      
–
      
–
      
–
      
2
      
2
  
Balance, June 30, 2018
    
23,094
    
$
4,619
    
$
143,596
    
$
(30,487
)
  
$
(1,888
)
  
$
540,300
    
$
841
    
$
656,981
  

See Notes to Unaudited Condensed Consolidated Financial Statements

8

ASTEC INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in thousands, except per share amounts, unless otherwise specified)

Note 1.  Significant Accounting Policies

Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated under the Securities Exchange Act of 1934.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three and six-month periods ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.  It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Astec Industries, Inc. Annual Report on Form 10-K for the year ended December 31, 2018.

The unaudited condensed consolidated balance sheet as of December 31, 2018 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

Certain reclassifications have been made in amounts previously reported to conform to current year presentation.

Dollar and share amounts shown are in thousands, except per share amounts, unless otherwise specified.

Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which significantly changes the accounting for operating leases by lessees. The accounting applied by lessors is largely unchanged from that applied under previous guidance. The new guidance establishes a right-of-use (“ROU”) model and requires lessees to recognize lease assets and lease liabilities in the balance sheet, initially measured at the present value of the lease payments, for leases which were classified as operating leases under previous guidance. Lease cost included in the statements of income will be calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. Lessees may make an accounting policy election to exclude leases with a term of 12 months or less from the requirement to record related assets and liabilities. Certain provisions of ASU No. 2016-02 were later modified or clarified by the issuance of ASU 2018-11, “Leases (Topic 842): Targeted Improvements” and ASU 2018-10, “Codification Improvements to Topic 842, Leases”. A modified retrospective transition approach is required by the ASU and its provisions must be applied to all leases existing at the date of initial application.  An entity may choose to use either (1) the standard’s effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application.  The new standards were effective for public companies for fiscal years beginning after December 15, 2018 and the Company adopted the new standards effective January 1, 2019 using the effective date as the date of initial application.  Consequently, financial information and the disclosures required under the new standards have not been provided for periods prior to January 1, 2019.  The adoption of these standards did not have a material impact on the Company’s financial position, results of operations or cash flows.  See Note 10, Leases, for additional information regarding the Company’s adoption of these standards.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments”. The standard changes how credit losses are measured for most financial assets and certain other instruments that currently are not measured through net income. The standard will require an expected loss model for instruments measured at amortized cost as opposed to the current incurred loss approach. In valuing available for sale debt securities, allowances will be required to be recorded, rather than the current approach of reducing the carrying amount, for other than temporary impairments. A cumulative adjustment to retained earnings is to be recorded as of the beginning of the period of adoption to reflect the impact of applying the provisions of the standard. The standard is effective for public companies for periods beginning after December 15, 2019 and the Company expects to adopt the new standard as of January 1, 2020. As the Company’s credit losses are typically minimal, the Company does not expect the adoption of this new standard to have a material impact on the Company's financial position, results of operations or cash flows.

9
In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815), Targeted Improvements to Hedging Activities”, to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The new guidance is effective for public companies for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted in any interim period after its issuance. The Company adopted the new standard effective January 1, 2019. The application of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, which permits companies to reclassify tax effects stranded in accumulated other comprehensive income (“OCI”) as a result of U.S. tax reform impacting tax rates or other items, such as changing from a worldwide tax system to a territorial system, from OCI to retained earnings.  Other tax effects stranded in OCI due to other reasons, such as prior changes in tax laws or changes in valuation allowances, may not be reclassified.  The new standard was effective for fiscal years beginning after December 15, 2018, and the Company adopted its provisions as of January 1, 2019.  As a result of adopting this new standard, the Company reclassified $721 of previously stranded tax effects from accumulated comprehensive loss to retained earnings as shown on the accompanying unaudited condensed consolidated statement of equity for the six months ended June 30, 2019.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement” which aims to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies when preparing fair value measurement disclosures.  The standard is effective for annual and interim periods beginning after December 15, 2019 with early adoption permitted.  The Company has not yet adopted this new standard.  The Company does not expect the adoption of this new standard to have a material impact on its financial position, results of operations or cash flows.

Note 2.  Earnings per Share
Basic earnings (loss) per share are determined by dividing earnings (loss) by the weighted average number of common shares outstanding during each period.  Diluted earnings per share include the potential dilutive effect of restricted stock units and shares held in the Company’s Supplemental Executive Retirement Plan.

The following table sets forth net income (loss) attributable to controlling interest and the number of basic and diluted shares used in the computation of earnings per share:


  
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
   
2019
    
2018
    
2019
    
2018
  
Numerator:
                        
Net income (loss) attributable to controlling interest
  
$
23,377
    
$
(40,674
)
  
$
37,651
    
$
(20,407
)
Denominator:
                                
Denominator for basic earnings (loss) per share
    
22,509
      
23,061
      
22,503
      
23,053
  
Effect of dilutive securities:
                                
Restricted stock units
    
110
      
–
      
105
      
–
  
Supplemental Executive Retirement Plan
    
48
      
–
      
48
      
–
  
Denominator for diluted earnings (loss) per share
    
22,667
      
23,061
      
22,656
      
23,053
  

Note 3.  Receivables
Receivables are net of allowances for doubtful accounts of $1,927 and $1,184 as of June 30, 2019 and December 31, 2018, respectively.


10
Note 4.  Inventories
Inventories consist of the following:


  
June 30,
2019
    
December 31,
2018
  
Raw materials and parts
  
$
176,938
    
$
173,919
  
Work-in-process
    
73,629
      
69,718
  
Finished goods
    
82,594
      
89,152
  
Used equipment
    
27,722
      
23,155
  
Total
  
$
360,883
    
$
355,944
  

Raw materials and parts are comprised of purchased steel and other purchased items for use in the manufacturing process or held for sale for the after-market parts business. The category also includes the manufacturing cost of completed equipment sub-assemblies produced for either integration into equipment manufactured at a later date or for sale in the Company’s after-market parts business.

Work-in-process consists of the value of materials, labor and overhead incurred to date in the manufacturing of incomplete equipment or incomplete equipment sub-assemblies being produced.

Finished goods consist of completed equipment manufactured for sale to customers.

Used equipment consists of equipment accepted in trade or purchased on the open market. The category also includes equipment rented to prospective customers on a short-term or month-to-month basis. Used equipment is valued at the lower of acquired or trade-in cost or net realizable value determined on each separate unit. Each unit of rental equipment is valued at the lower of original manufacturing, acquired or trade-in cost or net realizable value.

Inventories are valued at the lower of cost (first-in, first-out) or net realizable value, which requires the Company to make specific estimates, assumptions and judgments in determining the amount, if any, of reductions in the valuation of inventories to their net realizable values. The net realizable values of the Company’s products are impacted by a number of factors, including changes in the price of steel, competitive sales pricing, quantities of inventories on hand, the age of the individual inventory items, market acceptance of the Company’s products, actions by our competitors, the condition of our used and rental inventory and general economic factors. Once an inventory item’s value has been deemed to be less than cost, a net realizable value adjustment is calculated and a new “cost basis” for that item is effectively established. This new cost is retained for that item until such time as the item is disposed of or the Company determines that an additional write-down is necessary. Additional write-downs may be required in the future based upon changes in assumptions due to general economic downturns in the markets in which the Company operates, changes in competitor pricing, new product design or other technological advances introduced by the Company or its competitors and other factors unique to individual inventory items.

The most significant component of the Company’s inventory is steel. A significant decline in the market price of steel could result in a decline in the market value of the Company’s equipment or parts. During periods of significant declining steel prices, the Company reviews the valuation of its inventories to determine if reductions are needed in the recorded value of inventory on hand to its net realizable value.

The Company reviews the individual items included in its finished goods, used equipment and rental equipment inventory on a model-by-model or unit-by-unit basis to determine if any item’s net realizable value is below its carrying value. This analysis is expanded to include items in work-in-process and raw material inventory if factors indicate those items may also be impacted. In performing this review, judgments are made and, in addition to the factors discussed above, additional consideration is given to the age of the specific items of used or rental inventory, prior sales offers or lack thereof, the physical condition of the specific items and general market conditions for the specific items. Additionally, an analysis of raw material inventory is performed to calculate reserves needed for obsolete inventory based upon quantities of items on hand, the age of those items and their recent and expected future usage or sale.

11
When the Company determines that the value of inventory has become impaired through damage, deterioration, obsolescence, changes in price levels, excessive levels of inventory or other causes, the Company reduces the carrying value to the net realizable value based on estimates, assumptions and judgments made from the information available at that time. Abnormal amounts of idle facility expense, freight, handling cost and wasted materials are recognized as current period charges.

Note 5.  Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation of $262,001 and $254,493 as of June 30, 2019 and December 31, 2018, 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, and marketable equity securities held in an unqualified Supplemental Executive Retirement Plan (“SERP”).  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, other receivables, accounts payable 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.

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 June 30, 2019 and December 31, 2018 are Level 1 and Level 2 in the fair value hierarchy as defined above:

12


  
June 30, 2019
  
   
Level 1
    
Level 2
    
Total
  
Financial Assets:
                  
Trading equity securities:
                  
SERP money market fund
  
$
298
    
$
–
    
$
298
  
SERP mutual funds
    
4,946
      
–
      
4,946
  
Preferred stocks
    
272
      
–
      
272
  
Trading debt securities:
                        
Corporate bonds
    
5,235
      
–
      
5,235
  
Municipal bonds
    
–
      
1,361
      
1,361
  
Floating rate notes
    
1,331
      
–
      
1,331
  
U.S. government securities
    
2,435
      
–
      
2,435
  
Asset backed securities
    
–
      
409
      
409
  
Other
    
–
      
1,004
      
1,004
  
Derivative financial instruments
    
–
      
176
      
176
  
Total financial assets
  
$
14,517
    
$
2,950
    
$
17,467
  
                         
Financial Liabilities:
                        
SERP liabilities
  
$
–
    
$
6,807
    
$
6,807
  
Derivative financial instruments
    
–
      
42
      
42
  
Total financial liabilities
  
$
–
    
$
6,849
    
$
6,849
  


 
December 31, 2018
  
   
Level 1
    
Level 2
    
Total
  
Financial Assets:
                  
Trading equity securities:
                  
SERP money market fund
  
$
229
    
$
–
    
$
229
  
SERP mutual funds
    
4,755
      
–
      
4,755
  
Preferred stocks
    
248
      
–
      
248
  
Trading debt securities:
                        
Corporate bonds
    
5,398
      
–
      
5,398
  
Municipal bonds
    
–
      
1,546
      
1,546
  
Floating rate notes
    
1,300
      
–
      
1,300
  
U.S. government securities
    
2,210
      
–
      
2,210
  
Asset backed securities
    
–
      
442
      
442
  
Other
    
–
      
708
      
708
  
Derivative financial instruments
    
–
      
333
      
333
  
Total financial assets
  
$
14,140
    
$
3,029
    
$
17,169
  
                         
Financial Liabilities:
                        
SERP liabilities
  
$
–
    
$
6,641
    
$
6,641
  
Total financial liabilities
  
$
–
    
$
6,641
    
$
6,641
  

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.  No investments changed hierarchy levels from December 31, 2018 to June 30, 2019.

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.


13
Note 7. Debt
On April 12, 2017, the Company and certain of its subsidiaries entered into an amended and restated credit agreement whereby Wells Fargo extended to the Company an unsecured line of credit of up to $100,000, including a sub-limit for letters of credit of up to $30,000. In February 2019, the agreement was again amended to increase the unsecured line of credit to a maximum of $150,000 and to extend the maturity date to December 29, 2023. Other significant terms were left unchanged.  Outstanding borrowings under the agreement totaled $28,057 and $58,778 as of June 30, 2019 and December 31, 2018, respectively, which are included in long-term debt in the accompanying unaudited condensed consolidated balance sheets.  The highest borrowing amount outstanding at any time during the six-month period ended June 30, 2019 was $81,776.  Letters of credit totaling $8,630, including $3,200 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 June 30, 2019.  Additional borrowing available under the credit facility was $113,313 as of June 30, 2019.  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 3.15% as of June 30, 2019. 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 $6,706 with a South African bank to finance short-term working capital needs, as well as to cover performance letters of credit, advance payment and retention guarantees. As of June 30, 2019, Osborn had no outstanding borrowings but had $1,222 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 June 30, 2019, Osborn had available credit under the facility of $5,484. The interest rate is 0.25% less than the South Africa prime rate, resulting in a rate of 10.0% as of June 30, 2019.

The Company’s Brazilian subsidiary, Astec Brazil, has a $1,052 working capital loan outstanding as of June 30, 2019 from Brazilian banks 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.  Additionally, Astec Brazil has various five-year equipment financing loans outstanding with Brazilian banks in the aggregate of $18 as of June 30, 2019 that have interest rates ranging from 6.0% to 16.3%.  These equipment loans have maturity dates ranging from July 2019 to April 2020.  Astec Brazil’s loans are included in the accompanying unaudited condensed consolidated balance sheets as current maturities of long-term debt ($236) and long-term debt ($834) as of June 30, 2019.

Note 8.  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 and six-month periods ended June 30, 2019 and 2018 are as follows:


  
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
   
2019
    
2018
    
2019
    
2018
  
Reserve balance, beginning of the period
  
$
11,051
    
$
16,013
    
$
10,928
    
$
15,410
  
Warranty liabilities accrued
    
1,750
      
4,076
      
4,496
      
7,529
  
Warranty liabilities settled
    
(2,644
)
    
(3,851
)
    
(5,287
)
    
(6,676
)
Pellet plant agreement write-off
    
–
      
(4,806
)
    
–
      
(4,806
)
Other
    
(40
)
    
112
      
(20
)
    
87
  
Reserve balance, end of the period
  
$
10,117
    
$
11,544
    
$
10,117
    
$
11,544
  


14
Note 9.  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 $8,490 as of June 30, 2019 and $7,889 as of December 31, 2018, of which $6,565 and $6,057 were included in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018, respectively.

Note 10.  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, Leases, on January 1, 2019 using the effective date method.  Upon adoption, right-of-use (“ROU”) assets totaling $4,993 were recorded on the Company’s 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 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. The financial results for periods prior to January 1, 2019 are unchanged from results previously reported.  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.  Lease expense recorded in the three and six-month periods ended June 30, 2019 under ASC 842 was not materially different from lease expense that would have been recorded under the previous lease accounting standard.  Other transitional practical expedients allowed under ASU No. 2016-02 were adopted.

Other information concerning the Company’s operating leases accounted for under ASC 842 guidelines and the related expense, assets and liabilities follow:


  
Three Months Ended
June 30, 2019
  
Operating lease expense
  
$
651
  
Cash paid for operating leases included in operating cash flows
    
696
  


 
Six Months Ended
June 30, 2019
  
Operating lease expense
  
$
1,252
  
Cash paid for operating leases included in operating cash flows
    
1,341
  

15


  
As of
June 30, 2019
  
Operating lease right-of-use asset
  
$
4,075
  
Operating lease short-term liability included in other current liabilities
    
1,742
  
Operating lease long-term liability included in other long-term liabilities
    
2,349
  
Weighted average remaining lease term (in years)
    
4.73
  
Weighted average discount rate used in calculating right-of-use asset
    
4.12
%

Future annual minimum lease payments as of June 30, 2019 are as follows:

 
  
Amount
  
2019 (six months remaining)
  
$
1,116
  
2020
    
1,321
  
2021
    
683
  
2022
    
382
  
2023
    
219
  
2024 and thereafter
    
911
  
Total
    
4,632
  
Less interest
    
(541
)
Present value of lease liabilities
  
$
4,091
  

The Company adopted ASU No. 2016-02 on January 1, 2019 as noted above. As required by the ASU, the following table discloses the minimum rental commitments for all non-cancelable operating leases at December 31, 2018 as reported in the Company’s 2018 10-K under previous ASC 840 guidance:


  
Amount
  
2019
  
$
1,992
  
2020
    
1,100
  
2021
    
388
  
2022
    
144
  
2023
    
66
  
2024 and thereafter
    
12
  
Total
  
$
3,702
  

Note 11.  Income Taxes
The Company's combined effective income tax rates were 23.1% and 17.3% for the three-month periods ended June 30, 2019 and 2018, respectively. The Company's combined effective income tax rates were 22.3% and 10.8% for the six-month periods ended June 30, 2019 and 2018, respectively. The Company's effective tax rate for each period includes the effect of state income taxes and other discrete items as well as a benefit for research and development credits.

The Company's recorded liability for uncertain tax positions as of June 30, 2019 has increased by approximately $101 as compared to December 31, 2018 due to exposure related to federal and state credits, plus additional taxes and interest on existing reserves.


16
Note 12.  Revenue Recognition:
The following tables disaggregate our revenue by major source for the three and six-month periods ended June 30, 2019 and 2018 (excluding intercompany sales):


  
Three Months Ended June 30, 2019
  
   
Infrastructure
Group
    
Aggregate
and Mining
Group
    
Energy
Group
    
Total
  
Net Sales-Domestic:
                        
Equipment sales
  
$
65,514
    
$
46,887
    
$
40,818
    
$
153,219
  
Pellet plant sales
    
20,000
      
–
      
–
      
20,000
  
Parts and component sales
    
24,535
      
18,921
      
11,327
      
54,783
  
Service and equipment installation revenue
    
4,867
      
2,431
      
1,569
      
8,867
  
Used equipment sales
    
2,205
      
–
      
1,185
      
3,390
  
Freight revenue
    
3,146
      
1,801
      
1,561
      
6,508
  
Other
    
(288
)
    
(700
)
    
434
      
(554
)
Total domestic revenue
    
119,979
      
69,340
      
56,894
      
246,213
  
                                 
Net Sales-International:
                                
Equipment sales
    
5,219
      
24,416
      
5,216
      
34,851
  
Parts and component sales
    
5,435
      
11,438
      
2,425
      
19,298
  
Service and equipment installation revenue
    
2,084
      
308
      
5
      
2,397
  
Used equipment sales
    
121
      
371
      
70
      
562
  
Freight revenue
    
391
      
762
      
105
      
1,258
  
Other
    
6
      
202
      
15
      
223
  
Total international revenue
    
13,256
      
37,497
      
7,836
      
58,589
  
                                 
Total net sales
  
$
133,235
    
$
106,837
    
$
64,730
    
$
304,802
  


 
Six Months Ended June 30, 2019
  
   
Infrastructure
Group
    
Aggregate
and Mining
Group
    
Energy
Group
    
Total
  
Net Sales-Domestic:
                        
Equipment sales
  
$
144,878
    
$
102,091
    
$
80,550
    
$
327,519
  
Pellet plant sales
    
20,000
      
–
      
–
      
20,000
  
Parts and component sales
    
66,726
      
38,080
      
23,634
      
128,440
  
Service and equipment installation revenue
    
8,098
      
3,056
      
3,112
      
14,266
  
Used equipment sales
    
3,698
      
413
      
2,455
      
6,566
  
Freight revenue
    
6,976
      
3,396
      
3,131
      
13,503
  
Other
    
148
      
(1,981
)
    
581
      
(1,252
)
Total domestic revenue
    
250,524
      
145,055
      
113,463
      
509,042
  
                                 
Net Sales-International:
                                
Equipment sales
    
21,671
      
43,465
      
10,178
      
75,314
  
Parts and component sales
    
11,708
      
21,616
      
4,918
      
38,242
  
Service and equipment installation revenue
    
3,448
      
700
      
37
      
4,185
  
Used equipment sales
    
231
      
837
      
70
      
1,138
  
Freight revenue
    
630
      
1,430
      
288
      
2,348
  
Other
    
17
      
265
      
31
      
313
  
Total international revenue
    
37,705
      
68,313
      
15,522
      
121,540
  
                                 
Total net sales
  
$
288,229
    
$
213,368
    
$
128,985
    
$
630,582
  

17


  
Three Months Ended June 30, 2018
  
   
Infrastructure
Group
    
Aggregate
and Mining
Group
    
Energy
Group
    
Total
  
Net Sales-Domestic:
                        
Equipment sales
  
$
102,724
    
$
57,989
    
$
41,911
    
$
202,624
  
Pellet plant agreement sale charge
    
(75,315
)
    
–
      
–
      
(75,315
)
Parts and component sales
    
29,269
      
18,311
      
11,479
      
59,059
  
Service and equipment installation revenue
    
3,283
      
564
      
1,332
      
5,179
  
Used equipment sales
    
1,384
      
652
      
768
      
2,804
  
Freight revenue
    
3,216
      
1,912
      
1,617
      
6,745
  
Other
    
511
      
(535
)
    
2,314
      
2,290
  
Total domestic revenue
    
65,072
      
78,893
      
59,421
      
203,386
  
                                 
Net Sales-International:
                                
Equipment sales
    
12,040
      
23,385
      
9,075
      
44,500
  
Parts and component sales
    
4,310
      
12,070
      
3,280
      
19,660
  
Service and equipment installation revenue
    
644
      
328
      
229
      
1,201
  
Used equipment sales
    
661
      
630
      
583
      
1,874
  
Freight revenue
    
429
      
967
      
412
      
1,808
  
Other
    
46
      
24
      
29
      
99
  
Total international revenue
    
18,130
      
37,404
      
13,608
      
69,142
  
                                 
Total net sales
  
$
83,202
    
$
116,297
    
$
73,029
    
$
272,528
  


 
Six Months Ended June 30, 2018
  
   
Infrastructure
Group
    
Aggregate
and Mining
Group
    
Energy
Group
    
Total
  
Net Sales-Domestic:
                        
Equipment sales
  
$
188,242
    
$
121,483
    
$
78,643
    
$
388,368
  
Pellet plant agreement sale charge
    
(75,315
)
    
–
      
–
      
(75,315
)
Parts and component sales
    
70,382
      
36,145
      
22,794
      
129,321
  
Service and equipment installation revenue
    
5,211
      
890
      
3,428
      
9,529
  
Used equipment sales
    
3,009
      
2,063
      
935
      
6,007
  
Freight revenue
    
7,254
      
3,720
      
2,949
      
13,923
  
Other
    
775
      
(1,571
)
    
2,427
      
1,631
  
Total domestic revenue
    
199,558
      
162,730
      
111,176
      
473,464
  
                                 
Net Sales-International:
                                
Equipment sales
    
17,955
      
45,712
      
13,837
      
77,504
  
Parts and component sales
    
9,372
      
22,359
      
5,752
      
37,483
  
Service and equipment installation revenue
    
1,457
      
640
      
229
      
2,326
  
Used equipment sales
    
1,164
      
1,486
      
583
      
3,233
  
Freight revenue
    
683
      
2,297
      
676
      
3,656
  
Other
    
107
      
140
      
68
      
315
  
Total international revenue
    
30,738
      
72,634
      
21,145
      
124,517
  
                                 
Total net sales
  
$
230,296
    
$
235,364
    
$
132,321
    
$
597,981
  

18
Sales into major geographic regions for the three and six-month periods ended June 30, 2019 and 2018 were as follows:


  
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
   
2019
    
2018
    
2019
    
2018
  
United States
  
$
246,213
    
$
203,386
    
$
509,042
    
$
473,464
  
Africa
    
8,827
      
10,834
      
15,918
      
20,876
  
Asia (excl. China, Japan & Korea)
    
2,816
      
1,342
      
4,947
      
2,186
  
Australia
    
7,156
      
7,929
      
15,969
      
13,897
  
Canada
    
14,020
      
20,963
      
37,013
      
35,072
  
Central America
    
2,602
      
3,772
      
6,152
      
7,325
  
China, Japan &Korea
    
440
      
3,561
      
2,580
      
4,217
  
Europe
    
12,982
      
8,610
      
19,472
      
19,071
  
Middle East
    
925
      
2,280
      
1,776
      
2,910
  
South America
    
7,581
      
9,367
      
14,635
      
18,234
  
West Indies
    
188
      
551
      
1,566
      
660
  
Other
    
1,052
      
(67
)
    
1,512
      
69
  
Total foreign
    
58,589
      
69,142
      
121,540
      
124,517
  
Total consolidated sales
  
$
304,802
    
$
272,528
    
$
630,582
    
$
597,981
  

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.

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.

19
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, 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 include rental revenues, extended warranty revenues, early pay discounts and floor plan interest reimbursements.

Note 13.  Segment Information
The Company has three reportable segments, each of which is comprised of multiple business units that offer similar products and services and meet the requirements for aggregation. A brief description of each segment is as follows:

Infrastructure Group - The Infrastructure Group segment is comprised of five business units. These business units include Astec, Inc. (“Astec”), Roadtec, Inc. (“Roadtec”), Carlson Paving Products, Inc. (“Carlson”), Astec Mobile Machinery GmbH (“AMM”) and Astec Australia Pty Ltd (“Astec Australia”). Three of the business units (Astec, Roadtec and Carlson) design, engineer, manufacture and market a complete line of asphalt plants and their related components, asphalt pavers, screeds, milling machines, material transfer vehicles, stabilizers and related ancillary equipment. The other two business units (AMM and Astec Australia) primarily sell, service and install products produced by the manufacturing subsidiaries of the Company and a majority of their sales are to customers in the infrastructure industry. During late 2018, the Company decided to close AMM, located in Germany, in 2019, and its assets are currently being liquidated. The principal purchasers of the products produced by this group are asphalt producers, highway and heavy equipment contractors, and foreign and domestic governmental agencies.

Aggregate and Mining Group - The Company's Aggregate and Mining Group is comprised of eight 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. (“Telsmith”), Kolberg-Pioneer, Inc. (“KPI”), Astec Mobile Screens, Inc. (“AMS”), Johnson Crushers International, Inc. (“JCI”), Breaker Technology Ltd/Breaker Technology, Inc. (“BTI”), Osborn Engineered Products, SA (Pty) Ltd (“Osborn”), Astec do Brasil Fabricacao de Equipamentos Ltda. (“Astec Brazil”) and Telestack Limited (“Telestack”). 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.

Energy Group - The Company’s Energy Group is comprised of six business units focused on supplying heavy equipment such as heaters, drilling rigs, concrete plants, wood chippers and grinders, pump trailers, storage equipment and related parts to the oil and gas, construction, and water well industries, as well as commercial and industrial burners used primarily in commercial, industrial and process heating applications. The business units included in the Energy Group are Heatec, Inc. (“Heatec”), CEI Enterprises, Inc. (“CEI”), GEFCO, Inc. (“GEFCO”), Peterson Pacific Corp. (“Peterson”), Power Flame Incorporated (“Power Flame”) and RexCon, Inc. (“RexCon”). The principal purchasers of products produced by this group are oil, gas and water well drilling industry contractors, processors of oil, gas and biomass for energy production, ready mix concrete producers and contractors in the construction and demolition recycling markets.

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, Astec Industries, Inc., a captive insurance company and a Company-owned distributor in the start-up phase of operations in Chile. 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.

20
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, 2019
  
   
Infrastructure
Group
    
Aggregate
and Mining
Group
    
Energy
Group
    
Corporate
    
Total
  
Net sales to external customers
  
$
133,235
    
$
106,837
    
$
64,730
    
$
–
    
$
304,802
  
Intersegment sales
    
2,849
      
5,782
      
4,095
      
–
      
12,726
  
Gross profit
    
42,689
      
25,493
      
15,187
      
81
      
83,450
  
Gross profit percent
    
32.0
%
    
23.9
%
    
23.5
%
    
–
      
27.4
%
Segment profit (loss)
  
$
24,445
    
$
8,489
    
$
3,138
    
$
(13,220
)
  
$
22,852
  


 
Six Months Ended June 30, 2019
  
   
Infrastructure
Group
    
Aggregate
and Mining
Group
    
Energy
Group
    
Corporate
    
Total
  
Net sales to external customers
  
$
288,229
    
$
213,368
    
$
128,985
    
$
–
    
$
630,582
  
Intersegment sales
    
4,920
      
10,539
      
11,116
      
–
      
26,575
  
Gross profit
    
78,196
      
51,038
      
30,666
      
76
      
159,976
  
Gross profit percent
    
27.1
%
    
23.9
%
    
23.8
%
    
–
      
25.4
%
Segment profit (loss)
  
$
39,683
    
$
17,166
    
$
6,532
    
$
(26,690
)
  
$
36,691
  


 
Three Months Ended June 30, 2018
  
   
Infrastructure
Group
    
Aggregate
and Mining
Group
    
Energy
Group
    
Corporate
    
Total
  
Net sales to external customers
  
$
83,202
    
$
116,297
    
$
73,029
    
$
–
    
$
272,528
  
Intersegment sales
    
3,370
      
5,102
      
6,724
      
–
      
15,196
  
Gross profit (loss)
    
(47,817
)
    
29,042
      
19,808
      
75
      
1,108
  
Gross profit (loss) percent
    
(57.5
)%
    
25.0
%
    
27.1
%
    
–
      
0.4
%
Segment profit (loss)
  
$
(62,734
)
  
$
12,548
    
$
8,477
    
$
596
    
$
(41,113
)


 
Six Months Ended June 30, 2018
  
   
Infrastructure
Group
    
Aggregate
and Mining
Group
    
Energy
Group
    
Corporate
    
Total
  
Net sales to external customers
  
$
230,296
    
$
235,364
    
$
132,321
    
$
–
    
$
597,981
  
Intersegment sales
    
11,641
      
9,008
      
11,863
      
–
      
32,512
  
Gross profit (loss)
    
(14,536
)
    
58,331
      
35,095
      
223
      
79,113
  
Gross profit (loss) percent
    
(6.3
)%
    
24.8
%
    
26.5
%
    
–
      
13.2
%
Segment profit (loss)
  
$
(47,882
)
  
$
25,658
    
$
13,088
    
$
(10,652
)
  
$
(19,788
)

A reconciliation of total segment profit to the Company’s consolidated totals is as follows:

21


  
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
   
2019
    
2018
    
2019
    
2018
  
Total segment profit (loss)
  
$
22,852
    
$
(41,113
)
  
$
36,691
    
$
(19,788
)
Recapture (elimination) of intersegment profit
    
509
      
345
      
888
      
(764
)
Net income (loss)
    
23,361
      
(40,768
)
    
37,579
      
(20,552
)
Net loss attributable to non-controlling interest in subsidiaries
    
16
      
94
      
72
      
145
  
Net income (loss) attributable to controlling interest
  
$
23,377
    
$
(40,674
)
  
$
37,651
    
$
(20,407
)

Note 14.  Contingent Matters
Certain customers have financed purchases of Company products through arrangements in which the Company is contingently liable for customer debt of $2,675 at June 30, 2019. These arrangements expire at various dates through December 2023 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. The Company has recorded a liability of $1,453 related to these guarantees as of June 30, 2019.

In addition, the Company is contingently liable under letters of credit issued by a domestic lender totaling $8,630 as of June 30, 2019, including $3,200 of letters of credit guaranteeing certain Astec Brazil bank debt. The outstanding letters of credit expire at various dates through December 2020. As of June 30, 2019, the Company’s foreign subsidiaries are contingently liable for a total of $3,358 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 $11,988 as of June 30, 2019.

The Company manufactured its first wood pellet plant for a customer located in Georgia under a Company-financed arrangement whereby the Company deferred the recognition of revenue as payment under the arrangement was not assured.  After considering the uncertainty of completing the sale to the existing customer due to their unsuccessful attempts to obtain financing; the lack of success in attempting to market the plant to other pellet plant operators; the cost of repossessing the plant; and the Company’s decision to exit the pellet plant business line, the pellet plant inventory’s net realizable value was written down to zero in the fourth quarter of 2018.  The sale of the Georgia pellet plant was ultimately recognized at the end of the second quarter of 2019 upon the receipt of the discounted $20,000 sales price.

The Company and certain of its current and former executive officers have been named as defendants in a putative shareholder class action lawsuit filed on February 1, 2019, in the United States District Court for the Eastern District of Tennessee. The action is styled City of Taylor General Employees Retirement System v. Astec Industries, Inc., et al., Case No. 1:19-cv-00024-PLR-CHS. The complaint generally alleges that the defendants violated the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements and that the individual defendants are control person under Section 20(a) of the Exchange Act. The complaint was filed on behalf of shareholders who purchased shares of the Company’s stock between July 26, 2016 and October 22, 2018 and seeks monetary damages on behalf of the purported class. The Company disputes these allegations and intends to defend this lawsuit vigorously. The Company is unable to estimate the possible loss or range of loss at this time.

22
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 15.  Shareholders’ Equity
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 thereafter 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.  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 22 and 32 RSUs vested during the six-month periods ended June 30, 2019 and 2018, respectively.  The Company withheld 4 and 8 shares due to statutory payroll tax withholding requirements upon the vesting of the RSUs during each of the first six-month periods in 2019 and 2018, 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 six months of 2019 and 2018 was $777 and $1,853, respectively.  The grant date fair value of the RSUs granted during the first six months of 2019 and 2018 was $2,098 and $3,553, respectively.  Compensation expense of $1,380 and $1,019 was recorded in the six-month periods ended June 30, 2019 and 2018, respectively, to reflect the fair value of RSUs granted (or anticipated to be granted for 2019 performance) to employees amortized over the portion of the vesting period occurring during the periods.

Note 16.  Other Income, Net of Expenses
Other income, net of expenses for the three and six-month periods ended June 30, 2019 and 2018 is presented below:


  
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
   
2019
    
2018
    
2019
    
2018
  
Interest income
  
$
295
    
$
239
    
$
569
    
$
453
  
Gain (loss) on investments
    
49
      
34
      
198
      
(69
)
Insurance recovery
    
–
      
635
      
–
      
635
  
Other
    
28
      
144
      
72
      
494
  
Total
  
$
372
    
$
1,052
    
$
839
    
$
1,513
  


23
Note 17.  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 sheet 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 operations 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 $9,621 during the six-month period ended June 30, 2019. The Company reported $176 of derivative assets in other current assets and $42 of derivative liabilities in other current liabilities at June 30, 2019. At December 31, 2018, the Company reported $333 of derivative assets in other current assets.  The Company recognized, as a component of cost of sales,  net gains of $62 and $500 on the changes in fair value of derivative financial instruments in the three-month periods ended June 30, 2019 and 2018, respectively.  The Company recognized, as a component of cost of sales, a net loss of $14 and a net gain of $687 on the changes in fair value of derivative financial instruments in the six-month periods ended June 30, 2019 and 2018, respectively.  There were no derivatives that were designated as hedges at June 30, 2019.

Note 18.  Stock Buy Back Program
On July 29, 2018, the Company’s Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $150,000 of its common stock.  Under the share repurchase plan, the Company may purchase common stock in open market transactions, block or privately negotiated transactions, and may from time to time purchase shares pursuant to a trading plan in accordance with Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934, as amended, or by any combination of such methods. The number of shares to be purchased and the timing of the purchases are based on a variety of factors.  During the second half of 2018, the Company repurchased 582 shares of its stock at total cost of $24,138 under this program.  No additional shares were repurchased during the six months ended June 30, 2019.  No time limit was set for completion of repurchases under the authorization and the program may be suspended or discontinued at any time.


24
Item 2.  Management’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 2019, the Company’s expected capital expenditures in 2019, the ability of the Company to meet its working capital and capital expenditure requirements through August 2020, 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, and the ultimate outcome of the Company’s current claims and legal proceedings.

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 Report 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, 2018, 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, oil and natural gas 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.

25
The Company, as we refer to it herein, consists of a total of 22 companies that are consolidated in our financial statements, which include 17 manufacturing companies, three companies that operate as dealers for the manufacturing companies, a captive insurance company and the parent company. The companies fall within three reportable operating segments: the Infrastructure Group, the Aggregate and Mining Group and the Energy Group.

Infrastructure Group - This segment consists of five business units, three of which design, engineer, manufacture and market a complete line of asphalt plants, asphalt pavers and related components and ancillary equipment. The two remaining companies in the Infrastructure Group are Company-owned dealers which sell, service and install equipment produced by the manufacturing subsidiaries of the Company, with the majority of sales to the infrastructure industry. The Company-owned dealer in Germany is being closed in 2019 and its assets liquidated.

Aggregate and Mining Group - This segment consists of eight business units that design, manufacture and market heavy equipment and parts in the aggregate, metallic mining, quarrying, recycling, ports and bulk handling industries.

Energy Group - This segment consists of six business units that design, manufacture and market heaters, gas, oil and combination gas/oil burners, combustion control systems, drilling rigs, concrete plants, wood chippers and grinders, pump trailers, commercial and industrial burners, combustion control systems, storage equipment and related parts to the oil and gas, construction, and water well industries.

Individual Company subsidiaries included in the composition of the Company’s segments are as follows:

1.
Infrastructure Group – Astec, Inc., Roadtec, Inc., Carlson Paving Products, Inc., Astec Australia, Pty Ltd and Astec Mobile Machinery GmbH (which is being dissolved in 2019).

2.
Aggregate and Mining Group – Telsmith, Inc., Kolberg-Pioneer, Inc., Johnson Crushers International, Inc., Osborn Engineered Products SA (Pty) Ltd, Breaker Technology, Inc., Astec Mobile Screens, Inc., Astec do Brasil Fabricacao de Equipamentos LTDA and Telestack Limited.

3.
Energy Group – Heatec, Inc., CEI, Inc., GEFCO, Inc., Peterson Pacific Corp., Power Flame Incorporated and RexCon, Inc.

The Company also has one other category, Corporate, that contains the business units that do not meet the requirements for separate disclosure as a separate operating segment or inclusion in one of the other reporting segments. The business units in the Corporate category are Astec Insurance Company (“Astec Insurance” or “the captive”), Astec Industries LatAm SpA, a Company-owned distributor in Chile in the start-up phase of operations and Astec Industries, Inc., the parent company.

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.

26
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. Proposals being considered may rely in part on direct federal spending as well as increased private sector funding in exchange for federal tax credits. Governmental funding that is committed or earmarked for federal highway projects is always subject to repeal or reduction. Although continued funding under the FAST Act or 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; however, the Federal Reserve has increased the Federal Funds Rate several times in recent quarters, beginning in December 2016, with a 0.2570 decrease occuring in July 2019. The current Federal Funds Rate is still considered in the historically low range and future rate changes may occur.

27
Significant portions of the Company’s revenues from the Infrastructure 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 affect 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. 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 2019.

Contrary to the impact of oil prices on many of the Company’s Infrastructure Group products as discussed above, the products manufactured by the Energy Group, which are used in drilling for oil and natural gas, in heaters for refineries and oil sands, and in double fluid pump trailers for fracking and oil and gas extraction, would benefit from higher oil and natural gas prices, to the extent that such higher prices lead to increased development in the oil and natural gas production industries. The Company believes further development of domestic oil and natural gas production capabilities is needed and would positively impact demand for the Company’s oil and gas related products.

Steel is a major component in the Company’s equipment. Steel prices, which declined slightly in the first six months of 2019, are expected to remain stable for the third quarter of 2019.  The Company expects moderate steel price increases in the fourth quarter of 2019. 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. The Company will review the trends in steel prices in 2019 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 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. Increasing domestic interest rates 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 2018, approximately 60% of the Company’s sales were to the end user. The Company expects this ratio to be between 60% and 70% for 2019.

The Company is operated on a centrally led, but decentralized basis, with a complete operating management team for each operating subsidiary. Finance, insurance, legal, shareholder relations, corporate accounting and other corporate matters are primarily managed at the corporate level (i.e., Astec Industries, Inc., the parent company). The engineering, design, sales, manufacturing and basic accounting functions are the responsibility of each individual subsidiary. Standard accounting procedures are prescribed and followed in all reporting.

28
The Company’s current profit sharing plans allow corporate officers, subsidiary presidents and other key management employees at each subsidiary the opportunity to earn profit sharing incentives based upon the Company’s and/or the individual groups or subsidiaries’ return on capital employed, EBITDA margin and safety. Corporate officers’ and subsidiary presidents’ awards, when calculated at targeted performance, are between 35% and 100% of their base salary, depending upon their responsibilities, and the plans allow for awards of up to 200% of target incentive compensation. Each subsidiary also has the opportunity to earn up to 10% of its after-tax profit as a profit-sharing incentive award to be paid to its employees.

The Company’s current long-term incentive plans allow corporate officers, subsidiary presidents and other corporate or subsidiary management employees to be awarded Restricted Stock Units (“RSUs”) if certain goals are met based upon the Company’s Total Shareholder’s Return (“TSR”) as compared to a peer group and the Company’s pretax profit margin. The grant date value of corporate officers’ and subsidiary presidents’ awards, when calculated at targeted performance, are between 20% and 100% of their base salary, depending upon their responsibilities, and the plans allow for awards of up to 200% of target incentive compensation. Additional RSUs may be granted to other key subsidiary management employees based upon individual subsidiary profits.

Beginning in 2018 and continuing through mid-2019, the Company retained the services of a specialized consulting firm to assist with the accumulation of company-wide purchasing data and a system for maintaining similar data in the future for management to utilize in negotiations with suppliers or potential suppliers in order to obtain reduced prices on raw materials and equipment components purchased. The firm also assisted with the development of sales and operational planning procedures designed to achieve significant reductions in inventory levels maintained for normal production needs and to reduce existing excess inventories. The Company expects the results of these efforts to positively impact its gross margins and inventory levels in the remainder of 2019 and thereafter.

Results of Operations

Georgia Pellet Plant Agreement (Q2 2019)
The Company manufactured its first wood pellet plant for a customer under a Company-financed arrangement whereby the Company deferred the recognition of revenue as payment under the arrangement was not assured.  After considering the uncertainty of completing the sale to the customer due to its inability to obtain financing; the lack of success in attempting to market the plant to other pellet plant operators; the cost of repossessing the plant; and the Company’s decision to exit the pellet plant business line, the pellet plant inventory’s net realizable value was written down to zero in the fourth quarter of 2018.  The Company ultimately sold the pellet plant to the original customer at a discounted sales price of $20,000 at the end of the second quarter of 2019.  The sales agreement also included provisions to release the Company from any further financial obligations related to the plant.  Sales related to this pellet plant sale are included in the results of operations for the three and six-month periods ending June 30, 2019 and are non-recurring.  This pellet plant sale is referred to in this Quarterly Report as the Georgia Pellet Plant Sale.

Arkansas Pellet Plant Agreement (Q2 2018)
The Company’s sales contract with the purchaser of a large wood pellet plant in Arkansas, on which $143,300 of revenue (prior to the $75,315 charge discussed below) was recorded through June 30, 2018 (2018 revenues were not material) based on the over-time method, contained certain production output and operational provisions, which if not timely met, could have resulted in the Company having to refund the purchase price to the customer.  Additional contract provisions required the Company to compensate the customer for production shortfalls caused by the Company and other potential costs (depending on the market price of wood pellets).  As the plant did not meet the production output and operational specifications by the deadline set forth in the contract (June 29, 2018), the Company entered into an agreement with the customer on July 20, 2018, whereby the Company paid its customer $68,000 over 120 days following execution of the agreement and forgave $7,315 in accounts receivables to obtain a full release of all the Company’s contractual obligations under the sales contract.  The terms of the pellet plant agreement resulted in the Company’s Infrastructure Group recording charges against sales of $75,315 and gross margins of $71,029 in the second quarter of 2018.  Such charges are non-recurring and are referred to in this Quarterly Report as the Arkansas Pellet Plant Charges.

29
Net Sales
Net sales for the second quarter of 2019 were $304,802 compared to $272,528 for the second quarter of 2018, an increase of $32,274 or 11.8%. Sales are generated primarily from new equipment and parts sales to domestic and international customers.  Sales increased in the Infrastructure Group (due primarily to the Georgia Pellet Plant Sale in the second quarter of 2019 and the non-recurrence of the Arkansas Pellet Plant Charges  from the second quarter of 2018 as discussed above) but decreased in the Aggregate and Mining Group and the Energy Group.   Domestic sales for the second quarter of 2019 as compared to the second quarter of 2018 were negatively impacted by weakening demand and price competition for many of the Company’s products, especially in the paving, oil and gas and aggregate markets.  International sales in the second quarter of 2019 decreased 15.3% as compared to the second quarter of 2018.  Sales reported by the Company’s foreign subsidiaries in U.S. dollars for the second quarter of 2019 would have been $2,715 higher had second quarter 2019 foreign exchange rates been the same as second quarter 2018 rates.

Net sales for the first six months of 2019 were $630,582 compared to $597,981 for the first six months of 2018, an increase of $32,601 or 5.5%. Sales are generated primarily from new equipment and parts sales to domestic and international customers.  Sales increased in the Infrastructure Group (due primarily to the Georgia Pellet Plant Sale in the second quarter 2019 and the non-recurrence of the Arkansas Pellet Plant Charges from the second quarter of 2018 as discussed above) but decreased in the Aggregate and Mining Group and Energy Group.   Domestic sales for the first six months of 2019 as compared to the first six months of 2018 were negatively impacted by weakening demand and price competition for many of the Company’s products, especially in the paving, oil and gas and aggregate markets as well as weather related delays experienced by our customers at many of their job sites.  International sales in the first six months of 2019 decreased 2.4% as compared to the first six months of 2018.  Sales reported by the Company’s foreign subsidiaries in U.S. dollars for the first six months of 2019 would have been $6,114 higher had first six months 2019 foreign exchange rates been the same as first six months 2018 rates.

Domestic sales for the second quarter of 2019 were $246,213 or 80.8% of consolidated net sales compared to $203,386 or 74.6% of consolidated net sales for the second quarter of 2018, an increase of $42,827 or 21.1%. Domestic sales for the second quarter of 2019 as compared to the second quarter of 2018 increased by $54,907 in the Infrastructure Group (including the results of the Georgia Pellet Plant Sale and the non-recurrence of the Arkansas Pellet Plant Charges discussed above) but decreased $9,553 in the Aggregate and Mining Group and $2,527 in the Energy Group.

Domestic sales for the first six months of 2019 were $509,042 or 80.7% of consolidated net sales compared to $473,464 or 79.2% of consolidated net sales for the first six months of 2018, an increase of $35,578 or 7.5%. Domestic sales for the first six months of 2019 as compared to the first six months of 2018 increased by $50,966 in the Infrastructure Group (including the results of the Georgia Pellet Plant Sale and the non-recurrence of the Arkansas Pellet Plant Charges discussed above) and $2,287 in the Energy Group but decreased $17,675 in the Aggregate and Mining Group.

International sales for the second quarter of 2019 were $58,589 or 19.2% of consolidated net sales compared to $69,142 or 25.4% of consolidated net sales for the second quarter of 2018, a decrease of $10,553 or 15.3%. International sales for the second quarter of 2019 as compared to the second quarter of 2018 increased $93 in the Aggregate and Mining Group but decreased by $5,772 in the Energy Group and $4,874 in the Infrastructure Group.  Decreases in international sales in Canada, Central America, South America, Africa, the Middle East and China/Japan/Korea were partially offset by increases in sales in Europe and Asia.

International sales for the first six months of 2019 were $121,540 or 19.3% of consolidated net sales compared to $124,517 or 20.8% of consolidated net sales for the first six months of 2018, a decrease of $2,977 or 2.4%. International sales for the first six months of 2019 as compared to the first six months of 2018 decreased $5,623 in the Energy Group and $4,321 in the Aggregate and Mining Group but increased by $6,967 in the Infrastructure Group.  Decreases in international sales in Africa, South America, Central America, China/Japan/Korea and the Middle East were partially offset by increases in sales in Asia, Australia and Canada.

30
Parts sales for the second quarter of 2019 were $74,081 compared to $78,719 for the second quarter of 2018, a decrease of $4,638 or 5.9%.  Parts sales decreased $3,609 in the Infrastructure Group, $1,007 in the Energy Group and $22 in the Aggregate and Mining Group.

Parts sales for the first six months of 2019 were $166,682 compared to $166,804 for the first six months of 2018, a decrease of $122 or 0.1%.  Parts sales decreased $1,320 in the Infrastructure Group but increased $1,192 in the Aggregate and Mining Group and $6 in the Energy Group.

Gross Profit
Consolidated gross profit for the second quarter of 2019 was $83,450 compared to $1,108 for the second quarter of 2018, an increase of $82,342.  Second quarter 2019 gross profit was impacted by the Georgia Pellet Plant Sale, which resulted in $20,000 of gross margin in the quarter as the related inventory values had been written off in 2018 as discussed above.  Second quarter 2018 gross profit was impacted by  the Arkansas Pellet Plant Charges discussed above, which resulted in a decline in gross profit of $71,029.  Gross profit as a percentage of sales increased to 27.4% for the second quarter of 2019 compared to 0.4% for the second quarter of 2018 due primarily to the effects of the Georgia Pellet Plant Sale in the second quarter of 2019 and the Arkansas Pellet Plant Charges in the second quarter of 2018.

Consolidated gross profit for the first six months of 2019 was $159,976 compared to $79,113 for the first six months of 2018, an increase of $80,863.  The first six months of 2019 gross profit was impacted by the Georgia Pellet Plant Sale, which resulted in $20,000 of gross margin in the period as the related inventory values had been written off in 2018 as discussed above.  The first six months of 2018 gross profit was impacted by  the Arkansas Pellet Plant Charges discussed above, which resulted in a decline in gross profit of $71,029.  Gross profit as a percentage of sales increased to 25.4% for the first six months of 2019 compared to 13.2% for the first six months of 2018 due primarily to the effects of the Georgia Pellet Plant Sale in the first six months of 2019 and the Arkansas Pellet Plant Charges in the first six months of 2018.

Selling, General, Administrative and Engineering Expenses
Selling, general, administrative and engineering expenses was $52,969 for the second quarter of 2019 compared to $51,263 for the second quarter of 2018, an increase of $1,706 or 3.3%.  The overall increase was attributable to a $3,211 increase in general and administrative expense (primarily due to a $1,998 increase in consulting fees/outside services, including the procurement and inventory level consulting services mentioned above; a $618 increase in legal and professional fees; an increase of $561 in annual incentive and stock incentive plan expense; an increase of $465 in bad debt expense; and an increase of $268 in corporate procurement expenses; partially offset by a $696 reduction in plane maintenance costs) and reductions in selling expenses of $867 (primarily due to reductions in employee wages and commissions) and engineering expenses of $638.  The above described expenses for the second quarter of 2019 includes $657 of expenses incurred by the Company’s start-up sales operations in Chile.

Selling, general, administrative and engineering expenses was $111,316 for the first six months of 2019 compared to $103,341 for the first six months of 2018, an increase of $7,975 or 7.7%.  The overall increase was attributable to a $9,438 increase in general and administrative expense (primarily due to a $5,085 increase in consulting fees/outside services, including the procurement and inventory level consulting services mentioned above; a $1,396 increase in legal and professional fees; a $925 increase in annual incentive and stock incentive plan expense; a $688 increase in bad debt expense; a $433 increase in T&E expense and a $396 increase in recruitment and relocation expenses), which were partially offset by a $1,103 reduction in selling expenses (primarily a $949 decrease in T&E and a $528 reduction in legal and professional fees) and a $360 reduction in engineering expenses. The above described expenses for the second quarter of 2019 includes $1,218 of expenses incurred by the Company’s start-up sales operations in Chile.

Interest Expense
Interest expense for the second quarter of 2019 was $484 as compared to $168 for the second quarter of 2018, an increase of $316, due primarily to interest on increased borrowings on the Company’s domestic line of credit.

Interest expense for the first six months of 2019 was $1,131 as compared to $318 for the first six months of 2018, an increase of $813, due primarily to interest on increased borrowings on the Company’s domestic line of credit.

31
Other Income, Net of Expenses
Other income, net of expenses was $372 for the second quarter of 2019 compared to $1,052 for the second quarter of 2018, a decrease of $680, primarily due to a $635 insurance recovery in the second quarter of 2018.

Other income, net of expenses was $839 for the first six months of 2019 compared to $1,513 for the first six months of 2018, a decrease of $674, primarily due to a $635 insurance recovery in the second quarter of 2018.

Income Tax Expense
The Company’s combined effective income tax rate was 23.1% for the second quarter of 2019 compared to 17.3% for the second quarter of 2018.  The tax rate for 2019 returned to a more normalized rate as compared to the rates in 2018, which were impacted by the large operating loss resulting primarily from the Arkansas Pellet Plant Charges and the initial booking of the provisions of the Tax Cuts and Jobs Act of 2017.

The Company’s combined effective income tax rate was 22.3% for the first six months of 2019 compared to 10.8% for the first six months of 2018.  The tax rate for 2019 returned to a more normalized rate as compared to the rates in 2018 which were impacted by the large operating loss resulting primarily from the Arkansas Pellet Plant Charges and the initial booking of the provisions of the Tax Cuts and Jobs Act of 2017.

Net Income
The Company had net income attributable to controlling interest of $23,377 for the second quarter of 2019 compared to a net loss attributable to controlling interest of $40,674 for the second quarter of 2018, an increase of $64,051.  The second quarter of 2019 includes an after tax income of $15,273 related to the Georgia Pellet Plant Sale while the second quarter 2018 net loss includes an after-tax charge of $57,182 due to the Arkansas Pellet Plant Charges, as discussed above.  Net income attributable to controlling interest per diluted share was $1.03 for the second quarter of 2019 compared to a net loss per share of $1.76 for the second quarter of 2018, an increase of $2.79.  Diluted shares outstanding for the quarters ended June 30, 2019 and 2018 were 22,667 and 23,061, respectively.

The Company had net income attributable to controlling interest of $37,651 for the first six months of 2019 compared to a net loss attributable to controlling interest of $20,407 for the first six months of 2018, an increase of $58,058.  The first six months of 2019 includes an after tax income of $15,273 related to the Georgia Pellet Plant Sale while the net loss for the first six months of 2018 includes an after-tax charge of $57,182 due to the Arkansas Pellet Plant Charges, as discussed above.  Net income attributable to controlling interest per diluted share was $1.66 for the first six months of 2019 compared to a net loss per share of $0.89 for the first six months of 2018, an increase of $2.55.  Diluted shares outstanding for the six months ended June 30, 2019 and 2018 were 22,656 and 23,053, 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 quarters of 2019 and paid quarterly dividends of $0.10 per common share to shareholders in the first and second quarters of 2018.

Backlog
The backlog of orders as of June 30, 2019 was $246,092 compared to $302,892 as of June 30, 2018, a decrease of $56,800 or 18.8%. Domestic backlogs decreased $56,311 or 25.8% while international backlogs decreased $489 or 0.6%.  The decline in backlog was experienced by each of the segments ($11,033 in the Infrastructure Group; $40,438 in the Aggregate and Mining Group; and $5,329 in the Energy Group).  The Company is unable to determine whether the changes in backlogs were experienced by the industry as a whole; however, the Company believes the changes in backlogs reflect the current economic conditions the industry is experiencing.

32
Employees
Due to the recent reductions in backlogs and manufacturing activity, the Company made employee headcount reductions during the first six months of 2019 (from 4,401 employees at December 31, 2018 to 4,183 at June 30, 2019) and will continue to evaluate future staffing needs as sales and production levels dictate.

Segment Net Sales-Quarter:
   
Three Months Ended
June 30,
        
   
2019
    
2018
    
$ Change
    
% Change
  
Infrastructure Group
  
$
133,235
    
$
83,202
    
$
50,033
      
60.1
%
Aggregate and Mining Group
    
106,837
      
116,297
      
(9,460
)
    
(8.1
)%
Energy Group
    
64,730
      
73,029
      
(8,299
)
    
(11.4
)%

Infrastructure Group: Sales in this group were $133,235 for the second quarter of 2019 (including $20,000 from the Georgia Pellet Plant Sale discussed above) compared to $83,202 (after the $75,315 reduction due to the Arkansas Pellet Plant Charges discussed above) for the same period in 2018, an increase of $50,033 or 60.1%.  Domestic sales for the Infrastructure Group increased $54,907 or 84.4% for the second quarter of 2019 compared to the same period in 2018.  Excluding the impacts of the Georgia Pellet Plant Sale and the Arkansas Pellet Plant Charges (which are included in domestic sales), domestic sales declined by $40,408 for the second quarter of 2019 as compared to the second quarter of 2018 due to significant volume reductions in asphalt plant and mobile asphalt equipment sales.  The Company believes the reduction in domestic sales is due to the lack of Congressional action on a highway funding bill to extend or replace the Fast Act which provides federal funding through September 2020; competitive pricing pressures in the market; and customers postponing orders due to weather related delays in early 2019 at customer job sites.  International sales for the Infrastructure Group decreased $4,874 or 26.9% for the second quarter of 2019 compared to the same period in 2018 due primarily to a decline in asphalt plant sales.  The decline in sales occurred primarily in Canada.  Parts sales for the Infrastructure Group decreased 10.7% for the second quarter of 2019 as compared to the same period in 2018.

Aggregate and Mining Group: Sales in this group were $106,837 for the second quarter of 2019 compared to $116,297 for the same period in 2018, a decrease of $9,460 or 8.1%.  Domestic sales for the Aggregate and Mining Group decreased by $9,553 or 12.1% for the second quarter of 2019 compared to the same period in 2018 due primarily to decreased sales into the Company’s traditional rock quarry markets resulting from decreased rental activity (which typically results in subsequent equipment sales) by many of our distributors and a shortened construction period due to weather related issues.  International sales for the Aggregate and Mining Group remained constant with a minor increase of $93 or 0.2% in the second quarter of 2019 compared to the same period in 2018.  International sales increases between periods in Europe were offset by sales declines in Central America, South America and the Middle East.  Parts sales for this group remained constant for the second quarter of 2019 compared to the same period in 2018 with a minor decrease of $22.

Energy Group: Sales in this group were $64,730 for the second quarter of 2019 compared to $73,029 for the same period in 2018, a decrease of $8,299 or 11.4%.  Domestic sales for the Energy Group decreased $2,527 or 4.3% for the second quarter of 2019 compared to the same period in 2018 due primarily to decreased sales of wood chipper sales by Peterson as well as decreased industrial boiler sales by Heatec due to a slowdown in the asphalt and oil and gas industries.  These reduced sales were partially offset by increased concrete plant accessories sales by RexCon.  International sales for the Energy Group decreased $5,772 or 42.4% when compared to the second quarter of 2018.  Sales decreases occurred primarily in China/Japan/Korea, South America and Africa.  Parts sales for this group decreased 6.8% for the second quarter of 2019 compared to the same period in 2018 due primarily to decreased sales by the Company’s GEFCO subsidiary, which was impacted by a large parts order to one customer during the second quarter of 2018.

33
Segment Net Sales-Six Months:
   
Six Months Ended
June 30,
        
   
2019
    
2018
    
$ Change
    
% Change
  
Infrastructure Group
  
$
288,229
    
$
230,296
    
$
57,933
      
25.2
%
Aggregate and Mining Group
    
213,368
      
235,364
      
(21,996
)
    
(9.3
)%
Energy Group
    
128,985
      
132,321
      
(3,336
)
    
(2.5
)%

Infrastructure Group: Sales in this group were $288,229 for the first six months of 2019 (including $20,000 from the Georgia Pellet Plant Sale discussed above) compared to $230,296 (after the $75,315 reduction due to the Arkansas Pellet Plant Charges discussed above) for the same period in 2018, an increase of $57,933 or 25.2%.  Domestic sales for the Infrastructure Group increased $50,966 or 25.5% for the first six months of 2019 compared to the same period in 2018.  Excluding the impact of the Georgia Pellet Plant Sale and the Arkansas Pellet Plant Charges (which are included in domestic sales), domestic sales declined by $44,349 for the first six months of 2019 as compared to the first six months of 2018 due to significant volume reductions in asphalt plant and mobile asphalt equipment sales.  The Company believes the reduction in domestic sales is due to the lack of Congressional action on a highway funding bill to extend or replace the Fast Act which provides federal funding through September 2020; competitive pricing pressures in the market; and customers postponing orders due to weather related delays in early 2019 on customer job sites.  International sales for the Infrastructure Group increased $6,967 or 22.7% for the first six months of 2019 compared to the same period in 2018 due primarily to increases in asphalt plant sales.    International sales increases between periods occurred primarily in Central America, Canada, Australia and the West Indies and were partially offset by a reduction in sales into Europe.  Parts sales for the Infrastructure Group decreased 1.7% for the first six months of 2019 compared to the same period in 2018 due primarily to a reduction in asphalt plant related parts.

Aggregate and Mining Group: Sales in this group were $213,368 for the first six months of 2019 compared to $235,364 for the same period in 2018, a decrease of $21,996 or 9.3%.  Domestic sales for the Aggregate and Mining Group decreased by $17,675 or 10.9% for the first six months of 2019 compared to the same period in 2018 due primarily to decreased sales into the Company’s traditional rock quarry markets resulting from decreased rental activity (which typically results in subsequent equipment sales) by many of our distributors and a shortened construction period due to weather related issues.  International sales for the Aggregate and Mining Group decreased $4,321 or 5.9% in the first six months of 2019 compared to the same period in 2018.  International sales decreases between periods occurred primarily in Central America, Africa, and the Middle East and were partially offset by sales increases in Asia and Canada.  Parts sales for this group increased 2.0% for the first six months of 2019 compared to the same period in 2018.

Energy Group: Sales in this group were $128,985 for the first six months of 2019 compared to $132,321 for the same period in 2018, a decrease of $3,336 or 2.5%.  Domestic sales for the Energy Group increased $2,287 or 2.1% for the first six months of 2019 compared to the same period in 2018 due primarily to increased equipment sales by GEFCO and Heatec, partially offset by a reduction in equipment sales by Peterson.  International sales for the Energy Group decreased $5,623 or 26.6% when compared to the first six months of 2018.  Sales decreases occurred primarily in South America and Africa.  Parts sales for this group remained relatively flat for the first six months of 2019 compared to the same period in 2018, with a minor decrease of $121.

34
Segment Profit (Loss)-Quarter:
   
Three Months Ended
June 30,
        
   
2019
    
2018
    
$ Change
    
% Change
  
Infrastructure Group
  
$
24,445
    
$
(62,734
)
  
$
87,179
      
139.0
%
Aggregate and Mining Group
    
8,489
      
12,548
      
(4,059
)
    
(32.3
)%
Energy Group
    
3,138
      
8,477
      
(5,339
)
    
(63.0
)%
Corporate
    
(13,220
)
    
596
      
(13,816
)
    
(2,318.1
)%

Infrastructure Group: Segment profit for the Infrastructure Group was income of $24,445 for the second quarter of 2019 compared to a loss of $62,734 for the same period in 2018, an increase in earnings of $87,179 or 139.0%.  The segment gross profit for the second quarter of 2019 includes $20,000 from the Georgia Pellet Plant Sale while the segment loss for the second quarter of 2018 includes a $71,029 charge against gross profit due to the Arkansas Pellet Plant Charges, as discussed above.  Gross margins for the segment’s non-pellet related sales increased from 14.6% for the second quarter of 2018 to 19.9% in the second quarter of 2019.  Segment profit between periods was also impacted by increased state income tax expense ($3,091) due to increased earnings and increased general and administrative expenses ($1,046).

Aggregate and Mining Group: Segment profit for the Aggregate and Mining Group was $8,489 for the second quarter of 2019 compared to $12,548 for the same period in 2018, a decrease of $4,059 or 32.3%.  The decrease in segment profits between periods resulted from a decrease in gross profit of $3,549 due primarily to decreased sales of $9,460 between periods.  Gross margins dropped 110 basis points to 23.9% for the second quarter of 2019 compared to 25.0% for the second quarter of 2018 due primarily to overhead absorption issues related to the reduced production volume.  Segment profits were also negatively impacted by an increase in general and administrative expenses ($1,009).

Energy Group: Segment profit for the Energy Group was $3,138 for the second quarter of 2019 compared to $8,477 for the same period in 2018, a decrease of $5,339 or 63.0%.  Segment profits were negatively impacted by a $4,621 decrease in gross profit between periods from decreased sales of $8,299 along with the impact of a 360 basis point decrease in gross margin. The reduction in gross margins from 27.1% for the second quarter of 2018 to 23.5% for the second quarter of 2019 was primarily due to overhead absorption issues related to the reduced production volume.  Total selling, general, administrative and engineering expenses remained relatively flat between periods with increases in general and administrative expenses ($701) and engineering expenses ($149) offset by decreased selling expenses ($788).

Corporate: Corporate operations had a loss of $13,220 for the second quarter of 2019 compared to income of $596 for the second quarter of 2018, a decrease in earnings of $13,816. The reduced earnings are due primarily to increases in income tax expense ($12,872), interest expense ($370) and costs related to the new start-up sales operation in Chile ($657).

35
Segment Profit (Loss)-Six Months:
   
Six Months Ended
June 30,
        
   
2019
    
2018
    
$ Change
    
% Change
  
Infrastructure Group
  
$
39,683
    
$
(47,882
)
  
$
87,565
      
182.9
%
Aggregate and Mining Group
    
17,166
      
25,658
      
(8,492
)
    
(33.1
)%
Energy Group
    
6,532
      
13,088
      
(6,556
)
    
(50.1
)%
Corporate
    
(26,690
)
    
(10,652
)
    
(16,038
)
    
(150.6
)%

Infrastructure Group: Segment profit for the Infrastructure Group was income of $39,683 for the first six months of 2019 compared to a loss of $47,882 for the same period in 2018, an increase in earnings of $87,565 or 182.9%.  The segment gross profit for the first six months of 2019 includes $20,000 from the Georgia Pellet Plant Sale while the segment loss for the first six months of 2018 includes a $71,029 charge against gross profit due to the Arkansas Pellet Plant Charges, as discussed above.  Segment profit between periods was also impacted by a $1,703 increase in gross profits on non-pellet plant sales as the reduction in gross profit due to the $37,382 reduction in non-pellet plant sales between periods was offset by a 320 basis point increase in gross margins from 18.5% for the first six months of 2018 to 21.7% for the first six months of 2019.  Segment profits were also negatively impacted by an increase in general and administrative expenses ($2,084) and an increase in intercompany profit eliminations ($1,687), which were partially offset by decreases in selling expenses ($838) and engineering expenses ($549).

Aggregate and Mining Group: Segment profit for the Aggregate and Mining Group was $17,166 for the first six months of 2019 compared to $25,658 for the same period in 2018, a decrease of $8,492 or 33.1%.  The decrease in segment profits between periods results from a decrease in gross profit of $7,293 due primarily to decreased sales of $21,996 between periods and a gross margin decrease of 90 basis points to 23.9% for the first six months of 2019 from 24.8% for the first six months of 2018.  Segment profits were also negatively impacted by an increase in general and administrative expenses ($2,300), partially offset by decreased engineering expenses ($492).

Energy Group: Segment profit for the Energy Group was $6,532 for the first six months of 2019 compared to $13,088 for the same period in 2018, a decrease of $6,556 or 50.1%.  Segment profits were negatively impacted by a $4,429 decrease in gross profit between periods resulting from a decrease in sales of $3,336 along with the a 270 basis point decrease in gross margins.  Gross margins between periods were also negatively impacted by an increase in unabsorbed overhead variances of $3,815. Segment profits were also impacted by increases in general and administrative expenses ($656) and engineering expenses ($681), partially offset by a decrease in selling expenses ($787).

Corporate: Corporate operations had a loss of $26,690 for the first six months of 2019 compared to a loss of $10,652 for the first six months of 2018, a decrease in earnings of $16,038 or 150.6%.  The reduced earnings are due primarily to increases in income tax expense ($11,451), interest expense ($907), costs related to the new start-up sales operation in Chile ($1,218) and other general and administrative expenses not related to Chile ($2,713).

Goodwill Review
The Company’s annual test of goodwill for possible impairment, performed as of October 31, 2018, indicated that the goodwill at the Company’s Power Flame subsidiary (which is included in the Energy Group) was partially impaired and the impairment charge recorded in the fourth quarter of 2018 reduced its net goodwill to $4,929 as of December 31, 2018.  The Company reviews goodwill for impairment concerns each quarter and no impairment charges were recorded during the six-month period ended June 30, 2019; however, the Company will continue to review Power Flame’s business projections during the remainder of 2019, and it is possible additional impairment charges may be necessary prior to the end of 2019 since the Power Flame reporting unit had no excess fair value as of October 31, 2018.


36
Liquidity and Capital Resources
The Company's primary sources of liquidity and capital resources are its cash on hand, borrowing capacity under a $150,000 revolving credit facility and cash flows from operations. The Company had $24,905 of cash available for operating purposes as of June 30, 2019, of which $21,425 was held by the Company's foreign subsidiaries.  The transition of U.S. international taxation from a worldwide tax system to a territorial system, as provided under the Tax Act passed in December 2017, should greatly reduce, or eliminate, any additional taxes on these funds should the Company decide to repatriate these funds to the United States.  At June 30, 2019 and December 31, 2018, respectively, the Company had $28,057 and $58,778 borrowings outstanding under its revolving credit facility.  Net of borrowings and letters of credit totaling $8,630, the Company had borrowing availability of $113,313 under the revolving credit facility as of June 30, 2019.  The revolving credit facility agreement contains certain financial covenants, including provisions concerning required levels of annual net income and minimum tangible net worth.  The Company was in compliance with the financial covenants of the agreement at June 30, 2019.

The Company’s South African subsidiary, Osborn Engineered Products SA (Pty) Ltd (“Osborn”), has a credit facility of $6,706 with a South African bank to finance short-term working capital needs, as well as to cover performance letters of credit, advance payment and retention guarantees. As of June 30, 2019 and December 31, 2018, Osborn had no outstanding borrowings but had $1,222 in performance, advance payment and retention guarantees outstanding under the facility as of June 30, 2019. The facility has been guaranteed by Astec Industries, Inc., but is otherwise unsecured. A 0.75% unused facility fee is charged if less than 50% of the facility is utilized. As of June 30, 2019, Osborn had available credit under the facility of $5,484.

The Company’s Brazilian subsidiary, Astec Brazil, had a working capital loan outstanding of $1,052 and $1,207 as of June 30, 2019 and December 31, 2018, respectively, from a Brazilian bank.  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.  Additionally, Astec Brazil ha various five-year equipment financing loans outstanding with Brazilian banks in the aggregate of $18 and $137 as of June 30, 2019 and December 31, 2018, respectively.  These equipment loans have maturity dates ranging from July 2019 to April 2020.

Cash Flows from Operating Activities:
  
Six Months Ended
June 30,
    
Increase
  
   
2019
    
2018
    
(Decrease)
  
Net income (loss)
  
$
37,579
    
$
(20,552
)
  
$
58,131
  
Depreciation and amortization
    
13,139
      
13,880
      
(741
)
Provision for warranties
    
4,496
      
7,529
      
(3,033
)
Deferred income tax provision (benefit)
    
8,412
      
(121
)
    
8,533
  
Changes in working capital:
                        
Trade and other receivables
    
(6,719
)
    
(24,219
)
    
17,500
  
Inventories
    
(5,240
)
    
(3,410
)
    
(1,830
)
Prepaid expenses and other assets
    
564
      
(1,361
)
    
1,925
  
Accounts payable
    
(2,006
)
    
4,181
      
(6,187
)
Customer deposits
    
(13,025
)
    
(4,163
)
    
(8,862
)
Product warranty accruals
    
(5,287
)
    
(11,482
)
    
6,195
  
Prepaid and income taxes payable, net
    
7,669
      
(9,141
)
    
16,810
  
Accrued pellet plant agreement costs
    
–
      
68,000
      
(68,000
)
Other, net
    
3,289
      
(720
)
    
4,009
  
Net cash provided by operating activities
  
$
42,871
    
$
18,421
    
$
24,450
  

Net cash from operating activities improved by $24,450 for the first six months of 2019 as compared to the first six months of 2018 due primarily to the impact of net income ($58,131), trade and other receivables ($17,500), and the timing of tax payments versus when they were owed ($8,533 and $16,810).  These increases were partially offset due to the timing of the $68,000 payment required under the Arkansas pellet plant settlement agreement, which was recognized in the second quarter of 2018 but not paid until later in 2018.  The increases were also partially offset by a reduction in the impact of customer deposits ($8,862).

37
Cash Flows from Investing Activities:
  
Six Months Ended
June 30,
    
Increase
  
   
2019
    
2018
    
(Decrease)
  
Expenditures for property and equipment
  
$
(8,657
)
  
$
(8,719
)
  
$
62
  
Other
    
569
      
338
      
231
  
Net cash used by investing activities
  
$
(8,088
)
  
$
(8,381
)
  
$
293
  

Net cash used by investing activities declined by $293 for the first six months of 2019 as compared to the same period in 2018.

Total capital expenditures for 2019 are forecasted to be approximately $25,000.  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 August 2020.

Cash Flows from Financing Activities:
  
Six Months Ended
June 30,
    
Increase
  
   
2019
    
2018
    
(Decrease)
  
Payment of dividends
  
$
(4,956
)
  
$
(4,618
)
  
$
(338
)
Net change in borrowings from banks
    
(31,014
)
    
(1,105
)
    
(29,909
)
Other, net
    
62
      
(180
)
    
242
  
Net cash used by financing activities
  
$
(35,908
)
  
$
(5,903
)
  
$
(30,005
)

Cash used by financing activities increased by $30,005 for the first six months of 2019 compared to the same period in 2018 due primarily to the Company reducing the amount owed on its domestic line of credit during the first six months of 2019 by $30,721.

Financial Condition
The Company’s total current assets remained relatively flat at $557,535 as of June 30, 2019 compared to $560,991 as of December 31, 2018.

The Company’s total current liabilities were $173,936 as of June 30, 2019 compared to $189,231 as of December 31, 2018, a decrease of $15,295 or 8.1% due primarily to decreases in customer deposits ($13,025) and accrued payroll and related liabilities ($2,807).

Market Risk and Risk Management Policies
We have no material changes to the disclosure on this matter made in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

38
Contingencies
The Company manufactured its first wood pellet plant for a customer located in Georgia under a Company-financed arrangement whereby the Company deferred the recognition of revenue as payment under the arrangement was not assured.  After considering the uncertainty of completing the sale to the existing customer due to their unsuccessful attempts to obtain financing; the lack of success in attempting to market the plant to other pellet plant operators; the cost of repossessing the plant; and the Company’s decision to exit the pellet plant business line, the pellet plant inventory’s net realizable value was written down to zero in the fourth quarter of 2018.  The sale of the Georgia pellet plant was ultimately recognized at the end of the second quarter of 2019 upon the receipt of the discounted $20,000 sales price.

The Company and certain of its current and former executive officers have been named as defendants in a putative shareholder class action lawsuit filed on February 1, 2019, in the United States District Court for the Eastern District of Tennessee. The action is styled City of Taylor General Employees Retirement System v. Astec Industries, Inc., et al., Case No. 1:19-cv-00024-PLR-CHS. The complaint generally alleges that the defendants violated the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements and that the individual defendants are control person under Section 20(a) of the Exchange Act. The complaint was filed on behalf of shareholders who purchased shares of the Company’s stock between July 26, 2016 and October 22, 2018 and seeks monetary damages on behalf of the purported class. The Company disputes these allegations and intends to defend this lawsuit vigorously. The Company is unable to estimate the possible loss or range of loss at this time.

Off-balance Sheet Arrangements
As of June 30, 2019, the Company does not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.

Contractual Obligations
During the six months ended June 30, 2019, there were no substantial changes in the Company’s commitments or contractual liabilities.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk
The Company has no material changes to the disclosure on this matter made in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Item 4.  Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’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, 2018.

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 six month period ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

39
Remediation
As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2018, we began implementing a remediation plan to address the material weaknesses mentioned above. The weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings
The Company is involved from time to time in legal actions arising in the ordinary course of its business. Other than as set forth in Note 14, Contingent Matters, to the accompanying unaudited condensed financial statements and Part I, “Item 3. Legal Proceedings” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, the Company currently has no pending or threatened litigation that the Company believes will result in an outcome that would materially affect the Company’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.

Item 1A.  Risk Factors
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, 2018, which could materially affect the Company’s business, financial condition or future results. There have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.  The risks described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 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.

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 of its common stock.  Through December 31, 2018, the Company had repurchased 582 shares of its stock at total cost of $24,149 under this program.  Under the share repurchase plan, the Company may purchase common stock in open market transactions, block or privately negotiated transactions, and may from time to time purchase shares pursuant to a trading plan in accordance with Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934, as amended, or by any combination of such methods. The number of shares to be purchased and the timing of the purchases are based on a variety of factors.  No time limit was set for completion of repurchases under the authorization and the program may be suspended or discontinued at any time.  No additional shares were repurchased under this plan during the first six months of 2019.

40
Item 6.
Exhibits

Exhibit No.
Description
3.1
10.1
31.1
31.2
32*
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

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.

Items 3, 4 and 5 are not applicable and have been omitted.

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)
   
Date: August 7, 2019
/s/ Richard J. Dorris
 
Richard J. Dorris
Interim Chief Executive Officer and President
(Principal Executive Officer)
   
Date: August 7, 2019
/s/ David C. Silvious
 
David C. Silvious
Chief Financial Officer, Vice President, and Treasurer
(Principal Financial and Accounting Officer)



41