ASTEC INDUSTRIES INC - Quarter Report: 2020 March (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 March 31, 2020

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

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:

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:

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).

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

PART I – FINANCIAL INFORMATION

Astec Industries, Inc.

Condensed Consolidated Balance Sheets

(in thousands) (unaudited)

See Notes to Unaudited Condensed Consolidated Financial Statements

Astec Industries, Inc.

Condensed Consolidated Statements of Income

(in thousands, except per share data)

(unaudited)

See Notes to Unaudited Condensed Consolidated Financial Statements

Astec Industries, Inc.

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)

See Notes to Unaudited Condensed Consolidated Financial Statements

Astec Industries, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

See Notes to Unaudited Condensed Consolidated Financial Statements

Astec Industries, Inc.

Condensed Consolidated Statements of Equity

For the Three Months Ended March 31, 2020 and 2019

(in thousands)

(unaudited)

See Notes to Unaudited Condensed Consolidated Financial Statements

ASTEC INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar and share amounts in thousands, except per share amounts, unless otherwise specified)

		Three Months Ended March 31,
		2020				2019
Numerator:
Net income attributable to controlling interest		$	20,644			$	14,274
Denominator:
Denominator for basic earnings per share			22,545				22,498
Effect of dilutive securities:
Restricted stock units			119				100
Supplemental Executive Retirement Plan			49				48
Denominator for diluted earnings per share			22,713				22,646

		March 31, 2020				December 31, 2019
Raw materials and parts		$	164,510			$	160,872
Work-in-process			71,514				61,287
Finished goods			45,493				53,650
Used equipment			13,331				18,727
Total		$	294,848			$	294,536

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.

		March 31, 2020
		Level 1				Level 2				Total
Financial Assets:
Trading equity securities:
SERP money market fund		$	227			$	–			$	227
SERP mutual funds			3,612				–				3,612
Preferred stocks			259				–				259
Money market fund			211				–				211
Trading debt securities:
Corporate bonds			5,425				–				5,425
Municipal bonds			–				1,147				1,147
Floating rate notes			332				–				332
U.S. government securities			2,082				–				2,082
Asset backed securities			–				2,548				2,548
Other			201				1,364				1,565
Derivative financial instruments			–				466				466
Total financial assets		$	12,349			$	5,525			$	17,874
Financial Liabilities:
SERP liabilities		$	–			$	5,552			$	5,552
Total financial liabilities		$	–			$	5,552			$	5,552

		December 31, 2019
		Level 1				Level 2				Total
Financial Assets:
Trading equity securities:
SERP money market fund		$	208			$	–			$	208
SERP mutual funds			4,419				–				4,419
Preferred stocks			282				–				282
Trading debt securities:
Corporate bonds			5,117				–				5,117
Municipal bonds			–				1,154				1,154
Floating rate notes			535				–				535
U.S. government securities			2,035				–				2,035
Asset backed securities			–				2,316				2,316
Other			473				1,112				1,585
Derivative financial instruments			–				4				4
Total financial assets		$	13,069			$	4,586			$	17,655
Financial Liabilities:
Derivative financial instruments		$	–			$	49			$	49
SERP liabilities			–				6,645				6,645
Total financial liabilities		$	–			$	6,694			$	6,694

		Three Months Ended March 31,
		2020				2019
Reserve balance, beginning of the period		$	10,261			$	10,928
Warranty liabilities accrued			2,732				2,746
Warranty liabilities settled			(2,129	)			(2,643	)
Other			(212	)			20
Reserve balance, end of the period		$	10,652			$	11,051

		Three Months Ended
		March 31, 2020				March 31, 2019
Operating lease expense		$	663			$	601
Cash paid for operating leases included in operating cash flows			697				645

		March 31, 2020				December 31, 2019
Operating lease right-of-use asset		$	3,481			$	3,853
Operating lease short-term liability included in other current liabilities			1,449				1,846
Operating lease long-term liability included in other long-term liabilities			2,025				2,020
Weighted average remaining lease term (in years)			5.13				4.66
Weighted average discount rate used in calculating right-of-use asset			3.72	%			3.56	%

		Amount
Remainder of 2020		$	1,290
2021			731
2022			458
2023			303
2024			200
2025 and thereafter			784
Total			3,766
Less interest			(292	)
Present value of lease liabilities		$	3,474

		Three Months Ended March 31, 2020
		Infrastructure Solutions				Materials Solutions				Total
Net Sales-Domestic:
Equipment sales		$	100,419			$	41,297			$	141,716
Parts and component sales			52,641				18,476				71,117
Service and equipment installation revenue			6,762				427				7,189
Used equipment sales			7,160				–				7,160
Freight revenue			6,048				1,309				7,357
Other			(185	)			(472	)			(657	)
Total domestic revenue			172,845				61,037				233,882
Net Sales-International:
Equipment sales			19,424				14,440				33,864
Parts and component sales			8,334				9,257				17,591
Service and equipment installation revenue			842				220				1,062
Used equipment sales			606				746				1,352
Freight revenue			566				343				909
Other			1				187				188
Total international revenue			29,773				25,193				54,966
Total net sales		$	202,618			$	86,230			$	288,848

		Three Months Ended March 31, 2019
		Infrastructure Solutions				Materials Solutions				Total
Net Sales-Domestic:
Equipment sales		$	119,095			$	55,204			$	174,299
Parts and component sales			54,499				19,159				73,658
Service and equipment installation revenue			4,774				625				5,399
Used equipment sales			2,763				413				3,176
Freight revenue			5,400				1,595				6,995
Other			583				(1,281	)			(698	)
Total domestic revenue			187,114				75,715				262,829
Net Sales-International:
Equipment sales			21,414				19,049				40,463
Parts and component sales			8,765				10,178				18,943
Service and equipment installation revenue			1,397				391				1,788
Used equipment sales			110				466				576
Freight revenue			423				668				1,091
Other			26				64				90
Total international revenue			32,135				30,816				62,951
Total net sales		$	219,249			$	106,531			$	325,780

		Three Months Ended March 31,
		2020				2019
United States		$	233,882			$	262,829
Canada			14,664				22,993
Australia			5,795				8,813
Africa			6,631				7,091
South America			8,796				7,054
Europe			9,375				6,490
Central America			1,390				3,549
China, Japan & Korea			2,270				2,140
Asia (excl. China, Japan & Korea)			435				2,131
West Indies			4,756				1,378
Middle East			849				851
Other			5				461
Total foreign			54,966				62,951
Total consolidated sales		$	288,848			$	325,780

		Three Months Ended March 31, 2020
		Infrastructure Solutions				Materials Solutions				Corporate				Total
Net sales to external customers		$	202,618			$	86,230			$	–			$	288,848
Intersegment sales			5,941				8,274				–				14,215
Gross profit			52,923				21,005				93				74,021
Gross profit percent			26.1	%			24.4	%			0.0	%			25.6	%
Segment profit (loss)		$	17,220			$	6,035			$	(2,923	)		$	20,332

		Three Months Ended March 31, 2019
		Infrastructure Solutions				Materials Solutions				Corporate				Total
Net sales to external customers		$	219,249			$	106,531			$	–			$	325,780
Intersegment sales			9,092				4,757				–				13,849
Gross profit (loss)			51,309				25,545				(4	)			76,850
Gross profit percent			23.4	%			24.0	%			0.0	%			23.6	%
Segment profit (loss)		$	18,070			$	8,678			$	(12,908	)		$	13,840

		Three Months Ended March 31,
		2020				2019
Total profit shown above		$	20,332			$	13,840
Recapture of intersegment profit			151				377
Net income			20,483				14,217
Net loss attributable to non-controlling interest in subsidiaries			161				57
Net income attributable to controlling interest		$	20,644			$	14,274

		Three Months Ended March 31,
		2020				2019
Interest income		$	220			$	275
Gain (loss) on investments			(65	)			149
Other			79				44
Total		$	234			$	468

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Statements contained anywhere in this Quarterly Report on Form 10-Q that are not limited to historical information are considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are sometimes identified by the words “will,” “would,” “should,” “could,” “may,” “believes,” “anticipates,” “intends,” “forecasts” and “expects” and similar expressions.  Such forward-looking statements include, without limitation, statements regarding the Company’s expected sales and results of operations during 2020, the Company’s expected capital expenditures in 2020, the ability of the Company to meet its working capital and capital expenditure requirements through May 2021, the amount and impact of any current or future state or federal funding for transportation construction programs, the need for road improvements, the amount and impact of other public sector spending and funding mechanisms, changes in the economic environment as it affects the Company, the Company being called upon to fulfill certain contingencies, the granting of restricted stock units and other incentive awards, changes in interest rates and the impact of such changes on the financial results of the Company, changes in the prices of steel and oil and the impact of such changes generally and on the demand for the Company’s products, customer’s buying decisions, the Company’s business, the ability of the Company to offset future changes in prices in raw materials, the change in the strength of the dollar and the level of the Company’s presence and sales in international markets, the impact that further development of domestic oil and natural gas production capabilities would have on the domestic economy and the Company’s business, the percentage of the Company’s equipment sold directly to end users, the impact of IRS tax regulations, payment of dividends by the Company, the impact of the Company’s efforts to impact its gross margins and inventory levels, the restructuring/relocation of Albuquerque’s operations and the ultimate sale of the Albuquerque facilities, the exiting of Enid’s oil and gas business, the disposal of the related oil and gas inventory, the marketing for sale of Enid’s production facilities and remaining water well line of business, the possibility of future goodwill impairment charges, the ultimate outcome of the Company’s current claims and legal proceedings and the continued impact of the novel coronavirus (“COVID-19”) pandemic on the Company’s business.

These forward-looking statements are based largely on management’s expectations, which are subject to a number of known and unknown risks, uncertainties and other factors discussed in this 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, 2019, should be carefully considered when evaluating the Company’s business and future prospects.

Overview

The Company is a leading manufacturer and seller of equipment for the road building, aggregate processing, geothermal, water, oil and gas, and wood processing industries. The Company’s businesses:

•	design, engineer, manufacture and market equipment used in each phase of road building, including mining, quarrying and crushing the aggregate, mobile bulk and material handling solutions, producing asphalt or concrete, recycling old asphalt or concrete and applying the asphalt;

•	design, engineer, manufacture and market additional equipment and components, including equipment for geothermal drilling, industrial heat transfer, wood chipping and grinding, commercial and industrial burners, combustion control systems; and

•	manufacture and sell replacement parts for equipment in each of its product lines.

The Company, as we refer to it herein, consists of a total of 25 companies that are consolidated in our consolidated financial statements.  The companies include manufacturing companies, companies that operate as dealers for the manufacturing companies, a captive insurance company and the parent company. During the first quarter of 2020, the Company completed an internal reorganization of its reportable segments from three to two reportable segments (plus Corporate) and such segments are organized, operated and managed based on the products and services offered by the business units included in each segment.

Amounts previously reported under the previous segment structure have been restated to conform to the new segment structure. Additionally, in both internal and external communications, the Company is transitioning references to each individual business unit by a name associated with its location, as compared to previous references to the subsidiary company names. A brief description of each segment is as follows:

Infrastructure Solutions - The Infrastructure Solutions segment, also referred to herein as the Infrastructure Solutions Group, is comprised of 13 business units. These business units include Astec, Inc. (“CHA-Jerome Ave”), Roadtec, Inc. (“CHA-Manufacturers Rd”), Carlson Paving Products, Inc. (“Tacoma”), Heatec, Inc. (“CHA-Wilson Rd”), CEI Enterprises, Inc. (“Albuquerque”), GEFCO, Inc. (“Enid”), Peterson Pacific Corp. (“EUG-Airport Rd”), Power Flame Incorporated (“Parsons”), RexCon, Inc. (“Burlington”), Astec Mobile Machinery GmbH (“AMM”), Astec Australia Pty Ltd (“Australia”), Astec LatAm (“LatAm), and Astec Thailand (“Thailand”). Products designed, engineered, manufactured and marketed by this group include a complete line of asphalt plants and their related components, asphalt pavers, screeds, milling machines, material transfer vehicles, stabilizers and related ancillary equipment, concrete plants, water well drilling rigs, wood chippers, wood grinders, heaters, commercial burners and industrial burners.  The principal purchasers of the segment’s products are asphalt producers, highway and heavy equipment contractors, foreign and domestic governmental agencies, processors of oil, gas and biomass for energy production, ready mix concrete producers and contractors in the construction and demolition recycling markets.

In 2018, the Company decided to close and cease operations at AMM, located in Germany, and its land and buildings were sold in January 2020. In late 2019, the Company announced the closing of its Albuquerque site due to market conditions and underutilization of the manufacturing facility. Responsibilities for manufacturing and marketing of Albuquerque product lines were transferred to other Company facilities within the Infrastructure Solutions segment in late 2019 and early 2020. The Albuquerque site was closed as of March 31, 2020 and its land and buildings are currently accounted for as held for sale. In late 2019, the Company impaired and discontinued Enid’s oil and gas product lines and is in the process of disposing of the related oil and gas inventory.  The Company is also currently marketing its Enid production facilities and remaining water well line of business for sale.

Materials Solutions – The Materials Solutions segment, also referred to herein as the Material Solutions Group is comprised of 10 business units which are focused on designing and manufacturing heavy processing equipment, as well as servicing and supplying parts for the aggregate, metallic mining, recycling, ports and bulk handling markets. These business units are Telsmith, Inc. (“Mequon”), Kolberg-Pioneer, Inc. (“Yankton”), Astec Mobile Screens, Inc. (“Sterling”), Johnson Crushers International, Inc. (“EUG-Franklin Blvd”), Breaker Technology Ltd/Breaker Technology, Inc. (“Thornbury”), Osborn Engineered Products, SA (Pty) Ltd (“Johannesburg”), Astec do Brasil Fabricacao de Equipamentos Ltda. (“Belo Horizonte”), Telestack Limited (“Omagh”), Astec India (“India”) and Astec AME (“AME”). The principal purchasers of products produced by this group are distributors, open mine operators, quarry operators, port and inland terminal operators, highway and heavy equipment contractors and foreign and domestic governmental agencies.

Corporate - This category consists of business units that do not meet the requirements for separate disclosure as an operating segment or inclusion in one of the other reporting segments and includes the Company’s parent company and Astec Insurance Company (“Astec Insurance”), a captive insurance company.  Certain start-up costs related to foreign sales offices are also included in Corporate’s operating results. The Company evaluates performance and allocates resources to its operating segments based on profit or loss from operations before U.S. federal income taxes, state deferred taxes and corporate overhead and, thus, these costs are included in the Corporate category.

The Company’s financial performance is affected by a number of factors, including the cyclical nature and varying conditions of the markets it serves. Demand in these markets fluctuates in response to overall economic conditions and is particularly sensitive to the amount of public sector spending on infrastructure development, privately funded infrastructure development, changes in the prices of liquid asphalt, oil and natural gas and steel.

Federal funding provides a significant portion of all highway, street, roadway and parking construction in the United States. The Company believes that federal highway funding influences the purchasing decisions of the Company’s customers, who are typically more comfortable making capital equipment purchases with long-term federal legislation in place.

In July 2012, the “Moving Ahead for Progress in the 21st Century Act” (“Map-21”) was approved by the U.S. federal government, which authorized $105 billion of federal spending on highway and public transportation programs through fiscal year 2014. In August 2014, the U.S. government approved short-term funding of $10.8 billion through May 2015. Federal transportation funding operated on short-term appropriations until December 4, 2015 when the Fixing America’s Surface Transportation Act (“FAST Act”) was signed into law. The $305 billion FAST Act approved funding for highways of approximately $205 billion and transit projects of approximately $48 billion for the five-year period ending September 30, 2020.

The Company believes a multi-year highway program (such as the FAST Act) will have the greatest positive impact on the road construction industry and allows its customers to plan and execute longer-term projects. Given the inherent uncertainty in the political process, the level of governmental funding for federal highway projects will similarly continue to be uncertain. Since elected in late 2016, the current executive branch of the federal government has stressed that one of its priorities is a new infrastructure bill including increased funding for roads, bridges, tunnels, airports, railroads, ports and waterways, pipelines, clean water infrastructure, energy infrastructure and telecommunication needs. Governmental funding that is committed or earmarked for federal highway projects is always subject to repeal or reduction. Although continued funding under the FAST Act or funding of a bill passed by the new administration is expected, it may be at lower levels than originally approved or anticipated. In addition, Congress could pass legislation in future sessions that would allow for diversion of previously appropriated highway funds for other purposes, or it could restrict funding of infrastructure projects unless states comply with certain federal policies. The level of future federal highway construction is uncertain and any future funding may be at levels lower than those currently approved or that have been approved in the past.

The public sector spending described above is needed to fund road, bridge and mass transit improvements. The Company believes that increased funding is unquestionably needed to restore the nation’s highways to a quality level required for safety, fuel efficiency and mitigation of congestion. In the Company’s opinion, amounts needed for such improvements are significantly greater than amounts approved to date, and funding mechanisms such as the federal usage fee per gallon of gasoline, which is still at the 1993 level of 18.4 cents per gallon, would likely need to be increased along with other measures to generate the funds needed.

In addition to public sector funding, the economies in the markets the Company serves, the price of liquid asphalt, the price of oil and natural gas, and the price of steel may each affect the Company’s financial performance. Economic downturns generally result in decreased purchasing by the Company’s customers, which, in turn, causes reductions in sales and increased pricing pressure on the Company’s products. Rising interest rates also typically negatively impact customers’ attitudes toward purchasing equipment. The Federal Reserve has maintained historically low interest rates in response to the economic downturn which began in 2009 with several rate adjustments (both up and down) in recent years. The current Federal Funds Rate is considered in the historically low range and future rate changes may occur.

Significant portions of the Company’s revenues from the Infrastructure Solutions Group relate to the sale of equipment involved in the production, handling, recycling or application of asphalt mix. Liquid asphalt is a by-product of oil refining. An increase or decrease in the price of oil impacts the cost of asphalt, which is likely to alter demand for asphalt and, therefore, affects demand for certain Company products. While increasing oil prices may have a negative financial impact on many of the Company’s customers, the Company’s equipment can use a significant amount of recycled asphalt pavement, thereby partially mitigating the effect of increased oil prices on the final cost of asphalt for the customer. The Company continues to develop products and initiatives to reduce the amount of oil and related products required to produce asphalt. Oil price volatility makes it difficult to predict the costs of oil-based products used in road construction such as liquid asphalt and gasoline. While current oil prices are at recent record lows, oil prices have routinely fluctuated in recent years and are expected to continue to fluctuate in the future. Minor fluctuations in oil prices should not have a significant impact on customers’ buying decisions. Other factors such as political uncertainty in oil producing countries, interruptions in oil production due to disasters, whether natural or man-made, or other economic factors could significantly impact oil prices, which could negatively impact demand for the Company’s products. The Company believes the continued funding of the FAST Act federal highway bill passed in December 2015, together with the prospect of potential replacement funding, have a greater potential to impact the buying decisions of the Company’s customers than does the fluctuation of oil prices in 2020 and 2021.

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

Steel is a major component in the Company’s equipment. Steel prices remained level during the first quarter of 2020 but began a decline in April 2020 due to the unprecedented fall in demand as a result of the effects of COVID-19. Mills have responded and shuttered much of their production. Prices are expected to remain at lower levels as supply and demand moves toward balance. The Company will continue to utilize forward looking contracts when it deems conditions are appropriate (with no minimum or specified quantity guarantees) to minimize the impact of any price increases. We will continue to monitor trends in steel prices in 2020 and establish future contract pricing accordingly.

In addition to the factors stated above, many of the Company’s markets are highly competitive, and its products compete worldwide with a number of other manufacturers and dealers that produce and sell similar products. From 2010 through mid-2012, a weak U.S. dollar, combined with improving economic conditions in certain foreign economies, had a positive impact on the Company’s international sales. The continued strengthened U.S. dollar since mid-2012, including significant strengthening in the first quarter of 2020, has negatively impacted pricing in certain foreign markets the Company serves. The Company expects the U.S. dollar to remain strong in the near term relative to most foreign currencies. Domestic interest rates rising in the future or weakening economic conditions abroad could cause the U.S. dollar to further strengthen, which could negatively impact the Company’s international sales.

In the United States and internationally, the Company’s equipment is marketed directly to customers as well as through dealers. During 2019, approximately 60% of the Company’s sales were to the end user. The Company expects this ratio to be between 60% and 70% for 2020.

As mentioned above, the Company has recently transitioned from a decentralized management structure to a matrix organizational management structure with major directives and decisions being made at the segment and/or parent company level.  Subsidiary president positions, with responsibility for the performance of all aspects of their local company, have been eliminated. Performance is now evaluated at the consolidated and separate segment levels.  Performance of individual subsidiaries/sites is the responsibility of segment senior managers and segment functional team leaders under their direction.  Senior finance, insurance, legal, shareholder relations, corporate accounting and other corporate matters are primarily managed at the Corporate level (i.e., Astec Industries, Inc., the parent company). Standard accounting procedures are prescribed and followed in all reporting.

The Company’s current profit sharing plans allow corporate officers and other key management participants the opportunity to earn profit sharing incentives based upon the Company’s and/or the individual group’s working capital turnover, adjusted EBITDA margin and safety. Executive and senior leadership team members, when calculated at targeted performance, are between 15% and 100% of their base salary, depending upon their responsibilities, and the plans allow for awards of up to double the target incentive compensation for executive team members. Other salaried employees have the ability to earn profit sharing incentives of up to 5% of their annual salary and non-union hourly employees can earn between $0 and $750 each.

The Company’s current long-term incentive plans allow corporate officers and other key management participants to be awarded a 50/50 combination of service awards, Restricted Stock Units (“RSUs”), and performance awards, Performance Stock Units (“PSU”).  Service awards are granted at target performance and vest in three equal annual installments beginning on the first anniversary of the grant date, subject to continued employment.  Performance awards are granted at target performance, and are earned based upon the achievement of two equally rated performance metrics (return on invested capital (“ROIC”) and total shareholder return (“TSR”).  Total awards range from 20% to 150% of participants’ annual salaries at target and participants may earn up to 200% of their PSU award.

During 2018 through mid-2019, the Company retained the services of a specialized consulting firm to assist with the accumulation of company-wide purchasing data including a system for maintaining the data for management to utilize in negotiations with suppliers or potential suppliers in order to obtain reduced prices on raw materials and equipment components purchased. The firm also assisted with the development of sales and operational planning procedures designed to achieve significant reductions in inventory levels maintained for normal production needs and to reduce existing excess inventories. The Company expects the results of these efforts to positively impact its gross margins and inventory levels in the remainder of 2020 and thereafter.

Results of Operations

Impact of COVID-19

The COVID-19 outbreak has caused significant disruptions to national and global economies. Our U.S. based businesses are designated as “Critical Manufacturing” infrastructure companies by the U.S. Department of Homeland Security and, as such, have remained open. Two of our foreign operations in the Material Solutions segment, located in Northern Ireland and South Africa, as dictated by their local governments, ceased manufacturing activities in late March 2020 and are expected to remain closed at least until sometime in May 2020. The Company's top priority is to protect its employees and their families, its customers and suppliers and its operations from any adverse impacts by taking precautionary measures as directed by health authorities and local governments. In early March 2020, the Company formed a COVID-19 task force, which continually monitors information from government agencies, our sites, customers, suppliers and other sources. The Company has enacted several policies to combat the spread of the virus and keep our employees and visitors safe, including work at home initiatives, limits on employee travel, visitors policies, cleaning and disinfecting procedures and mandated temperature checks for visitors and employees. We are utilizing technology to hold meetings virtually as business permits. During the first quarter of 2020, the impact on our sales and financial results was minimal with identified delayed shipments totaling $8,766 and canceled orders of $331. Additionally, customers attributed delays in remitting payments to us totaling $3,638 due to the impact of COVID-19 on their businesses.  No significant additional costs to our business were identified in the first quarter of 2020. We expect an increase in the impact from COVID-19 to our business in the second quarter and possibly thereafter. While we expect this situation to be temporary, any longer-term impact to our business is currently unknown due to the uncertainty around the outbreak’s duration and its broader impact. As part of our strategic planning, management has prepared several fluid business models including specific actions to take in the future, depending on the magnitude of the virus on our business levels.  For a more detailed description of the risks our business faces as a result of COVID-19, please see Part II – Item 1.A. (“Risk Factors”) below.  The Company’s strong balance sheet, including $43,854 of cash on hand, no borrowings under its domestic $150,000 bank line of credit, only $1,171 of debt outstanding on its foreign banking arrangements and $25,672 of cash expected to be received from U.S. tax refund request filed due to changes in net operating loss (“NOL”) carryback rules under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, will aid the Company in withstanding possible future negative impacts of COVID-19.  As discussed elsewhere in this report, as part of the Company’s management transition from a decentralized management model to a matrix organizational management structure, the Company has taken numerous steps to right size it operations. While COVID-19 did not have a material impact on the Company’s first quarter 2020 operations, management has prepared several scenarios of possible future impacts and related costs and cash savings action steps to take as the circumstances dictate. See the Liquidity and Capital Resources section below for addition information concerning the Company’s liquidity.

Restructuring Charges

During the first three months of 2020, the Company incurred $2,711 ($2,679 in the Infrastructure Solutions segment and $32 in the Materials Solutions segment) of restructuring and asset impairment charges comprised of goodwill impairment charges of $1,646 due to a 100% impairment of goodwill related to its mobile asphalt equipment operations included in the Infrastructure Solutions segment; $344 of costs associated with the closing of its Albuquerque site and moving its operations to other Company locations; $251 of severance pay associated with exiting the oil and gas line of business at its Enid site; and $470 of severance pay associated with work force reductions at other locations.

The Company is in the final stage of completing its closing of its AMM operations in Germany which began in late 2018 and the site’s real estate was sold in early 2020.  Related restructuring charges totaling $512 were incurred in the first three months of 2019.

Net Sales

Net sales for the first quarter of 2020 were $288,848 compared to $325,780 for the first quarter of 2019, a decrease of $36,932 or 11.3%. Sales are generated primarily from new equipment and parts sales to domestic and international customers.  Sales decreased in both the Infrastructure Solutions and Material Solutions Groups. Domestic sales for the first quarter of 2020 as compared to the first quarter of 2019 declined by 11.0%, due primarily to reduced backlogs entering into the first quarter of 2020 as compared to the first quarter of 2019. International sales in the first quarter of 2020 decreased 12.7% as compared to the first quarter of 2019, partially due to the impact from the strong U.S. dollar causing Company products produced in the United States to be more expensive. Sales reported by the Company’s foreign subsidiaries in U.S. dollars for the first quarter of 2020 would have been $2,783 higher had first quarter 2020 foreign exchange rates been the same as first quarter 2019 rates.

Domestic sales for the first quarter of 2020 were $233,882 or 81.0% of consolidated net sales compared to $262,829 or 80.7% of consolidated net sales for the first quarter of 2019, a decrease of $28,947 or 11.0%. Domestic sales for the first quarter of 2020 as compared to the first quarter of 2019 decreased by $14,269 in the Infrastructure Solutions Group and $14,678 in the Materials Solutions Group.

International sales for the first quarter of 2020 were $54,966 or 19.0% of consolidated net sales compared to $62,951 or 19.3% of consolidated net sales for the first quarter of 2019, a decrease of $7,985 or 12.7%. International sales for the first quarter of 2020 as compared to the first quarter of 2019 decreased $2,362 in the Infrastructure Solutions Group and $5,623 in the Materials Solutions Group.  Decreases in international sales in Canada, South America, Australia, Mexico and Asia were partially offset by increases in sales in Brazil, the West Indies and Europe.

Parts sales for the first quarter of 2020 were $88,708 compared to $92,601 for the first quarter of 2019, a decrease of $3,893 or 4.2%.  Parts sales as a percentage of net sales increased 230 basis points to 30.7% in the first quarter of 2020 compared to 28.4% in the first quarter of 2019.  Parts sales decreased $2,289 in the Infrastructure Solutions Group and $1,604 in the Materials Solutions Group.

Gross Profit

Consolidated gross profit decreased $2,829 or 3.7% to $74,021 for the first quarter of 2020 compared to $76,850 for the first quarter of 2019.  Gross profit as a percentage of sales increased 200 basis points to 25.6% for the first quarter of 2020 compared to 23.6% for the first quarter of 2019 due primarily to improved overhead absorption variances (partially resulting from the Company’s new capacity and load sharing between facilities as part of the Company’s restructuring activities which began in late 2019), reduced manufacturing labor (partially due to the late 2019 and early 2020 Company’s efforts to right size its operations) and reduced material costs associated with the Company’s strategic procurement efforts.

Selling, General, Administrative and Engineering Expenses

Selling, general, administrative and engineering expenses decreased $1,993, or 3.4%, to $56,167 or 19.4% of net sales for the first quarter of 2020, compared to $58,160 or 17.9% of net sales for the first quarter of 2019 primarily due to a $3,034 decrease in general and administrative expenses (primarily outside services and consultants ($2,650)), partially offset by a $1,616 increase in selling expenses (primarily increased exhibit costs associated with the once every three year ConExpo show ($4,182), partially offset by reduction in other exhibit costs ($1,369) and salaries and commissions ($1,142)).

Interest Expense

Interest expense for the first quarter of 2020 decreased $611 to $37 from $648 for the first quarter of 2019 due primarily to the Company not having any loans outstanding on the Company’s domestic line of credit in the first quarter of 2020.

Other Income, Net of Expenses

Other income, net of expenses was $234 for the first quarter of 2020 compared to $468 for the first quarter of 2019, a decrease of $234 due primarily to reduced investment earnings.

Income Tax Expense

The Company’s income tax benefit for the first three months of 2020 was $5,143 compared to income tax expense of $3,781 for the first three months of 2019. The Company’s combined effective income tax rate was (33.5)% for the first quarter of 2020 compared to 21.0% for the first quarter of 2019. The tax provision for the three months ended March 31, 2020 includes a $9,532, or $0.42 per diluted share, tax benefit resulting from provisions of the CARES Act enacted on March 27, 2020. Among other provisions, the CARES Act modified the NOL carryback provisions, which allowed the Company to carryback its 2018 NOL to prior tax years.  This change not only favorably impacted the timing of the NOL benefit, but also increased the tax benefit amount as the federal tax rates in the prior years (35%) were higher than the current federal tax rate (21%).

Net Income

The Company’s net income attributable to controlling interest was $20,644 for the first quarter of 2020 compared to $14,274 for the first quarter of 2019, an increase of $6,370 or 44.6%, primarily resulting from a $9,532 tax benefit from the provisions of the CARES act, partially offset by a pre-tax increase of $2,199 in restructuring and asset impairment charges between periods. Net income attributable to controlling interest per diluted share was $0.91 for the first quarter of 2020 compared to $0.63 for the first quarter of 2019, an increase of $0.28.  Diluted shares outstanding for the quarters ended March 31, 2020 and 2019 were 22,713 and 22,646, 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 quarter of 2020 and 2019.

Backlog

The backlog of orders as of March 31, 2020 was $245,431 compared to $236,548 as of March 31, 2019, an increase of $8,883 or 3.8%. Domestic backlogs increased $23,372 or 14.4% while international backlogs decreased $14,489 or 19.4%.  The backlog increased $25,351 in the Infrastructure Solutions Group and decreased $16,468 in the Materials Solutions 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.

Employees

Due to restructuring plans implemented by the Company in the last quarter of 2019 and the first quarter of 2020, including its efforts to right-size its workforce considering current production requirements, the Company reduced its employee headcount 13.6% compared to March 31, 2019 (from 4,344 employees at March 31, 2019 to 3,866 employees at December 31, 2019 to 3,753 at March 31, 2020) and will continue to evaluate future staffing needs as sales and production levels dictate.

Segment Net Sales:

Infrastructure Solutions Group: Sales in this group were $202,618 for the first quarter of 2020 compared to $219,249 for the same period in 2019, a decrease of $16,631 or 7.6%. The group’s backlog at the end of the first quarter of 2020 as compared to the end of the first quarter of 2019 increased $25,351 or 19.1%. Domestic sales for the Infrastructure Solutions Group decreased $14,269 or 7.6% for the first quarter of 2020 compared to the same period in 2019 due primarily to decreases in asphalt plant and mobile asphalt equipment sales, including $7,532 of orders whose shipment was delayed to COVID-19 issues. International sales for the Infrastructure Solutions Group decreased $2,362 or 7.4% for the first quarter of 2020 compared to the same period in 2019 due primarily to decreases in asphalt plant sales. International sales decreases between periods occurred primarily in Canada, Australia and Mexico, partially offset by increases in sales into the West Indies, Brazil and Europe.  Parts sales for the Infrastructure Solutions Group decreased 3.6% for the first quarter of 2020 compared to the same period in 2019.

Materials Solutions Group: Sales in this group were $86,230 for the first quarter of 2020 compared to $106,531 for the same period in 2019, a decrease of $20,301 or 19.1%. The group’s backlog at the end of the first quarter of 2020 as compared to the end of the first quarter of 2019 decreased $16,468 or 15.9%. Domestic sales for the Materials Solutions Group decreased by $14,678 or 19.4% for the first quarter of 2020 compared to the same period in 2019 due primarily to decreased sales into the Company’s traditional rock quarry markets.  International sales for the Material Solutions Group decreased $5,623 or 18.2% for the first quarter of 2020 compared to the same period in 2019 due primarily to reductions in sales into the mining industry. International sales decreases between periods occurred primarily in South America, Canada and Asia, partially offset by sales increases in Brazil.  Parts sales for this group decreased 5.5% for the first quarter of 2020 compared to the same period in 2019.

Segment Profit (Loss):

Infrastructure Solutions Group: Segment profit for the Infrastructure Solutions Group was $17,220 for the first quarter of 2020 compared to $18,070 for the same period in 2019, a decrease of $850 or 4.7%. Segment profits were favorably impacted by an increase in gross profit of $1,614 due to a 270 basis point increase in gross margins between periods (26.1% and 23.4% for the first quarter of 2020 and 2019, respectively) and a reduction in general and administrative expenses of $1,169. The increases were offset by increases in selling expenses ($1,673) and restructuring and asset impairment charges of $2,679, including $1,646 of goodwill impairment related to the Company’s mobile asphalt equipment product lines.

Materials Solutions Group: Segment profit for the Materials Solutions Group was $6,035 for the first quarter of 2020 compared to $8,678 for the same period in 2019, a decrease of $2,643 or 30.5%.  The decrease in segment profits between periods resulted from a decrease in gross profit of $4,540 due primarily to decreased sales of $20,301 between periods. Gross margins remained relatively constant between periods at 24.4% and 24.0% for the first quarters of 2020 and 2019, respectively. Segment profits were positively impacted by decreases in general and administrative expenses ($1,084) and selling expenses ($481).

Corporate: Corporate operations had a loss of $2,923 for the first quarter of 2020 compared to a loss of $12,908 for the first quarter of 2019, a favorable change of $9,985 or 77.4%, due primarily to reductions in income taxes ($9,069) and interest expense ($548).

Liquidity and Capital Resources

The Company's primary sources of liquidity and capital resources are its (1) cash on hand, (2) borrowing capacity under a $150,000 revolving credit facility and (3) cash flows from operations, which may be negatively affected in the future as a result of COVID-19. The Company had $43,854 of cash available for operating purposes as of March 31, 2020, of which $11,172 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, greatly reduced any additional taxes on these funds should the Company decide to repatriate these funds to the United States. At March 31, 2020, or at any time during the first three months of 2020, the Company had no borrowings outstanding under its $150,000 domestic revolving credit facility. Net of letters of credit totaling $7,877, the Company had borrowing availability of $142,123 under the revolving credit facility as of March 31, 2020.  The revolving credit facility agreement contains certain financial covenants, including provisions concerning required levels of annual net income and minimum tangible net worth.  The Company was in compliance with the financial covenants of the agreement at March 31, 2020.

The Company’s South African subsidiary, Osborn Engineered Products SA (Pty) Ltd (“Osborn”), has a credit facility of $5,338 with a South African bank to finance short-term working capital needs, as well as to cover performance letters of credit, advance payment and retention guarantees. As of March 31, 2020, Osborn had no outstanding borrowings but had $883 in performance, advance payment and retention guarantees outstanding under the facility. The facility has been guaranteed by Astec Industries, Inc., but is otherwise unsecured. A 0.75% unused facility fee is charged if less than 50% of the facility is utilized. As of March 31, 2020, Osborn had available credit under the facility of $4,455.

The Company’s Brazilian subsidiary, Astec Brazil, has a $667 working capital loan outstanding as of March 31, 2020 from a Brazilian bank with an interest rate of 10.4%.  The loan’s final monthly payment is due in April 2024 and the debt is secured by Astec Brazil’s manufacturing facility and also by letters of credit totaling $3,200 issued by Astec Industries, Inc. Additionally, as of March 31, 2020 Astec Brazil had $504 outstanding under order anticipation agreements with a local bank with maturity dates through September 2020, which are included as short-term debt in the accompanying condensed unaudited consolidated balance sheets.

Cash Flows from Operating Activities:

Net cash provided from operating activities decreased by $6,426 for the first three months of 2020 as compared to the first three months of 2019 due primarily to increases in the growth of receivables ($12,835) and prepaid, refundable and income taxes payable, net of ($19,063), partially offset by an increase in net income $6,266, changes in the growth inventories of $10,576 and deferred income tax provision of $9,563.

Cash Flows from Investing Activities:

Net cash used by investing activities increased by $274 for the first three months of 2020 as compared to the same period in 2019.

Total capital expenditures for 2020 are currently forecasted to be approximately $30,000. 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 May 2021.

Cash Flows from Financing Activities:

Cash used by financing activities decreased by $1,804 for the first three months of 2020 compared to the same period in 2019 due primarily to the Company having no borrowings or repayments under its domestic line of credit during the first three months of 2020.

Financial Condition

The Company’s total current assets increased to $534,182 as of March 31, 2020 from $506,304 as of December 31, 2019, an increase of $27,878 or 5.5%, due primarily to increases in prepaid and refundable income taxes ($18,791) and trade receivables and contract assets ($16,439) offset by a decrease in cash and cash equivalents of ($5,003) during the first three months of 2020.

The Company’s total current liabilities decreased to $168,890 as of March 31, 2020 from $172,767 as of December 31, 2019, a decrease of $3,877, or 2.2%, due primarily to an increase in accounts payable ($6,968) being offset by reductions in customer deposits ($5,154) and accrued payroll and related liabilities ($4,559).

Market Risk and Risk Management Policies

We have no material changes to the disclosure on this matter made in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Contingencies

Certain customers have financed purchases of Company products through arrangements in which the Company is contingently liable for customer debt of $1,828 at March 31, 2020. 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. Additionally, the Company is also potentially liable for 1.75% of the unpaid balance, determined as of December 31st of the prior year, on certain past customer equipment purchases that were financed by an outside finance company (the maximum exposure for the Company in 2020 is $584). The Company has recorded a liability of $1,498 related to these guarantees as of March 31, 2020.

In addition, the Company is contingently liable under letters of credit issued by a domestic lender totaling $7,877 as of March 31, 2020, including $3,200 of letters of credit guaranteeing certain Astec Brazil bank debt. The outstanding letters of credit expire at various dates through April 2021. As of March 31, 2020, the Company’s foreign subsidiaries are contingently liable for a total of $2,321 in performance letters of credit, advance payments and retention guarantees. The maximum potential amount of future payments under these letters of credit and guarantees for which the Company could be liable is $10,198 as of March 31, 2020.

The Company and certain of its current and former executive officers have been named as defendants in a putative shareholder class action lawsuit filed on February 1, 2019, as amended on August 26, 2019, in the United States District Court for the Eastern District of Tennessee. The action is styled City of Taylor General Employees Retirement System v. Astec Industries, Inc., et al., Case No. 1:19-cv-00024-PLR-CHS. The complaint generally alleges that the defendants violated the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements and that the individual defendants are control person under Section 20(a) of the Exchange Act. The complaint was filed on behalf of shareholders who purchased shares of the Company’s stock between July 26, 2016 and October 22, 2018 and seeks monetary damages on behalf of the purported class. The Company disputes these allegations and intends to defend this lawsuit vigorously and filed a motion to dismiss the lawsuit on October 25, 2019. The Company is unable to determine whether or not a future loss will be incurred due to this litigation, or estimate a range of loss, if any, at this time.

The Company's GEFCO subsidiary has been named a defendant in a lawsuit originally filed on August 16, 2018 with an amended complaint filed on January 25, 2019, in the United States District Court for the Western District of Oklahoma. The action is styled VenVer S.A. and Americas Coil Tubing LLP v. GEFCO, Inc., Case No. CIV-18-790-SLP.  The complaint alleges breaches of warranty and other similar claims regarding equipment sold by GEFCO in 2013.  In addition to seeking a rejection (rescission) of the purchase contract, the plaintiff is seeking special and consequential damages.  The original purchase price of the equipment was approximately $8,500. GEFCO disputes the plaintiff’s allegations and intends to defend this lawsuit vigorously. The Company is unable to determine whether or not a future loss will be incurred due to this litigation, or estimate a range of loss, if any, at this time.

The Company is currently a party to various claims and legal proceedings that have arisen in the ordinary course of business. If management believes that a loss arising from such claims and legal proceedings is probable and can reasonably be estimated, the Company records the amount of the loss (excluding estimated legal fees) or the minimum estimated liability when the loss is estimated using a range and no point within the range is more probable than another. As management becomes aware of additional information concerning such contingencies, any potential liability related to these matters is assessed and the estimates are revised, if necessary. If management believes that a loss arising from such claims and legal proceedings is either (i) probable but cannot be reasonably estimated or (ii) reasonably possible but not probable, the Company does not record the amount of the loss, but does make specific disclosure of such matter. Based upon currently available information and with the advice of counsel, management believes that the ultimate outcome of its current claims and legal proceedings, individually and in the aggregate, will not have a material adverse effect on the Company's financial position, cash flows or results of operations. However, claims and legal proceedings are subject to inherent uncertainties and rulings unfavorable to the Company could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse effect on the Company's financial position, cash flows or results of operations.

Off-balance Sheet Arrangements

As of March 31, 2020, the Company does not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.

Contractual Obligations

During the three months ended March 31, 2020, there were no material changes in the Company’s commitments or contractual liabilities disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

The Company has no material changes to the disclosure on this matter made in Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Item 4.  Controls and Procedures 

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. 

 

The Company’s management, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report.  Based upon that evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were not effective due to material weaknesses in the Company’s internal control over financial reporting that were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

Other than the remediation efforts discussed below, there have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the three-month period ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2019, we began implementing a remediation plan to address the material weaknesses mentioned above. The weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

The Company is involved from time to time in legal actions arising in the ordinary course of its business. Other than as set forth in Note 15, Contingent Matters, to the accompanying unaudited condensed financial statements and Part I, “Item 3. Legal Proceedings” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, the Company currently has no pending or threatened litigation that the Company believes will result in an outcome that would materially affect the Company’s business, financial position, cash flows or results of operations. Nevertheless, there can be no assurance that future litigation to which the Company becomes a party will not have a material adverse effect on its business, financial position, cash flows or results of operations.

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, 2019, which could materially affect the Company’s business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and in this Quarterly Report on Form 10-Q are not the only risks facing our Company.  Additional risks and uncertainties not currently known to management or that management currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition or operating results. The Company is adding the following risk factors to those disclosed in its Report on Form 10-K for the year ended December 31, 2019.

The spread of the novel coronavirus (COVID-19), declared a global pandemic by the World Health Organization in March 2020, has spread to many countries around the world and is impacting worldwide economic activity. Many governments have implemented policies intended to stop or slow the further spread of the disease, such as shelter-in-place orders, travel restrictions and quarantines, resulting in the temporary closure of schools and non-essential businesses, and these measures may remain in place for a significant period of time. Though the Company’s U.S. business has been deemed “Critical Manufacturing” by the U.S. Department of Homeland Security, and U.S. locations have remained open, two of our foreign businesses closed in March 2020 and are not expected to reopen until sometime in May.  The Company has also experienced and may continue to experience disruptions that prevent it from meeting the demands of its sales force and customers, including disruptions to the manufacturing of its products and supply chain, disruptions to its distribution network, disruptions in or restrictions on the ability of its employees, contractors, sales force and other business partners to work effectively and disruptions in the shipment of its products. In addition, the Company’s increased use of remote work technology could increase our risk of cybersecurity breaches and related information technology threats.  Further, the Company’s management team and members of the Company’s COVID-19 task force are committing increased resources to managing the Company’s response to the pandemic and such attention is being diverted from day-to-day Company operations, which could hinder the Company’s ability to implement new or innovative strategies.  The COVID-19 pandemic and measures implemented to slow the spread of COVID-19 may also negatively impact the Company's ability to meet the financial covenants of its debt agreements with various banking institutions if the Company’s financial health declines.  The impact of COVID-19 and measures implemented to slow the spread could also cause delay in, or limit the ability of, the Company’s customers to make timely payments to the Company. In addition, the pandemic has resulted in a widespread health crisis that is adversely affecting the economies and financial markets of many countries. During the COVID-19 pandemic and even after it has subsided, the Company may continue to experience adverse impacts to the Company’s business as a result of the pandemic’s global economic impact, including any recession, economic downturn, government spending cuts, tightening of credit markets or increased unemployment that has occurred or may occur in the future, which could cause its ultimate customers and potential customers to postpone or reduce spending on its products or put downward pressure on prices.

Individually and collectively, the consequences of the COVID-19 pandemic could adversely impact our business, financial condition, results of operations, cash flows and liquidity. The extent to which the COVID-19 pandemic ultimately impacts the Company’s business, financial condition, results of operations, cash flows, and liquidity may differ from management’s current estimates due to the inherent uncertainties regarding the duration and further spread of the outbreak, its severity, actions taken to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. The extent to which the COVID-19 pandemic adversely affects the Company’s business, financial condition, results of operations, and cash flows and liquidity may also have the effect of intensifying many of the other risks described in the “Risk Factors” section  set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

On July 29, 2018, the Company’s Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $150,000 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 2019 or the first three months of 2020.

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

Item 6.  Exhibits

The exhibits are numbered in accordance with Item 601 of Regulation S-K.  Inapplicable exhibits are not included in the list.

* In accordance with Release No. 34-47551, this exhibit is hereby furnished to the SEC as an accompanying document and is not to be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.