Astec Industries(US:ASTE)2019-03-16 00:11markdown Part I [Business](index=5&type=section&id=Item%201.%20Business) Astec Industries designs, manufactures, and markets equipment for road building and construction, operating through three main segments - The company is a manufacturer of equipment for road building, aggregate processing, and energy industries, operating through **17 manufacturing subsidiaries**[13](index=13&type=chunk)[14](index=14&type=chunk)[15](index=15&type=chunk) - The business is organized into **three reportable segments**: Infrastructure Group, Aggregate and Mining Group, and Energy Group, with a separate Corporate category for oversight and support functions[18](index=18&type=chunk) - The company's strategy emphasizes being a **cost-efficient producer**, a **technological innovator**, and providing **first-class customer service**, positioning itself to capitalize on infrastructure needs globally[16](index=16&type=chunk) [Infrastructure Group](index=7&type=section&id=Item%201.%20Business%20-%20Infrastructure%20Group) The Infrastructure Group focuses on asphalt-related road construction equipment, with its backlog significantly decreasing in 2018 - This segment designs and manufactures a complete line of asphalt plants, pavers, screeds, milling machines, and material transfer vehicles[20](index=20&type=chunk) - Astec is developing new asphalt plant models specifically for foreign markets where current offerings have not been well received[25](index=25&type=chunk) - The German subsidiary, Astec Mobile Machinery GmbH, ceased operations in early 2019 and is being liquidated[31](index=31&type=chunk) Infrastructure Group Backlog (2017-2018) | Year | Backlog (in thousands) | Change | | :--- | :--- | :--- | | 2018 | $149,436 | -37.6% | | 2017 | $239,495 | | - The 2018 backlog decrease was significantly impacted by the removal of a **$60 million** order for a three-line pellet plant from the 2017 backlog[39](index=39&type=chunk) [Aggregate and Mining Group](index=10&type=section&id=Item%201.%20Business%20-%20Aggregate%20and%20Mining%20Group) This group manufactures heavy processing equipment for aggregate, mining, and bulk handling markets, with its backlog increasing by **11.7%** in 2018 - The group designs and manufactures heavy processing equipment for aggregate, metallic mining, recycling, ports, and bulk handling markets through eight business units including Telsmith, KPI-JCI-AMS, and Telestack[40](index=40&type=chunk) - The group's Brazilian subsidiary, Astec Brazil, began full production in 2015 but sales have been hampered by the economic downturn in South America[55](index=55&type=chunk)[56](index=56&type=chunk) Aggregate and Mining Group Backlog (2017-2018) | Year | Backlog (in thousands) | Change | | :--- | :--- | :--- | | 2018 | $130,691 | +11.7% | | 2017 | $116,987 | | [Energy Group](index=14&type=section&id=Item%201.%20Business%20-%20Energy%20Group) The Energy Group supplies heavy equipment to the oil and gas, construction, and water well industries, with its backlog growing by **18%** in 2018 - The group serves the oil & gas, construction, and water well industries with products like heaters, drilling rigs, concrete plants, wood chippers, and industrial burners[66](index=66&type=chunk) - The group includes Power Flame, acquired in August 2016, and RexCon, acquired in October 2017[66](index=66&type=chunk) Energy Group Backlog (2017-2018) | Year | Backlog (in thousands) | Change | | :--- | :--- | :--- | | 2018 | $64,834 | +17.9% | | 2017 | $54,987 | | [Risk Factors](index=19&type=section&id=Item%201A.%20Risk%20Factors) The company identifies several risks including economic downturns, dependency on government funding, and volatility in oil and steel prices - Economic downturns and reduced government infrastructure spending (e.g., FAST Act) pose significant risks to revenue[98](index=98&type=chunk)[103](index=103&type=chunk)[104](index=104&type=chunk) - Volatility in oil and steel prices can negatively impact production costs, gross margins, and demand for products across different segments[109](index=109&type=chunk)[112](index=112&type=chunk) - The company faces risks from integrating acquisitions, international market fluctuations, and the loss of key management personnel, highlighted by the recent resignation of the CEO[113](index=113&type=chunk)[116](index=116&type=chunk)[118](index=118&type=chunk) - Goodwill impairment is a risk, with charges of **$11.2 million** recorded in 2018. The company also identified material weaknesses in internal controls, which could impact investor confidence[130](index=130&type=chunk)[136](index=136&type=chunk) - Risks associated with new, innovative projects, such as the wood pellet plants, include potential for significant cost overruns and negative margins[131](index=131&type=chunk)[132](index=132&type=chunk) [Properties](index=27&type=section&id=Item%202.%20Properties) The company owns and leases numerous properties globally, serving as corporate offices, manufacturing plants, and service centers - The company operates from **21 separate manufacturing locations** as of 2018[86](index=86&type=chunk) - Properties are located globally, including the U.S., Canada, South Africa, Brazil, Australia, and Germany, supporting manufacturing, sales, and service functions for all three operating segments[143](index=143&type=chunk)[144](index=144&type=chunk)[145](index=145&type=chunk) [Legal Proceedings](index=29&type=section&id=Item%203.%20Legal%20Proceedings) Astec Industries is a defendant in a shareholder class action lawsuit filed on **February 1, 2019**, alleging false and misleading statements - A shareholder class action lawsuit was filed on **February 1, 2019**, alleging violations of the Exchange Act due to purportedly false and misleading statements made between **July 26, 2016, and October 22, 2018**[147](index=147&type=chunk) - Management disputes the allegations and believes the ultimate outcome will not have a material adverse effect on the company's financials, though an unfavorable ruling is possible[148](index=148&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=31&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on Nasdaq, increased its quarterly dividend to **$0.11 per share**, and repurchased **582,000 shares** in 2018 - The quarterly cash dividend was increased to **$0.11 per share** starting in Q3 2018[157](index=157&type=chunk) 2018 Share Repurchases | Period | Shares Repurchased (thousands) | Average Price Paid | Total Cost (in thousands) | | :--- | :--- | :--- | :--- | | August 2018 | 297 | $46.91 | $13,932 | | October 2018 | 238 | $35.10 | $8,354 | | November 2018 | 47 | $39.29 | $1,847 | | **Total** | **582** | **$41.46** | **$24,133** | - As of **December 31, 2018**, approximately **$125.9 million** remained available for repurchase under the authorized plan[158](index=158&type=chunk) [Controls and Procedures](index=32&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were not effective as of **December 31, 2018**, due to material weaknesses - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were not effective as of **December 31, 2018**[164](index=164&type=chunk) - The ineffectiveness was attributed to material weaknesses in internal control over financial reporting, with a remediation plan outlined in Appendix A[164](index=164&type=chunk)[165](index=165&type=chunk) Part III [Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters](index=34&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Shareholder%20Matters) This section provides information on equity compensation plans, detailing securities to be issued and those available for future issuance Equity Compensation Plan Information as of December 31, 2018 | Plan Category | Number of securities to be issued upon exercise | Securities remaining available for future issuance | | :--- | :--- | :--- | | Equity Compensation Plans Approved by Shareholders | 165,238 | 503,635 | | Equity Compensation Plans Not Approved by Shareholders | 27,546 | 71,736 | | **Total** | **192,784** | **575,371** | - The Amended and Restated Non-Employee Directors Compensation Plan allows directors to receive annual retainers in cash or common stock and provides an annual stock award in the form of restricted stock units (RSUs)[173](index=173&type=chunk)[174](index=174&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=35&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the financial statements, schedules, and exhibits filed with the Form 10-K, including key agreements and certifications - All financial statements, including Consolidated Balance Sheets, Statements of Operations, and Cash Flows, are located in Appendix A[176](index=176&type=chunk) - Key filed exhibits include the Separation Agreement with former CEO Benjamin G. Brock, the Second Amendment to the Credit Agreement, and Sarbanes-Oxley certifications[179](index=179&type=chunk) Appendix A: Financial Information [Selected Consolidated Financial Data](index=39&type=section&id=Selected%20Consolidated%20Financial%20Data) The company's 2018 financial performance shows a net loss of **$60.4 million**, decreased net sales, and a sharp fall in gross profit margin Selected Consolidated Financial Data (2017 vs. 2018, in thousands) | Metric | 2018 | 2017 | Change | | :--- | :--- | :--- | :--- | | Net sales | $1,171,599 | $1,184,739 | -1.1% | | Gross profit | $135,766 | $243,129 | -44.2% | | Gross profit % | 11.6% | 20.5% | -8.9 p.p. | | Income (loss) from operations | ($86,421) | $55,537 | -255.6% | | Net income (loss) attributable to controlling interest | ($60,449) | $37,795 | -259.9% | | Diluted EPS | ($2.64) | $1.63 | -261.9% | | Total assets | $855,457 | $889,579 | -3.8% | | Total equity | $585,290 | $686,765 | -14.8% | [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=42&type=section&id=Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) The MD&A details 2018's operational and financial events, heavily impacted by wood pellet plant issues, leading to a net loss and goodwill impairment - A 2018 agreement related to a wood pellet plant resulted in a **$75.3 million** reduction in sales and a **$71.0 million** reduction in gross margin for the Infrastructure Group[212](index=212&type=chunk) - The company wrote down the value of a separate, unsold wood pellet plant to zero, resulting in a **$65.7 million** charge to cost of sales, as it decided to exit the pellet plant business line[213](index=213&type=chunk) - A goodwill impairment charge of **$11.2 million** was recorded in the Energy Group related to the RexCon and Power Flame acquisitions[216](index=216&type=chunk) - The company's total backlog decreased **16.2%** to **$345.0 million** at year-end 2018, largely due to a **$60.2 million** reduction from pellet plant-related orders[229](index=229&type=chunk) Net Sales by Segment (2017 vs. 2018, in thousands) | Segment | 2018 Sales | 2017 Sales | % Change | | :--- | :--- | :--- | :--- | | Infrastructure Group | $442,289 | $553,691 | (20.1)% | | Aggregate and Mining Group | $453,164 | $403,720 | 12.2% | | Energy Group | $276,146 | $227,328 | 21.5% | [Management's Report on Internal Control over Financial Reporting](index=60&type=section&id=Management%27s%20Report%20on%20Internal%20Control%20over%20Financial%20Reporting) Management concluded that internal control over financial reporting was ineffective as of **December 31, 2018**, due to several material weaknesses - Management identified material weaknesses and concluded that internal control over financial reporting was not effective as of **December 31, 2018**[327](index=327&type=chunk) - Corporate-level weaknesses were found in the goodwill impairment assessment and income tax calculation processes[317](index=317&type=chunk)[319](index=319&type=chunk) - Business unit-level weaknesses included ineffective IT controls over a new ERP system at Roadtec, improper application of new revenue recognition standards (**ASC 606**), and inadequate controls over inventory[321](index=321&type=chunk)[323](index=323&type=chunk)[325](index=325&type=chunk) - A remediation plan is underway, focusing on enhancing controls, hiring/training personnel, implementing new software, and increasing corporate monitoring[329](index=329&type=chunk) [Reports of Independent Registered Public Accounting Firm](index=63&type=section&id=Reports%20of%20Independent%20Registered%20Public%20Accounting%20Firm) The independent auditor issued an adverse opinion on internal controls but an unqualified opinion on the consolidated financial statements - The auditor issued an adverse opinion on the company's internal control over financial reporting as of **December 31, 2018**, due to identified material weaknesses[334](index=334&type=chunk) - The auditor issued an unqualified opinion on the consolidated financial statements, stating they are presented fairly in accordance with U.S. GAAP[335](index=335&type=chunk)[343](index=343&type=chunk) [Notes to Consolidated Financial Statements](index=73&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail accounting policies, goodwill impairment, tax impacts, and contingent liabilities, with segment data showing varied performance - Goodwill impairment of **$11.19 million** was recorded in the Energy Group in Q4 2018. The valuations performed in 2017 and 2016 indicated no impairment[437](index=437&type=chunk) - The company's credit facility was amended in February 2019, increasing the unsecured line of credit from **$100 million** to **$150 million** and extending the maturity to **December 2023**[445](index=445&type=chunk) - The **2017 Tax Cuts and Jobs Act** resulted in a provisional tax expense of **$492k** in 2017, which was finalized in 2018 with a subsequent adjustment increasing tax expense by **$1.235 million**[480](index=480&type=chunk)[485](index=485&type=chunk) - Contingent liabilities as of Dec 31, 2018, include **$2.2 million** for customer debt guarantees and **$13.1 million** for letters of credit and performance guarantees[487](index=487&type=chunk)[488](index=488&type=chunk) - The company adopted new revenue recognition standards (**ASU 2014-09**) on Jan 1, 2018, using the modified retrospective method, which did not have a material impact on financial results[497](index=497&type=chunk)