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-month period ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. 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, 2017.
The unaudited condensed consolidated balance sheet as of December 31, 2017 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.
Dollar and share amounts shown are in thousands, except per share amounts, unless otherwise specified.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers", which supersedes existing revenue guidance under U.S. GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Certain provisions of the standard were clarified in March 2016 with the issuance of ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606)", which provided additional implementation guidance in order to eliminate the potential for diversity in practice arising from inconsistent application of the principal versus agent guidance. Under the new guidance, when an entity determines it is a principal in a transaction, the entity recognizes revenue in the gross amount of consideration; however, in transactions where an entity determines it is an agent, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled. These new standards require companies to use more judgment and to make more estimates than under previous guidance and expand required disclosures to include information regarding contract assets and liabilities as well as a more disaggregated view of revenue. The standards are effective for public companies for annual periods beginning after December 15, 2017 and, as such, the Company adopted the new standards effective January 1, 2018 using the modified retrospective transition method. See Note 11, Revenue Recognition, for additional disclosures required by the standards. The adoption of the standards did not have a material impact on the Company's financial position, results of operations or cash flows, and no cumulative effect adjustment to retained earnings was necessitated.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10)", which requires, among other things, equity investments with readily determinable fair values, except those accounted for under the equity method of accounting or those that result in consolidation of the investee, to be measured at fair value with changes in fair value recognized in net income. The new standard was further clarified by the issuance of ASU No. 2018-03, "Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities" in February 2018. The standards are effective for public companies in fiscal years beginning after December 15, 2017, and the Company adopted the standards effective January 1, 2018. The adoption of these standards did not have a material impact on the Company's financial position, cash flows or results of operations.
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 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 statement 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. The new standard is effective for public companies for fiscal years beginning after December 15, 2018. The Company plans to adopt the new standard effective January 1, 2019. The Company does not expect the adoption of this standard to have a material impact on its results of operations or cash flows; however, the Company has not determined the impact the adoption of this new standard will have on its financial position.
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. The Company has not yet determined what impact, if any, the adoption of this new standard will have on the Company's financial position, results of operations or cash flows.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)" which clarifies how certain cash receipts and cash payments should be presented on the statement of cash flows. The statement also addresses how the predominance principle should be applied when cash payments have aspects of more than one class of cash flows.
The standard is effective for public companies in fiscal years beginning after December 15, 2017, and the Company adopted the standard effective January 1, 2018. The adoption of this standard did not have a material impact on the Company's unaudited condensed consolidated statements of cash flows.
In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory" which requires companies to account for the income tax effects of intercompany sales and transfers of assets other than inventory, such as intangible assets, when the transfer occurs. This is a change from previous guidance, which required companies to defer the income tax effects of intercompany transfers of assets until the asset has been sold to an outside party or otherwise recognized by being depreciated, amortized or impaired. The new guidance requires companies to defer the income tax effects of only intercompany transfers of inventory. The standard is effective for public companies in fiscal years beginning after December 15, 2017.
The Company adopted the new standard effective January 1, 2018. The application of this standard did not have a material impact on the Company's financial position, results of operations or cash flows.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805), Clarifying the Definition of a Business," which provides additional guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard is effective for public companies for annual or interim periods beginning after December 15, 2017. The Company adopted the new standard effective January 1, 2018. The application of this standard did not have a material impact on the Company's financial position, results of operations or cash flows.
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 plans to adopt the new standard effective January 1, 2019. The Company does not expect the application of this standard to have a material impact on its 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 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. Additional disclosures will also be required upon adoption of the new standard. The new standard is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company does not expect the adoption of this standard to have a material impact on its financial position, results of operations or cash flows.
In March 2018, the FASB issued ASU No. 2018-05 "Income Taxes (Topic 740), amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update)", which addresses the accounting and disclosures around the enactment of the Tax Cuts and Jobs Act and the Securities and Exchange Commission's Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"). The Company has adopted this new standard. See Note 10, Income Taxes, for the disclosures related to this amended guidance.
Note 2. Earnings per Share
Basic earnings per share are determined by dividing earnings 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 attributable to controlling interest and the number of basic and diluted shares used in the computation of earnings per share:
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
Net income attributable to controlling interest
|
|
$
|
20,267
|
|
|
$
|
15,120
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
|
|
|
23,045
|
|
|
|
23,013
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Restricted stock units
|
|
|
136
|
|
|
|
102
|
|
Supplemental Executive Retirement Plan
|
|
|
55
|
|
|
|
61
|
|
Denominator for diluted earnings per share
|
|
|
23,236
|
|
|
|
23,176
|
|
|
|
|
|
|
|
|
|
|
Note 3. Receivables
Receivables are net of allowances for doubtful accounts of $1,446 and $1,716 as of March 31, 2018 and December 31, 2017, respectively.
Note 4. Inventories
Inventories consist of the following:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Raw materials and parts
|
|
$
|
171,713
|
|
|
$
|
146,144
|
|
Work-in-process
|
|
|
148,146
|
|
|
|
129,441
|
|
Finished goods
|
|
|
71,167
|
|
|
|
94,571
|
|
Used equipment
|
|
|
20,133
|
|
|
|
21,223
|
|
Total
|
|
$
|
411,159
|
|
|
$
|
391,379
|
|
Raw material inventory is 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 inventory 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 inventory consists of completed equipment manufactured for sale to customers.
Used equipment inventory 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.
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 allowance 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 equipment or parts we sell. 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.
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 $242,831 and $237,742 as of March 31, 2018 and December 31, 2017, 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, revolving debt, 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 March 31, 2018 and December 31, 2017 are Level 1 and Level 2 in the fair value hierarchy as defined above:
|
|
March 31, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
Trading equity securities:
|
|
|
|
|
|
|
|
|
|
SERP money market fund
|
|
$
|
115
|
|
|
$
|
--
|
|
|
$
|
115
|
|
SERP mutual funds
|
|
|
5,200
|
|
|
|
--
|
|
|
|
5,200
|
|
Preferred stocks
|
|
|
362
|
|
|
|
--
|
|
|
|
362
|
|
Trading debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
5,659
|
|
|
|
--
|
|
|
|
5,659
|
|
Municipal bonds
|
|
|
--
|
|
|
|
1,672
|
|
|
|
1,672
|
|
Floating rate notes
|
|
|
877
|
|
|
|
--
|
|
|
|
877
|
|
U.S. Treasury notes
|
|
|
1,311
|
|
|
|
--
|
|
|
|
1,311
|
|
Asset backed securities
|
|
|
--
|
|
|
|
499
|
|
|
|
499
|
|
Other
|
|
|
--
|
|
|
|
902
|
|
|
|
902
|
|
Derivative financial instruments
|
|
|
--
|
|
|
|
190
|
|
|
|
190
|
|
Total financial assets
|
|
$
|
13,524
|
|
|
$
|
3,263
|
|
|
$
|
16,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
SERP liabilities
|
|
$
|
--
|
|
|
$
|
8,362
|
|
|
$
|
8,362
|
|
Derivative financial instruments
|
|
|
--
|
|
|
|
13
|
|
|
|
13
|
|
Total financial liabilities
|
|
$
|
--
|
|
|
$
|
8,375
|
|
|
$
|
8,375
|
|
|
|
December 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
Trading equity securities:
|
|
|
|
|
|
|
|
|
|
SERP money market fund
|
|
$
|
124
|
|
|
$
|
--
|
|
|
$
|
124
|
|
SERP mutual funds
|
|
|
4,839
|
|
|
|
--
|
|
|
|
4,839
|
|
Preferred stocks
|
|
|
364
|
|
|
|
--
|
|
|
|
364
|
|
Trading debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
5,661
|
|
|
|
--
|
|
|
|
5,661
|
|
Municipal bonds
|
|
|
--
|
|
|
|
1,912
|
|
|
|
1,912
|
|
Floating rate notes
|
|
|
753
|
|
|
|
--
|
|
|
|
753
|
|
U.S. Treasury notes
|
|
|
1,030
|
|
|
|
--
|
|
|
|
1,030
|
|
Asset backed securities
|
|
|
--
|
|
|
|
526
|
|
|
|
526
|
|
Other
|
|
|
--
|
|
|
|
968
|
|
|
|
968
|
|
Total financial assets
|
|
$
|
12,771
|
|
|
$
|
3,406
|
|
|
$
|
16,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
SERP liabilities
|
|
$
|
--
|
|
|
$
|
8,552
|
|
|
$
|
8,552
|
|
Derivative financial instruments
|
|
|
--
|
|
|
|
112
|
|
|
|
112
|
|
Total financial liabilities
|
|
$
|
--
|
|
|
$
|
8,664
|
|
|
$
|
8,664
|
|
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, 2017 to March 31, 2018.
The trading equity investments noted above are valued at their fair value based on their quoted market prices, and the 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.
Net unrealized gains or losses incurred on investments held amounted to net gains of $140 and $242 as of March 31, 2018 and December 31, 2017, respectively.
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. There were no borrowings outstanding under the agreement at any time during the three-month period ended March 31, 2018. Letters of credit totaling $9,400, 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 March 31, 2018, resulting in additional borrowing ability of $90,600 under the credit facility. The credit agreement has a five-year term expiring in April 2022. 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 2.64% as of March 31, 2018. 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 $8,035 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, 2018, Osborn had no outstanding borrowings but had $1,346 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, 2018, Osborn had available credit under the facility of $6,689. The interest rate is 0.25% less than the South Africa prime rate, resulting in a rate of 9.75% as of March 31, 2018.
The Company's Brazilian subsidiary, Astec Brazil, has outstanding working capital loans totaling $2,891 as of March 31, 2018 from Brazilian banks with interest rates ranging from 10.4% to 11.0%. The loans' maturity dates range from November 2018 to April 2024 and the debts are 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 $516 as of March 31, 2018 that have interest rates ranging from 3.5% to 16.3%. These equipment loans have maturity dates ranging from September 2018 to April 2020. Astec Brazil's loans are included in the accompanying unaudited condensed consolidated balance sheets as current maturities of long-term debt ($2,050) and long-term debt ($1,357) as of March 31, 2018.
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-month periods ended March 31, 2018 and 2017 are as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Reserve balance, beginning of the period
|
|
$
|
15,410
|
|
|
$
|
13,156
|
|
Warranty liabilities accrued
|
|
|
3,453
|
|
|
|
3,996
|
|
Warranty liabilities settled
|
|
|
(2,825
|
)
|
|
|
(3,460
|
)
|
Other
|
|
|
(25
|
)
|
|
|
27
|
|
Reserve balance, end of the period
|
|
$
|
16,013
|
|
|
$
|
13,719
|
|
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 $8,291 as of March 31, 2018 and $8,119 as of December 31, 2017, of which $6,139 and $5,615 were included in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017, respectively.
Note 10. Income Taxes
The Company's combined effective income tax rate was 23.0% and 34.1% for the three-month periods ended March 31, 2018 and 2017, respectively. The Company's effective tax rates for the three-month periods ended March 31, 2018 and 2017 include 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 March 31, 2018 has increased by approximately $32 as compared to December 31, 2017 due to additional taxes and interest on existing reserves.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Tax Act") was signed into law making significant changes to the Internal Revenue Code ("IRC"). Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. The Company's fourth quarter 2017 provision for income taxes was reduced by $1,056 (comprised of a $1,548 reduction in income tax expense recorded in connection with the remeasurement of deferred tax assets and liabilities and $492 of additional income tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings) due to applying the provisions of the Tax Act. As of March 31, 2018, the Company has not remeasured the one-time transition tax. The accounting for the one-time transition tax is expected to be completed in the fourth quarter of 2018, coincident with the filing of the Company's 2017 U.S. federal income tax return.
In March 2018, the FASB issued ASU No. 2018-05 "Income Taxes (Topic 740), amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update)", which addresses the accounting and disclosures around the enactment of the Tax Act and SAB 118, which was issued in December 2017.
SAB 118 was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, the Company determined that $492 of additional income tax liability recorded at December 31, 2017 due to the provisions of the Tax Act is a provisional amount and constituted a reasonable estimate at March 31, 2018, based upon the best information currently available. The ultimate impact may differ from the provisional amount, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued and actions the Company may take as a result of the Tax Act. Any subsequent adjustment to the amount will be recorded to current income tax expense when the analysis is complete, which is expected in the fourth quarter of 2018, coincident with the filing of the Company's 2017 U.S. federal income tax return.
In addition to providing for a territorial tax system, beginning in 2018 the Tax Act also includes two new U.S. tax base erosion provisions: the global intangible low-taxed income ("GILTI") provisions and the base-erosion and anti-abuse tax ("BEAT") provisions.
The GILTI provisions require the Company to include, in its U.S. federal income tax return, foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary's tangible assets. The Company elected to account for GILTI tax in the period in which it is incurred, and, therefore, did not provided any deferred tax impacts of GILTI in its consolidated financial statements as of December 31, 2017. As of March 31, 2018, the Company has estimated an annualized GILTI inclusion for 2018 of $2,081, resulting in $127 of income tax expense for the three-month period ended March 31, 2018.
The BEAT provisions in the Tax Act eliminates the deduction of certain base-erosion payments made to related foreign corporations and imposes a minimum tax, if greater than regular tax. The Company does not expect it will be subject to this tax, and, therefore, has not included any tax impact of BEAT in its unaudited condensed consolidated financial statements for the three-month period ended March 31, 2018.
The Tax Act also provides for a new U.S. tax deduction, the foreign-derived intangible income ("FDII") provision. The FDII provision allows the Company to claim a deduction, in its U.S. federal income tax return, based upon a percentage of calculated taxable income from foreign-derived intangible income. As of March 31, 2018, the Company estimated the annual deduction for FDII to be $3,345 for 2018, resulting in a $203 reduction to income tax expense in the three-month period ended March 31, 2018.
The changes to existing U.S. tax laws as a result of the Tax Act, which we believe have the most significant impact on the Company's federal income taxes are as follows:
Reduction of the U.S. Corporate Income Tax Rate:
The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Company recognized a deferred tax benefit of $1,548 as of December 31, 2017 due to the remeasurement necessitated by the Tax Act's reduction of the U.S. corporate federal income tax rate from 35% to 21%. This benefit is attributable to the Company being in a net deferred tax liability position when considering only U.S. federal deferred items. The Company has significant deferred tax assets related to foreign jurisdictions and U.S. state income taxes.
Transition Tax on Foreign Earnings:
The Company recognized a provisional income tax liability of $492 as of December 31, 2017 related to the one-time transition tax on certain foreign earnings. The determination of the transition tax requires further analysis regarding the amount and composition of the Company's historical foreign earnings and foreign taxes, which is expected to be completed in the fourth quarter of 2018, coincident with the filing of the Company's 2017 U.S. federal income tax return.
Repeal of Domestic Production Activities Deduction:
The Domestic Production Activities Deduction ("DPAD") benefit has historically been material to the Company's federal income taxes; however, the Tax Act repealed the DPAD previously provided under IRC §199, and, as such, no DPAD benefit is reflected in the three-month period ended March 31, 2018. The DPAD benefit reduced income tax expense by $447 for the three-month period ended March 31, 2017.
Note 11. Revenue Recognition:
As discussed in Note 1, the Company adopted the provisions of ASU No. 2014-09, "Revenue from Contracts with Customers" and its related amendments effective January 1, 2018. The adoption of this standard did not have a material impact on the timing or amounts of revenues recognized by the Company, and, as such, no cumulative effect adjustment was recorded as of the adoption of the standard.
The following table disaggregates our revenue by major source for the three-month period ended March 31, 2018 (excluding intercompany sales):
|
|
Infrastructure
Group
|
|
|
Aggregate
and Mining
Group
|
|
|
Energy
Group
|
|
|
Total
|
|
Net Sales-Domestic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment sales
|
|
$
|
85,518
|
|
|
$
|
63,494
|
|
|
$
|
36,731
|
|
|
$
|
185,743
|
|
Parts and component sales
|
|
|
41,113
|
|
|
|
17,834
|
|
|
|
11,315
|
|
|
|
70,262
|
|
Equipment installation revenue
|
|
|
837
|
|
|
|
--
|
|
|
|
--
|
|
|
|
837
|
|
Service revenue
|
|
|
1,091
|
|
|
|
326
|
|
|
|
2,096
|
|
|
|
3,513
|
|
Rental revenue
|
|
|
--
|
|
|
|
72
|
|
|
|
159
|
|
|
|
231
|
|
Used equipment sales
|
|
|
1,624
|
|
|
|
1,410
|
|
|
|
167
|
|
|
|
3,201
|
|
Extended warranty revenue
|
|
|
472
|
|
|
|
(5
|
)
|
|
|
25
|
|
|
|
492
|
|
Freight revenue
|
|
|
4,038
|
|
|
|
1,808
|
|
|
|
1,332
|
|
|
|
7,178
|
|
Other
|
|
|
(207
|
)
|
|
|
(1,103
|
)
|
|
|
(71
|
)
|
|
|
(1,381
|
)
|
Total domestic revenue
|
|
|
134,486
|
|
|
|
83,836
|
|
|
|
51,754
|
|
|
|
270,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales-International:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment sales
|
|
|
5,914
|
|
|
|
22,327
|
|
|
|
4,762
|
|
|
|
33,003
|
|
Parts and component sales
|
|
|
5,062
|
|
|
|
10,289
|
|
|
|
2,473
|
|
|
|
17,824
|
|
Equipment installation revenue
|
|
|
34
|
|
|
|
11
|
|
|
|
--
|
|
|
|
45
|
|
Service revenue
|
|
|
778
|
|
|
|
300
|
|
|
|
--
|
|
|
|
1,078
|
|
Rental revenue
|
|
|
61
|
|
|
|
--
|
|
|
|
15
|
|
|
|
76
|
|
Used equipment sales
|
|
|
503
|
|
|
|
856
|
|
|
|
--
|
|
|
|
1,359
|
|
Extended warranty revenue
|
|
|
--
|
|
|
|
23
|
|
|
|
24
|
|
|
|
47
|
|
Freight revenue
|
|
|
256
|
|
|
|
1,331
|
|
|
|
264
|
|
|
|
1,851
|
|
Other
|
|
|
--
|
|
|
|
94
|
|
|
|
--
|
|
|
|
94
|
|
Total international revenue
|
|
|
12,608
|
|
|
|
35,231
|
|
|
|
7,538
|
|
|
|
55,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
147,094
|
|
|
$
|
119,067
|
|
|
$
|
59,292
|
|
|
$
|
325,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue is 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 to ensure the equipment performs according to the customer's need, regardless of whether the Company provides installation services in addition to 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. Other contract assets are not material.
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 or for annual rebates given to certain high volume customers. Contract liabilities, excluding customer deposits, are immaterial at March 31, 2018.
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. Additionally, in order to recognize the sale as a bill and hold, the product must be identified as belonging to the customer, be ready for physical transfer to the customer and the Company cannot have the ability to use the product or to direct it to another customer.
The Company has a pellet plant sale accounted for over time using the ratio of costs incurred to estimated total costs. Under the over time method, revenue, in an amount equal to cost incurred, is recognized until there is sufficient information to determine the estimated profit on the project with a reasonable level of certainty. The factors considered in this evaluation include the stage of design completion, the stage of equipment manufacturing completion, the state of construction completion, the status of outstanding subcontracts, certainty of quantities of labor and materials, certainty of the schedule and the relationship with the customer. Pellet plant sales recognized under the over time method in the first quarter of 2018 were not significant. Penalties are accounted for as a reduction in net sales. Net contract assets/liabilities were an asset of $1,401 as of March 31, 2018 and a liability of $2,757 as of December 31, 2017.
Equipment Installation and Service Revenue – The Company often contracts with the purchaser of its equipment to provide installation services. Installation is 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 service 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.
Rental Revenue – The Company occasionally rents its equipment to customers under short-term rental agreements. Rental revenue is recognized ratably over the rental period.
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.
Extended Warranty Revenue – The Company occasionally sells separately priced contracts which extend warranty coverages beyond the base warranty period included with its equipment when sold. Revenues for extended warranties sold are recognized over the life of the contract.
Freight Revenue - 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 early pay discounts and floor plan interest reimbursements.
Note 12. 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
- This segment consists of five business units, three of which design, engineer, manufacture and market a complete line of portable, stationary and relocatable hot-mix asphalt plants, wood pellet plants, asphalt pavers, material transfer vehicles, stabilizers, milling machines, paver screeds and related ancillary equipment. The other two business units in this segment primarily operate as Company-owned dealers in the foreign countries in which they are domiciled. These two business units 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. The principal purchasers of the products produced by this group are asphalt producers, highway and heavy equipment contractors, distributors, wood pellet processors and foreign and domestic governmental agencies.
Aggregate and Mining Group
- This segment consists of eight business units that design, engineer, manufacture and market a complete line of jaw crushers, cone crushers, horizontal shaft impactors, vertical shaft impactors, material handling, roll rock crushers and stationary rockbreaker systems, vibrating feeders and high frequency vibrating screens, conveyors, inclined, vertical and horizontal screens and sand classifying and washing equipment. 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
- This segment consists of six business units that design, engineer, manufacture and market a complete line of drilling rigs for the oil and gas, geothermal and water well industries, high pressure diesel pump trailers for fracking and cleaning oil and gas wells, commercial and industrial burners, combustion control systems, a variety of industrial heaters to fit a broad range of applications including heating equipment for refineries, roofing material plants, chemical processing, rubber plants, oil sands and energy related processing, heat transfer processing equipment, thermal fluid storage tanks, waste heat recovery equipment, central mix and ready mix concrete batch plants, concrete mixers and concrete paving equipment, whole-tree pulpwood and biomass chippers and horizontal grinders. 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, concrete plant operators and contractors in the construction and demolition recycling markets. This group includes the operations of RexCon, Inc. beginning in October 2017.
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., and Astec Insurance. The Company evaluates performance and allocates resources to its operating segments based on profit or loss from operations before U.S. federal income taxes and corporate overhead and thus these costs are included in the Corporate category.
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment sales and transfers are valued at prices comparable to those for unrelated parties.
Segment Information:
|
|
Three Months Ended March 31, 2018
|
|
|
|
Infrastructure
Group
|
|
|
Aggregate
and Mining
Group
|
|
|
Energy
Group
|
|
|
Corporate
|
|
|
Total
|
|
Net sales to external customers
|
|
$
|
147,094
|
|
|
$
|
119,067
|
|
|
$
|
59,292
|
|
|
$
|
--
|
|
|
$
|
325,453
|
|
Intersegment sales
|
|
|
8,271
|
|
|
|
3,906
|
|
|
|
5,139
|
|
|
|
--
|
|
|
|
17,316
|
|
Gross profit
|
|
|
33,280
|
|
|
|
29,289
|
|
|
|
15,286
|
|
|
|
150
|
|
|
|
78,005
|
|
Gross profit percent
|
|
|
22.6
|
%
|
|
|
24.6
|
%
|
|
|
25.8
|
%
|
|
|
--
|
|
|
|
24.0
|
%
|
Segment profit (loss)
|
|
$
|
14,852
|
|
|
$
|
13,110
|
|
|
$
|
4,611
|
|
|
$
|
(11,248
|
)
|
|
$
|
21,325
|
|
|
|
Three Months Ended March 31, 2017
|
|
|
|
Infrastructure
Group
|
|
|
Aggregate
and Mining
Group
|
|
|
Energy
Group
|
|
|
Corporate
|
|
|
Total
|
|
Net sales to external customers
|
|
$
|
165,243
|
|
|
$
|
100,613
|
|
|
$
|
52,545
|
|
|
$
|
--
|
|
|
$
|
318,401
|
|
Intersegment sales
|
|
|
4,025
|
|
|
|
3,436
|
|
|
|
5,591
|
|
|
|
--
|
|
|
|
13,052
|
|
Gross profit
|
|
|
37,801
|
|
|
|
25,023
|
|
|
|
12,887
|
|
|
|
60
|
|
|
|
75,771
|
|
Gross profit percent
|
|
|
22.9
|
%
|
|
|
24.9
|
%
|
|
|
24.5
|
%
|
|
|
--
|
|
|
|
23.8
|
%
|
Segment profit (loss)
|
|
$
|
18,180
|
|
|
$
|
8,428
|
|
|
$
|
2,729
|
|
|
$
|
(14,428
|
)
|
|
$
|
14,909
|
|
A reconciliation of total segment profits to the Company's consolidated totals is as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Total segment profits
|
|
$
|
21,325
|
|
|
$
|
14,909
|
|
Recapture (elimination) of intersegment profit
|
|
|
(1,109
|
)
|
|
|
171
|
|
Net income
|
|
|
20,216
|
|
|
|
15,080
|
|
Net loss attributable to non-controlling interest in subsidiaries
|
|
|
(51
|
)
|
|
|
(40
|
)
|
Net income attributable to controlling interest
|
|
$
|
20,267
|
|
|
$
|
15,120
|
|
Note 13. Contingent Matters
Certain customers have financed purchases of Company products through arrangements in which the Company is contingently liable for customer debt of $3,366 as of March 31, 2018. The maximum potential amount of future payments for which the Company would be liable was equal to $3,366 as of March 31, 2018. These arrangements also 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 $962 related to these guarantees as of March 31, 2018.
In addition, the Company is contingently liable under letters of credit issued by Wells Fargo totaling $9,400 as of March 31, 2018, including $3,200 of letters of credit that guarantee certain Astec Brazil bank debt. The outstanding letters of credit expire at various dates through October 2020. As of March 31, 2018, the Company's foreign subsidiaries are contingently liable for a total of $6,188 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 $15,588 as of March 31, 2018.
The Company has a sales contract with the purchaser of a large wood pellet plant, on which inception to date revenues of $142,487 have been recorded through March 31, 2018. Revenues for the three months ended March 31, 2018 were not significant. As the plant had not yet met the production output and operational specifications set forth in the original contract, the Company entered into a contract amendment in February 2018, whereby the Company agreed to compensate the customer for production shortfalls caused by the Company and other potential costs (depending upon the market price of wood pellets), from January 1, 2018 through June 15, 2018. The Company incurred penalties related to production shortfalls in the three-month period ended March 31, 2018 (penalties are recorded as reductions in revenues) and expects to incur additional penalties during the three-month period ended June 30, 2018. The customer's ultimate acceptance of the plant, and forfeiture of their right to any potential refund of the purchase price, is contingent upon the plant operating at the aforementioned production output and operational specifications during a 30-day test period. Under the terms of the contract, as currently amended, the original test period deadline of June 19, 2018 could potentially be extended by 120 to 180 days, during which time the customer may be entitled to additional damages.
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 14. 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 annual 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 annual 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 24 and 22 RSUs vested during the three-month periods ended March 31, 2018 and 2017, respectively. The Company withheld 7 and 8 shares due to statutory payroll tax withholding requirements upon the vesting of the RSUs in the first three months of 2018 and 2017, respectively, and used Company funds to remit the related required minimum withholding taxes to the various tax authorities. The vesting date fair value of the RSUs that vested during the first three months of 2018 and 2017 was $1,412 and $1,445, respectively. The grant date fair value of the RSUs granted during the first three months of 2018 and 2017 was $3,098 and $4,895, respectively. Compensation expense of $752 and $856 was recorded in the three-month periods ended March 31, 2018 and 2017, respectively, to reflect the fair value of RSUs granted (or anticipated to be granted for 2018 performance) to employees amortized over the portion of the vesting period occurring during the periods.
Note 15. Other Income, Net of Expenses
Other income, net of expenses for the three-month periods ended March 31, 2018 and 2017 is presented below:
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Interest income
|
|
$
|
214
|
|
|
$
|
175
|
|
Gain (loss) on investments
|
|
|
(103
|
)
|
|
|
27
|
|
License fee income
|
|
|
194
|
|
|
|
250
|
|
Other
|
|
|
156
|
|
|
|
60
|
|
Total
|
|
$
|
461
|
|
|
$
|
512
|
|
Note 16. 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 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 income in the current period. The Company does not engage in speculative transactions nor does it hold or issue financial instruments for trading purposes. The average U.S. dollar equivalent notional amount of outstanding foreign currency exchange contracts was $12,947 during the three-month period ended March 31, 2018. The Company included $190 of derivative assets in other current assets and $13 of derivative liabilities in other current liabilities as of March 31, 2018. The Company reported $112 of derivative liabilities in other current liabilities as of December 31, 2017. The Company recognized, as a component of cost of sales, a net gain of $187 and a net loss of $350 on the changes in fair value of derivative financial instruments in the three-month periods ended March 31, 2018 and 2017, respectively. There were no derivatives that were designated as hedges as of March 31, 2018.
Note 17. Business Combination
On October 1, 2017, the Company acquired substantially all of the assets and liabilities of RexCon LLC ("RexCon") for a total purchase price of $26,443. The purchase price was paid in cash with $3,000 deposited into escrow for a period of time not to exceed eighteen months pending final resolution of certain post-closing adjustments and any indemnification claims. The Company's preliminary allocation of the purchase price includes the recognition of $3,488 of goodwill and $7,778 of other intangible assets consisting of non-compete agreements (5-year useful life), technology (19-year useful life), trade names (15-year useful life) and customer relationships (18-year useful life). The revenues and results of operations of RexCon were not significant in relation to the Company's consolidated financial statements for the period ended March 31, 2018 and would not have been material on a proforma basis to any earlier period. RexCon's operating results are included in the Company's Energy Group beginning in the fourth quarter of 2017.
RexCon, located in Burlington, Wisconsin since 2009, was founded in 2003 through an asset acquisition with the original company being founded over 100 years ago. RexCon is a manufacturer of high-quality stationary and portable, central mix and ready mix concrete batch plants, concrete mixers and concrete paving equipment. RexCon specializes in providing portable, high-production concrete equipment to contractors and producers worldwide in a totally integrated turnkey production system, including customized site layout and design engineering, batch plants, mixers, water heaters and chillers, ice production and delivery systems, material handling conveyors, gensets and power distribution, cement silos and screws, central dust collection, aggregate heating and cooling systems, batch automation controls, and batch office trailers.