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Good day, ladies and gentlemen, and welcome to the Alamo Group Second Quarter 2018 Earnings Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation, the conference will be opened for question. [Operator Instructions] This conference is being recorded for today, Thursday, August 2, 2018.
I would like to now turn the conference over to Mr. Ed Rizzuti, Vice President and General Counsel and Securities of Alamo Group. Please go ahead.
Thank you. By now, you should have all received a copy of the press release. However, if anyone is missing a copy and would like to receive one, please contact us at (212) 827-3773, and we will send you a release and make sure you are on the company’s distribution list. There will be a replay of the call, which will be in one hour after the call and run for one week. The replay can be accessed by dialing 1 (888) 203-1112, with the passcode 5765996. Additionally, the call is being webcast on the company’s website at www.alamo-group.com, and a replay will be available for 60 days.
On the line with me today are Ron Robinson, President and Chief Executive Officer; Dan Malone, Executive Vice President and Chief Financial Officer; and Richard Wehrle, Vice President, Treasurer and Corporate Controller. Management will make some opening remarks, and then we’ll open up the line for your questions. During the call today, management may reference certain non-GAAP numbers in their remarks. Reconciliations of these non-GAAP results to applicable GAAP numbers are included in the attachments to our earnings release.
Before turning the call over to Ron, I’d like to make a few comments about forward-looking statements. We will be making forward-looking statements today that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause the company’s actual results in future periods to differ materially from forecasted results.
Among those factors which could cause actual results to differ materially are the following: market demand, competition, weather, seasonality, currency-related issues and other risk factors listed from time to time in the company’s SEC reports. The company does not undertake any obligation to update the information contained herein, which speaks only as of this date.
I would now like to introduce Ron. Ron, please go ahead.
Thank you, Ed, and we want to thank all of you for joining us here today. Dan Malone, our CFO, will begin our call with a review of our financial results for the second quarter of 2018 and I will then provide a few comments on the results following our formal remarks. We look forward to taking any questions you may have. So Dan, please go ahead.
Thank you, Ron. Our second quarter 2018 results again set company records for sales and earnings. These records were achieved both with and without the accretive results of the Old Dominion Brush, Santa Izabel and R.P.M. Tech business acquisitions. High order backlog and very strong industrial division results were the main drivers of our second quarter performance and we also benefited by second quarter shipments of orders which had been delayed by first quarter labor action at our at our Gradall facility in New Philadelphia, Ohio. Second quarter 2018 sales of $257.1 million; beat the prior year’s second quarter by 20.6% and by about 13.9% without the net effect of the acquisitions.
Year-to-date net sales were up 15.5% with organic sales growth of 8.8% without the acquisitions. Industrial division’s second quarter 2018 sales of $150 million represented 27.9% increase over the prior year’s second quarter sales. Excluding the effect the Old Dominion Brush and R.P.M. Tech acquisitions, this division’s second quarter sales increased 19.1%. Year-to-date net sales in this division are up 16.1% over prior year with organic sales growth of 7.9% without the acquisitions.
Agricultural Division second quarter 2018 sales were $59.1 million up 8.9% over the prior year second quarter excluding the effect of the Santa Izabel acquisition, this division’s second quarter sales grew by about 1.5%. Year-to-date this division’s sales are up 11.1% and grew 2.6% without the acquisition. European Division second quarter 2018 sales were $48 million or 15.1% higher than the second quarter of 2017. Even without a favorable currency translation tailwind, this division’s local currency sales were up 7.4% compared to the prior year second quarter.
Year-to-date, this division sales were up 19.9% and also grew 11.2% without the benefit of favorable currency translation. Second quarter 2018 gross margin of $66.5 million grew by 21.5% over the prior year second quarter. Our second quarter 2018 gross margin was 25.8% of net sales, which compares favorably to 25.6% of net sales for the prior year quarter. Year-to-date gross margin was 25.6% of net sales up from 25.4% in the prior year period. These favorable comparisons were helped by pricing actions, purchasing initiatives and productivity improvements partially offset by an unfavorable mix of equipment aftermarket parts sales as well as higher material cost.
Second quarter 2018 operating income of $26.8 million was 31.9% higher than the prior year second quarter primarily due to organic sales growth. Without the contributions of the acquired companies, operating income was up 26.8% over the prior year quarter. Year-to-date operating income is up 18.7% over the prior year and grew 14.1% without acquisitions.
The second quarter 2018 operating income was 10.4% of net sales, which is well above 9.5% of net sales for the prior year quarter. The second quarter improvement is due to the gross profit improvement already mentioned as well as significant leveraging of fixed SG&A expenses. Year-to-date operating income was 9.7% of net sales compared to 9.5% in the same prior year period.
Second quarter 2018 net income and earnings per share were also helped by lower U.S. statutory tax rates. Our second quarter 2018 effective income tax rate dropped to 25.8% from 31.9% in the prior year second quarter, a savings of $1.5 million or $0.13 per diluted share. Year-to-date our effective tax rate dropped to 26.3% from 33.3% in the prior year period, a savings of $3.1 million or $0.26 per diluted share.
Net income for the quarter – for the second quarter 2018 was $18.8 million, or $1.60 per diluted share, both of which are 52.4% increases over the prior year second quarter. Year-to-date net income and diluted earnings per share up over 35% over the prior – compared to the prior year period. First half 2018 EBITDA of $59.1 million was up 16.8% over the prior year first half, trailing 12-month EBITDA of $118.5 million continues to trend positively and is now up 7.7% over the full year 2017 EBITDA.
For the first half of 2018, the net cash used in operating activities totaled $27.7 million, which compares to $12.4 million net cash provided in the prior year first half. High sales growth, order backlog and supplier lead times have increased our operating working capital requirements also high utilization rates have caused us to increase the investment in our vacuum truck rental fleet.
We ended the second quarter with $43.6 million cash on hand, down from $75.9 million as of the end of the first quarter, and $119 million in total debt down from $147.3 million at the prior quarter end. During the second quarter, we started repatriating excess cash from our overseas operations. We will continue to bring excess cash back, but as we mentioned in the last quarterly call, we’re being careful not incur local taxes or other indirect cost of moving these funds.
Our order backlog ended the second quarter at $221 million, up about 40% from the prior year’s second quarter. Second quarter 2018 new order bookings grew about 7% over the prior year quarter. Without the benefit of acquisitions, we saw organic new order growth of about 4%. This reflects continued strong new order bookings in our industrial division partially offset by a slowing of order rates in the agricultural and European divisions.
In summary, our second quarter 2018 results were highlighted by a record second quarter sales and earnings and effective tax rate reductions that boosted EPS by $0.13 over the prior year quarter, all divisions returning operating income in between 9% and 11% of sales, year-over-year improvements in gross and operating margins. Continued EBITDA growth prior record levels and high ending order backlogs.
I’d now like to turn the call back over to Ron.
Thank you, Dan. As you can see, we’re pleased with our strong second quarter results and it was particularly pleasing that all three of our divisions contributed to this nice level of growth. Certainly the results for the quarter were helped by U.S. corporate tax reform and also from the benefits of the acquisitions we completed in 2017. But even without these benefits, the company had a record quarter with sales up nearly 9% on an organic basis and up over 20% overall.
Net income was up over 36% in total and even adjusted for the help from the tax reform was up about 30%. Obviously, the sales increase was the main reason for our earnings growth, but it was also nice to see our margins go up as well during the quarter. Particularly given that the cost increases we are experiencing this year are above the average of the last several years. This is likely to continue throughout 2018 as not only cost increases are going up, but as the tariffs start to impact our imported components which should affect our cost throughout the rest of the year as well.
As I indicated earlier, the improvements were evident across all of our divisions, but certainly our industrial division was the strongest contributor with excavators, vacuum trucks and snow removal equipment among other products all showing strong results. You may recall at the end of the last quarter our Gradall unit was on strike, which had negatively affected our first quarter results. This was settled about a week after the end of the quarter. And Gradall had an excellent second quarter, which more than made up for the delayed shipments from Q1.
It was also nice to see our vacuum truck products have a strong quarter led by our Super Products unit especially given the weakness we had seen in that area in the past several years. The Industrial Division also benefited from the acquisitions of both Old Dominion and R.P.M. Tech, which became part of the Alamo’s Industrial Division in 2017 added nearly 8% to the division sales.
Alamo’s Agricultural Division had a good second quarter as well. The organic growth in the quarter was less than 2% while overall growth was nearly up around 9% aided by the acquisition last year of San Isabel in Brazil. We’re pleased with our results in our ag, but a little concern that overall farm incomes have yet to rebound as much as we had anticipated. I know some of the big tractor manufacturers have shown better growth, but in many cases this was compared to lower comparable sales of the last few years.
Our organic growth sales are not up as much, but they were never down as much as a lot of the big ticket items were in the last several years particularly items like combines and high horsepower tractors. So I think we’re pleased with the performance in our ag and the margins continue to grow, but we would like to see a little more growth in the overall ag sector. Alamo’s European Division also had a very nice second quarter with sales up over 15% and there were no acquisitions, which contributed to that.
They did benefit a little bit by currencies where – as exchange rates were more favorable in the second quarter of 2018 compared to 2017. However, in the third quarter this benefit seems to be weakening as the U.S. dollar has started to strengthen again. But either way in local currency, our European results have improved nicely in 2018 and with the help of a strong backlog should continue to perform well for the rest of the year. In fact, this comment really applies to the company as a whole as our strong backlog should continue to benefit Alamo Group throughout the whole 2018.
Certainly, we are concerned about cost increases that we’re seeing, which will be further impacted by the new tariffs, which really started to show up more in the third quarter on internationally sourced components as well as we’re seeing longer lead times, which is affecting some of our capital investments. But – and in general we are concerned that the geopolitical climate in the world today is creating some degree of uncertainty for not only us but our suppliers and even our customers which is certainly a difficult forecast.
Still we feel that our markets are in good shape. We have a good backlog. We have the additions from recent acquisitions. We have contributions from U.S. tax reform. We have our ongoing operational improvements. And as long as we react quickly to any external changes, we feel the outlook for Alamo Group looks very good for the remainder of 2018.
So again we thank you for your interest and support of Alamo Group. And now, I would like to open it up for any questions you may have.
Thank you. [Operator Instructions] Our first question comes from Mike Shlisky with Seaport Global.
Good morning guys.
Good morning, Mike.
So I wanted to ask a question about Europe. I mean hearing about some dry conditions in large parts of northern Europe, even Eastern Europe and that appears to be affecting some livestock producers as well as some crop growers. [Indiscernible] in the sentiment from some of your dealers or end-users in that part of the world or even off the farm in the more industrial mowing area, where grass just simply is not growing in a very large part of Europe right now.
So far we’ve not seen any particular effect. I mean our backlogs are strong in Europe. They’re holding well. Yeah like I said, I am concerned a little bit about. There is even a few drop conditions starting in some central parts of the U.S., there’s some in Europe, but I they haven’t reached sort of the critical levels. And I think central Europe has done fairly well for us, which is more where our stronger markets are and more in central than in northern or southeastern Europe were – a known like down in the Greece area. It’s been terrible too. So, actually, we’re watching it, but we have not seen any impact on us or our backlogs and actually agricultural – I think the farm sentiment there is actually pretty decent.
Okay, great. I also wanted to ask about your price versus cost. Should you maybe kind of sum it up for us in the quarter? I mean, we would able to offset all of the higher cost raw materials with either pricing or other productivity enhancements? And given that it seems there’s still high pricing announcements and new tariffs. Do you have additional pricing action steps in the back half of the year?
Yes. I mean certainly in the second quarter like I said, pricing in general has been going up at a little above the rates over the last several years and tariffs didn’t effect us as much in the second quarter there. They’re coming in more in the third quarter. But I think we’ve reacted fairly quickly and on the second quarter we started some surcharges. We had some price increases, which were probably a little bit above average – our price increases were above the average over the last few years as well.
So I think with the combination of price increases and surcharges, we’ve been able to pass along most of our cost increases, so that we’ve been able to – the margins didn’t go up a lot, but they went up. And I think in this environment that was very positive development. And we believe we’re trying to stay on top of it. And we’re passing – people are passing along tariffs to us as already and we’re passing along to our customers as well. So we’re building it into our cost. We are reacting quickly. We’ve got price increases and surcharges that – I’m not saying we’re not going to be affected, but, I think, we’re staying on top of that and been able to – and – but the market has pretty well accepted the actions we have taken.
Got it. And I want to ask about kind of a little more detail as to what’s in the backlog. I guess, first, I’m wondering if you tell me that the backlog stretch further out this quarter than maybe it did last quarter? And then secondly, just a little bit of color on some of the better performing products in the backlog. I was hoping to ask about the snow in particular, but kind of anything that you think kind of stands out as one of the better products out there?
Yes, as is typical, I mean, our backlog, like I said – I think it carries us well in – most of the third quarter, some of it does go into fourth quarter, a little of it goes even into next year. But I mean we don’t get – it’s almost not healthy to get too far ahead. We try to – as we’ve also said, we’ve increased some capital spending. We try to increase some production because we really don’t want our backlogs to get too – too far ahead because I think that could have a negative effect on the market from our point of view if our lead times get too great. So I think, the backlog is strong, it’s healthy, and I don’t wanted to grow too – get too much stronger.
So, most of it will ship in the third quarter. Like I said, some of it will certainly carry over beyond that. As I said earlier, I think our Industrial Division really did strong as far as where – who had the stronger sales and bookings growth was the Industrial Division. Certainly, excavator Gradall unit did well. Vacuum trucks have done well. This is led by our Super Products Group both in the sales and in the rentals, where we’re increasing our rental fleet there. You are right. Snow removal bookings have been good and they didn’t start out good in the second quarter, but they ended good in the second quarter as people were trying to get ready for this coming winter season.
So that was good. But everybody was fairly strong across there. Even mowers were good, street sweepers were good. But, like I said, it’s pretty broad. Like I said, if there was any softness, it’s a little bit in the ag. Like I said, it was still up, but – and we think, ag is in good shape for us. But we weren’t up as much as the big tractor guys because we weren’t down as much as the big tractor guys for the – in the last several years. So – but it’s still very solid and we feel good. But, like I said, the Industrial Division is where we saw the heaviest growth.
Okay, thanks very much. I will hop back in the queue. I appreciate it.
Thank you.
Thanks, Mike.
Our next question comes from Joe Mondello with Sidoti.
Hi, good morning guys.
Good morning, Joe.
I wanted to ask in terms of the strike that hit at the end of the first quarter, if you could any way quantify sort of the revenue that was pushed from 1Q to 2Q at that segment?
Well, as we said, in the first quarter results, we said we thought – we probably had about $6 million – $5 million or $6 million give or take delayed shipments. And we have said even then we thought we would make most of that up in the second, may be going in the third. We made it all up in the second. I mean – so – and Gradall was back. As I said just then with Mike that Gradall has had good bookings and good backlog growth on their own. But, yes, fortunately, they were able to catch up on – over the few – some of the delayed shipments. And so, they’re back on track and back on schedule and still showing nice growth.
So if you exclude sort of $6 million in second quarter that would could to – equate to 14% year-over-year revenue growth organically anyways?
Yes, which is still pretty healthy.
Yes, I’m just wondering sort of could you walk us through some of the drivers there, and I wouldn’t suspect that 14% is sustainable over a longer period, but how are you thinking about growth over the next couple quarters, considering that growth that you saw in the second quarter?
Well, like I said, first of all, there are a lot of sort of geopolitical uncertainties, so I’m not going to – who knows what that’s going to do to say not only our input costs, but even our customers and suppliers and this kind of stuff. Yes, I’m concerned about the overall economy. But actually, I think, our markets are in pretty good shape. I think our – in our Industrial Division, which, as you know, is mainly governmental oriented spending, that governmental budget seem to be in pretty good shape.
And they’re spending. They always seem to have a little bit more need than they have money. So I think that keeps the demand pretty steady. And as they have money, they’re being helped. I think we’re being helped by, I think, even Gradall by some new product introductions that they’ve made in the last couple of years. I think – and we believe, not only we have been helped the last couple of years, but we got some interesting new products coming up the next couple of years as well, that, I think, are going to help drive further demand.
I think that – yes, just in general, as I said, it was nice to see over vacuum trucks, that market pick up. I mean, we’re heavily governmental oriented there. But as you knew couple of years ago, we had some downturn in vacuum trucks as particularly on the nongovernmental side, which had been growing nicely and then sort of took a dive, went down, when oil was down and mining was down and construction had softened a little. Whereas, like I said, that has not only stabilized, but rebounded nicely. Plus, we’ve got some new marketing initiatives there and new – opened up some new branches there.
And so we’ve – I mean, so I think, some of the things we’re doing will solidify some of this growth that we have seen. Yes, the market itself certainly has been growing at 14%, but with some new products, some new marketing and some new other new initiatives. I think we’re in pretty good shape that we can have a little bit above average growth.
Just to get a sense of what volume is trending at, because I know pricing is coming up so much. Of the 19% organic growth at Industrial, how much of that is pricing?
Yes, it varies and it’s hard to say – we don’t – the way we break things up, but probably in the 3% to 4% range.
Okay, so you’re still sort of looking at 10% in the second quarter, then. All right and I wanted to ask about the third quarter of last year. You had a huge outlier, like, if you look at trends over the last several years, your margin at Industrial segment in the third quarter of last year was huge outliers. It’s above 11%. I’m wondering if you could recall what drove that and are we looking up against a pretty tough comp here in the third quarter as a result of that?
Yes, I think that – yes, I think it was a good quarter. Third quarter is usually pretty good for us, but it wasn’t as much – went right as much – nothing really went wrong. I think that it was – yes, parts were probably a little bit stronger. And we said in the first quarter, parts were a little bit off as far as a percent of sales. And to be honest, I think, even year-to-date, parts are still a little bit below our average. So the mix for us – we did good this quarter even with a slightly unfavorable mix. And that tends to happen when whole goods grow, I mean, parts are little more stable. So when we see an uptick in new equipment, parts usually, as a percent, go down a little bit, just because, like I said, they’re a little bit more stable in the ups and downs.
But, I think, in the third quarter of last year, if there was one outlier, it was probably parts. I know we had a good quarter in parts at that point. Other than that, like I just said, it was just – it was a good quarter where not a lot went wrong. And as Dan said earlier, I mean, in this quarter, even some of our divisions were at 11%. So like I said, we ought to be at 10% overall, but which – if we’re going to be 10% overall that means somebody is going to be above 10%. And so I think Industrial Division has historically been one of our leading margin producers as well.
Okay. And then at the ag segment, again, it looks like for the second half of the – second half of last year, you saw a very strong revenue growth. Just wondering, given the dynamic that’s going on in the market right now and given what – the growth that you saw in the back half of last year, sort of alluding to maybe a tougher comp. Just wondering what sort of your outlook is at ag considering all that in the back half?
Yes, well, as I said, right, we actually did well in ag this quarter, even though organic growth was less than 2% for the quarter. And so – and like I said, I think, it’s been a little ag in general. There has been a little softer. Farm incomes have not rebounded as strongly as we would have liked this year yet. I think we’re still waiting to follow that. I think it’s good that the government put – gave $12 billion sort of help to the farmers in the last few weeks to help offset the negative effects on Alamo – some of these tariffs that are coming. So, I think, that will help. As you said – like as I said, the big tractors and combines did had a nice growth in the quarter, but, I think, that’s of very low comparables and I think there’s been a little pent-up demand there.
Because acreage under cultivation has held up nicely even though farm incomes have not rebounded to the levels they were of two or three years ago. But we’re finding the ag to be healthy, just not rebounding and growing as much as we would like. And so – and we have got decent backlogs there now and we feel good about the outlook for the rest of the year, but probably not – probably won’t see a lot of strong growth there on what we’re seeing now. We’ll see if this – the ag, the money that they’re going to give to ag and we’re kind of watching commodity prices. But, other than that, I mean, I think ag is healthy. It’s not just growing as much as we’d like it.
Okay. And then I just wanted to clarify because I did missed a little bit of your commentary based on sort of material costs and the new Chinese tariffs that just were implemented in July. It sounds likes or it sounded like your press release write a little bit more that you have a little more caution in the back half of the year. Does that just mean there is more of a cost headwind and you just have to sort of react to that, but you’re still able to pass price through or does that mean that there are some more headwinds coming in that and maybe pushing price through won’t be as easy as it was in the first half of the year?
Well, no, I think – certainly, there were cost increases in the first half of the year above the rates over the last several years. The tariffs really didn’t start effecting until the third quarter, and they’re growing as more and more items have been included in the things that are subject to the tariffs. So I think, yes, we feel cost increases for the whole year are going to be above average. But, I think, we feel reasonably descent that we’re going to be able to pass those along or – like even on the Chinese, I mean, the dollar has grown – has strengthened versus the Chinese currency. Like I said, that may hurt us a little bit in Europe, but that should help us offset some of these tariffs. Like I said, as the strengthening dollar will make goods from there even cheaper, which will help to offset some of the tariff costs.
And I think that that in this environment, just the market in general has been – seems to be willing to accept the price increases, where they were passing it along in the form of price increases or surcharges or something like that, the market. I mean, I know even John Deere, they were commenting in the last quarter that they anticipate doing above average pricing, maintaining margins through pricing. And I think – so we’re not doing it on our own. I think most people are taking this kind of action in the market and just have to read the newspapers that know what’s going on and the market seems to know what – is being accepting of the price increase, nobody likes it, but we’re all in the same boat. So…
So for the most part, you feel like generally you can continue to push price through and that you shouldn’t see too much of a margin squeeze headwind?
Yes. Like I said, that’s why I was very pleased that even in the second quarter, our margins actually went up. We had an unfavorable mix, parts versus old goods and we had above-average cost increases and margin still went up. So I think as long as we stay on top of it, we respond quickly and everything. That’s usually our problem is the lag time between – when we get the right cost increase and when we’re able to pass it along. So as long as there’s not – I think it’s usually the lag that if we’re going to get hurt, it’s in the lag between the one of the two events occur. And that’s where, I think, we have shown over the years that we were pretty well on top of that, and so there isn’t as much of a lag.
So, like I say, it’s like currencies. It’s not that I worry about changes in currencies. I worry about rapid changes in currencies when something happens quickly and a rapid changes in cost and those were a little harder to pass on, but I think we’ve been on top of it. As we showed in the second quarter, I mean, we can still improve margins even in – when scenario – when costs are going up above average. And we feel comfortable that we can continue to do it. I mean, like I say, I’m comfortable in general with the whole geopolitical climate. But I think I’m comfortable that as long as we react quickly to whatever happens will be okay.
Great. Last question for me, just two-part question sort of. Your free cash flow was – you used a lot of cash on your free cash flow in the first half of this year compared to last year. I see a lot of it’s going to working capital, just wondering your thoughts on that. And then secondly, just was wondering sort of how the M&A pipeline looks – you still have a lot of room on your balance sheet, so just wondering about that.
Yes, free cash flow – as you said, we did put a little bit more into working capital, number one, because of the growth – the strong sales growth. And number two, not only our commodity prices going up, but lead times are going up, but as our suppliers backlogs have grown and the lead times for input components has lengthened and Joe, I mean, we’re buying a little bit ahead and we’re – so yes, we’re putting a little bit more into working capital.
We still feel good about our turns, but just we want to be able to deliver and we’re – so we are putting a little bit more into assets for that. But, I mean, like I say, it’s really the growth, it’s more related to the growth in sales than it is even the growth – than cost increases and lead time deliveries lengthening. It’s more related to the growth in sales. And so, we actually feel reasonably good about where we are on our – that we’re managing our asset properly and effectively.
M&A, we’re – yes, we’re looking a lot – yes, we spent a lot of time last several months looking at opportunity. And our spending a lot of time, I’m a little frustrated that valuations are fairly heady and we certainly have walked away from some deals just because we’re not willing to stretch to some of these valuations, which is why, we’re I think, we’re spending more on R&D in developing some new products, rather than trying to buy them and spending a little bit more on own operations and improving our plant efficiencies and our plant technological capabilities.
M&A, I think, I mean, we’re still very active. The good news is we’re actually seeing a fair bit. I think it’s still definitely a part of our strategy. And I think we’re finding some things that are actionable. Usually, they’re a little on the smaller side. We’re looking at some bigger deals, but those are the ones, where it seems like valuations have been most affected. But, yes, like I say, we’re finding stuff. We’re looking at stuff. We’re looking at a lot. But valuations in the short-term are going to somewhat limited – some – because we’re just not willing to give up on our economic criteria for acquisitions.
Not surprised to hear that. I just had one last one, sorry, I just wanted to squeeze in. Actually I’m drawing a board – actually, I’m sorry – your facility potential plans, I’m not sure where you are on with that, but I know it’s been sort of in the back burner at least in the back of your mind. The restructuring efforts that you potentially are doing or will do at some point in time up in Milwaukee with a couple facilities that you have there, just wondering if there’s any plan or what your thoughts are on that?
Yes, there are plans. It’s still under evaluation and I hope we’re little – that has developed slower than I would like, just we’ve been – just finding the right facilities or the capital involved. So – but now that’s still something we want to get a better footprint there. As we said, when we bought R.P.M., we’re probably looking at something consolidating that somewhat with some of Tenco operations. So, yes, we have a couple of things. We’re starting to move on some of those.
As we have said, CapEx spending will be above the average over the last several years, this year and next year. And it’s been a little slower to develop, but it is happening and we’re investing a little bit more in – not only equipment, but technologically more advanced equipment. We are in – just recently are expanding a couple of facilities that you really haven’t seen the numbers hit the balance sheet yet. But they will start to hit in the second half of the year.
So we are doing exactly what we said that CapEx spending is going to up this year and next year, not – like have a very little effect on our cash flows, but it will be up. And I think, it will have a good effect on our operations and all of those are – some were in the works, some are coming sooner, some are coming later. But yes, we are spending more and that is proceeding.
Okay, great. Well, thanks a lot. I appreciate it.
Thank you, Joe
Thanks, Joe
Thank you. [Operator Instructions] We now have a follow-up question from Mike Shlisky with Seaport Global.
Hey, guys, thanks. Got two more questions for you. First, I want to ask about the truck chassis availability. You had mentioned in your release, there was [indiscernible] mentioned ever being a big problem, but I’m curious the kind of timeframe that you expect for chassis not only just be totally fine and not really worth mentioning anymore, is it going to be this half of this year or perhaps the first part of 2019?
Yes, I mean, I don’t know what the truck chassis – I mean, their backlogs have grown. I think we’re in better shape actually. I mentioned it because it’s concerned and I don’t see it getting better. I mean, I’ve read some companies, I know like say – I think Douglas Dynamics and I will talk they missed some shipments. We haven’t – fortunately, we haven’t missed any shipments or had significant delay, but we’ve ordered a little bit ahead. And I think we’re in pretty good shape. But the backlogs that the suppliers, I mean, the lead times on truck chassis have probably doubled in the last year.
And there’s still – so is that going to slow down. Yes, I think, there is a little bit of – I don’t know if there’s a bubble coming, but, I mean, seeing people are ordering, a lot of people have ordered more. But right now lead times are literally double what they were last year for chassis and I don’t see that slowing down. I mean, like I said, at some point it is going to slow down and get back to normal. But we’ve ordered a few more. We’re stocking a few more. And so far we haven’t really had any major problems meeting our deliveries and meeting our forecast. So once it’s going to settle down, I don’t know. I mean, I would assume within the next year, but like I say it’s a concern and we are responding.
We have pretty strong relationships with the chassis manufacturers, particularly the ones we do very high volumes with. I think we have a little more concern on the customer supply chassis because they don’t have the same sort of volume leverage that we have with the manufacturers. And sometimes some of those have been delayed and we’ve had to shuffle priorities to deal with that.
Got it. And then kind of finally, I wanted to ask, maybe more of a big picture question about tax reform and that is the limited taxability of state and local taxes on people’s tax return is starting this year. I’m curious, have any states, maybe higher tax states –expressed concerns about their DOT budgets going forward if there’s some complications around collecting the same number of taxes or being – or if it’s not that – are not being able to actually raise taxes in the future if they’re supposed for paying higher taxes to the federal government. You’re kind of like overall thoughts on how the soft deductions might impact your business maybe in 2019?
Yes, first of all, in this geopolitical climate, you hear lots of things. I mean, as far as I don’t – there’s nothing there that has affected us. If it does, it’s probably on a small basis. I mean, yes, our state taxes are certainly an issue, but, I mean, in the scheme of things, we’re seeing that are small things. So I mean, I’ve heard a talk in California, they wanted to raise taxes to offset the decline in federal taxes. But, I mean, we don’t have any manufacturing in California. So yes, like I said, yes, you hear things and especially in this geopolitical climate, but I really – that’s what I said. Don’t ask me to forecast what’s going to happen on taxes or geopolitical events. Like I said, I just try to respond quickly, not guess – guess at, like I say, my crystal ball doesn’t work on that.
Helpful and then…
But – DOT budgets are really pretty small part of the state and local governmental budgets and we’re in the maintenance. Our type of equipment is used for services that aren’t as optional as perhaps other things in the budget.
Okay, fair enough. I’ll leave it there. Thank you, guys.
Thank you, Mike.
Thank you. There are no other additional questions at this time.
Okay. Well, thank you then. And again, thank you all for joining us today. We look forward to speaking with you on our third quarter conference call. And with that, we’ll close the meeting. Have a good day. Thank you.