# ASTEC INDUSTRIES INC (ASTE) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from ASTEC INDUSTRIES INC's 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/792987/000079298723000015/aste-20221231.htm Accession: 0000792987-23-000015 Filing date: 2023-03-01 Report date: 2022-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/ASTE/ All MD&A years: /company/ASTE/mda/ Previous year: /company/ASTE/mda/fy2021/ (FY 2021) Next year: /company/ASTE/mda/fy2023/ (FY 2023) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes included in Item 8 of this Annual Report on Form 10-K for the year ended December 31, 2022. The results of operations and other information included herein are not necessarily indicative of the financial condition, results of operations and cash flows that may be expected in future periods. This Annual Report on Form 10-K, including matters discussed in this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements relating to our plans, estimates and beliefs that involve important risks and uncertainties. See "Safe Harbor Statements Under the Private Securities Litigation Reform Act" and Part I, Item 1A. Risk Factors for a discussion of uncertainties and assumptions that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. This section of this Annual Report on Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. A similar discussion of 2020 items and year-to-year comparisons between 2021 and 2020 can be found 22 Table of Contents in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2021. The financial condition and results of operations discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations are those of Astec Industries, Inc. and its consolidated subsidiaries, collectively, the "Company," "Astec," "we," "our" or "us." Business Overview We design, engineer, manufacture and market equipment and components used primarily in road building and related construction activities, as well as certain other products. Our products are used in each phase of road building, from quarrying and crushing the aggregate to application of the road surface for both asphalt and concrete. We also manufacture certain equipment and components unrelated to road construction, including equipment for the mining, quarrying, construction and demolition industries and port and rail yard operators; industrial heat transfer equipment; commercial whole-tree pulpwood chippers; horizontal grinders; blower trucks; commercial and industrial burners; and combustion control systems. Our products are marketed both domestically and internationally primarily to asphalt and concrete producers; highway and heavy equipment contractors; utility contractors; sand and gravel producers; construction, demolition, recycle and crushing contractors; forestry and environmental recycling contractors; mine and quarry operators; port and inland terminal authorities; power stations and domestic and foreign government agencies. In addition to equipment sales, we manufacture and sell replacement parts for equipment in each of our product lines and replacement parts for some competitors' equipment. The distribution and sale of replacement parts is an integral part of our business. Executive Summary Highlights of our financial results as of and for the year ended December 31, 2022 as compared to the prior year include the following: •Net sales were $1,274.5 million, an increase of 16.3% •Gross profit was $264.1 million, an increase of 5.9% •Income from operations decreased $12.4 million to $7.5 million •Net income attributable to Astec decreased to a loss of $0.1 million •Diluted earnings per share were zero, a decrease of 100.0% •Backlog of $912.7 million, an increase of 19.7% Significant Items Impacting Financial Results in 2022 Simplify, Focus and Grow Strategic Transformation ("SFG") Our ongoing strategic transformation initiative focused on implementing new business strategies and operating structure is concentrated on aligning our operations under the OneASTEC business model with the strategic pillars of Simplify, Focus and Grow. SFG is a multi-year program with the primary goals of optimizing our manufacturing footprint and centralizing our business into common platforms and operating models to reduce complexity and cost, improve productivity and embed continuous improvement in our processes. These efforts are considered critical to enabling us to operate competitively and supporting future growth, which are expected to broadly benefit our customers, partners, employees and shareholders. Currently, we have two elements of the SFG program in operation, which include the implementation of a standardized enterprise resource planning ("ERP") system and a gross margin-generating lean manufacturing initiative. Our multi-year phased implementation of a standardized ERP system across our global organization will replace much of our existing disparate core financial systems. The upgraded ERP will initially convert our internal operations, manufacturing, finance, human capital resources management and customer relationship systems to cloud-based platforms. This new ERP system will provide for standardized processes and integrated technology solutions that enable us to better leverage automation and process efficiency, transforming how we connect people, products and processes to operate as OneASTEC. An implementation of this scale is a major financial undertaking and has required, and will continue to require, substantial time and attention of management and key employees. We have materially completed the ERP global design in 2022, launched the human capital resources module throughout our domestic sites in January 2023 and expect to convert the operations of one manufacturing site along with Corporate in 2023 to set the foundation before accelerating the implementation at additional manufacturing sites. We anticipate incurring total costs associated with the ERP implementation in the range of $125 to $150 million, with an estimated $25 to $30 million incurred per year beginning in 2022. 23 Table of Contents In addition, in the first quarter of 2022, a lean manufacturing initiative at one of our largest sites was initiated and is expected to drive improvement in gross margin at that site. We substantially completed the design efforts for this project during 2022. We also began executing investments to acquire and install manufacturing equipment intended to drive increased efficiencies in our production processes. We plan to continue these capital investments during 2023, which are anticipated to be completed by the end of the year. Gross margin improvements are expected to be realized with the project completion in early to mid-2024. This improvement is intended to serve as the optimal blueprint for our other manufacturing facilities. Costs incurred during the year ended December 31, 2022 were $25.5 million, which represent costs directly associated with the SFG initiatives and which cannot be capitalized in accordance with U.S. GAAP. These costs are included in "Selling, general and administrative expenses" in the Consolidated Statements of Operations. Additionally, at December 31, 2022, we have capitalized $17.8 million in deferred implementation costs associated with the ERP implementation that will be amortized ratably over the remaining contract term once the ERP is ready for use, of which $1.2 million and $16.6 million were included in "Prepaid expenses and other assets" and "Other long-term assets" in the Consolidated Balance Sheets, respectively. MINDS Acquisition We entered into a Share Purchase Agreement, dated as of March 22, 2022, with MINDS Automation Group, Inc. ("MINDS"), a leader in plant automation control systems and cloud-based data management in the asphalt industry in Canada. The acquisition was completed on April 1, 2022 at a purchase price of $19.3 million, which was paid in cash. This acquisition provides us with a broader line of controls and automation products designed to deliver enhanced productivity through improved equipment performance for our customers. Share Repurchases We completed a series of repurchases under our approved share repurchase program during 2022, acquiring 251,087 shares at an aggregate repurchase price of approximately $10.1 million. As of December 31, 2022, $115.7 million remains available for repurchase under the approved share repurchase program. Closure of Tacoma Facility In January 2021, we announced plans to close the Tacoma facility in order to simplify and consolidate operations. The Tacoma facility ceased manufacturing operations at the end of 2021. The transfer of the manufacturing and marketing of Tacoma product lines to other facilities within the Infrastructure Solutions segment was completed during the first quarter of 2022. The Tacoma facility's land, building and certain equipment assets of $15.4 million, which are currently being actively marketed for sale, are included in "Assets held for sale" in the Consolidated Balance Sheets at December 31, 2022. Leadership Change As previously announced on January 6, 2023, Mr. Barry A. Ruffalo's employment as President and Chief Executive Officer was terminated and he was succeeded by Mr. Jaco van der Merwe. In accordance with the terms of Mr. Ruffalo's separation agreement, we recorded $4.4 million of restructuring related costs in the fourth quarter of 2022. Additional costs are anticipated to be incurred in the first quarter of 2023 for this separation. Management continually reviews our organizational structure and operations to ensure they are optimized and aligned with achieving our near-term and long-term operational and profitability targets. In connection with this review, in February 2023, we implemented a limited restructuring plan to right-size and reduce the fixed cost structure of our overhead departments. We anticipate charges of $3.0 million to $4.0 million for employee termination costs, excluding equity award modifications, to be incurred primarily in the first quarter of 2023. No further actions are currently planned. However, additional actions may be taken as a result of management’s ongoing business reviews. Industry and Business Condition Our financial performance is affected by a number of factors, including the cyclical nature and varying conditions of the markets we serve. Demand in these markets fluctuates in response to overall economic conditions and is particularly sensitive to the amount of public sector spending on infrastructure development, privately funded infrastructure development and changes in the prices of liquid asphalt, oil, natural gas and steel. In addition, many of our markets are highly competitive, and our products compete worldwide with similar products produced and sold by a number of other manufacturers and dealers. We ended 2021 with a strong backlog of orders, which continued to grow during 2022, but at a slower pace than we experienced during the prior year. The backlog of orders as of December 31, 2022 was $912.7 million compared to $762.6 million as of December 31, 2021, an increase of $150.1 million or 19.7%. Increased orders were driven by higher demand from the continuation of dealer inventory replenishment and the infrastructure investment by the United States' government under the Infrastructure Investment and Jobs Act ("IIJA") enacted in November 2021. The higher demand has contributed to longer lead times. In addition, we are continuing to experience constrained production cycles due to increased lead times for certain 24 Table of Contents production materials, parts and supplies and manufacturing labor shortages which have and may continue to impact our ability to satisfy the orders in our backlog in a manner that meets the timelines of our customers. Federal funding provides a significant portion of all highway, street, roadway and parking construction in the United States. We believe that federal highway funding influences the purchasing decisions of our customers, who are typically more amenable to making capital equipment purchases with long-term federal legislation in place. As noted above, the U.S. government enacted the IIJA in November 2021. The IIJA allocates $548 billion in government spending to new infrastructure over the five-year period concluding in 2026, with certain amounts specifically allocated to fund highway and bridge projects. We believe that multi-year highway programs (such as the IIJA) will have the greatest positive impact on the road construction industry and allow our customers to plan and execute longer-term projects. Significant portions of our revenues from the Infrastructure Solutions segment relate to the sale of equipment involved in the production, handling, recycling or application of asphalt mix. Liquid asphalt is a by-product of oil refining. An increase or decrease in the price of oil impacts the cost of asphalt, which is likely to alter demand for asphalt and therefore affect demand for certain of our products. While increasing oil prices may have a negative financial impact on many of our customers, our equipment can use a significant amount of reclaimed asphalt pavement, thereby partially mitigating the effect of increased oil prices on the final cost of asphalt for the customer. We continue to develop products and initiatives to reduce the amount of oil and related products required to produce asphalt. Oil prices increased throughout 2021 and 2022, reaching a peak in the third quarter and subsequently stabilizing during the fourth quarter of 2022. Entering 2023, oil prices continue to remain at relatively high levels with price volatility making it difficult to predict the costs of oil-based products used in road construction such as liquid asphalt and gasoline. Oil prices have routinely fluctuated in recent years and are expected to continue to fluctuate in the future. Based on the current macroeconomic environment, including the ongoing impact of the conflict in Ukraine, we anticipate that oil prices will remain at relatively high levels in 2023. Steel is a major component of our equipment. Driven by supply constraints, steel prices increased throughout the prior year, stabilizing at historically high levels at the end of 2022, which we expect to carry through 2023. During 2022, we have observed a slowing in market demand and reduced lead times as buyers are responding to recessionary pressures and continue to restrict purchases to immediate or near-term needs. However, we anticipate that steel demand will remain relatively strong in 2023, driven by the IIJA domestically and impacted by international production capacity being restricted by the conflict in Ukraine. We continue to employ flexible strategies to ensure supply and minimize the impact of price volatility. Potential ongoing constraints in the supply of certain steel products may continue pressuring the availability of other components used in our manufacturing process. Furthermore, given the volatility of steel prices and the nature of our customers' orders, we may not be able to pass through all increases in steel costs to our customers, which negatively impacts our gross profit and margins. We actively manage our global supply chain for any identified constraints and volatility. Supply chain constraints have eased recently, however we do see challenges related to vendor capacity continue to occur, albeit at a decreasing number of suppliers. As a result, we have experienced elevated lead times in certain components used in our manufacturing processes. We are continuing to focus on identifying and qualifying alternative suppliers wherever possible, which has helped alleviate the challenges in our supply chain. We also continually monitor potential future supply costs and availability in an effort to proactively address challenges that might occur. We cannot estimate the full impact that any future disruptions might have on our operations. In addition, we have experienced a shortage of necessary production personnel and increasing labor costs to attract staff in our manufacturing operations. This has resulted in a variety of challenges in running our operations efficiently to meet strong customer demand. We continue to adjust our production schedules and manufacturing workload distribution, outsource components, implement efficiency improvements and actively modify our recruitment process and compensation and benefits to attract and retain production personnel in our manufacturing facilities. Whenever possible, we attempt to cover increased costs of production by adjusting the prices of our products. Backlog fulfillment times from the initial order to completing the contracted sale vary and can extend past twelve months with the growth we have experienced in the backlog. For this reason, we have limitations on our ability to pass on cost increases to our customers on a short-term basis. In addition, the markets we serve are competitive in nature, and competition limits our ability to pass through cost increases in many cases. Through our operational excellence initiatives, we also strive to minimize the effect of inflation through cost reductions and improved manufacturing efficiencies. Our business was significantly affected by the contributory effects of the COVID-19 pandemic such as fluctuations in demand for our products, material price increases, increased shipping costs and lead times from production materials, supplies and parts, labor shortages and increased labor costs throughout 2020 and 2021, with the impacts lessening throughout 2022. The future impact of COVID-19 or other health related emergencies on our operations and the markets we serve remains uncertain and cannot be accurately predicted. See Part I, Item 1A. Risk Factors in this Annual Report on Form 10-K for a discussion of the risks associated with the COVID-19 or future pandemics. 25 Table of Contents Results of Operations: 2022 vs. 2021 Net Sales Net sales increased $179.0 million or 16.3% to $1,274.5 million in 2022 from $1,095.5 million in 2021. The increase in net sales was primarily driven by changes in the volume, pricing and mix of sales that generated increases in (i) equipment sales of $141.1 million, (ii) parts and component sales of $34.6 million, (iii) service and equipment installation revenue of $7.1 million and (iv) freight revenue of $4.2 million partially offset by decreased used equipment sales of $4.2 million and other revenue of $3.8 million primarily driven by higher utilization of our interest subsidy programs offered to certain of our dealer customers. Included in these net increases is $4.4 million of incremental net sales from an acquired business. Sales reported by our foreign subsidiaries in U.S. dollars for 2022 would have been $18.6 million higher had foreign exchange rates been the same as the 2021 rates. Domestic sales for 2022 were $1,014.3 million or 79.6% of net sales compared to $842.1 million or 76.9% of net sales for 2021, an increase of $172.2 million or 20.4%. Domestic sales increased primarily due to: (i) $144.3 million higher equipment sales (ii) $25.6 million higher parts and component sales, (iii) $4.7 million higher service and equipment installation revenue and (iv) $4.7 million higher freight revenue. These increases were partially offset by decreased other revenue of $3.6 million primarily driven by higher utilization of our interest subsidy programs offered to certain of our dealer customers and lower used equipment sales of $3.5 million. Included in these net increases is $2.3 million of incremental net sales from an acquired business. International sales for 2022 were $260.2 million or 20.4% of net sales compared to $253.4 million or 23.1% of net sales for 2021, an increase of $6.8 million or 2.7%. International sales increased primarily due to higher parts and component sales and service revenue of $9.0 million and $2.4 million, respectively. These increases were partially offset by $3.2 million lower equipment sales. Included in these net increases is $2.1 million of incremental net sales from an acquired business. Gross Profit Consolidated gross profit for 2022 was $264.1 million or 20.7% of net sales as compared to $249.5 million or 22.8% of net sales in 2021, an increase of $14.6 million or 5.9%. The increase was primarily driven by the impact of net favorable volume, pricing and mix that generated $131.8 million higher gross profit. These increases were partially offset by the impact of inflation on materials, labor and overhead of $104.0 million and manufacturing inefficiencies of $14.9 million largely due to logistics and manufacturing throughput disruptions. Selling, General and Administrative Expenses Selling, general and administrative expenses for 2022 were $216.1 million or 17.0% of net sales compared to $200.6 million or 18.3% of net sales for 2021, an increase of $15.5 million or 7.7%, primarily due to: (i) $12.1 million increased costs related to our SFG transformation program, (ii) $3.2 million of exhibit, promotional and travel costs due to the return of in-person industry conferences and business activities, (iii) $2.8 million incremental expenses associated with MINDS, (iv) $2.0 million of acquisition and integration related costs mainly associated with the acquisition of MINDS and (v) increased net payroll and employee benefit costs due to increased headcount throughout our organization partially offset by lower health insurance claims experience and reduced deferred compensation program costs associated with our stock price changes. These increases were partially offset by lower depreciation and amortization expense of $3.7 million and reduced expenses related to closing a site location of $2.1 million. Research and Development Expenses Research and development expenses increased $5.0 million or 18.9% to $31.5 million in 2022 from $26.5 million in 2021. Increased research and development costs were primarily driven by higher prototype materials costs and increased personnel-related expenses. 26 Table of Contents Restructuring, Impairment and Other Asset Charges, Net Restructuring, asset impairment charges and the net gain on the sale of property and equipment for the years ended December 31, 2022 and 2021 are presented below and relate primarily to our SFG initiatives and recent leadership change:  [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(in millions)","","2022","","2021"],["Restructuring charges:"],["Costs associated with leadership change","","$","4.4","","","$","\u2014"],["Costs associated with closing Enid","","1.0","","","0.7"],["Costs associated with closing Tacoma","","0.8","","","1.6"],["Costs associated with closing Mequon","","\u2014","","","0.6"],["Total restructuring related charges","","6.2","","","2.9"],["Asset impairment charges:"],["Other impairment charges","","3.5","","","0.2"],["Total asset impairment charges","","3.5","","","0.2"],["Gain on sale of property and equipment, net:"],["Gain on sale of property and equipment, net","","(0.7)","","","(0.6)"],["Total gain on sale of property and equipment, net","","(0.7)","","","(0.6)"],["Restructuring, impairment and other asset charges, net","","$","9.0","","","$","2.5"]] [[/GREPCENT_TABLE]] See Note 22, Strategic Transformation and Restructuring, Impairment and Other Asset Charges, of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for discussion of the individual restructuring actions taken and the impairment charges recorded. Income Tax Provision Income tax expense for the year ended December 31, 2022 was $5.0 million, reflecting a 113.6% effective tax rate compared to an income tax benefit of $2.1 million for the year ended December 31, 2021, reflecting a (15.2)% effective tax rate. Our effective tax rates are affected by recurring items which are generally consistent from period to period, as well as discrete items that may occur but are not consistent from period to period. The items having the most significant impact on the effective tax rate for 2022 include discrete tax expense for a foreign valuation allowance of $5.5 million for net operating losses ("NOLs") at our Brazilian subsidiary partially offset by the net benefits of $2.1 million for research and development tax credits and $0.9 million from the foreign derived intangible income deduction. The items having the most significant impact on the effective tax rate for 2021 include a benefit from net releases of valuation allowances of $8.1 million primarily related to NOLs at our Brazilian and German subsidiaries and a net benefit of $2.3 million for research and development tax credits partially offset by a $4.4 million provision from the dissolution of our Germany subsidiary. Future utilization of our NOLs and state tax credit carryforwards is evaluated on a periodic basis, and the valuation allowance is adjusted accordingly. There is no guarantee that we will not incur additional valuation allowances to our NOLs. Backlog The backlog of orders at December 31, 2022 was $912.7 million compared to $762.6 million at December 31, 2021, an increase of $150.1 million or 19.7%. Domestic and international backlogs increased $146.3 million or 23.3% and $3.8 million or 2.8%, respectively. The backlog increased $117.8 million to $567.1 million in the Infrastructure Solutions segment and increased $27.9 million to $341.2 million in the Materials Solutions segment. The Corporate and Other backlog represents our controls and automation business and totaled $4.4 million as of December 31, 2022. Increased orders were driven by higher demand from the continuation of dealer inventory replenishment and the infrastructure investment by the United States' government under the IIJA enacted in November 2021. The higher demand has contributed to longer lead times. 27 Table of Contents Net Sales by Segment [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(in millions)","","2022","","2021","","$ Change","","% Change"],["Infrastructure Solutions","","$","847.4","","","$","743.4","","","$","104.0","","","14.0","%"],["Materials Solutions","","$","422.7","","","$","352.1","","","$","70.6","","","20.1","%"],["Corporate and Other","","$","4.4","","","$","\u2014","","","$","4.4","","","100.0","%"]] [[/GREPCENT_TABLE]] Infrastructure Solutions Sales in this segment were $847.4 million for 2022 compared to $743.4 million for 2021, an increase of $104.0 million, or 14.0%. The increase was primarily driven by favorable net volume, pricing and the mix of sales that generated increased (i) new equipment sales of $78.4 million, (ii) parts and component sales of $20.3 million, (iii) service and equipment installation revenue of $5.3 million and (iv) freight revenue of $2.6 million. These increases were partially offset by lower used equipment sales of $3.1 million. Domestic sales for the Infrastructure Solutions segment increased by $103.4 million, or 17.2%, for 2022 compared to 2021 primarily due to: (i) increased new equipment sales of $80.1 million, (ii) increased parts and component sales of $18.1 million, (iii) increased service and equipment installation sales of $4.5 million and (iv) increased freight revenue of $2.6 million. These increases were partially offset by lower used equipment sales of $2.7 million. International sales for the Infrastructure Solutions segment increased $0.6 million, or 0.4%, for 2022 compared to 2021 primarily due to increased parts and component sales of $2.2 million partially offset by lower equipment sales of $1.7 million. Materials Solutions Sales in this segment were $422.7 million for 2022 compared to $352.1 million for 2021, an increase of $70.6 million or 20.1%. The increase was primarily driven by favorable net volume, pricing and the mix of sales that generated increased new equipment and parts and component sales of $59.1 million and $14.1 million, respectively. These increases were partially offset by decreased other revenue of $4.5 million primarily driven by increased utilization of our interest subsidy programs offered to some of our dealer customers. Domestic sales for the Materials Solutions segment increased $66.5 million or 27.7% for 2022 compared to 2021 driven by: (i) increased new equipment of $62.1 million (ii) increased parts and component sales of $7.4 million and (iii) increased freight revenue of $2.1 million. These increases were partially offset by decreased other revenue of $4.5 million primarily driven by increased utilization of our interest subsidy programs offered to certain of our dealer customers. International sales for the Materials Solutions segment increased $4.1 million or 3.7% for 2022 compared to 2021 primarily due to increased parts and component sales of $6.7 million partially offset by lower new equipment sales of $3.0 million. Corporate and Other Sales in this segment represent our controls and automation business acquired in April 2022. Segment Operating Adjusted EBITDA Segment Operating Adjusted EBITDA is the measure of segment profit or loss used by our Chief Executive Officer, whom is determined to be the chief operating decision maker ("CODM"), to evaluate performance and allocate resources to the operating segments. Segment Operating Adjusted EBITDA, a non-GAAP financial measure, is defined as net income or loss before the impact of interest income or expense, income taxes, depreciation and amortization and certain other adjustments that are not considered by the CODM in the evaluation of ongoing operating performance. This non-GAAP financial measure can be useful to investors in understanding operating results and the performance of our core business from management's perspective. Our presentation of Segment Operating Adjusted EBITDA may not be comparable to similar measures used by other companies and is not necessarily indicative of the results of operations that would have occurred had each reportable segment been an independent, stand-alone entity during the periods presented. See Note 19, Operations by Industry Segment and Geographic Area, of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for a reconciliation of Segment Operating Adjusted EBITDA to total consolidated net income attributable to controlling interest. 28 Table of Contents [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(in millions)","","2022","","2021","","$ Change","","% Change"],["Infrastructure Solutions","","$","73.0","","","$","73.9","","","$","(0.9)","","","(1.2)","%"],["Materials Solutions","","$","44.5","","","$","39.1","","","$","5.4","","","13.8","%"],["Corporate and Other","","$","(46.5)","","","$","(48.2)","","","$","1.7","","","3.5","%"]] [[/GREPCENT_TABLE]] Infrastructure Solutions Segment Operating Adjusted EBITDA for the Infrastructure Solutions segment was $73.0 million for 2022 compared to $73.9 million for 2021, a decrease of $0.9 million or 1.2%. The decrease in Segment Operating Adjusted EBITDA resulted primarily from: (i) the impact of higher inflation on materials, labor and overhead costs of $66.7 million, (ii) increased general and administrative costs of $8.3 million, (iii) manufacturing inefficiencies of $5.3 million largely due to logistics and manufacturing throughput disruptions and (iv) increased research and development costs of $4.2 million. Incorporated in these increased costs is a $4.6 million impact of annual incentive compensation, which was recorded in Corporate and Other in the prior year period and has been reflected in the Infrastructure Solutions segment in the current year. These increased costs were partially offset by the impact of favorable net volume, pricing and mix that generated $80.5 million higher gross profit and reduced expenses related to closed site locations of $2.0 million. Materials Solutions Segment Operating Adjusted EBITDA for the Materials Solutions segment was $44.5 million for 2022 compared to $39.1 million for 2021, an increase of $5.4 million or 13.8%. The increase in Segment Operating Adjusted EBITDA resulted primarily from the impact of favorable volume, pricing and mix that generated $51.3 million higher gross profit partially offset by the impact of higher inflation on materials, labor and overhead costs of $37.2 million and manufacturing inefficiencies $7.9 million due to supply chain and logistics disruptions. Incorporated in these increased costs is a $1.8 million impact of annual incentive compensation, which was recorded in Corporate and Other in the prior year period and has been reflected in the Materials Solutions segment in the current year. Corporate and Other Corporate and Other operations had net expenses of $46.5 million for 2022 compared to $48.2 million for 2021, a decrease of $1.7 million or 3.5%. The decrease in expenses was primarily driven by: (i) lower net annual incentive compensation of $2.0 million due to $6.4 million that was recorded within Infrastructure Solutions and Materials Solutions in the current year as compared to within Corporate in the prior year period, (ii) reduced consulting fees of $1.7 million and (iii) reduced deferred compensation program cost driven by our stock price changes of $1.5 million. These decreases were partially offset by increases in internal headcount and share-based compensation expenses of $2.8 million. Liquidity and Capital Resources Our primary sources of liquidity and capital resources are cash and cash equivalents on hand, borrowing capacity under a $250.0 million revolving credit facility and cash flows from operations. As of December 31, 2022, our total liquidity was $232.0 million, consisting of $62.8 million of cash and cash equivalents available for operating purposes and $169.2 million available for additional borrowings under our revolving credit facility, to the extent our compliance with financial covenants permits such borrowings. Our foreign subsidiaries held $27.0 million of cash and cash equivalents available for operating purposes and is considered to be indefinitely invested in those jurisdictions. In April 2022, we acquired MINDS with a total cash consideration paid to the selling shareholders of $19.3 million funded from cash on hand. Our future cash requirements primarily include working capital needs, debt service obligations, capital expenditures, vendor hosted software arrangements including the related implementation costs, unrecognized tax benefits and operating lease payments. In addition, our variable cash uses may include the payment of our quarterly cash dividend, financing other strategic initiatives of our business, including, but not limited to, the SFG transformation, strategic acquisitions and share repurchases under our share repurchase authorization. We believe that our current working capital, cash flows generated from future operations and available capacity under our revolving credit facility will be sufficient to meet working capital and capital expenditure requirements for our existing business for at least the next 12 months. On December 19, 2022, we entered into a new credit agreement (the "Credit Agreement") with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto, which replaced the previously existing credit facility with a borrowing capacity of $150.0 million and a maturity date of December 29, 2023 (the "Previous Credit Facility"). The Credit Agreement provides for (i) a revolving credit facility (consisting of revolving credit loans and swingline loans) and a letter of credit facility, in an aggregate amount of up to $250.0 million, (ii) an incremental credit facility in an aggregate amount not to exceed $125.0 million (the “Credit Facilities”) and (iii) a maturity date of December 19, 2027. 29 Table of Contents We had $78.0 million in outstanding borrowings under the Credit Facilities at December 31, 2022 and no outstanding borrowings on the Previous Credit Facility at December 31, 2021. Our outstanding letters of credit totaling $2.8 million decreased borrowing availability to $169.2 million under the revolving credit facility as of December 31, 2022. We anticipate continuing to utilize the Credit Facilities with more frequency in the near-term to support our domestic working capital needs in response to supply chain disruptions. The Credit Agreement contains certain financial covenants, including requirements related to our Consolidated Total Net Leverage Ratio and Consolidated Interest Coverage Ratio, each as defined in the agreement. Failure to satisfy these covenants could result in the accelerated repayment of our indebtedness. We were in compliance with the financial covenants of the Credit Facilities at December 31, 2022. Due to the increased borrowings under our Credit Facilities and higher interest rates, we expect our interest expense in 2023 to be significantly higher than in prior years. Our Brazilian subsidiary maintains a separate term loan for working capital purposes with a bank in Brazil, which is secured by its manufacturing facility. Certain of our international subsidiaries in South Africa, Australia, Brazil, Canada and the United Kingdom each have separate credit facilities with local financial institutions primarily to finance short-term working capital needs, as well as to cover foreign exchange contracts, performance letters of credit, advance payment and retention guarantees. In addition, the Brazilian subsidiary also enters into order anticipation agreements on a periodic basis. Both the outstanding borrowings under the credit facilities of the international subsidiaries and the order anticipation agreements are recorded in "Short-term debt" in our Consolidated Balance Sheets. Each of the credit facilities are generally guaranteed by Astec Industries, Inc. and/or secured with certain assets of the local subsidiary. We regularly enter into agreements primarily to purchase inventory in the ordinary course of business. As of December 31, 2022, open purchase obligations totaled $330.9 million, of which $324.9 million are expected to be fulfilled within one year. We estimate that our capital expenditures will be between $25 and $35 million for the year ending December 31, 2023, which may be impacted by general economic, financial or operational changes and competitive, legislative and regulatory factors, among other considerations. Cash Flows The following table summarizes cash flows during the years ended December 31, 2022 and 2021, respectively: [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(in millions)","","2022","","2021"],["Net cash (used in) provided by operating activities","","$","(73.9)","","","$","7.4"],["Net cash used in investing activities","","(53.2)","","","(18.4)"],["Net cash provided by (used in) financing activities","","60.1","","","(12.1)"],["Effect of exchange rates on cash","","(1.4)","","","(1.1)"],["Decrease in cash and cash equivalents and restricted cash","","(68.4)","","","(24.2)"],["Cash, cash equivalents and restricted cash, end of period","","$","66.0","","","$","134.4"]] [[/GREPCENT_TABLE]] Net cash (used in) provided by operating activities Our operating activities were a $73.9 million net use of cash during 2022 as compared to providing net cash of $7.4 million during 2021. This decrease is primarily due to: (i) higher net cash usages in our operating assets and liabilities of $49.1 million mainly driven by the increase of inventories on hand of $44.9 million due to higher backlog and supply chain disruptions and (ii) lower net income adjusted for non-cash items of $33.7 million. Net cash used in investing activities Net cash used in investing activities increased by $34.8 million during 2022 as compared to 2021 primarily due to increased purchases of property and equipment of $20.6 million in part due to our manufacturing facility transformation initiative and the acquisition of MINDS in the second quarter of 2022 at a purchase price of $17.8 million, net of cash acquired. These cash outflows were partially offset by increased cash inflows of $3.8 million from disposals of property and equipment. Net cash provided by (used in) financing activities Our financing activities provided net cash of $60.1 million during 2022 as opposed to a net use of $12.1 million in cash during 2021 primarily due to increased net proceeds from borrowings of $83.5 million partially offset by repurchases of stock under our share repurchase program of $10.1 million in 2022. 30 Table of Contents Financial Condition Our current assets increased to $696.4 million at December 31, 2022 from $636.0 million at December 31, 2021, an increase of $60.4 million or 9.5%. The increase is due primarily to increased inventories of $94.7 million driven by supply chain disruptions resulting in maintaining elevated inventory levels, increased trade and other net receivables and contract assets of $28.4 million, the recording of $15.4 million of assets at our closed Tacoma site as held for sale and increased prepaid expenses and other assets of $4.7 million. These increases were partially offset by decreased cash, cash equivalents and restricted cash of $68.4 million, the net sale of short-term trading securities of $4.7 million and decreased prepaid and refundable income taxes of $4.6 million. Accounts receivable days outstanding decreased from 50.3 in 2021 to 44.5 in 2022. Our current liabilities increased to $274.0 million at December 31, 2022 from $223.3 million at December 31, 2021, an increase of $50.7 million or 22.7%. The increase is primarily due to increased accounts payable of $25.0 million, increased customer deposits of $9.3 million, additional net borrowings of $6.8 million on short-term debt facilities in order to meet working capital needs at certain of our international sites, increased accrued employee related liabilities of $4.7 million and increased other current liabilities of $3.4 million. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. Application of these principles requires us to make estimates and judgments that affect the amounts as reported in the consolidated financial statements. Accounting policies that are critical to aid in understanding and evaluating the results of operations and financial position include the following: Inventory Valuation: Inventories are valued at the lower of first-in first-out cost or net realizable value. The most significant component of our inventories is steel. Open market prices and tariffs are subject to volatility and determine our cost of steel. During periods when open market prices decline, we may need to reduce the carrying value of the inventory. In addition, certain items in inventory become obsolete over time, and we reduce the carrying value of these items to their net realizable value. These reductions are determined by management based on estimates, assumptions and judgments made from the information available at that time. See Note 2, Basis of Presentation and Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K, for a description of our process used to value inventories at the lower of first-in first-out cost or net realizable value. We do not believe it is reasonably likely that the inventory values will materially change in the near future. Revenue Recognition: Revenue is generally recognized when we satisfy a performance obligation by transferring control of goods or providing services. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. We generally obtain purchase authorizations from our customers for a specified amount of product at a specified price with specified delivery terms. A significant portion of our equipment sales represents equipment produced in our plants under short-term contracts for a specific customer project or equipment designed to meet a customer's specific requirements. Most of the equipment sold by us is based on standard configurations, some of which are modified to meet customer needs or specifications. We provide customers with technical design and performance specifications and perform pre-shipment testing to ensure the equipment performs according to design specifications, regardless of whether we provide installation services in addition to selling the equipment. Significant down payments are required on many equipment orders with other terms allowing for payment shortly after shipment, typically 30 days. Taxes assessed by a governmental authority that are directly imposed on revenue-producing transactions between us and our customers, such as sales, use, value-added and some excise taxes, are excluded from revenue. Costs of obtaining sales contracts with an expected duration of one year or less are expensed as incurred. As contracts are typically paid within one year from the date of the contract fulfillment, revenue adjustments for a potential financing component or the costs to obtain the contract are not made. Depending on the terms of the arrangement with the customer, recognition of a portion of the consideration received may be deferred and recorded as a contract liability if we have to satisfy a future obligation, such as to provide installation assistance, service work to be performed in the future without charge, floor plan interest to be reimbursed to our dealer customers, payments for extended warranties, for annual rebates given to certain high volume customers or for obligations for future estimated returns to be allowed based upon historical trends. Other contract assets and liabilities are typically not material as a percentage of total assets or total liabilities, respectively. Certain contracts include terms and conditions through which we recognize revenues upon completion of equipment production, which is subsequently stored at one of our plants at the customer's request. Revenue is recorded on such contracts upon the customer's assumption of title and transfer of control and when collectibility is probable. In addition, there must be a fixed schedule of delivery of the goods consistent with the customer's business practices, we must not have retained any specific performance obligations such that the earnings process is not complete, and the goods must have been segregated from our inventory prior to revenue recognition. We have certain sales containing multiple performance obligations, whereby revenue attributable to the sale of a product is recognized when the product is shipped, and the revenue attributable to services provided with respect to the product (such as installation services) is recognized when the service is performed. Consideration is allocated to deliverables using observable 31 Table of Contents market prices from stand-alone performance obligations or a cost plus margin approach when one is not available. Otherwise, we use third-party evidence of selling price or our best estimate of the selling price for the deliverables. We evaluate sales with multiple performance obligations to determine whether revenue related to individual elements should be recognized separately or as a combined unit. In addition to the previously mentioned general revenue recognition criteria, we only recognize revenue on individual delivered elements when there is objective and reliable evidence that the delivered element has a determinable value to the customer on a standalone basis and there is no right of return. We have certain sales orders on which we record revenue over time based upon the ratio of costs incurred to estimated total costs. Goodwill and Other Intangible Assets: Goodwill is tested for impairment annually on October 1, or more frequently, if events or circumstances indicate that the carrying amount of the asset may not be recoverable. Goodwill is allocated to, and evaluated for impairment at, four identified reporting units. A reporting unit is an operating segment or, under certain circumstances, a component of an operating segment that constitutes a business, has available discrete financial information, and whose operating results are regularly reviewed by management. We combine and aggregate components of an operating segment as a single reporting unit if the components have similar economic characteristics. Goodwill is tested for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors that includes, but is not limited to, the macroeconomic conditions, industry and competitive environment conditions, overall financial performance, business specific events and market considerations to determine whether it is more likely than not that a reporting unit's fair value is less than its carrying amount. We may elect not to perform the qualitative assessment for some or all reporting units and perform the quantitative impairment test. The quantitative goodwill impairment test requires us to compare the carrying value of the reporting unit's net assets to the fair value of the reporting unit. We determine fair values of each reporting unit using an equally weighted combination of the discounted cash flow method, a form of the income approach, and the guideline public company method, a form of the market approach. This analysis requires significant assumptions, including projected net sales, projected earnings before interest, tax, depreciation and amortization, terminal growth rates, the cost of capital, the selection of appropriate guideline companies and related valuation multiples. Our estimates are subject to change given the inherent uncertainty in predicting future results. Additionally, the discount rate and the terminal growth rate are based on our judgment of the rates that would be utilized by a hypothetical market participant. We performed a quantitative analysis during 2022 on our four reporting units whereby the fair values of each reporting unit exceeded its carrying value and therefore no indicators of impairment existed. However, the fair values of the Materials Solutions and Astec Digital reporting units exceeded their carrying values by 3.2% and 5.0%, respectively. Since the Materials Solutions and Astec Digital reporting units' fair values did not substantially exceed the carrying values, we may be at risk for an impairment loss in the future if forecasted trends assumed in the fair value calculation are not realized. As of December 31, 2022, there was $19.4 million and $8.7 million of goodwill recorded related to the Materials Solutions and Astec Digital reporting units, respectively. No goodwill impairment charges were recognized in 2022 or 2021. Goodwill impairment charges of $1.6 million were recognized in 2020. See Note 2, Basis of Presentation and Significant Accounting Policies, and Note 7, Goodwill, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, for a detail of the testing management performed for goodwill impairment, goodwill reported by segment and impairment charges recorded. Intangible assets with definite lives are tested for impairment if conditions exist that indicate the carrying value may not be recoverable. Risk factors that may be considered include an economic downturn in the general economy, a geographic market or the commercial and residential construction industries, a change in the assessment of future operations as well as the cyclical nature of our industry and the customization of the equipment we sell, each of which may cause adverse fluctuations in operating results. Other risk factors considered would be an increase in the price or a decrease in the availability of oil that could reduce the demand for our products in addition to the significant fluctuations in the purchase price of raw materials not recoverable through selling price increases that could have a negative impact on the cost of production and gross profit as well as others more fully described in the Part I, Item 1A. Risk Factors section of this Annual Report on Form 10-K. An impairment charge is recorded when the carrying value of the definite lived intangible asset is not recoverable by the cash flows generated from the use of the asset. Some of the inputs used in the impairment testing are highly subjective and are affected by changes in business factors and other conditions. Changes in any of the inputs could have an effect on future tests and result in impairment charges. The useful lives of identifiable intangible assets are determined after considering the specific facts and circumstances related to each intangible asset. Factors considered when determining useful lives include the contractual term of any agreement, the history of the asset, our long-term strategy for the use of the asset, any laws or other local regulations which could impact the useful life of the asset, and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have definite lives are amortized, generally on a straight-line basis, over their useful lives, ranging from 3 to 19 years. Income Taxes: Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss 32 Table of Contents and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We periodically assess the need to establish valuation allowances against our deferred tax assets to the extent we no longer believe it is more-likely-than-not that the tax assets will be fully utilized. Judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against net deferred tax assets. Liabilities for uncertain income tax positions are based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more-likely-than-not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires an estimate and measurement of the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we must determine the probability of various possible outcomes. We reevaluate these uncertain tax positions on a quarterly basis or when new information becomes available. These reevaluations are based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, successfully settled issues under audit, expirations due to statutes and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an increase to accrued taxes. Recent Accounting Changes and Pronouncements See Note 2, Basis of Presentation and Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for discussion of recently issued accounting pronouncements applicable to us and the impact of those standards on our consolidated financial statements and related disclosures.