What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-01 compared with 2022-02-28 · 210 added, 175 removed, 178 unchanged (68% of the section changed)

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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.

Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Annual Report on Form 10-K can be found in Part II, Item 7.

A similar discussion of 2020 items and year-to-year comparisons between 2021 and 2020 can be found

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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 .

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and combustion control systems.

Our products are marketed both domestically and internationally primarily to asphalt producers;

Our products are marketed both domestically and internationally primarily to asphalt and concrete producers;

highway and heavy equipment contractors;

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construction, demolition, recycle and crushing contractors;

forestry and environmental recycling contractors;

mine and quarry operators;

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Executive Summary

Highlights of our financial results as of and for the year ended December 31, 2021 as compared to the same period of the prior year include the following:

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%

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• Income from operations decreased $12.4 million to $7.5 million

• Net income attributable to Astec decreased to $17.8 million, or 62.0%

• Diluted earnings per share were $0.78, a decrease of 62.0%

Significant Items Impacting Operations in 2021

COVID-19 Pandemic

The COVID-19 pandemic has caused significant disruptions to national and global economies and to our business.

While our businesses have generally remained operational throughout the pandemic, with temporary closures in the United Kingdom and South Africa early in the pandemic, our business has been significantly affected by the contributory effects of the pandemic such as decreased demand for our products in 2020, material price increases, increased lead times from production materials, supplies and parts and labor shortages.

These trends continue to impact our business today and may continue to impact our business in the near-term.

We have also taken precautions to protect our employees and their families and our customers and suppliers from COVID-19 and continually monitor the markets in which we operate for the effects of COVID-19 and the related actions of governments and other authorities to contain COVID-19.

The COVID-19 pandemic may continue to negatively disrupt our business and results of operations in the future.

The ongoing impact of the COVID-19 pandemic on our operations and the markets we serve remains uncertain due to constantly evolving developments including, but not limited to, government directives, treatment availability and acceptance, vaccine mandates and the spread of new variants, such as the Delta and Omicron variants, and cannot be accurately predicted.

See Part I, Item 1A.

Risk Factors in this Annual Report on Form 10-K.

Closure of Tacoma Facility

In January 2021, management announced plans to close the Tacoma facility.

The Tacoma facility ceased manufacturing operations at the end of 2021.

The transfer of the manufacturing and marketing of the Tacoma product lines to other facilities within the Infrastructure Solutions segment is expected to be completed during early 2022.

• 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")

Beginning in late 2019, we initiated a strategic transformation initiative focused on implementing new business strategies and a new operating structure.

This transformation is concentrated on aligning our operations under the OneASTEC business model with the strategic pillars of Simplify, Focus and Grow.

SFG is an ongoing, 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.

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.

Since initiating SFG, we have consolidated certain of our sites as a key part of these initiatives.

Site consolidation costs including headcount reductions, inventory movement and facility shut-down costs are included in "Restructuring, impairment and other asset charges, net" in the Consolidated Statements of Operations.

In addition, in late 2020 we launched a multi-year phased implementation of a standardized enterprise resource planning ("ERP") system across our global organization, which will replace much of our existing disparate core financial systems.

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.

An implementation of this scale is a major financial undertaking and will require substantial time and attention of management and key employees.

Costs incurred during 2021 were $13.4 million, which represent costs directly associated with the SFG initiative and which cannot be capitalized in accordance with U.S.

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.

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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.

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.

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

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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 a number of other manufacturers and dealers that produce and sell similar products.

We ended 2020 with a strong backlog of orders, which has grown throughout 2021 across our global organization as well as in both the Infrastructure Solutions and Materials Solutions segments.

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 pent-up demand, both customer retail and dealer inventory replenishment, following economic uncertainty in 2020 as a result of COVID-19 as well as in anticipation of future infrastructure investment by the United States' government under the Infrastructure Investment and Jobs Act ("IIJA") enacted in November 2021.

Additionally, we are continuing to experience constrained production cycles due to increased lead times for certain 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.

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

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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.

Federal transportation funding under the Fixing America's Surface Transportation Act expired December 3, 2021.

As noted above, the U.S.

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We continue to develop products and initiatives to reduce the amount of oil and related products required to produce asphalt.

While oil prices have increased throughout 2021, its price volatility makes it difficult to predict the costs of oil-based products used in road construction such as liquid asphalt and gasoline.

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, we expect prices will continue to increase into 2022.

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.

With a drop in supply, similar to oil, steel prices began increasing in the latter part of 2020 and have continued to increase throughout the year.

As a result, we have experienced a rising cost of steel throughout 2021.

We anticipate that steel demand will remain strong into 2022, bolstered by the IIJA.

However, we expect new steelmaking capacity to enter the market in 2022 moving us towards a more historical balance of supply and demand, thus slowing the pace of price inflation we experienced in 2021.

In response to these factors, we continue to employ flexible strategies to ensure supply and minimize the impact of price volatility.

Ongoing constraints in the supply of certain steel products will continue pressuring the availability of other components used in our manufacturing process.

Furthermore, given the recent volatility of steel prices and the nature of our customers' orders, we are often not able to pass through all of the increases in steel costs to our customers, which negatively impacts our gross profit.

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.

Challenges related to our supply chain, including potential labor shortages at our vendors and logistics partners and the availability of shipping containers, cargo ships and unloading space, have continued to drive increased lead times for certain components used in our manufacturing processes.

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.

We will continue to monitor potential future supply costs and availability.

In addition, we have experienced a shortage of necessary production personnel and increasing labor costs to attract staff in our manufacturing operations.

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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.

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.

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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.

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Results of Operations:

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 was primarily driven by changes in the volume, pricing and mix of sales that generated increases in equipment and parts and component sales of $45.2 million and $29.8 million, respectively, partially offset by decreases in used equipment and service and equipment installation sales of $7.3 million and $3.4 million, respectively.

Additionally, we recognized $33.1 million of net incremental sales from acquired businesses partially offset by reduced sales from the exit of our Enid oil and gas drilling product lines of $25.0 million.

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 2021 would have been $11.6 million lower had exchange foreign exchange rates been the same as 2020 rates.

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) net incremental sales of $26.0 million from acquired businesses, (ii) $19.1 million higher equipment sales, and (iii) $14.6 million of higher parts and components sales.

These increases were partially offset by:

(i) reduced sales from the exit of our Enid oil and gas drilling product lines of $24.0 million, (ii) lower used equipment sales of $6.2 million and (iii) reduced service and equipment installation sales of $4.2 million.

(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:

(i) $26.1 million higher equipment sales mainly from COVID-19 related temporary site closures in the prior year, (ii) $15.2 million of higher parts and components sales and (iii) net incremental sales of $7.1 million from acquired businesses.

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.

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:

(i) the impact of net favorable volume, pricing and mix that generated $39.8 million higher gross profit, (ii) $16.8 million in manufacturing efficiencies, (iii) net incremental gross profit of $5.6 million from acquired businesses and (iv) reduced costs from the exit of our Enid oil and gas drilling product lines of $2.9 million.

These increases were partially offset by the impact of inflation on materials, labor and overhead of $53.5 million.

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) increased costs for centralization and infrastructure efforts associated with our transformation initiatives, (ii) $12.9 million of higher technology and software licensing costs, (iii) $5.4 million of incremental expenses for acquired businesses and (iv) $2.1 million of higher amortization expense.

These increases were partially offset by decreases of $7.1 million for reduced expenses associated with closed locations and $4.9 million of lower trade show and promotional expenses.

(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.

During 2021, we increased efforts related to research and development of new products and improvements to existing product lines as well as adaptation of those products to other markets as compared to prior year that experienced COVID-19 constraints and restructuring.

Increased research and development costs were primarily driven by higher prototype materials costs and increased personnel-related expenses.

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Restructuring, Impairment and Other Asset Charges, Net

We are in the process of a strategic transformation under which we have completed various restructuring and right-sizing actions.

Restructuring, asset impairment charges and the net gain on the sale of property and equipment for the year ended December 31, 2021 and 2020 are presented below:

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:

Years Ended December 31,

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Restructuring charges:

Costs associated with closing Tacoma $ 1.6 $ 0.9

Costs associated with leadership change $ 4.4 $ —

Costs associated with closing Enid 1.0 0.7

Costs associated with closing Tacoma 0.8 1.6

Costs associated with closing Mequon — 0.6

Costs associated with closing Albuquerque — 1.3

Costs associated with closing AMM — 0.3

Workforce reductions at multiple sites — 1.3

Other restructuring charges — 0.3

Total restructuring related charges 6.2 2.9

Asset impairment charges:

Airplane impairment charges — 2.3

Goodwill impairment charges — 1.6

Other impairment charges 3.5 0.2

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Income Tax Provision

Income tax benefit for the year ended December 31, 2021 was $1.4 million compared to income tax benefit of $1.2 million for 2020.

The effective tax rates for 2021 and 2020 were (8.5)% and (2.6)%, respectively.

Our tax rates are affected by recurring items which are generally consistent from period to period, as well as discrete items that may occur in any given period but are not consistent from period to period.

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 net operating losses ("NOLs"), where deductions exceed taxable income, at our Brazilian subsidiary, the dissolution of Astec Mobile Machinery GmbH ("AMM") during the year and a benefit of $4.1 million for research and development tax credits.

These benefits were partially offset by a $4.4 million change in the NOLs of our foreign entities.

Significantly impacting the 2020 income tax benefit was a net discrete tax benefit of $9.5 million resulting from provisions of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act").

Among other provisions, the CARES Act modified the NOL carryback provisions, which allowed us to carryback its 2018 NOL to prior tax years.

This change not only favorably impacted the timing of the NOL benefit, but also increased the tax benefit amount as the federal tax rates in the prior years (35%) were higher than the current federal tax rate (21%).

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.

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%.

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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.

Increased orders were driven by pent-up demand, both customer retail and dealer inventory replenishment, following economic uncertainty in 2020 as a result of COVID-19 as well as in anticipation of future infrastructure investment by the United States' government combined with slower production cycles due to increased lead times for certain production materials, parts and supplies and manufacturing labor shortages.

The Corporate and Other backlog represents our controls and automation business and totaled $4.4 million as of December 31, 2022.

The higher demand has contributed to longer lead times.

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Net Sales by Segment

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Materials Solutions $ 422.7 $ 352.1 $ 70.6 20.1 %

Corporate and Other $ 4.4 $ — $ 4.4 100.0 %

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 a positive impact of changes in the volume, pricing and mix of sales that generated increases in equipment and parts and components sales of $28.8 million and $18.0 million respectively, partially offset by decreases in used equipment and service and equipment installation sales of $6.3 million and $2.8 million, respectively.

Domestic sales for the Infrastructure Solutions segment increased by $13.0 million or 2.2% for 2021 compared to 2020 primarily due to (i) $26.0 million of net incremental sales from acquired businesses, (ii) increased equipment sales of $14.2 million and (iii) increased parts and component sales of $6.1 million.

These increases were partially offset by:

(i) reduced sales from the exit of our Enid oil and gas drilling product lines of $24.0 million, (ii) $4.8 million of lower used equipment sales and (iii) $3.5 million of lower service and equipment installation sales.

International sales for the Infrastructure Solutions segment increased $32.2 million or 28.2% for 2021 compared to 2020 driven by:

(i) increased equipment sales of $14.6 million, (ii) increased parts and component sales of $11.9 million and (iii) $7.1 million of net incremental sales from acquired businesses.

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 $349.2 million for 2021 compared to $321.6 million for 2020, an increase of $27.6 million or 8.6% driven by the favorable impact of changes in volume, pricing and mix of sales that generated increases in equipment and parts and components sales of $16.4 million and $11.8 million, respectively.

Domestic sales for the Materials Solutions segment increased $12.1 million or 5.3% for 2021 compared to 2020 primarily due to increased parts and component sales of $8.5 million and increased equipment sales of $5.0 million partially offset by lower used equipment sales.

International sales for the Materials Solutions segment increased $15.5 million or 16.6% for 2021 compared to 2020 primarily due to increased equipment sales of $11.4 million and increased parts and component sales of $3.3 million related to the recovery from COVID-19 related temporary site closures in the prior year.

Segment Profit (Loss)

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.

Table of Conten t s

Years Ended December 31,

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Materials Solutions $ 44.5 $ 39.1 $ 5.4 13.8 %

Corporate $ (64.8) $ (40.1) $ (24.7) (61.6) %

Corporate and Other $ (46.5) $ (48.2) $ 1.7 3.5 %

Infrastructure Solutions

Segment profit for the Infrastructure Solutions segment was $53.0 million for 2021 compared to $53.8 million for 2020, a decrease of $0.8 million or 1.5%.

The decrease in segment profit resulted primarily from the impact of higher inflation on materials, labor and overhead costs of $33.1 million and increased general and administrative costs of $6.6 million.

These increased costs were partially offset by:

(i) the impact of favorable volume, pricing and mix that generated $25.1 million higher gross profit, (ii) reduced losses from divested businesses of $7.0 million, (iii) $4.0 million of increased manufacturing efficiencies and (iv) $3.1 million in decreased restructuring costs.

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 profit for the Materials Solutions segment was $29.3 million for 2021 compared to $32.1 million for 2020, a decrease of $2.8 million or 8.7%.

The decrease in segment profits resulted primarily from:

(i) the impact of higher inflation on materials, labor and overhead costs of $20.5 million, (ii) increased general and administrative costs of $7.3 million, (iii) a settlement loss on pension termination of $5.2 million and (iv) increased research and development expenses of $3.0 million.

These increased costs were partially offset by:

(i) the impact of favorable volume, pricing and mix that generated $14.7 million higher gross profit, (ii) $11.5 million in manufacturing efficiencies, (iii) $5.5 million reduced income tax expense and (iv) reduced expenses associated with closed locations of $4.1 million.

Corporate operations incurred expenses of $64.8 million for 2021 compared to expenses of $40.1 million for 2020, an unfavorable change of $24.7 million or 61.6%.

The increase in expenses resulted primarily from:

(i) increased costs related to centralization and infrastructure efforts associated with our transformation initiatives, (ii) the net change in income tax benefit and expense of $4.3 million and (iii) increased research and development expenses of $2.7 million.

These increased costs were partially offset by non-recurring impairment charges incurred in the prior year of $2.7 million primarily related to a Company airplane that was subsequently sold in the first quarter of 2021.

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 $150.0 million revolving credit facility (the "Credit Facility") and cash flows from operations.

We had $134.1 million of cash and cash equivalents available for operating purposes as of December 31, 2021, of which $21.7 million was held by our foreign subsidiaries.

We did not have any outstanding borrowings on the Credit Facility at December 31, 2021 or 2020.

In addition, no borrowings were made under the Credit Facility during 2021 or 2020.

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.

Table of Conten t s

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.

The revolving credit facility agreement contains certain financial covenants, including provisions concerning required levels of annual net income and minimum tangible net worth.

We were in compliance with the financial covenants of the Credit Facility at December 31, 2021.

Certain of our international subsidiaries in South Africa, Australia, Brazil and the United Kingdom each have separate credit facilities with local financial institutions 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 maintains an independent credit facility at a separate financial institution and also enters into order anticipation agreements on a periodic basis.

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.

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and/or secured with certain assets of the local subsidiary.

Material cash requirements as of December 31, 2021 include working capital needs, capital expenditures, vendor hosted software arrangements including the related implementation costs, unrecognized tax benefits and operating lease payments.

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 $30 and $40 million for the year ending December 31, 2022, which may be impacted by general economic, financial or operational changes, including the impact of COVID-19 on our operating results, and competitive, legislative and regulatory factors, among other considerations.

In late 2020 and early 2021, we entered into certain vendor hosted software arrangements in conjunction with our transformation initiatives to convert our internal operations, manufacturing and finance systems to cloud-based platforms globally.

These agreements include software-related payments of $45.9 million to be paid through September 2027.

Payments of $5.8 million will be made during 2022, $16.9 million during the years 2023 to 2024, $16.7 million during the years 2025 to 2026 and $6.5 million after 2026.

These cash payments are exclusive of the separately contracted implementation costs that are project-based and are committed at each phase of the implementation.

Our liability for unrecognized tax benefits totaled $10.8 million at December 31, 2021 for which the timing of cash settlements to the respective taxing authorities, if any, cannot be reliably predicted.

As of December 31, 2021, our short and long-term operating lease liabilities are $1.8 million and $4.7 million, respectively.

These balances represent our contractual obligation to make future payments on our leases, discounted to reflect our cost of borrowing.

See Note 10, Leases, for information regarding our leases, including obligations by fiscal year.

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminates the option to deduct research and development expenditures in the year incurred and requires taxpayers to amortize domestic expenditures over five years and foreign expenditures over 15 years.

If this component of the legislation is not deferred, repealed or modified, operating cash flows will be materially decreased beginning in 2022.

Cash Flows from Operating Activities

Years Ended December 31,

(in millions) 2021 2020 Increase / Decrease

Net income $ 17.9 $ 46.9 $ (29.0)

Deferred tax (benefit) provision (1.3) 8.6 (9.9)

Gain on disposition of property and equipment (0.6) (6.2) 5.6

Non-cash curtailment and settlement loss (gain) on pension and postretirement benefits, net 3.2 (0.5) 3.7

Asset impairment charges, net 0.2 4.4 (4.2)

(Purchase) sale of trading securities, net (3.1) 0.2 (3.3)

(Increase) decrease in receivables and other contract assets (30.8) 12.2 (43.0)

(Increase) decrease in inventories (53.8) 44.7 (98.5)

Increase in prepaid expenses (6.2) — (6.2)

Increase (decrease) in accounts payable 30.8 (8.6) 39.4

Increase (decrease) in accrued payroll and related expenses 3.0 (5.1) 8.1

Increase (decrease) in customer deposits 26.5 (11.2) 37.7

Income taxes payable/prepaid (13.6) 16.0 (29.6)

Other, net 35.2 40.1 (4.9)

Net cash provided by operating activities $ 7.4 $ 141.5 $ (134.1)

Net cash provided by operating activities decreased $134.1 million in 2021 compared to 2020.

The primary drivers of the decrease in operating cash flows were the increase of inventories on hand due to higher backlog and supply chain logistics challenges of $98.5 million, the timing of receivables and other contract assets of $43.0 million and payable/prepaid income taxes of $29.6 million and lower net income of $29.0 million.

These decreases were partially offset by increases related to the timing of accounts payable payments of $39.4 million and higher customer deposits of $37.7 million associated with higher backlog amounts in the current year.

Cash Flows from Investing Activities

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.

The following table summarizes cash flows during the years ended December 31, 2022 and 2021, respectively:

Years Ended December 31,

(in millions) 2021 2020 Increase / Decrease

Acquisitions, net of cash acquired $ 0.1 $ (32.5) $ 32.6

(Price adjustment on prior) proceeds from sale of subsidiary (1.1) 9.1 (10.2)

Expenditures for property and equipment (20.1) (15.4) (4.7)

Proceeds from sale of property and equipment 1.9 17.7 (15.8)

Purchase of investments (1.0) (1.1) 0.1

Sale of investments 1.8 1.3 0.5

(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 used in investing activities decreased by $2.5 million in 2021 as compared to 2020 primarily due to acquisitions occurring in the prior year that did not recur in 2021 partially offset by higher proceeds from the sale of property and equipment and divestiture activity in 2020 that did not recur in 2021 combined with increased property and equipment expenditures in 2021.

Cash Flows from Financing Activities

Years Ended December 31,

(in millions) 2021 2020 Increase / Decrease

Payment of dividends $ (10.2) $ (10.0) $ (0.2)

Borrowings, net under bank loans 1.0 0.1 0.9

Withholding tax paid upon vesting of share-based compensation awards (3.5) (0.8) (2.7)

Other, net 0.6 0.3 0.3

Net cash used in financing activities $ (12.1) $ (10.4) $ (1.7)

Net cash used in financing activities increased by $1.7 million in 2021 as compared to 2020 primarily due to higher withholding tax payments on the vesting of share-based compensation awards.

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

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.

Table of Conten t s

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 increases in inventories of $53.3 million, increases in trade receivables and contract assets, net of $28.2 million, increases in prepaid and refundable income taxes of $10.7 million and increases in prepaid expenses and other assets of $6.0 million partially offset by decreases in cash, cash equivalents and restricted cash of $24.2 million.

Accounts receivable days outstanding increased from 45.3 in 2020 to 50.3 in 2021.

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 increases in accounts payable of $30.8 million, increases in customer deposits of $26.0 million and increases in accrued payroll and related liabilities of $2.8 million partially offset by decreases in other accrued liabilities of $4.8 million.

Contingencies

Management has reviewed all claims and lawsuits and has made adequate provision for any losses that are probable and can be reasonably estimated.

Based upon currently available information and with the advice of counsel, management believes that the ultimate outcome of our current claims and legal proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position, cash flows or results of operations.

However, claims and legal proceedings are subject to inherent uncertainties and rulings unfavorable to us could occur.

If an unfavorable ruling were to occur, there exists the possibility of a material adverse effect on our financial position, cash flows or results of operations.

See Note 16, Commitments and Contingencies 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 contingent liabilities for customer purchases, various guarantees including letters of credit, advance payments and retention guarantees as well as contingencies related to legal proceedings in which we are involved.

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

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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.

Other contract assets and liabilities are typically not material as a percentage of total assets or total liabilities, respectively.

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.

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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 market prices from stand-alone performance obligations or a cost plus margin approach when one is not available.

Consideration is allocated to deliverables using observable

Table of Conten t s

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.

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Goodwill and Other Intangible Assets:

Goodwill is not amortized but is tested for impairment annually or more frequently if events or circumstances indicate that such goodwill might be impaired.

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 in 2020.

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.

Intangible assets with definite lives are tested for impairment if conditions exist that indicate the carrying value may not be recoverable.

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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 and tax credit carryforwards.

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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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis