ASTEC INDUSTRIES INC 10-Q

Item 1. Financial Statements (Unaudited) ASTEC INDUSTRIES, INC. Consolidated Balance Sheets (In millions, except share and per share data, unaudited) March 31, 2023 December 31, 2022 ASSETS Current assets: Cash, cash equivalents and restricted cash $ 42.5 $ 66.0 Investments 3.6 3.9 Trade receivables and contract assets, net of allowance for credit losses of $ 2.1 and $ 2.3 , respectively 172.2 167.1 Other receivables, net of allowance for credit losses of $ 0.7 , respectively 5.8 6.5 Inventories 420.1 393.4 Prepaid and refundable income taxes 9.1 15.9 Prepaid expenses and other assets 27.1 28.2 Assets held for sale — 15.4 Total current assets 680.4 696.4 Property and equipment, net of accumulated depreciation of $ 236.2 and $ 233.8 , respectively 176.7 173.6 Investments 16.9 15.1 Goodwill 45.6 45.2 Intangible assets, net of accumulated amortization of $ 46.7 and $ 45.1 , respectively 21.2 22.5 Deferred income tax assets 34.7 32.1 Other long-term assets 32.9 29.5 Total assets $ 1,008.4 $ 1,014.4 LIABILITIES AND EQUITY Current liabilities: Current maturities of long-term debt $ 0.2 $ 0.2 Short-term debt 10.8 9.4 Accounts payable 112.0 107.2 Customer deposits 67.5 69.5 Accrued product warranty 12.4 11.9 Accrued employee related liabilities 34.6 35.3 Accrued loss reserves 2.3 1.9 Other current liabilities 32.2 38.6 Total current liabilities 272.0 274.0 Long-term debt 65.0 78.1 Deferred income tax liabilities 2.2 2.1 Other long-term liabilities 33.6 33.3 Total liabilities 372.8 387.5 Commitments and contingencies (Note 8) Shareholders' equity: Preferred stock - authorized 2,000,000 shares of $ 1.00 par value; none issued — — Common stock – authorized 40,000,000 shares of $ 0.20 par value; issued and outstanding – 22,690,567 as of March 31, 2023 and 22,624,031 as of December 31, 2022 4.5 4.5 Additional paid-in capital 135.2 135.8 Accumulated other comprehensive loss ( 40.1 ) ( 40.1 ) Company stock held by deferred compensation programs, at cost ( 1.1 ) ( 1.1 ) Retained earnings 537.0 527.8 Shareholders' equity 635.5 626.9 Noncontrolling interest 0.1 — Total equity 635.6 626.9 Total liabilities and equity $ 1,008.4 $ 1,014.4 The accompanying notes are an integral part of these unaudited consolidated financial statements. 1 INDEX ASTEC INDUSTRIES, INC. Consolidated Statements of Operations (In millions, except share and per share data, unaudited) Three Months Ended March 31, 2023 2022 Net sales $ 347.9 $ 291.2 Cost of sales 258.7 226.5 Gross profit 89.2 64.7 Selling, general and administrative expenses 67.9 59.7 Restructuring and other asset charges, net 3.7 1.0 Income from operations 17.6 4.0 Other (expenses) income, net: Interest expense ( 2.0 ) ( 0.4 ) Interest income 0.5 0.2 Other income, net 0.4 1.2 Income before income taxes 16.5 5.0 Income tax provision 4.4 0.9 Net income 12.1 4.1 Net loss attributable to noncontrolling interest — — Net income attributable to controlling interest $ 12.1 $ 4.1 Per share data: Earnings per common share - Basic $ 0.53 $ 0.18 Earnings per common share - Diluted $ 0.53 $ 0.18 Weighted average shares outstanding - Basic 22,655,821 22,782,476 Weighted average shares outstanding - Diluted 22,742,937 22,904,167 The accompanying notes are an integral part of these unaudited consolidated financial statements. 2 INDEX ASTEC INDUSTRIES, INC. Consolidated Statements of Comprehensive Income (In millions, unaudited) Three Months Ended March 31, 2023 2022 Net income $ 12.1 $ 4.1 Other comprehensive income: Foreign currency translation adjustments 0.1 4.2 Other comprehensive income 0.1 4.2 Comprehensive income 12.2 8.3 Comprehensive income attributable to noncontrolling interest ( 0.1 ) ( 0.1 ) Comprehensive income attributable to controlling interest $ 12.1 $ 8.2 The accompanying notes are an integral part of these unaudited consolidated financial statements. 3 INDEX ASTEC INDUSTRIES, INC. Consolidated Statements of Cash Flows (In millions, unaudited) Three Months Ended March 31, 2023 2022 Cash flows from operating activities: Net income $ 12.1 $ 4.1 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 6.3 6.7 Provision for credit losses 0.2 0.6 Provision for warranties 3.9 3.2 Deferred compensation benefit — ( 0.8 ) Share-based compensation 0.8 1.8 Deferred tax benefit ( 2.6 ) ( 4.0 ) Gain on disposition of property and equipment ( 3.4 ) — Amortization of debt issuance costs 0.1 — Distributions to deferred compensation programs' participants ( 0.1 ) ( 0.1 ) Change in operating assets and liabilities: (Purchase) sale of trading securities, net ( 0.8 ) 0.6 Receivables and other contract assets ( 4.5 ) 5.3 Inventories ( 27.2 ) ( 53.7 ) Prepaid expenses 2.5 ( 1.0 ) Other assets ( 5.4 ) ( 1.4 ) Accounts payable 3.5 17.3 Accrued loss reserves 0.4 ( 0.2 ) Accrued employee related liabilities ( 0.8 ) 3.7 Other accrued liabilities ( 5.9 ) ( 3.0 ) Accrued product warranty ( 3.4 ) ( 2.4 ) Customer deposits ( 1.9 ) 9.3 Income taxes payable/prepaid 7.0 4.4 Net cash used in operating activities ( 19.2 ) ( 9.6 ) Cash flows from investing activities: Expenditures for property and equipment ( 8.0 ) ( 11.6 ) Proceeds from sale of property and equipment 20.0 0.2 Purchase of investments ( 0.2 ) ( 0.3 ) Net cash provided by (used in) investing activities 11.8 ( 11.7 ) (Continued) 4 INDEX ASTEC INDUSTRIES, INC. Consolidated Statements of Cash Flows (Continued) (In millions, unaudited) Three Months Ended March 31, 2023 2022 Cash flows from financing activities: Payment of dividends ( 2.9 ) ( 2.8 ) Proceeds from borrowings on credit facilities and bank loans 32.1 5.4 Repayments of borrowings on credit facilities and bank loans ( 44.0 ) ( 3.6 ) Withholding tax paid upon vesting of share-based compensation awards ( 1.4 ) ( 1.3 ) Net cash used in financing activities ( 16.2 ) ( 2.3 ) Effect of exchange rates on cash 0.1 0.9 Decrease in cash, cash equivalents and restricted cash ( 23.5 ) ( 22.7 ) Cash, cash equivalents and restricted cash, beginning of period 66.0 134.4 Cash, cash equivalents and restricted cash, end of period $ 42.5 $ 111.7 Supplemental cash flow information: Cash paid during the year for: Interest, net of capitalized interest $ 1.2 $ 0.1 Income taxes paid $ 0.3 $ 0.4 Supplemental disclosures of non-cash items: Non-cash investing activities: Capital expenditures in accounts payable $ 1.3 $ 0.9 Non-cash financing activities: Additions to right-of-use assets and lease liabilities $ 0.1 $ 0.4 The accompanying notes are an integral part of these unaudited consolidated financial statements. 5 INDEX ASTEC INDUSTRIES, INC. Consolidated Statements of Equity (In millions except share and per share data, unaudited) Common Stock Common Stock Amount Additional Paid-in-Capital Accumulated Other Comprehensive Loss Company Shares Held by SERP Retained Earnings Noncontrolling Interest Total Equity Balance, December 31, 2022 22,624,031 $ 4.5 $ 135.8 $ ( 40.1 ) $ ( 1.1 ) $ 527.8 $ — $ 626.9 Net income — — — — — 12.1 — 12.1 Other comprehensive income — — — — — — 0.1 0.1 Dividends ($ 0.13 per share) — — — — — ( 2.9 ) — ( 2.9 ) Share-based compensation — — 0.8 — — — — 0.8 Issuance of common stock under incentive plan 66,536 — — — — — — — Withholding tax paid upon equity award vesting — — ( 1.4 ) — — — — ( 1.4 ) Balance, March 31, 2023 22,690,567 $ 4.5 $ 135.2 $ ( 40.1 ) $ ( 1.1 ) $ 537.0 $ 0.1 $ 635.6 Common Stock Common Stock Amount Additional Paid-in-Capital Accumulated Other Comprehensive Loss Company Shares Held by SERP Retained Earnings Noncontrolling Interest Total Equity Balance, December 31, 2021 22,767,052 $ 4.5 $ 130.6 $ ( 32.4 ) $ ( 1.2 ) $ 549.3 $ 0.5 $ 651.3 Net income — — — — — 4.1 — 4.1 Other comprehensive income — — — 4.1 — — 0.1 4.2 Dividends ($ 0.12 per share) — — — — — ( 2.8 ) — ( 2.8 ) Share-based compensation — — 1.8 — — — — 1.8 Issuance of common stock under incentive plan 69,995 0.1 — — — — — 0.1 Withholding tax paid upon equity award vesting — — ( 1.3 ) — — — — ( 1.3 ) Balance, March 31, 2022 22,837,047 $ 4.6 $ 131.1 $ ( 28.3 ) $ ( 1.2 ) $ 550.6 $ 0.6 $ 657.4 The accompanying notes are an integral part of these unaudited consolidated financial statements. 6 INDEX ASTEC INDUSTRIES, INC. Notes To Unaudited Consolidated Financial Statements Note 1. Basis of Presentation and Significant Accounting Policies Description of Business Astec Industries, Inc. ("Astec" or the "Company") is a Tennessee corporation which was incorporated in 1972. The Company designs, engineers, manufactures and markets equipment and components used primarily in road building and related construction activities, as well as other products discussed below. The Company's products are used in each phase of road building, from quarrying and crushing the aggregate to application of the road surface. The Company also manufactures 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; concrete plants; commercial and industrial burners; and combustion control systems. The Company operates in two reportable segments (plus Corporate and Other) - Infrastructure Solutions and Materials Solutions. The Company's two reportable business segments comprise sites based upon the nature of the products or services produced, the type of customer for the products, the similarity of economic characteristics, the manner in which management reviews results and the nature of the production process, among other considerations. The Corporate and Other category consists primarily of the parent company, Astec Insurance Company ("Astec Insurance" or the "captive"), a captive insurance company, and the controls and automation business, which do not meet the requirements for separate disclosure as an operating segment or inclusion in one of the other reporting segments. Basis of Presentation The accompanying unaudited consolidated financial statements include the accounts of Astec and its subsidiaries and have been prepared by the Company, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). The Company prepares its financial statements in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP"). Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the SEC rules and regulations governing interim financial statements. However, the Company believes that the disclosures made in the unaudited consolidated financial statements and related notes are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. All intercompany balances and transactions between the Company and its affiliates have been eliminated in consolidation. Noncontrolling interest in the Company's consolidated financial statements represents the 7 % interest in a consolidated subsidiary which is not owned by the Company. Since the Company controls this subsidiary, the subsidiary's financial statements are consolidated with those of the Company, and the noncontrolling owner's 7 % share of the subsidiary's net assets and results of operations is deducted and reported as "Noncontrolling interest" in the Consolidated Balance Sheets and as "Net loss attributable to noncontrolling interest" in the Consolidated Statements of Operations. The Company executed an agreement in February 2022 with the noncontrolling interest holder, which is undergoing a judicial reorganization in Brazil, to acquire their outstanding interest in full for R$ 10.0 M (approximately $ 2.0 million, subject to the effect of exchange rates). Completion of the transaction is subject to obtaining certain judicial approval in Brazil. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Significant items subject to such estimates and assumptions include excess and obsolete inventory, inventory net realizable value, product warranty obligations, self-insurance loss reserves, capitalization of internal use software, goodwill impairment and the measurement of income tax assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. On an ongoing basis, the Company evaluates these assumptions, judgments and estimates. Actual results could differ from those estimates. In the opinion of management, the consolidated financial statements contain all adjustments necessary for a fair statement of the results of operations and comprehensive income (loss) for the three months ended March 31, 2023 and 2022, the financial position as of March 31, 2023 and December 31, 2022 and the cash flows for the three months ended March 31, 2023 and 2022, and except as otherwise discussed herein, such adjustments consist only of those of a normal recurring nature. The interim results are not necessarily indicative of results that may be achieved in a full reporting year. All dollar amounts, except share and per share amounts, are in millions of dollars unless otherwise indicated. 7 INDEX Reclassifications and Adjustments Certain reclassifications have been made to the prior period financial information to conform to the presentation used in the financial statements for the three months ended March 31, 2023. • The Company elected to present research and development expenses in "Selling, general and administrative expenses". These amounts were previously included in a separate financial statement caption in the Consolidated Statements of Operations. • The Company reclassified certain accrued liability balances from "Other current liabilities" to "Accrued employee related liabilities" to more appropriately reflect the nature of such accrued balances. • The Company elected to present gains and losses recognized on the change in fair value of derivative instruments and foreign currency transaction gains and losses, net in "Other income (expenses), net". These amounts were previously included in "Cost of sales". There was no change to previously reported "Total current liabilities" or "Net income (loss) attributable to controlling interest" related to these reclassifications. During the first quarter of 2023, the Company identified immaterial errors associated with over-accruals of inventory-related expenses in its historical financial statements. The cumulative effect of the errors generated in 2021 and 2022 was corrected during the first quarter of 2023, resulting in a decrease in "Cost of sales" of $ 1.9 million. Such adjustment was not considered material to the Company's consolidated financial statements for the year ended December 31, 2022 or any of the financial statements for the previously filed annual periods. Recently Adopted Accounting Pronouncements In October 2021, the Financial Accounting Standards Board issued ASU 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers", which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 2014-09, Revenue from Contracts with Customers (Topic 606). The update will generally result in an entity recognizing contract assets and contract liabilities at amounts consistent with those recorded by the acquiree immediately before the acquisition date rather than at fair value. The new standard is effective on a prospective basis for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company elected to early adopt this guidance on April 1, 2022. The adoption of this new standard did not have a material impact on its financial position, results of operations, cash flows or disclosures. Recent accounting guidance not discussed above is not applicable, did not have, or is not expected to have a material impact on the Company. Note 2. Acquisition MINDS Acquisition - The Company entered into a Share Purchase Agreement, dated as of March 22, 2022, by and between MINDS Automation Group, Inc., 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. The Company's allocation of the purchase price resulted in the recognition of $ 9.3 million of goodwill and $ 9.3 million of intangible assets primarily consisting of customer relationships ( 9 year life) and developed technology ( 7 year life). Significant inputs and assumptions used in determining the fair values of these intangible assets include management's forecasts of future revenues, earnings and cash flows, a discount rate based on the median weighted average cost of capital of the Company and select market competitors, and the proportion of intangible assets acquired in relation to tangible assets. Goodwill acquired is attributable to future growth opportunities provided by the acquired intellectual capital and the ability to generate cross-selling synergies. The acquisition provides the Company with a broader line of controls and automation products designed to deliver enhanced productivity through improved equipment performance. Results of operations have been consolidated from the date of acquisition. The goodwill is not deductible for income tax purposes. Proforma financial information is not included since not significant. Acquisition and integration costs incurred were nominal during the three months ended March 31, 2023 for this acquisition. Acquisition and integration costs incurred were $ 0.5 million during the three months ended March 31, 2022. These costs are recorded in "Selling, general and administrative expenses" in the Consolidated Statements of Operations. 8 INDEX The following table summarizes the allocations of the total purchase price: (in millions) Amount Cash $ 1.5 Trade receivables 2.7 Inventories 0.7 Prepaid expenses and other assets 0.4 Property and equipment 0.2 Goodwill 9.3 Intangible assets 9.3 Other long-term assets 0.5 Total assets acquired $ 24.6 Accounts payable ( 0.7 ) Accrued payroll and related liabilities ( 0.8 ) Other current liabilities ( 1.1 ) Deferred income tax liabilities ( 2.4 ) Other long-term liabilities ( 0.3 ) Total liabilities assumed ( 5.3 ) Total purchase price $ 19.3 Note 3. Inventories Inventories are valued at the lower of cost (first-in, first-out) or net realizable value, which requires the Company to make specific estimates, assumptions and judgments in determining the amount, if any, of reductions in the valuation of inventories to their net realizable values. Inventories consist of the following: (in millions) March 31, 2023 December 31, 2022 Raw materials and parts $ 311.9 $ 302.9 Work-in-process 71.7 57.3 Finished goods 36.1 32.1 Used equipment 0.4 1.1 Total $ 420.1 $ 393.4 Note 4. Fair Value Measurements The Company has various financial instruments that must be measured at fair value on a recurring basis, including marketable debt and equity securities held by Astec Insurance and marketable equity securities held in the Company's deferred compensation programs. The Company's deferred compensation programs include a non-qualified Supplemental Executive Retirement Plan ("SERP") and a separate non-qualified Deferred Compensation Plan. Although the deferred compensation programs' investments are allocated to individual participants, and investment decisions are made solely by those participants, they are non-qualified plans. Consequently, the Company owns the assets and the related offsetting liability for disbursement until such time as a participant makes a qualifying withdrawal. The SERP assets and related offsetting liability are recorded in non-current "Investments" and "Other long-term liabilities", respectively, in the Consolidated Balance Sheets. The Company's subsidiaries also occasionally enter into foreign currency exchange contracts to mitigate exposure to fluctuations in currency exchange rates. The carrying amount of cash and cash equivalents, trade receivables and contract assets, other receivables, accounts payable and short-term and long-term debt approximates their fair value because of their short-term nature and/or interest rates associated with the instruments. Investments are carried at their fair value based on quoted market prices for identical or similar assets or, where no quoted prices exist, other observable inputs for the asset. The fair values of foreign currency exchange contracts are based on quotations from various banks for similar instruments using models with market-based inputs. 9 INDEX Financial assets and liabilities are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The inputs used to measure the fair value are identified in the following hierarchy: Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 - Unadjusted quoted prices in active markets for similar assets or liabilities; or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable for the asset or liability. Level 3 - Inputs reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. As indicated in the tables below, the Company has determined that all of its financial assets and liabilities as of March 31, 2023 and December 31, 2022 are Level 1 and Level 2 in the fair value hierarchy as defined above: March 31, 2023 (in millions) Level 1 Level 2 Total Financial assets: Trading equity securities: Deferred compensation programs' mutual funds $ 4.9 $ — $ 4.9 Preferred stocks 0.3 — 0.3 Equity funds 0.6 — 0.6 Trading debt securities: Corporate bonds 4.3 — 4.3 Municipal bonds — 0.4 0.4 Agency bonds — 2.2 2.2 Floating rate notes 0.1 — 0.1 U.S. government securities 1.9 — 1.9 Asset-backed securities — 3.8 3.8 Other 1.4 0.6 2.0 Derivative financial instruments — 0.1 0.1 Total financial assets $ 13.5 $ 7.1 $ 20.6 Financial liabilities: Derivative financial instruments $ — $ 0.1 $ 0.1 Deferred compensation programs' liabilities — 6.1 6.1 Total financial liabilities $ — $ 6.2 $ 6.2 10 INDEX December 31, 2022 (in millions) Level 1 Level 2 Total Financial assets: Trading equity securities: Deferred compensation programs' mutual funds $ 4.4 $ — $ 4.4 Preferred stocks 0.3 — 0.3 Equity funds 0.6 — 0.6 Trading debt securities: Corporate bonds 5.0 — 5.0 Municipal bonds — 0.3 0.3 Floating rate notes 0.2 — 0.2 U.S. government securities 0.8 — 0.8 Asset-backed securities — 5.4 5.4 Other 1.3 0.7 2.0 Total financial assets $ 12.6 $ 6.4 $ 19.0 Financial liabilities: Deferred compensation programs' liabilities $ — $ 5.7 $ 5.7 Total financial liabilities $ — $ 5.7 $ 5.7 Note 5. Product Warranty Reserves The Company warrants its products against manufacturing defects and performance to specified standards. The warranty period and performance standards vary by market and uses of its products, but generally range from three months to two years or up to a specified number of hours of operation. The Company estimates the costs that may be incurred under its warranties and records a liability at the time product sales are recorded. The product warranty liability is primarily based on historical claim rates, nature of claims and the associated cost. Changes in the Company's product warranty liability for the three month periods ended March 31, 2023 and 2022 are as follows: Three Months Ended March 31, (in millions) 2023 2022 Reserve balance, beginning of the period $ 11.9 $ 10.5 Warranty liabilities accrued 3.9 3.2 Warranty liabilities settled ( 3.4 ) ( 2.4 ) Reserve balance, end of the period $ 12.4 $ 11.3 Note 6. Accrued Loss Reserves The Company records reserves for losses related to known workers' compensation and general liability claims that have been incurred but not yet paid or are estimated to have been incurred but not yet reported to the Company. The undiscounted reserves are actuarially determined based on the Company's evaluation of the type and severity of individual claims and historical information, primarily its own claims experience, along with assumptions about future events. Changes in assumptions, as well as changes in actual experience, could cause these estimates to change in the future. Total accrued loss reserves were $ 6.2 million and $ 5.8 million at March 31, 2023 and December 31, 2022, respectively, of which $ 3.9 million were included in "Other long-term liabilities" in the Consolidated Balance Sheets at both March 31, 2023 and December 31, 2022. Note 7. Income Taxes For the three months ended March 31, 2023, the Company recorded an income tax expense of $ 4.4 million, reflecting a 26.7 % effective tax rate, compared to a $ 0.9 million income tax expense for the three months ended March 31, 2022, reflecting an 18.0 % effective tax rate. The income tax expense for the three months ended March 31, 2023 was higher compared to the same period in 2022, primarily due to higher pretax book income and valuation allowance increases related to a domestic subsidiary, partially offset by a net discrete tax benefit related to a research and development credit. The Company's recorded liability for uncertain tax positions was $ 12.2 million and $ 12.0 million as of March 31, 2023 and December 31, 2022, respectively. The increase is the result of $ 0.2 million of incremental reserves associated with the 2023 11 INDEX research and development credit. The Company does not anticipate a significant change in unrecognized tax benefits due to the expiration of relevant statutes of limitations and federal, state, and foreign tax audit resolutions over the next twelve months. The Company regularly assesses the likelihood of an adverse outcome resulting from examinations to determine the adequacy of its tax reserves. The Company is currently under audit by the U.S. Internal Revenue Service for the federal income tax return from the 2018 tax year as well as various other state income tax and jurisdictional audits. As of March 31, 2023, the Company believes that it is more-likely-than-not that the tax positions it has taken will be sustained upon the resolution of its audits, resulting in no material impact on its consolidated financial position, results of operations and cash flows. However, the final determination with respect to any tax audits, and any related litigation, could be materially different from the Company's estimates and/or from its historical income tax provisions and accruals and could have a material effect on operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties and/or interest assessments. On August 16, 2022, the Inflation Reduction Act of 2022 ("IRA") was signed into law. The IRA levies a 1% excise tax on net stock repurchases after December 31, 2022 and imposes a 15% corporate alternative minimum tax ("CAMT") for tax years beginning after December 31, 2022. The Company did not repurchase any shares during the three months ended March 31, 2023. CAMT does not impact the Company's results of operations or financial position. Note 8. Commitments and Contingencies Certain customers have financed purchases of Company products through arrangements with third-party financing institutions. Under these arrangements, the Company is contingently liable for customer debt of $ 1.9 million and $ 2.4 million at March 31, 2023 and December 31, 2022, respectively. These arrangements expire at various dates running through September 2025. Additionally, the Company is also contingently liable for 1.75 % of the unpaid balance, determined as of December 31 of the prior year (or approximately $ 0.1 million for 2023), on certain past customer equipment purchases that were financed by an outside finance company. The agreements provide that the Company will receive the lender's full security interest in the financed equipment if the Company is required to fulfill its contingent liability under these arrangements. The Company has recorded a liability of $ 0.8 million and $ 1.0 million related to these guarantees which were included in "Other current liabilities" in the Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022, respectively. The Company reviews off-balance sheet guarantees individually and at the loss pool level based on one agreement. Prior history is considered with respect to the Company having to perform on any off-balance sheet guarantees, as well as future projections of individual customer credit worthiness with respect to assessing credit losses related to off-balance sheet guarantees. In addition, the Company is contingently liable under letters of credit issued under its $ 250.0 million revolving credit facility (the "Credit Facilities"), which outstanding letters of credit totaled $ 2.6 million as of March 31, 2023. The outstanding letters of credit expire at various dates through February 2024. The maximum potential amount of future payments under letters of credit issued under the Credit Facilities for which the Company could be liable is $ 30.0 million as of March 31, 2023. As of March 31, 2023, the Company's foreign subsidiaries are contingently liable for a total of $ 4.4 million in performance letters of credit, advance payments and retention guarantees, of which $ 2.9 million is secured by separate credit facilities with local financial institutions. The maximum potential amount of future payments under these letters of credit and bank guarantees for which the Company could be liable is $ 9.7 million as of March 31, 2023. The Company and certain of its former executive officers were named as defendants in a putative shareholder class action lawsuit filed on February 1, 2019, as amended on August 26, 2019, in the United States District Court for the Eastern District of Tennessee. The action is styled City of Taylor General Employees Retirement System v. Astec Industries, Inc., et al., Case No. 1:19-cv-24-CEA-CHS. The complaint generally alleges that the defendants violated the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 10b-5 promulgated thereunder, by making allegedly false and misleading statements and that the individual defendants were control persons under Section 20(a) of the Exchange Act. The complaint is filed on behalf of shareholders who purchased stock of the Company between July 26, 2016 and October 22, 2018 and seeks monetary damages on behalf of the purported class. On October 25, 2019, the defendants filed a Motion to Dismiss. On February 19, 2021, the Motion to Dismiss was granted with prejudice and judgment was entered for the defendants. On March 19, 2021, plaintiff filed a Motion to Alter or Amend the Judgment and For Leave to File the Proposed Amended Complaint, which was denied on May 5, 2021. Plaintiff appealed the Motion to Dismiss and denial of its Motion to Alter or Amend the Judgment and For Leave to File the Proposed Amended Complaint to the United States Court of Appeals for the Sixth Circuit. On March 31, 2022, the United States Court of Appeals for the Sixth Circuit issued an opinion reversing the dismissal of the Company and one former executive officer, affirming the dismissal of certain other former executive officers and remanding the action to the United States District Court for the Eastern District of Tennessee for proceedings consistent with the opinion. On July 11, 2022 Defendants filed an answer to the complaint, and the action is now in discovery. The Company's GEFCO, Inc. ("GEFCO") subsidiary has been named a defendant in a lawsuit originally filed on August 16, 2018 with an amended complaint filed on January 25, 2019, in the United States District Court for the Western District of Oklahoma. The action is styled VenVer S.A. and Americas Coil Tubing LLP v. GEFCO, Inc., Case No. CIV-18-790-SLP. The complaint alleges breaches of warranty and other similar claims regarding equipment sold by GEFCO in 2013. In addition to seeking a rescission of the purchase contract, the plaintiff is seeking special and consequential damages. The original purchase price of 12 INDEX the equipment was approximately $ 8.5 million. GEFCO disputes the plaintiff's allegations and intends to defend this lawsuit vigorously. On July 7, 2020, the plaintiffs filed a separate lawsuit directly against Astec Industries, Inc. that generally mirrored the allegations in the GEFCO suit. In January 2023, the court allowed Astec Industries, Inc. to be added as a defendant to the GEFCO suit and, as a result, the separate suit against Astec Industries, Inc. was dismissed. The Company disputes the plaintiffs' allegations and is vigorously defending the GEFCO suit. The Company is unable to determine whether or not a future loss will be incurred due to this litigation or estimate the possible loss or range of loss, if any, at this time. In addition to the two matters noted above, the Company is currently a party, and may become a party, to various other claims and legal proceedings in the ordinary course of business. If management believes that a loss arising from any claims and legal proceedings is probable and can reasonably be estimated, the Company records the amount of the loss (excluding estimated legal fees) or, when the loss is estimated using a range and no point within the range is more probable than another, the minimum estimated liability. As management becomes aware of additional information concerning such contingencies, any potential liability related to these matters is assessed and the estimates are revised, if necessary. If management believes that a loss arising from such claims and legal proceedings is either (i) probable but cannot be reasonably estimated or (ii) reasonably estimable but not probable, the Company does not record the amount of the loss but does make specific disclosure of such matter. Based upon currently available information and with the advice of counsel, management believes that the ultimate outcome of its current claims and legal proceedings, individually and in the aggregate, will not have a material adverse effect on the Company's financial position, cash flows or results of operations. However, claims and legal proceedings are subject to inherent uncertainties, and rulings unfavorable to the Company could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse effect on the Company's financial position, cash flows or results of operations. 13 INDEX Note 9. Revenue Recognition The following tables disaggregate the Company's revenue by major source for the three month periods ended March 31, 2023 and 2022 (excluding intercompany sales): Three Months Ended March 31, 2023 Three Months Ended March 31, 2022 (in millions) Infrastructure Solutions Materials Solutions Corporate and Other Total Infrastructure Solutions Materials Solutions Corporate and Other Total Net Sales-Domestic: Equipment sales $ 106.9 $ 67.7 $ 1.3 $ 175.9 $ 95.2 $ 45.6 $ — $ 140.8 Parts and component sales 59.3 21.3 0.1 80.7 56.4 20.8 — 77.2 Service and equipment installation revenue 16.5 0.2 — 16.7 6.7 0.2 — 6.9 Used equipment sales 0.9 — — 0.9 1.7 — — 1.7 Freight revenue 6.9 2.1 — 9.0 6.6 1.6 — 8.2 Other — ( 2.2 ) 0.3 ( 1.9 ) 0.1 ( 0.4 ) — ( 0.3 ) Total domestic revenue 190.5 89.1 1.7 281.3 166.7 67.8 — 234.5 Net Sales-International: Equipment sales 24.2 13.4 2.0 39.6 16.6 14.7 — 31.3 Parts and component sales 13.0 9.8 0.1 22.9 12.3 9.7 — 22.0 Service and equipment installation revenue 1.0 0.9 0.2 2.1 1.2 0.7 — 1.9 Used equipment sales 0.4 0.4 — 0.8 0.2 0.5 — 0.7 Freight revenue 0.8 0.3 — 1.1 0.5 0.3 — 0.8 Other — — 0.1 0.1 — — — — Total international revenue 39.4 24.8 2.4 66.6 30.8 25.9 — 56.7 Total net sales $ 229.9 $ 113.9 $ 4.1 $ 347.9 $ 197.5 $ 93.7 $ — $ 291.2 14 INDEX Sales into major geographic regions were as follows: Three Months Ended March 31, (in millions) 2023 2022 United States $ 281.3 $ 234.5 Canada 21.8 14.2 Europe 11.0 5.4 Australia 9.7 10.2 Africa 8.1 9.1 South America (Excluding Brazil) 5.6 5.2 Brazil 4.5 3.8 Central America (Excluding Mexico) 2.1 2.6 Asia 0.9 4.0 Mexico 0.8 0.7 Other 2.1 1.5 Total foreign 66.6 56.7 Total net sales $ 347.9 $ 291.2 As of March 31, 2023, the Company had contract assets of $ 5.6 million and contract liabilities, excluding customer deposits, of $ 5.7 million, including $ 2.5 million of deferred revenue related to extended warranties. As of December 31, 2022, the Company had contract assets of $ 3.8 million and contract liabilities, excluding customer deposits, of $ 5.5 million, including $ 2.9 million of deferred revenue related to extended warranties. Note 10. Segment Information The Company has two reportable segments, each of which comprise sites based upon the nature of the products or services produced, the type of customer for the products, the similarity of economic characteristics, the manner in which management reviews results and the nature of the production process, among other considerations. Segment Operating Adjusted EBITDA is the measure of segment profit or loss used by the Company's Chief Executive Officer, whom is determined to be the chief operating decision maker ("CODM"), to evaluate performance and allocate resources to the operating segments is Segment Operating Adjusted EBITDA. 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. The Company's 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. A brief description of each segment is as follows: Infrastructure Solutions – Sites within the Infrastructure Solutions segment design, engineer, manufacture and market a complete line of asphalt plants, concrete plants and their related components and ancillary equipment as well as supplying asphalt road construction equipment, industrial thermal systems and other heavy equipment. The sites based in North America within the Infrastructure Solutions segment are primarily manufacturing operations while those located outside of North America, service and install equipment and provide parts in the regions in which they operate for many of the products produced by all of the Company's manufacturing sites. The primary purchasers of the products produced by this segment are asphalt and concrete producers, highway and heavy equipment contractors, utility contractors, forestry and environmental recycling contractors and domestic and foreign governmental agencies. Materials Solutions – Sites within the Materials Solutions segment design and manufacture heavy processing equipment, in addition to servicing and supplying parts for the aggregate, metallic mining, recycling, ports and bulk handling markets. The sites within the Materials Solutions segment are primarily manufacturing operations, with the AME site functioning to market, service and install equipment and provide parts in the regions in which they operate for many of the products produced by all of the Company's manufacturing sites. Additionally, the Materials Solutions segment offers consulting and engineering services to provide complete "turnkey" processing systems. The principal purchasers of aggregate processing equipment include distributors, highway and heavy equipment contractors, sand and gravel producers, demolition, recycle and crushing contractors, open mine operators, quarry operators, port and inland terminal authorities, power stations and foreign and domestic governmental agencies. 15 INDEX Corporate and Other – The Corporate and Other category consists primarily of the parent company, the Company's captive insurance company, Astec Insurance, and the controls and automation business, which do not meet the requirements for separate disclosure as an operating segment or inclusion in one of the other reporting segments. The parent company and the captive insurance company provide support and corporate oversight for other sites. The controls and automation business manufactures hardware and software products that are marketed independently and included in certain products of the Company's other segments. The accounting policies of the reportable segments are the same as those described in Note 1, Basis of Presentation and Significant Accounting Policies. Intersegment sales and transfers between foreign subsidiaries are valued at prices comparable to those for unrelated parties. Segment Information: Three Months Ended March 31, 2023 Three Months Ended March 31, 2022 (in millions) Infrastructure Solutions Materials Solutions Corporate and Other Total Infrastructure Solutions Materials Solutions Corporate and Other Total Revenues from external customers $ 229.9 $ 113.9 $ 4.1 $ 347.9 $ 197.5 $ 93.7 $ — $ 291.2 Intersegment sales 0.7 13.3 0.2 14.2 1.1 9.7 — 10.8 Segment Operating Adjusted EBITDA 27.3 15.3 ( 6.8 ) 35.8 16.4 12.2 ( 9.8 ) 18.8 A reconciliation of total Segment Operating Adjusted EBITDA to the Company's "Net income attributable to controlling interest" is as follows: Three Months Ended March 31, (in millions) 2023 2022 Net income attributable to controlling interest Segment Operating Adjusted EBITDA $ 35.8 $ 18.8 Adjustments: Transformation program ( 7.2 ) ( 5.3 ) Restructuring and other related charges ( 7.1 ) ( 1.0 ) Gain on sale of property and equipment, net 3.4 — Transaction costs — ( 0.6 ) Interest expense, net ( 1.5 ) ( 0.2 ) Depreciation and amortization ( 6.3 ) ( 6.7 ) Income tax provision ( 4.4 ) ( 0.9 ) Elimination of intercompany profit ( 0.6 ) — Net income attributable to controlling interest $ 12.1 $ 4.1 Note 11. Strategic Transformation and Restructuring and Other Asset Charges The Company is undergoing a multi-year phased implementation of a standardized enterprise resource planning ("ERP") system across the global organization, which will replace much of the existing disparate core financial systems. The upgraded ERP will initially convert 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 the Company to better leverage automation and process efficiency. An implementation of this scale is a major financial undertaking and requires substantial time and attention of management and key employees. In addition, beginning in the first quarter of 2022, a lean manufacturing initiative at one of the Company's largest sites was initiated and is expected to drive improvement in gross margin at that site. Gross margin improvements are expected to be realized in conjunction with the project completion in early to mid-2024. This improvement is intended to serve as the optimal blueprint for the Company's other manufacturing facilities. Costs incurred of $ 7.2 million and $ 5.3 million related to these strategic transformational initiatives in the three months ended March 31, 2023 and 2022, respectively, are recorded in "Selling, general and administrative expenses" in the Consolidated Statements of Operations. 16 INDEX The Company periodically sells or disposes of its assets in the normal course of its business operations as they are no longer needed or used, and the Company may incur gains or losses on these disposals. Certain of the costs associated with these decisions are separately identified as restructuring. The Company reports asset impairment charges and gains or losses on the sales of property and equipment collectively, with restructuring charges in "Restructuring and other asset charges, net" in the Consolidated Statements of Operations to the extent they are experienced. Restructuring charges and the net gain on sale of property and equipment are presented below: Three Months Ended March 31, (in millions) 2023 2022 Restructuring charges: Costs associated with leadership change and overhead restructuring $ 7.0 $ — Costs associated with exited operations - Enid 0.1 0.2 Costs associated with closing Tacoma — 0.8 Total restructuring related charges 7.1 1.0 Gain on sale of property and equipment, net: Gain on sale of property and equipment, net ( 3.4 ) — Total gain on sale of property and equipment, net ( 3.4 ) — Restructuring and other asset charges, net $ 3.7 $ 1.0 Restructuring charges by segment are as follows: Three Months Ended March 31, (in millions) 2023 2022 Infrastructure Solutions $ 0.3 $ 1.0 Corporate and Other 6.8 — Total restructuring related charges $ 7.1 $ 1.0 Net gains on sale of property and equipment by segment are as follows: Three Months Ended March 31, (in millions) 2023 2022 Infrastructure Solutions $ ( 3.4 ) $ — Total gain on sale of property and equipment, net $ ( 3.4 ) $ — Restructuring charges accrued, but not paid, were $ 2.5 million and $ 4.7 million as of March 31, 2023 and December 31, 2022, respectively. In January 2021, the Company 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. In conjunction with this action, the Company recorded $ 0.8 million of restructuring related charges during the three months ended March 31, 2022 in "Restructuring and other asset charges, net" in the Consolidated Statements of Operations. The Company recorded the Tacoma facility's land, building and certain equipment assets of $ 15.4 million as held for sale in its Consolidated Balance Sheets at December 31, 2022. The sale of these assets was completed in the first quarter of 2023 for $ 19.9 million. The Company recorded a gain on the sale of $ 3.4 million, which was recorded in "Restructuring and other asset charges, net" in the Consolidated Statements of Operations. Additional restructuring costs of $ 0.1 million and $ 0.2 million were incurred during the three months ended March 31, 2023 and 2022, respectively, for the Company's exited oil and gas drilling product lines produced at its former Enid, Oklahoma ("Enid") location. Effective as of January 6, 2023, Mr. Barry A. Ruffalo's employment as President and Chief Executive Officer was terminated. In connection with his separation, the Company entered into an agreement with Mr. Ruffalo (the "Separation Agreement") pursuant 17 INDEX to which, Mr. Ruffalo was entitled to certain severance payments and benefits. During the first quarter of 2023, $ 1.8 million of restructuring costs, related to the modification of Mr. Ruffalo's equity awards and other third-party transition support costs, were recorded in "Restructuring and other asset charges, net" in the Consolidated Statements of Operations. The related recovery of $ 1.6 million of incurred share-based compensation expense was recorded in "Selling, general and administrative expenses" in the Consolidated Statements of Operations. The Separation Agreement also included a release and waiver by Mr. Ruffalo and other customary provisions. Management continually reviews the Company's organizational structure and operations to ensure they are optimized and aligned with achieving near-term and long-term operational and profitability targets. In connection with this review, in February 2023, the Company implemented a limited restructuring plan to right-size and reduce the fixed cost structure of certain overhead departments. Charges of $ 5.3 million for employee termination costs, including equity award modifications, were incurred in the first quarter of 2023 and recorded in "Restructuring and other asset charges, net" in the Consolidated Statements of Operations. The related recovery of $ 0.8 million of incurred share-based compensation expense was recorded in "Selling, general and administrative expenses" in the Consolidated Statements of Operations. Note 12. Earnings Per Common Share Basic earnings per common share is determined by dividing "Net income attributable to controlling interest" by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per common share includes the dilutive effect of common stock equivalents, consisting of restricted stock units, performance stock units and stock held in the Company's supplemental executive retirement plan, using the treasury stock method. Performance stock units, which are considered contingently issuable, are considered dilutive when the related performance criterion has been met. The following table sets forth a reconciliation of the number of shares used in the computation of basic and diluted earnings per common share: Three Months Ended March 31, 2023 2022 Denominator: Denominator for basic earnings per common share 22,655,821 22,782,476 Effect of dilutive securities 87,116 121,691 Denominator for diluted earnings per common share 22,742,937 22,904,167 Antidilutive securities excluded from the calculation of diluted earnings per share 63,949 — 18 INDEX