Forward-Looking Statements
This Quarterly Report on Form 10-Q, particularly the following discussion and analysis of our results of operations, financial condition and liquidity in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements within the meaning of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Such statements relate to, among other things, income, earnings, cash flows, changes in operations, operating improvements, businesses in which we operate andthe United States and global economies. Statements in this Quarterly Report on Form 10-Q that are not historical are hereby identified as "forward-looking statements" and may be indicated by words or phrases such as "anticipates," "supports," "plans," "projects," "expects," "believes," "should," "would," "could," "hope," and "forecast," and use of the future tense and similar words or phrases. These forward-looking statements are based largely on management's expectations, which are subject to a number of known and unknown risks, uncertainties and other factors described under the caption "Item 1A. Risk Factors" in Part II of this Report, elsewhere herein and in other documents filed by the Company with theSecurities and Exchange Commission , including Part I, Item 1A. Risk Factors of the Company's Annual Report on Form 10-K for the year ended December 31, 2021, which may cause actual results, financial or otherwise, to be materially different from those anticipated, expressed or implied by the forward-looking statements. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements to reflect future events or circumstances, except as required by law. The financial condition, results of operations and cash flows discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations are those ofAstec Industries, Inc. and its consolidated subsidiaries, collectively, the "Company," "Astec," "we," "our" or "us." The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . The financial position, results of operations, cash flows and other information included herein are not necessarily indicative of the financial position, results of operations and cash flows that may be expected in future periods.
Overview
We design, engineer, manufacture and market equipment and components used primarily in road building and related construction activities, as well as certain other products. Our products are used in each phase of road building, from quarrying and crushing the aggregate to application of the road surface for both asphalt and concrete. We also manufacture certain equipment and components unrelated to road construction, including equipment for the mining, quarrying, construction and demolition industries and port and rail yard operators; industrial heat transfer equipment; commercial whole-tree pulpwood chippers; horizontal grinders; blower trucks; commercial and industrial burners; and combustion control systems. Our products are marketed both domestically and internationally primarily to asphalt producers; highway and heavy equipment contractors; utility contractors; sand and gravel producers; construction, demolition, recycle and crushing contractors; mine and quarry operators; port and inland terminal authorities; power stations and domestic and foreign government agencies. In addition to equipment sales, we manufacture and sell replacement parts for equipment in each of our product lines and replacement parts for some competitors' equipment. The distribution and sale of replacement parts is an integral part of our business.
See Note 10. "Segment Information," of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion of our reportable segments.
Executive Summary
Highlights of our financial results for the three months ended
•Net sales were
•Gross profit was
•Income from operations decreased
•Net income attributable to Astec decreased to
•Diluted earnings per share were
22
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During the first quarter of 2022, we identified errors in our previously issued financial statements and based on a quantitative and qualitative assessment determined the correction of these errors to be immaterial to the prior period consolidated financial statements taken as a whole. To reflect the correction of the above errors, we have revised the previously issued consolidated financial statements and prior period information included in Management's Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q. See Note 2. Immaterial Error Correction of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details of the revision impact on the prior period.
Significant Items Impacting Operations in 2022
Simplify, Focus and Grow Strategic Transformation ("SFG") - Our ongoing strategic transformation initiative focused on implementing new business strategies and a new operating structure is concentrated on aligning our operations under the OneASTEC business model with the strategic pillars of Simplify, Focus and Grow. SFG is a multi-year program with the primary goals of optimizing our manufacturing footprint and centralizing our business into common platforms and operating models to reduce complexity and cost, improve productivity and embed continuous improvement in our processes. These efforts are considered critical to enabling us to operate competitively and supporting future growth, which are expected to broadly benefit our customers, partners, employees and shareholders. Currently, we have two elements of the SFG program in operation, which include the implementation of a standardized enterprise resource planning ("ERP") system and a gross margin-generating lean manufacturing initiative. Our multi-year phased implementation of a standardized ERP system across our global organization will replace much of our existing disparate core financial systems. The upgraded ERP will initially convert our internal operations, manufacturing, finance, human capital resources management and customer relationship systems to cloud-based platforms. This new ERP system will provide for standardized processes and integrated technology solutions that enable us to better leverage automation and process efficiency. 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 expect to complete the ERP global design in 2022 and convert the operations of one site in 2023 to set the foundation before accelerating the implementation at additional sites. Beginning 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. This improvement is intended to serve as the optimal blueprint for our other manufacturing facilities. Costs incurred, during the three months endedMarch 31, 2022 andMarch 31, 2021 , were$5.3 million and$3.2 million , respectively, which represent costs directly associated with the SFG initiative and which cannot be capitalized in accordance withU.S. GAAP. These costs are included in "Selling, general and administrative expenses" in the Consolidated Statements of Operations. COVID-19 Pandemic - The COVID-19 pandemic has caused significant disruptions to national and global economies and to our business. Our business has been significantly affected by the contributory effects of the 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. These trends continue to impact our business today and may continue to impact our business in the near-term. Furthermore, while our business operations were fully operational during the first quarter of 2022, they were not at optimal manufacturing efficiency due to a spike in the COVID-19 omicron variant impacting our labor force. The COVID-19 pandemic and its contributory effect on the economy 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 and cannot be accurately predicted. Tacoma Site Closure - InJanuary 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. We recorded the Tacoma facility's land, building and certain equipment assets of$15.4 million , which are currently being marketed for sale, as held for sale atMarch 31, 2022 in our Consolidated Balance Sheets.
Industry and Business Condition
Our financial performance is affected by a number of factors, including the cyclical nature and varying conditions of the markets we serve. Demand in these markets fluctuates in response to overall economic conditions and is particularly sensitive to the amount of public sector spending on infrastructure development, privately funded infrastructure development and changes in the prices of liquid asphalt, oil, natural gas and steel. In addition, many of our markets are highly competitive, and our products compete worldwide with a number of other manufacturers and dealers that produce and sell similar products. 23
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We experienced continual strengthening of our backlog of orders throughout 2021, which has grown again during the first quarter of 2022 in both the Infrastructure Solutions and Materials Solutions segments. The backlog of orders as ofMarch 31, 2022 was$834.7 million compared to$420.8 million as ofMarch 31, 2021 , an increase of$413.9 million or 98.4%. Increased orders are driven by (i) continuation of the pent-up demand experienced in 2021, (ii) both customer retail and dealer inventory replenishment following economic uncertainty as a result of COVID-19 and (iii) the infrastructure investment bythe United States' government under theInfrastructure Investment and Jobs Act ("IIJA") enacted inNovember 2021 . In addition, 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. Federal funding provides a significant portion of all highway, street, roadway and parking construction inthe United States . We believe that federal highway funding influences the purchasing decisions of our customers, who are typically more amenable to making capital equipment purchases with long-term federal legislation in place. As noted above, theU.S. government enacted the IIJA inNovember 2021 . The IIJA allocates$548 billion in government spending to new infrastructure over the five-year period concluding in 2026, with certain amounts specifically allocated to fund highway and bridge projects. We believe that multi-year highway programs (such as the IIJA) will have the greatest positive impact on the road construction industry and allow our customers to plan and execute longer-term projects. Significant portions of our revenues from the Infrastructure Solutions segment relate to the sale of equipment involved in the production, handling, recycling or application of asphalt mix. Liquid asphalt is a by-product of oil refining. An increase or decrease in the price of oil impacts the cost of asphalt, which is likely to alter demand for asphalt and therefore affect demand for certain of our products. While increasing oil prices may have a negative financial impact on many of our customers, our equipment can use a significant amount of reclaimed asphalt pavement, thereby partially mitigating the effect of increased oil prices on the final cost of asphalt for the customer. We continue to develop products and initiatives to reduce the amount of oil and related products required to produce asphalt. While oil prices have increased throughout the prior year, 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 have routinely fluctuated in recent years and are expected to continue to fluctuate in the future. Based on the current macroeconomic environment, including the ongoing impact of the conflict inUkraine , we expect prices will continue to increase in 2022. Steel is a major component of our equipment. With a drop in supply, similar to oil, steel prices increased throughout the prior year. As a result, we have experienced a rising cost of steel. We anticipate that steel demand will remain strong throughout 2022, bolstered by the IIJA domestically and impacted by international production capacity being restricted by the conflict inUkraine . However, we expect new steelmaking capacity to enter the market during 2022 that will move us towards a more historical balance of supply and demand, thus slowing the pace of price inflation we have recently experienced. 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 may not be able to pass through all of the increases in steel costs to our customers, which negatively impacts our gross profit. 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 and expenses for certain components used in our manufacturing processes. We cannot estimate the full impact that any future disruptions might have on our operations. We continually 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. Furthermore, we experienced a spike in the COVID-19 omicron variant impacting our labor force inDecember 2021 and in the beginning of the first quarter. This has resulted in a variety of challenges in running our operations efficiently to meet strong customer demand. We continue to adjust our production schedules and manufacturing workload distribution, outsource components, implement efficiency improvements and actively modify our recruitment process and compensation and benefits to attract and retain production personnel in our manufacturing facilities. Whenever possible, we attempt to cover increased costs of production by adjusting the prices of our products. Backlog fulfillment times from the initial order to completing the contracted sale vary and can extend past twelve months with the growth we have experienced in the backlog. For this reason, we have limitations on our ability to pass on cost increases to our customers on a short-term basis. In addition, the markets we serve are competitive in nature, and competition limits our ability to pass through cost increases in many cases. Through our operational excellence initiatives, we also strive to minimize the effect of inflation through cost reductions and improved manufacturing efficiencies. Results of OperationsNet Sales
Net sales increased
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and component sales of$8.6 million , (ii) service and equipment installation revenue of$1.4 million and (iii) freight revenue of$0.9 million partially offset by decreased equipment sales of$2.3 million and$1.6 million in lower used equipment sales. Sales reported by our foreign subsidiaries inU.S. dollars for the first quarter of 2022 would have been$1.7 million higher had foreign exchange rates been the same as 2021 rates. Domestic sales for the first quarter of 2022 were$234.5 million or 80.5% of net sales compared to$225.6 million or 79.3% of net sales for 2021, an increase of$8.9 million or 3.9%. Domestic sales increased primarily due to: (i)$7.6 million higher parts and component sales, (ii)$1.1 million higher service and equipment installation revenue and (iii)$1.1 million higher freight revenue. These increases were partially offset by lower used equipment sales of$1.3 million . International sales for the first quarter of 2022 were$56.7 million or 19.5% of net sales compared to$58.8 million or 20.7% of net sales for 2021, a decrease of$2.1 million or 3.6%. International sales decreased primarily due to$3.0 million lower equipment sales partially offset by$1.1 million increased parts and component sales. Gross Profit Consolidated gross profit for the first quarter of 2022 was$66.1 million or 22.7% of net sales as compared to$68.2 million or 24.0% of net sales for the first quarter of 2021, a decrease of$2.1 million or 3.1%. The decrease was primarily driven by the impact of inflation on materials, labor and overhead of$25.5 million , partially offset by the impact of net favorable volume, pricing and mix that generated$23.7 million higher gross profit.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first quarter of 2022 were$52.7 million or 18.1% of net sales compared to$51.7 million or 18.2% of net sales for the first quarter of 2021, an increase of$1.0 million , or 1.9%, primarily due to: (i)$2.4 million of exhibit, promotional and travel costs due to the return of in-person industry conferences and business activities, (ii)$2.1 million increased costs related to our SFG transformation program, (iii) increased technology expenses of$0.6 million and (iii)$0.6 million of transaction costs primarily associated with the acquisition ofMINDS Automation Group, Inc. ("MINDS") that was completed inApril 2022 . These increases were partially offset by lower health insurance claims experience of$2.6 million , reduced deferred compensation program cost driven by our stock price changes of$1.6 million and reduced depreciation and amortization expense of$0.9 million .
Income Tax
Our income tax expense for the first quarter of 2022 was$0.9 million compared to$0.8 million for the first quarter of 2021. Our effective income tax rate was 18.0% for the first quarter of 2022 compared to 8.6% for the first quarter of 2021. The income tax expense for 2022 was higher compared to 2021 primarily due to lower net discrete benefits from the vesting of employee shared-based compensation awards offset by an increased net benefit for foreign-derived income.
Backlog
The backlog of orders as ofMarch 31, 2022 was$834.7 million compared to$420.8 million as ofMarch 31, 2021 , an increase of$413.9 million or 98.4%. Domestic backlog increased$384.1 million or 119.0% to$707.0 million and international backlog increased$29.8 million or 30.4% to$127.7 million . The backlog increased$263.1 million to$517.7 million in the Infrastructure Solutions segment and increased$150.8 million to$317.0 million in the Materials Solutions segment. Increased orders were driven by (i) continuation of the pent-up demand experienced in 2021, (ii) both customer retail and dealer inventory replenishment following economic uncertainty as a result of COVID-19 and (iii) the infrastructure investment bythe United States' government under the IIJA enacted inNovember 2021 . SegmentNet Sales : Three Months Ended March 31, (in millions) 2022 2021 $ Change % Change Infrastructure Solutions$ 197.5 $ 201.5 $ (4.0) (2.0) % Materials Solutions 93.7 82.9 10.8 13.0 % Infrastructure Solutions Sales in this segment were$197.5 million for the first quarter of 2022 compared to$201.5 million for the same period in 2021, a decrease of$4.0 million or 2.0%. The decrease was primarily driven by unfavorable net volume, pricing and the mix of sales that resulted in lower new and used equipment sales of$8.0 million and$1.2 million , respectively. These decreases were partially offset by higher (i) parts and component sales of$3.6 million , (ii) service and equipment installation sales of$1.1 million and (iii) freight revenue of$0.7 million , respectively. 25
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Domestic sales for the Infrastructure Solutions segment increased$1.7 million or 1.0% for the first quarter of 2022 compared to the same period in 2021 primarily due to (i) increased parts and component sales of$4.4 million , (ii) increased freight revenue of$1.0 million and (iii) increased service and equipment installation sales of$0.9 million . These increases were partially offset by lower new and used equipment sales of$3.2 million and$1.3 million , respectively.
International sales for the Infrastructure Solutions segment decreased
Materials Solutions
Sales in this segment were$93.7 million for the first quarter of 2022 compared to$82.9 million for the same period in 2021, an increase of$10.8 million or 13.0% driven by the favorable impact of volume, pricing and the mix of sales that generated increases in equipment and parts and component sales of$5.7 million and$5.1 million , respectively.
Domestic sales for the Materials Solutions segment increased by
International sales for the Materials Solutions segment increased
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 are 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 10. "Segment Information," of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a reconciliation of Segment Operating Adjusted EBITDA to total consolidated net income attributable to controlling interest. Three Months Ended March 31, (in millions) 2022 2021 $ Change % Change Infrastructure Solutions $ 16.4$ 26.2 $ (9.8) (37.4) % Materials Solutions 12.2 9.7 2.5 25.8 % Corporate (9.8) (15.0) 5.2 34.7 % Infrastructure Solutions segment: Segment Operating Adjusted EBITDA for the Infrastructure Solutions segment was$16.4 million for the first quarter of 2022 compared to$26.2 million for the same period in 2021, a decrease of$9.8 million or 37.4%. The decrease in Segment Operating Adjusted EBITDA resulted primarily from: (i) the impact of higher inflation on materials, labor and overhead costs of$17.3 million , (ii) increased general and administrative costs of$3.5 million and (iii)$0.7 million in manufacturing inefficiencies due to supply chain and logistics disruptions as well as pandemic related labor restrictions. Annual incentive compensation was recorded in Corporate in the prior year period and has been reflected in the Infrastructure Solutions segment in the current year resulting in a$1.5 million impact. These increased costs were partially offset by the impact of favorable volume, pricing and mix that generated$11.7 million higher gross profit. Materials Solutions segment: Segment Operating Adjusted EBITDA for the Materials Solutions segment was$12.2 million for the first quarter of 2022 compared to$9.7 million for the same period in 2021, an increase of$2.5 million or 25.8%. The increase in Segment Operating Adjusted EBITDA between periods resulted primarily from the impact of favorable volume, pricing and mix that generated$12.0 million higher gross profit. These increases were partially offset by the impact of higher inflation on materials, labor and overhead costs of$8.2 million and increased general and administrative costs of$1.5 million . Annual incentive compensation was recorded in Corporate in the prior year period and has been reflected in the Materials Solutions segment in the current year resulting in a$0.7 million impact. Corporate: Corporate operations had net expenses of$9.8 million for the first quarter of 2022 compared to$15.0 million for the first quarter of 2021, a decrease of$5.2 million or 34.7%. The decrease in expenses was driven by lower health insurance claims 26
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experience of$2.6 million ,$2.2 million of annual incentive compensation that was recorded within the reportable segments in the current year as compared to at Corporate in the prior year period and reduced deferred compensation program cost driven by our stock price changes of$1.6 million . These decreases were partially offset by increases in consultant costs and stock compensation expenses.
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$111.4 million of cash and cash equivalents available for operating purposes as ofMarch 31, 2022 , of which$21.8 million was held by our foreign subsidiaries. Our future cash requirements include working capital needs, capital expenditures, vendor hosted software arrangements including the related implementation costs, unrecognized tax benefits and operating lease payments. In addition, we intend to fund other initiatives of our business including the SFG transformation and may identify strategic acquisitions which cash uses are variable in nature. InApril 2022 , we acquired MINDS with a total cash consideration payable to the selling shareholders of$18.2 million , subject to adjustment for cash, indebtedness and net working capital and was funded from cash on hand. We believe that our current working capital, cash flows generated from future operations and available capacity under our credit facility will be sufficient to meet working capital and capital expenditure requirements for at least the next 12 months. We did not have any outstanding borrowings on the Credit Facility atMarch 31, 2022 orDecember 31, 2021 . In addition, no borrowings have been made under the Credit Facility during 2022. Our outstanding letters of credit totaling$2.5 million decreased borrowing availability to$147.5 million under the revolving credit facility as ofMarch 31, 2022 . The 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 atMarch 31, 2022 . Certain of our international subsidiaries inSouth Africa ,Australia ,Brazil and theUnited 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. Both the outstanding borrowings under the credit facilities of the international subsidiaries and the order anticipation agreements are recorded in "Short-term debt" in our Consolidated Balance Sheets. Each of the credit facilities are generally guaranteed byAstec Industries, Inc. and/or secured with certain assets of the local subsidiary. We regularly enter into agreements primarily to purchase inventory in the ordinary course of business. As ofMarch 31, 2022 , open purchase obligations totaled$298.5 million , of which$274.4 million are expected to be fulfilled within one year. We estimate that our capital expenditures will be between$40 and$50 million for the year endingDecember 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.
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