# ASTEC INDUSTRIES INC (ASTE) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ASTEC INDUSTRIES INC's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/792987/000079298722000013/aste-20211231.htm
Accession: 0000792987-22-000013
Filing date: 2022-02-28
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/ASTE/
All MD&A years: /company/ASTE/mda/
Next year: /company/ASTE/mda/fy2022/ (FY 2022)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes included in Item 8 of this Annual Report on Form 10-K for the year ended December 31, 2021. The results of operations and other information included herein are not necessarily indicative of the financial condition, results of operations and cash flows that may be expected in future periods. This Annual Report on Form 10-K, including matters discussed in this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements relating to our plans, estimates and beliefs that involve important risks and uncertainties. See "Safe Harbor Statements Under the Private Securities Litigation Reform Act" and Part I, Item 1A. Risk Factors for a discussion of uncertainties and assumptions that may cause actual results to differ materially from those expressed or implied in the forward-looking statements.

This section of this Annual Report on Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. 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. 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, 2020.

The financial condition and results of operations discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations are those of Astec Industries, Inc. and its consolidated subsidiaries, collectively, the "Company," "Astec," "we," "our" or "us."

Business Overview

We design, engineer, manufacture and market equipment and components used primarily in road building and related construction activities, as well as certain other products. Our products are used in each phase of road building, from quarrying and crushing the aggregate to application of the road surface for both asphalt and concrete. We also manufacture certain equipment and components unrelated to road construction, including equipment for the mining, quarrying, construction and demolition industries and port and rail yard operators; industrial heat transfer equipment; commercial whole-tree pulpwood chippers; horizontal grinders; blower trucks; commercial and industrial burners; and combustion control systems.

Our products are marketed both domestically and internationally primarily to asphalt 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.

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:

•Net sales were $1,097.2 million, an increase of 7.1%

•Gross profit was $251.7 million, an increase of 4.8%

•Income from operations decreased $20.9 million to $22.1 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.

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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.

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. 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. 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. GAAP. These costs are included in "Selling, general and administrative expenses" in the Consolidated Statements of Operations.

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.

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. The backlog of orders as of December 31, 2021 was $762.6 million compared to $360.5 million as of December 31, 2020, an increase of $402.1 million or 111.5%. 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.

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. government enacted the IIJA in November 2021. The IIJA allocates $548 billion in government spending to new infrastructure over the five-year period concluding in 2026, with certain amounts specifically allocated to fund highway and bridge projects. We believe that multi-year highway programs (such as the IIJA) will have the greatest positive impact on the road construction industry and allow our customers to plan and execute longer-term projects.

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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 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 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.

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.

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. 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. 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. 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 Operations: 2021 vs. 2020

Net Sales

Net sales increased $72.8 million or 7.1% to $1,097.2 million in 2021 from $1,024.4 million in 2020. 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. 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.

Domestic sales for 2021 were $842.1 million or 76.7% of net sales compared to $817.0 million or 79.8% of net sales for 2020, an increase of $25.1 million or 3.1%. 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.

International sales for 2021 were $255.1 million or 23.3% of net sales compared to $207.4 million or 20.2% of net sales for 2020, an increase of $47.7 million or 23.0%. 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.

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Gross Profit

Consolidated gross profit for 2021 was $251.7 million or 22.9% of net sales as compared to $240.1 million or 23.4% of net sales in 2020, an increase of $11.6 million or 4.8%. 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.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for 2021 were $200.6 million or 18.3% of net sales compared to $166.9 million or 16.3% of net sales for 2020, an increase of $33.7 million or 20.2%, 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.

Research and Development Expenses

Research and development expenses increased $4.4 million or 19.9% to $26.5 million in 2021 from $22.1 million in 2020. 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.

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: 

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[[/GREPCENT_TABLE]]

See Note 22, "Strategic Transformation and Restructuring, Impairment and Other Asset Charges", of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for discussion of the individual restructuring actions taken and the impairment charges recorded.

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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%).

Backlog

The backlog of orders at December 31, 2021 was $762.6 million compared to $360.5 million at December 31, 2020, an increase of $402.1 million or 111.5%. Domestic and international backlogs increased $346.4 million or 123.4% and $55.7 million or 69.7%, respectively. The backlog increased $231.1 million to $449.3 million in the Infrastructure Solutions segment and increased $171.0 million to $313.3 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.

Net Sales by Segment

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["(in millions)","","2021","","2020","","$ Change","","% Change"],["Infrastructure Solutions","","$","748.0","","","$","702.8","","","$","45.2","","","6.4","%"],["Materials Solutions","","$","349.2","","","$","321.6","","","$","27.6","","","8.6","%"]]
[[/GREPCENT_TABLE]]

Infrastructure Solutions

Sales in this segment were $748.0 million for 2021 compared to $702.8 million for 2020, an increase of $45.2 million or 6.4%. 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. 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.

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.

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.

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Segment Profit (Loss)

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["(in millions)","","2021","","2020","","$ Change","","% Change"],["Infrastructure Solutions","","$","53.0","","","$","53.8","","","$","(0.8)","","","(1.5)","%"],["Materials Solutions","","$","29.3","","","$","32.1","","","$","(2.8)","","","(8.7)","%"],["Corporate","","$","(64.8)","","","$","(40.1)","","","$","(24.7)","","","(61.6)","%"]]
[[/GREPCENT_TABLE]]

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.

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

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.

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 outstanding letters of credit totaling $2.5 million decreased borrowing availability to $147.5 million under the revolving credit facility as of December 31, 2021. 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. Both the outstanding borrowings under the credit facilities of the international subsidiaries and the order anticipation agreements are recorded in "Short-term debt" in our Consolidated Balance Sheets. Each of the credit facilities are generally guaranteed by Astec Industries, Inc. and/or secured with certain assets of the local subsidiary.

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, 2021, open purchase obligations totaled $243.0 million, of which $231.3 million are expected to be fulfilled within one year.

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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

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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.

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Cash Flows from Investing Activities

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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

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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.

Financial Condition

Our current assets increased to $641.7 million at December 31, 2021 from $565.8 million at December 31, 2020, an increase of $75.9 million or 13.4%. 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.

Our current liabilities increased to $225.3 million at December 31, 2021 from $170.3 million at December 31, 2020, an increase of $55.0 million or 32.3%. 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.

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Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. Application of these principles requires us to make estimates and judgments that affect the amounts as reported in the consolidated financial statements. Accounting policies that are critical to aid in understanding and evaluating the results of operations and financial position include the following:

Inventory Valuation: Inventories are valued at the lower of first-in first-out cost or net realizable value. The most significant component of our inventories is steel. Open market prices and tariffs are subject to volatility and determine our cost of steel. During periods when open market prices decline, we may need to reduce the carrying value of the inventory. In addition, certain items in inventory become obsolete over time, and we reduce the carrying value of these items to their net realizable value. These reductions are determined by management based on estimates, assumptions and judgments made from the information available at that time. See Note 2, Basis of Presentation and Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K, for a description of our process used to value inventories at the lower of first-in first-out cost or net realizable value. We do not believe it is reasonably likely that the inventory values will materially change in the near future.

Revenue Recognition: Revenue is generally recognized when we satisfy a performance obligation by transferring control of goods or providing services. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. We generally obtain purchase authorizations from our customers for a specified amount of product at a specified price with specified delivery terms. A significant portion of our equipment sales represents equipment produced in our plants under short-term contracts for a specific customer project or equipment designed to meet a customer's specific requirements. Most of the equipment sold by us is based on standard configurations, some of which are modified to meet customer needs or specifications. We provide customers with technical design and performance specifications and perform pre-shipment testing to ensure the equipment performs according to design specifications, regardless of whether we provide installation services in addition to selling the equipment. Significant down payments are required on many equipment orders with other terms allowing for payment shortly after shipment, typically 30 days. Taxes assessed by a governmental authority that are directly imposed on revenue-producing transactions between us and our customers, such as sales, use, value-added and some excise taxes, are excluded from revenue. Costs of obtaining sales contracts with an expected duration of one year or less are expensed as incurred. As contracts are typically paid within one year from the date of the contract fulfillment, revenue adjustments for a potential financing component or the costs to obtain the contract are not made. 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.

Certain contracts include terms and conditions through which we recognize revenues upon completion of equipment production, which is subsequently stored at one of our plants at the customer's request. Revenue is recorded on such contracts upon the customer's assumption of title and transfer of control and when collectibility is probable. In addition, there must be a fixed schedule of delivery of the goods consistent with the customer's business practices, we must not have retained any specific performance obligations such that the earnings process is not complete and the goods must have been segregated from our inventory prior to revenue recognition.

We have certain sales containing multiple performance obligations, whereby revenue attributable to the sale of a product is recognized when the product is shipped, and the revenue attributable to services provided with respect to the product (such as installation services) is recognized when the service is performed. Consideration is allocated to deliverables using observable market prices from stand-alone performance obligations or a cost plus margin approach when one is not available. Otherwise, we use third-party evidence of selling price or our best estimate of the selling price for the deliverables. We evaluate sales with multiple performance obligations to determine whether revenue related to individual elements should be recognized separately or as a combined unit. In addition to the previously mentioned general revenue recognition criteria, we only recognize revenue on individual delivered elements when there is objective and reliable evidence that the delivered element has a determinable value to the customer on a standalone basis and there is no right of return.

We have certain sales orders on which we record revenue over time based upon the ratio of costs incurred to estimated total costs.

Goodwill and Other Intangible Assets: Goodwill is 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.

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Intangible assets with definite lives are tested for impairment if conditions exist that indicate the carrying value may not be recoverable. Risk factors that may be considered include an economic downturn in the general economy, a geographic market or the commercial and residential construction industries, a change in the assessment of future operations as well as the cyclical nature of our industry and the customization of the equipment we sell, each of which may cause adverse fluctuations in operating results. Other risk factors considered would be an increase in the price or a decrease in the availability of oil that could reduce the demand for our products in addition to the significant fluctuations in the purchase price of raw materials not recoverable through selling price increases that could have a negative impact on the cost of production and gross profit as well as others more fully described in the Part I, Item 1A. Risk Factors section of this Annual Report on Form 10-K. An impairment charge is recorded when the carrying value of the definite lived intangible asset is not recoverable by the cash flows generated from the use of the asset. Some of the inputs used in the impairment testing are highly subjective and are affected by changes in business factors and other conditions. Changes in any of the inputs could have an effect on future tests and result in impairment charges.

The useful lives of identifiable intangible assets are determined after considering the specific facts and circumstances related to each intangible asset. Factors considered when determining useful lives include the contractual term of any agreement, the history of the asset, our long-term strategy for the use of the asset, any laws or other local regulations which could impact the useful life of the asset, and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have definite lives are amortized, generally on a straight-line basis, over their useful lives, ranging from 2 to 19 years.

Income Taxes: Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We periodically assess the need to establish valuation allowances against our deferred tax assets to the extent we no longer believe it is more likely than not that the tax assets will be fully utilized. Judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against net deferred tax assets. Liabilities for uncertain income tax positions are based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires an estimate and measurement of the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we must determine the probability of various possible outcomes. We reevaluate these uncertain tax positions on a quarterly basis or when new information becomes available. These reevaluations are based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, successfully settled issues under audit, expirations due to statutes and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an increase to accrued taxes.

Recent Accounting Changes and Pronouncements

See Note 2, Basis of Presentation and Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for discussion of recently issued accounting pronouncements applicable to us and the impact of those standards on our consolidated financial statements and related disclosures.