What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-22 compared with 2023-02-23 · 51 added, 57 removed, 114 unchanged (49% of the section changed)

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Actual results in future periods may differ materially from those expressed or implied because of a number of risks and uncertainties which are discussed below and in the Forward-Looking Information section beginning on page 13.

We experienced strong demand for our products in 2022 which led to record net sales for the full year.

Our markets continue to exhibit strength and we currently see do not anticipate a significant reduction in customer demand, at least in the near term.

However, many of the same adverse operating conditions that we experienced in 2022 including, among other things, supply chain disruptions, input cost inflation, and labor shortages continue to present challenges to our business.

Supply chain and labor issues have led to disruptions in our manufacturing facilities which constrain our operating efficiencies and negatively impact our overall profitability.

These challenges are also partially responsible for our record high backlog levels, as we have struggled to fully complete and ship products in a timely manner.

While our supply chain appears to be gradually improving, we expect that some or all of these adverse operating conditions will persist for at least a portion of 2023.

We experienced strong demand for our products in 2023 together with improving supply chain conditions which facilitated higher throughput and better operating efficiency, leading to record net sales and income for the full year.

Market conditions are mixed;

governmental and industrial product demand is robust while vegetation product demand has been hampered by higher interest rates and elevated channel inventories.

While our supply chain has improved, there are lingering supply chain issues and we continue to face labor challenges in some of our locations.

2023 Performance

In 2023, the Company's net sales increased by 12% and net income increased by 34% compared to 2022.

The increase in both net sales and net income was primarily due to a strong demand for our products.

Margins improved due to the increase in demand along with pricing actions we began in 2021 which helped mitigate inflation cost pressures.

However, our results were constrained by higher input costs, ongoing supply chain disruptions, and skilled labor shortages.

The increase in both net sales and net income was primarily due to a strong demand for our products and improving operating conditions, particularly in the later part of the year.

Margins improved due to the increase in demand along with pricing actions which helped mitigate inflation cost pressures.

However, our full-year results were constrained to some extent by higher input costs, ongoing supply chain disruptions, and skilled labor shortages, all of which had a greater impact on our results earlier in the year.

The Company's Vegetation Management Division experienced a 4% increase in net sales for the full year of 2023 compared to the full year of 2022.

The increase in net sales was primarily due to continued strong customer demand for our products and positive pricing actions.

The division's income from operations for 2022 was up 37% versus the full year of 2021, due to improved sales and positive pricing actions but offset by higher input costs and operational inefficiencies due to supply chain disruptions and labor constraints.

The division's income from operations for 2023 was up 13% versus the full year of 2022, due to improved sales, positive pricing actions,and better productivity, but offset by higher input costs, lingering supply chain disruptions, labor constraints, and higher marketing costs.

The Company's Industrial Equipment Division net sales were up 23% for the full year of 2023 compared to the full year of 2022.

The division's net sales were strong in the excavator and vacuum truck product lines and were also supported by moderate sales increases in our street sweeper, debris collector and snow removal equipment lines.

Negatively impacting this division were higher input costs and supply chain disruptions including, most significantly, a shortage of truck chassis.

These adverse conditions had a negative impact on the division's income from operations, which for the full year of 2022 was up only 5% compared to the full year of 2021.

The division's net sales were strong in each of the product lines:

excavator and vacuum trucks, street sweepers, debris collectors, and snow removal equipment.

The division's income from operations for 2023 was up 89% versus the full year of 2022, driven by significant sales growth and improved operating efficiencies, but offset by higher input costs and certain key supplier issues, most notably, a shortage of truck chassis earlier in the year.

Consolidated income from operations was $198.0 million for the full year of 2023 compared to $148.6 million in 2022, an increase of 33%.

The Company's backlog increased 26% to $1.0 billion at the end of 2022 versus the backlog of $800.8 million at the end of 2021.

The increase in the Company's backlog was primarily attributable to continued strong customer demand for our products in both of the Company's divisions as outlined above.

The Company's backlog decreased 15% to $859.8 million at the end of 2023 versus the backlog of $1.0 billion at the end of 2022.

The decrease in the Company's backlog was primarily attributable to a decline in Vegetation Management Division product orders which returned to normal levels from a historical perspective.

Inflationary Impacts

In 2022, the cost of commodities, components, parts, and accessories was significantly higher compared to the cost of those items purchased in 2021, mainly as a result of ongoing upward inflationary pressure.

In 2023, we anticipate that the average cost of commodities, components, parts, and accessories will be slightly higher than the average costs experienced during 2022 but the rate of inflation appears to be moderating.

Any material worsening of the current inflationary environment could lead to higher input costs which is likely to have a material adverse effect on our business and financial results.

Impact of the War in Ukraine

In 2022, we discontinued sales into the Russian and Belarusian markets as a response to the war in Ukraine.

Our sales in those markets represented an insignificant share of our overall international business and, accordingly, this decision did not have a material impact on our 2022 results nor do we expect it to have a material impact on our future financial results.

The war has disrupted parts of our supply chain and has created additional inflationary pressure on some of the items we purchase for our end-products, but we do not believe these effects are material to our business.

However, any significant change in or escalation of the war in Ukraine could result in unanticipated effects which may adversely impact our business.

In 2023, the cost of commodities, components, parts, and accessories was higher compared to the cost of those items purchased in 2022, mainly as a result of inflationary pressure.

Inflation moderated in the second half of 2023 and we anticipate that trend will continue in 2024 with the average cost of commodities, components, parts, and accessories increasing slightly when compared to the average costs in 2023.

The following discussion should be read in conjunction with the consolidated financial statements of the Company and the notes thereto included elsewhere in this Annual Report on Form 10-K.

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The Company’s net sales in the fiscal year ended December 31, 2023 (“2023”) were $1,689.7 million, an increase of $176.1 million or 11.6% compared to $1,513.6 million for the fiscal year ended December 31, 2022 (“2022”).

The increase in sales was attributable to continued strong customer demand for our products in both the Vegetation Management and Industrial Equipment Divisions, improved pricing, and higher throughput due to gradually improving supply chain conditions.

Supply chain disruptions and a shortage of skilled labor negatively impacted net sales, especially in the first half of the year earlier.

Net Vegetation Management sales were $979.0 million in 2023 compared to $937.1 million in 2022, an increase of $41.9 million or 4.5%, coming from a strong performance in European agricultural and governmental mowing, forestry and tree care, and North American governmental mowing equipment.

Skilled labor shortages and certain supplier issues constrained this division during 2023.

Net Industrial Equipment sales were $710.6 million in 2023 compared to $576.6 million in 2022, representing an increase of $134.0 million or 23.3%.

The increase was a result of strong performance in all product lines including excavator and vacuum trucks, sweepers and debris collection, and snow removal equipment further supported by the acquisition of Royal Truck.

This division was negatively impacted by a shortage of skilled labor and disruptions in parts of its supply chain, predominantly causing delays in receiving truck chassis.

Gross profit for 2023 was $453.6 million (26.8% of net sales) compared to $376.5 million (24.9% of net sales) in 2022, an increase of $77.1 million.

The increase in gross profit was mainly attributable to higher sales volume and better operational performance during 2023 compared to 2022 as well as improved pricing which led to higher profitability as a percentage of sales in 2023 compared to 2022, though these results were partially offset by the negative impacts of supply chain disruptions and material inflation previously mentioned.

Selling, general and administrative expenses (“SG&A”) were $240.2 million (14.2% of net sales) in 2023 compared to $212.6 million (14.0% of net sales) in 2022, an increase of $27.6 million.

The increase in SG&A expenses in 2023 was largely attributable to higher marketing expenses related to trade shows, sales promotions and commissions and to a lesser extent, sales volume-driven administration expense.

Amortization expense in 2023 was $15.5 million compared to $15.3 million in 2022, an increase of $0.2 million.

Interest expense for 2023 was $26.1 million compared to $14.4 million in 2022, an increase of $11.7 million or 81.7%.

The increase in interest expense in 2023 primarily came from higher interest rates compared to 2022.

Other income (expense), net was income of $1.8 million during 2023 compared to expense of $0.7 million in 2022.

The increase in 2023 was primarily the result of a gain on fixed assets relating to the sale of a manufacturing facility located in Kent, Washington partially offset by loss on currency exchange.

The expense in 2022 was primarily the result of an excise tax audit and to a lesser extent, changes in exchange rates.

Provision for income taxes was $39.0 million (22.2% of income before income taxes) for 2023 compared to $32.4 million (24.1% of income before income taxes) in 2022.

Net income for 2023 was $136.2 million compared to $101.9 million in 2022, with the increase in 2023 net income resulting from the factors described above.

Fiscal 2022 compared to Fiscal 2021

The Company’s net sales in the fiscal year ended December 31, 2022 (“2022”) were $1,513.6 million, an increase of $179.4 million or 13.4% compared to $1,334.2 million for the fiscal year ended December 31, 2021 (“2021”).

The increase in sales was attributable to continued strong customer demand for our products in both the Vegetation Management and Industrial Equipment Divisions and improved pricing.

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Net income for 2022 was $101.9 million compared to $80.2 million in 2021, with the increase in 2022 net income resulting from the factors described above.

Fiscal 2021 compared to Fiscal 2020

The Company’s net sales in the fiscal year ended 2021 were $1,334.2 million, an increase of $170.7 million or 14.7% compared to $1,163.5 million for the fiscal year ended December 31, 2020 (“2020”).

The increase in sales was attributable to the continued strong recovery in customer demand for our products in both the Vegetation Management and the Industrial Equipment Divisions.

Negatively affecting sales in 2020 was the onset of the COVID-19 pandemic which materially impacted global demand for the Company's products and overall Company financial performance.

Net Vegetation Management sales were $812.7 million in 2021 compared to $654.6 million in 2020, an increase of $158.1 million or 24.1%, coming from improved sales in the forestry/tree care and agricultural mowing units along with solid contributions from the U.K., Europe, Brazil and Australia operations.

Sales in this Division were negatively impacted by operational and supply chain disruptions and logistics issues due to the pandemic.

Net Industrial Equipment sales were $521.5 million in 2021 compared to $508.8 million in 2020, representing an increase of $12.7 million or 2.5%.

The increase primarily resulted from higher customer demand for excavation/vacuum truck products and to a lesser extent the sweeper/debris collection products, offset by softer demand for snow removal equipment.

Negatively affecting this Division were delays in truck chassis deliveries due to ongoing computer chip shortages as well as other supply chain constraints and operational disruptions due to the pandemic.

Gross profit for 2021 was $334.5 million (25.1% of net sales) compared to $293.7 million (25.2% of net sales) in 2020, an increase of $40.8 million.

The increase in gross profit was primarily attributable to higher sales volume in 2021 as well as pricing increases that were implemented over the course of the year.

This was offset by inflationary pressures, mainly from steel, along with higher costs relating to delivery of component parts, such as airfreighting charges to meet customer deliveries, which also had a negative effect on gross margin percentage for the full year of 2021.

Negatively affecting the gross margin and gross margin percentage during for the full year of 2020 was a $4.8 million charge on sales of inventory that had been previously stepped-up related to the Morbark acquisition.

Selling, general and administrative expenses (“SG&A”) were $202.9 million (15.2% of net sales) in 2021 compared to $184.2 million (15.8% of net sales) in 2020, an increase of $18.7 million.

The full year of 2021 included higher administrative and marketing expenses as the Company returned to pre-pandemic expense levels.

Amortization expense in 2021 was $14.6 million compared to $14.7 million in 2020, a decrease of $0.1 million.

Interest expense for 2021 was $10.5 million compared to $15.8 million in 2020, a decrease of $5.3 million or 33.5%.

The decrease in interest expense in 2021 primarily came from a decrease in interest rates, and to a lesser extent, reduced borrowing levels.

Other income (expense), net was income of $1.9 million during 2021 compared to expense of $0.6 million in 2020.

The income in 2021 was primarily from changes in exchange rates and the sale of a facility in the Netherlands and the expense in 2020 was primarily the result of changes in exchange rates offset by the gain on the sale of two properties, one in the U.S.

and one in Canada.

Provision for income taxes was $29.3 million (26.7% of income before income taxes) for 2021 compared to $22.0 million (27.5% of income before income taxes) in 2020.

Net income for 2021 was $80.2 million compared to $57.8 million in 2020, with the increase in 2021 net income resulting from the factors described above.

Liquidity and Capital Resources

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These sales, primarily in the Vegetation Management Division, help balance the Company’s production during the first and fourth quarters.

As of December 31, 2022, the Company had working capital of $536.7 million, which represents a increase of $117.1 million from working capital of $419.6 million as of December 31, 2021.

The increase in working capital was primarily a result of volume-driven and inflation-driven increases in accounts receivable as well as an increase in inventory to support the Company's higher backlog levels.

As of December 31, 2023, the Company had working capital of $590.0 million, which represents an increase of $53.3 million from working capital of $536.7 million as of December 31, 2022.

The increase in working capital was primarily a result of volume-driven and inflation-driven increases in accounts receivable as well as a volume driven increase in inventory to support the Company's backlog.

Capital expenditures were $37.7 million for 2023, compared to $31.1 million for 2022.

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Net cash provided by operating activities was $131.2 million for 2023, compared to $14.5 million for 2022.

The decrease of cash from operating activities is primarily the result of increased borrowings on the Company's revolving credit facility used for increased working capital needs in support of elevated backlog levels.

The increase of cash from operating activities is primarily the result of stronger net income driven by sales growth and a significantly lower year-on-year change in operating assets compared to 2022.

Net cash used in investing activities was $52.6 million for 2023, compared to $31.7 million for 2022.

Net cash provided by financing activities was $24.5 million for 2022, compared to net cash used of $23.0 million for 2021.

The increase in investing activities is driven by the acquisition of Royal Truck.

Net cash used by financing activities was $76.9 million for 2023, compared to net cash provided of $24.5 million for 2022.

This reduction in cash provided by financing activities is due to repayment of revolving credit.

The Company had $42.5 million in cash and cash equivalents held by its foreign subsidiaries as of December 31, 2023.

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Under the 2022 Credit Agreement, the Company has borrowed $255.0 million pursuant to a Term Facility, while up to $400.0 million is available to the Company pursuant to a Revolver Facility which terminates in five years.

The Term Facility requires the Company to

make equal quarterly principal payments of $3.75 million over the term of the loan, with the final payment of any outstanding principal amount, plus interest, due at the end of the five year term.

The Term Facility requires the Company to make equal quarterly principal payments of $3.75 million over the term of the loan, with the final payment of any outstanding principal amount, plus interest, due at the end of the five year term.

Borrowings under the 2022 Credit Agreement bear interest, at the Company’s option, at a Term Secured Overnight Financing Rate (“SOFR”) or a Base Rate (each as defined in the 2022 Credit Agreement), plus, in each case, an applicable margin.

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The Agreement also contains various covenants relating to limitations on indebtedness, limitations on investments and acquisitions, limitations on the sale of properties and limitations on liens and capital expenditures.

The Agreement also contains other customary covenants, representations and events of defaults.

The Agreement also contains

other customary covenants, representations and events of defaults.

The expiration date of the 2022 Credit Agreement, including the Term Facility and the Revolver Facility, is October 28, 2027.

As of December 31, 2022, $301.9 million was outstanding under the Credit Agreement, $249.9 million on the Term Facility and $52.0 million on the Revolver Facility.

As of December 31, 2023, $235.2 million was outstanding under the Credit Agreement, $235.2 million on the Term Facility and zero on the Revolver Facility.

On December 31, 2023, $2.6 million of the revolver capacity was committed to irrevocable standby letters of credit issued in the ordinary course of business as required by vendors' contracts resulting in $397.4 million in available borrowings.

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If this occurs, the Company’s results of operations would be adversely impacted.

In 2022, the Company was materially impacted by inflationary pressures that significantly increased the price of steel as well as the price of many other purchased components.

In 2022, we worked to mitigate some of the effects of cost increases through aggressive pricing actions but cost inflation is an ongoing challenge that could have a material impact on the Company's business and financial results, particularly if the current inflationary environment materially worsens.

In 2023, the cost of commodities, components, parts, and accessories was higher compared to the cost of those items purchased in 2022, mainly as a result of inflationary pressure.

In 2023, we worked to mitigate some of the effects of cost increases through pricing actions.

However, cost inflation is an ongoing challenge that could have a material impact on the Company's business and financial results, particularly if the current inflationary environment materially worsens.

New Accounting Pronouncements

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An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements.

Management believes the following critical accounting policy reflect its more significant estimates and assumptions used in the preparation of the Consolidated Financial Statements.

Management believes the following critical accounting policy reflects its more significant estimates and assumptions used in the preparation of the Consolidated Financial Statements.

For further information on the critical accounting policies, see Note 1 of our Notes to Consolidated Financial Statements.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis