GIBRALTAR INDUSTRIES, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Certain information set forth herein includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and, therefore are, or may be deemed to be, “forward-looking statements.” These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “anticipates,” “aspires,” “expects,” “estimates,” “seeks,” “projects,” “intends,” “plans,” “may,” “will” or “should” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, competition, strategies, margins, integration of acquired businesses, the industries in which we operate and the expected impact of evolving laws and regulation. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to, those described in the “Risk Factors” disclosures in our most recent Annual Report on Form 10-K. Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition, liquidity and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements contained herein. In addition, even if our results of operations, financial condition, liquidity, and the development of the industries in which we operate are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods. Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statements that we make herein speak only as of the date of those statements, and we undertake no obligation to update those statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data. The Company uses certain operating performance measures, specifically consolidated gross margin, operating margin by segment and consolidated operating margin, to manage the Company's businesses, set operational goals, and establish performance targets for incentive compensation for the Company's employees. The Company defines consolidated gross margin as a percentage of total consolidated gross profit to total consolidated net sales. The Company defines operating margin by segment as a percentage of total income from operations by segment to total net sales by segment and consolidated operating margin as a percentage of total consolidated income from operations to total consolidated net sales. The Company believes consolidated gross margin, operating margin and consolidated operating margin may be useful to investors in evaluating the profitability of the Company's segments and the Company on a consolidated basis. Overview Gibraltar Industries, Inc. (the "Company") is a leading manufacturer and provider of products and services for the renewable energy, residential, agtech, and infrastructure markets. The Company operates and reports its results in the following four reporting segments: • Renewables; • Residential; • Agtech; and • Infrastructure. The Company serves customers primarily in North America including renewable energy (solar) developers, home improvement retailers, wholesalers, distributors, institutional and commercial growers of food and plants, and contractors. At June 30, 2023, the Company operated 30 facilities, comprised of 22 manufacturing facilities, one distribution center, and seven offices, which are located in 15 states, Canada, China, and Japan. The Company's operational infrastructure provides the necessary scale to support regional and national customers in each of the Company's markets. Recent Trends The broader market dynamics over the past few years have resulted in impacts to the Company. Supply chains continue to recover from global disruptions experienced over the last few year including shortages of solar modules used by the Company's customers in conjunction with the goods and services the Company provides and for which 19 Table of Contents such shortages have resulted in project delays. We continue working to minimize supply chain challenges which have and may continue to adversely impact our performance and our financial results. In addition, the uncertainty of the current environment and potential worsening of macro-economic conditions present risks for the Company. Although such uncertainty did not significantly impact our financial results in the first half of 2023, the Company expects that some of these dynamics, along with higher interest rates, will continue in 2023. In June 2022, the Uyghur Forced Labor Prevention Act ("UFLPA") was enacted. The UFLPA requires traceability of components of imported goods to validate that the components are not sourced from areas in the Xinjiang region of China. This has caused solar panels to be held at the border awaiting a determination that the panels do not contain components from Xinjiang. While a few of the historically significant suppliers have begun to have panels cleared for importation, the clearance is still on a shipment-by-shipment basis, and formal documentation requirements have not yet been published. Some of the Company's larger customers have continued to shift sourcing to modules manufactured outside of the typical southeast Asia manufacturers in efforts to clear U.S. customs more efficiently and ramp up the execution of solar projects. In December 2022, the U.S. Department of Commerce ("USDOC") announced its preliminary ruling regarding the circumvention of antidumping and countervailing duties (“AD/CVD”) on Chinese imports of solar panels produced in four other countries in Southeast Asia. Four of eight major manufacturers across the four countries investigated were found to have been circumventing the AD/CVD orders. The findings are preliminary and further investigation is occurring with a final determination scheduled for August 17, 2023. Independent of the DOC’s final determination, the Presidential Proclamation issued in June 2022 provides that duties will not be collected on the imports from the impacted countries until June 2024. This provides U.S. solar importers time to adjust supply chains to ensure compliance with U.S. law. As the timing and progress of many of our customers’ projects depend upon the supply of solar panels, our operating results have been and could be impacted by these actions. We continue to work with customers who are assessing their ability to source panels needed to complete projects. On August 16, 2022, the Inflation Reduction Act ("IRA") was signed into law. Among other things, the IRA provides for Investment Tax Credits ("ITC") for renewable energy. The IRA provides a 30% ITC for projects started prior January 29, 2023. Projects started on or after this date have the opportunity to claim the 30% rate only if the project is less than one megawatt or adheres to the new prevailing wage and apprenticeship requirements. Otherwise, these projects will default to a base rate of 6%. The IRA also provides the option to earn an additional 10% credit for domestic content, and separately, an additional 10% credit for siting a project in an “energy community.” Lastly, under the IRA, Manufacturers Tax Credits ("MTC") that support clean energy manufacturing were established and expanded, and are available to suppliers of certain, specific solar tracker components, including mechanical parts and battery storage, that are made in the U.S. Final guidance is pending and expected to be issued by the Department of Treasury over the course of 2023 for the domestic content, energy community, and MTC credits. The Company believes that these enhanced tax credits under the IRA will provide long-term certainty for the industry and should reduce policy driven demand swings for our products. We will work with our customers to maximize the tax credits available to them. Business Strategy The Company's mission is to make life better for people and the planet, fueled by advancing the disciplines of engineering, science, and technology. The Company is innovating to reshape critical markets in sustainable power, comfortable and efficient living, and productive growing throughout North America. Furthermore, the Company strives to create compounding and sustainable value for its stockholders and stakeholders with strong and relevant leadership positions in higher growth, profitable end markets focused on addressing some of the world's most challenging opportunities. The foundation of the Company's strategy is built on three core pillars: Business System, Portfolio Management, and Organization Development. 1. Business System reflects the necessary systems, processes, and management tools required to deliver consistent and continuous performance improvement, every day. The Company's business system is a critical enabler to grow, scale, and deliver its plans. The Company's focus is on deploying effective tools to drive growth, improve operating performance, and develop the organization utilizing 80/20 and lean quote-to-cash initiatives along with digital systems for speed, agility and responsiveness. The Business System pillar challenges existing operating paradigms, drives day-to-day performance, forces prioritization of resources, tests the Company's business models, and drives new product and services innovation. 20 Table of Contents 2. Portfolio Management is focused on optimizing the Company’s business portfolio in higher growth markets with leadership positions while ensuring its financial capital and human resources are effectively and efficiently deployed to deliver sustainable, profitable growth while increasing its relevance with customers and shaping its markets. Recent acquisitions to help achieve these objectives include the assets of a small privately held manufacturing and distributing company of roof flashing and accessory products in July 2023 and Quality Aluminum Products ("QAP") in 2022, both within the Residential segment. To further these objectives, the Company made the decision in 2022 to divest its non-core Processing business and is currently in the final stages of liquidation of this business. 3. Organization Development drives the Company’s continuous focus on ensuring it has the right design and structure to scale the organization in order to execute the Company’s plans and meet commitments. The Company aspires to make its place of work the "Best Place to Work", where focus is on creating an environment for our people to have the best opportunity for success, continue to develop, grow and learn. At core of this pillar is the Company’s development process focused on helping employees reach their potential, improve performance, develop career roadmaps, identify ongoing education requirements, and respective succession plans. The Company believes doing so helps it attract and retain the best people to execute its business plans. The Company believes the key elements of the Company's strategy enable the Company to respond timely to changes in the end markets the Company serves, including the broader market dynamics experienced over the past two years. The Company continues to examine the need for restructuring of the Company's operations, including consolidation of facilities, reducing overhead costs, curtailing investments in working capital, and managing the Company's business to generate incremental cash. The Company believes its strategy enables the Company to respond to volatility in commodity and other input costs and fluctuations in customer demand, along with striving to maintain and improve margins. The Company has used cash flows generated by these initiatives to minimize debt, improve the Company's liquidity position, invest in growth initiatives and return capital to the Company's shareholders through share repurchases. Overall, the Company continues to strive to achieve stronger financial results, make more efficient use of capital, and deliver higher stockholder returns. Recent Developments On July 5, 2023, the Company acquired the assets of a Utah based privately held company that manufactures and distributes roof flashing and accessory products, for $10.4 million. On December 8, 2022, the Company entered into a Credit Agreement (the "Credit Agreement"), and concurrently with entering into the Credit Agreement, the Company paid off all amounts owed under the Sixth Amended and Restated Credit Agreement dated as of January 24, 2019, which was terminated with no prepayment penalties. The Credit Agreement provides for a revolving credit facility and letters of credit in an aggregate amount equal to $400 million. The Company can request additional financing to increase the revolving credit facility to $700 million or enter into a term loan of up to $300 million subject to conditions set forth in the Credit Agreement. The Credit Agreement contains two financial covenants. As of June 30, 2023, the Company was in compliance with both financial covenants. The Credit Agreement terminates on December 8, 2027. On August 22, 2022, the Company purchased all the issued and outstanding membership interests of Quality Aluminum Products ("QAP"), a manufacturer of soffit, fascia, trim coil, rain carrying products and aluminum siding for an aggregate purchase price of $52.1 million. The acquisition of QAP was financed primarily through borrowings under the Company's revolving credit facility. The results of operations of QAP have been included in the Residential segment of the Company's consolidated financial statements from the date of acquisition. In May 2022, the Company's Board of Directors authorized a share repurchase program of up to $200 million of the Company's issued and outstanding common stock. The program has a duration of three years, ending May 2, 2025. Repurchases may be made, from time to time, in amounts and at prices the Company deems appropriate, subject to market conditions, applicable legal requirements, debt covenants and other considerations. Any such repurchases may be executed using open market purchases, privately negotiated agreements or other transactions. The repurchase program may be suspended or discontinued at any time at the Company's discretion. As of June 30, 2023, the Company has repurchased 2,518,941 shares for an aggregate price of $111.0 million under this repurchase program. 21 Table of Contents Results of Operations Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022 The following table sets forth selected results of operations data and its percentage of net sales for the three months ended June 30 (in thousands): 2023 2022 Net sales $ 364,914 100.0 % $ 366,949 100.0 % Cost of sales 268,175 73.5 % 276,678 75.4 % Gross profit 96,739 26.5 % 90,271 24.6 % Selling, general, and administrative expense 53,662 14.7 % 50,132 13.7 % Income from operations 43,077 11.8 % 40,139 10.9 % Interest expense 1,308 0.3 % 656 0.1 % Other (income) expense (509) (0.1) % 281 0.1 % Income before taxes 42,278 11.6 % 39,202 10.7 % Provision for income taxes 11,555 3.2 % 9,895 2.7 % Net income $ 30,723 8.4 % $ 29,307 8.0 % The following table sets forth the Company’s net sales by reportable segment for the three months ended June 30, (in thousands): Impact of 2023 2022 Total Change Acquisitions Portfolio Management Ongoing Operations Net sales: Renewables $ 77,459 $ 101,549 $ (24,090) $ — $ — $ (24,090) Residential 228,234 200,245 27,989 25,563 — 2,426 Agtech 35,028 43,680 (8,652) — (1,983) (6,669) Infrastructure 24,193 21,475 2,718 — — 2,718 Consolidated $ 364,914 $ 366,949 $ (2,035) $ 25,563 $ (1,983) $ (25,615) Consolidated net sales decreased by $2.0 million, or 0.5%, to $364.9 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The net sales decrease was largely due to a $25.6 million or 7.0% decrease in organic revenue, the net result of a 8% volume decline and a 1% increase in pricing to customers, essentially offset by $25.6 million of revenues generated from QAP, which was acquired during the third quarter of 2022 and reported as part of the Company's Residential segment. Consolidated backlog remained flat at $411 million, as compared to the end of the prior year quarter. Net sales in the Company's Renewables segment decreased $24.1 million, or 23.6%, to $77.5 million for the three months ended June 30, 2023 compared to $101.5 million for the three months ended June 30, 2022. Revenue declined as a result of the continued lower demand for solar module installations impacted by importation challenges resulting from the UFLPA implemented in June 2022, along with timing delays experienced by new projects due to lengthier permitting processes. New order bookings continued to accelerate during the quarter and backlog increased 6% from the prior year, as customers and solar module importers gain a better understanding of documentary compliance requirements relative to the UFLPA. Net sales in the Company's Residential segment increased $28.0 million, or 14.0%, to $228.2 million for the three months ended June 30, 2023 compared to $200.2 million for the three months ended June 30, 2022. Sales of $25.6 million generated by QAP, acquired in the third quarter of 2022, along with the positive impact of participation gains offset the year over year impact of market price adjustments made in prior quarters in response to lower commodity prices and some remaining channel inventory right-sizing. Net sales in the Company's Agtech segment decreased 19.9%, or $8.7 million, to $35.0 million for the three months ended June 30, 2023 compared to $43.7 million for the three months ended June 30, 2022. Revenue declined as the commercial business experienced customer-driven delays in project starts. While backlog decreased 24% year 22 Table of Contents over year, primarily because of a slower commercial end market, the Company expects new produce projects to drive improved revenue in the second half of 2023. Net sales in the Company's Infrastructure segment increased 12.6%, or $2.7 million, to $24.2 million for the three months ended June 30, 2023 compared to $21.5 million for the three months ended June 30, 2022. The increase in revenue was due to continued solid market demand supported by the Infrastructure Investment and Jobs Act and ongoing efforts to increase market participation. Backlog also benefited from these efforts resulting in a 46% increase year over year. The Company's consolidated gross margin increased to 26.5% for the three months ended June 30, 2023 compared to 24.6% for the three months ended June 30, 2022. The increase was driven by improved price to material cost alignment, solid execution in field operations and continued operational efficiencies, along with favorable business and product mix. Selling, general, and administrative ("SG&A") expenses increased by $3.5 million, or 7.0% to $53.7 million for the three months ended June 30, 2023 compared to $50.1 million for the three months ended June 30, 2022. The $3.5 million increase was primarily due to higher performance-based compensation expense as compared to the prior year quarter. SG&A expenses as a percentage of net sales increased to 14.7% for the three months ended June 30, 2023 compared to 13.7% for the three months ended June 30, 2022. The following table sets forth the Company’s income from operations and income from operations as a percentage of net sales by reportable segment for the three months ended June 30, (in thousands): Impact of 2023 2022 Total Change Portfolio Management Ongoing Operations Income from operations: Renewables $ 5,908 7.6 % $ 6,829 6.7 % $ (921) $ — $ (921) Residential 43,959 19.3 % 35,664 17.8 % 8,295 — 8,295 Agtech (1,117) (3.2) % 1,542 3.5 % (2,659) (3,113) 454 Infrastructure 5,828 24.1 % 2,887 13.4 % 2,941 — 2,941 Unallocated Corporate Expenses (11,501) (3.2) % (6,783) (1.8) % (4,718) — (4,718) Consolidated income from operations $ 43,077 11.8 % $ 40,139 10.9 % $ 2,938 $ (3,113) $ 6,051 The Renewables segment generated an operating margin of 7.6% in the current year quarter compared to 6.7% in the prior year quarter. The increase in operating margin was driven by field operations efficiencies, favorable price to cost alignment and improved supply chain management that offset lower volumes and restructuring charges incurred in the current year quarter. The Residential segment generated an operating margin of 19.3% in the current year quarter compared to 17.8% in the prior year quarter. The expansion in operating margin was the result of increased volume, improved alignment of price/cost, implementation of additional 80/20 initiatives, and favorable product line mix. The Agtech segment generated an operating margin of (3.2)% in the current year quarter compared to 3.5% in the prior year quarter. Operating margin declined year over year, due to portfolio management charges related to the liquidation of the processing business recorded in the current quarter, partially offset by 80/20 initiatives, supply chain optimization initiatives, and improvement in project management systems. The Infrastructure segment generated an operating margin of 24.1% during the three months ended June 30, 2023 compared to 13.4% during the three months ended June 30, 2022. The margin improved year over year driven by strong operating execution, 80/20 productivity, supply chain efficiency, and product line mix. Unallocated corporate expenses increased $4.7 million from $6.8 million during the three months ended June 30, 2022 to $11.5 million during the three months ended June 30, 2023. The increase in expense was primarily the result of higher performance-based compensation expense as compared to the prior year quarter. 23 Table of Contents Interest expense increased $0.6 million to $1.3 million for the three months ended June 30, 2023 compared to $0.7 million for the three months ended June 30, 2022. The increase in interest expense was primarily due to higher interest rates as rates more than tripled as compared to the prior year quarter. Average outstanding balances on the Company's revolving credit facility were $61.9 million and $60.9 million for the three months ended June 30, 2023, and 2022, respectively. The Company recorded other income of $0.5 million for the three months ended June 30, 2023, compared to other expense of $0.3 million recorded for the three months ended June 30, 2022. The change year over year is the combined result of foreign currency translation fluctuations and changes in the fair market valuation allowance related to the liquidation of the processing business. The Company recognized a provision for income taxes of $11.6 million and $9.9 million, with effective tax rates of 27.3% and 25.2% for the three months ended June 30, 2023, and 2022, respectively. The effective tax rate for the three months ended June 30, 2023, and 2022, respectively, was greater than the U.S. federal statutory rate of 21% due to state taxes and nondeductible permanent differences partially offset by favorable discrete items due to an excess tax benefit on stock-based compensation. Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022 The following table sets forth selected results of operations data and its percentage of net sales for the six months ended June 30 (in thousands): 2023 2022 Net sales $ 658,181 100.0 % $ 684,814 100.0 % Cost of sales 484,513 73.6 % 529,699 77.3 % Gross profit 173,668 26.4 % 155,115 22.7 % Selling, general, and administrative expense 101,221 15.4 % 93,781 13.7 % Income from operations 72,447 11.0 % 61,334 9.0 % Interest expense 2,799 0.4 % 1,141 0.2 % Other (income) expense (906) (0.1) % 434 0.1 % Income before taxes 70,554 10.7 % 59,759 8.7 % Provision for income taxes 18,732 2.8 % 14,996 2.2 % Net income $ 51,822 7.9 % $ 44,763 6.5 % The following table sets forth the Company’s net sales by reportable segment for the six months ended June 30, (in thousands): Impact of 2023 2022 Total Change Acquisitions Portfolio Management Ongoing Operations Net sales: Renewables $ 136,664 $ 180,332 $ (43,668) $ — $ — $ (43,668) Residential 407,729 379,730 27,999 39,829 — (11,830) Agtech 70,880 86,108 (15,228) — (1,292) (13,936) Infrastructure 42,908 38,644 4,264 — — 4,264 Consolidated $ 658,181 $ 684,814 $ (26,633) $ 39,829 $ (1,292) $ (65,170) Consolidated net sales decreased by $26.6 million, or 3.9%, to $658.2 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The 3.9% decrease in revenue was driven by a $65.2 million or 9.5% decrease in organic revenue, the net result of a 11% volume decline and a 1% increase in pricing to customers which primarily occurred in the first quarter of 2023. Partially offsetting the year over year decrease were $39.8 million of revenues generated by QAP, which was acquired during the third quarter of 2022 and reported as part of the Company's Residential segment. Consolidated backlog remained flat at $411 million, as compared to the end of the prior year period. 24 Table of Contents Net sales in the Company's Renewables segment decreased $43.7 million, or 24.2%, to $136.7 million for the six months ended June 30, 2023 compared to $180.3 million for the six months ended June 30, 2022. The decline was the result of decreased demand for solar module installations, which continues to be impacted by importation challenges resulting from the UFLPA implemented in June 2022, along with timing delays incurred due to lengthier permitting processes. New order bookings continued to accelerate during the year and backlog increased 6% from the prior year, as customers and solar module importers gain a better understanding of documentary compliance requirements relative to the UFLPA. Net sales in the Company's Residential segment increased $28.0 million, or 7.4%, to $407.7 million for the six months ended June 30, 2023 compared to $379.7 million for the six months ended June 30, 2022. Sales of $39.8 million generated by QAP, acquired in the third quarter of 2022, along with the positive impact of participation gains more than offset channel inventory correction, price declines related to commodity cost reductions, and adverse winter weather conditions in the earlier months of 2023. Net sales in the Company's Agtech segment decreased 17.7%, or $15.2 million, to $70.9 million for the six months ended June 30, 2023 compared to $86.1 million for the six months ended June 30, 2022. Revenue declined as both the segment's commercial business and produce projects experienced delayed project starts, the latter the result of key project re-scoping and prioritizing. While backlog decreased 24% year over year, primarily because of a slower commercial end market, the Company expects new produce projects to drive improved revenue in the second half of 2023. Net sales in the Company's Infrastructure segment increased 11.1%, or $4.3 million, to $42.9 million for the six months ended June 30, 2023 compared to $38.6 million for the six months ended June 30, 2022. The increase in revenue was due to continued solid market demand supported by the Infrastructure Investment and Jobs Act and ongoing efforts to increase market participation. Backlog also benefited from these efforts resulting in a 46% increase year over year. The Company's consolidated gross margin increased to 26.4% for the six months ended June 30, 2023 compared to 22.7% for the six months ended June 30, 2022. The increase was driven by improved price to material cost alignment, solid execution in field operations, improvement in supply chain management and continued operational efficiencies, along with favorable business and product mix. Selling, general, and administrative ("SG&A") expenses increased by $7.4 million, or 7.9%, to $101.2 million for the six months ended June 30, 2023 compared to $93.8 million for the six months ended June 30, 2022. The $7.4 million increase was primarily due to higher performance-based compensation expense as compared to the prior year. Incremental SG&A expenses incurred by QAP, acquired in the third quarter of 2022, also contributed to the increase. SG&A expenses as a percentage of net sales increased to 15.4% for the six months ended June 30, 2023 compared to 13.7% for the six months ended June 30, 2022. The following table sets forth the Company’s income from operations and income from operations as a percentage of net sales by reportable segment for the six months ended June 30, (in thousands): Impact of 2023 2022 Total Change Portfolio Management Ongoing Operations Income from operations: Renewables $ 8,177 6.0 % $ (155) (0.1) % $ 8,332 $ — $ 8,332 Residential 73,468 18.0 % 69,099 18.2 % 4,369 — 4,369 Agtech 1,213 1.7 % 1,573 1.8 % (360) (1,223) 863 Infrastructure 8,542 19.9 % 4,068 10.5 % 4,474 — 4,474 Unallocated Corporate Expenses (18,953) (2.9) % (13,251) (1.9) % (5,702) — (5,702) Consolidated income from operations $ 72,447 11.0 % $ 61,334 9.0 % $ 11,113 $ (1,223) $ 12,336 The Renewables segment generated an operating margin of 6.0% in the current year compared to (0.1)% in the prior year. The increase in operating margin was driven by field operations productivity, favorable price to cost alignment and improved supply chain management that offset lower volumes. 25 Table of Contents The Residential segment generated an operating margin of 18.0% in the current year compared to 18.2% in the prior year. The decrease in operating margin was the result of the anticipated lower margins from the Company's recent acquisition of QAP largely offset by continued price/cost rebalancing, 80/20 activities and mix. The Agtech segment generated an operating margin of 1.7% in the current year compared to 1.8% in the prior year. Operating margin declined year over year, due to portfolio management charges related to the liquidation of the processing business recorded in the current year, largely offset by 80/20 initiatives, supply chain optimization initiatives, and improvement in project management systems. The Infrastructure segment generated an operating margin of 19.9% during the six months ended June 30, 2023 compared to 10.5% during the six months ended June 30, 2022. The margin improved year over year driven by strong operating execution, 80/20 productivity, supply chain efficiency, and product line mix. Unallocated corporate expenses increased $5.7 million from $13.3 million during the six months ended June 30, 2022 to $19.0 million during the six months ended June 30, 2023. The increase in expense was primarily due to higher performance-based compensation expense as compared to the prior year. Interest expense increased year over year with $2.8 million for the six months ended June 30, 2023 compared to $1.1 million for the six months ended June 30, 2022. The increase in expense was largely due to higher interest rates which more than tripled compared to the prior year. Higher average outstanding balances on the Company's revolving credit facility of $72.5 million and $55.4 million for the six months ended June 30, 2023, and 2022, respectively, also contributed to the increased expense. The Company recorded other income of $0.9 million for the six months ended June 30, 2023, compared to other expense of $0.4 million recorded for the six months ended June 30, 2022. The change year over year is the combined result of foreign currency translation fluctuations and changes in the fair market valuation allowance related to the liquidation of the processing business. The Company recognized a provision for income taxes of $18.7 million and $15.0 million, with effective tax rates of 26.6% and 25.1% for the six months ended June 30, 2023 and 2022, respectively. The effective tax rate for the six months ended June 30, 2023, and 2022, respectively, was greater than the U.S. federal statutory rate of 21% due to state taxes and nondeductible permanent differences partially offset by favorable discrete items due to an excess tax benefit on stock-based compensation. Liquidity and Capital Resources The following table sets forth the Company's liquidity position as of (in thousands): June 30, 2023 December 31, 2022 Cash and cash equivalents $ 18,621 $ 17,608 Availability on revolving credit facility 383,855 304,505 $ 402,476 $ 322,113 Sources of Liquidity The Company's sources of liquidity are comprised of cash on hand and available borrowing capacity under the Company's Credit Agreement (the "Credit Agreement"), entered into on December 8, 2022. The Credit Agreement replaced and paid off all amounts owed under the Sixth Amended and Restated Credit Agreement dated as of January 24, 2019. The Credit Agreement maintains similar capacity as the prior agreement in which it provides for a revolving credit facility and letters of credit in an aggregate amount equal to $400 million. The Company can request additional financing to increase the revolving credit facility to $700 million or enter into a term loan of up to $300 million subject to conditions set forth in the Credit Agreement. The Company believes that these sources provide the Company with ample liquidity and capital resources to invest in operational excellence, growth initiatives and the development of the organization. The Company has been able to weather the economic impacts of the broader market dynamics, including the inflationary cost environment, while continuing to make investments that support the Company's strategy. The Company continues to remain focused on managing its working capital, closely monitoring customer credit and collection activities, and working to extend payment terms with its vendors. The Company believes its liquidity, together with the cash expected to be generated from operations, will be sufficient to fund working capital needs and growth initiatives for the foreseeable future. 26 Table of Contents The Company can and does use the Credit Agreement to provide liquidity and capital resources primarily for the Company's U.S. operations when necessary. Generally, the Company's foreign operations have generated cash flow from operations sufficient to invest in working capital and fund their capital improvements. As of June 30, 2023 and December 31, 2022, the Company's foreign subsidiaries held $16.4 million and $15.2 million of cash, respectively. Outstanding balances on the Company's revolving credit facility under the Company's Credit Agreement accrue interest at a rate, at the Company's option, equal to the applicable margin plus (a) a base rate, (b) a daily simple secured overnight financing rate ("SOFR"), (c) a term SOFR rate, or (d) for certain foreign currencies, a foreign currency rate. See Note 8 to the Company's consolidated financial statements in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for further information on the Credit Agreement. Uses of Cash / Cash Requirements The Company's material short-term cash requirements primarily include accounts payable, certain employee and retiree benefit-related obligations, operating lease obligations, interest and repayments of borrowing on its revolving credit facility, capital expenditures, and other purchase obligations originating in the normal course of business for inventory purchase orders and contractual service agreements. The Company's principal capital requirements are to fund its operations' working capital and capital improvements, as well as provide capital for acquisitions and to strategically allocate capital through repurchases of Company stock. The Company will continue to invest in growth opportunities as appropriate while focusing on working capital efficiency and profit improvement opportunities to minimize the cash invested to operate its business. The Company intends to fund its cash requirements through cash generated from operations and, as necessary, from the availability on its revolving credit facility. In May 2022, the Company's Board of Directors authorized a share repurchase program of up to $200 million of the Company's issued and outstanding common stock. The program has a duration of three years, ending May 2, 2025. Repurchases may be made, from time to time, in amounts and at prices the Company deems appropriate, subject to market conditions, applicable legal requirements, debt covenants and other considerations. Any such repurchases may be executed using open market purchases, privately negotiated agreements or other transactions. The repurchase program may be suspended or discontinued at any time at the Company's discretion. As of June 30, 2023, the Company has repurchased 2,518,941 shares for an aggregate price of $111.0 million under this repurchase program, including 521,575 shares repurchased for an aggregate price of $25.2 million during the six months ended June 30, 2023. Over the long-term, the Company expects that future investments, including strategic business opportunities such as acquisitions, may be financed through a number of sources, including internally available cash, availability under the Credit Agreement, new debt financing, the issuance of equity securities, or any combination of the aforementioned. All potential acquisitions are evaluated based on the Company's acquisition strategy, which includes the enhancement of the Company's existing products, operations, and/or capabilities, as well as expanding the Company's access to new products, markets, and customers, with the goal of creating compounding and sustainable stockholder value. These expectations are forward-looking statements based upon currently available information and may change if conditions in the credit and equity markets deteriorate or other circumstances change. To the extent that operating cash flows are lower than current levels, or sources of financing are not available or not available at acceptable terms, the Company's future liquidity may be adversely affected. Except as disclosed above, there have been no material changes in the Company's cash requirements since December 31, 2022, the end of fiscal year 2022. See Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. 27 Table of Contents Cash Flows The following table sets forth selected cash flow data for the six months ended June 30, (in thousands): 2023 2022 Cash provided by (used in): Operating activities $ 114,094 $ 544 Investing activities (4,730) (11,202) Financing activities (107,970) 16,032 Effect of foreign exchange rate changes (381) (1,074) Net increase in cash and cash equivalents $ 1,013 $ 4,300 Operating Activities Net cash provided by operating activities for the six months ended June 30, 2023 of $114.1 million consisted of net income of $51.8 million, non-cash net charges totaling $21.6 million, which include depreciation, amortization, stock-based compensation, exit activity recoveries and other non-cash charges, and $40.7 million of cash generated from working capital and other net operating assets. The cash generated from working capital and other net operating assets was largely due to increases in accounts payable, the result of the timing of purchases and vendor payments, and billings in excess of costs, the result of increased advance payments from and billings to customers on projects. In addition, cash was generated due to the Company's focus on reducing its investment in inventory to better align with lower sales volumes while still meeting customer demand. These activities were partially offset by an increase in accounts receivable largely the result of seasonal increases in demand. Net cash provided by operating activities for the six months ended June 30, 2022 of $0.5 million consisted of income from continuing operations of $44.8 million and non-cash net charges totaling $20.7 million, which include depreciation, amortization, stock-based compensation, exit activity costs and other non-cash charges, offset by a $64.9 million investment in working capital and other net assets. The investment in working capital and other net assets was due to increases in accounts receivable and inventory, largely the result of seasonal increases in demand along with increased raw material and freight costs impacting inventory. A decrease in accounts payable as a result of the correlation between the timing of inventory receipts and vendor payments also contributed to the increase. The overall increase was partially offset by an increase in accrued expenses and other non-current liabilities due to increases in advance payments from and billings to customers on projects. Investing Activities Net cash used in investing activities for the six months ended June 30, 2023 of $4.7 million was primarily due to capital expenditures of $5.3 million, offset by receipt of the $0.6 million final working capital settlement resulting from the 2022 acquisition of QAP. Net cash used in investing activities for the six months ended June 30, 2022 of $11.2 million was primarily due to capital expenditures of $11.3 million. Financing Activities Net cash used in financing activities for the six months ended June 30, 2023 of $108.0 million consisted of net long-term debt payments of $79.2 million and $28.8 million of common stock repurchases. Net long-term debt payments consisted of $120.0 million in long-term debt payments, offset by $40.8 million in proceeds from borrowing on the Company's long-term debt credit facility. The Company paid $26.0 million during the six months ended June 30, 2023 related to repurchase of 538,575 shares under the Company's authorized share repurchase program. The remainder of the repurchased common stock of $2.8 million related to the net settlement of tax obligations for participants in the Company's equity incentive plans. Net cash provided by financing activities for the six months ended June 30, 2022 of $16.0 million was the result of $120.5 million in proceeds from borrowing on our long-term credit facility, offset by $51.0 million in payments on long-term debt and $53.5 million of common stock repurchases. Share repurchases of 1,194,925 under the Company’s authorized share repurchase program totaled $50.0 million with the balance repurchased for the net settlement of tax obligations for participants in the Company's equity incentive plans. 28 Table of Contents Critical Accounting Estimates There have been no material changes to the Company's critical accounting estimates during the six months ended June 30, 2023 from those disclosed in the consolidated financial statements and accompanying notes contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. Recent Accounting Pronouncements See Note 2 to the Company's consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on recent accounting pronouncements.