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Item 2. Management’s Discussion and Analysis

2023-10-31 compared with 2023-08-04 · 77 added, 77 removed, 116 unchanged (57% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) provides a comparison of the Company's results of operations, as well as liquidity and capital resources for the quarters ended June 30, 2023 and 2022.

The MD&A should be read in conjunction with the Company's consolidated financial statements and notes included in Item 1 of this Quarterly Report.

Throughout this MD&A, the Company refers to measures used by management to evaluate performance, including financial measures that are not defined under generally accepted accounting principles (GAAP) in the U.S.

Net sales excluding foreign currency translation (i.e.

organic sales) is not a measure of financial performance under GAAP;

Net sales excluding foreign currency translation (i.e., organic sales) is not a measure of financial performance under GAAP;

however, the Company believes it is useful in understanding its financial results and provides comparable measures for understanding the operating results of the Company between different periods.

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Supply chain challenges continue to impact the global economy.

Our operating performance during the second quarter of 2023 has benefited from fewer supply chain disruptions enabling us to obtain key component parts, increase production and reduce backlog.

Our operating performance throughout 2023 has benefited from fewer supply chain disruptions enabling us to obtain key component parts, increase production and reduce backlog.

If there are additional disruptions in our supply chain, or we continue to experience certain supply shortages, it could materially or adversely impact our operating results and financial condition.

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Any sustained adverse impacts to our business, the industries in which we operate, market demand for our products, and/or certain suppliers or customers may also affect our future results of operations, financial position, or cash flows.

We are actively monitoring the macroeconomic environment, especially the potential impact of global supply chain constraints on material inflation, and the potential decreased demand for our products.

We are actively monitoring the global macroeconomic environment, including geopolitical conflict, the potential impact of global supply chain constraints on material inflation, and change in demand for our products.

We continued to deliver strong net sales and net income growth in the third quarter of 2023.

Our performance reflects actions and investments we made beginning in 2022 and have continued to execute upon throughout 2023 and into 2024.

Global economic conditions continue to be highly volatile and uncertainty remains regarding supply chain challenges, inflationary trends, and overall business environment.

We continue to monitor the market demand for our products in EMEA and the slower than expected recovery in APAC.

We anticipate that we will need to remain agile as we continue to navigate evolving challenges.

We remain confident in the long-term growth trends for our products and services in the markets we serve.

The following table compares the results of operations for the three and six months ended June 30, 2023 and 2022, respectively (in millions, except per share data and percentages):

The following table compares the results of operations for the three and nine months ended September 30, 2023 and 2022, respectively (in millions, except per share data and percentages):

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2023 % 2022 % 2023 % 2022 %

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Interest expense, net (3.3) (1.1) (2.2) (0.8) (11.0) (1.2) (3.7) (0.5)

Net foreign currency transaction gain (loss) 1.0 0.3 (1.0) (0.4) 0.9 0.1 (0.4) (0.1)

Other expense, net (0.6) (0.2) (0.3) (0.1) (0.7) (0.1) (0.5) (0.1)

Net foreign currency transaction (loss) gain (0.4) (0.1) — — 0.5 0.1 (0.4) —

Other (expense) income, net (1.1) (0.4) 0.6 0.2 (1.8) (0.2) 0.1 —

Income before income taxes 29.9 9.8 19.8 7.5 101.8 10.9 54.8 6.8

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Net income per share - diluted $ 1.21 $ 0.83 $ 4.19 $ 2.27

Consolidated net sales for the second quarter of 2023 totaled $321.7 million, a 14.8% increase as compared to consolidated net sales of $280.2 million in the second quarter of 2022.

Consolidated net sales for the third quarter of 2023 totaled $304.7 million, a 15.9% increase as compared to consolidated net sales of $262.9 million in the third quarter of 2022.

The components of the consolidated net sales change were as follows:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

Price 8.9% 9.6%

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Total growth 15.9% 16.4%

The 14.8% increase in consolidated net sales in the second quarter of 2023 as compared to the same period in 2022 was driven by:

The 15.9% increase in consolidated net sales in the third quarter of 2023 as compared to the same period in 2022 was driven by:

• Organic sales growth of 13.9%, which excludes the effects of foreign currency exchange.

The organic sales growth was primarily due to growth across all regions led by strong equipment sales, particularly in the Americas region;

partly offset by

• A net unfavorable impact from foreign currency exchange across all regions of approximately 0.2%.

The 16.6% increase in consolidated net sales in the first six months of 2023 as compared to the same period in 2022 was driven by:

The organic sales growth was primarily due to equipment sales growth in the Americas and APAC partly offset by volume declines in EMEA;

• A net favorable impact from foreign currency exchange across all regions of approximately 2.0%.

The 16.4% increase in consolidated net sales in the first nine months of 2023 as compared to the same period in 2022 was driven by:

• Organic sales growth of 16.6%, which excludes the effects of foreign currency exchange.

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• A net unfavorable impact from foreign currency exchange across all regions of approximately 0.2%.

The following table sets forth the net sales by geographic area for the three and six months ended June 30, 2023 and 2022 (in millions, except percentages):

The following table sets forth the net sales by geographic area for the three and nine months ended September 30, 2023 and 2022 (in millions, except percentages):

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 % Change 2023 2022 % Change

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Total $ 304.7 $ 262.9 15.9 % $ 932.2 $ 801.2 16.4 %

Americas net sales were $216.6 million for the second quarter of 2023, an increase of 21.4% from the second quarter of 2022 driven by:

• Organic sales growth of 21.7% driven equally by price realization and volume increases in all product categories, led by strong equipment and parts and consumables sales in North America;

partly offset by

• A net unfavorable impact from foreign currency exchange of approximately 0.3%.

Americas net sales were $421.0 million for the first six months of 2023, an increase of 24.3% from the first six months of 2022 driven by:

• Organic sales growth of 24.6% driven equally by price realization and volume increases in all product categories across the region;

partly offset by

• A net unfavorable impact from foreign currency exchange of approximately 0.3%.

Americas net sales were $211.2 million for the third quarter of 2023, an increase of 21.4% from the third quarter of 2022 driven by:

• Organic sales growth of 20.8% driven nearly equally by price realization and volume increases in equipment sales and service across the region;

• A net favorable impact from foreign currency exchange of approximately 0.6%.

Americas net sales were $632.2 million for the first nine months of 2023, an increase of 23.3% from the first nine months of 2022 driven by:

• Organic sales growth of 23.3% driven nearly equally by price realization and volume increases in all product categories across the region.

Europe, Middle East and Africa ("EMEA")

EMEA net sales were $80.0 million for the second quarter of 2023, an increase of 3.5% from the second quarter of 2022 driven by:

• Organic sales growth of 2.4% driven by price realization in both equipment and service product categories across the region partly offset by volume declines;

EMEA net sales were $72.0 million for the third quarter of 2023, an increase of 4.3% from the third quarter of 2022 driven by:

• Organic sales decline of 2.8% driven by volume declines in both equipment and parts and consumables partly offset by price realization in all product categories;

• A net favorable impact from foreign currency exchange of approximately 7.1%.

EMEA net sales were $162.1 million for the first six months of 2023, an increase of 3.9% from the first six months of 2022 driven by:

EMEA net sales were $234.1 million for the first nine months of 2023, an increase of 4.0% from the first nine months of 2022 driven by:

• Organic sales growth of 3.6% driven by price realization partly offset by volume declines across all product categories.

The organic growth was led by equipment across our direct geographies, especially in Iberia;

partly offset by

• A net unfavorable impact from foreign currency exchange of approximately 2.6%.

The organic growth was led by price realization on equipment sales across our direct geographies, especially in Iberia;

• A net favorable impact from foreign currency exchange of approximately 0.4%.

Asia Pacific ("APAC")

APAC net sales were $25.1 million for the second quarter of 2023, an increase of 2.4% from the second quarter of 2022 driven by:

• Organic sales growth of 6.3% driven primarily by price realization in Australia and volume growth in China;

APAC net sales were $21.5 million for the third quarter of 2023, an increase of 8.0% from the third quarter of 2022 driven by:

• Organic sales growth of 11.8% driven primarily by price realization on equipment sales in Australia and volume growth in equipment sales in China;

partly offset by

• A net unfavorable impact from foreign currency exchange of approximately 3.8%.

APAC net sales were $44.4 million for the first six months of 2023, an increase of 1.8% from the first six months of 2022 driven by:

• Organic sales growth of 6.6% driven by equipment sales growth across our direct geographies, especially Australia, China and India;

APAC net sales were $65.9 million for the first nine months of 2023, an increase of 3.8% from the first nine months of 2022 driven by:

• Organic sales growth of 8.3% driven by price realization on equipment sales across our direct geographies, especially Australia, China and India;

partly offset by

• A net unfavorable impact from foreign currency exchange of approximately 4.5%.

Gross profit margin of 43.4% was 550 basis points higher in the second quarter of 2023 compared to the second quarter of 2022.

Gross profit margin of 42.2% was 410 basis points higher in the first six months of 2023 compared to the first six months of 2022.

The increase in both periods was driven by pricing realization, more than offsetting the impact of multi-year inflation on materials and labor.

Our LIFO benefit for the three and six months ended June 30, 2023 was $0.2 million and $3.2 million, respectively, compared to a LIFO charge of $4.9 million and $6.0 million in the three and six months ended June 30, 2022, respectively.

The benefit in each period was attributable to a stabilized inflation environment on materials in 2023.

Gross profit margin of 43.3% was 500 basis points higher in the third quarter of 2023 compared to the third quarter of 2022.

Gross profit margin of 42.6% was 440 basis points higher in the first nine months of 2023 compared to the first nine months of 2022.

The increase in both periods was driven by pricing realization, more than offsetting the impact of multi-year inflation.

The LIFO impact for the three and nine months ended September 30, 2023 was a charge of $0.7 million and a benefit of $2.5 million, respectively, compared to a LIFO charge of $2.1 million and $8.1 million in the three and nine months ended September 30, 2022, respectively.

The change in LIFO impact was attributable to a stabilized inflationary environment on materials in 2023.

Operating Expense

Selling and Administrative Expense

Selling and administrative expense ("S&A expense") was $87.0 million for the second quarter of 2023, an increase of $7.9 million compared to the second quarter of 2022.

S&A expense was $168.7 million for the first six months of 2023, an increase of $13.0 million compared to the first six months of 2022.

The S&A expense increase in each period was primarily driven by higher variable costs associated with increased operating performance and investments in strategic initiatives.

As a percentage of net sales, S&A expense for the second quarter of 2023 decreased 120 basis points to 27.0% from 28.2% in the second quarter of 2022.

S&A expense as a percentage of net sales for the first six months of 2023 decreased 200 basis points to 26.9% from 28.9% in the first six months of 2022.

The decrease in both periods was driven by the leverage attributable to our sales and gross margin growth, as well as our cost-containment initiatives.

Selling and administrative expense ("S&A expense") was $88.2 million for the third quarter of 2023, an increase of $16.8 million compared to the third quarter of 2022.

As a percentage of net sales, S&A expense for the third quarter of 2023 increased 170 basis points to 28.9% from 27.2% in the third quarter of 2022.

The S&A expense increase in each period was primarily driven by higher variable costs associated with increased operating performance.

S&A expense was $256.9 million for the first nine months of 2023, an increase of $29.8 million compared to the first nine months of 2022.

The increase was primarily driven by higher variable costs associated with increased operating performance and investments in strategic initiatives.

S&A expense as a percentage of net sales for the first nine months of 2023 decreased 70 basis points to 27.6% from 28.3% in the first nine months of 2022.

The decrease as a percentage of net sales was driven by our sales growth in the comparable periods, as well as our cost-containment initiatives.

Research and Development Expense

Research and development expense ("R&D expense") was $9.0 million, or 2.8% of net sales, for the second quarter of 2023, flat as a percentage of net sales compared to the second quarter of 2022.

R&D expense was $16.9 million, or 2.7% of net sales, for the first six months of 2023, essentially flat compared to the first six months of 2022.

Research and development expense ("R&D expense") was $9.1 million, or 3.0% of net sales, for the third quarter of 2023, with R&D expense as a percentage of net sales remaining flat as compared to the third quarter of 2022.

R&D expense was $26.0 million, or 2.8% of net sales, for the first nine months of 2023, essentially flat compared to the first nine months of 2022.

We continue to invest in developing innovative products and technologies at levels necessary to propel our technology and innovation leadership position.

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Interest Expense, Net

Interest expense, net was $4.0 million in the second quarter of 2023 compared to $1.2 million in the same period of 2022.

Interest expense, net was $7.7 million in the first six months of 2023 compared to $1.5 million in the first six months of 2022.

The increase in both periods was the result of higher debt levels coupled with rising interest rates on our variable interest rate debt.

The following table compares the debt levels, average interest rate, interest income and interest expense for the three and six months ended June 30, 2023 and 2022, respectively (in millions, except percentages):

Three Months Ended June 30, Six Months Ended June 30,

Interest expense, net was $3.3 million in the third quarter of 2023 compared to $2.2 million in the same period of 2022.

The increase was the result of higher interest rates on our variable interest debt.

Interest expense, net was $11.0 million in the first nine months of 2023 compared to $3.7 million in the first nine months of 2022.

The increase was the result of higher debt levels coupled with rising interest rates on our variable interest rate debt.

The following table compares the debt levels, average interest rate, interest income and interest expense for the three and nine months ended September 30, 2023 and 2022, respectively (in millions, except percentages):

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Weighted Average Outstanding Borrowings $ 262.4 $ 269.3 $ 291.3 $ 269.4

interest rate 6.28 % 1.98 % 6.04 % 1.67 %

Average interest rate 6.48 % 3.34 % 6.19 % 2.26 %

Interest expense 4.3 2.2 13.5 4.6

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Interest expense, net $ 3.3 $ 2.2 $ 11.0 $ 3.7

Our debt portfolio as of June 30, 2023 was comprised of debt predominately in U.S.

Our debt portfolio as of September 30, 2023 was comprised of debt predominately in U.S.

The Company manages its floating rate debt exposure using fixed rate interest rate swaps to reduce the Company's risk of the possibility of increased interest costs.

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Net Foreign Currency Transaction Gain (Loss)

Net foreign currency transaction gain was $1.0 million in the second quarter of 2023 compared to a loss of $1.0 million in the second quarter of 2022.

Net foreign currency transaction gain was $0.9 million in the first six months of 2023 compared to a loss of $0.4 million in the first six months of 2022.

The favorable impact was primarily due to strengthening of the Brazilian real relative to the euro during this time.

The effective tax rate for the second quarter of 2023 was 21.6% compared to 18.2% for the second quarter of 2022.

The increase was primarily due to a decrease in discrete tax benefits recognized during the quarter partly offset by favorable changes in the mix in forecasted earnings by country.

The effective tax rate for the first six months of 2023 was 22.7% compared to 23.1% for the first six months of 2022.

The decrease was primarily due to favorable changes the mix in forecasted earnings by country.

Net foreign currency transaction loss was $0.4 million in the third quarter of 2023 compared to less than $0.1 million in the third quarter of 2022.

The unfavorable impact was primarily due to the strengthening of the U.S.

dollar relative to the Brazilian real and Mexican peso.

Net foreign currency transaction gain was $0.5 million in the first nine months of 2023 compared to a loss of $0.4 million in the first nine months of 2022.

The favorable impact was primarily due to hedging gains on foreign denominated receivables.

The effective tax rate for the third quarter of 2023 was 23.4% compared to 21.2% for the third quarter of 2022.

The increase was primarily due to a decrease in discrete tax benefits recognized during the quarter.

The effective tax rate for the first nine months of 2023 was 22.9% compared to 22.4% for the first nine months of 2022.

The increase was driven by a decrease in discrete tax benefits recognized, as well as unfavorable changes in the mix of forecasted earnings by jurisdiction.

In general, it is our practice and intention to permanently reinvest the earnings of our foreign subsidiaries and repatriate earnings only when the tax impact is zero or immaterial.

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Backlog is one of the many indicators of business conditions in the Company's markets.

Our order backlog was $255.2 million at June 30, 2023 compared to $326.4 million at December 31, 2022.

Our order backlog was $213.9 million at September 30, 2023 compared to $326.4 million at December 31, 2022.

The decrease was the result of the Company's ability to obtain key component parts and increase production levels.

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Liquidity and Capital Resources

Cash, cash equivalents and restricted cash totaled $95.8 million at June 30, 2023 compared to $77.4 million as of December 31, 2022.

Cash, cash equivalents and restricted cash totaled $97.0 million at September 30, 2023 compared to $77.4 million as of December 31, 2022.

Wherever possible, cash management is centralized and intercompany financing is used to provide working capital to subsidiaries as needed.

Our current ratio was 2.3 as of June 30, 2023 and 2.2 as of December 31, 2022.

Our primary working capital, which is comprised of accounts receivable, inventories and accounts payables, was $348.9 million as of June 30, 2023 and $332.0 million as of December 31, 2022.

Our debt-to-capital ratio was 34.8% as of June 30, 2023 compared to 38.9% as of December 31, 2022.

As of June 30, 2023, we had letters of credit and bank guarantees outstanding in the amount of $3.1 million, leaving approximately $261.9 million of unused borrowing capacity on our revolving facility.

Our current ratio was 2.3 as of September 30, 2023 and 2.2 as of December 31, 2022.

Our primary working capital, which is comprised of accounts receivable, inventories and accounts payables, was $328.0 million as of September 30, 2023 and $332.0 million as of December 31, 2022.

Our debt-to-capital ratio was 28.9% as of September 30, 2023 compared to 38.9% as of December 31, 2022.

As of September 30, 2023, we had letters of credit and bank guarantees outstanding in the amount of $3.1 million, leaving approximately $316.9 million of unused borrowing capacity on our revolving facility.

Cash Flow from Operating Activities

Net cash provided by operating activities during the six months ended June 30, 2023 was $70.2 million compared to net cash used by operating activities of $23.6 million during the six months ended June 30, 2022.

Net cash provided by operating activities during the nine months ended September 30, 2023 was $124.6 million compared to net cash used by operating activities of $38.8 million during the nine months ended September 30, 2022.

The increase was the result of improved operating performance and moderating investments in working capital.

Cash Flow from Investing Activities

Net cash used in investing activities during the six months ended June 30, 2023 was $12.0 million compared to net cash used by investing activities of $10.1 million during the six months ended June 30, 2022.

The increase in cash outflows was the result of higher capital expenditures as the Company continues to deploy cash flow toward operational capital needs.

Net cash used in investing activities during the nine months ended September 30, 2023 was $15.2 million compared to net cash used by investing activities of $19.0 million during the nine months ended September 30, 2022.

The decrease in cash outflows was primarily driven by the timing of property, plant and equipment investments as the Company continues to deploy cash flow toward operational capital needs.

Cash Flow from Financing Activities

Net cash used in financing activities during the six months ended June 30, 2023 was $38.1 million compared to net cash used by financing activities of $12.2 million during the six months ended June 30, 2022.

The increase in cash outflows was driven by repayments of borrowings and share purchases.

The Company repurchased 143,305 shares of common stock for $10.0 million during the first six months of 2023 as we continue to focus on returning capital to shareholders in line with our capital allocation priorities.

Net cash used in financing activities during the nine months ended September 30, 2023 was $87.1 million compared to net cash used by financing activities of $1.2 million during the nine months ended September 30, 2022.

The increase in cash outflows was primarily driven by repayments of borrowings and share purchases.

The Company repurchased 165,098 shares of common stock for $11.7 million during the first nine months of 2023 as we continued to focus on returning capital to shareholders in line with our capital allocation priorities.

Newly Issued Accounting Guidance

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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-Q

Item 2. Management’s Discussion and Analysis