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Item 2. Management’s Discussion and Analysis

2024-08-08 compared with 2024-05-03 · 82 added, 54 removed, 121 unchanged (53% 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 March 31, 2024 and 2023.

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.

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Supply chain challenges continue to impact the global economy.

Our operating performance during the first quarter of 2024 has benefited from fewer supply chain disruptions enabling us to obtain key component parts, increase production and reduce backlog.

Our operating performance during the second quarter of 2024 has benefited from fewer supply chain disruptions enabling us to obtain key component parts, increase production and reduce backlog.

We are impacted by customer spend and global demand for our products.

We have been able to successfully manage volatility in demand through our broad and expanding product offerings.

We are monitoring a weaker-than-expected economic environment in our EMEA region and facing challenging business conditions in APAC, especially in China, where government efforts to support manufacturing amid weaker demand are resulting in market oversupply and pricing pressure.

The global nature of our operations subjects us to exposures resulting from both foreign currency exchange fluctuations in the normal course of business and geopolitical risks stemming from global conflicts.

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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.

While global economic conditions continue to be uncertain, including the ability to attract and retain skilled labor, lingering and targeted supply chain disruptions, and evolving compliance regulations, we remain agile as we continue to manage evolving conditions.

We are confident in the long-term growth trends for all our products and services in the markets we service.

The following table compares the results of operations for the three months ended March 31, 2024 and 2023, respectively (in millions, except per share data and percentages):

With growing volatility in global economics, including political relations between major economies, we remain agile as we continue to manage these evolving conditions.

Despite the challenging economic environment, particularly in EMEA and APAC, we remain confident in the long-term growth prospects for our products and services across the markets we service.

The following table compares the results of operations for the three and six months ended June 30, 2024 and 2023, respectively (in millions, except per share data and percentages):

Three Months Ended

June 30, Six Months Ended

2024 % 2023 % 2024 % 2023 %

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Interest expense, net (2.5) (0.8) (4.0) (1.2) (4.8) (0.7) (7.7) (1.2)

Net foreign currency transaction loss (0.2) (0.1) (0.1) —

Net foreign currency transaction gain 0.7 0.2 1.0 0.3 0.5 0.1 0.9 0.1

Other income (expense), net 0.1 — (0.6) (0.2) 0.2 — (0.7) (0.1)

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Net income per share - diluted $ 1.45 $ 1.68 $ 2.94 $ 2.98

Consolidated net sales for the first quarter of 2024 totaled $311.0 million, a 1.7% increase as compared to consolidated net sales of $305.8 million in the first quarter of 2023.

Consolidated net sales for the second quarter of 2024 totaled $331.0 million, a 2.9% increase as compared to consolidated net sales of $321.7 million in the second quarter of 2023.

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

Three Months Ended March 31,

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

Price 2.7% 3.6%

Volume —% (1.8)%

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Total growth 2.9% 2.3%

The 1.7% increase in consolidated net sales in the first quarter of 2024 as compared to the same period in 2023 was driven by:

• Organic sales growth of 0.9% primarily due to equipment sales growth, particularly in the Americas;

• A net favorable impact from foreign currency exchange of approximately 0.5%;

The 2.9% increase in consolidated net sales in the second quarter of 2024 as compared to the same period in 2023 was driven by:

• Organic sales growth of 2.7% was primarily due to price realization and higher equipment sales in the Americas, partly offset by lower organic sales in the EMEA and APAC regions;

• Inorganic growth of 0.8% driven by the acquisition of TCS;

The following table sets forth the net sales by geographic area for the three months ended March 31, 2024 and 2023 (in millions, except percentages):

partly offset by

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

The 2.3% increase in consolidated net sales in the first six months of 2024 as compared to the same period in 2024 was driven by:

• Organic sales growth of 1.8% attributed to price realization across the regions and higher equipment sales in the Americas, partly offset by lower sales in the EMEA and APAC regions;

• Inorganic growth of 0.6% driven by the acquisition of TCS;

partly offset by

• A net unfavorable impact from foreign currency exchange across all regions of approximately 0.1%.

The following table sets forth the net sales by geographic area for the three and six months ended June 30, 2024 and 2023 (in millions, except percentages):

Three Months Ended

2024 2023 % Change

June 30, Six Months Ended

2024 2023 % Change 2024 2023 % Change

Americas $ 227.8 $ 216.6 5.2 % $ 443.4 $ 421.0 5.3 %

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Total $ 331.0 $ 321.7 2.9 % $ 642.0 $ 627.5 2.3 %

Americas net sales were $215.6 million for the first quarter of 2024, an increase of 5.5% from the first quarter of 2023 driven by:

• Organic sales growth of 5.1% was driven primarily by price realization in North America and price realization and volume increases in Latin America.

This was partially offset by volume decreases in North America;

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

Americas net sales were $227.8 million for the second quarter of 2024, an increase of 5.2% from the second quarter of 2023 driven by:

• Organic sales growth of 5.5% was driven primarily by price realization and favorable product and channel mix across the region, partly offset by unit volume decreases in North America commercial equipment;

partly offset by

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

Americas net sales were $443.4 million for the first six months of 2024, an increase of 5.3% from the first six months of 2023 driven by:

• Organic sales growth of 5.3% driven by price realization and higher equipment sales, including a favorable product and channel mix across the region, partly offset by unit volume declines in North America commercial equipment.

Europe, Middle East and Africa ("EMEA")

EMEA net sales were $76.8 million for the first quarter of 2024, a decrease of 6.5% from the first quarter of 2023 driven by:

• Organic sales decline of 9.2% driven by volume declines in both equipment and parts and consumables partly offset by price realization in all product categories;

EMEA net sales were $81.5 million for the second quarter of 2024, an increase of 1.9% from the second quarter of 2023 driven by:

• Inorganic sales increase of 3.1% due to the acquisition of TCS;

partly offset by

• A net unfavorable impact from foreign currency exchange of approximately 0.9%;

• Organic sales decline of 0.3% driven by volume declines in both equipment and parts and consumables attributed to weaker-than-expected economic conditions, partly offset by price realization.

EMEA net sales were $158.3 million for the first six months of 2024, a decrease of 2.3% from the first six months of 2023 driven by:

• Organic sales decline of 4.8% driven by volume declines in both equipment and parts and consumables, partly offset by price realization;

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

• Inorganic sales increase of 1.3% driven by the acquisition of TCS.

• Inorganic sales increase of 2.2% due to the acquisition of TCS.

Asia Pacific ("APAC")

APAC net sales were $18.6 million for the first quarter of 2024, a decrease of 3.6% from the first quarter of 2023 driven by:

• A net unfavorable impact from foreign currency exchange of approximately 2.5%;

APAC net sales were $21.7 million for the second quarter of 2024, a decrease of 13.5% from the second quarter of 2023 driven by:

• Organic sales decline of 11.9% driven by volume declines in China and Australia, partly offset by price realization in Australia;

Gross profit margin of 44.2% was 320 basis points higher in the first quarter of 2024 compared to the first quarter of 2023.

The increase was driven by pricing realization and cost saving initiatives.

Gross profit margin expansion year over year was also due to mix shift to higher margin sectors, including industrial equipment and the direct sales channel.

• A net unfavorable impact from foreign currency exchange of approximately 1.6%.

APAC net sales were $40.3 million for the first six months of 2024, a decrease of 9.2% from the first six months of 2023 driven by:

• Organic sales decline of 7.1% attributed to product mix and volume declines, particularly in China, partly offset by price realization;

• A net unfavorable impact from foreign currency exchange of approximately 2.1%.

Gross profit margin of 43.1% was 30 basis points lower in the second quarter of 2024 compared to the second quarter of 2023.

The slight margin rate decrease is attributed to higher inflation, offset by price realization, while the overall margin rate is supported by favorable channel and product mix.

Gross profit margin of 43.6% was 140 basis points higher in the first six months of 2024 compared to the first six months of 2023.

The margin rate increase was driven by price realization and cost saving initiatives, which more than offset the effects of inflation.

Strong margin rates are also supported by favorable product mix, including higher industrial equipment sales, and a shift to direct channel sales.

Operating Expense

Selling and Administrative Expense

Selling and administrative expense ("S&A expense") was $89.9 million for the first quarter of 2024, an increase of $8.2 million compared to the first quarter of 2023.

As a percentage of net sales, S&A expense for the first quarter of 2024 increased 220 basis points to 28.9% from 26.7% in the first quarter of 2023.

The S&A expense increase was primarily driven by annualization of resources to support growth and investment in enterprise initiatives.

Selling and administrative expense ("S&A expense") was $92.9 million for the second quarter of 2024, an increase of $5.9 million compared to the second quarter of 2023.

As a percentage of net sales, S&A expense for the second quarter of 2024 increased 110 basis points to 28.1% from 27.0% in the second quarter of 2023.

The S&A expense increase was driven by higher costs linked to our strategic investments and higher compensation and benefits expense related to incremental resources to support the Company's enterprise growth strategy.

S&A expense was $182.8 million for the first six months of 2024, an increase of $14.1 million compared to the first six months of 2023.

S&A expense as a percentage of net sales for the first six months of 2024 increased 160 basis points to 28.5% from 26.9% in the first six months of 2023.

The S&A expense increase was driven by higher costs linked to our strategic investments and higher compensation expense related to incremental resources to support the Company's enterprise growth strategy.

Research and Development Expense

Research and development expense ("R&D expense") was $10.1 million, or 3.2% of net sales, for the first quarter of 2024, with R&D expense as a percentage of net sales increasing 60 basis points compared to the first quarter of 2023.

Research and development expense ("R&D expense") was $11.2 million, or 3.4% of net sales, for the second quarter of 2024, with R&D expense as a percentage of net sales increasing 60 basis points compared to the second quarter of 2023.

R&D expense was $21.3 million, or 3.3% of net sales, for the first six month of 2024, increasing 60 basis points compared to the first six months of 2023.

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

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Interest Expense, Net

Interest expense, net was $2.3 million in the first quarter of 2024 compared to $3.7 million in the same period of 2023.

Interest expense, net was $2.5 million in the second quarter of 2024 compared to $4.0 million in the same period of 2023.

The decrease was the result of lower weighted average outstanding borrowings.

The following table compares the debt levels, average interest rate, interest income and interest expense for the three months ended March 31, 2024 and 2023, respectively (in millions, except percentages):

Three Months Ended March 31,

The following table compares the debt levels, average interest rate, interest income and interest expense for the three and six months ended June 30, 2024 and 2023, respectively (in millions, except percentages):

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

2024 2023 2024 2023

Weighted Average Outstanding Borrowings $ 214.6 $ 295.9 $ 214.1 $ 306.0

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Interest expense, net $ 2.5 $ 4.0 $ 4.9 $ 7.7

Our debt portfolio as of March 31, 2024 was comprised of debt predominately in U.S.

Our debt portfolio as of June 30, 2024 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.

The Company has an aggregate $120.0 million notional amount of interest rate swaps that exchange a variable rate of interest for a fixed rate of interest of 4.076% over the term of the agreements.

Net Foreign Currency Transaction Loss

Net foreign currency transaction loss was $0.2 million in the third quarter of 2024 compared to $0.1 million in the first quarter of 2023.

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

dollar relative to the Brazilian real and other currencies.

The effective tax rate for the first quarter of 2024 was 19.1% compared to 24.1% for the first quarter of 2023.

The decrease was primarily due to an increase in discrete tax benefits associated with share-based compensation.

Net Foreign Currency Transaction Gain

Net foreign currency transaction gain was $0.7 million in the second quarter of 2024 compared to $1.0 million in the second quarter of 2023.

Net currency transaction gain was $0.5 million in the first six months of 2024 compared to a gain of $0.9 million in the first six months of 2023.

The favorable impact in both periods was primarily due to the strengthening of the U.S.

dollar relative to the Euro and other currencies.

The effective tax rate for the second quarter of 2024 was 24.4% compared to 21.6% for the second quarter of 2023.

The increase was primarily due to an increase in nondeductible executive compensation and unfavorable changes in the mix in forecasted earnings by country.

The effective tax rate for the first six months of 2024 was 21.8% compared to 22.7% for the first six months of 2023.

The decrease was primarily due to an increase in discrete tax benefits associated with share-based compensation partly offset by an increase in nondeductible executive compensation.

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 $136.7 million at March 31, 2024 compared to $186.2 million at December 31, 2023.

Our order backlog was $110.0 million at June 30, 2024 compared to $186.2 million at December 31, 2023.

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

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Liquidity and Capital Resources

Cash, cash equivalents and restricted cash totaled $88.8 million at March 31, 2024 compared to $117.1 million as of December 31, 2023.

Cash, cash equivalents and restricted cash totaled $84.6 million at June 30, 2024 compared to $117.1 million as of December 31, 2023.

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

Our current ratio was 2.2 as of March 31, 2024 and 2.1 as of December 31, 2023.

Our primary working capital, which is comprised of accounts receivable, inventories and accounts payables, was $313.8 million as of March 31, 2024 and $312.1 million as of December 31, 2023.

Our debt-to-capital ratio was 25.8% as of March 31, 2024 compared to 25.8% as of December 31, 2023.

As of March 31, 2024, we had letters of credit and bank guarantees outstanding in the amount of $3.2 million, leaving approximately $321.8 million of unused borrowing capacity on our revolving facility.

Our current ratio was 2.2 as of June 30, 2024 and 2.1 as of December 31, 2023.

Our primary working capital, which is comprised of accounts receivable, inventories and accounts payables, was $329.8 million as of June 30, 2024 and $312.1 million as of December 31, 2023.

Our debt-to-capital ratio was 25.4% as of June 30, 2024 compared to 25.8% as of December 31, 2023.

As of June 30, 2024, we had letters of credit and bank guarantees outstanding in the amount of $3.2 million, leaving approximately $321.8 million of unused borrowing capacity on our revolving facility.

Cash Flow from Operating Activities

Net cash provided by operating activities during the three months ended March 31, 2024 was $2.9 million compared to net cash provided by operating activities of $31.1 million during the three months ended March 31, 2023.

The decrease was the result of consumption of working capital, mainly related to bonus payouts and spend on our ERP modernization project, which was partly offset strong operating performance.

Net cash provided by operating activities during the six months ended June 30, 2024 was $21.5 million compared to net cash provided by operating activities of $70.2 million during the six months ended June 30, 2023.

The decrease was the result of consumption of working capital and spend on our ERP modernization project, which was partly offset by strong operating performance.

Cash Flow from Investing Activities

Net cash used in investing activities during the three months ended March 31, 2024 was $60.6 million compared to net cash used by investing activities of $6.8 million during the three months ended March 31, 2023.

The increase in cash outflows was primarily driven by cash used for the investment in Brain Corp of $32.1 million and cash used, net of cash acquired, for the acquisition of TCS of $25.5 million.

Net cash used in investing activities during the six months ended June 30, 2024 was $64.9 million compared to net cash used by investing activities of $12.0 million during the six months ended June 30, 2023.

in cash outflows was primarily driven by cash used for the investment in Brain Corp of $32.1 million and cash used, net of cash acquired, for the acquisition of TCS of $25.7 million.

Cash Flow from Financing Activities

Net cash provided by financing activities during the three months ended March 31, 2024 was $26.9 million compared to net cash used by financing activities of $10.3 million during the three months ended March 31, 2023.

The increase in cash inflows was primarily driven by proceeds from exercises of stock options, in addition to net borrowings.

Net cash provided by financing activities during the six months ended June 30, 2024 was $12.4 million compared to net cash used by financing activities of $38.1 million during the six months ended June 30, 2023.

The increase in cash inflows was primarily driven by proceeds from exercises of stock options and net proceeds from borrowings, partly offset by share repurchases and dividend payments.

Newly Issued Accounting Guidance

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Early adoption is permitted for annual financial statements that have not yet been issued.

The amendments should be applied on a prospective

basis although retrospective application is permitted.

The amendments should be applied on a prospective basis although retrospective application is permitted.

We are currently evaluating the impact of adoption on our financial disclosures.

31 unchanged sentences

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