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Item 2. Management’s Discussion and Analysis

2024-11-01 compared with 2024-08-08 · 72 added, 70 removed, 133 unchanged (52% 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, 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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Macroeconomic Events

Supply chain challenges continue to impact the global economy.

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 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.

Recent macroeconomic events including inflation, slower economic growth, and political unrest have led to economic uncertainty and volatility globally.

Our business is influenced by customer spending and global demand for our products.

We are closely monitoring a weaker-than-expected economic environment in our EMEA region and are facing challenging business conditions in APAC, especially in China, where excess manufacturing capacity and government-induced overproduction are resulting in increased 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.

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):

Despite the challenging economic environment, particularly in EMEA and APAC, we remain confident in the long-term overall health of our business and the strength of our products and services across the markets we serve.

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

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2024 % 2023 % 2024 % 2023 %

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Interest expense, net (2.7) (0.9) (3.3) (1.1) (7.5) (0.8) (11.0) (1.2)

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)

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

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

Income before income taxes 27.5 8.7 29.9 9.8 99.5 10.4 101.8 10.9

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Net income per share - diluted $ 1.09 $ 1.21 $ 4.03 $ 4.19

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.

Consolidated net sales for the third quarter of 2024 totaled $315.8 million, a 3.6% increase as compared to consolidated net sales of $304.7 million in the third quarter of 2023.

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 1.8% 3.1%

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Total growth 3.6% 2.7%

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:

The 3.6% increase in consolidated net sales in the third 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;

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

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;

The 2.7% increase in consolidated net sales in the first nine months of 2024 as compared to the same period in 2023 was driven by:

• Organic sales growth of 2.1% attributed to price realization across all regions and favorable product and channel mix 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;

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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, 2024 and 2023 (in millions, except percentages):

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

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2024 2023 % Change 2024 2023 % Change

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Total $ 315.8 $ 304.7 3.6 % $ 957.8 $ 932.2 2.7 %

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

Americas net sales were $218.7 million for the third quarter of 2024, an increase of 3.6% from the third quarter of 2023 driven by:

• Organic sales growth of 4.6% was driven by higher equipment sales and strong price realization;

• A net unfavorable impact from foreign currency exchange of approximately 1.0%.

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.

Americas net sales were $662.1 million for the first nine months of 2024, an increase of 4.7% from the first nine months of 2023 driven by:

• Organic sales growth of 5.0% driven by strong price realization and higher equipment sales, including favorable product and channel mix in North America, partly offset by unit volume declines in North America commercial equipment;

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

Europe, Middle East and Africa ("EMEA")

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:

EMEA net sales were $76.3 million for the third quarter of 2024, an increase of 6.0% from the third quarter of 2023 driven by:

• Inorganic sales increase of 5.8% 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 1.0%;

partly offset by

• Organic sales decrease of 0.8% driven by volume declines in both equipment and parts and consumables, partly offset by price realization.

EMEA net sales were $234.6 million for the first nine months of 2024, an increase of 0.2% from the first nine months of 2023 driven by:

• Inorganic sales increase of 3.3% due to the acquisition of TCS;

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

partly offset by

• Organic sales decrease of 3.6% driven by volume declines in both equipment and parts and consumables, partly offset by price realization.

Asia Pacific ("APAC")

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;

• 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;

APAC net sales were $20.8 million for the third quarter of 2024, a decrease of 3.3% from the third quarter of 2023 driven by:

• Organic sales decrease of 4.3% driven by volume declines in China and Australia, partly offset by price realization in Australia;

• A net favorable impact from foreign currency exchange of approximately 1.0%.

APAC net sales were $61.1 million for the first nine months of 2024, a decrease of 7.3% from the first nine months of 2023 driven by:

• Organic sales decrease of 6.2% attributed to volume declines in China, partly offset by price realization in Australia;

• A net unfavorable impact from foreign currency exchange of approximately 1.1%.

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.

Gross profit margin of 42.4% was 90 basis points lower in the third quarter of 2024 compared to the third quarter of 2023.

The margin rate decrease is primarily attributed to higher inflationary pressure on materials as well as elevated freight costs, partly offset by price realization.

Gross profit margin of 43.2% was 60 basis points higher in the first nine months of 2024 compared to the first nine 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.

Strong margin rates are also supported by favorable product mix, including higher industrial equipment sales.

Operating Expense

Selling and Administrative Expense

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.

Selling and administrative expense ("S&A expense") was $92.7 million for the third quarter of 2024, an increase of $4.5 million compared to the third quarter of 2023.

As a percentage of net sales, S&A expense for the third quarter of 2024 increased 50 basis points to 29.4% from 28.9% in the third quarter of 2023.

S&A expense was $275.5 million for the first nine months of 2024, an increase of $18.6 million compared to the first nine months of 2023.

S&A expense as a percentage of net sales for the first nine months of 2024 increased 120 basis points to 28.8% from 27.6% in the first nine months of 2023.

The S&A expense increase in both periods 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, partly offset by lower bad debt expense, lower legal fees, and a decrease in warranty claims.

Research and Development Expense

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.

Research and development expense ("R&D expense") was $10.5 million, or 3.3% of net sales, for the third quarter of 2024, with R&D expense as a percentage of net sales increasing 30 basis points compared to the third quarter of 2023.

R&D expense was $31.8 million, or 3.3% of net sales, for the first nine months of 2024, increasing 50 basis points compared to the first nine 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 $2.5 million in the second quarter of 2024 compared to $4.0 million in the same period of 2023.

Interest expense, net was $2.7 million in the third quarter of 2024 compared to $3.3 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 and six months ended June 30, 2024 and 2023, respectively (in millions, except percentages):

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

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

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

2024 2023 2024 2023

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Interest expense, net $ 2.7 $ 3.3 $ 7.5 $ 11.0

Our debt portfolio as of June 30, 2024 was comprised of debt predominately in U.S.

Our debt portfolio as of September 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 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.

Net Foreign Currency Transaction Gain (Loss)

Net foreign currency transaction loss was $0.4 million in the third quarters of 2024 and 2023.

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

dollar relative to the Chinese renminbi and Mexican peso.

Net currency transaction gain was $0.1 million in the first nine months of 2024 compared to a gain of $0.5 million in the first nine months of 2023.

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

The effective tax rate for the third quarter of 2024 was 24.4% compared to 23.4% for the third 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 effective tax rate for the first nine months of 2024 was 22.5% compared to 22.9% for the first nine 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.

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

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

Our order backlog was $76.8 million at September 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 $84.6 million at June 30, 2024 compared to $117.1 million as of December 31, 2023.

Cash, cash equivalents and restricted cash totaled $91.3 million at September 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 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.

Our current ratio was 2.2 as of September 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 $334.0 million as of September 30, 2024 and $312.1 million as of December 31, 2023.

Our debt-to-capital ratio was 24.4% as of September 30, 2024 compared to 25.8% as of December 31, 2023.

As of September 30, 2024, we had letters of credit and bank guarantees outstanding in the amount of $3.2 million, leaving approximately $439.3 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, 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.

Net cash provided by operating activities during the nine months ended September 30, 2024 was $52.2 million compared to net cash provided by operating activities of $124.6 million during the nine months ended September 30, 2023.

The decrease was the result of consumption of working capital and spend on our ERP modernization project of $25.6 million.

Cash Flow from Investing Activities

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.

Net cash used in investing activities during the nine months ended September 30, 2024 was $69.1 million compared to net cash used in investing activities of $15.2 million during the nine months ended September 30, 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 $25.7 million.

Cash Flow from Financing Activities

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.

Net cash used in financing activities during the nine months ended September 30, 2024 was $8.1 million compared to net cash used in financing activities of $87.1 million during the nine months ended September 30, 2023.

The decrease in cash outflows 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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Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue” or similar words or the negative thereof.

These statements do not relate to strictly historical or current facts and provide current expectations of forecasts of future events.

These statements do not relate to strictly historical or current

facts and provide current expectations of forecasts of future events.

Any such expectations or forecasts of future events are subject to a variety of factors.

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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