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Item 2. Management’s Discussion and Analysis

2025-05-01 compared with 2024-11-01 · 77 added, 104 removed, 101 unchanged (64% 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 September 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

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.

While we do not have any direct operations or employees in areas experiencing conflicts, our operating results have been and may continue to be negatively impacted by supply chain constraints and inflationary pressures from these conflicts.

As described in Part I, Item 1A - Risk Factors in the annual report on Form 10-K for the fiscal year ended December 31, 2023, we may encounter financial difficulties if the U.S.

or other global economies experience an additional or continued long-term economic downturn as our product sales are sensitive to declines in capital spending by our customers.

Ongoing geopolitical tensions, including conflicts in the Middle East and Eastern Europe, along with evolving global trade dynamics, continue to contribute to economic uncertainty and market volatility.

In March 2025, the U.S.

imposed additional tariffs on a wide range of imports, with the potential for further tariff actions.

These trade measures, along with updates to export controls and sanctions regimes, pose ongoing risks to global supply chains, potentially increasing the cost of goods, straining procurement cycles, and impacting customer demand.

We are closely monitoring the evolving trade landscape, and our analysis of the potential impact of tariffs on our operations is actively underway.

Future trade policy shifts or retaliatory measures could raise manufacturing costs, affect product pricing, or contribute to inflationary pressures on our customers, which may in turn reduce demand for our products.

Our business remains sensitive to global demand trends.

In China, market saturation has contributed to declining sales of mid-tier products and intensified pricing competition.

In certain other markets, including Australia and Mexico, shifting customer behavior has led to deferred purchases or a greater reliance on rental solutions.

In response, we continue to pursue operational efficiencies, refine cost management strategies, and monitor global developments closely to mitigate potential risks.

As described in Part I, Item 1A - Risk Factors in the annual report on Form 10-K for the fiscal year ended December 31, 2024, we may encounter financial difficulties if the United States or other global economies experience an additional or continued long-term economic downturn as our product sales are sensitive to declines in capital spending by our customers.

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.

Changes in foreign currency may also adversely impact our new sales, earnings, and financial condition.

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.

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):

Amid the uncertainties of a slowing global economy, rising inflation, and ongoing geopolitical challenges, our focus remains on building long-term resilience.

With our global footprint, supply chain, and customer base, we

are working to navigate the effects of shifting trade policies, such as tariffs, alongside broader geopolitical and macroeconomic uncertainties.

While the full impact of these factors is uncertain and difficult to predict, we are committed to supporting our customers, ensuring operational stability, and navigating these volatile conditions with a focus on long-term growth.

The following table compares the results of operations for the three months ended March 31, 2025 and 2024, respectively (in millions, except per share data and percentages):

Three Months Ended

September 30, Nine Months Ended

September 30,

2025 % 2024 %

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Interest expense, net (2.3) (0.8) (2.3) (0.7)

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)

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

Other income, net 0.1 — 0.1 —

Income before income taxes 17.2 5.9 35.1 11.3

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Net income per share - diluted $ 0.69 $ 1.49

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.

Consolidated net sales for the first quarter of 2025 totaled $290.0 million, a 6.8% decrease as compared to consolidated net sales of $311.0 million in the first quarter of 2024.

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

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

Price 1.8% 3.1%

Three Months Ended March 31

Volume (4.9)%

Organic growth 2.7% 2.1%

Organic decline (5.0)%

Acquisitions 0.3%

Foreign currency (2.1)%

Total growth 3.6% 2.7%

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;

• Inorganic growth of 1.3% driven by the acquisition of TCS;

partly offset by

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

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;

Total decline (6.8)%

The 6.8% decrease in consolidated net sales in the first quarter of 2025 as compared to the same period in 2024 was driven by:

• Organic sales decline of 5.0% was primarily due to broad volume declines across all geographies, particularly in North America, which was lapping a significant backlog reduction benefit in the prior year period;

• A net unfavorable impact from foreign currency exchange of approximately 2.1% due primarily to the strengthening of the Brazilian Real and Euro relative to the U.S.

partly offset by

• 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 nine months ended September 30, 2024 and 2023 (in millions, except percentages):

• Acquisition-related growth of 0.3% driven by TCS.

The following table sets forth the net sales by geographic area for the three months ended March 31, 2025 and 2024 (in millions, except percentages):

Three Months Ended

September 30, Nine Months Ended

September 30,

2024 2023 % Change 2024 2023 % Change

2025 2024 % Change

Americas $ 197.3 $ 215.6 (8.5) %

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Total $ 290.0 $ 311.0 (6.8) %

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 $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;

Americas net sales were $197.3 million for the first quarter of 2025, a decrease of 8.5% from the first quarter of 2024 driven by:

• Organic sales decline of 6.9% was driven by volume declines, particularly in North America, which was lapping a significant backlog reduction benefit in the prior year period, partly offset by price realization in Latin America;

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

Europe, Middle East and Africa ("EMEA")

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;

• 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%;

EMEA net sales were $76.0 million for the first quarter of 2025, a decrease of 1.0% from the first quarter of 2024 driven by:

• A net unfavorable impact from foreign currency exchange of approximately 3.0%;

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.

• Acquisition-related growth of 1.4% due to TCS;

• Organic sales growth of 0.6% was primarily due to price realization in parts and consumables and service, partly offset by volume declines in equipment.

Asia Pacific ("APAC")

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;

APAC net sales were $16.7 million for the first quarter of 2025, a decrease of 10.2% from the first quarter of 2024 driven by:

• Organic sales decline of 7.5% driven primarily by net volume declines in parts and consumables and the impact of negative product mix;

• A net unfavorable impact from foreign currency exchange of approximately 2.7%.

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.

Gross profit margin of 41.4% was 280 basis points lower in the first quarter of 2025 compared to the first quarter of 2024.

The margin rate decrease was primarily attributed to a shift in product and channel mix as well as ongoing inflation.

The prior-year quarter includes benefits from a significant reduction in the backlog, largely consisting of higher-margin industrial products sold to direct customers.

Operating Expense

Selling and Administrative Expense

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.

Selling and administrative expense ("S&A expense") was $90.7 million for the first quarter of 2025, an increase of $0.8 million compared to the first quarter of 2024.

As a percentage of net sales, S&A expense for the first quarter of 2025 increased 240 basis points to 31.3% from 28.9% in the first quarter of 2024.

The S&A expense increase was driven by higher costs linked to our strategic investments, including Enterprise Resource Planning ("ERP") modernization costs and restructuring-related charges, partly offset by lower compensation and benefit expense and discretionary spending.

Research and Development Expense

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.

Research and development expense ("R&D expense") was $9.7 million, or 3.3% of net sales, for the first quarter of 2025, with R&D expense as a percentage of net sales increasing 10 basis points compared to the first quarter of 2024.

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

Total Other Expense, Net

Interest Expense, Net

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 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

Interest expense, net was $2.3 million in the first quarter of 2025 and 2024.

The following table compares the debt levels, average interest rate, interest income and interest expense for the three months ended March 31, 2025 and 2024, respectively (in millions, except percentages):

Three Months Ended March 31,

Weighted Average Outstanding Borrowings $ 204.0 $ 217.8

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Interest expense, net $ 2.3 $ 2.3

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

Our debt portfolio as of March 31, 2025 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 (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 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.

Net Foreign Currency Transaction Loss

Net foreign currency transaction loss was $0.2 million in the first quarters of 2025 and 2024.

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

The effective tax rate for the first quarter of 2025 was 23.8% compared to 19.1% for the first quarter of 2024.

The increase was primarily due to a decrease in discrete tax benefits associated with share-based compensation recognized in the first quarter of 2024.

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.

No deferred taxes have been provided for withholding taxes or other taxes that would result upon repatriation of our foreign investments to the U.S.

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

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.

Backlog includes orders that can be cancelled or postponed at the option of the customer at any time without penalty.

Liquidity and Capital Resources

Cash, cash equivalents and restricted cash totaled $91.3 million at September 30, 2024 compared to $117.1 million as of December 31, 2023.

Cash and cash equivalents totaled $79.5 million at March 31, 2025 compared to $99.8 million as of December 31, 2024.

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 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.

Our current ratio was 2.1 as of March 31, 2025 and 2.0 as of December 31, 2024.

Our primary working capital, which is comprised of accounts receivable, inventories and accounts payables, was $327.2 million as of March 31, 2025 and $316.0 million as of December 31, 2024.

Our debt-to-capital ratio was 25.5% as of March 31, 2025 compared to 24.3% as of December 31, 2024.

As of March 31, 2025, we had letters of credit and bank guarantees outstanding in the amount of $3.2 million, leaving approximately $434.3 million of unused borrowing capacity on our revolving facility.

Cash Flow from Operating Activities

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.

Net cash used in operating activities during the three months ended March 31, 2025 was $0.4 million compared to net cash provided by operating activities of $2.9 million during the three months ended March 31, 2024.

The cash used was driven by spend of our ERP modernization project of $12.4 million as well as consumption of working capital and lower operating performance.

Cash Flow from Investing Activities

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.

Net cash used in investing activities during the three months ended March 31, 2025 was $6.9 million compared to net cash used in investing activities of $60.6 million during the three months ended March 31, 2024.

The cash used was driven by capital expenditures.

Cash Flow from Financing Activities

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.

Net cash used in financing activities during the three months ended March 31, 2025 was $13.7 million compared to net cash provided by financing activities of $26.9 million during the three months ended March 31, 2024.

The cash used was driven by share repurchases and dividends, partly offset by net proceeds from borrowings.

Newly Issued Accounting Guidance

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We do not expect the amendments in this update to have a material impact on our consolidated financial statements.

In November 2023, the FASB issued ASU 2023-07 Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures, which requires an entity to disclose significant segment expenses impacting profit and loss that are regularly provided to the chief operating decision maker.

The amendments in this ASU are required to be adopted for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

Early adoption is permitted.

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

In December 2023, the FASB issued ASU 2023-09 Income Taxes (Topic 740):

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

In November 2024, the FASB issued ASU 2024-03 Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Topic 220) - Disaggregation of Income Statement Expenses , which requires disaggregation of certain income statement expense captions into specified categories to be disclosed within the notes to the financial statements, but does not change the expense captions on the consolidated income statement.

The ASU is effective for annual periods beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027.

Adoption of this ASU can either be applied prospectively to consolidated financial statements issued for reporting periods after the effective date of this ASU or retrospectively to any or all prior periods presented in the consolidated financial statements.

We are evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.

No other new accounting pronouncements issued but not yet effective have had, or are expected to have, a material impact on our results of operations or financial position.

Cautionary Statement Relevant to Forward-Looking Information

This Quarterly Report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Litigation Reform Act of 1995.

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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our ability to comply with global laws and regulations;

changes in foreign currency exchange rates;

our ability to adapt to customer pricing sensitivities;

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our ability to successfully protect our information technology systems from cybersecurity risks;

complications with our new Enterprise Resource Planning ("ERP") system;

the occurrence of a significant business interruption;

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our ability to integrate acquisitions;

and our ability to develop and commercialize new innovative products and services.

our ability to develop and commercialize new innovative products and services;

and risks related to our business transformation and strategic initiatives.

We caution that forward-looking statements must be considered carefully and that actual results may differ in material ways due to risks and uncertainties both known and unknown.

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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