Allient Inc: Form 10-Q for the period ended Sep 30, 2024

All statements contained herein that are not statements of historical fact constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain the word “believe,” “anticipate,” “expect,” “project,” “intend,” “will continue,” “will likely result,” “should” or words or phrases of similar meaning. Forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from the expected results described in the forward-looking statements. The risks and uncertainties include those associated with: the domestic and foreign general business and economic conditions in the markets we serve, including political and currency risks and adverse changes in local legal and regulatory environments; the severity, magnitude and duration of the impact of global pandemics, including impacts from businesses’ and governments’ responses to the impact on our operations and personnel, and on commercial activity and demand across our and our customers’ businesses, and on global supply chains; our inability to predict the extent to which global pandemic impacts will adversely impact our business operations, financial performance, results of operations, financial position, the prices of our securities and the achievement of our strategic objectives; the geopolitical conflicts and their ability to create instability and economic uncertainty; the introduction of new technologies and the impact of competitive products; the ability to protect the Company’s intellectual property; our ability to sustain, manage or forecast our growth and product acceptance to accurately align capacity with demand; the continued success of our customers and the ability to realize the full amounts reflected in our order backlog as revenue; the loss of significant customers or the enforceability of the Company’s contracts in connection with a merger, acquisition, disposition, bankruptcy, or otherwise; our ability to meet the technical specifications of our customers; the performance of subcontractors or suppliers and the continued availability of parts and components; failure of a key information technology system, process or site or a breach of information security, including a cybersecurity breach, ransomware, or failure of one or more key information technology systems, networks, processes, associated sites or service providers; changes in government regulations; the availability of financing and our access to capital markets, borrowings, or financial transactions to hedge certain risks; the ability to attract and retain qualified personnel, and in particular those who can design new applications and products for the motion industry; the ability to implement our corporate strategies designed for growth and improvement in profits including to identify and consummate favorable acquisitions to support external growth and the development of new technologies; the ability to successfully integrate an acquired business into our business model without substantial costs, delays, or problems; our ability to control costs, including the establishment and operation of low cost region manufacturing and component sourcing capabilities; and in the Company’s Annual Report in Form 10-K. Actual results, events and performance may differ materially from the Company’s forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements as a prediction of actual results. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict the occurrence of those matters or the manner in which they may affect us. The Company has no obligation or intent to release publicly any revisions to any forward-looking statements, whether as a result of new information, future events, or otherwise.

New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. The Company’s expectations, beliefs and projections are believed to have a reasonable basis; however, the Company makes no assurance that expectations, beliefs, or projections will be achieved.

Overview

We are a global company that is engaged in the business of designing, manufacturing, and selling precision motion, control, power and structural composites to provide integrated system solutions as well as individual products, to a broad spectrum of customers throughout the world primarily for the industrial, vehicle, medical, and aerospace and defense markets. We are headquartered in Amherst, NY, and have operations in the United States, Canada, Mexico, Europe, and Asia-Pacific. We are known worldwide for our expertise in electro-magnetic, mechanical, and electronic motion technology. We sell component and integrated controlled motion solutions to end customers and OEMs through our own direct sales force and authorized manufacturers’ representatives and distributors. Our products include nano precision positioning systems, servo control systems, motion controllers, digital servo amplifiers and drives, brushless servo, torque, and coreless motors, brush motors, integrated motor-drives, gear motors, gearing, incremental and absolute optical encoders, active (electronic) and passive (magnetic) filters for power quality and harmonic issues, Industrial safety rated input/output Modules, Universal Industrial Communications Gateways, light-weighting technologies, transformers, and other controlled motion-related products.

Business Environment

Recent Events

Beginning in 2022 and continuing through 2023 and through most of 2024, inflation negatively impacted our input costs and pricing, primarily for labor and materials. We, our customers, and our suppliers also experienced the effect of a higher interest rate environment in those periods. Gross domestic product growth slowed throughout 2022 largely due to the widespread impacts of inflation, increasing interest rates, and more restrictive financial conditions. While gross domestic product began to rebound in 2023, the factors contributing to supply chain disruptions, labor shortages, and global inflation remained persistent into 2023, along with elevated geopolitical uncertainty. There were varying degrees of impact on our customers, and thus our business around the world, with Europe experiencing the greatest amount of stress in 2023 and into 2024.

The current geopolitical conflicts, the condition of sovereign finances, and the outcome of the U.S. Presidential election are creating higher levels of economic uncertainty and increased volatility with respect to energy prices, interest rates, our supply chain, and certain customer ordering patterns. We have been closely monitoring the developments and continue to adjust our production platform to react to changing customer ordering patterns and realize efficiencies. The ordering patterns of our aerospace and defense customers have been particularly impacted by changes in sovereign governments priorities and budgets. The impact of the conflicts on our operational and financial performance will depend on future developments that cannot be predicted.

Changing order patterns, supply chain disruptions, and the evolution of our business required us to carry larger inventories in 2024 and 2023 to meet the needs of our customers, especially as they began to return to a new normal after the disruptions caused by the COVID-19 pandemic. Starting in the second quarter of 2024, there were more abrupt and larger changes to order patterns as our customers reacted to elevated inventory levels and slowing customer demand. Several customers, particularly in the Vehicle and Industrial markets, reduced demand or pushed out delivery dates for their orders, and we experienced an acceleration of these customers’ actions starting in the second quarter of 2024, and continuing through the third quarter of 2024.

As the pace of our customers’ actions increased, we recently advanced our “Simplify to Accelerate NOW” strategy. This strategy is being implemented to reduce costs and help create earnings momentum as the Company seeks to enhance efficiency, reduce working capital requirements and strengthen cash flow through realignment and rationalization of our resources.

The Simplify to Accelerate NOW strategy is centered on three high-level strategic initiatives:

1. Realign and right-size the Company’s footprint to better align with its markets and customers. Initiatives are already underway and are expected to continue with earnest throughout 2024 and beyond.

2. Reinforce lean manufacturing disciplines throughout the Company to accelerate margin expansion.

3. Focus on working capital reduction to drive additional cash generation and de-lever the balance sheet.

Beginning in the second quarter and continuing into the third quarter of 2024, we began to implement our Simplify to Accelerate NOW strategy. We executed certain actions that streamline our operations to enhance efficiency as well as drive profitability. Expected cost savings of this initiative are anticipated to be approximately $10 million annually. As part of this program, the Company will continue to realign production and rationalize our footprint through the remainder of 2024. In addition, the Company has implemented reductions to its workforce in many operations throughout the world, to reflect the reduction in sales it is forecasting for the remainder of 2024. The costs associated with this program are expected to be between approximately $1.9 million and $2.4 million, primarily related to severance and related expenses.

The Company completed the acquisition of SNC in the first quarter of 2024 and the acquisition of Sierramotion in the third quarter of 2023. These acquisitions are important to executing on the Company’s strategic plan, and we remain focused in the near term on successfully integrating these acquisitions and leveraging the synergies that will be important drivers of our future growth and profitability.

Operating Results

Three months ended September 30, 2024 compared to three months ended September 30, 2023

(Dollars in thousands, except per share data)

REVENUES: The decrease in revenues during the third quarter 2024 reflects decreases in each of the target markets, most significantly within Vehicle and Industrial markets. Decreases in revenues compared to the prior year period are largely impacted by elevated shipments during the prior year period as supply chains normalized, combined with elevated inventory levels and slowing demand at our customers which began in the second quarter of 2024 and continued into the current period, partially offset by revenue contributed from the 2023 and 2024 acquisitions. Our revenue for the third quarter of 2024 was comprised of 56% to U.S. customers and 44% to customers primarily in Europe, Canada, and Asia-Pacific. The overall decrease in revenue was primarily due to a 14.3% volume decrease slightly offset by a foreign currency increase of 0.4%. The acquisitions completed in 2023 and 2024 contributed an incremental $10,473 of revenue in the three months ended September 30, 2024. Organic revenue decreased 21.5% during the third quarter 2024.

ORDER BOOKINGS AND BACKLOG: Bookings decreased in the third quarter 2024 compared to 2023, due primarily to a 34.2% decrease in volume slightly offset by a 0.5% increase in foreign currency impact. The decrease in bookings from the prior year quarter is in large part due to a large $31 million order in the defense market received during the third quarter of 2023, as well as continued impacts of changes in customer order patterns in reacting to elevated inventory levels and customer demand.

GROSS PROFIT AND GROSS MARGIN: Gross profit decreased to $39,264 in the third quarter of 2024 from $47,498 in the third quarter of 2023 driven by lower sales volume, and gross margins decreased to 31.4% for 2024, compared to 32.7% for 2023. The decrease in gross margin percentage was driven by lower fixed cost absorption on lower sales volumes, as well as the gross margin impact of our most recent acquisition.

SELLING EXPENSES: Selling expenses increased 5% during the third quarter of 2024 compared to 2023 primarily due to increased costs in connection with our recently completed acquisitions and to the mix of sales with commissions. Selling expenses as a percentage of revenues were 5% and 4% in the three months ended September 30, 2024 and 2023, respectively.

GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses decreased 5% during the third quarter 2024 compared to 2023 due primarily to lower incentive compensation as well as cost reduction actions taken reflecting our Simplify to Accelerate NOW strategy. As a percentage of revenues, general and administrative expenses were 11% and 10% in the three months ended September 30, 2024 and 2023, respectively.

ENGINEERING AND DEVELOPMENT EXPENSES: Engineering and development expenses decreased by 15% in the third quarter of 2024 compared to 2023. The decrease reflects the cost reduction actions taken as part of our Simplify to Accelerate NOW strategy. As a percentage of revenues, engineering and development expenses were 7% for each of the three months ended September 30, 2024 and 2023.

BUSINESS DEVELOPMENT COSTS: Business development costs include acquisition and integration related costs as well as restructuring and business realignment costs. The decrease in business development costs in the third quarter of 2024 compared to 2023 primarily reflects a decrease in fair value measurement of contingent consideration liabilities, offset by current year restructuring-related costs associated with our Simplify to Accelerate NOW strategy.

AMORTIZATION OF INTANGIBLE ASSETS: Amortization of intangible assets remained consistent compared to the prior year period.

INTEREST EXPENSE: Interest expense increased in the third quarter of 2024 compared to 2023 due to higher average debt balances and, to a lesser extent, higher interest rates compared to the prior year period. The increase in interest expense is partially offset by reductions to interest expense realized through our interest rate swaps.

INCOME TAXES: The effective income tax rate was 22.6% and 23.0% for the three months ended September 30, 2024 and 2023, respectively. The effective tax rate for the three months ended September 30, 2024 includes net discrete tax costs of 1.2%, primarily due to share based awards and provision to return adjustments. The tax rate for the three months ended September 30, 2023 does not include any discrete tax items that had a significant impact on tax rates. The lower effective tax rate in the third quarter of 2024 as compared to the third quarter of 2023 is primarily due to the realization of certain deferred income tax assets that had been reserved in prior years and estimates of tax credits. The Company expects its income tax rate for the full year 2024 to be approximately 21% to 23%.

NET INCOME AND ADJUSTED NET INCOME: Net income decreased during the third quarter of 2024 compared to 2023, primarily relating to lower sales volume, including a decrease in organic revenue, partially offset by a decrease in operating expenses, reflecting the actions in our Simplify to Accelerate NOW strategy. Adjusted net income for the quarters ended September 30, 2024 and 2023 was $5,068 and $9,980, respectively. Adjusted diluted earnings per share for the third quarter of 2024 and 2023 were $0.31 and $0.61, respectively. Adjusted net income and adjusted diluted earnings per share are non-GAAP measures. See information included in “Non–GAAP Measures” below for a discussion of the non-GAAP measure and reconciliation of net income to adjusted net income and diluted earnings per share to adjusted diluted earnings per share.

EBITDA AND ADJUSTED EBITDA: EBITDA was $12,595 for the third quarter of 2024 compared to $18,243 for the third quarter of 2023. Adjusted EBITDA was $14,432 and $20,849 for the third quarters of 2024 and 2023, respectively. EBITDA and Adjusted EBITDA are non-GAAP measures. EBITDA consists of income before interest expense, provision for income taxes, and depreciation and amortization. Adjusted EBITDA also excludes stock-based compensation expense, foreign currency gain/loss and certain other items. Refer to information included in “Non-GAAP Measures” below for a discussion of the non-GAAP measure and a reconciliation of net income to EBITDA and Adjusted EBITDA.

Nine months ended September 30, 2024 compared to nine months ended September 30, 2023

(Dollars in thousands, except per share data)

REVENUES: The decrease in revenues for the year to date 2024 reflects decreases within each of the target markets, most significantly in Vehicle. Decreases in revenues compared to the prior year period are largely impacted by elevated shipments during the prior year period as supply chains normalized, combined with elevated inventory levels and slowing demand at our customers in the current period, partially offset by revenue contributes from the 2023 and 2024 acquisitions. Our revenues for the period ended September 30, 2024 was comprised of 55% to U.S. customers and 45% to customers primarily in Europe, Canada and Asia-Pacific. The overall decrease in revenue was due to a 6.8% volume decrease offset slightly by an insignificant favorable currency impact. The acquisitions completed in 2023 and 2024 contributed an incremental $30,856 of revenue in the nine months ended September 30, 2024. Organic revenue decreased 13.9% during the year to date 2024.

ORDER BOOKINGS AND BACKLOG: Orders decreased for the year to date 2024 compared to 2023, and included a 12.8% decrease in volume slightly offset by an insignificant increase in foreign exchange impact. The decrease in bookings from the prior year quarter is in large part due to a large $31 million order in the defense market received during the third quarter of 2023, as well as continued impacts of changes in customer order patterns in reacting to elevated inventory levels and customer demand.

GROSS PROFIT AND GROSS MARGIN: Gross profit decreased to $127,317 for year to date 2024 from $139,309 in 2023 driven by lower sales volume, and gross margins decreased to 31.2% for 2024, compared to 31.8% for 2023. The decrease in gross margin percentage was driven by lower fixed cost absorption on lower sales volumes, as well as the unfavorable gross margin impact of our most recent acquisition.

SELLING EXPENSES: Selling expenses increased 5% during year to date 2024 compared to 2023 primarily due to increased costs in connection with our recently completed acquisitions and to the mix of sales with commissions. Selling expenses as a percentage of revenues were comparable at 5% and 4% during year to date 2024 and 2023, respectively.

GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses decreased by 3% during the nine months ended September 30, 2024 compared to the same period of 2023 due primarily to a decrease in incentive compensation as well as cost reduction actions taken reflecting our Simplify to Accelerate NOW strategy. As a percentage of revenues, general and administrative expenses were 10% in each of 2024 and 2023.

ENGINEERING AND DEVELOPMENT EXPENSES: Engineering and development expenses decreased by 2% during the year to date 2024 compared to 2023. The decrease is due primarily to cost saving actions taken in connection with our Simplify to Accelerate NOW strategy. As a percentage of revenues, engineering and development expenses were 7% for each of the nine months ended September 30, 2024 and 2023.

BUSINESS DEVELOPMENT COSTS: Business development costs include acquisition and integration related costs as well as restructuring and business realignment costs. The increase in business development costs for year to date 2024 compared to 2023 primarily reflects restructuring-related costs associated with our Simplify to Accelerate NOW strategy, which contributed $1,863 of the increase over the prior year period, offset by lower acquisition and integration related costs and a decrease in the fair value measurement of contingent consideration liabilities.

AMORTIZATION OF INTANGIBLE ASSETS: Amortization of intangible assets increased for year to date 2024 compared to 2023 due to incremental intangible amortization attributable to the 2023 and 2024 acquisitions.

INTEREST EXPENSE: Interest expense increased by 10% for the year to date 2024 compared to 2023 primarily due to an increase in interest rates, as well as an increase in average debt levels to fund acquisitions and capital expenditures. The increase in interest expense is partially offset in part by interest rate swaps.

INCOME TAXES: For the nine months ended September 30, 2024 and 2023, the effective income tax rate was 21.8% and 23.4%, respectively. The effective tax rate for the nine months ended September 30, 2024 includes net discrete tax costs of 1.2%, primarily related to share-based awards, provision to return adjustment, offset partially by the reversal of prior year uncertain tax positions. The effective tax rate for the nine months ended September 30, 2023 includes net discrete tax benefits of (1.5%), primarily related to share-based awards and the reversal of prior year uncertain tax positions.

NET INCOME AND ADJUSTED NET INCOME: Net income decreased during year to date 2024 compared to 2023, primarily relating to lower sales volume, including a decrease in organic revenue, as well as an increase in business development costs, relating to the restructuring costs incurred, offset partially by reductions in other operating expenses. Adjusted net income for the nine month periods ended September 30, 2024 and 2023 was $19,471 and $28,386, respectively. Adjusted diluted earnings per share for year to date 2024 and 2023 were $1.17 and $1.75, respectively. Adjusted net income and adjusted diluted earnings per share are non-GAAP measures. See information included in “Non–GAAP Measures” below for a discussion of the non-GAAP measure and reconciliation of net income to Adjusted net income and diluted earnings per share to Adjusted diluted earnings per share.

EBITDA AND ADJUSTED EBITDA: EBITDA was $42,438 for year to date 2024 compared to $54,042 for year to date 2023. Adjusted EBITDA was $48,404 and $60,255 for year to date 2024 and 2023, respectively. EBITDA and Adjusted EBITDA are non-GAAP measures. EBITDA consists of income before interest expense, provision for income taxes, and depreciation and amortization. Adjusted EBITDA also excludes stock-based compensation expense, foreign currency gain/loss and certain other items. Refer to information included in “Non-GAAP Measures” below for a discussion of the non-GAAP measure and a reconciliation of net income to EBITDA and Adjusted EBITDA.

Non-GAAP Measures

Organic revenue, EBITDA, Adjusted EBITDA, Adjusted net income and Adjusted diluted earnings per share are provided for information purposes only and are not measures of financial performance under GAAP. Management believes the presentation of these financial measures reflecting non-GAAP adjustments provides important supplemental information to investors and other users of our financial statements in evaluating the operating results of the Company as distinct from results that include items that are not indicative of ongoing operating results. In particular, those charges and credits that are not directly related to operating unit performance, and that are not a helpful measure of the performance of our underlying business particularly in light of their unpredictable nature. These non-GAAP disclosures have limitations as analytical tools, should not be viewed as a substitute for revenue and net income determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies. In addition, the supplemental presentation should not be construed as an inference that the Company’s future results will be unaffected by similar adjustments to net income determined in accordance with GAAP. Organic revenue is reported revenues adjusted for the impact of foreign currency and the revenue contribution from acquisitions.

The Company believes that revenue excluding foreign currency exchange impacts is a useful measure in analyzing sales results. The Company excludes the effect of currency translation from revenue for this measure because currency translation is not fully under management’s control, is subject to volatility and can obscure underlying business trends. The portion of revenue attributable to currency translation is calculated as the difference between the current period revenue and the current period revenue after applying foreign exchange rates from the prior period.

The Company believes EBITDA is often a useful measure of a Company’s operating performance and is a significant basis used by the Company’s management to measure the operating performance of the Company’s business because EBITDA excludes charges for depreciation, amortization and interest expense that have resulted from our debt financings, acquisitions, as well as our provision for income tax expense. EBITDA is frequently used as one of the bases for comparing businesses in the Company’s industry.

The Company also believes that Adjusted EBITDA provides helpful information about the operating performance of its business. Adjusted EBITDA excludes stock-based compensation expense, as well as business development costs, foreign currency gains/losses on short-term assets and liabilities, and other items that are not indicative of the Company’s core operating performance. EBITDA and Adjusted EBITDA do not represent and should not be considered as an alternative to net income, operating income, net cash provided by operating activities or any other measure for determining operating performance or liquidity that is calculated in accordance with GAAP.

Management uses Adjusted net income and Adjusted diluted earnings per share to assess the Company’s consolidated financial and operating performance. Adjusted net income and Adjusted diluted earnings per share are provided for informational purposes only and are not a measure of financial performance under GAAP. These measures help management make decisions that are expected to facilitate meeting current financial goals as well as achieving optimal financial performance. Adjusted net income provides management with a measure of financial performance of the Company based on operational factors as it removes the impact of certain non-routine items from the Company’s operating results. Adjusted diluted earnings per share provides management with an indication of how Adjusted net income would be reflected on a per share basis for comparison to the GAAP diluted earnings per share measure. Adjusted net income is a key metric used by senior management and the Company’s board of directors to review the consolidated financial performance of the business. This measure adjusts net income determined in accordance with GAAP to reflect changes in financial results associated with the highlighted expense and income items.

The Company’s calculation of organic revenue for the three and nine months ended September 30, 2024 is as follows:

The Company’s calculation of EBITDA and Adjusted EBITDA for the three and nine months ended September 30, 2024 and 2023 is as follows (in thousands):

(1) Includes a Q3 2024 fair value measurement reduction of $270 due to acquisition-related contingent consideration.

The Company’s calculation of Adjusted net income and Adjusted diluted earnings per share for the three and nine months ended September 30, 2024 and 2023 is as follows (in thousands except per share amounts):

(1) Applies a blended federal, state, and foreign tax rate of approximately 23% applicable to the non-GAAP adjustments.

(2) Includes a Q3 2024 fair value measurement reduction of $270 due to acquisition-related contingent consideration.

(1) Applies a blended federal, state, and foreign tax rate of approximately 23% applicable to the non-GAAP adjustments.

Liquidity and Capital Resources

The Company’s liquidity position as measured by cash and cash equivalents increased by $5,217 to a balance of $37,118 at September 30, 2024 from December 31, 2023.

Of the $37,118 of cash and cash equivalents at September 30, 2024, $27,224 was located at our foreign subsidiaries and may be subject to withholding tax if repatriated back to the U.S.

During the nine months ended September 30, 2024, the increase in cash provided by operating activities is due to improved cash inflows on collections on accounts receivable, and cash used/provided by inventory, offset by increase in cash used in accounts payable and accrued liabilities, as well as lower net income.

The increase in cash used in investing activities in the nine months ended September 30, 2024 relates to $20 million in cash paid for the acquisition of SNC. For the year to date 2024 and 2023, $6,250 of cash was paid relating to the 2022 Spectrum acquisition. Cash used in investing activities in the nine months ended September 30, 2024 includes $6,903 for purchases of property and equipment compared to $7,850 during the nine months ended September 30, 2023. Capital expenditures are expected to be between $8,000 and $11,000 for the full year 2024.

The increase in cash provided by financing activities during the nine months ended September 30, 2024 is primarily due to borrowings of $20,000 to fund the SNC acquisition. Debt payments of $9,500 were made during the nine months ended September 30, 2023. The $50,000 Notes issued in March 2024 were used to pay down the Revolving Facility. As of September 30, 2024, we had $175,962 of obligations under the Revolving Facility, excluding deferred financing costs.

Financial covenants under the 2024 Credit and Note Payable Agreements require the Company to maintain a minimum interest coverage ratio of at least 3.0:1.0 at the end of each fiscal quarter. In addition, the Company’s Leverage Ratio at the end of any fiscal quarter shall not be greater than 4.25:1.0 through December 31, 2024 or greater than 3.75 to 1.0 as of the end of any fiscal quarter thereafter; provided that the Company may elect to temporarily increase the Leverage Ratio to by 0.5:1.0 following a material acquisition under the 2024 Credit and Note Payable Agreements. The 2024 Credit and Note Payable Agreements also include covenants and restrictions that limit the Company’s ability to incur additional indebtedness, merge, consolidate or sell all or substantially all of its assets and enter into transactions with an affiliate of the Company on other than an arms’ length transaction. These covenants, which are described more fully in the 2024 Credit and Note Payable Agreements, to which reference is made for a complete statement of the covenants, were modified as of October 22, 2024, and are subject to certain exceptions. The Company was in compliance with all covenants as of September 30, 2024.

As of September 30, 2024, the unused Revolving Facility was $104,038. The amount available to borrow may be limited by our debt and EBITDA levels, which impacts our covenant calculations. The Revolving Facility matures March 1, 2029. The Series A Senior Notes, under the 2024 Note Payable Agreement, are due March 21, 2031.

On October 22, 2024, the Company entered into a Second Amendment to the Third Amended and Restated Credit Agreement and a Second Amendment to the Note Purchase and Private Shelf Agreement (collectively, the “October 2024 Credit and Note Payable Amendments”). These amendments include provisions to increase the maximum Leverage Ratio to 4.5:1.0 for the quarters ending March 31, 2025 and June 30, 2025, 4.0:1.0 for the quarter ending September 30, 2025, and returning to 3.75:1.0 for the quarter ending December 31, 2025 and thereafter. From January 1, 2025 through September 30, 2025, borrowings under the Revolving Facility will bear interest at Term SOFR plus a margin of 2.50% and a commitment fee of 0.325% on the unused portion of the Revolving Facility. Also, from October 1, 2024 through September 30, 2025, the Series A Notes will bear interest at 6.46%.

The Company declared dividends of $0.09 per share during the nine months ended September 30, 2024 and $0.085 per share during the nine months ended September 30, 2023. The Company’s working capital, capital expenditure and dividend requirements are expected to be funded from cash provided by operations and amounts available under the Amended Credit Agreement.

We believe our diverse markets, our strong market position in many of our businesses, and the steps we have taken to strengthen our balance sheet, such as retaining cash to support shorter term needs and amending our revolving credit facility leaves us well-positioned to manage our business. We continually assess our liquidity and cash positions taking geopolitical and other market uncertainties into consideration. Based on our analysis, we believe our existing balances of cash, our currently anticipated operating cash flows, and our available financing under agreements in place will be more than sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months.

Foreign Currency

We have international operations in The Netherlands, Sweden, Germany, China, Portugal, Canada, Czech Republic, Mexico, the United Kingdom, and New Zealand which expose us to foreign currency exchange rate fluctuations due to transactions denominated in Euros, Swedish Krona, Chinese Renminbi, Canadian dollar, Czech Krona, Mexican pesos, British Pound Sterling, and New Zealand dollar, respectively. We continuously evaluate our foreign currency risk, and we take action from time to time in order to best mitigate these risks. A hypothetical 10% change in the value of the U.S. dollar in relation to our most significant foreign currency exposures would have had an impact of approximately $4,213 on our sales for the nine months ended September 30, 2024. This amount is not indicative of the hypothetical net earnings impact due to partially offsetting impacts on cost of sales and operating expenses in those currencies. We estimate that foreign currency exchange rate fluctuations during the three months ended September 30, 2024 increased revenues in comparison to the three months ended September 30, 2023 by $641. For the nine months ended September 30, 2024, we estimate that foreign currency exchange rate fluctuations increased revenue by $155 in 2024 compared to 2023.

We translate all assets and liabilities of our foreign operations, where the U.S. dollar is not the functional currency, at the period-end exchange rate and translate sales and expenses at the average exchange rates in effect during the period. The net effect of these translation adjustments is recorded in the condensed consolidated financial statements as comprehensive income. The translation adjustments were a gain of $5,805 and a loss of $2,923 for the three months ended September 30, 2024 and 2023, respectively. For the nine months ended September 30, 2024 and 2023, the translation adjustments were a gain of $235 and a loss of $1,995, respectively. Translation adjustments are not adjusted for income taxes as they relate to permanent investments in our foreign subsidiaries. A hypothetical 10% change in the value of the U.S. dollar in relation to our most significant foreign currency net assets would have had an impact of approximately $17,152 on our foreign net assets as of September 30, 2024.

We have contracts to hedge our short-term balance sheet exposure, primarily intercompany, that are denominated in currencies (Euro, Mexican Peso, New Zealand Dollar, Chinese Renminbi, Swedish Krona) other than the subsidiary’s functional currency and are adjusted to current values using period-end exchange rates. The resulting gains or losses are recorded in other expense, net in the consolidated statements of income and comprehensive income. To minimize foreign currency exposure, the Company had foreign currency contracts with notional amounts of $24,438 at September 30, 2024. The foreign currency contracts are recorded in the condensed consolidated balance sheets at fair value and resulting gains or losses are recorded in other expense, net in the condensed consolidated statements of income and comprehensive income. During the three and nine months ended September 30, 2024, we recorded losses of $461 and $380 on foreign currency contracts which are included in other expense, net and generally offset the gains or losses from the foreign currency adjustments on the intercompany balances that are also included in other expense, net. Net foreign currency transaction gains and losses included in other expense, net amounted to losses of $1,388 and a loss of $257 for the nine months ended September 30, 2024 and 2023, respectively.

Interest Rates

The Series A Notes under our 2024 Note Payable Agreement will bear interest at a fixed rate 5.96% and will mature on March 21, 2031. Interest on the Notes will be payable quarterly on the 21st day of March, June, September and December in each year, commencing on June 21, 2024. As amended on October 22, 2024, the Series A Notes will bear interest at 6.46% from October 1, 2024 through September 30, 2025. Interest will be computed on the basis of a 360-day year composed of twelve 30-day months.

Interest rates on our Credit Facility are based on Term SOFR plus a margin of 1.25% to 2.50% (2.125% at September 30, 2024), depending on the Company’s ratio of total funded indebtedness to consolidated EBITDA. As amended on October 22, 2024, borrowings under the Credit Facility will bear interest at Term SOFR plus a margin of 2.50% from January 1, 2025 through September 30, 2025. We use interest rate derivatives to add stability to interest expense and to manage our exposure to interest rate movements. We primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. In March 2020, the Company entered into two interest rate swaps with a combined notional amount of $20,000 that increased to $60,000 in March 2022 and matures in December 2024. In March 2022 the Company entered into an additional interest rate swap with a notional amount of $40,000 that matures in December 2026. In September 2024, the Company entered into an additional interest rate swap with a notional amount of $50,000 that matures in September 2027.

As of September 30, 2024, we had $175,962 outstanding under the Revolving Facility (excluding deferred financing fees), of which $150,000 is currently being hedged. Refer to Note 10, Debt Obligations, of the notes to consolidated financial statements for additional information about our outstanding debt. A hypothetical one percentage point (100 basis points) change in the Base Rate on the $25,962 of unhedged floating rate debt outstanding at September 30, 2024 would have approximately a $200 impact on our interest expense for the nine months ended September 30, 2024.

Conclusion regarding the effectiveness of disclosure controls and procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (principal accounting officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2024. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on management’s evaluation of our disclosure controls and procedures as of September 30, 2024, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

Changes in internal control over financial reporting

During the quarter ended September 30, 2024, there were no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to the risk factors disclosed in the Company’s Form 10-K for the year ended December 31, 2023, except to the extent factual information disclosed elsewhere in this Form 10-Q relates to such risk factors. For a full discussion of these risk factors, please refer to “Item 1A. Risk Factors” in the 2023 Annual Report and 10-K.