UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
Commission file number 0-21835
HELIOS TECHNOLOGIES, INC.
(Exact Name of Registration as Specified in its Charter)
Florida
59-2754337
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
7456 16th St E
SARASOTA, Florida
34243
(Address of Principal Executive Offices)
(Zip Code)
(941)362-1200
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock $.001 Par Value
HLIO
The New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
Smaller Reporting Company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The registrant had 32,556,476 shares of common stock, par value $.001, outstanding as of October 28, 2022.
Helios Technologies, Inc.
INDEX
For the quarter ended
October 1, 2022
Page
PART I. FINANCIAL INFORMATION
3
Item 1.
Financial Statements
Consolidated Balance Sheets as of October 1, 2022 (unaudited) and January 1, 2022
Consolidated Statements of Operations for the Three Months Ended October 1, 2022 (unaudited) and October 2, 2021 (unaudited)
4
Consolidated Statements of Operations for the Nine Months Ended October 1, 2022 (unaudited) and October 2, 2021 (unaudited)
5
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended October 1, 2022 (unaudited) and October 2, 2021 (unaudited)
6
Consolidated Statements of Shareholders’ Equity for the Three Months Ended October 1, 2022 (unaudited) and October 2, 2021 (unaudited)
7
Consolidated Statements of Shareholders’ Equity for the Nine Months Ended October 1, 2022 (unaudited) and October 2, 2021 (unaudited)
8
Consolidated Statements of Cash Flows for the Nine Months Ended October 1, 2022 (unaudited) and October 2, 2021 (unaudited)
9
Condensed Notes to the Consolidated, Unaudited Financial Statements
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
23
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
34
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
35
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
36
2
PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
Consolidated Balance Sheets
(in thousands, except per share data)
January 1, 2022
(unaudited)
Assets
Current assets:
Cash and cash equivalents
$
36,813
28,540
Restricted cash
33
41
Accounts receivable, net of allowance for credit losses of $1,122 and $1,212
131,649
134,561
Inventories, net
179,718
165,629
Income taxes receivable
6,517
2,762
Other current assets
19,543
20,101
Total current assets
374,273
351,634
Property, plant and equipment, net
171,323
174,210
Deferred income taxes
6,008
2,934
Goodwill
447,140
459,936
Other intangible assets, net
396,528
412,759
Other assets
24,295
13,873
Total assets
1,419,567
1,415,346
Liabilities and shareholders' equity
Current liabilities:
Accounts payable
64,921
85,301
Accrued compensation and benefits
19,004
28,595
Other accrued expenses and current liabilities
30,890
28,254
Current portion of long-term non-revolving debt, net
18,897
18,125
Dividends payable
2,930
2,917
Income taxes payable
7,489
6,328
Total current liabilities
144,131
169,520
Revolving line of credit
267,693
242,312
Long-term non-revolving debt, net
169,332
183,897
57,042
71,836
Other noncurrent liabilities
29,932
38,818
Total liabilities
668,130
706,383
Commitments and contingencies
—
Shareholders' equity:
Preferred stock, par value $0.001, 2,000 shares authorized, no shares issued or outstanding
Common stock, par value $0.001, 100,000 shares authorized, 32,544 and 32,407 shares issued and outstanding
32
Capital in excess of par value
401,549
394,641
Retained earnings
435,392
363,279
Accumulated other comprehensive loss
(85,537
)
(48,989
Total shareholders' equity
751,437
708,963
Total liabilities and shareholders' equity
The accompanying Condensed Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.
Consolidated Statements of Operations
Three Months Ended
October 2, 2021
Net sales
207,205
223,241
Cost of sales
137,939
142,299
Gross profit
69,266
80,942
Selling, engineering and administrative expenses
31,749
32,786
Amortization of intangible assets
6,774
7,407
Operating income
30,743
40,749
Interest expense, net
4,098
3,813
Foreign currency transaction (gain) loss, net
(199
304
Other non-operating expense (income), net
177
(616
Income before income taxes
26,667
37,248
Income tax provision
6,289
9,488
Net income
20,378
27,760
Net income per share:
Basic
0.63
0.86
Diluted
0.85
Weighted average shares outstanding:
32,541
32,385
32,585
32,539
Dividends declared per share
0.09
Nine Months Ended
689,420
651,499
454,202
413,036
235,218
238,463
98,059
95,757
20,554
25,285
116,605
117,421
11,719
12,965
(1,296
1,271
1,508
(727
104,674
103,912
23,782
22,870
80,892
81,042
2.49
2.51
2.48
2.50
32,493
32,272
32,597
32,437
0.27
Consolidated Statements of Comprehensive Income
(in thousands)
Other comprehensive loss
Foreign currency translation adjustments, net of tax
(20,181
(7,528
(47,053
(14,215
Unrealized gain on interest rate swap, net of tax
3,240
623
10,505
2,865
Total other comprehensive loss
(16,941
(6,905
(36,548
(11,350
Comprehensive income
3,437
20,855
44,344
69,692
Consolidated Statements of Shareholders’ Equity (unaudited)
Accumulated
Capital in
other
Preferred
Common
excess of
Retained
comprehensive
shares
stock
par value
earnings
loss
Total
Balance at July 2, 2022
32,504
397,643
417,944
(68,596
747,024
Shares issued, restricted stock
Shares issued, ESPP
511
Shares issued, acquisition
25
1,573
Stock-based compensation
1,840
Cancellation of shares for payment of employee tax withholding
(18
Dividends declared
(2,930
Balance at October 1, 2022
32,544
Balance at July 3, 2021
32,249
379,299
317,799
(38,785
658,345
12
18
Shares issued, other compensation
522
134
10,390
2,050
(235
Shares repurchased
(7
(583
(2,916
Balance at October 2, 2021
32,400
391,461
342,643
(45,690
688,446
Balance at January 1, 2022
32,407
88
1
111
112
24
1,571
6,212
(2,559
(8,779
Balance at January 2, 2021
32,120
371,778
270,320
(34,340
607,790
43
19
1,318
197
14,014
6,233
(4
(1,335
(8,719
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
37,360
41,131
Stock-based compensation expense
Amortization of debt issuance costs
374
(Benefit) provision for deferred income taxes
(2,055
2,230
Forward contract gains, net
(6,433
(3,401
Other, net
1,039
(135
(Increase) decrease in:
Accounts receivable
(2,861
(36,634
Inventories
(19,666
(35,759
(1,775
(1,893
633
(288
6,240
3,989
Increase (decrease) in:
(17,230
11,945
Accrued expenses and other liabilities
(5,658
8,079
2,485
9,599
(5,364
(4,527
Net cash provided by operating activities
74,193
81,985
Cash flows from investing activities:
Business acquisitions, net of cash acquired
(67,252
(48,481
Amounts paid for net assets acquired
(2,400
Capital expenditures
(21,916
(17,054
Proceeds from dispositions of property, plant and equipment
1,903
82
Cash settlement of forward contracts
4,448
1,433
Software development costs
(2,345
(1,785
Net cash used in investing activities
(85,162
(68,205
Cash flows from financing activities:
Borrowings on revolving credit facilities
112,720
71,198
Repayment of borrowings on revolving credit facilities
(72,167
(44,500
Repayment of borrowings on long-term non-revolving debt
(12,616
(12,178
Proceeds from stock issued
1,682
1,353
Dividends to shareholders
(8,766
(8,694
Other financing activities
(5,306
(2,851
Net cash provided by financing activities
15,547
4,328
Effect of exchange rate changes on cash, cash equivalents and restricted cash
3,687
4,363
Net increase in cash, cash equivalents and restricted cash
8,265
22,471
Cash, cash equivalents and restricted cash, beginning of period
28,581
25,257
Cash, cash equivalents and restricted cash, end of period
36,846
47,728
CONDENSED NOTES TO THE CONSOLIDATED, UNAUDITED FINANCIAL STATEMENTS
(Currencies in thousands, except per share data)
1. COMPANY BACKGROUND
Helios Technologies, Inc. (“Helios,” or the “Company”) together with its wholly owned subsidiaries, is a global leader in highly engineered motion control and electronic controls technology for diverse end markets, including construction, material handling, agriculture, energy, recreational vehicles, marine and health and wellness. Helios sells its products to customers in over 90 countries around the world. The Company’s strategy for growth is to be the leading provider in niche markets, with premier products and solutions through innovative product development and acquisitions.
The Company operates in two business segments: Hydraulics and Electronics. There are three key technologies within the Hydraulics segment: cartridge valve technology (“CVT”), quick-release hydraulic coupling solutions (“QRC”) and hydraulic system design (“Systems”). CVT products provide functions important to a hydraulic system: to control rates and direction of fluid flow and to regulate and control pressures. QRC products allow users to connect and disconnect quickly from any hydraulic circuit without leakage and ensure high-performance under high temperature and pressure using one or multiple couplers. Systems provide engineered solutions for machine users, manufacturers or designers to fulfill complete system design requirements including electro-hydraulic, remote control, electronic control and programmable logic controller systems, as well as automation of existing equipment. The Electronics segment provides complete, fully-tailored display and control solutions for engines, engine-driven equipment, specialty vehicles, therapy baths and traditional and swim spas. This broad range of products is complemented by extensive application expertise and unparalleled depth of software, embedded programming, hardware and sustaining engineering teams.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Accordingly, certain information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements are not included herein. The financial statements are prepared on a consistent basis (including normal recurring adjustments) and should be read in conjunction with the consolidated financial statements and related notes contained in the Annual Report on Form 10-K for the fiscal year ended January 1, 2022 (“Form 10-K”), filed by Helios with the Securities and Exchange Commission on March 1, 2022. In management’s opinion, all adjustments necessary for a fair presentation of the Company’s financial statements are reflected in the interim periods presented. Operating results for the nine months ended October 1, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ended December 31, 2022.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Earnings Per Share
The following table presents the computation of basic and diluted earnings per common share (in thousands, except per share data):
Weighted average shares outstanding - Basic
Net effect of dilutive securities - Stock based compensation
44
154
104
165
Weighted average shares outstanding - Diluted
3. BUSINESS ACQUISITION
Acquisition of Daman
On September 16, 2022, the Company completed the acquisition of Daman Products Company, Inc. ("Daman"), an Indiana corporation. The acquisition was completed pursuant to a Membership Interest Purchase Agreement ("Agreement") among the Company and the owners of Daman.
Daman is a leading designer and manufacturer of standard and custom precision hydraulic manifolds and other fluid conveyance products for its customer base, predominantly in North America. The acquisition of Daman expands the Company's technologies and markets and provides an opportunity to produce integrated package offerings with multiple Helios brands. The results of Daman’s operations are reported in the Company’s Hydraulics segment and have been included in the Consolidated, Unaudited Financial Statements since the date of acquisition.
Initial cash consideration paid at closing, net of cash acquired, totaled $64,331. Total consideration for the acquisition is subject to a post-closing adjustment in accordance with the terms of the Agreement. The consideration was funded with borrowings on the Company’s credit facility.
The Company recorded $24,891 of goodwill and $29,720 of other identifiable intangible assets in connection with the acquisition. The purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The fair value of identified intangibles assets acquired was based on estimates and assumptions made by management at the time of acquisition. As additional information becomes available, as of the acquisition date, management will finalize its analysis of the estimated fair value. The purchase price allocation is preliminary, pending post-closing adjustments, final intangibles valuation and tax related adjustments, and may be revised during the remainder of the measurement period (which will not exceed 12 months from the acquisition date). Any such revisions or changes to the fair values of the tangible and intangible assets acquired and liabilities assumed could be material.
11
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following tables provide information regarding the Company’s assets and liabilities measured at fair value on a recurring basis at October 1, 2022 and January 1, 2022.
Quoted Market
Significant Other Observable
Significant Unobservable
Prices (Level 1)
Inputs (Level 2)
Inputs (Level 3)
Interest rate swap contracts
11,997
Forward foreign exchange contracts
3,048
15,045
Liabilities
73
Contingent consideration
6,305
6,378
Interest rate swap contract
1,521
1,040
2,561
3,248
51
6,400
9,699
3,299
A summary of the changes in the estimated fair value of contingent consideration at October 1, 2022 is as follows:
Change in estimated fair value
1,244
Payment on liability
(1,082
Accretion in value
249
Currency remeasurement
(506
5. INVENTORIES, NET
At October 1, 2022 and January 1, 2022, inventory consisted of the following:
Raw materials
105,018
90,487
Work in process
46,275
34,713
Finished goods
38,038
50,638
Provision for obsolete and slow-moving inventory
(9,613
(10,209
6. OPERATING LEASES
The Company leases machinery, equipment, vehicles, buildings and office space, throughout its locations, which are classified as operating leases. Remaining terms on these leases range from less than one year to nine years. For the nine months ended October 1, 2022 and October 2, 2021, operating lease costs totaled $5,105 and $4,316, respectively.
Supplemental balance sheet information related to operating leases is as follows:
Right-of-use assets
18,426
22,776
Lease liabilities:
Current lease liabilities
4,599
5,823
Non-current lease liabilities
14,883
17,940
Total lease liabilities
19,482
23,763
Weighted average remaining lease term (in years):
5.0
Weighted average discount rate:
4.5
%
Supplemental cash flow information related to leases is as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
5,205
4,357
Non-cash impact of new leases and lease modifications
977
5,209
13
Maturities of lease liabilities are as follows:
2022 Remaining
1,658
2023
4,897
2024
4,247
2025
3,933
2026
3,271
2027
1,341
Thereafter
2,753
Total lease payments
22,100
Less: Imputed interest
2,618
Total lease obligations
Less: Current lease liabilities
7. GOODWILL AND INTANGIBLE ASSETS
A summary of changes in goodwill by segment for the nine months ended October 1, 2022, is as follows:
Hydraulics
Electronics
273,665
186,271
Measurement period adjustment, Joyonway acquisition
66
Measurement period adjustment, NEM acquisition
(37
Acquisition of Taimi
260
24,891
Currency translation
(37,611
(365
(37,976
261,168
185,972
Acquired Intangible Assets
At October 1, 2022 and January 1, 2022, intangible assets consisted of the following:
Gross CarryingAmount
AccumulatedAmortization
Net CarryingAmount
Definite-lived intangibles:
Trade names and brands
85,184
(16,859
68,325
83,443
(15,216
68,227
Non-compete agreements
2,025
1,519
3,218
(1,092
2,126
Technology
49,292
(19,563
29,729
50,425
(16,729
33,696
Supply agreement
21,000
(12,250
8,750
(10,675
10,325
Customer relationships
332,808
(49,476
283,332
336,809
(43,488
293,321
Sales order backlog
720
1,023
(1,023
Workforce
6,077
(1,924
4,153
(1,013
5,064
497,106
(100,578
501,995
(89,236
14
Amortization expense on acquired intangible assets for the nine months ended October 1, 2022 and October 2, 2021, was $20,554 and $25,285, respectively. Future estimated amortization expense is presented below.
Year:
7,443
28,655
27,640
27,456
25,704
22,431
257,199
8. DERIVATIVE INSTRUMENTS & HEDGING ACTIVITIES
The Company addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments and hedging activities.
The fair value of the Company’s derivative financial instruments included in the Consolidated Balance Sheets is presented as follows:
Asset Derivatives
Liability Derivatives
Balance Sheet
Fair Value (1)
Location
Derivatives designated as hedging instruments:
Other non-current liabilities
Derivatives not designated as hedging instruments:
2,625
866
Other current liabilities
423
174
Total derivatives
(1) See Note 4 for information regarding the inputs used in determining the fair value of derivative assets and liabilities.
The amount of gains and losses related to the Company’s derivative financial instruments for the nine months ended October 1, 2022 and October 2, 2021, are presented as follows:
Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives (Effective Portion)
Location of Gain or (Loss) Reclassifiedfrom Accumulated Other Comprehensive Income
Amount of Gain or (Loss) Reclassified from AccumulatedOther Comprehensive Income into Earnings (Effective Portion)
into Earnings (Effective Portion)
Derivatives in cash flow hedging relationships:
13,726
3,718
(1,447
(3,137
Interest expense presented in the Consolidated Statements of Operations, in which the effects of cash flow hedges are recorded, totaled $11,719 and $12,965 for the nine months ended October 1, 2022 and October 2, 2021, respectively.
15
Amount of Gain or (Loss) Recognized in Earnings on Derivatives
Location of Gain or (Loss) Recognized
in Earnings on Derivatives
6,433
3,401
Foreign currency transaction gain / loss, net
Interest Rate Swap Contracts
The Company has entered into interest rate swap transactions to hedge the variable interest rate payments on its credit facilities. In connection with the transactions, the Company pays interest based upon a fixed rate as agreed upon with the respective counterparties and receives variable rate interest payments based on the one-month LIBOR. The interest rate swaps are designated as hedging instruments and are accounted for as cash flow hedges. The aggregate notional amount of the swaps was $245,000 as of October 1, 2022. The notional amount decreases periodically through the dates of expiration in April 2023 and October 2025. The contracts are settled with the respective counterparties on a net basis at each settlement date.
Forward Foreign Exchange Contracts
The Company has entered into forward contracts to economically hedge translational and transactional exposure associated with various business units whose local currency differs from the Company’s reporting currency. The Company’s forward contracts are not designated as hedging instruments for accounting purposes.
At October 1, 2022, the Company had seven forward foreign exchange contracts with an aggregate notional value of €27,500, maturing at various dates through March 2024.
Net Investment Hedge
The Company utilizes foreign currency denominated debt to hedge currency exposure in foreign operations. The Company has designated €90,000 of borrowings on the revolving credit facility as a net investment hedge of a portion of the Company’s European operations. The carrying value of the euro denominated debt totaled $88,193 as of October 1, 2022 and is included in the Revolving line of credit line item in the Consolidated Balance Sheets. The gain on the net investment hedge recorded in accumulated other comprehensive income as part of the currency translation adjustment was $10,868, net of tax, for the nine months ended October 1, 2022.
9. CREDIT FACILITIES
Total long-term non-revolving debt consists of the following:
Maturity Date
Long-term non-revolving debt:
Term loan with PNC Bank
Oct 2025
178,750
190,000
Term loans with Citibank
Various
9,859
12,416
Other long-term debt
90
Total long-term non-revolving debt
188,618
202,506
Less: current portion of long-term non-revolving debt
Less: unamortized debt issuance costs
389
484
Total long-term non-revolving debt, net
Information on the Company’s revolving credit facilities is as follows:
Balance
Available Credit
Revolving line of credit with PNC Bank
130,788
157,487
Revolving line of credit with Citibank
May 2023
1,593
711
658
548
16
Future maturities of total debt are as follows:
5,395
20,531
24,285
407,693
457,904
Term Loan and Line of Credit with PNC Bank
The Company has a credit agreement that includes a revolving line of credit and term loan credit facility with PNC Bank, National Association, as administrative agent, and the lenders party thereto. The revolving line of credit allows for borrowings up to an aggregate maximum principal amount of $400,000.
To hedge currency exposure in foreign operations, €90,000 of the borrowings on the line of credit are denominated in euros. The borrowings have been designated as a net investment hedge, see additional information in Note 8.
The effective interest rate on the credit agreement at October 1, 2022 was 4.6%. Interest expense recognized on the credit agreement during the nine months ended October 1, 2022 and October 2, 2021, totaled $9,818 and $9,631, respectively. As of the date of this filing, the Company was in compliance with all debt covenants related to the credit agreement.
Term Loans and Line of Credit with Citibank
The Company has an uncommitted fixed asset facility agreement (the “Fixed Asset Facility”), short-term revolving facility agreement (the “Working Capital Facility”) and term loan facility agreement (the "Shanghai Branch Term Loan Facility") with Citibank (China) Co., Ltd. Shanghai Branch, as lender.
Under the Fixed Asset Facility, the Company borrowed on a secured basis RMB 2,614. The proceeds of the loan were used for purchases of certain equipment. Outstanding borrowings under the Fixed Asset Facility accrue interest at a rate equal to the National Interbank Funding Center 1-year loan prime rate plus 1.5%, to be repaid on a specified schedule. Currently drawn funds have a final payment due in May 2023.
Under the Working Capital Facility, the Company may, from time-to-time, borrow amounts on an unsecured revolving facility up to a total of RMB 16,000. Proceeds may only be used for expenditures related to production at the Company’s facility located in Kunshan City, China. Outstanding borrowings under the Working Capital Facility accrue interest at a rate equal to the National Interbank Funding Center 1-year loan prime rate plus 0.5%. All outstanding balances will be due in May 2023.
Under the Shanghai Branch Term Loan Facility, the Company borrowed on a secured basis RMB 42,653. Outstanding borrowings under the Shanghai Branch Term Loan Facility accrue interest at a rate equal to the National Interbank Funding Center 1-year loan prime rate plus 1.5%, to be repaid on a specified schedule with the final payment due in October 2024.
The Company has a term loan facility agreement (the “Sydney Branch Term Loan Facility”) with Citibank, N.A., Sydney Branch, as lender. Under the Sydney Branch Term Loan Facility, the Company borrowed on a secured basis AUD 7,500. Outstanding borrowings under the Sydney Branch Term Loan Facility accrue interest at a rate equal to the Australian Bank Bill Swap Reference Rate plus 2.0%, to be repaid throughout the term of the loan with a final payment due date of December 2024.
As of the date of this filing, the Company was in compliance with all debt covenants related to the Fixed Asset Facility, Working Capital Facility and Term Loan Facilities.
17
10. INCOME TAXES
The provision for income taxes for the three months ended October 1, 2022 and October 2, 2021 was 23.6% and 25.5% of pretax income, respectively. The provision for income taxes for the nine months ended October 1, 2022 and October 2, 2021 was 22.7% and 22.0% of pretax income, respectively. These effective rates fluctuate relative to the levels of income and different tax rates in effect among the countries in which the Company sells products.
At October 1, 2022, the Company had an unrecognized tax benefit of $8,352 including accrued interest. If recognized, $2,110 of unrecognized tax benefit would reduce the effective tax rate in future periods. The Company recognizes interest and penalties related to income tax matters in income tax expense. Interest accrued as of October 1, 2022 is not considered material to the Company’s Consolidated, Unaudited Financial Statements.
The Company remains subject to income tax examinations in the U.S. and various state and foreign jurisdictions for tax years 2009-2021. Although the Company is not currently under examination in most jurisdictions, limited transfer pricing disputes exist for years dating back to 2008. The Company does not expect to recognize any benefit within the next 12 months due to the expiration of statutes of limitation.
11. STOCK-BASED COMPENSATION
Equity Incentive Plan
The Company’s 2019 Equity Incentive Plan ("2019 Plan") and its predecessor equity plan provide for the grant of shares of restricted stock, restricted stock units, stock options, stock appreciation rights, dividend or dividend equivalent rights, stock awards and other awards valued in whole or in part by reference to or otherwise based on the Company’s common stock, to officers, employees and directors of the Company.
Restricted Stock Units
The Company grants restricted stock units (“RSUs”) to employees in connection with a long-term incentive plan. Awards with time-based vesting requirements primarily vest ratably over a three-year period. Awards with performance-based vesting requirements cliff vest after a three-year performance cycle and only after the achievement of certain performance criteria over that cycle. The number of shares ultimately issued for the performance-based units may vary from 0% to 200% of their target amount based on the achievement of defined performance targets. Compensation expense recognized for RSUs granted to employees totaled $5,566 and $4,168, respectively, for the nine months ended October 1, 2022 and October 2, 2021.
Effective January 1, 2022, the board terminated the 2012 Non-Employee Director Fees Plan (the “2012 Directors Plan”) and approved a new Helios Technologies, Inc. Non-Employee Director Compensation Policy (the “Director Compensation Policy”), which revised the compensation for Non-Employee Directors. The Director Compensation Policy compensates Non-Employee Directors for their board service with cash awards and equity-based compensation through grants of RSUs, issued pursuant to the 2019 Plan, which vest over a one-year period. Directors were granted 13,137 RSUs during the nine months ended October 1, 2022. The Company recognized director stock compensation expense on the RSUs of $266 for the nine months ended October 1, 2022. Directors were granted 20,375 shares of stock and the Company recognized director stock compensation expense of $1,586 for the nine months ended October 2, 2021, under the 2012 Directors Plan.
The following table summarizes RSU activity for the nine months ended October 1, 2022:
Weighted Average
Number of Units
Grant-Date
Fair Value per Share
Nonvested balance at January 1, 2022
237
45.58
Granted
102
92.41
Vested
(109
43.79
Forfeited
(14
66.84
Nonvested balance at October 1, 2022 (1)
216
67.26
(1) Includes 106,221 nonvested performance-based RSUs.
The Company had $9,656 of total unrecognized compensation cost related to the RSU awards as of October 1, 2022. That cost is expected to be recognized over a weighted average period of 1.8 years.
Stock Options
In 2022, the Company granted stock options with market-based vesting conditions to its officers. As of October 1, 2022, there were 82,500 unvested options and no vested unexercised options. The exercise price per share is $50.60, which is equal to the market price of Helios stock on the grant date. The options vest after achievement of defined stock prices and after the required service periods, which range from one to three years. These options have a 10-year expiration. The grant date fair value of the options totaled $2,334 and was estimated using a Monte Carlo simulation.
The Company has also granted stock options with only time-based vesting conditions to its officers. As of October 1, 2022, there were 13,222 unvested options and 11,011 vested unexercised options. The exercise prices per share, which range from $35.04 to $55.03, are equal to the market price of Helios stock on the respective grant dates. The options vest ratably over a three-year period and have a 10-year expiration. The grant date fair value of the options was estimated using a Black Scholes valuation model.
At October 1, 2022, the Company had $2,495 of unrecognized compensation cost related to the options, which is expected to be recognized over a weighted average period of 1.1 years.
Employee Stock Purchase Plans
The Company maintains an Employee Stock Purchase Plan (“ESPP”) in which U.S. employees are eligible to participate. Employees who choose to participate are granted an opportunity to purchase common stock at 85 percent of market value on the first or last day of the quarterly purchase period, whichever is lower. Employees in the United Kingdom (“UK”), under a separate plan, are granted an opportunity to purchase the Company’s common stock at market value, on the first or last day of the quarterly purchase period, whichever is lower, with the Company issuing one additional free share of common stock for each six shares purchased by the employee under the plan. Employees purchased 28,960 shares at a weighted average price of $54.29, and 22,747 shares at a weighted average price of $57.93, under the ESPP and UK plans during the nine months ended October 1, 2022 and October 2, 2021, respectively. The Company recognized $272 and $431 of compensation expense during the nine months ended October 1, 2022 and October 2, 2021, respectively.
12. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables present changes in accumulated other comprehensive loss by component:
UnrealizedGains and(Losses) onDerivative Instruments
ForeignCurrencyItems
(1,334
(47,655
Other comprehensive income (loss) before reclassifications
14,841
(59,695
(44,854
Amounts reclassified from accumulated other comprehensive loss, net of tax
(1,115
Tax effect
(3,221
12,642
9,421
Net current period other comprehensive income (loss)
9,171
(94,708
(5,922
(28,418
6,071
(17,944
(11,873
(2,353
(853
3,729
2,876
(3,057
(42,633
13. SEGMENT REPORTING
The Company has two reportable segments: Hydraulics and Electronics. These segments are organized primarily based on the similar nature of products offered for sale, the types of customers served and the methods of distribution and are consistent with how the segments are managed, how resources are allocated and how information is used by the chief operating decision makers.
The Company evaluates performance and allocates resources based primarily on segment operating income. Certain costs were not allocated to the business segments as they are not used in evaluating the results of, or in allocating resources to the Company’s segments. These costs are presented in the Corporate and other line item. For the nine months ended October 1, 2022, the unallocated costs totaled $27,270 and included certain corporate costs not deemed to be allocable to either business segment of $348, amortization of acquisition-related intangible assets of $20,554 and other acquisition and integration-related costs of $6,368. The accounting policies of the Company’s operating segments are the same as those used to prepare the accompanying Consolidated, Unaudited Financial Statements.
20
The following table presents financial information by reportable segment:
131,204
133,404
411,118
385,549
76,001
89,837
278,302
265,950
29,411
31,799
92,097
92,200
10,964
18,445
51,778
56,324
Corporate and other
(9,632
(9,495
(27,270
(31,103
5,584
4,187
13,899
10,205
2,562
8,017
6,849
8,449
6,749
21,916
17,054
822,548
821,836
574,606
585,739
Corporate
22,413
7,771
Geographic Region Information
Net sales are measured based on the geographic destination of sales. Tangible long-lived assets are shown based on the physical location of the assets and primarily include net property, plant and equipment and exclude right-of-use assets.
Americas
114,659
109,365
365,610
314,469
EMEA
49,012
55,952
175,039
166,183
APAC
43,534
57,924
148,771
170,847
Tangible long-lived assets
105,571
97,649
30,632
35,829
16,694
17,956
152,897
151,434
14. RELATED PARTY TRANSACTIONS
The Company purchases from, and sells inventory to, entities partially owned or managed by directors of Helios. For the nine months ended October 1, 2022 and October 2, 2021, inventory sales to the entities totaled $2,146 and $2,516, respectively, and inventory purchases from the entities totaled $0 and $3,221, respectively.
At October 1, 2022 and January 1, 2022, amounts due from the entities totaled $307 and $344, respectively.
21
In March 2022, the Company completed a sale of real estate to one of its executive officers for $1,850, which sale price was based on the valuation from an independent third-party appraisal. Concurrent with the sale, the Company also purchased real estate from the executive officer for $970, which purchase price reflected a below market valuation based on the original cost of the property to the executive officer, plus the cost of improvements funded by the executive officer.
15. COMMITMENTS AND CONTINGENCIES
The Company is not a party to any legal proceedings other than routine litigation incidental to its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the results of operations, financial position or cash flows of the Company.
22
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words "expects," "anticipates," "believes," "intends," "plans," "will" and similar expressions identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Form 10-Q with the Securities and Exchange Commission. These forward-looking statements are subject to risks and uncertainties, including, without limitation, those discussed in this report and those identified in Part I, Item 1A, "Risk Factors" included in our Form 10-K. In addition, new risks emerge from time to time, and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. Accordingly, our future results may differ materially from historical results or from those discussed or implied by these forward-looking statements. Given these risks and uncertainties, the reader should not place undue reliance on these forward-looking statements.
OVERVIEW
We are a global leader in highly engineered motion control and electronic controls technology for diverse end markets, including construction, material handling, agriculture, energy, recreational vehicles, marine and health and wellness.
We operate under two business segments: Hydraulics and Electronics. The Hydraulics segment designs and manufactures hydraulic cartridge valves, hydraulic quick release couplings as well as engineers complete hydraulic systems. The Electronics segment designs and manufactures customized electronic controls systems and displays for a variety of end markets including industrial and mobile, recreational and health and wellness.
In November 2016, we announced a vision to achieve $1.0 billion in sales in 2025, through a combination of organic growth and acquisitions, and to deliver operating margins in excess of 20%. In 2021, we augmented our strategy and accelerated our growth plans to achieve the milestone of over $1.0 billion in sales with top tier adjusted EBITDA margin of approximately 25% in 2023.
Underpinning our expectation of compounded annual growth of approximately two times our market's growth rates, we have an active acquisition pipeline and a history of acquiring companies with niche technologies, as well as strong profitability.
Recent Acquisitions
Our acquisition activity, driven by our strategic vision, has enabled us to diversify our product offerings and the markets we serve and expand our geographic presence. Prior to 2016, we operated primarily in the Hydraulics market with a small presence in electronics.
In July 2022, we completed the acquisition of the assets of Taimi R&D, Inc., a Canadian manufacturer of innovative hydraulic components that offer ball-less design swivel products, which improve hydraulic reliability of equipment, increase the service life of components and help protect the environment by reduced leakage. Taimi brings a differentiated, yet complementary product line to our hydraulics platform as well as strong engineering breadth.
In September 2022, we completed another flywheel acquisition of Daman Products Company, headquartered in Mishawaka, Indiana. Daman is a leading designer and manufacturer of standard and custom precision hydraulic manifolds and other fluid conveyance products for its customer base, predominantly in North America. The acquisition of Daman expands the Company's technologies and markets and provides an opportunity to produce integrated package offerings with multiple Helios brands.
Global Economic Conditions
Russian Invasion of Ukraine
In February of 2022, Russia invaded Ukraine. As a result, several governments have enacted sanctions against Russia and Russian interests. The conflict has led to economic uncertainty and market disruptions, including significant volatility in commodity, fuel and energy prices as well as in credit and capital markets. We do not have operations in the region, and less than 1% of our sales are to Russia and Ukraine customers. In Europe, we continue to experience inflation from: increased energy and raw material costs, logistics issues and reduced orders from customers who do business in the region. The broader consequences of the conflict could impact our business through further increases or fluctuations in commodity and energy prices, further disruptions to the global supply chain, reduced availability of certain natural resources and other adverse effects on macroeconomic conditions.
COVID-19 Update
In the third quarter we did not have any COVID-related shutdowns or other significant new disruption to our business from the pandemic. However, we continue to face constraints related to sourcing certain electronic and other components, which originated from the high demand for these products caused by the pandemic. We have been able to mitigate the impact with our procurement efforts, production schedule adjustments and product redesigns. While at a slowing degree, in the third quarter we continued to experience delays in shipments as well as material and logistics cost increases.
Our outlook for the remainder of the 2022 fiscal year assumes the global economy continues to recover; however, we cannot at this time predict any future impacts. The Company continues to monitor developments, new strains and variants of COVID-19 and government requirements and recommendations at the national, state and local levels, as well as vaccine mandates, to evaluate whether to reinstate and/or extend certain initiatives it implemented to help contain the spread of COVID-19. Refer to Item 1A "Risk Factors" of our Form 10-K for additional COVID-19 related discussion.
Industry Conditions
Market demand for our products is dependent on demand for the industrial goods in which the products are incorporated. The capital goods industries in general, and the Hydraulics and Electronics segments specifically, are subject to economic cycles. We utilize industry trend reports from various sources, as well as feedback from customers and distributors, to evaluate economic trends. We also rely on global government statistics such as Gross Domestic Product and Purchasing Managers Index to understand macroeconomic conditions.
According to the National Fluid Power Association (the fluid power industry’s trade association in the U.S.), the U.S. index of shipments of hydraulic products increased 19.9% during the first nine months of 2022, after increasing 20.9% during 2021. In Europe, the CEMA Business Barometer reported in October that the general business climate index for the European agricultural machinery industry has continued its sideways movement at a positive level after the sharp declines in the course of the Russian war against Ukraine and current business appears to remain stable. Further noted was the price increases and bottlenecks on the supplier side that continue to challenge the industry, for which some slight easing is observable.
The Federal Reserve’s Industrial Production Index, which measures the real output of all relevant establishments located in the U.S., reports third quarter 2022 sales of semiconductors and other electronics components improved over the second quarter of 2022 back up to first quarter 2022 levels. The Institute of Printed Circuits Association (“IPC”) reported that total North American printed circuit board (“PCB”) shipments were up 14.6% in September 2022 compared with the same month last year; compared with August 2022, September shipments grew 17.9%. PCB year-to-date bookings were down 2.6% in September compared to the same period last year. However, September bookings increased 52.0% from August 2022. The IPC also reported that North American electronics manufacturing services (“EMS”) shipments were up 15.5% in September 2022 compared with the same month last year; compared with August 2022, September shipments declined 0.1%. EMS bookings in September were up 21.1% compared to September last year and improved 18.1% from August 2022. Further noted was improvement in bookings is a sign that demand for durable goods still has some life despite the slowing macroeconomic environment, and shipments remain healthy, which indicates that severe supply chain constraints are behind us.
2022 Third Quarter Results and Comparison of the Three and Nine Months Ended October 1, 2022 and October 2, 2021
(in millions except per share data)
$ Change
% Change
207.2
223.2
(16.0
(7.2
)%
69.3
80.9
(11.6
(14.3
Gross profit %
33.4
36.2
30.7
40.7
(10.0
(24.6
Operating income %
14.8
18.2
20.4
27.8
(7.4
(26.6
Diluted net income per share
(0.22
(25.9
689.4
651.5
37.9
5.8
235.2
238.5
(3.3
(1.4
34.1
36.6
116.6
117.4
(0.8
(0.7
16.9
18.0
81.0
(0.1
(0.02
Third quarter consolidated net sales declined $16.0 million, 7.2%, over the prior-year third quarter. We experienced organic net sales decline of $18.9 million, 8.5%, over the prior-year third quarter, offset partially by acquisition growth of $2.9 million. Discrete impacts to our third quarter organic sales compared to the prior year quarter are as follows:
Third quarter sales to the Americas region increased compared to the 2021 third quarter, while sales to the EMEA and APAC regions declined. Demand for electronics products in our health and wellness end market has sharply declined from the prior year third quarter, which was strengthened by the pandemic as consumers invested in health and leisure products. Sales in several of our end markets improved over the third quarter of 2021, with our recreational end markets leading the growth. Improvement was also realized in the industrial machinery and mobile equipment end markets.
Consolidated net sales for the year-to-date period improved by $37.9 million, 5.8%, compared with the prior-year period. Acquisition-related sales for the first three quarters of 2022 totaled $16.7 million and organic sales were up $21.2 million, 3.3%. Discrete impacts to our year-to-date organic sales compared to the prior year period are as follows:
Year-to-date sales to the Americas and EMEA regions increased compared to the 2021 comparable period, while sales to the APAC region declined. Sales growth in the year-to-date period was driven by the industrial machinery, mobile equipment, construction and recreational end markets while health and wellness contracted.
Third quarter gross profit decreased $11.6 million, 14.3%, over the prior-year third quarter driven by lower volume and unfavorable foreign currency partially offset by pricing. Changes in foreign currency exchange rates compared to the third quarter of 2021 reduced gross profit by $2.1 million. Gross margin declined by 2.8 percentage points compared with the prior-year third quarter, impacted most significantly by higher raw material costs. While the majority of these costs were passed on to customers, the result of increasing sales with no additional profit is an unfavorable impact to margins. We are also experiencing higher energy costs in the EMEA region that further compressed margins. Material costs as a percentage of sales, excluding pricing changes and acquisition-related sales, increased by 3.5 percentage points compared to the prior-year third quarter.
Gross profit for the first nine months of 2022 decreased $3.3 million, 1.4%, compared with the same period of 2021. While sales volumes were higher in the current year period, headwinds from inflation and foreign currency offset the gains. Changes in foreign currency exchange rates compared to the first nine months of 2021 reduced year-to-date gross profit by $6.2 million. Gross margin declined 2.5 percentage points over the prior-year period as pricing efforts did not recover the full margin to offset the impact of higher raw material and logistic costs. Material costs as a percentage of sales, excluding pricing changes and acquisition-related sales, increased in the year-to-date period by 4.0 percentage points compared to the prior year-to-date period.
In the third quarter of 2022, we incurred $1.8 million of costs related to our restructuring activities. The restructuring plans are expected to improve the global cost structure of the business. In the EMEA region, we continued the execution of an operational restructure in our Hydraulics segment that combines the manufacturing operations at two of our locations into one location. We are continuing our sales and research and development ("R&D") efforts in both locations in order to serve customers in the regions. In the APAC region, we are executing an organizational restructure in our Hydraulics segment among several locations to align employee talent with the strategic operational goals of the Company. We estimate annual cost savings in our Hydraulics segment will total $1.8 million. In our Electronics segment, we executed an organizational restructure to adjust our labor base in line with current demand levels. The restructuring costs are comprised of recurring labor costs for employees who worked on projects, severance and other expenses associated with the manufacturing relocation.
Operating income as a percentage of sales decreased 3.4 percentage points to 14.8% in the third quarter of 2022 compared to the prior-year period. Gross margin level changes, our restructuring activities, increased acquisition and integration costs of $1.4 million and reduced leverage of our selling, engineering and administrative ("SEA") level fixed cost base on the lower sales volume led to the erosion.
For the first nine months of 2022, operating income as a percentage of sales decreased 1.1 percentage points to 16.9% compared to with the prior-year period. Partially offsetting the factors noted above, was acquisition-related amortization for the first nine months of 2022, which was lower than the prior-year period by $4.7 million, primarily from the sales order backlog intangible acquired with the Balboa acquisition that was fully amortized in the second quarter of 2021.
26
SEGMENT RESULTS
The following table sets forth the results of operations for the Hydraulics segment (in millions):
131.2
133.4
(2.2
(1.6
46.5
50.2
(3.7
35.4
37.6
29.4
31.8
(2.4
(7.5
22.4
23.8
411.1
385.5
25.6
6.6
146.8
146.5
0.3
0.2
35.7
38.0
92.1
92.2
23.9
Third quarter net sales for the Hydraulics segment decreased by $2.2 million, 1.6%, compared with the prior-year third quarter. We experienced organic net sales decline of $4.3 million, 3.2%, over the prior-year third quarter and acquisition growth of $2.1 million. Discrete impacts to our third quarter organic sales compared to the prior year quarter are as follows:
Year-to-date net sales grew by $25.6 million, 6.6%, compared with the 2021 comparable period. Acquisition-related sales accounted for $14.2 million of the increase and sales from our organic businesses improved $11.4 million, 3.0%. Discrete impacts to our year-to-date organic sales compared to the prior year period are as follows:
Organic sales growth in the first three quarters of 2022 benefited from improved demand primarily in the Americas and EMEA regions, as well as in several of our end markets including the mobile and industrial equipment markets.
27
The following table presents net sales based on the geographic region of the sale for the Hydraulics segment (in millions):
49.7
45.2
10.0
41.3
44.8
(3.5
(7.8
40.2
43.4
(3.2
142.7
121.2
21.5
17.7
143.2
134.7
8.5
6.3
125.2
129.6
(4.4
(3.4
Regional sales performance in the third quarter compared to the prior year quarter was driven by:
Americas - demand, pricing and our recent acquisitions contributed to a 10.0% increase in sales
EMEA - excluding unfavorable changes in foreign currency rates of $6.3 million, sales improved 6.3%, primarily from pricing
APAC - excluding unfavorable changes in foreign currency rates of $1.6 million, sales declined 3.7%, driven by lower demand in Korea and China
Regional sales performance in the year-to-date period compared to the prior year period was driven by:
Americas - demand, pricing and our recent acquisitions contributed to a 17.7% increase in sales
EMEA - excluding unfavorable changes in foreign currency rates of $14.9 million, sales improved 17.4%, primarily from demand, pricing and our 2021 acquisition
APAC - excluding unfavorable changes in foreign currency rates of $4.5 million, sales in the region were flat
In the third quarter of 2022, gross profit decreased $3.7 million, 7.4%, compared with the same quarter of the prior year. Changes in foreign currency exchange rates compared to the third quarter of 2021 reduced gross profit by $1.9 million. Gross profit margin declined over the same period by 2.2 percentage points to 35.4%, which is primarily attributable to rising material and energy costs, for which margin was not fully recovered by pricing efforts. Material costs as a percentage of sales, excluding pricing changes and acquisition-related sales, increased in the third quarter by 3.9 percentage points compared to the prior-year third quarter.
During the 2022 year-to-date period, gross profit improved slightly, $0.3 million, 0.2%, over the comparable prior-year period. The segment realized an unfavorable impact on gross profit from changes in foreign currency rates, compared to the first three quarters of 2021, of $5.3 million. Gross margin for the first three quarters of 2022 decreased 2.3 percentage points as the segment was impacted by higher material, logistic and energy costs. Higher freight costs of $1.5 million impacted gross margin for the year-to-date period compared to the prior-year period. Material costs as a percentage of sales, excluding pricing changes and acquisition-related sales, increased in the first three quarters of 2022 by 3.2 percentage points compared to the prior-year period. Price increases to customers did not fully recover the margin impact of the material cost increases.
Restructuring costs totaled $1.1 million for the third quarter of 2022; $0.3 million of the costs are included in direct labor in cost of goods sold and $0.8 million are reflected in SEA expenses. The restructuring costs are comprised of $0.6 million of recurring labor costs for employees who worked on the restructuring projects, non-recurring severance of $0.3 million and other non-recurring expenses associated with the manufacturing relocation of $0.2 million.
28
SEA expenses decreased $1.3 million, 7.1%, in the third quarter of 2022 compared with the prior-year period. Non-recurring costs from restructuring activities inflated costs in the 2022 third quarter when compared to the prior-year quarter while changes in foreign currency rates compared to the prior-year quarter reduced SEA costs by $1.0 million. Additional savings of $1.1 million were realized from lower benefit costs, primarily from performance-based incentive compensation accruals. The savings led to SEA as a percent of sales decreasing 0.8 percentage points during the quarter, to 13.0%, compared to the 2021 third quarter.
Restructuring activities totaled $3.0 million for the year-to-date period of 2022; $0.9 million of the costs are included in direct labor in cost of goods sold and $2.1 million are reflected in SEA expenses. The restructuring costs are comprised of $1.8 million of recurring labor costs for employees who worked on the restructuring projects, non-recurring severance of $0.9 million and other non-recurring expenses associated with the manufacturing relocation of $0.3 million.
Year-to-date SEA expenses increased $0.4 million, 0.7%, in 2022 compared with the prior-year period, mainly due to our 2021 acquisition, non-recurring costs from restructuring activities as well as higher travel and marketing costs of $0.8 million, offset by savings of $0.8 million realized from lower benefit costs, primarily from performance-based incentive compensation accruals. Changes in foreign currency rates compared to the prior-year period further reduced SEA costs by $2.4 million. SEA as a percent of sales decreased 0.8 percentage points to 13.3% in 2022, also benefiting from fixed cost leverage on the higher sales.
The following table sets forth the results of operations for the Electronics segment (in millions):
76.0
89.8
(13.8
(15.4
22.8
31.3
(8.5
(27.2
30.0
34.9
11.0
18.4
(40.2
14.5
20.5
278.3
266.0
12.3
4.6
88.4
92.5
(4.1
34.8
51.8
56.3
(4.5
(8.0
18.6
21.2
Third quarter net sales for the Electronics segment declined $13.8 million, 15.4%, compared with the prior-year third quarter. Acquisition growth contributed an increase of $0.8 million. Discrete impacts to our third quarter organic sales compared to the prior year quarter are as follows:
Third quarter demand in our health and wellness end market declined sharply compared to the prior year quarter, which was strengthened by the pandemic as consumers invested in health and leisure products. Inventory held by customers remained inflated in this end market, which further led to the decline. We continue to realize growth in our recreational, construction and industrial machinery end markets.
Year-to-date net sales for the Electronics segment improved by $12.3 million, 4.6%, compared with the prior-year period. Acquisition growth accounted for $2.5 million of the increase. Discrete impacts to our year-to-date organic sales compared to the prior year period are as follows:
29
The segment experienced a favorable sales mix, which contributed to the period over period increase. We realized sales growth in our recreational and industrial machinery end markets, which was offset by the decline in health and wellness.
The following table presents net sales based on the geographic region of the sale for the Electronics segment (in millions):
65.0
64.2
0.8
1.2
7.7
11.1
(30.6
3.3
(11.2
(77.2
222.9
193.3
29.6
15.3
31.5
1.0
23.6
41.2
(17.6
(42.7
Americas - demand lessened but pricing efforts contributed to a 1.2% increase in sales
EMEA - excluding unfavorable changes in foreign currency rates of $0.3 million, sales declined 27.9%, primarily from lower demand in the health and wellness end market
APAC - sales declined 77.2% from reduced demand in the health and wellness end market in China; impacts from foreign currency exchange rates were minimal
Americas - demand, pricing and capacity improvements contributed to a 15.3% increase in sales
EMEA - excluding unfavorable changes in foreign currency rates of $1.1 million, sales improved 4.4%, primarily from pricing
APAC - sales declined 42.7%, from lower demand in the health and wellness end market in China; impacts from foreign currency exchange rates were minimal
Third quarter gross profit decreased $8.5 million, 27.2%, compared with the third quarter of the prior year, primarily due to lower sales volume and material cost increases. Impacts from changes in foreign currency exchange rates compared to the prior-year period reduced gross profit by $0.3 million. Gross margin declined over the same period by 4.9 percentage points to 30.0%. The segment continues to experience increases in raw material costs, due to high demand and shortages of materials in the market for electronic and other components used in our products. Pricing efforts have offset some of the impact but did not recover the full margin. Material costs as a percentage of sales, excluding pricing changes and acquisition-related sales, increased in the third quarter by 3.9 percentage points compared to the prior-year quarter. In addition, the segment experienced reduced labor efficiency from lower production due to the demand decline.
In the third quarter of 2022, we executed an organizational restructure to adjust our labor base in line with current demand levels. We incurred $0.8 million of restructuring costs for severance; $0.4 million of the costs are included in direct labor in cost of goods sold and $0.4 million are reflected in SEA expenses.
30
During the 2022 year-to-date period, the segment experienced a $4.1 million, 4.4%, decrease in gross profit over the comparable prior-year period, primarily due to higher material costs and unfavorable impacts from changes in foreign currency exchange rates compared to the prior-year period of $0.9 million. Gross margin for the first three quarters of 2022 decreased 3.0 percentage points from the higher material costs as margin was not fully recovered by pricing efforts. Material costs as a percentage of sales, excluding pricing changes and acquisition-related sales, increased in the first three quarters of 2022 by 5.5 percentage points compared to the prior-year period.
SEA expenses decreased by $1.1 million, 8.5%, in the third quarter of 2022, compared with the third quarter of 2021, impacted by savings of $0.9 million realized from lower benefit costs, primarily from performance-based incentive compensation accruals and lower R&D costs of $0.2 million. SEA costs as a percentage of sales increased 1.1 percentage points, to 15.5%, in the third quarter of 2022 compared with the prior-year third quarter from lost leverage of our fixed costs on the lower sales.
Year-to-date SEA expenses increased $0.4 million, 1.1%, in 2022 compared with the prior-year period primarily from our 2021 acquisition offset by lower benefit costs of $1.1 million, mainly from performance-based incentive compensation accruals, and lower R&D costs of $0.4 million. SEA as a percent of sales decreased 0.4 percentage points to 13.2% in 2022 from 13.6% in 2021 from improved leverage of our fixed costs on the higher sales.
Corporate and Other
Certain costs are excluded from business segment results as they are not used in evaluating the results of, or in allocating resources to, our operating segments. For the third quarter of 2022, these costs totaled $9.6 million for (i) amortization of acquisition-related intangible assets of $6.8 million and (ii) $2.8 million related to other acquisition and integration activities. Year-to-date, corporate and other costs totaled $27.3 million for (i) transition costs for one of our executive officers of $0.3 million, (ii) amortization of acquisition-related intangible assets of $20.6 million and (iii) $6.4 million related to other acquisition and integration activities.
Interest Expense, net
Net interest expense increased $0.3 million to $4.1 million in the third quarter of 2022 compared with $3.8 million in the prior-year third quarter. While average debt balances were lower compared to the prior year quarter, the impact was offset by higher interest rates. Average net debt decreased to $399.2 million during the third quarter of 2022 compared with $413.2 million during the third quarter of 2021. Year-to-date net interest expense decreased $1.3 million to $11.7 million compared with $13.0 million during the comparable 2021 period. The decrease is primarily a result of lower debt balances during the first three quarters of 2022. Average net debt for the 2022 year-to-date period totaled $418.6 million compared with $430.4 million in the corresponding period of 2021.
Income Taxes
The provision for income taxes for the third quarter of 2022 was 23.6% of pretax income compared to 25.5% for the prior-year third quarter. The year-to-date provision was 22.7% and 22.0% of pretax income for 2022 and 2021, respectively. The 2021 year-to-date tax rate includes benefit from the settlement of a transfer pricing dispute resolved through competent authority between the United States and Germany. These effective rates fluctuate relative to the levels of income and different tax rates in effect among the countries in which we sell our products.
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On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was enacted into law in response to the COVID-19 pandemic. The Company has evaluated the various income and payroll tax provisions and expects little or no impact to income tax expense. However, the Company is taking advantage of the various payment deferments allowed and employee retention credits afforded by the CARES Act and other similar state and/or foreign liquidity measures. The CARES Act allowed employers to defer the deposit and payment of the employer's share of Social Security taxes. We deferred 50% of the $1.7 million in payroll taxes normally due between March 27, 2020 and December 31, 2020. We paid 50% of this amount during the fourth quarter of 2021. The remaining balance will be paid during the fourth quarter of 2022 and is included in the Accrued compensation and benefits line item in the accompanying Consolidated Balance Sheets.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary source of capital has been cash generated from operations. In recent years, we have used borrowings on our credit facilities to fund acquisitions. During the first nine months of 2022, cash provided by operating activities totaled $74.2 million. At the end of the third quarter, we had $36.8 million of available cash and cash equivalents on hand and $131.4 million of available credit on our revolving credit facilities. We also have a $300.0 million accordion feature available on our credit facility, subject to certain pro forma compliance requirements, intended to support potential future acquisitions.
Our principal uses of cash have been paying operating expenses, making capital expenditures, servicing debt, making acquisition-related payments and paying dividends to shareholders.
We believe that cash generated from operations and our borrowing availability under our credit facilities will be sufficient to satisfy our operating expenses. In the event that economic conditions were to severely worsen for a protracted period of time, we would have several options available to ensure liquidity in addition to increased borrowings. Capital expenditures could be postponed since they primarily pertain to long-term improvements in operations, operating expense reductions could be made and finally, the dividend to shareholders could be reduced or suspended.
Cash Flows
The following table summarizes our cash flows for the periods (in millions):
74.2
82.0
(85.2
(68.2
(17.0
15.6
4.3
11.3
Effect of exchange rate changes on cash
3.7
4.4
Net increase in cash
8.3
22.5
(14.2
Cash on hand increased $8.3 million in the first three quarters of 2022 to $36.8 million as of October 1, 2022. Changes in exchange rates during the nine months ended October 1, 2022, favorably impacted cash and cash equivalents by $3.7 million. Cash balances on hand are a result of our cash management strategy, which focuses on maintaining sufficient cash to fund operations while reinvesting cash in the Company and paying down borrowings on our credit facilities.
Operating activities
Cash from operations declined by $7.8 million in the first nine months of 2022 compared to the prior-year comparable period. Year-to-date cash earnings (calculated as net income plus adjustments to reconcile net income to net cash provided by operating activities, excluding changes in net operating assets and liabilities) decreased by $10.1 million over the prior-year period. Changes in net operating assets and liabilities increased cash by $2.3 million, compared to the prior-year period, primarily from favorable cash flows from AR and inventories only partially offset by reductions in AP and accrued expenses. Strategic investments in inventory reduced cash by $19.7 million and $35.8 million in the first three quarters of 2022 and 2021, respectively. Days of inventory on hand increased to 118 days as of October 1, 2022,
compared with 92 days as of October 2, 2021. The increase in inventory levels is primarily from higher material costs and supply chain challenges such as (i) making earlier purchases of material to avoid shortages, (ii) inventory on hand that is waiting on delayed components to complete and (iii) delayed orders by customers after we have already started the production process. Changes in accounts receivable reduced cash by $2.9 million and $36.6 million in the first three quarters of 2022 and 2021, respectively. Days sales outstanding increased slightly from the prior-year period at 58 days as of October 1, 2022, compared to 56 days as of October 2, 2021, as our collection patterns remain consistent with the prior period.
Investing activities
Capital expenditures totaled $21.9 million for the first nine months of 2022, an increase of $4.9 million over the prior-year comparable period. Capital expenditures for 2022 are forecasted to be approximately 3%-4% of sales, for investments in machinery and equipment for capacity expansion projects, improvements to manufacturing technology and maintaining/replacing existing machine capabilities.
Cash used for acquisition related activities in the first nine months of 2022 totaled $67.3 million, compared to $50.9 million in the prior-year period.
Financing activities
Cash provided by financing activities totaled $15.6 million during the first nine months of 2022, compared with $4.3 million in the prior-year period. Borrowings, net of repayments, on our credit facilities totaled $27.9 million for the first nine months of 2022 compared to $14.5 million during the same period of 2021.
During the third quarter of 2022, we declared a quarterly cash dividend of $0.09 per share payable on October 20, 2022, to shareholders of record as of October 5, 2022. The declaration and payment of future dividends is subject to the sole discretion of the board of directors, and any determination as to the payment of future dividends will depend upon our profitability, financial condition, capital needs, future prospects and other factors deemed pertinent by the board of directors.
Off Balance Sheet Arrangements
We do not engage in any off-balance sheet financing arrangements. In particular, we do not have any material interest in variable interest entities, which include special purpose entities and structured finance entities.
Inflation
As more fully described throughout Item 2 above, we are experiencing supply shortages and increasing material and logistics costs. Continued increases in the global demand for the materials used in our products could result in significant increases in the costs of the components we purchase, and we may not be able to fully offset such higher costs through price increases. There is no assurance that our business will not be materially affected by inflation in the future.
Critical Accounting Policies and Estimates
We currently apply judgment and estimates that may have a material effect on the eventual outcome of assets, liabilities, revenues and expenses for impairment of long-lived assets, inventory, goodwill, accruals, income taxes and fair value measurements. Our critical accounting policies and estimates are included in our Form 10-K, and any changes made during the first nine months of 2022, are disclosed in Note 2 to the Consolidated, Unaudited Financial Statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See “Item 7A – Quantitative and Qualitative Disclosures about Market Risk” in our Form 10-K. There were no material changes during the nine months ended October 1, 2022.
Item 4. CONTROLS AND PROCEDURES.
The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report, have concluded that our disclosure controls and procedures are effective and are designed to ensure that the information we are required to disclose is recorded, processed, summarized and reported within the necessary time periods. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports that we file or submit pursuant to the Securities Exchange Act of 1934, as amended, 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.
There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Securities Exchange Act of 1934, as amended, during the period covered by this report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
None.
Item 1A. RISK FACTORS.
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors that affect our business and financial results that are discussed in Part I, Item 1A, “Risk Factors” of our Form 10-K and Part II, Item 1A, "Risk Factors" of our second quarter Form 10Q. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report. Other than as set forth below, there have been no material changes to such risk factors.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
Item 4. MINE SAFETY DISCLOSURES.
Not applicable.
Item 5. OTHER INFORMATION.
Item 6. EXHIBITS.
Exhibits:
Exhibit
Number
Exhibit Description
10.1+
Form of Performance Stock Option Agreement for Helios employees (filed herewith).
10.2+
Form of Performance Stock Option Agreement for business unit officers (filed herewith).
10.3
Third Amendment to Second Amended and Restated Credit Agreement among Helios Technologies, Inc. as Borrower, the Guarantor parties thereto, the financial institutions party thereto from time to time as lenders, and PNC Bank, National Association, as Administrative Agent, dated July 29, 2022 (filed herewith).
31.1
CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
CEO Certification pursuant to 18 U.S.C. § 1350.
32.2
CFO Certification pursuant to 18 U.S.C. § 1350.
101.INS
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH
XBRL Schema Document
101.CAL
XBRL Calculation Linkbase Document
101.DEF
XBRL Definition Linkbase Document
101.LAB
XBRL Label Linkbase Document
101.PRE
XBRL Presentation Linkbase Document
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2022, has been formatted in Inline XBRL.
+
Executive management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 8, 2022
By:
/s/ Tricia L. Fulton
Tricia L. Fulton
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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