# HELIOS TECHNOLOGIES, INC. (HLIO) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from HELIOS TECHNOLOGIES, INC.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1024795/000095017023005179/hlio-20221231.htm
Accession: 0000950170-23-005179
Filing date: 2023-02-28
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/HLIO/
All MD&A years: /company/HLIO/mda/
Previous year: /company/HLIO/mda/a-0000950170-22-002443/ (FY 2022)
Next year: /company/HLIO/mda/fy2023/ (FY 2023)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The operating results of the Hydraulics and Electronics segments included in Management’s Discussion and Analysis of Financial Condition and Results of Operations are presented on a basis consistent with our internal management reporting. Segment information included in Note 16 of the Notes to the Consolidated Financial Statements included in this Annual Report is also presented on this basis. All differences between our internal management reporting basis and accounting principles generally accepted in the U.S. (“U.S. GAAP”), specifically the allocation of certain corporate and acquisition-related costs, are included in Corporate and Other.

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, mobile, recreational and health and wellness.

During 2021, we augmented our strategy and accelerated our growth plans by two years with intent to achieve our targeted milestone of over $1 billion in sales with top tier adjusted EBITDA margin of approximately 25% in 2023. We plan to achieve this milestone on a run-rate basis ending the fourth quarter of 2023 through a combination of organic growth, acquisitions made to date as well as execution of our manufacturing and operating strategy.

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 January 2021, we acquired the assets of BJN Technologies, LLC, an innovative engineering solutions provider that was founded in 2014. With the acquisition, we formed the Helios Center of Engineering Excellence to centralize our innovation and technology advancements to better leverage existing talents across the electronics segment initially, and then throughout all of Helios.

In July 2021, we completed another flywheel acquisition of NEM S.r.l., an innovative hydraulic solutions company providing customized material handling, construction, industrial vehicle and agricultural applications to its global customer base, predominantly in Europe and Asia. NEM enhances the Helios electro-hydraulic product offering, provides geographic expansion and adds scale to address new markets.

In October 2021, we completed the acquisition of Joyonway, a developer of control panels, software, systems and accessories for the health and wellness industry. Joyonway operates from two locations in China, Shenzhen and Dongguan, both of which are in the hub of electronics and software development in China and give us a foothold for electronics manufacturing in Asia.

In July 2022, we completed the acquisition of the assets of Taimi R&D, Inc., a Canadian manufacturer of innovative hydraulic components that offers 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.

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In January 2023, we completed the acquisition of Schultes Precision Manufacturing, Inc. Schultes is a highly trusted specialist in manufacturing precision machined components and assemblies for customers requiring very tight tolerances, superior quality, and exceptional value-added manufacturing processes. Currently serving the hydraulic, aerospace, communication, food services, medical device, and dental industries, Schultes brings the manufacturing quality, reliability, and responsiveness critical to its customers’ success. Schultes provides additional manufacturing know-how and expands our business into new end markets with attractive secular tailwinds.

Global Economic Conditions

Russian Invasion of Ukraine

In early 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 Pandemic

In the first half of 2022, we experienced mild impacts from the pandemic. At the beginning of the second quarter our locations in China began to shut down periodically due to regulatory lockdown measures associated with a COVID-19 outbreak. The shutdown of our locations and our customers' locations impacted operations and sales through May with recovery occurring in June as the lockdowns were lifted. We also faced disruption to our workforce from the pandemic. While the impact was not significant, the absenteeism caused labor inefficiencies in production. Additionally, in certain locations we faced pressure from competitive labor markets. In the second half of 2022, there were no COVID-related shutdowns or other significant new disruption to our business from the pandemic.

Throughout the year, and continuing into 2023, we faced 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 some of the impact with our procurement efforts, production schedule adjustments and product redesigns.

Demand in the health and wellness market was favorably impacted by the pandemic in 2020 and 2021, as consumers invested in leisure products and activities. However, during 2022, we experienced a sharp decline in sales in this end market as demand declined and inventory levels in the channel increased.

Refer to Item 1A Risk Factors of this Annual Report for additional COVID-19 related discussion.

Industry Conditions

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 higher level economic conditions.

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Hydraulics

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 20% in 2022, after increasing 21% in 2021 and decreasing 20% in 2020. In Europe, the CEMA Business Barometer reports that in December 2022, the business climate index for the European agricultural machinery industry had its first significant upward trend since the sharp declines in the course of the Russian war against Ukraine. CEMA further reported that supply constraints appear to have become more acute in only certain segments while many manufacturers seem increasingly able to realize orders. The CECE (Committee for European Construction Equipment) business climate index bounced back in November after steady decline throughout the year. They reported the favorability was driven by a slightly less tense supply chain.

Electronics

The Federal Reserve’s Industrial Production Index, which measures the real output of all relevant establishments located in the U.S., reports production of semiconductors and other electronics components declined during the fourth quarter of 2022, to the lowest level since the second quarter of 2021. Output peaked in the fourth quarter of 2021. The Institute of Printed Circuits Association (“IPC”) reported that total North American printed circuit board (“PCB”) shipments in December 2022 were down 5.1% compared with November 2022, and for the year orders were down 6.5% while shipments were up 10.1%. The IPC also reported that North American electronics manufacturing services (“EMS”) shipments in December 2022 were up 5.8% compared with November 2022, and for the year orders were down 3.7% while shipments were up 4.5%.

2022 Results and Comparison of Years Ended December 31, 2022 and January 1, 2022

The following table sets forth our consolidated results of operations:

[[GREPCENT_TABLE]]
[["(in millions except net income per share)","","For the year ended"],["","","December 31, 2022","","","January 1, 2022","","","$ Change","","","% Change"],["Net sales","","$","885.4","","","$","869.2","","","$","16.2","","","","1.9","%"],["Gross profit","","$","298.5","","","$","312.8","","","$","(14.3",")","","","(4.6",")%"],["Gross profit %","","","33.7","%","","","36.0","%"],["Operating income","","$","137.3","","","$","149.3","","","$","(12.0",")","","","(8.0",")%"],["Operating income %","","","15.5","%","","","17.2","%"],["Net income","","$","98.4","","","$","104.6","","","$","(6.2",")","","","(5.9",")%"],["Diluted net income per share","","$","3.02","","","$","3.22","","","$","(0.20",")","","","(6.2",")%"]]
[[/GREPCENT_TABLE]]

Consolidated net sales for the 2022 year increased $16.2 million, 1.9%, over the prior year. Acquisition growth accounted for a $24.9 million increase while organic sales declined $8.7 million, 1.0%. Discrete impacts to our organic sales compared to 2021 are as follows:

•
Changes in foreign currency exchange rates - unfavorable by $27.6 million, 3.2%

•
Pricing changes - favorable by $40.2 million, 4.6%

•
Delayed sales due to supply chain constraints - unfavorable by an estimated $12.3 million

Our 2022 sales to the Americas and EMEA regions increased compared to 2021, both benefiting from pricing and acquisition-related sales, while sales to the APAC region declined from demand and foreign currency. Demand for electronics products in our health and wellness end market has sharply declined from the prior year, which was strengthened by the pandemic as consumers invested in health and leisure products. Sales growth during the year was realized in the industrial machinery, mobile equipment, construction and recreational end markets.

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Gross profit declined $14.3 million, 4.6%, in 2022 compared to 2021 driven by lower volume, higher material costs and unfavorable foreign currency partially offset by pricing and acquisitions. Changes in foreign currency exchange rates compared to 2021 reduced gross profit by $7.9 million. Gross margin declined 2.3 percentage points over the prior year as pricing efforts did not recover the full margin to offset the impact of higher material costs. Material costs as a percentage of sales, excluding pricing changes and acquisition-related sales, increased in the year-to-date period by 3.3 percentage points compared to the prior year.

During 2022, we incurred $5.2 million of costs related to our restructuring activities. In the EMEA region, we executed an operational restructure in our Hydraulics segment that combined the manufacturing operations at two of our locations into one location. We are continuing our sales and R&D efforts in both locations in order to serve customers in the regions. In the APAC region, we executed an organizational restructure in our Hydraulics segment among several locations to align employee talent with the strategic operational goals of the Company. 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 of $2.2 million, non-recurring severance and termination benefits of $2.3 million and other expenses of $0.7 million. The restructuring plans are expected to improve the global cost structure of the business.

Operating income as a percentage of sales decreased 1.7 percentage points to 15.5% in 2022 compared with the prior-year period. Operating margin was favorably impacted during 2022 by a $4.7 million decrease in acquisition-related amortization, primarily from the sales order backlog intangible acquired with the Balboa acquisition that was fully amortized in the second quarter of 2021. However, this was offset by the gross margin level changes, non-recurring restructuring costs that were $2.5 million higher in 2022 than the prior period and increased M&A related professional fees totaling $1.9 million.

Net income and EPS benefited from foreign currency transaction gains of $0.9 million in 2022 compared to losses of $1.0 million in 2021, gains on sale of property, plant and equipment primarily related to our restructuring activities totaling $1.8 million and a decrease in tax expense of $3.2 million compared to 2021, primarily due to a decrease in foreign income taxed at different rates and state and local tax benefits.

Segment Results

Hydraulics

The following table sets forth the results of operations for the Hydraulics segment (in millions):

[[GREPCENT_TABLE]]
[["","","For the year ended"],["","","December 31, 2022","","","January 1, 2022","","","$ Change","","","% Change"],["Net sales","","$","551.3","","","$","516.4","","","$","34.9","","","","6.8","%"],["Gross profit","","$","195.5","","","$","193.4","","","$","2.1","","","","1.1","%"],["Gross profit %","","","35.5","%","","","37.5","%"],["Operating income","","$","122.7","","","$","119.8","","","$","2.9","","","","2.4","%"],["Operating income %","","","22.3","%","","","23.2","%"]]
[[/GREPCENT_TABLE]]

Net sales for the Hydraulics segment grew by $34.9 million, 6.8%, compared with 2021. Acquisition-related sales accounted for $22.4 million of the increase and sales from our organic businesses improved $12.5 million, 2.4%. Discrete impacts to our organic sales compared to the prior year are as follows:

•
Changes in foreign currency exchange rates - unfavorable by $26.2 million, 5.1%

•
Pricing changes - favorable by $23.0 million, 4.5%

•
Delayed sales due to supply chain constraints - unfavorable by an estimated $7.1 million

Organic sales growth in 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.

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The following table presents net sales based on the geographic region of the sale for the Hydraulics segment (in millions):

[[GREPCENT_TABLE]]
[["","","For the year ended"],["","","December 31, 2022","","","January 1, 2022","","","$ Change","","","% Change"],["Americas","","$","199.5","","","$","167.7","","","$","31.8","","","","19.0","%"],["EMEA","","","186.5","","","","180.0","","","","6.5","","","","3.6","%"],["APAC","","","165.3","","","","168.7","","","","(3.4",")","","","(2.0",")%"],["Total","","$","551.3","","","$","516.4"]]
[[/GREPCENT_TABLE]]

Regional sales performance in 2022 compared to the prior year was driven by:

Americas - demand, pricing and our recent acquisitions contributed to a 19.0% increase in sales

EMEA - excluding unfavorable changes in foreign currency rates of $19.6 million, sales improved 14.5%, primarily from demand, pricing and our 2021 acquisition

APAC - excluding unfavorable changes in foreign currency rates of $6.6 million, sales improved 1.9%, primarily from demand in Japan and India

Costs related to our restructuring activities totaled $4.0 million during 2022; $1.1 million of the costs are included in cost of goods sold and $2.9 million are reflected in selling, engineering and administrative expenses (“SEA”). The restructuring costs are comprised of $2.2 million of recurring labor costs for employees who worked on the restructuring projects, non-recurring severance and termination benefits of $1.1 million and other non-recurring professional fees and expenses associated with the manufacturing relocation of $0.7 million.

During 2022, gross profit improved $2.1 million, 1.1%, over the prior year, favorably impacted by pricing and acquisitions. The segment realized an unfavorable impact on gross profit from changes in foreign currency rates, compared with 2021 of $7.1 million. Gross margin for 2022 decreased 2.0 percentage points as the segment incurred higher material, logistic and energy costs. Freight costs increased $1.9 million in 2022 and material costs as a percentage of sales, excluding pricing changes and acquisition-related sales, increased in 2022 by 2.8 percentage points. Price increases to customers did not fully recover the margin impact of the material cost increases.

SEA expenses decreased $0.8 million, 1.1%, in 2022 compared with the prior year. Changes in foreign currency rates compared to the prior year reduced SEA costs by $3.4 million. Increased SEA expenses from our acquisitions, higher non-recurring restructuring costs of $1.3 million and travel and marketing costs of $1.0 million were partially offset by $1.6 million of savings realized from lower benefit costs, primarily from performance-based incentive compensation accruals. SEA as a percent of sales decreased 1.1 percentage points to 13.2% in 2022 also benefiting from improved leverage of our fixed costs on the higher sales.

Electronics

The following table sets forth the results of operations for the Electronics segment (in millions):

[[GREPCENT_TABLE]]
[["","","For the year ended"],["","","December 31, 2022","","","January 1, 2022","","","$ Change","","","% Change"],["Net sales","","$","334.1","","","$","352.7","","","$","(18.6",")","","","(5.3",")%"],["Gross profit","","$","103.0","","","$","120.0","","","$","(17.0",")","","","(14.2",")%"],["Gross profit %","","","30.8","%","","","34.0","%"],["Operating income","","$","52.5","","","$","71.7","","","$","(19.2",")","","","(26.8",")%"],["Operating income %","","","15.7","%","","","20.3","%"]]
[[/GREPCENT_TABLE]]

Net sales for the Electronics segment declined by $18.6 million, 5.3%, compared with the prior year. Acquisition-related sales totaled $2.5 million. Discrete impacts to our organic sales compared to the prior year period are as follows:

•
Changes in foreign currency exchange rates - unfavorable by $1.4 million

•
Pricing changes - favorable by $17.2 million, 4.9%

•
Delayed sales due to supply chain constraints - unfavorable by an estimated $5.2 million

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During 2022, demand in our health and wellness end market sharply declined from the prior year, 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 contributed to the decline. However, we realized sales growth in our recreational and mobile and industrial machinery end markets.

The following table presents net sales based on the geographic region of the sale for the Electronics segment (in millions):

[[GREPCENT_TABLE]]
[["","","For the year ended"],["","","December 31, 2022","","","January 1, 2022","","","$ Change","","","% Change"],["Americas","","$","270.9","","","$","257.8","","","$","13.1","","","","5.1","%"],["EMEA","","","37.1","","","","42.0","","","","(4.9",")","","","(11.7",")%"],["APAC","","","26.1","","","","52.9","","","","(26.8",")","","","(50.7",")%"],["Total","","$","334.1","","","$","352.7"]]
[[/GREPCENT_TABLE]]

Regional sales performance in 2022 compared to the prior year was driven by:

Americas - demand, pricing and capacity improvements contributed to a 5.1% increase in sales

EMEA - excluding unfavorable changes in foreign currency rates of $1.3 million, sales declined 8.6%, primarily from lower demand in the health and wellness end market

APAC - sales declined 50.7%, from lower demand in the health and wellness end market in China; impacts from foreign currency exchange rates were minimal

In 2022, we executed an organizational restructure to adjust our labor base in line with current demand levels. We incurred $1.2 million of restructuring costs for severance and termination benefits; $0.6 million of the costs are included in cost of goods sold and $0.6 million are reflected in SEA expenses.

The segment experienced a $17.0 million, 14.2%, decrease in gross profit over the prior year, primarily due to lower sales volume and material cost increases. Further, unfavorable impacts from changes in foreign currency exchange rates compared to the prior year totaled $0.9 million. Gross margin for 2022 decreased 3.2 percentage points from the higher material costs as the margin was not fully recovered by pricing efforts. Material costs as a percentage of sales, excluding pricing changes and acquisition-related sales, increased in 2022 by 4.7 percentage points compared to 2021.

SEA expenses increased $2.2 million, 4.6%, in 2022 compared with the prior year primarily from our 2021 acquisition, higher costs for salaries of $1.5 million and travel and marketing of $0.7 million offset by lower benefit costs of $1.1 million, mainly from performance-based incentive compensation accruals, and lower R&D costs of $0.5 million. SEA as a percent of sales increased 1.4 percentage points to 15.1% in 2022 from 13.7% in 2021, further impacted by reduced leverage of our fixed costs on the lower sales.

Corporate and Other

Certain costs are excluded from business segment results as they are not used in evaluating the results of, or allocating resources to, our operating segments. For the year ended December 31, 2022, these costs totaled $37.9 million for (i) transition costs for one of our executive officers of $0.3 million, (ii) amortization of acquisition-related intangible assets of $28.1 million and (iii) $9.5 million related to other acquisition and integration activities.

For the year ended January 1, 2022, these costs totaled $42.2 million primarily for acquisition-related items such as (i) transaction costs of $4.0 million, (ii) charges related to inventory step-up to fair value of $0.6 million, (iii) amortization of acquisition-related intangible assets of $32.8 million, (iv) $4.6 million related to other acquisition and integration activities and (v) other costs not deemed allocable to either business segment of $0.2 million.

Interest Expense, net

Net interest expense decreased $0.2 million during 2022 to $16.7 million compared with $16.9 million in 2021. The change is attributable to lower average debt levels during 2022, as repayments exceeded borrowings used to fund acquisitions, offset by higher interest rates when compared to 2021. Average net debt decreased by $17.4 million during 2022 to $409.5 million compared with $426.9 million in 2021.

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Income Taxes

The provision for income taxes for the year ended December 31, 2022, was 19.2% of pretax income compared with 20.3% for the year ended January 1, 2022. The difference relates principally to a shift in the mix of the company's worldwide income and favorable provision to return state tax adjustments related to the 2021 filed tax returns. The effective rate typically fluctuates relative to the levels of income and different tax rates in effect from year to year among the countries in which we sell our products.

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 allows 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 and the remaining balance was paid during the fourth quarter of 2022.

On August 16, 2022, the Inflation Reduction Act was enacted into law, and includes, among other things, a new 15% minimum tax and 1% excise tax on stock repurchases after December 31, 2022. While these tax law changes have no immediate effect and are not expected to have a material impact on our future financial results, we will continue to evaluate its impact as further information becomes available.

As of December 31, 2022, the Company had approximately $25.2 million of undistributed earnings of its non-U.S. subsidiaries for which it has not provided for non-U.S. withholding taxes and state taxes because such earnings are intended to be reinvested indefinitely in international operations.

2021 Results and Comparison of Years Ended January 1, 2022 and January 2, 2021

For the discussion and analysis of our 2021 results compared with our 2020 results, refer to our Annual Report on Form 10-K for the fiscal year ended January 1, 2022, filed with the SEC on March 1, 2022. The discussion is incorporated herein by reference.

Liquidity and Capital Resources

Historically, our primary source of capital has been cash generated from operations. We also use borrowings on our credit facilities to fund acquisitions. During 2022, net cash provided by operating activities totaled $109.9 million and as of December 31, 2022 we had $43.7 million of cash on hand and $138.8 million of available credit on our revolving credit facilities. We also have a $300.0 million accordion feature available on our credit facility, which is subject to certain pro forma compliance requirements and is 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 and capital expenditures for the foreseeable future. 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 borrowing. Capital expenditures could be postponed since they primarily pertain to long-term improvements in operations, operating expense reductions could be made and the dividend to shareholders could be reduced or suspended.

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Cash flows

The following table summarizes our cash flows for the periods (in millions):

[[GREPCENT_TABLE]]
[["","","For the year ended"],["","","December 31, 2022","","","January 1, 2022","","","$ Change"],["Net cash provided by operating activities","","$","109.9","","","$","113.1","","","$","(3.2",")"],["Net cash used in investing activities","","","(90.8",")","","","(90.3",")","","","(0.5",")"],["Net cash used in financing activities","","","(6.9",")","","","(22.6",")","","","15.7"],["Effect of exchange rate changes on cash and cash equivalents","","","3.0","","","","3.0","","","","\u2014"],["Net increase in cash and cash equivalents","","$","15.2","","","$","3.2","","","$","12.0"]]
[[/GREPCENT_TABLE]]

Cash on hand increased $15.2 million to $43.7 million at the end of 2022. Cash and cash equivalents were favorably impacted by changes in exchange rates by $3.0 million during the years ended December 31, 2022 and January 1, 2022. 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 also paying down borrowings on our credit facilities.

Operating activities

Net cash from operations totaled $109.9 million in 2022, a decrease of $3.2 million, 2.8%, compared with the prior year. 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 $12.4 million compared to the prior year. However, changes in net operating assets and liabilities increased cash by $9.2 million compared to 2021, primarily from favorable cash flows from AR and inventories only partially offset by reductions in AP and accrued expenses. Investments in inventory, net of acquisitions, reduced cash by $27.0 million and $52.5 million in 2022 and 2021, respectively. Inventory on hand as of December 31, 2022 increased by $26.0 million, 15.7%, compared to the 2021 year end. The increase 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. Days of inventory on hand increased to 111 days for the 2022 year, compared with 91 days during the 2021 year. Changes in accounts receivable, net of acquisitions, increased cash by $9.1 million in 2022 compared with a decrease in cash of $32.4 million in 2021, a result of lower sales in the last few months of the 2022 year compared to 2021. Days sales outstanding for the 2022 year decreased slightly to 52 days, from 57 days during 2021, impacted by the lower fourth quarter sales compared to the first three quarters of 2022 as our collection patterns remain consistent with the prior year.

Investing activities

Cash used in investing activities totaled $90.8 million in 2022, which was largely in line with the prior period of $90.3 million. The increase in acquisition-related payments accounted for $3.8 million of the fluctuation. Capital expenditures were $31.9 million during 2022, $5.1 million, 19.0%, higher than the prior year primarily from investments in machinery and equipment. These increases in cash used were partially offset by proceeds from dispositions of property, plant and equipment which was $7.0 million higher than 2021, driven by the sale of a building related to our restructuring projects. Capital expenditures for 2023 are forecasted to be approximately 3%-5% of sales, for investments in machinery and equipment for capacity expansion projects, improvements to manufacturing technology and maintaining/replacing existing machine capabilities.

Financing activities

Net cash used in financing activities totaled $6.9 million in 2022, compared with $22.6 million in 2021.

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Borrowings, net of repayments, on our credit facilities in 2022 totaled $8.0 million as borrowings of approximately $65.0 million for the Daman acquisition were not offset fully by repayments during the year. In the 2021 year, repayments, net of borrowings, on our credit facilities totaled $9.8 million as acquisition related borrowings of $56.7 million were more than offset by repayments during the year.

Borrowings on our term loans and revolving credit facilities as of December 31, 2022 totaled $183.6 million and $262.9 million, respectively. See Note 10 of the Notes to the Consolidated Financial Statements included in this Annual Report for additional information regarding our credit facilities.

We have historically declared regular quarterly dividends to shareholders of $0.09 per share. We paid dividends totaling $11.7 million and $11.6 million for the years ended December 31, 2022 and January 1, 2022, respectively. 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, acquisition opportunities, future prospects and other factors deemed pertinent by the board of directors.

Contractual obligations

Credit facilities

Information on our credit facilities, including future maturities, is presented in Note 10 of the Notes to the Consolidated Financial Statements included in this Annual Report. Our revolving credit facility with PNC Bank matures and is payable in full in October 2025; however, we may make earlier payments. Our term loan with PNC Bank is payable in quarterly installments of $3.8 million through 2023 and quarterly installments of $5.0 million thereafter through the maturity date of October 2025, at which time the remaining balance will be due in full.

Interest rates on our credit facilities range from 3.9% to 6.4% as of December 31, 2022. Future interest payments are estimated to total $71.6 million, with annual payments ranging from $26.3 million to $20.8 million payable through the last maturity date of October 2025. Future payments assume the current interest rate environment, current currency exchange rates, future required payments on term loans and revolver borrowings consistent with December 31, 2022 debt levels. Future payments do not include an estimate of impacts from our derivative instruments.

Contingent consideration payments

Our contingent consideration liabilities total $6.7 million as of December 31, 2022. The balance represents the fair value estimate of contractual contingent payments related to our acquisitions of Balboa and NEM and are payable at various times through the last quarter of 2024.

Supplier purchases

We regularly place purchase orders with our suppliers for inventory and capital expenditures to be used in the ordinary course of business. Open purchase orders as of December 31, 2022 total $131.2 million for purchases expected in 2023 and $15.2 million for purchases expected in 2024.

Building purchase commitment

In 2020, the Company entered into a lease to buy agreement for the purchase of a building. We have the option to purchase the building at any time during the lease period and are committed to buy at the end of the 6-year lease term. The full purchase price is €26.7 million; however, the actual purchase price will be reduced by 60% of the payments made during the lease term.

Leases

We regularly enter into operating lease agreements for the use of machinery, equipment, vehicles, buildings and office space. Future maturities of our operating lease liabilities are presented in Note 7 of the Notes to the Consolidated Financial Statements included in this Annual Report.

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Critical Accounting Policies and Estimates

We prepare our Consolidated Financial Statements in conformity with U.S. GAAP, which requires management to make certain estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Based on facts and circumstances inherent in developing estimates and assumptions, we believe it is unlikely that applying other such estimates and assumptions would have caused materially different amounts to have been reported. The following policies are considered by management to be the most critical in understanding the judgements, estimates and assumptions that are involved in the preparation of our Consolidated Financial Statements.

Business Combinations

Business combinations are accounted for under the acquisition method of accounting, which requires recognition separately from goodwill, the assets acquired and the liabilities assumed at their acquisition date fair values. Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values, and the values of assets in use, and often requires the application of judgment regarding estimates and assumptions. While the ultimate responsibility resides with management, for certain acquisitions we retain the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets and assumed liabilities, including intangible assets and tangible long-lived assets. Acquired intangible assets, excluding goodwill, are valued using various methodologies such as the discounted cash flow method, which is based on future cash flows specific to the type of intangible asset purchased and the relief from royalty method, which is based on the present value of savings resulting from the right to manufacture or sell products that incorporate the intangible asset without having to pay a license for its use. These methodologies incorporate various estimates and assumptions, the most significant being estimated royalty rates, projected revenue growth rates, profit margins and forecasted cash flows based on the discount rate.

Goodwill

Goodwill represents the excess of the purchase price of an acquisition over the fair value of the net assets acquired. Goodwill is tested for impairment annually or more frequently if events or circumstances indicate a reduction in the fair value below the carrying value. The carrying value of assets is calculated at the reporting unit level. An impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value.

The assessment of fair value for impairment purposes requires significant judgment by management. We generally use a combination of market and income approach methodologies to estimate the fair value of our reporting units. The income approach is generally based on a discounted cash flow analysis, which estimates the present value of the projected free cash flows to be generated by the reporting unit. Assumptions used in the analysis include estimated future revenues and expenses, weighted average cost of capital, capital expenditures and other variables. Assumptions made for future cash flows are developed based on consideration of current and future economic conditions, recent sales trends, planned timing of product launches or other relevant variables. The market approach estimates the value of reporting units by comparing to guideline public companies or guideline transactions. Various valuation multiples of companies that are economically and operationally similar are used as data points for selecting multiples for the reporting units. Changes in assumptions or estimates could materially affect the estimated fair value of our reporting units and the potential for impairment.

Income Taxes

Our income tax policy provides for a balance sheet approach under which deferred income taxes are provided for based upon enacted tax laws and rates applicable to the periods in which the taxes become payable. These differences result from items reported differently for financial reporting and income tax purposes, primarily depreciation, amortization, accrued expenses and reserves.

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Our annual tax rate fluctuates based on our income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective government taxing authorities. Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties. We review our tax positions quarterly and adjust the balances as new information becomes available. Indefinite reinvestment is determined by management’s judgment about, and intentions concerning, our future operations.

We recognize and measure uncertain tax positions in accordance with ASC 740. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We file annual income tax returns in multiple taxing jurisdictions around the world. Many years may pass before an uncertain tax position is audited by the relevant tax authorities and finally resolved. While it is often difficult to predict the outcome or the timing of resolution of any particular uncertain tax position, we believe that our reserves for income taxes are adequate such that we reflect the benefits more likely than not to be sustained in an examination. We adjust these reserves, as well as the related interest and penalties, where appropriate in light of changing facts and circumstances. Settlement of any particular position could require the use of cash. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

See Note 12 of the Notes to the Consolidated Financial Statements included in this Annual Report for income tax amounts, including reserves.

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 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.

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