HELIOS TECHNOLOGIES, INC. (HLIO) FY 2024 MD&A

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, industrial, mobile, energy, recreational vehicles, marine and health and wellness.

We operate under two business segments: Hydraulics and Electronics. The Hydraulics segment designs and manufactures hydraulic motion control and fluid conveyance technology products, including cartridge valves, manifolds, quick release couplings as well as engineers hydraulic solutions and in some cases complete systems. The Electronics segment designs and manufactures customized electronic controls systems, displays, wire harnesses, and software solutions for a variety of end markets.

With our global operating network we have the advantages of leveraging sales, marketing, innovation, customer relationships and operational excellence across all our businesses. We are committed to furthering the mission of integrating the businesses and leveraging resources to best serve our customers and explore new opportunities.

Acquisitions

Our acquisition activity over the past three years, driven by our strategic vision, has enabled us to diversify our product offerings and the markets we serve and expand our geographic presence.

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 the 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.

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.

In May 2023, we completed the acquisition of i3 Product Development. i3 is a custom engineering services firm, with engineers specializing in electronics, mechanical, industrial, embedded and software engineering. i3 specializes in working to transform customer’s ideas into industrial design solutions through rapid prototyping and creating 3D models in-house. Their solutions are used across many sectors, including medical, off-highway, recreational and commercial marine, power sports, health and wellness, agriculture, consumer goods, industrial, sports and fitness.

In 2024, the Company continued to explore and evaluate potential acquisitions, but no acquisitions were executed.

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Global Economic Conditions

Geo-Political Conflict

We continue to monitor the ongoing conflicts in Ukraine and in the Middle East and evaluate the broader economic impact those conflicts could have on our operations, supply channels and the operations of our partners and customers. We do not have operations in these regions at this time and those conflicts have not and are not expected to have a material impact on our financial condition or results. Refer to Item 1A Risk Factors of this Annual Report for additional discussion about geo-political risks.

Supply Chain

While there were no impacts to operations resulting from the COVID-19 Pandemic in 2024, for comparison purposes the results in the early part of 2023 faced constraints related to sourcing certain electronic and other components, which originated from the high demand for these products caused by the pandemic. We were able to mitigate some of the impact with our procurement efforts, production schedule adjustments and product redesigns. The availability of components improved through 2023 and did not have a significant impact to results in 2024.

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.

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 decreased 15% in 2024, after decreasing 4% in 2023 and increasing 20% in 2022. In Europe, the CEMA Business Barometer reported in January 2025 that the general business climate index for the European agricultural machinery industry has risen further but continues in negative territory. The majority of survey participants expect incoming orders to rise in the coming six months from their current depressed levels and the confidence index for almost all European markets has improved. CEMA further reported that the direct customers of the manufacturers, the dealers, have still not been able to pass on all orders to the end customers and the dealer stocks continue with above-average levels in almost all European markets, though a considerable improvement can be seen compared to previous months. The Committee for European Construction Equipment business climate index bounced back slightly in later part of 2024 after consecutive months of decline. They reported that sales in the European market are still declining but the momentum decelerates. The expectations for next year are pretty diverse across the industry, as one third of companies anticipate a return to growth while almost the same share expects more declines to come.

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 through 2024 with an uptick at the end of December 2024. The Institute of Printed Circuits Association (“IPC”) reported that North American printed circuit board (“PCB”) shipments decreased in December 2024 by 0.3% against the same month last year following a year over year increase in November of 4.7% and a year over year decline in October of 11.1%. PCB bookings increased year over year in the last quarter with December up 59.6%, November up 29.1% and October up 3.5%. The IPC also reported that North American electronics manufacturing services (“EMS”) shipments decreased 7.8% in December 2024 compared to the same month last year following year over year increases in October and November of 14.7% and 10.6%, respectively. EMS bookings also increased year over year in the last quarter with December up 28%, November up 8.1% and October up 6.6%. The significant year over year increase in both PCB and EMS bookings were attributed to orders being pulled forward due to tariff uncertainties.

Restructuring Activities

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During 2024, we incurred $5.2 of costs related to our restructuring activities, down from $12.1 in 2023. Restructuring activities include activities within our Hydraulics segment related to the creation of our two new Regional Operational Centers of Excellence ("CoE") which are nearing completion. We also continue to add capabilities and activities to our recently expanded Tijuana, Mexico facility to support our Electronics segment. Initial efforts have focused on circuit board assembly and wire harness production. We have also recently initiated some restructuring activities to better optimize our European regional operations. We are transitioning some manufacturing of manifolds and integrated package assembly to our Roncolo, Italy location. These activities include in part the transferring of equipment and operations between facilities. The restructuring costs are comprised of non-recurring severance and termination benefits of $2.5 and $2.7 of travel and other expenses. The restructuring plans are expected to improve the global cost structure of the business.

Executive Officer Transition

In July 2024, the Board of Directors terminated the former President and Chief Executive Officer, Josef Matosevic. Sean Bagan was immediately appointed to serve as Interim President and Chief Executive Officer in addition to his role as Chief Financial Officer, and Philippe Lemaitre as Executive Chairman in addition to his role as Chairman, while the search for a replacement was underway. On January 6, 2025, the Company announced that the Board of Directors of the Company promoted Sean Bagan to President and Chief Executive Officer of the Company, effective January 6, 2025. He will continue to serve as Chief Financial Officer while the Company conducts a search process to identify a permanent Chief Financial Officer. In connection with Mr. Bagan’s appointment, Chairman Philippe Lemaitre, serving as Executive Chairman, resumed his role as Non-Executive Chairman.

2024 Results and Comparison of Years Ended December 28, 2024 and December 30, 2023

(In millions, except per share data)

The following is a discussion of our results of operations and liquidity and capital resources for the year ended December 28, 2024; comparisons are with the corresponding reporting period of 2023, unless otherwise noted.

The following table presents our consolidated results of operations:

Consolidated net sales for the 2024 year declined $29.7, 3.6%. We experienced organic net sales decline of $34.7 which was partially offset by sales from acquisitions totaling $5.0. Sales were impacted most by reduced demand for products in our agriculture, mobile, industrial and recreational marine markets. These end markets experienced lower year over year demand with declines persisting through the fourth quarter. Sales to the Health and Wellness end market were up from the prior year almost 20%. As previously noted, during the Covid-19 pandemic consumers significantly invested in health and leisure products, accelerating sales in that end market. This was followed by a sharp decline in 2023. 2024 was more in line with pre-pandemic demand levels. In 2024, consolidated net sales were down in the Americas and EMEA, but up in APAC which was primarily driven by increased sales to China. There was an unfavorable impact of $0.7 on consolidated net sales from changes in foreign currency exchange rates during the year.

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Gross profit declined $9.4, 3.6%, in 2024 driven by lower volume and higher wage and benefit costs of $6.1M partially offset by lower restructuring costs of $3.0M and lower material costs. Gross margin was flat year-over-year. Material costs as a percentage of sales, excluding targeted pricing benefits and acquisition-related sales, were down slightly year-over-year on a consolidated basis. This was offset by lower fixed overhead costs leverage on lower volume and cost impacts noted above. Changes in foreign currency exchange rates compared to 2023 reduced gross profit by $0.1.

Operating income as a percentage of sales increased 60 basis points to 10.2% in 2024 compared with the prior year period. Operating margin was favorably impacted during 2024 most significantly from lower payroll and benefit costs compared with the prior year period, which included a $5.5 reversal of unvested stock compensation in connection with the officer transition in July 2024 and lower selling, engineering and administrative ("SEA") restructuring costs of $3.9. Additionally, M&A and Integration SEA costs in 2024 were down $3.3 in 2024. These were partially offset by an increase in research and development costs of $0.9.

Net income and earnings per share (“EPS”) were favorably impacted by a contingent gain of $3.8 related to the insurance reimbursement for business interruption losses incurred in the third quarter of 2023 at a manufacturing location in Italy. They were unfavorably impacted by foreign currency transaction losses of $1.3 in 2024 compared to a loss of $0.6 in 2023. There was a slight decrease in tax expense of $0.2 and an increase in interest expense of $2.6 compared to 2023.

Segment Results

Hydraulics

The following table presents the results of operations for the Hydraulics segment:

Net sales for the Hydraulics segment declined by $28.6, 5.1%. We experienced organic net sales decline of $30.5, 5.4%, as acquisition sales only impacted results by $1.9. Net Sales declined in 2024 due to decreased demand in the Americas and EMEA regions and significant declines in the agricultural, mobile and industrial end markets. Sales to APAC grew from prior year, primarily driven by sales to China and Australia. Discrete impacts to our organic sales included nominal favorable pricing changes of $2.2, 0.4%, and an unfavorable change in foreign currency exchange rates of $0.5, 0.1%.

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

In 2024, we continued and are nearing completion of our restructuring activities within our Hydraulics segment related to the creation of our two new regional operational Centers of Excellence. We also initiated some restructuring activities to better optimize our European regional operations. We incurred $4.5 of restructuring costs related to these activities including labor, travel and other expenses associated with the manufacturing relocation. $3.3 of the costs are included in cost of goods sold and $1.2 are reflected in SEA expenses.

During 2024, gross profit declined $16.0, 8.8%, from lower volume and higher direct labor costs. Gross margin declined by 120 basis points primarily due to lower fixed overhead costs leverage on lower volume and sales mix. Material costs as a percentage of sales were relatively flat, excluding pricing changes and acquisition-related sales. Changes in foreign currency exchange rates had an unfavorable impact of $0.1.

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Operating income as a percentage of sales decreased 40 basis points to 16.1%. SEA expenses decreased $9.1, 10.3%, mainly due to lower labor and benefit costs, which includes a $3.7 reversal of unvested stock compensation in connection with the officer transition in July 2024, a reduction in research and development costs of $0.6 and a reduction in travel, professional services and other discretionary spend. SEA as a percent of sales decreased 80 basis points to 14.8% in 2024.

In the third quarter of 2023, the Company experienced aggregate losses related to a fire and a weather-related incident at one of its manufacturing locations in Italy resulting in the shut-down of operations for a period of time and disruption in production as recovery efforts ensued. Impacted operations were restored. At the end of 2024 we recorded a contingent gain related to the open insurance claims. The total reimbursement recorded was $9.1, of which $5.3 was offset against actual costs as a result of the incident and the remaining $3.8 was recorded as a gain included in Other Income. The reimbursement payments have been collected in 2025, with $1.1 million outstanding to be collected.

In October 2024, the corporate headquarters and Hydraulics segment operations located in Sarasota, Florida were impacted by Hurricane Milton. Operations were impacted for eighteen shifts leading up to and following the storm. Actual costs for cleanup, repair and labor related to the Hydraulics segment were $1.2. There were no insurance reimbursements received nor are expected to be received for this event.

Electronics

The following table presents the results of operations for the Electronics segment:

Net sales for the Electronics segment declined by $1.1, 0.4%. We experienced organic net sales decline of $4.2, 1.6%, which was partially offset by acquisition sales of $3.1. Organic sales declined in 2024 from decreased demand in the America’s region within several of our end markets including recreational, industrial and mobile. Health and wellness increased year over year and almost offset the losses in the other end markets. The APAC region increased driven by a significant increase in sales to China. Sales in the EMEA region were relatively flat. Discrete impacts to our organic sales included pricing changes that were favorable by $2.8, 1.0%, and unfavorable changes in foreign currency exchange rates of $0.2, 0.1%.

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

In 2024, we continued and are nearing completion of our restructuring activities within our Electronics segment to shift product lines to the expanded facility in Tijuana and to adjust our labor base in line with current demand levels. We incurred $0.7 of restructuring costs including labor, travel and other expenses associated with the manufacturing relocation. $0.1 of the costs are included in cost of goods sold and $0.6 are reflected in SEA expenses.

During 2024, gross profit increased $6.6, 8.3%, primarily due to the contribution from acquisition revenues, pricing, and lower material costs. Gross margin for 2024 increased by 260 basis points primarily from lower material costs offset by the impact of a higher mix of revenue in products with a lower margin profile. Material costs as a percentage of sales decreased by 330 basis points, excluding pricing changes and acquisition-related sales.

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Operating income as a percentage of sales decreased 180 basis points to 11.0%. SEA expenses increased $1.7, 3.1%, in 2024 primarily from acquisitions, an increase in research and development costs of $1.7, which were partially offset by the benefit of a $1.8 reversal of unvested stock compensation in connection with the officer transition in July 2024. SEA as a percent of sales increased 70 basis points to 21.2% in 2024 from 20.5% in 2023, reflecting the impact of acquisitions and increased costs referenced above.

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 28, 2024, these costs totaled $34.2 and included amortization of acquisition-related intangible assets of $31.5, $1.9 related to officer transition costs and $0.8 related to other costs which was primarily acquisition and integration related activities.

For the year ended December 30, 2023, these costs totaled $38.1 and included amortization of acquisition-related intangible assets of $32.9, $4.0 related to other acquisition and integration activities and $1.2 of officer transition costs.

Interest Expense, net

Net interest expense increased $2.6 during 2024 to $33.8 compared with $31.2 in 2023. The change is attributable to higher average debt levels during 2024 and higher interest rates. Average net debt increased by $1.5 during 2024 to $448.9.

Income Taxes

The provision for income taxes for the year ended December 28, 2024, was 22.8% of pretax income compared with 23.8% for the year ended December 30, 2023. The difference relates principally to a shift in the mix of the company's worldwide income and decrease in valuation allowance established. 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.

The Organization for Economic Cooperation and Development (“OECD”), under its Pillar Two initiative, recently has proposed a set of Global Anti-Base Erosion (“GloBE”) rules to impose a minimum tax on income earned by multinational enterprises (“MNE”). Specifically, the GloBE rules impose a minimum tax of 15 percent on MNE income that arises in each participating jurisdiction. Several countries, including the UK and EU member states, have agreed to adopt the OECD’s minimum tax rules and several countries, including the UK, have already implemented these rules.

On December 20, 2022, the OECD published Pillar Two guidance on safe harbors and penalty relief (the “Safe Harbor Guidance”). The Safe Harbor Guidance includes a Transitional Country-by-Country Report (“CbCR”) Safe Harbor, which would deem a MNE’s top-up tax for a jurisdiction to be zero and would allow the MNE to avoid undertaking detailed GloBE calculations in respect of that jurisdiction during the Transition Period if it can demonstrate one of the three transitional tests.

The Helios Technologies Inc Group is a MNE group that is within the scope and subject to the GloBE rules. The United States has not currently made any public announcement regarding implementation of Pillar Two Framework.

The company continues to evaluate the impact of Pillar Two and application of safe harbors. For the year ended December 28, 2024, there are no impacts to income tax expense related to Pillar Two. The company does not expect it to have a material impact in 2025 to their effective tax rate.

As of December 28, 2024, the Company had approximately $37.1 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.

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2023 Results and Comparison of Years Ended December 30, 2023 and December 31, 2022

For the discussion and analysis of our 2023 results compared with our 2022 results, refer to our Annual Report on Form 10-K for the fiscal year ended December 30, 2023, filed with the SEC on February 27, 2024. The discussion is incorporated herein by reference.

Liquidity and Capital Resources

Historically, our primary source of capital has been cash generated from operations. We have also used borrowings on our credit facilities to fund acquisitions. During 2024, net cash provided by operating activities totaled $122.1 and as of December 28, 2024, we had $44.1 of cash on hand and $352.4 of available credit on our revolving credit facilities. At year end 2024, approximately half of the cash on hand was held in institutions in APAC, approximately 40% was held in institutions in EMEA, and the remainder was held in institutions in the Americas. We also have a $400.0 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.

Cash flows

The following table summarizes our cash flows for the periods:

Cash on hand increased $11.7 to $44.1 at the end of 2024. Cash and cash equivalents were unfavorably impacted by changes in exchange rates by $1.7 and favorably impacted by changes in exchange rates by $0.8 during the years ended December 28, 2024, and December 30, 2023, respectively. 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.

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Operating activities

Net cash from operations totaled $122.1 in 2024, an increase of $38.2, 45.5%, 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 $1.0 compared to the prior year. However, changes in net operating assets and liabilities increased cash by $39.2 compared to 2023, primarily from reduction in inventories. Reductions in inventory, net of acquisitions, increased cash by $19.4 in 2024 compared with a decrease in cash by $17.9 in 2023. Inventory on hand as of December 28, 2024, decreased by $25.0, 11.6%, compared to the 2023 year end. The decrease is driven primarily by the execution of management's inventory reduction efforts and improved inventory management in response to lower sales. Days of inventory on hand increased to 134 days for the 2024 year, compared with 130 days during the 2023 year. Changes in accounts receivable, net of acquisitions, increased cash by $7.3 and $16.3 in 2024 and 2023, respectively. Days sales outstanding for the 2024 year decreased slightly to 47 days from 50 days during 2023, as our collection patterns remain consistent with the prior year. Changes in accounts payable, net of acquisitions, decreased cash by $11.8 and $5.2 in 2024 and 2023, respectively. Days payables outstanding for the 2024 year decreased to 37 days from 45 days during 2023.

Investing activities

Cash used in investing activities totaled $30.3 in 2024, a decrease of $123.6, 80.3%, compared with the prior year. The decrease in acquisition-related payments accounted for $114.2 of the fluctuation due to no acquisition-related activity in 2024. Capital expenditures were $27.0 during 2024, $7.3, or 21.3%, lower than the prior year primarily from cost deferral initiatives in 2024. Capital expenditures for 2025 are forecasted to be approximately 3.0%-4% of sales for improvements to manufacturing technology and maintaining and replacing existing machine capabilities.

Financing activities

Net cash used in financing activities totaled $78.4 in 2024, compared with net cash provided by financing activities of $57.9 in 2023. In 2024, repayments, net of borrowings, totaled $68.0. Cash paid for acquisitions in 2023 was primarily financed with borrowings on our credit facility. Borrowings, net of repayments, totaled $75.7 in 2023.

Borrowings on our term loans and revolving credit facilities as of December 28, 2024, totaled $300.3 and $150.3, respectively. See Note 10 of the Notes to the Consolidated Financial Statements included in this Annual Report for additional information regarding our credit facilities.

In connection with the debt refinancing in June 2024, while the term loan credit facility aggregate principle amount of $300.0 remained unchanged, the cash flow activity reflects repayments and borrowings on the non-revolving debt that were direct results of the refinancing. The company also incurred $3.1 of debt issuance costs in connection with the debt refinancing. These costs are captured within the Other Financing Activities caption in the Statement of Cash Flows. Additionally in June 2024, the Company received $7.1 in proceeds in connection with the termination of the interest rate swaps.

In May 2023, we entered into an incremental facility amendment to our credit agreement with PNC Bank, National Association, as administrative agent, and various lenders party thereto. With the amendment we incurred a new term loan with an aggregate principal amount of $150.0 for which the proceeds were used to repay outstanding balances on our revolving credit facility.

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On June 25, 2024, the Company amended and restated its credit agreement (the “Third Amended and Restated Credit Agreement”) with PNC Bank, National Association, as administrative agent, and the lenders party thereto. The amendment extended the debt maturity for five years and increased the Company’s revolving credit facility (the “Revolving Credit Facility) to $500.0, with the aggregate principle amount of the term loan credit facility (the “Term Loan Facility”) remaining at $300.0. The amendment also revised the accordion feature to permit an increase of up to an additional $400.0. Borrowings under the line of credit bear interest at defined rates plus an applicable margin based on the Company’s leverage ratio. Scheduled principal payments under the Term Loan Facility are payable in quarterly installments beginning on September 28, 2024 and continuing on the last day of each following fiscal quarter, beginning at $3.75 before increasing to $5.6 in June 2026 and $7.5 in June 2028. All remaining principal and unpaid accrued interest are due on the Term Loan Facility maturity date, which is June 25, 2029.

In May 2024, $0.5 was paid to the former owners of Balboa Water Group in connection with payment due on the contingent consideration liability. The contingent consideration liability was revalued and final payment is due in 2025.

We have historically declared regular quarterly dividends to shareholders of $0.09 per share. We paid dividends totaling $11.9 and $11.8 for the years ended December 28, 2024 and December 30, 2023, 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 June 2029; however, we may make earlier payments. Our term loan with PNC Bank is payable in quarterly installments of $3.8 million through March 2026, quarterly installments of $5.6 million through March 2028 and quarterly installments of $7.5 million thereafter through the maturity date of June 2029, at which time the remaining balance will be due in full.

Interest rates on our credit facilities range from 4.9% to 7.2% as of December 28, 2024. Future interest payments are estimated to total $112.2, with annual payments ranging from $10.8 to $27.7 payable through the last maturity date of June 2029. Future payments assume the current interest rate environment, current currency exchange rates, future required payments on term loans and revolver borrowings consistent with December 28, 2024 debt levels. Future payments do not include an estimate of impacts from our derivative instruments.

Contingent consideration payments

Our contingent consideration liabilities total $0.4 as of December 28, 2024. The balance represents the fair value estimate of contractual contingent payment related to our acquisition of Balboa Water Group, which is payable in 2025.

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 28, 2024 total $66.1 for purchases expected in 2025 and $0.4 for purchases expected in 2026.

Building purchase commitment

The Company is negotiating a lease-to-buy agreement for the purchase of a building with the option to purchase the building at any time during the lease period. Under the draft agreement, the company would commit to purchasing the building at the end of the 6-year lease term. The expected purchase price is €26.7; however, the actual purchase price will be reduced by 60% of the payments made during the lease term.

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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.

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. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The following policies are considered by management to be the most critical in understanding the judgments, 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.

Intangible assets consist primarily of customer relationships, technology, trade names and brands and supply agreements. Amortization is on a straight-line basis over their estimated useful lives and the amortization is reflected in the Consolidated Statements of Operations. The useful lives used are as follows: Customer Relationships - 8 to 26 years; Trade Names and Brands - 10 to 20 years; Technology - 5 to 13 years; and Supply Agreements - 10 years. Intangible assets are tested for impairment if certain circumstances arise that would indicate the carrying amount of the assets may not be recoverable. Such circumstances can include, but are not limited to, a decrease in market price, economic decline, changes in the market, change in business operations or plans for disposition. The assessment of fair value for impairment purposes requires significant judgment by management, which could be negatively impacted by economic decline, market deterioration and changes in other market conditions. Additional information about intangible assets, including the gross and net carrying values for the reported periods and historical and future estimated amortization expense is presented in Note 8 of the Notes to the Consolidated Financial Statements included in this Annual Report. Additional information about our acquisitions, including acquired intangible assets deemed material to the Company’s financial results, is presented in Note 3 of the Notes to the Consolidated Financial Statements included in this Annual Report.

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Goodwill

Goodwill represents the excess of the purchase price of an acquisition over the fair value of the net assets acquired. We test goodwill for impairment at the reporting unit level, as of the third quarter period end date, on an annual basis and between annual tests whenever events or circumstances indicate the carrying value of a reporting unit may exceed its fair value. Examples of such circumstances could include, but are not limited to, a significant loss of market share, significant decline in operating results, change in management strategy or operations, economic decline, and other such significant disruptions to the business. 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.

There are multiple steps in our process for testing goodwill impairment. The first step is identification of our operating segments, followed by the identification of the reporting units, such that the reporting unit has discrete financial information, its operating results are reviewed regularly by management, and its economic characteristics are different from the economic characteristics of the other components of the operating segment., As part of the annual test of goodwill impairment the Company considers economic factors and current business operations when assessing the reporting unit structures for the purposes of goodwill impairment testing. The reporting units comprised of our four prominent businesses and the 2023 acquisition of i3.

In certain circumstances the Company may elect to test goodwill using a qualitative assessment, assessing whether it is more likely than not that the fair value of the reporting unit is less than the carrying value. More often the Company will test goodwill using the income based and market based valuation methods, as quoted market prices are not available for all reporting units. When possible, we generally use a combination of market and income approach methodologies to estimate the fair value of our reporting units. The assessment of fair value for impairment purposes requires significant judgment by management. Management’s assumptions include projected future performance, expected future costs, expected new product releases and expected future economic and market conditions (i.e. inflation, tax rates, end-market growth or decline, and expected market share performance). If these assumptions and estimates are not met or operations are impacted by other factors the reporting units could be subject to goodwill impairment.

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, working capital, capital expenditures and other variables. Assumptions made for future cash flows are developed based on consideration of current and future economic conditions, recent and expected sales trends, planned timing of product launches and other relevant variables. Each reporting unit regularly prepares discrete operating forecasts and long range plans and uses these forecasts as the basis for the assumptions in the discounted cash flow analysis. Within the discounted cash flow models, the Company uses a discount rate, commensurate with its cost of capital but adjusted for inherent business risks, and an appropriate terminal growth factor.

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, which are deemed to be market-adjusted multiples based on key data points for guideline public companies. Changes in assumptions or estimates could materially affect the estimated fair value of our reporting units and the potential for impairment. We also reconcile the estimated aggregate fair value of our reporting units resulting from these procedures to our overall market capitalization.

The Company completed its annual goodwill impairment testing for 2024, 2023, and 2022, and determined that the carrying amount of goodwill for each reporting unit was not impaired. In addition, in management’s assessment of reporting units for GWI testing, it was determined that the two prominent Electronics businesses share very similar economic characteristics, are operationally interdepended, and should be aggregated and tested as a single reporting unit. The test for goodwill impairment was performed for each business and for the consolidated reporting unit. Neither test indicated any impairment.

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Given the relatively small excess fair value over the carrying value of the i3 reporting unit in 2024, less than 3%, it is at risk for possible future impairment. This goodwill value of $25.9, assumed in the May 2023 acquisition of i3, is 5.2% of the $498.9 of Goodwill as of December 28, 2024. Management is monitoring this closely but believes in the benefits that this acquisition and specifically the Cygnus software will bring to the Company in the coming years. However, if the expected benefits do not materialize due to poor economic conditions, missed operational objectives, or other such factors impacting Management’s assumptions, there could future impairment of the goodwill.

A third party was used to assist in the valuation and testing of the fair value of the reporting units. The third party provided estimates such as risk premiums, select multiples and discount rates, used in conjunction with Management’s estimates and assumptions to calculate the fair value of the reporting unit. These estimates require significant judgment. If there is economic decline, expectations for growth are not met, product launches are delayed, there is a change to management’s operating outlook, operational restructuring, or any other significant change to the assumptions, estimates or other risks previously mentioned, the reporting units could be subject to impairment.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. To the extent the Company determines that it is more likely than not a deferred income tax asset will not be realized, a valuation allowance is established. The recoverability analysis of the deferred income tax assets and the related valuation allowances requires significant judgment and relies on estimates. At December 28, 2024, valuation allowances against deferred tax assets were $2.3 million. Refer to Note 12 of the Notes to the Consolidated Financial Statements included in this Annual Report for additional information on the composition of these valuation allowances.

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. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. 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.

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