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 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 January 2021, we acquired all of 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 with NEM S.r.l. ("NEM"), 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 assets related to the electronic control systems and parts business of Shenzhen Joyonway Electronics & Technology Co., Ltd and its related entities (collectively, "Joyonway"). Joyonway is a fast-growing 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. This provides us a foothold for electronics manufacturing in Asia.
21
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.
Global Economic Conditions
COVID-19 Update
We continue to experience impacts to our operations from the effects of the COVID-19 pandemic. Most recently, 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 shut down of our locations and our customers' locations impacted operations and sales through May. Recovery occurred in June as the lockdowns were lifted. We are monitoring the most recent new variant but to date have not been impacted by new lock down measures.
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 second quarter we continued to experience delays in shipments as well as material and logistics cost increases.
We are also facing some disruption to our workforce from the pandemic. While the impact has not been significant, the absenteeism has caused labor inefficiencies in production. The Omicron variant impacted 2021 fourth quarter labor efficiency, and we continued to experience the effects through January 2022. During the second quarter the disruption primarily occurred in our European operations. Additionally, in certain locations we are facing pressure from competitive labor markets; however, to date we have been successful at minimizing the impact on our operations.
We are closely monitoring the various laws, regulations and executive orders that could impact future periods relating to government-imposed requirements regarding mandatory testing for COVID-19 in the workplace and/or vaccination requirements for employees. The Company has taken and is in the process of taking necessary steps to comply with applicable requirements. At this time, we do not believe there will be a material impact on our operations due to these requirements.
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.
22
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 are experiencing 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 increased inflation, 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.
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.
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 18.2% during the first half of 2022, after increasing 20.9% during 2021. In Europe, the CEMA Business Barometer reports that the general business climate index for the European agricultural machinery industry has risen slightly for the first time since its sharp decline in the course of the Russian war against Ukraine and expectations for the coming six months have improved again. Further noted was the price increases and bottlenecks on the supplier side that continue to challenge the industry, and some companies are planning temporary production stops due to shortages. The Committee for European Construction Equipment (“CECE”) business climate index reports that the index has gone down for the fifth consecutive month, and is now at levels last seen at the end of 2020. Further noted was that the industry backlog remains high but new order intake is no longer growing.
Electronics
The Federal Reserve’s Industrial Production Index, which measures the real output of all relevant establishments located in the U.S., reports second quarter 2022 sales of semiconductors and other electronics components declined over the first quarter of 2022 down to third quarter 2021 levels. The Institute of Printed Circuits Association (“IPC”) reported that total North American printed circuit board (“PCB”) shipments were up 17.1% in June 2022 compared with the same month last year; compared with May 2022, June shipments grew 26.3%. The IPC also reported that North American electronics manufacturing services (“EMS”) shipments were down 7.6% in June 2022 compared with the same month last year; compared with May 2022, June shipments grew 9.6%. Demand continues to exceed supply for both PCB and EMS products as the book-to-bill ratios were 1.03 and 1.39 in June, respectively, as reported by the ICP. Further noted was shipments in the PCB sector are improving, suggesting supply chain challenges might be abating.
23
2022 Second Quarter Results and Comparison of the Three and Six Months Ended July 2, 2022 and July 3, 2021
(in millions except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
July 2, 2022 |
|
|
July 3, 2021 |
|
|
$ Change |
|
|
% Change |
|
Net sales |
|
$ |
241.7 |
|
|
$ |
223.4 |
|
|
$ |
18.3 |
|
|
|
8.2 |
% |
Gross profit |
|
$ |
82.3 |
|
|
$ |
82.2 |
|
|
$ |
0.1 |
|
|
|
0.1 |
% |
Gross profit % |
|
|
34.1 |
% |
|
|
36.8 |
% |
|
|
|
|
|
|
Operating income |
|
$ |
43.0 |
|
|
$ |
42.1 |
|
|
$ |
0.9 |
|
|
|
2.1 |
% |
Operating income % |
|
|
17.8 |
% |
|
|
18.8 |
% |
|
|
|
|
|
|
Net income |
|
$ |
30.0 |
|
|
$ |
30.7 |
|
|
$ |
(0.7 |
) |
|
|
(2.3 |
)% |
Diluted net income per share |
|
$ |
0.92 |
|
|
$ |
0.95 |
|
|
$ |
(0.03 |
) |
|
|
(3.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
July 2, 2022 |
|
|
July 3, 2021 |
|
|
$ Change |
|
|
% Change |
|
Net sales |
|
$ |
482.2 |
|
|
$ |
428.3 |
|
|
$ |
53.9 |
|
|
|
12.6 |
% |
Gross profit |
|
$ |
166.0 |
|
|
$ |
157.5 |
|
|
$ |
8.5 |
|
|
|
5.4 |
% |
Gross profit % |
|
|
34.4 |
% |
|
|
36.8 |
% |
|
|
|
|
|
|
Operating income |
|
$ |
85.9 |
|
|
$ |
76.7 |
|
|
$ |
9.2 |
|
|
|
12.0 |
% |
Operating income % |
|
|
17.8 |
% |
|
|
17.9 |
% |
|
|
|
|
|
|
Net income |
|
$ |
60.5 |
|
|
$ |
53.3 |
|
|
$ |
7.2 |
|
|
|
13.5 |
% |
Diluted net income per share |
|
$ |
1.86 |
|
|
$ |
1.65 |
|
|
$ |
0.21 |
|
|
|
12.7 |
% |
Second quarter consolidated net sales grew $18.3 million, 8.2%, over the prior-year second quarter. Acquisition growth accounted for $6.6 million of the increase, and we experienced solid organic growth of $11.7 million, 5.2%. Changes in foreign currency exchange rates compared to the second quarter of 2021, had an unfavorable impact on sales for the quarter totaling $7.5 million, 3.4%, and earnings per share by $0.03. Price increases added $10.7 million to second quarter organic sales compared with the prior-year period. Organic sales improved in the Americas and Europe, the Middle East and Africa ("EMEA") regions compared to the second quarter of 2021 by 22.6% and 7.5%, respectively; meanwhile, organic sales for the Asia Pacific ("APAC") region fell by 15.0%, all excluding effects of changes in foreign currency exchange rates. Sales in several of our end markets improved over the second quarter of 2021, with the industrial machinery, mobile equipment and recreational end markets leading the growth, while the health and wellness end market started to contract.
Consolidated net sales for the year-to-date period improved by $53.9 million, 12.6%, compared with the prior-year period. Acquisition-related sales for the first half of 2022 totaled $13.8 million. Organic sales were up $40.1 million, 9.4%, compared with the first half of 2021. Changes in foreign currency exchange rates unfavorably impacted sales for the first six months of 2022 compared to the first six months of 2021 by $12.2 million, 2.8%, and earnings per share by $0.05. Price increases added $20.4 million to the first six months of 2022 organic sales compared to the prior-year period. Organic sales improved in the Americas and EMEA regions compared to the first six months of 2021 by 22.1% and 12.8%, respectively; meanwhile, organic sales for the APAC region fell by 6.2%, all excluding the effects of changes in foreign currency exchange rates. Sales growth in the year-to-date period was driven by the industrial machinery, mobile equipment and recreational end markets.
Gross profit remained fairly consistent in the second quarter of 2022 compared with the prior-year period despite both volume and pricing increases. Changes in foreign currency exchange rates compared to the second quarter of 2021 reduced gross profit by $2.2 million. Gross margin declined by 2.7 percentage points compared with the prior-year second quarter driven 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. Material costs as a percentage of sales, excluding pricing changes and acquisition-related sales, increased by 3.9 percentage points compared to the prior-year second quarter.
24
Gross profit for the first six months of 2022 increased $8.5 million, 5.4%, compared with the same period of 2021, from pricing and increased sales volume. Changes in foreign currency exchange rates compared to the first six months of 2021 reduced year-to-date gross profit by $3.9 million. Gross margin declined 2.4 percentage points over the prior-year period as pricing efforts did not recover the full margin to offset the impact of higher raw material costs. Material costs as a percentage of sales, excluding pricing changes and acquisition-related sales, increased in the year-to-date period by 4.1 percentage points compared to the prior year-to-date period.
In the second quarter of 2022, we incurred $1.7 million of restructuring costs within our Hydraulics segment. In the EMEA region, we executed an operational restructure that combined 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 executed an organizational restructure among several locations to align employee talent with the strategic operational goals of the Company. The restructuring plans are expected to improve the global cost structure of the business. We estimate annual cost savings will total $1.8 million. The restructuring costs were primarily for labor, severance and manufacturing relocation costs.
Operating income as a percentage of sales decreased 1.0 percentage point to 17.8% in the second quarter of 2022 compared to the prior-year period. Improved leverage of our selling, engineering and administrative ("SEA") level fixed cost base on the higher sales volume was reduced by gross margin level changes, our restructuring activities and increased travel and marketing costs of $0.9 million.
For the first six months of 2022, operating income as a percentage of sales remained fairly consistent with the prior-year period, decreasing 0.1 percentage points to 17.8%. Acquisition-related amortization for the first six months of 2022 was lower than the prior-year period by $4.1 million, primarily from the sales order backlog intangible acquired with the Balboa acquisition that was fully amortized in the second quarter of 2021.
SEGMENT RESULTS
Hydraulics
The following table sets forth the results of operations for the Hydraulics segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
July 2, 2022 |
|
|
July 3, 2021 |
|
|
$ Change |
|
|
% Change |
|
Net sales |
|
$ |
142.8 |
|
|
$ |
133.0 |
|
|
$ |
9.8 |
|
|
|
7.4 |
% |
Gross profit |
|
$ |
49.5 |
|
|
$ |
50.9 |
|
|
$ |
(1.4 |
) |
|
|
(2.8 |
)% |
Gross profit % |
|
|
34.7 |
% |
|
|
38.3 |
% |
|
|
|
|
|
|
Operating income |
|
$ |
31.1 |
|
|
$ |
32.3 |
|
|
$ |
(1.2 |
) |
|
|
(3.7 |
)% |
Operating income % |
|
|
21.8 |
% |
|
|
24.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
July 2, 2022 |
|
|
July 3, 2021 |
|
|
$ Change |
|
|
% Change |
|
Net sales |
|
$ |
279.9 |
|
|
$ |
252.1 |
|
|
$ |
27.8 |
|
|
|
11.0 |
% |
Gross profit |
|
$ |
100.3 |
|
|
$ |
96.3 |
|
|
$ |
4.0 |
|
|
|
4.2 |
% |
Gross profit % |
|
|
35.8 |
% |
|
|
38.2 |
% |
|
|
|
|
|
|
Operating income |
|
$ |
62.7 |
|
|
$ |
60.4 |
|
|
$ |
2.3 |
|
|
|
3.8 |
% |
Operating income % |
|
|
22.4 |
% |
|
|
24.0 |
% |
|
|
|
|
|
|
Second quarter net sales for the Hydraulics segment increased by $9.8 million, 7.4%, compared with the prior-year second quarter. Acquisition-related sales accounted for $5.7 million of the increase and sales from our organic businesses improved $4.1 million, 3.1%. Changes in foreign currency exchange rates compared to the second quarter of 2021, had an unfavorable impact on sales totaling $7.0 million. Price increases added $5.6 million to second quarter organic sales compared with the prior-year second quarter. Organic sales growth 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.
25
Year-to-date net sales grew by $27.8 million, 11.0%, compared with the first half of 2021. Acquisition-related sales accounted for $12.1 million of the increase and sales from our organic businesses improved $15.7 million, 6.2%. Changes in foreign currency exchange rates unfavorably impacted sales for the first half of 2022 by $11.5 million compared with rates in effect during the same period of 2021. Price increases added $9.6 million to organic sales in the first half of 2022 compared with the prior-year period.
The segment’s supply chain continues to experience constraints on its ability to source certain components. While the effect on sales has been mitigated by our increased procurement efforts and production schedule adjustments, we estimate that approximately $6.0 million of sales were delayed into future quarters due to the supply shortages.
The following table presents net sales based on the geographic region of the sale for the Hydraulics segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
July 2, 2022 |
|
|
July 3, 2021 |
|
|
$ Change |
|
|
% Change |
|
Americas |
|
$ |
49.9 |
|
|
$ |
41.7 |
|
|
$ |
8.2 |
|
|
|
19.7 |
% |
EMEA |
|
|
49.0 |
|
|
|
46.6 |
|
|
|
2.4 |
|
|
|
5.2 |
% |
APAC |
|
|
43.9 |
|
|
|
44.7 |
|
|
|
(0.8 |
) |
|
|
(1.8 |
)% |
Total |
|
$ |
142.8 |
|
|
$ |
133.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
July 2, 2022 |
|
|
July 3, 2021 |
|
|
$ Change |
|
|
% Change |
|
Americas |
|
$ |
93.1 |
|
|
$ |
76.0 |
|
|
$ |
17.1 |
|
|
|
22.5 |
% |
EMEA |
|
|
101.9 |
|
|
|
89.9 |
|
|
|
12.0 |
|
|
|
13.3 |
% |
APAC |
|
|
84.9 |
|
|
|
86.2 |
|
|
|
(1.3 |
) |
|
|
(1.5 |
)% |
Total |
|
$ |
279.9 |
|
|
$ |
252.1 |
|
|
|
|
|
|
|
Demand in the Americas region improved during the second quarter of 2022 compared to the prior-year second quarter and, including pricing impacts, sales increased 19.7%. Improved demand, pricing and our recent acquisition in the region generated an increase in sales to the EMEA region of 5.2%, compared with the second quarter of 2021, or 16.7% excluding adverse impacts from foreign currency exchange rate fluctuations totaling $5.4 million. Impacted by lockdowns in China, sales to the APAC region declined 1.8%, compared with the second quarter of 2021, but improved 1.8% excluding adverse impacts from foreign currency exchange rate fluctuations totaling $1.6 million.
During the 2022 year-to-date period, sales growth of $17.1 million, 22.5%, occurred in the Americas region due to improved demand and pricing. Improved demand, pricing and our recent acquisition in the region generated an increase in sales to the EMEA region of 13.3%, compared with the first half of 2021, or 22.9% after adjusting for unfavorable impacts from foreign currency fluctuations totaling $8.6 million. Sales to the APAC region declined 1.5%, compared with the first six months of 2021, but improved 1.7% excluding unfavorable impacts from foreign currency exchange rate fluctuations totaling $2.8 million.
In the second quarter of 2022, gross profit decreased $1.4 million, 2.8%, compared with the same quarter of the prior year. Changes in foreign currency exchange rates compared to the second quarter of 2021 reduced gross profit by $1.9 million. Gross profit margin declined over the same period by 3.6 percentage points to 34.7%. Fixed cost leverage on the higher sales positively impacted gross margin for the quarter while an unfavorable mix, increased labor costs and impacts from rising material, logistics and energy costs compressed the margin. Material costs as a percentage of sales, excluding pricing changes and acquisition-related sales, increased in the second quarter by 3.2 percentage points compared to the prior-year second quarter.
26
During the 2022 year-to-date period, gross profit increased $4.0 million, 4.2%, over the comparable prior-year period, due primarily to sales volume and pricing. The segment realized an unfavorable impact on gross profit from changes in foreign currency rates, compared to the first two quarters of 2021, of $3.5 million. Gross margin for the first two quarters of 2022 decreased 2.4 percentage points as the segment was impacted by higher material, logistic and energy costs and labor costs from increased wages and overtime. Higher freight costs of $1.4 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 two quarters of 2022 by 2.5 percentage points compared to the prior-year period.
As previously noted, restructuring charges totaling $1.7 million were incurred in our Hydraulics segment during the second quarter of 2022; $0.6 million of the costs are included in direct labor in cost of goods sold and $1.1 million are reflected in SEA expenses.
SEA expenses decreased $0.2 million, 1.1%, in the second quarter of 2022 compared with the prior-year period. SEA costs from our 2021 acquisition and our restructuring activities inflated costs in the 2022 second quarter when compared to the prior-year second quarter. Changes in foreign currency rates compared to the prior-year second quarter reduced SEA costs by $0.7 million. Better leverage of our fixed cost base on the higher sales led to SEA as a percent of sales decreasing 1.1 percentage points during the quarter, to 12.9%, compared to the 2021 second quarter.
Year-to-date SEA expenses increased $1.7 million, 4.7%, in 2022 compared with the prior-year period, mainly due to our acquisition and restructuring activities as well as higher travel and marketing costs of $0.5 million. Changes in foreign currency rates compared to the prior-year period reduced SEA costs by $1.3 million. SEA as a percent of sales decreased 0.8 percentage points to 13.4% in 2022 from 14.2% in 2021 from fixed cost leverage on the higher sales.
As a result of the impacts to gross profit and SEA noted above, second quarter operating income decreased $1.2 million, 3.7%, compared with the second quarter of the prior year, and operating margin declined 2.5 percentage points to 21.8%. Operating income for the year-to-date period increased $2.3 million, 3.8%, with operating margin declining 1.6 percentage points to 22.4% compared to the same period in the prior year.
Electronics
The following table sets forth the results of operations for the Electronics segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
July 2, 2022 |
|
|
July 3, 2021 |
|
|
$ Change |
|
|
% Change |
|
Net sales |
|
$ |
98.9 |
|
|
$ |
90.4 |
|
|
$ |
8.5 |
|
|
|
9.4 |
% |
Gross profit |
|
$ |
32.8 |
|
|
$ |
31.2 |
|
|
$ |
1.6 |
|
|
|
5.1 |
% |
Gross profit % |
|
|
33.2 |
% |
|
|
34.5 |
% |
|
|
|
|
|
|
Operating income |
|
$ |
20.3 |
|
|
$ |
19.6 |
|
|
$ |
0.7 |
|
|
|
3.6 |
% |
Operating income % |
|
|
20.5 |
% |
|
|
21.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
July 2, 2022 |
|
|
July 3, 2021 |
|
|
$ Change |
|
|
% Change |
|
Net sales |
|
$ |
202.3 |
|
|
$ |
176.1 |
|
|
$ |
26.2 |
|
|
|
14.9 |
% |
Gross profit |
|
$ |
65.6 |
|
|
$ |
61.2 |
|
|
$ |
4.4 |
|
|
|
7.2 |
% |
Gross profit % |
|
|
32.4 |
% |
|
|
34.8 |
% |
|
|
|
|
|
|
Operating income |
|
$ |
40.8 |
|
|
$ |
37.9 |
|
|
$ |
2.9 |
|
|
|
7.7 |
% |
Operating income % |
|
|
20.2 |
% |
|
|
21.5 |
% |
|
|
|
|
|
|
Second quarter net sales for the Electronics segment grew by $8.5 million, 9.4%, compared with the prior-year second quarter. Acquisition growth accounted for $1.0 million of the increase. Price increases added $5.1 million of sales to the 2022 second quarter compared to the 2021 second quarter. Changes in foreign currency exchange rates compared to the second quarter of 2021, adversely impacted second quarter sales by $0.5 million.
27
Second quarter growth was primarily driven by demand in our recreational and industrial machinery end markets, while demand in our health and wellness end market has softened. The segment's supply chain continues to experience constraints on its ability to source certain electronic and other components. While the effect on sales has been mitigated by our procurement efforts, production schedule adjustments and product redesigns, we estimate that approximately $9.1 million of sales were delayed into future quarters due to the shortages.
Year-to-date net sales for the Electronics segment improved by $26.2 million, 14.9%, compared with the prior-year period. Sales totaling $1.7 million were contributed by our recently acquired business. Price increases added $10.8 million of sales to the first two quarters of 2022 compared to the prior-year period. Changes in foreign currency exchange rates unfavorably impacted sales by $0.7 million for the year-to-date period compared with rates in effect during the same period of 2021.
The following table presents net sales based on the geographic region of the sale for the Electronics segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
July 2, 2022 |
|
|
July 3, 2021 |
|
|
$ Change |
|
|
% Change |
|
Americas |
|
$ |
80.2 |
|
|
$ |
64.1 |
|
|
$ |
16.1 |
|
|
|
25.1 |
% |
EMEA |
|
|
12.3 |
|
|
|
11.0 |
|
|
|
1.3 |
|
|
|
11.8 |
% |
APAC |
|
|
6.4 |
|
|
|
15.3 |
|
|
|
(8.9 |
) |
|
|
(58.2 |
)% |
Total |
|
$ |
98.9 |
|
|
$ |
90.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
July 2, 2022 |
|
|
July 3, 2021 |
|
|
$ Change |
|
|
% Change |
|
Americas |
|
$ |
157.9 |
|
|
$ |
129.1 |
|
|
$ |
28.8 |
|
|
|
22.3 |
% |
EMEA |
|
|
24.1 |
|
|
|
20.4 |
|
|
|
3.7 |
|
|
|
18.1 |
% |
APAC |
|
|
20.3 |
|
|
|
26.6 |
|
|
|
(6.3 |
) |
|
|
(23.7 |
)% |
Total |
|
$ |
202.3 |
|
|
$ |
176.1 |
|
|
|
|
|
|
|
Demand in the Americas region was solid during the second quarter of 2022, and coupled with pricing and capacity improvements, sales grew 25.1% compared to the second quarter of 2021. Sales to the EMEA region improved by 11.8%, compared with the second quarter of 2021, or 16.4% after adjusting for adverse impacts from foreign currency fluctuations totaling $0.5 million. Reduced demand for our products from customers in China, and regulatory lock downs in the country, resulted in sales to the APAC region contracting by $8.9 million compared to the prior-year period, with minimal impacts from foreign currency exchange rate changes.
During the 2022 year-to-date period, sales growth of 22.3% occurred in the Americas region from demand, pricing and capacity improvements. In the EMEA region, sales grew 18.1% over the first half of 2021, or 21.6% after adjusting for unfavorable impacts from foreign currency fluctuations totaling $0.7 million. Due to the second quarter demand decline and lockdowns in China, the APAC region experienced a 23.7% sales reduction compared to the first two quarters of 2021, with minimal impacts from changes in foreign currency exchange rates.
Second quarter gross profit increased 5.1%, compared with the second quarter of the prior year, primarily due to sales volume and pricing. Unfavorable impacts from changes in foreign currency exchange rates compared to the prior-year period impacted gross profit by $0.3 million. Gross margin declined over the same period by 1.3 percentage points to 33.2%. 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. Material costs as a percentage of sales, excluding pricing changes, increased in the second quarter by 4.7 percentage points compared to the prior-year quarter, despite a favorable sales mix.
During the 2022 year-to-date period, the segment experienced a 7.2% increase in gross profit over the comparable prior-year period, primarily due to sales volume and pricing. Unfavorable impacts from changes in foreign currency exchange rates compared to the prior-year period impacted gross profit by $0.5 million. Gross margin for the first two quarters of 2022 decreased 2.4 percentage points from the higher material costs. Material costs as a percentage of sales, excluding pricing changes, increased in the first two quarters of 2022 by 6.0 percentage points compared to the prior-year period.
28
SEA expenses increased by $0.9 million, 7.8%, in the second quarter of 2022, compared with the second quarter of 2021, impacted by our 2021 acquisition and higher costs for travel and marketing of $0.2 million, R&D of $0.2 million and wage and benefits of $0.3 million. SEA costs as a percentage of sales decreased 0.2 percentage points to 12.6% in the second quarter of 2022 compared to 12.8% in the prior-year second quarter from improved leverage of our fixed costs on the higher sales.
Year-to-date SEA expenses increased $1.5 million, 6.4%, in 2022 compared with the prior-year period primarily from our 2021 acquisition and increased corporate costs allocated to the segment totaling $0.5 million. SEA as a percent of sales decreased 0.9 percentage points to 12.3% in 2022 from 13.2% in 2021 from improved leverage of our fixed costs on the higher sales.
As a result of the impacts to gross profit and SEA noted above, second quarter operating income increased 3.6% compared with the second quarter of the prior year, while operating margin declined 1.2 percentage points to 20.5%. Operating income for the year-to-date period increased 7.7% and operating margin dropped 1.3 percentage points to 20.2% compared to the same period in the prior year.
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 second quarter of 2022, these costs totaled $8.4 million for (i) amortization of acquisition-related intangible assets of $6.8 million and (ii) $1.6 million related to other acquisition and integration activities. Year-to-date, corporate and other costs totaled $17.6 million for (i) transition costs for one of our executive officers of $0.3 million, (ii) amortization of acquisition-related intangible assets of $13.8 million and (iii) $3.5 million related to other acquisition and integration activities.
Interest Expense, net
Net interest expense decreased $0.6 million to $3.8 million in the second quarter of 2022 compared with $4.4 million in the prior-year second quarter. The decrease is primarily a result of lower debt balances during the second quarter of 2022. Average net debt decreased to $390.3 million during the second quarter of 2022 compared with $414.5 million during the second quarter of 2021. Year-to-date net interest expense decreased $1.6 million to $7.6 million compared with $9.2 million during the comparable 2021 period. The decrease is primarily a result of lower debt balances during the first half of 2022. Average net debt for the 2022 year-to-date period totaled $397.1 million compared with $420.0 million in the corresponding period of 2021.
Income Taxes
The provision for income taxes for the second quarter of 2022 was 22.5% of pretax income compared to 17.6% for the prior-year second quarter. The year-to-date provision was 22.4% and 20.1% of pretax income for 2022 and 2021, respectively. The 2021 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.
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.
29
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 six months of 2022, cash provided by operating activities totaled $44.2 million. At the end of the second quarter, we had $41.3 million of available cash and cash equivalents on hand and $174.2 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
July 2, 2022 |
|
|
July 3, 2021 |
|
|
$ Change |
|
Net cash provided by operating activities |
|
$ |
44.2 |
|
|
$ |
49.5 |
|
|
$ |
(5.3 |
) |
Net cash used in investing activities |
|
|
(9.2 |
) |
|
|
(14.2 |
) |
|
|
5.0 |
|
Net cash used in financing activities |
|
|
(24.8 |
) |
|
|
(28.7 |
) |
|
|
3.9 |
|
Effect of exchange rate changes on cash |
|
|
2.6 |
|
|
|
2.5 |
|
|
|
0.1 |
|
Net increase in cash |
|
$ |
12.8 |
|
|
$ |
9.1 |
|
|
$ |
3.7 |
|
Cash on hand increased $12.8 million from $28.6 million at the end of 2021 to $41.4 million as of July 2, 2022. Changes in exchange rates during the six months ended July 2, 2022 favorably impacted cash and cash equivalents by $2.6 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 $5.3 million in the first half 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 $1.5 million over the prior-year period. Changes in net operating assets and liabilities reduced cash by $3.8 million, compared to the prior-year period, primarily from reductions in AP and accrued expenses only partially offset by favorable cash flows from AR and inventories. Strategic investments in inventory reduced cash by $17.9 million and $22.9 million in the first two quarters of 2022 and 2021, respectively. The increase in inventory levels is primarily from 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 103 days as of July 2, 2022, compared with 81 days as of July 3, 2021. Changes in accounts receivable reduced cash by $20.0 million and $37.4 million in the first two quarters of 2022 and 2021, respectively. Days sales outstanding remained fairly consistent with the prior-year period at 56 days as of July 2, 2022 compared to 55 days as of July 3, 2021. Our collection patterns remain consistent with the prior period.
30
Investing activities
Capital expenditures totaled $13.5 million for the first six months of 2022, an increase of $3.2 million over the prior-year comparable period. Capital expenditures for 2022 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.
Cash provided from acquisition related activities in the first six months of 2022 totaled $1.3 million, compared to cash used in the prior-year period of $3.4 million.
Financing activities
Cash used for financing activities totaled $24.8 million during the first six months of 2022, compared with cash used of $28.7 million in the prior-year period. Repayments, net of borrowings, on our credit facilities totaled $16.8 million for the first six months of 2022 compared to net repayments of $22.1 million during the same period of 2021.
During the second quarter of 2022, we declared a quarterly cash dividend of $0.09 per share payable on July 20, 2022, to shareholders of record as of July 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 in 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 six months of 2022, are disclosed in Note 2 to the Consolidated, Unaudited Financial Statements.
31