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 industrial technology leader that develops and manufactures solutions for both the hydraulics and electronics markets. We were originally founded in 1970 as Sun Hydraulics Corporation, which designed and manufactured cartridge valves for hydraulics systems. We changed the Company’s legal name on June 13, 2019, from Sun Hydraulics Corporation to Helios Technologies, Inc.
Today we operate under two business segments: Hydraulics and Electronics. These businesses design and manufacture hydraulic cartridge valves, hydraulic quick release couplings and customized electronic controls systems and displays for a variety of end markets, as well as design complete hydraulic systems.
Strategic Vision
Our strategic goals are to achieve $1 billion in sales by the end of 2023 through a combination of organic growth and acquisitions, while remaining a technology leader and delivering superior profitability, with adjusted EBITDA margins of approximately 25%. We are augmenting our strategy with value streams that we expect to help us to execute our goals and potentially accelerate the achievement of our strategic vision by reaching the $1 billion revenue target two years ahead of our original plan, which was previously 2025.
We believe the value streams will deliver growth, diversification and market leading financial performance as we develop into a more sophisticated, globally oriented, customer centric and learning organization. These are:
1.
Protect the business through customer centricity and drive cash generation through the launch of new products and leveraging existing products;
2.
Think and act globally to better leverage our assets, accelerate innovation and diversify end markets by driving intra- and inter-company initiatives and by building in the region for the region;
3.
Diversify our markets and sources of revenue by swarming commercial opportunities that leverage our products and technologies’ value in industries in which we currently do not operate, such as defense and commercial food service, thereby creating greater opportunities for growth while reducing risk and cyclicality; and
4.
Develop our talent, our most critical resource, through a culture of customer-centricity through the embracement of diversity, engagement of the team, focus on shared, deeply rooted values and promotion of a learning organization. We provide training, development, educational and mentoring opportunities to our existing employees as well as seek to attract and retain top talent throughout our global workforce.
Our strategy is underpinned by the execution of acquisitions, which we expect to include bolt-on, flywheel type acquisitions (up to $100 million in enterprise value) and the evaluation of more transformative type acquisitions (enterprise value in excess of $100 million). The objective of our acquisition strategy is to enhance Helios by:
23
Growing our current product portfolio or adding new technologies and capabilities that complement our current offerings;
Expanding geographic presence; and
Bringing new customers or markets.
To support the execution of our strategy, our financial strategy is oriented on delivering industry leading margins, a strong balance sheet and sufficient financial flexibility to support organic and acquisitive growth.
We align our internal key performance indicators with our strategy to ensure our short-term actions will deliver long-term expectations.
Recent Acquisitions
In November 2020, we acquired Balboa Water Group, further diversifying the markets we serve and also expanding our technological capabilities in electronics. Balboa is an innovative market leader of electronic controls for the health and wellness industry with proprietary and patented technology that enables end-to-end electronic control systems for therapy baths and spas. Headquartered in Costa Mesa, California, Balboa has manufacturing operations that support the business in Mexico, with sales and warehouse operations in Denmark. This acquisition expanded our electronic control technology with complementary AC (alternating current) capabilities and enabled further diversification of end markets. The results of Balboa’s operations are reported in our Electronics segment and have been included in the Consolidated Financial Statements since the acquisition date.
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 technology advancements and new product development and better leverage existing talents across the electronics segment initially, and then throughout all of Helios.
In July 2021, we acquired 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 our electro-hydraulic product offering, further develops our presence in OEM markets, provides geographic expansion and adds scale to address new markets.
In October 2021, we acquired the assets of Shenzhen Joyonway Electronics & Technology Co., Ltd and its related entities (collectively “Joyonway”). A fast-growing developer of control panels, software, systems and accessories for the health and wellness industry, Joyonway operates in two cities, Shenzhen and Dongguan, which are in the hub of electronics and software development in China.
Global Economic Conditions
COVID-19 Update
Many of our customers and end markets are recovering from the substantial impacts of the pandemic experienced during 2020. Demand in the first nine months of 2021 for our products exceeded our expectations as end market recovery occurred sooner and was stronger than we projected. Demand in the health and wellness and recreational marine markets has been favorably impacted by the pandemic as consumers are investing in leisure products and activities. We face constraints on our ability to source certain electronic and other components, which originated from the high demand for these products caused by the pandemic. While we have been able to mitigate the majority of the impact with our procurement efforts and production schedule adjustments, we are experiencing delays in shipments as well as material and logistics cost increases.
24
We are not currently experiencing significant disruption to our workforce from the pandemic. 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, including but not limited to the ETS published by OSHA on November 5, 2021. 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 2021 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 Part I, Item 1A, “Risk Factors” of our Form 10-K for additional COVID-19 related discussion.
Industry Conditions
Market demand for our products is dependent on demand for the industrial goods in which the products are incorporated. The capital goods industries in general, and the Hydraulics and Electronics segments specifically, are subject to economic cycles. We utilize industry trend reports from various sources, as well as feedback from customers and distributors, to evaluate economic trends. We also rely on global government statistics such as Gross Domestic Product and Purchasing Managers Index to understand macro-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 increased approximately 19% during the first nine months of 2021, after decreasing 20% in 2020. In Europe, the CEMA Business Barometer reports that in June 2021, the general business climate index for the European agricultural machinery industry rose to its highest level since 2008. The favorable index peaked in June 2021 and has since continued to decline slightly through October. The report further noted that uncertainty exists related to the ability to realize incoming orders due to extreme price increases and supplier shortages, with many companies expecting a production stoppage due to lack of certain parts. The Committee for European Construction Equipment (“CECE”) business climate index reports that the boom of the European construction equipment sector continues and the index remains at extremely high levels. Consistent with the CEMA Business Barometer, the CECE business climate index reported that the strong demand cannot be fully realized due to supply side bottlenecks.
Electronics
The Federal Reserve’s Industrial Production Index, which measures the real output of all relevant establishments located in the U.S., reports sales of semiconductors and other electronics components increased slightly during the second and third quarters of 2021, after decreasing in the first quarter of 2021. The index continues to exceed fourth quarter 2019 levels and surpassed fourth quarter 2020 levels during the second quarter of 2021. The Institute of Printed Circuits Association (“IPC”) reported that total North American printed circuit board (“PCB”) shipments increased 2.3% in September 2021 compared with the same month last year; compared with August 2021, September shipments grew 18.4%. The IPC also reported that North American electronics manufacturing services (“EMS”) shipments were down 9.9% in September 2021 compared with the same month last year; compared with August 2021, September shipments fell 0.8%. While the IPC reported that demand for both PCB and EMS production is high, shipments remain constrained due to component shortages and other disruptions in the supply chain. However, the report further indicated that the PCB sector saw strong shipment growth in September, which is a hopeful sign that production levels are improving after two months of lower-than-expected deliveries.
25
2021 Third Quarter Results and Comparison of the Three and Nine Months Ended October 2, 2021 and September 26, 2020
(in millions except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
October 2, 2021
|
|
|
September 26, 2020
|
|
|
$ Change
|
|
|
% Change
|
|
Net sales
|
|
$
|
223.2
|
|
|
$
|
122.6
|
|
|
$
|
100.6
|
|
|
|
82.1
|
%
|
Gross profit
|
|
$
|
80.9
|
|
|
$
|
46.9
|
|
|
$
|
34.0
|
|
|
|
72.5
|
%
|
Gross profit %
|
|
|
36.2
|
%
|
|
|
38.3
|
%
|
|
|
|
|
|
|
Operating income
|
|
$
|
40.7
|
|
|
$
|
18.3
|
|
|
$
|
22.4
|
|
|
|
122.4
|
%
|
Operating income %
|
|
|
18.2
|
%
|
|
|
14.9
|
%
|
|
|
|
|
|
|
Net income
|
|
$
|
27.8
|
|
|
$
|
13.0
|
|
|
$
|
14.8
|
|
|
|
113.8
|
%
|
Basic and diluted net income per common share
|
|
$
|
0.86
|
|
|
$
|
0.40
|
|
|
$
|
0.46
|
|
|
|
115.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
October 2, 2021
|
|
|
September 26, 2020
|
|
|
$ Change
|
|
|
% Change
|
|
Net sales
|
|
$
|
651.5
|
|
|
$
|
371.4
|
|
|
$
|
280.1
|
|
|
|
75.4
|
%
|
Gross profit
|
|
$
|
238.5
|
|
|
$
|
143.5
|
|
|
$
|
95.0
|
|
|
|
66.2
|
%
|
Gross profit %
|
|
|
36.6
|
%
|
|
|
38.6
|
%
|
|
|
|
|
|
|
Operating income
|
|
$
|
117.4
|
|
|
$
|
25.0
|
|
|
$
|
92.4
|
|
|
|
369.6
|
%
|
Operating income %
|
|
|
18.0
|
%
|
|
|
6.7
|
%
|
|
|
|
|
|
|
Net income
|
|
$
|
81.0
|
|
|
$
|
8.7
|
|
|
$
|
72.3
|
|
|
|
831.0
|
%
|
Basic and diluted net income per common share
|
|
$
|
2.51
|
|
|
$
|
0.27
|
|
|
$
|
2.24
|
|
|
|
829.6
|
%
|
Third quarter consolidated net sales increased $100.6 million, 82.1%, compared with the prior-year period. Changes in foreign currency exchange rates favorably impacted sales for the quarter by $1.1 million, 0.5%, with no impact to earnings per share. Pricing changes impacted the 2021 third quarter organic sales by $0.7 million compared with the prior-year period. Acquisitive growth accounted for a large portion of the increase in sales, $63.7 million, over the prior-year period. In addition, we experienced strong organic growth of $36.9 million, 30.1%, compared with the prior-year period, which resulted from improved demand in all regions of both segments as our markets recovered from the significant impacts of the COVID-19 pandemic during the 2020 year.
Consolidated net sales for the year-to-date period increased $280.1 million, 75.4%, compared with the prior-year period. Changes in foreign currency exchange rates favorably impacted sales for the first nine months of 2021 by $13.8 million, 2.1%, and earnings per share by $0.05. The effect of pricing changes impacted organic sales by $0.7 million for the nine months ended October 2, 2021, compared to the prior-year period. Acquisition-related sales for the year-to-date period totaled $180.2 million and we experienced significant organic growth, $99.9 million, 26.9%, compared with the 2020 period. The organic growth is attributable to improved demand in all regions and most end markets as the economy recovered from the COVID-19 pandemic. Year-to-date sales for 2020 were unfavorably impacted by facility closures, customer shut-downs and regulatory restrictions imposed on shipments.
Gross profit trended upward in the third quarter compared with the third quarter of 2020 due to the increased sales volume. Third quarter gross margin declined by 2.1 percentage points compared with the prior-year period, as manufacturing labor efficiencies and improved leverage of our fixed cost base on the higher sales were offset by increases in logistics and raw material costs and the addition of sales from our recently acquired businesses, which have different margin profiles compared to our historical businesses (higher material and production costs with lower selling, engineering and administrative (“SEA”) costs). Material costs as a percentage of sales, excluding pricing changes and acquisition-related sales, increased in the third quarter by 1.2 percentage points compared to the prior year third quarter driven by increasing raw material costs primarily from supply shortages, higher freight and logistics costs and a change in sales mix. We have passed on certain material and freight cost increases to customers by implementing price increases, some of which will primarily be realized in future quarters.
26
Gross profit for the first nine months of 2021 increased $95.0 million, 66.2%, compared with the same period of 2020, primarily due to the increased sales volume and a favorable impact from changes in foreign currency exchange rates totaling $4.3 million. Gross margin declined 2.0 percentage points over the prior-year period as manufacturing labor efficiencies and improved leverage of our fixed cost base on the higher sales were offset by material and freight cost increases and the different margin profile of our recently acquired businesses. Material costs as a percentage of sales, excluding pricing changes and acquisition-related sales, increased in the year-to-date period by 3.2 percentage points compared to the prior year-to-date period, primarily a result of raw material price increases driven by supply shortages, higher freight and logistics costs and a change in sales mix.
Operating income as a percentage of sales increased 3.3 percentage points to 18.2% in the third quarter of 2021 compared to 14.9% in the prior-year period, primarily from continued cost management initiatives and improved leverage of our fixed cost base on the higher sales volume. This positive impact was reduced by the gross margin level changes and increases in acquisition-related costs of $2.8 million for intangible amortization, $0.6 million for amortization of inventory step-up to fair value and $0.6 million of professional fees for acquisition and integration-related activities. The prior year third quarter included non-recurring costs totaling $0.6 million related to the separation of a former officer of the Company.
For the first nine months of 2021, operating income as a percentage of sales increased 11.3 percentage points to 18.0%. During the first quarter of 2020, current and expected economic impacts from the COVID-19 pandemic led to a goodwill impairment charge of $31.9 million. Excluding the impairment charge in 2020, operating income as a percentage of sales for the first nine months of 2021 improved 2.7 percentage points, up from 15.3%, as a result of continued cost management initiatives and improved leverage of our fixed cost base on higher sales volume, partially offset by increases in acquisition-related costs including $12.0 million for intangible amortization, $0.6 million for amortization of inventory step-up to fair value and $2.1 million of professional fees for acquisition and integration-related activities. Additionally, the 2020 year-to-date period included $2.4 million for CEO and officer transition costs.
SEGMENT RESULTS
Hydraulics
The following table sets forth the results of operations for the Hydraulics segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
October 2, 2021
|
|
|
September 26, 2020
|
|
|
$ Change
|
|
|
% Change
|
|
Net sales
|
|
$
|
133.4
|
|
|
$
|
98.2
|
|
|
$
|
35.2
|
|
|
|
35.8
|
%
|
Gross profit
|
|
$
|
50.2
|
|
|
$
|
35.5
|
|
|
$
|
14.7
|
|
|
|
41.4
|
%
|
Gross profit %
|
|
|
37.6
|
%
|
|
|
36.1
|
%
|
|
|
|
|
|
|
Operating income
|
|
$
|
31.8
|
|
|
$
|
18.9
|
|
|
$
|
12.9
|
|
|
|
68.3
|
%
|
Operating income %
|
|
|
23.8
|
%
|
|
|
19.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
October 2, 2021
|
|
|
September 26, 2020
|
|
|
$ Change
|
|
|
% Change
|
|
Net sales
|
|
$
|
385.5
|
|
|
$
|
304.1
|
|
|
$
|
81.4
|
|
|
|
26.8
|
%
|
Gross profit
|
|
$
|
146.5
|
|
|
$
|
112.7
|
|
|
$
|
33.8
|
|
|
|
30.0
|
%
|
Gross profit %
|
|
|
38.0
|
%
|
|
|
37.1
|
%
|
|
|
|
|
|
|
Operating income
|
|
$
|
92.2
|
|
|
$
|
62.4
|
|
|
$
|
29.8
|
|
|
|
47.8
|
%
|
Operating income %
|
|
|
23.9
|
%
|
|
|
20.5
|
%
|
|
|
|
|
|
|
27
Third quarter net sales for the Hydraulics segment totaled $133.4 million, an increase of $35.2 million, 35.8%, compared with the prior-year period. Acquisition-related sales accounted for $4.7 million of the increase and sales from our organic businesses improved $30.5 million, 31.1%, over the prior year third quarter. The 2021 third quarter benefited from end market recovery from the pandemic as we experienced improved demand in all regions and many of our end markets including U.S. and European agriculture and construction equipment markets as well as mobile and industrial equipment markets. The segment’s supply chain is experiencing 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 $6.7 million of sales were delayed into future quarters due to the supply shortages. Changes in foreign currency exchange rates favorably impacted sales for the quarter by $1.0 million. Pricing changes had minimal impact on third quarter sales compared with the prior-year quarter.
Year-to-date net sales totaled $385.5 million, an increase of $81.4 million, 26.8%, compared with the first nine months of 2020 primarily due to end market recovery from the pandemic. Changes in foreign currency exchange rates favorably impacted sales for the first nine months of 2021 by $13.5 million.
The following table presents net sales based on the geographic region of the sale for the Hydraulics segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
October 2, 2021
|
|
|
September 26, 2020
|
|
|
$ Change
|
|
|
% Change
|
|
Americas
|
|
$
|
45.2
|
|
|
$
|
27.7
|
|
|
$
|
17.5
|
|
|
|
63.2
|
%
|
EMEA
|
|
|
44.8
|
|
|
|
32.1
|
|
|
|
12.7
|
|
|
|
39.6
|
%
|
APAC
|
|
|
43.4
|
|
|
|
38.4
|
|
|
|
5.0
|
|
|
|
13.0
|
%
|
Total
|
|
$
|
133.4
|
|
|
$
|
98.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
October 2, 2021
|
|
|
September 26, 2020
|
|
|
$ Change
|
|
|
% Change
|
|
Americas
|
|
$
|
121.2
|
|
|
$
|
99.4
|
|
|
$
|
21.8
|
|
|
|
21.9
|
%
|
EMEA
|
|
|
134.7
|
|
|
|
96.7
|
|
|
|
38.0
|
|
|
|
39.3
|
%
|
APAC
|
|
|
129.6
|
|
|
|
108.0
|
|
|
|
21.6
|
|
|
|
20.0
|
%
|
Total
|
|
$
|
385.5
|
|
|
$
|
304.1
|
|
|
|
|
|
|
|
Demand in the Americas region improved during the third quarter of 2021 compared to the prior-year third quarter as sales increased $17.5 million, 63.2%. Increased demand, primarily in the agriculture and construction equipment end markets, and our recent acquisition in the region generated an increase in sales to the EMEA region of $12.7 million, 39.6%, compared with the 2020 third quarter, or 38.0% excluding positive impacts from foreign currency exchange rate fluctuations totaling $0.5 million. Sales to the APAC region grew $5.0 million, 13.0%, compared with the third quarter of 2020, or 11.7% excluding positive impacts from foreign currency exchange rate fluctuations totaling $0.5 million. The APAC growth primarily resulted from increased demand in Korea and China.
Demand in the Americas region improved during the first three quarters of 2021 compared to the prior-year period as sales increased $21.8 million, 21.9%. We experienced significant sales growth in the EMEA region during the 2021 year-to-date period, an increase of $38.0 million, 39.3%, over the prior-year period, or 30.9% excluding positive impacts from foreign currency exchange rate fluctuations totaling $8.1 million. The increase was primarily driven by demand in the European agriculture and construction equipment end markets as well as our recent acquisition in the region. APAC sales improved by $21.6 million, 20.0%, over the prior year-to-date period, or 14.9% after excluding positive impacts from foreign currency exchange rate fluctuations totaling $5.5 million. Demand in China, Korea and Australia were the primary contributors to sales growth in the APAC region.
In the third quarter of 2021, gross profit increased $14.7 million, 41.4%, compared with the same quarter of the prior year due to the higher sales volume. Gross profit margin improved over the third quarter of 2020, increasing 1.5 percentage point to 37.6%. Fixed cost leverage on the higher sales, production labor efficiencies and a favorable sales mix led to the improvement. Increases in freight and logistics costs totaling $0.9 million negatively impacted third quarter gross margin.
28
During the year-to-date, period gross profit improved by $33.8 million, 30.0%, over the prior-year period due to sales volume and a favorable impact from changes in foreign currency rates of $4.1 million. Gross profit margin for the first nine months of 2021 increased 0.9 percentage points to 38.0% as we benefited from improved leverage of our fixed manufacturing costs on the higher sales volume and improved labor efficiencies, which were offset by increased material and freight costs. Increases in freight and logistics costs, totaling $3.0 million, negatively impacted gross margin for the year-to-date period. Material costs as a percentage of sales increased in the first nine months of 2021 by 2.1 percentage points, compared to the prior-year period, a result of a change in sales mix and the higher freight and material prices.
SEA expenses increased $1.8 million, 10.8%, in the third quarter of 2021 compared with the same period of the prior year. During 2020, we instituted strict cost control measures in light of the COVID-19 pandemic and its expected impacts on the world economies and our operations. While costs related to travel and marketing continue to be low, 2021 SEA costs represent a return to a more normalized level. Personnel costs are increasing as we scale up to support increased demand and expect higher payout of performance-based incentive compensation. Increased leverage of our fixed cost base on higher sales led to SEA as a percent of sales decreasing 3.1 percentage points during the quarter to 13.8% compared to the 2020 third quarter.
Year-to-date SEA expenses increased $4.0 million, 8.0%, in 2021 compared with the prior-year period driven primarily by personnel cost and higher R&D spend. SEA as a percent of sales decreased 2.5 percentage points to 14.1% in 2021 from 16.5% in 2020, a result of improved leverage of fixed costs on the higher sales.
As a result of the impacts to gross profit and SEA noted above, third quarter operating income increased $12.9 million, 68.3%, compared with the third quarter of the prior year, and operating margin improved 4.6 percentage points to 23.8%. Operating income for the year-to-date period increased $29.8 million, 47.8%, with operating margin strengthening 3.4 percentage points to 23.9% compared to the same period of the prior year.
Electronics
The following table sets forth the results of operations for the Electronics segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
October 2, 2021
|
|
|
September 26, 2020
|
|
|
$ Change
|
|
|
% Change
|
|
Net sales
|
|
$
|
89.8
|
|
|
$
|
24.4
|
|
|
$
|
65.4
|
|
|
|
268.0
|
%
|
Gross profit
|
|
$
|
31.3
|
|
|
$
|
11.4
|
|
|
$
|
19.9
|
|
|
|
174.6
|
%
|
Gross profit %
|
|
|
34.9
|
%
|
|
|
46.8
|
%
|
|
|
|
|
|
|
Operating income
|
|
$
|
18.4
|
|
|
$
|
4.7
|
|
|
$
|
13.7
|
|
|
|
291.5
|
%
|
Operating income %
|
|
|
20.5
|
%
|
|
|
19.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
October 2, 2021
|
|
|
September 26, 2020
|
|
|
$ Change
|
|
|
% Change
|
|
Net sales
|
|
$
|
266.0
|
|
|
$
|
67.3
|
|
|
$
|
198.7
|
|
|
|
295.2
|
%
|
Gross profit
|
|
$
|
92.5
|
|
|
$
|
30.8
|
|
|
$
|
61.7
|
|
|
|
200.3
|
%
|
Gross profit %
|
|
|
34.8
|
%
|
|
|
45.7
|
%
|
|
|
|
|
|
|
Operating income
|
|
$
|
56.3
|
|
|
$
|
10.4
|
|
|
$
|
45.9
|
|
|
|
441.3
|
%
|
Operating income %
|
|
|
21.2
|
%
|
|
|
15.5
|
%
|
|
|
|
|
|
|
Third quarter net sales for the Electronics segment totaled $89.8 million, an increase of $65.4 million compared with the prior-year period. Acquisition-related sales totaling $59.0 million were contributed by Balboa Water Group. The segment also realized solid organic growth of $6.4 million, 26.2%, compared with the prior year third quarter. During the 2020 year, we experienced significant demand reductions caused by the COVID-19 pandemic as many of our customers shut down operations for a period of time and several of our large OEM customers adjusted the timing of order request dates into later quarters. Pricing changes added $0.7 million of sales to the 2021 third quarter organic sales compared with the prior-year period.
29
Year-to-date net sales for the Electronics segment totaled $266.0 million, an increase of $198.7 million compared with the prior-year period. Acquisition-related sales totaling $175.5 million were contributed by Balboa Water Group. The segment also realized considerable organic growth in the first nine months of 2021 totaling $23.2 million, 34.5%, compared with the same period of 2020. Price increases on organic sales during the first nine months of 2021 compared with the prior-year period totaled $1.2 million.
Demand in the health and wellness industries has been strengthened by the pandemic as consumers invest in health and leisure products. The same trend is occurring in the U.S. recreational vehicle and recreational marine markets, in which demand continues to remain strong. We have taken swift and successful actions to expand production capacity in an effort to fulfill the high incoming order levels for our products. The segments’ supply chain is experiencing constraints on its ability to source certain electronic and other components. While the effect on sales has been mitigated by our increased procurement efforts and production schedule adjustments, we estimate that approximately $9.8 million of sales were delayed into future quarters due to the supply shortages. Changes in exchange rates had a minimal impact on third quarter and year-to-date sales.
The following table presents net sales based on the geographic region of the sale for the Electronics segment (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
October 2, 2021
|
|
|
September 26, 2020
|
|
|
$ Change
|
|
|
% Change
|
|
Americas
|
|
$
|
64.2
|
|
|
$
|
21.4
|
|
|
$
|
42.8
|
|
|
|
200.0
|
%
|
EMEA
|
|
|
11.1
|
|
|
|
1.5
|
|
|
|
9.6
|
|
|
|
640.0
|
%
|
APAC
|
|
|
14.5
|
|
|
|
1.5
|
|
|
|
13.0
|
|
|
|
866.7
|
%
|
Total
|
|
$
|
89.8
|
|
|
$
|
24.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
October 2, 2021
|
|
|
September 26, 2020
|
|
|
$ Change
|
|
|
% Change
|
|
Americas
|
|
$
|
193.3
|
|
|
$
|
56.4
|
|
|
$
|
136.9
|
|
|
|
242.7
|
%
|
EMEA
|
|
|
31.5
|
|
|
|
5.9
|
|
|
|
25.6
|
|
|
|
433.9
|
%
|
APAC
|
|
|
41.2
|
|
|
|
5.0
|
|
|
|
36.2
|
|
|
|
724.0
|
%
|
Total
|
|
$
|
266.0
|
|
|
$
|
67.3
|
|
|
|
|
|
|
|
During the third quarter and year-to-date period of 2021, we experienced significant growth in all regions, which was primarily attributable to the acquisition of Balboa Water Group as well as robust organic growth in all regions. Sales to the Americas region during the first three quarters of 2021 accounted for 72.7% of total segment sales, a decrease from 83.8% in the 2020 comparable period, which is due to a variation in the regional footprint of Balboa. Similarly, sales to EMEA and APAC increased to 11.8% and 15.5% of total segment sales for the year-to-date period, respectively.
Third quarter gross profit increased $19.9 million compared with the third quarter of the prior year due to the increased sales volume. Gross profit margin for the same period decreased by 11.9 percentage points, primarily from the addition of sales from Balboa, which have a different margin profile compared to our historical business (higher material and production costs with lower SEA costs). Additionally, the segment experienced an increase in raw material and freight and logistics costs during the quarter due to the high demand, and shortages of materials in the market for electronic and other components used in our products. Material costs as a percentage of sales, excluding pricing changes and acquisition-related sales, increased in the third quarter by 10.5 percentage points compared to the prior year third quarter, a result of the raw material and freight costs increases.
For the first nine months of 2021 gross profit increased $61.7 million compared with the 2020 period. Gross profit margin for the same period decreased 10.9 percentage points driven by our acquisition of Balboa, which has a different margin profile from our historical business and the rising raw material and freight and logistics costs. Material costs as a percentage of sales, excluding pricing changes and acquisition-related sales, increased in the year-to-date period by 8.2 percentage points compared to the prior-year period, a result of the raw material and freight costs increases.
30
SEA expenses increased by $6.2 million in the third quarter of 2021, compared with the third quarter of 2020, primarily from the addition of Balboa. SEA costs as a percentage of sales decreased to 14.4% in the third quarter of 2021 compared to 27.5% in the prior-year third quarter. SEA expenses increased by $15.8 million in the first nine months of 2021 compared with the same period of 2020. SEA costs as a percentage of sales decreased to 13.6% in the current year-to-date period compared to 30.3% in the prior-year period. The improvement in SEA as a percentage of sales is due to the cost structure of Balboa as well as increased leverage on our fixed costs due to higher sales in our legacy business, partially offset by an increase in personnel costs to support the increase in operations and expected higher payout of performance-based incentive compensation.
As a result of the impacts to gross profit and SEA costs noted above, operating income increased $13.7 million and $45.9 million during the third quarter and year-to-date period of 2021, respectively, compared to the prior-year periods.
Corporate and Other
Certain costs are excluded from business segment results as they are not used in evaluating the results of, or in allocating resources to, our operating segments. For the third quarter of 2021, these costs totaled $9.5 million, of which $7.4 million was amortization of acquisition-related intangible assets, $1.5 million was for other acquisition and integration-related costs and $0.6 million was for acquisition-related inventory step up amortization. Year-to-date, corporate and other costs totaled $31.1 million, of which $25.3 million was amortization of acquisition-related intangible assets, $4.6 million was for other acquisition and integration-related costs, $0.6 million was for acquisition-related inventory step up amortization and $0.6 million costs related to the separation of a corporate officer.
Interest Expense, net
Net interest expense increased to $3.8 million in the third quarter of 2021 compared with $2.7 million in the prior-year quarter. The change is attributable to increased borrowings used to fund the acquisitions of Balboa in November 2020 and NEM in July 2021. Average net debt increased to $413.2 million for the third quarter compared with $239.2 million during the third quarter of 2020. Year-to-date net interest expense was up to $13.0 million compared with $8.6 million during the comparable 2020 period. Average net debt for the 2021 year-to-date period totaled $430.4 million compared with $253.1 million in the same period of 2020. The increase is due to borrowings used to fund the acquisitions of Balboa and NEM.
Income Taxes
The provision for income taxes for the third quarter of 2021 was 25.5% of pretax income compared to 20.7% for the prior-year third quarter. The year-to-date provision was 22.0% and 16.9% of pretax income for 2021 and 2020, respectively, after adjusting for the impact of the 2020 goodwill impairment charge. 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. The total amount deferred as of December 31, 2020 is $1.5 million, of which 50% is due by December 31, 2021 and 50% is due by December 31, 2022.
31
LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary source of capital has been cash generated from operations. In recent years, we have used borrowings on our credit facilities to fund acquisitions. During the first nine months of 2021, cash provided by operating activities totaled $82.0 million. At the end of the third quarter, we had $47.7 million of available cash and cash equivalents on hand and $120.9 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
October 2, 2021
|
|
|
September 26, 2020
|
|
|
$ Change
|
|
Net cash provided by operating activities
|
|
$
|
82.0
|
|
|
$
|
77.0
|
|
|
$
|
5.0
|
|
Net cash used in investing activities
|
|
|
(68.2
|
)
|
|
|
(9.0
|
)
|
|
|
(59.2
|
)
|
Net cash provided by (used in) financing activities
|
|
|
4.3
|
|
|
|
(54.3
|
)
|
|
|
58.6
|
|
Effect of exchange rate changes on cash
|
|
|
4.4
|
|
|
|
(3.4
|
)
|
|
|
7.8
|
|
Net increase in cash
|
|
$
|
22.5
|
|
|
$
|
10.3
|
|
|
$
|
12.2
|
|
Cash on hand increased $22.5 million from $25.3 million at the end of 2020 to $47.7 million as of October 2, 2021. Changes in exchange rates during the nine months ended October 2, 2021 favorably impacted cash and cash equivalents by $4.4 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 totaled $82.0 million during the first three quarters of 2021, an increase of $5.0 million compared to the prior-year period. Year-to-date cash earnings increased by $55.9 million over the prior-year period; however, changes in net operating assets and liabilities reduced cash by $50.9 million, compared to the prior-year period, as higher working capital levels are required to support our significant increase in operations. Changes in inventory reduced cash by $35.8 million in the first nine months of 2021 compared to an increase in cash of $7.8 million during the first nine months of 2020. Supply shortages, primarily in the Electronics segment, are driving up inventory levels as we are purchasing inventory earlier to avoid shortages and waiting on parts to complete products. Days of inventory on hand decreased to 92 days as of October 2, 2021, compared with 98 days as of September 26, 2020, positively impacted by the addition of Balboa’s operations. Changes in accounts receivable reduced cash by $36.6 million and $4.7 million in the first nine months of 2021 and 2020, respectively. Days sales outstanding increased slightly to 56 days as of October 2, 2021 from 53 days as of September 26, 2020, as our collection patterns remain fairly consistent with the prior period.
32
Investing activities
Capital expenditures totaled $17.1 million for the first nine months of 2021, an increase of $9.9 million over the prior-year comparable period. Due to the economic conditions and uncertainty of future cash flows during the 2020 period, the Company only funded critical capital expenditure projects. Capital expenditures for 2021 are forecasted to be approximately $25.0 to $27.0 million, primarily for investments in machinery and equipment for capacity expansion projects, improvements to manufacturing technology and maintaining/replacing existing machine capabilities.
Cash used for acquisition-related activities in the first three quarters of 2021 totaled $50.9 million. The cash outflows were primarily used to fund the acquisition of NEM and acquire the net assets of BJN Technologies, LLC.
Financing activities
Cash provided by financing activities totaled $4.3 million during the first nine months of 2021, compared with cash used of $54.3 million in the prior-year period. During the 2021 period, the Company received proceeds from borrowings on its revolving credit facility to fund the acquisition of NEM. Borrowings, net of repayments, on our credit facilities totaled $14.5 million for the first three quarters of 2021 compared to net repayments of $44.7 million during the same period of 2020.
During the third quarter of 2021, we declared a quarterly cash dividend of $0.09 per share payable on October 20, 2021, to shareholders of record as of October 5, 2021. 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 nine months of 2021, are disclosed in Note 2 to the Consolidated, Unaudited Financial Statements.
33