# Helios Technologies, Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [Helios Technologies, Inc.](/companies/hlio.md) (CIK 1024795)
- Form: 10-Q
- Filed: 2023-11-07
- Accepted by EDGAR: Nov 7, 2023, 15:46 ET
- Period: 2023-09-30
- Accession: 0000950170-23-059853
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1024795/000095017023059853/hlio-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1024795/000095017023059853/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-02 to 2023-09-30 | $201.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $642.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-02 to 2023-09-30 | $141.7m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $435.7m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-02 to 2023-09-30 | $59.7m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $206.5m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-07-02 to 2023-09-30 | $37.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-09-30 | $113.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-02 to 2023-09-30 | $13.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | $68.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-07-02 to 2023-09-30 | $1.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $10.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-02 to 2023-09-30 | $3.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $34.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-02 to 2023-09-30 | $0.11 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.04 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-02 to 2023-09-30 | $0.11 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.04 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-02 to 2023-09-30 | 33,100,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 33,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $50.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-07-02 to 2023-09-30 | $5.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $25.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $8.8m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2023-09-30 | $35.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $410.2m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $1.59bn | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $136.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $748.6m | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $304.2m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-09-30 | $21.8m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-09-30 | $842.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 36,038 characters.

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, manifolds, hydraulic quick release couplings, machined components and assemblies as well as engineers hydraulic solutions and in some cases complete systems. Our Hydraulics segment includes products sold under the Sun Hydraulics, Faster, Custom Fluidpower, Seungwon, NEM, Taimi, Daman and Schultes brands. 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. The Electronics segment includes products sold under the Enovation Controls, Murphy, Zero Off, HCT, Balboa Water Group and Joyonway brands.

### Recent Acquisitions

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 acquired i3 Product Development, a custom design and engineering services firm, with over 55 engineers with expertise in electronics, mechanical, industrial, embedded and software engineering. We anticipate that i3 will equip Helios with significant value-added professional services capabilities to provide customization to Helios platforms and to develop greenfield solutions. i3 specializes in working to transform customers' ideas into industrial design solutions through rapid prototyping and creating 3D models in house. They have also built and patented a remote support platform that provides customers in the field support for their internet of things devices.

### Restructuring Activities

We continued our restructuring activities within our Hydraulics segment related to the creation of our two new Regional Operational Centers of Excellence ("CoE"). Facility expansion was completed in Mishawaka, Indiana, the Hydraulic Manifold Solutions CoE, which now includes the manifold machining and integrated package assembly operations from Sun Hydraulics, the integrated package business from Faster Inc., and incremental capacity to allow for Daman’s core organic growth. The quick release coupling (QRC) manufacturing transferred from Maumee, Ohio, to the cartridge valve technology location in Sarasota, Florida, which completes the Hydraulic Valve and Coupling Solutions CoE. While the majority of relocation efforts have been accomplished, there still remain additional transfers and integration and efficiency efforts underway in the fourth quarter of 2023.

### Manufacturing and Operating Strategy Activities

Over the last couple years, we have presented the major areas for integration as we transform from being a holding company into an integrated operating company. We have developed the strategies and tactics and have several projects in various phases from ideation to execution. We started with the Electronics segment and then moved to the Hydraulics segment. We created manufacturing roadmaps with several programs, each of which might stretch over a couple of years, and are comprised of multiple projects that have clear structure and owners. Work is moving forward on multiple programs and projects simultaneously. This is a continuous improvement process that will drive efficiency and improvements across the business, and we are now doing this as an integrated operating company versus at the business unit level. Some of our recent notable activities include: the creation of our new Centers of Excellence, transferring some of the board assembly and wire harness production from our Tulsa location to our facility in Tijuana, adding capacity at our plants in Italy, India, Tijuana and Indiana, and constructing an automated warehouse at our Faster Italy location.

### Global Economic Conditions

We continue to navigate through challenges and disruptions created by the Russia-Ukraine war and general macroeconomic conditions that have created economic uncertainty, market disruption, supply constraints and inflation. We have been mitigating some of the inflation effects through pricing efforts and cost savings measures. We continue to face constraints related to sourcing certain electronic and other components. We are mitigating some of the impact with our procurement efforts, production schedule adjustments and product redesigns.

Refer to Item 1A "Risk Factors" of our Form 10-K for additional discussion of risks related to global economic 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 8% during the first nine months of 2023 while the U.S. index of orders of hydraulic products declined 4% during the same period. In Europe, the CEMA Business Barometer reported in October that the general business climate index for the European agricultural machinery industry remained in negative territory. The CEMA Barometer report added, this confirms that customers of manufacturers, the dealers, are not able to pass on their numerous orders to end customers causing a record high over-supply. The CECE (Committee for European Construction Equipment) recently reported that the business climate index continued its downturn in July and reached the lowest level in more than two and a half years. The CECE reported that the current level of incoming orders is below prior year levels and, specific to the European market, the order intake is decreasing substantially.

#### Electronics

The Federal Reserve’s Industrial Production Index, which measures the real output of all relevant establishments located in the U.S., reports third quarter 2023 sales of semiconductors and other electronics components continued to improve reaching higher levels than seen in recent years. The Institute of Printed Circuits Association (“IPC”) reported that total North American printed circuit board (“PCB”) shipments were down 15% in September 2023 compared with the same month last year, however, PCB bookings were down 33% in September compared to the same month last year. The IPC also reported that North American electronics manufacturing services (“EMS”) shipments and bookings were down 10% and 17%, respectively, in September 2023 compared with the same month last year. EMS shipments and bookings were also down 12% and 14%, respectively, in September 2023 compared with the previous month.

### 2023 Third Quarter Results and Comparison of the Three and Nine Months Ended September 30, 2023, and October 1, 2022

(In millions, except per share data)

The following is a discussion of our third quarter and first nine months of 2023 results of operations and liquidity and capital resources; comparisons are with the corresponding reporting periods of 2022, unless otherwise noted.

The following table presents our consolidated results of operations:

|  | Three Months Ended September 30, 2023 | October 1, 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $201.4 | $207.2 | $(5.8) | (2.8)% |
| Gross profit | $59.7 | $69.3 | $(9.6) | (13.9)% |
| Gross profit % | 29.6% | 33.4% |  |  |
| Operating income | $13.8 | $30.7 | $(16.9) | (55.0)% |
| Operating income % | 6.9% | 14.8% |  |  |
| Net income | $3.5 | $20.4 | $(16.9) | (82.8)% |
| Diluted net income per share | $0.11 | $0.63 | $(0.52) | (82.5)% |
|  | **Nine Months Ended** |  |  |  |
|  | **September 30, 2023** | **October 1, 2022** | **$ Change** | **% Change** |
| Net sales | $642.2 | $689.4 | $(47.2) | (6.8)% |
| Gross profit | $206.5 | $235.2 | $(28.7) | (12.2)% |
| Gross profit % | 32.2% | 34.1% |  |  |
| Operating income | $68.0 | $116.6 | $(48.6) | (41.7)% |
| Operating income % | 10.6% | 16.9% |  |  |
| Net income | $34.1 | $80.9 | $(46.8) | (57.8)% |
| Diluted net income per share | $1.04 | $2.48 | $(1.44) | (58.1)% |

Third quarter consolidated net sales declined $5.8, 2.8%. We experienced organic net sales decline of $19.1, 9.2%, which was offset partially by sales from acquisitions totaling $13.3. Sales were impacted by reduced demand for products in our mobile, marine, industrial and health and wellness end markets, offset partially by an increase to the off-road vehicles end market. Consolidated net sales were slightly up in the Americas region and down in the EMEA and APAC regions during the third quarter. Discrete impacts favorable to our third quarter organic sales included pricing changes of $3.6, 1.7%, and changes in foreign currency exchange rates of $2.2, 1.1%.

Constraints related to sourcing certain electronic and other components persisted but eased slightly during the third quarter. As of September 30, 2023, we estimate that approximately $11.2 of sales were delayed into future quarters due to the supply shortages.

Consolidated net sales for the year-to-date period were lower by $47.2, 6.8%. Acquisition-related sales for the first three quarters of 2023 totaled $43.4 and organic sales declined $90.6, 13.1%. Sales were impacted most by reduced demand for products in our health and wellness end market, which continues to be below the prior year. Sales in this end market were previously strengthened by the pandemic as consumers invested in health and leisure products. Other declines include sales into the industrial, marine and mobile end markets, offset partially by increases in the off-road vehicles and agriculture end markets. Consolidated net sales were down in all regions in the year-to-date period. Discrete impacts to our year-to-date organic sales included pricing changes that were favorable by $16.2, 2.3%, and changes in foreign currency exchange rates that were unfavorable by $1.6, 0.2%.

Third quarter gross profit decreased $9.6, 13.9%, driven by lower volume, the unfavorable margin profile of acquired businesses which generally have higher cost of sales and lower selling, engineering and administrative expenses (“SEA”), higher restructuring costs of $1.4 and higher wage and benefit costs of $1.0, partially offset by pricing and favorable foreign currency impacts of $0.4. Material costs as a percentage of sales, excluding pricing changes and acquisition-related sales, decreased by 140 basis points primarily from segment and product mix. Gross margin declined by 380 basis points, impacted by lower fixed costs leverage on lower volume and cost impacts noted above.

Gross profit for the year-to-date period decreased $28.7, 12.2%. This was attributable to lower volume, the unfavorable margin profile of acquired businesses, higher restructuring costs of $3.3, higher wage and benefit costs of $1.1 and unfavorable foreign currency of $0.6, partially offset by pricing. Material costs as a percentage of sales, excluding pricing changes and acquisition-related sales, decreased by 20 basis points primarily from segment and product mix. Gross margin declined by 190 basis points, impacted by lower fixed costs leverage on lower volume and cost impacts noted above.

Third quarter operating income as a percentage of sales declined 790 basis points to 6.9%. In addition to the gross margin level changes, amortization expense on acquired intangible assets increased by $1.4 due to our 2022 and 2023 acquisitions. SEA expenses also increased by $6.0, mainly from acquisitions, higher restructuring costs of $1.6, higher wage and benefit costs of $1.3 and increased research and development (R&D) investment for new product development of $0.7.

Operating income for the year-to-date period as a percentage of sales decreased 630 basis points to 10.6%. In addition to the gross margin level changes, amortization expense on acquired intangible assets increased by $4.1 due to our 2022 and 2023 acquisitions. SEA expenses were also up by $15.7, mainly from acquisitions, higher restructuring of $2.0, higher wage and benefit costs of $4.7 and increased R&D for investment related to new product development of $1.3. Other increases included officer transition costs of $0.6, professional fees of $0.5 and board of director fees of $0.5.

Net interest expense increased by $4.6 to $8.7 in the third quarter of 2023. Average net debt increased to $510.8 during the third quarter of 2023 compared with $399.2 during the third quarter of 2022. Year-to-date net interest expense totaled $22.6, an increase of $10.9. Average net debt for the year-to-date period increased to $455.9 compared with $418.6 during the prior year period. In addition to higher interest rates in the current year, average net debt balances increased with the acquisitions of Daman in September 2022, Schultes in January 2023 and i3 in May 2023.

The provision for income taxes for the third quarter of 2023 was 30.5% of pretax income compared to 23.6% for the prior year third quarter. The year-to-date provision was 23.8% and 22.7% of pretax income for 2023 and 2022, respectively. 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 August 16, 2022, the Inflation Reduction Act was enacted into law, and includes, among other things, a new 15% minimum tax and 1% excise tax on stock repurchases after December 31, 2022. These tax law changes have no immediate material effect and are not expected to have a material impact on our future financial results, we will continue to evaluate its impact as further information becomes available.

### SEGMENT RESULTS

### Hydraulics

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

|  | Three Months Ended September 30, 2023 | October 1, 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $132.0 | $131.2 | $0.8 | 0.6% |
| Gross profit | $41.1 | $46.5 | $(5.4) | (11.6)% |
| Gross profit % | 31.1% | 35.4% |  |  |
| Operating income | $18.4 | $29.4 | $(11.0) | (37.4)% |
| Operating income % | 13.9% | 22.4% |  |  |
|  | **Nine Months Ended** |  |  |  |
|  | **September 30, 2023** | **October 1, 2022** | **$ Change** | **% Change** |
| Net sales | $432.1 | $411.1 | $21.0 | 5.1% |
| Gross profit | $140.7 | $146.8 | $(6.1) | (4.2)% |
| Gross profit % | 32.6% | 35.7% |  |  |
| Operating income | $73.3 | $92.1 | $(18.8) | (20.4)% |
| Operating income % | 17.0% | 22.4% |  |  |

26

Third quarter net sales for the Hydraulics segment increased by $0.8, 0.6%. We experienced organic net sales decline of $10.2, 7.8%, which was offset by acquisition sales totaling $11.0. Sales in the third quarter to the mobile and industrial end markets were down compared to the prior year-period, in addition to a slight decline noted in the agricultural end market. Discrete impacts favorable to our third quarter organic sales included pricing changes of $2.4, 1.8%, and changes in foreign currency exchange rates of $2.2, 1.7%.

As of September 30, 2023, we estimate that approximately $7.8 of Hydraulics segment sales were delayed into future quarters due to supply shortages.

Year-to-date net sales for the Hydraulics segment increased by $21.0, 5.1%. We experienced organic net sales decline of $18.9, 4.6%, and acquisition sales totaled $39.9. Year-to-date sales to the mobile and industrial end markets contracted, while sales to the agricultural markets improved. Discrete impacts to our year-to-date organic sales included pricing changes that were favorable by $12.4, 3.0% and changes in foreign currency exchange rates that were unfavorable by $1.3, 0.3%.

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

|  | Three Months Ended September 30, 2023 | October 1, 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Americas | $55.7 | $49.7 | $6.0 | 12.1% |
| EMEA | 38.8 | 41.3 | (2.5) | (6.1)% |
| APAC | 37.5 | 40.2 | (2.7) | (6.7)% |
| **Total** | $132.0 | $131.2 |  |  |
|  | **Nine Months Ended** |  |  |  |
|  | **September 30, 2023** | **October 1, 2022** | **$ Change** | **% Change** |
| Americas | $174.2 | $142.7 | $31.5 | 22.1% |
| EMEA | 139.5 | 143.2 | (3.7) | (2.6)% |
| APAC | 118.4 | 125.2 | (6.8) | (5.4)% |
| **Total** | $432.1 | $411.1 |  |  |

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

Americas - pricing and our recent acquisitions contributed to a 12.1% increase

EMEA - excluding favorable changes in foreign currency rates of $2.8, sales were down $5.3, 12.8%, primarily from softer demand in the region

APAC - excluding unfavorable changes in foreign currency rates of $0.6, sales declined $2.1, 5.2%, from softer demand in the region

Regional sales performance in the year-to-date period compared to the prior year period was driven by:

Americas - pricing and our recent acquisitions contributed to a 22.1% increase

EMEA - excluding favorable changes in foreign currency rates of $1.6, sales declined $5.3, 3.7%, from softer demand in the region

APAC - excluding unfavorable changes in foreign currency rates of $2.9, sales declined $3.9, 3.1%, from softer demand in the region

Third quarter gross profit declined $5.4, 11.6%, from volume while gross margin declined by 430 basis points, primarily from unfavorable margin profile of acquired businesses, $1.7 of increased restructuring costs comprised of labor costs, travel and other expenses associated with the manufacturing relocation, partially offset by pricing noted above and $0.3 favorable change in foreign currency exchange rates. Material costs as a percentage of sales decreased by 310 basis points, excluding pricing changes and acquisition-related sales.

Year-to-date gross profit declined $6.1, 4.2%, from volume while gross margin declined by 310 basis points, primarily from the unfavorable margin profile of acquired businesses, $3.6 of increased restructuring costs comprised of labor costs, travel and other expenses associated with the manufacturing relocation, $0.7 of unfavorable change in foreign currency exchange rates, partially offset by pricing amounts noted above. Material costs as a percentage of sales increased by 170 basis points, excluding pricing changes and acquisition-related sales.

Operating income as a percentage of sales declined 850 basis points to 13.9% in the third quarter of 2023. SEA expenses went up by $5.6, mainly due to acquisitions and corporate activities. Other increases were for restructuring activities of $0.9, higher wage and benefit costs of $0.2, professional fees of $0.2 and R&D costs of $0.4, which were primarily for new product development activities.

Year-to-date operating income as a percentage of sales decreased 540 basis points to 17.0%. SEA expenses went up by $12.7, mainly due to acquisitions and higher wage and benefit costs of $1.2 for merit increases, market adjustments and corporate activities. Other increases were for restructuring activities of $1.3, professional fees of $0.7 and R&D costs of $0.8.

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 have been restored. There are insurance claims open related to these incidents and the Company is working closely with the insurance carrier to assess the claims and evaluate potential recoveries. Losses from damage to the building, equipment and supplies have been fully offset by probable insurance recoveries, which represents anticipated insurance proceeds not in excess of the associated losses, for which receipt has been deemed probable. Any recoveries in excess of losses incurred will be recognized when all contingencies related to the claim have been resolved.

### Electronics

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

|  | Three Months Ended September 30, 2023 | October 1, 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $69.4 | $76.0 | $(6.6) | (8.7)% |
| Gross profit | $18.6 | $22.8 | $(4.2) | (18.4)% |
| Gross profit % | 26.8% | 30.0% |  |  |
| Operating income | $4.2 | $11.0 | $(6.8) | (61.8)% |
| Operating income % | 6.1% | 14.5% |  |  |
|  | **Nine Months Ended** |  |  |  |
|  | **September 30, 2023** | **October 1, 2022** | **$ Change** | **% Change** |
| Net sales | $210.1 | $278.3 | $(68.2) | (24.5)% |
| Gross profit | $65.8 | $88.4 | $(22.6) | (25.6)% |
| Gross profit % | 31.3% | 31.8% |  |  |
| Operating income | $23.8 | $51.8 | $(28.0) | (54.1)% |
| Operating income % | 11.3% | 18.6% |  |  |

Third quarter net sales for the Electronics segment declined $6.6, 8.7%. We experienced organic net sales decline of $8.9, 11.7%, which was partially offset by acquisition sales of $2.3. Compared to the prior year period, third quarter sales in the health and wellness, marine and industrial machinery end markets declined, while sales to the off-road vehicles end market increased. Demand in our health and wellness end market continued to decline compared to the prior year, which was strengthened by the pandemic as consumers invested in health and leisure products. Orders for health and wellness are down in the third quarter 2023 compared to the second quarter 2023 but up over the third quarter 2022. Discrete impacts to our third quarter sales included pricing changes that were favorable by $1.2, 1.6%.

As of September 30, 2023, we estimate that approximately $3.4 of Electronics segment sales were delayed into future quarters due to supply shortages.

Year-to-date net sales for the Electronics segment declined $68.2, 24.5%. We experienced organic net sales decline of $71.7, 25.8%, which was partially offset by acquisition sales of $3.5. In the year-to-date period, lower demand in the health and wellness end market was the primary driver of the sales decline, while the marine market also experienced a notable decline. This was partially offset by improvement in the mobile and off-road vehicles end markets. Discrete impacts to our year-to-date sales included pricing changes that were favorable by $3.8, 1.4%, partially offset by unfavorable changes in foreign currency exchange rates of $0.3.

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

|  | Three Months Ended September 30, 2023 | October 1, 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Americas | $59.4 | $65.0 | $(5.6) | (8.6)% |
| EMEA | 5.7 | 7.7 | (2.0) | (26.0)% |
| APAC | 4.3 | 3.3 | 1.0 | 30.3% |
| **Total** | $69.4 | $76.0 |  |  |
|  | **Nine Months Ended** |  |  |  |
|  | **September 30, 2023** | **October 1, 2022** | **$ Change** | **% Change** |
| Americas | $177.7 | $222.9 | $(45.2) | (20.3)% |
| EMEA | 19.4 | 31.8 | (12.4) | (39.0)% |
| APAC | 13.0 | 23.6 | (10.6) | (44.9)% |
| **Total** | $210.1 | $278.3 |  |  |

Lower sales in the industrial and recreation end markets, as well as the reduced demand in the health and wellness end market, contributed to the decline in sales across the Americas and EMEA regions in the third quarter. Lower sales in the industrial end market, as well as the reduced demand in the health and wellness end market, also contributed to the decline in sales across all regions in the year-to-date periods.

Third quarter gross profit decreased $4.2, 18.4%, due to the lower sales volume. Gross margin declined by 320 basis points to 26.8% as pricing and favorable sales mix were not able to offset higher material costs and reduced leverage of our fixed cost base on the lower sales. Material costs as a percentage of sales, excluding pricing changes and acquisition-related sales, increased in the third quarter by 200 basis points due to higher material inflationary costs, partially offset by a favorable sales mix.

Year-to-date gross profit decreased $22.6, 25.6%, due to the lower sales volume. Gross margin declined by 50 basis points to 31.3% as a favorable sales mix and pricing were not able to offset the reduced leverage of our fixed cost base on the lower sales. Material costs as a percentage of sales, excluding pricing changes and acquisition-related sales, decreased in the first three quarters of 2023 by 210 basis points primarily due to a favorable sales mix.

SEA expenses increased by $2.6, 22.0%, in the third quarter of 2023, primarily from acquisitions and wages and benefits of $1.1 for the rolling impact of previous merit increases, market adjustments and new hires for investments in engineering, sales and corporate activities.

Year-to-date SEA expenses increased by $5.4, 14.8%, primarily from acquisitions and wages and benefits of $3.4 for merit increases, market adjustments and new hires for investments in engineering, sales and corporate activities.

### 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 2023, these costs totaled $8.8 for: amortization of acquisition-related intangible assets of $8.2, $0.5 related to our acquisition and integration activities and $0.1 for officer transition costs. Compared to the third quarter of 2022, these costs decreased by $0.8, primarily from the net impact of other acquisition and integration activities and acquisition-related amortization. Year-to-date, corporate and other costs totaled $29.1 for: amortization of acquisition-related intangible assets of $24.7, $3.4 related to our acquisition and integration activities and $1.0 for officer transition costs. Compared to the 2022 year-to-date period, corporate and other costs increased by $1.8, primarily from the net impact of other acquisition and integration activities and acquisition-related amortization.

### LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of capital are cash generated from operations and borrowings on our credit facilities to fund acquisitions. During the first nine months of 2023, cash provided by operating activities totaled $50.2. At the end of the third quarter, we had $35.2 of available cash and cash equivalents on hand and $183.3 of available credit on our revolving credit facilities. We also have a $300.0 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 are operating expenses, capital expenditures, servicing debt, acquisition-related payments and 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, acquisition activity could be delayed and finally, the dividend to shareholders could be reduced or suspended.

#### Cash Flows

The following table summarizes our cash flows for the periods:

|  | Nine Months Ended September 30, 2023 | October 1, 2022 | $ Change |
| --- | ---: | ---: | ---: |
| Net cash provided by operating activities | $50.2 | $74.2 | $(24.0) |
| Net cash used in investing activities | (144.5) | (85.2) | (59.3) |
| Net cash provided by financing activities | 85.7 | 15.5 | 70.2 |
| Effect of exchange rate changes on cash and cash equivalents | 0.1 | 3.7 | (3.6) |
| Net (decrease) increase in cash and cash equivalents | $(8.5) | $8.3 | $(16.8) |

Cash on hand decreased $8.5 in the first three quarters of 2023 to $35.2 as of September 30, 2023. Changes in exchange rates during the nine months ended September 30, 2023, did not have a significant impact on cash and cash equivalents. 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

Year-to-date cash from operations declined by $24.0 to $50.2. 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 $31.1 in the first three quarters of 2023 compared to the same period in 2022. Included in current year cash earnings is $2.7 related to a payment made on the contingent consideration liability from the NEM acquisition, which was required to be included in operating cash flows for the period as the total payments exceeded the acquisition date fair value of the liability. Changes in net operating assets and liabilities improved cash flow by $7.3, compared to the prior year period, primarily from favorable cash flows from accounts receivable and inventories. Investments in inventory reduced cash by $14.4 and $19.7 in the first three quarters of 2023 and 2022, respectively. Days of inventory on hand increased to 133 days as of September 30, 2023, compared with 118 days as of October 1, 2022. The increase is primarily due to the decline in sales to the health and wellness end market. We have higher inventory than needed for current sales levels to that end market. Changes in accounts receivable reduced cash by $1.5 and $2.9 in the first three quarters of 2023 and 2022, respectively. Days sales outstanding increased slightly to 59 days as of September 30, 2023, compared with 58 days as of October 1, 2022, as our collection patterns remain largely consistent with the prior period.

#### Investing activities

Cash used in investing activities totaled $144.5 in the first three quarters of 2023, compared to cash used of $85.2 in the first three quarters of the prior year. Cash paid, net of cash acquired, for our acquisitions in the first three quarters of 2023 totaled $114.8.

Capital expenditures totaled $25.5, 4.0% of sales, for the first three quarters of 2023, an increase of $3.6 over the prior year comparable period. Capital expenditures for 2023 are forecasted to be approximately 4%-5% of sales, for investments in machinery and equipment for capacity expansion projects, improvements to manufacturing technology and maintaining/replacing existing machine capabilities.

#### Financing activities

Net cash provided by financing activities totaled $85.7 during the first three quarters of 2023, compared with cash provided of $15.5 in the prior year period. Cash paid for acquisitions in 2023 was primarily financed with borrowings on our credit facility; borrowings, net of repayments, during 2023 totaled $100.4. In 2022, borrowings, net of repayments, totaled $27.9.

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. The new term loan is payable in full in October 2025 and is not subject to any required repayments prior to that date. As part of the amendment, we continue to have the ability to increase our revolving credit facility or incur a new term loan up to an additional borrowing limit of $300.0.

During the third quarter of 2023, we declared a quarterly cash dividend of $0.09 per share payable on October 20, 2023, to shareholders of record as of October 5, 2023. 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 and Supply Chain

As more fully described in Item 2 above, we are experiencing supply shortages and increasing material 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 2023, are disclosed in Note 2 to the Consolidated, Unaudited Financial Statements.

## Market risk

As filed, 172 characters.

See “Item 7A – Quantitative and Qualitative Disclosures about Market Risk” in our Form 10-K. There were no material changes during the nine months ended September 30, 2023.

## Controls and procedures

As filed, 1,389 characters.

The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report, have concluded that our disclosure controls and procedures are effective and are designed to ensure that the information we are required to disclose is recorded, processed, summarized and reported within the necessary time periods. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports that we file or submit pursuant to the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Securities Exchange Act of 1934, as amended, during the period covered by this report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 619 characters.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors that affect our business and financial results that are discussed in Part I, Item 1A, “Risk Factors” of our Form 10-K. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report. There have been no material changes to such risk factors.

Filed Nov 7, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-059853. Last ingested by Listed: Oct 24, 2026, 15:02 ET. No prices; not investment advice.