# Helios Technologies, Inc.: Form 10-Q for the period ended Sep 28, 2024

- Company: [Helios Technologies, Inc.](/companies/hlio.md) (CIK 1024795)
- Form: 10-Q
- Filed: 2024-11-06
- Accepted by EDGAR: Nov 6, 2024, 16:52 ET
- Period: 2024-09-28
- Accession: 0000950170-24-122433
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1024795/000095017024122433/hlio-20240928.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1024795/000095017024122433/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-09-28.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-06-30 to 2024-09-28 | $194.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-12-31 to 2024-09-28 | $626.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2024-06-30 to 2024-09-28 | $134.0m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-12-31 to 2024-09-28 | $428.1m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2024-06-30 to 2024-09-28 | $60.5m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-12-31 to 2024-09-28 | $198.3m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2024-06-30 to 2024-09-28 | $30.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-12-31 to 2024-09-28 | $106.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2024-06-30 to 2024-09-28 | $22.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-12-31 to 2024-09-28 | $68.5m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2024-06-30 to 2024-09-28 | $1.9m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-12-31 to 2024-09-28 | $8.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-06-30 to 2024-09-28 | $11.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-12-31 to 2024-09-28 | $34.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-06-30 to 2024-09-28 | $0.34 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-12-31 to 2024-09-28 | $1.03 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-06-30 to 2024-09-28 | $0.34 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-12-31 to 2024-09-28 | $1.03 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-06-30 to 2024-09-28 | 33,200,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-12-31 to 2024-09-28 | 33,200,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-12-31 to 2024-09-28 | $86.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2024-06-30 to 2024-09-28 | $6.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Capital expenditure | 9 months, 2023-12-31 to 2024-09-28 | $19.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-12-31 to 2024-09-28 | $8.9m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2024-09-28 | $46.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-09-28 | $405.9m | us-gaap:AssetsCurrent |
| Total assets | at 2024-09-28 | $1.57bn | us-gaap:Assets |
| Current liabilities | at 2024-09-28 | $134.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-09-28 | $686.2m | us-gaap:Liabilities |
| Long-term debt | at 2024-09-28 | $287.9m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2024-09-28 | $17.6m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2024-09-28 | $885.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 37,334 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, industrial, mobile, energy, recreational vehicles, marine and health and wellness.

We operate under two business segments: Hydraulics and Electronics. The Hydraulics segment designs and manufactures hydraulic motion control and fluid conveyance technology products, including cartridge valves, manifolds, quick release couplings as well as engineers hydraulic solutions and in some cases complete systems. 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, displays, wire harnesses and software solutions 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. Their solutions are used across many sectors, including medical, off-highway, recreational and commercial marine, power sports, health and wellness, agriculture, consumer goods, industrial, sports and fitness.

### Restructuring Activities

Our previously announced restructuring activities within our Hydraulics segment related to the creation of our two new Regional Operational Centers of Excellence ("CoE") are substantially complete. The Hydraulic Manifold Solutions CoE, located in Mishawaka, Indiana, is now doing the manifold machining and integrated package assembly for Sun Hydraulics, Faster Inc., and Daman. The Hydraulic Valve and Coupling Solutions CoE, located in Sarasota, Florida, is manufacturing and assembling cartridge valve technology and quick release couplings. There still remain some integration and optimization activities we expect to be completed in 2024. We also continue to add capabilities and activities to our recently expanded Tijuana, Mexico facility to support our Electronics segment. Initial efforts have focused on circuit board assembly and wire harness production.

We have also initiated some restructuring activities to better optimize our European regional operations. We are transitioning some manufacturing of manifolds and integrated package assembly to our Roncolo, Italy location. To create capacity in Roncolo, we are moving some turning and lathing operations from Roncolo to our Rivolta, Italy location. These activities include transferring equipment and operations between facilities. The activities are proceeding as planned and we expect them to continue throughout 2024 and into 2025.

### Manufacturing and Operating Strategy Activities

During 2021, we augmented our strategy to transform our business from a holding company to a global integrated operating company. This strategy leverages the breadth of our global footprint and depth of our manufacturing capabilities. We created manufacturing roadmaps with several programs to continuously improve processes that will drive efficiency and improvements across the business. In support of our mission to “Think and Act Globally”, we are driving “in the region, for the region” manufacturing to better align supply chain and manufacturing value streams with customers geographically to shorten lead times, reduce inventory, optimize costs, and mitigate global supply risks. We have made significant progress against our strategy as disclosed in 2023 related to 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. We notably began a project to optimize our European operations and we expect the new project to take place throughout this fiscal year.

### Global Economic and Geopolitical Conditions

We expect the challenging macroeconomic conditions to continue, characterized by economic uncertainty and market disruption driven by inflationary pressures, political uncertainty, the ongoing Russia-Ukraine war and the Israeli-Hamas war. We do not have operations in these conflict regions at this time and those conflicts have not and are not expected to have a material impact on our financial condition or results. In addition, we are continuously monitoring these economic and geopolitical conditions and remain focused on liquidity management, pricing discipline, cost savings initiatives and production efficiency as ways to mitigate the risks associated with the uncertainty.

Refer to Item 1A "Risk Factors" of our Form 10-K for additional discussion of risks related to global economic conditions.

### Industry Conditions

The capital goods industries in general, and the Hydraulics and Electronics segments specifically, are subject to economic cycles. We utilize industry trend reports from various sources, as well as feedback from customers and distributors, to evaluate economic trends. We also rely on global government statistics such as Gross Domestic Product and Purchasing Managers Index to understand 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 decreased 13% during the first nine months of 2024 compared to the first nine months of the prior year while the U.S. index of orders of hydraulic products declined 14% during the same period. Monthly shipments and orders continue to trend downward, declining about 18% and 19%, respectively, for the three months ended September 28, 2024 over the year ago period, and 8% and 3%, respectively, compared to the previous quarter. In Europe, the CEMA Business Barometer reported in September 2024 that the general business climate index for the European agricultural machinery industry has improved slightly but business continues to be at a very low level compared to prior years. The CEMA Barometer report also indicated that incoming orders both within and outside of Europe remain below prior year levels and there are no European markets with positive confidence levels. The CECE (Committee for European Construction Equipment) September report noted that the sales and order trends in Europe continue to be depressed and that a near term pessimistic outlook remains. The general economic climate was the number one reported factor limiting sales.

#### 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 2024 output of semiconductors and other electronics components increased from the second quarter 2024, the second sequential quarterly increase, and remain higher than sales levels seen in recent years in comparable periods. The Institute of Printed Circuits Association (“IPC”) reported that total North American printed circuit board (“PCB”) shipments were down 24.1% in September, up 35% in August and down 21% in July compared with the same months last year. PCB bookings in 2024 have been flat to down compared to the prior year in seven of the nine months, with September being down 4%, August being up 44% and July being down 25%. The IPC also reported that North American electronics manufacturing services (“EMS”) shipments were up 10.3% in September, down 4% in August and up 2% in July compared to the prior year. EMS bookings were up 20% in September, up 16% in August and flat in July year over year. IPC also indicated that the electronics sector demand index fell 7.3% in September and sentiment among electronics manufacturers declined with cost concerns and demand weaknesses cited as primary reasons.

#### Executive Officer Transition

In July 2024, the Board of Directors (the “Board”) terminated the former President and Chief Executive Officer, Josef Matosevic. The Board has initiated a comprehensive search process to identify a permanent successor. The process will include internal and external candidates. Sean Bagan has been appointed to serve as Interim President and Chief Executive Officer in addition to his role as Chief Financial Officer, and Philippe Lemaitre as Executive Chairman in addition to his role as Chairman. Both will continue in these roles and we do not expect any material disruption to the ongoing operations while the search is underway.

### 2024 Third Quarter Results and Comparison of the Three Months Ended September 28, 2024, and September 30, 2023

(In millions, except per share data)

The following is a discussion of our third quarter of 2024 results of operations and liquidity and capital resources. Comparisons are with the corresponding reporting period of 2023, unless otherwise noted.

The following table presents our consolidated results of operations:

|  | Three Months Ended September 28, 2024 | September 30, 2023 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $194.5 | $201.4 | $(6.9) | (3.4)% |
| Gross profit | $60.5 | $59.7 | $0.8 | 1.3% |
| Gross profit % | 31.1% | 29.6% |  |  |
| Operating income | $22.2 | $13.8 | $8.4 | 60.9% |
| Operating income % | 11.4% | 6.9% |  |  |
| Net income | $11.4 | $3.5 | $7.9 | 225.7% |
| Diluted net income per share | $0.34 | $0.11 | $0.23 | 209.1% |
|  | **Nine Months Ended** |  |  |  |
|  | **September 28, 2024** | **September 30, 2023** | **$ Change** | **% Change** |
| Net sales | $626.4 | $642.2 | $(15.8) | (2.5)% |
| Gross profit | $198.3 | $206.5 | $(8.2) | (4.0)% |
| Gross profit % | 31.7% | 32.2% |  |  |
| Operating income | $68.5 | $68.0 | $0.5 | 0.7% |
| Operating income % | 10.9% | 10.6% |  |  |
| Net income | $34.2 | $34.1 | $0.1 | 0.3% |
| Diluted net income per share | $1.03 | $1.04 | $(0.01) | (1.0)% |

Third quarter consolidated net sales declined $6.9, 3.4%, below the prior-year third quarter. There was no impact from acquisitions in the third quarter. Sales declined in each segment due to lower demand in end markets, predominantly the agriculture end market, partially offset by growth in the health and wellness end market. Changes in foreign currency exchange rates had a favorable impact to our third quarter sales of $0.6, 0.3%.

Consolidated net sales for the year-to-date period were lower by $15.8, 2.5%. Organic sales declined $20.8, 3.2%, which was offset partially by sales from acquisitions totaling $5.0. Changes in foreign currency exchange rates had an unfavorable impact to our year-to-date sales of $0.6, 0.1%.

Supply chain and pricing did not have a material impact on our consolidated sales in the third quarter and year-to-date periods compared to the prior year periods. Although inflation continues to run above the federal reserve target rate of 2.0%, we did see a more stable pricing environment compared with the prior year period.

Sales were negatively impacted by reduced demand for products in our agriculture, mobile, industrial and recreational end markets, offset partially by an increase to the health and wellness end market. Sales were up in the APAC region and down in the Americas and EMEA regions during the third quarter and year-to-date periods compared to the prior year.

Third quarter gross profit increased $0.8, 1.3%, above the prior year third quarter as the impact of lower volume was offset by lower material costs, reductions in variable overhead and favorable foreign currency impacts of $0.2. Gross margin increased by 150 basis points as the impact of lower fixed costs leverage on lower volume and a higher mix of revenue in lower margin products were offset by improvements in material costs and variable overhead.

Year-to-date gross profit decreased $8.2, 4.0%, from lower volume, higher labor costs and unfavorable foreign currency impacts of $0.1, partially offset by contributions from acquisitions. Gross margin declined 50 basis points, primarily due to lower fixed costs leverage on lower volume, a higher mix of revenue in lower margin products and higher labor costs, partially offset by improvements in pricing and material costs.

Third quarter operating income as a percentage of sales increased 450 basis points to 11.4%. The increase is due to the gross margin level changes and lower SEA expenses as a percentage of revenue, primarily from lower payroll and benefit costs, compared with the prior year period, including a $5.5 reversal of unvested stock compensation in connection with the officer transition in July 2024.

Year-to-date operating income as a percentage of sales increased 30 bps to 10.9%. The improvement is due to lower SEA expenses as a percentage of revenue, primarily from lower payroll and benefit costs, including the reversal of unvested stock compensation in connection with the officer transition in July 2024, partially offset by the gross margin decrease.

Net interest expense increased by $0.3 to $9.0 in the third quarter of 2024. The prior year period interest expense benefited $1.8 from a recognized gain on an interest rate swap agreement. Excluding the impact of the interest rate swap agreement, net interest expense was lower by $1.5M due to carrying a lower debt balance throughout the period and lower interest rates. Average net debt decreased to $447.2 during the third quarter of 2024 compared with $510.8 during the third quarter of 2023. The reduction in average net debt is due to the paying down of debt incurred from the prior year acquisitions. Year-to-date net interest expense totaled $25.7, an increase of $3.1 year over year, due to carrying higher debt throughout the period and the write-off of $0.5 unamortized debt issuance costs as part of our debt refinancing in Q2. Average net debt for the year-to-date period increased to $464.6 compared with $455.9 during the prior-year period. The increase in the year-to-date average net debt balance is due to carrying a higher debt balance throughout the period as a result of borrowings related to the Schultes and i3 acquisitions during the first half of 2023.

The provision for income taxes for the third quarter of 2024 was 14.2% of pretax income compared to 30.5% for the prior-year third quarter. The year-to-date provision was 20.3% and 23.8% of pretax income for 2024 and 2023, 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. The change in the comparable prior-year quarter and year-to-date is primarily due to an overall increase in discrete tax benefits driven by the officer transition in July 2024.

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

The company continues to evaluate the impact of Pillar Two and application of safe harbors. The company does not expect it to have a material impact in 2024 to its effective tax rate.

### SEGMENT RESULTS

### Hydraulics

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

|  | Three Months Ended September 28, 2024 | September 30, 2023 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $129.4 | $132.0 | $(2.6) | (2.0)% |
| Gross profit | $40.9 | $41.1 | $(0.2) | (0.5)% |
| Gross profit % | 31.6% | 31.1% |  |  |
| Operating income | $24.2 | $18.4 | $5.8 | 31.5% |
| Operating income % | 18.7% | 13.9% |  |  |
|  | **Nine Months Ended** |  |  |  |
|  | **September 28, 2024** | **September 30, 2023** | **$ Change** | **% Change** |
| Net sales | $417.5 | $432.1 | $(14.6) | (3.4)% |
| Gross profit | $130.3 | $140.7 | $(10.4) | (7.4)% |
| Gross profit % | 31.2% | 32.6% |  |  |
| Operating income | $69.9 | $73.3 | $(3.4) | (4.6)% |
| Operating income % | 16.7% | 17.0% |  |  |

Third quarter net sales for the Hydraulics segment decreased by $2.6, 2.0%, compared with the prior year third quarter. The decline in sales in the third quarter was primarily driven by softness in the agriculture end market, while industrial and mobile end markets were up compared to the prior year-period. Changes in foreign currency exchange rates had a favorable impact of $0.6, 0.5%.

Year-to-date net sales for the Hydraulics segment decreased by $14.6, 3.4%. We experienced organic net sales decline of $16.5, 3.8%, from the prior year, which was partially offset by acquisition sales totaling $1.9. Sales to the agriculture, industrial and mobile end markets were down compared to the prior year-period. Changes in foreign currency exchange rates had an unfavorable impact of $0.5, 0.1%.

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

|  | Three Months Ended September 28, 2024 | September 30, 2023 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Americas | $52.1 | $55.7 | $(3.6) | (6.5)% |
| EMEA | 36.7 | 38.8 | (2.1) | (5.4)% |
| APAC | 40.6 | 37.5 | 3.1 | 8.3% |
| **Total** | $129.4 | $132.0 |  |  |
|  | **Nine Months Ended** |  |  |  |
|  | **September 28, 2024** | **September 30, 2023** | **$ Change** | **% Change** |
| Americas | $167.4 | $174.2 | $(6.8) | (3.9)% |
| EMEA | 125.0 | 139.5 | (14.5) | (10.4)% |
| APAC | 125.1 | 118.4 | 6.7 | 5.7% |
| **Total** | $417.5 | $432.1 |  |  |

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

Americas - sales declined $3.6, 6.5%, primarily from generally softer demand in the region.

EMEA - excluding favorable changes in foreign currency rates of $0.4, sales declined $2.5, 6.4%, primarily driven by softness in the agriculture end market.

APAC - excluding favorable changes in foreign currency rates of $0.2, sales increased $2.9, 7.7%, with increased demand in China, Australia and India.

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

Americas - sales decreased $8.7, 5.0% excluding $1.9 of acquisition related sales. The decline was driven by reductions in the agriculture, mobile and industrial end markets.

EMEA - excluding favorable changes in foreign currency rates of $0.5, sales were down $15.0, 10.8%, primarily driven by softness in the agriculture end market, with generally all end markets in the region down year over year.

APAC - excluding unfavorable changes in foreign currency rates of $1.0, sales increased $7.7, 6.5%, from stronger demand in China, Australia and India.

Third quarter gross profit declined $0.2, 0.5%, primarily from lower volume while gross margin increased by 50 basis points, primarily from reduced overhead expenses. Changes in foreign currency exchange rates had a favorable impact of $0.2.

Year-to-date gross profit declined $10.4, 7.4%, from lower volume while gross margin declined by 140 basis points, primarily from fixed cost absorption on lower volume and higher labor costs. Changes in foreign currency exchange rates had an unfavorable impact of $0.1.

Operating income as a percentage of sales increased 480 basis points to 18.7% in the third quarter of 2024 due to the gross margin improvement and lower SEA expenses. SEA expenses went down by $6.0, mainly due to lower labor and benefit costs, including a $3.7 reversal of unvested stock compensation in connection with the officer transition in July 2024.

Year-to-date operating income as a percentage of sales decreased 30 basis points to 16.7% as the gross margin decline was partially offset by lower SEA expense as a percent of sales of 110 bps. SEA expenses went down by $7.0, primarily due to lower labor and benefit costs, including the reversal of unvested stock compensation in connection with the officer transition in July 2024.

As previously noted 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, which resulted in the shut-down of operations for a period of time and disruption in production as recovery efforts ensued. 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 are expected to be 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. Management is working to resolve these claims in 2024.

### Electronics

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

|  | Three Months Ended September 28, 2024 | September 30, 2023 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $65.1 | $69.4 | $(4.3) | (6.2)% |
| Gross profit | $19.6 | $18.6 | $1.0 | 5.4% |
| Gross profit % | 30.1% | 26.8% |  |  |
| Operating income | $6.8 | $4.2 | $2.6 | 61.9% |
| Operating income % | 10.4% | 6.1% |  |  |
|  | **Nine Months Ended** |  |  |  |
|  | **September 28, 2024** | **September 30, 2023** | **$ Change** | **% Change** |
| Net sales | $208.9 | $210.1 | $(1.2) | (0.6)% |
| Gross profit | $68.0 | $65.8 | $2.2 | 3.3% |
| Gross profit % | 32.6% | 31.3% |  |  |
| Operating income | $24.2 | $23.8 | $0.4 | 1.7% |
| Operating income % | 11.6% | 11.3% |  |  |

31

Third quarter net sales for the Electronics segment decreased $4.3, 6.2%, compared with the prior year third quarter. There was no impact from acquisitions in the third quarter. Compared to the prior year period, third quarter sales in the health and wellness end market increased, while sales to the recreational, industrial, and mobile end markets decreased. Changes in foreign currency exchange rates had no impact.

Year-to-date net sales for the Electronics segment decreased $1.2, 0.6%. Organic sales were down $4.3, 2.0%, excluding incremental acquisition sales of $3.1. Strength in the health and wellness end market was offset by declines in the industrial, recreational and mobile end markets. Changes in foreign currency exchange rates had an unfavorable impact of $0.1, 0.0%.

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

|  | Three Months Ended September 28, 2024 | September 30, 2023 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Americas | $50.9 | $59.4 | $(8.5) | (14.3)% |
| EMEA | 6.5 | 5.7 | 0.8 | 14.0% |
| APAC | 7.7 | 4.3 | 3.4 | 79.1% |
| **Total** | $65.1 | $69.4 |  |  |
|  | **Nine Months Ended** |  |  |  |
|  | **September 28, 2024** | **September 30, 2023** | **$ Change** | **% Change** |
| Americas | $166.8 | $177.7 | $(10.9) | (6.1)% |
| EMEA | 22.0 | 19.4 | 2.6 | 13.4% |
| APAC | 20.1 | 13.0 | 7.1 | 54.6% |
| **Total** | $208.9 | $210.1 |  |  |

While the health and wellness end market had strong demand in the Americas, market softening in other end markets drove the overall decline in the third quarter and year to date periods in the region. Health and wellness end market drove the growth in EMEA and APAC regions over the comparable periods.

Third quarter gross profit increased $1.0, 5.4% compared to the prior year third quarter, as the lower volume was offset by a decrease in material costs. Gross margin increased by 330 basis points to 30.1% as lower material costs partially offset the impact of a higher mix of revenue in products with a lower margin profile and slightly lower leverage of fixed costs.

Year-to-date gross profit increased $2.2, 3.3%, primarily due to the contribution from acquisition revenues and lower material costs. Gross margin improved over the same period by 130 basis points to 32.6% as lower material costs offset the impact of a higher mix of revenue in products with a lower margin profile. Material costs have trended lower year-to-date compared to the prior year, due to decreased inflationary pressures.

Operating income as a percentage of sales increased 430 basis points to 10.4% in the third quarter of 2024 compared to the prior year period due to the improvement in gross margin and lower SEA expenses. SEA expenses decreased $1.6 primarily due to lower labor and benefit costs, including a $1.8 reversal of unvested stock compensation in connection with the officer transition in July 2024.

Year-to-date operating income as a percentage of sales increased 30 basis points to 11.6% compared to the prior year period. This is primarily due to the gross margin improvement partially offset by SEA expenses increasing by $1.8, in part due to additional costs associated with the 2023 acquisition.

### 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 2024, these costs totaled $8.8 for: amortization of acquisition-related intangible assets of $7.9, $0.1 related to our acquisition and integration activities and $0.8 for officer transition costs. Compared to the third quarter of 2023, these costs remained primarily flat. Year-to-date, corporate and other costs totaled $25.6 for: amortization of acquisition related intangible assets of $23.6, $0.7 related to our acquisition and integration activities and $1.3 for officer transition costs. Compared to the 2023 year-to-date period that included 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.

### LIQUIDITY AND CAPITAL RESOURCES

Historically, our primary source of capital has been cash generated from operations. We also use borrowings on our credit facilities to fund acquisitions. During the first nine months of 2024, cash provided by operating activities totaled $86.4. At the end of the third quarter, we had $46.7 of available cash and cash equivalents on hand and $325.8 of available credit on our revolving credit facilities. We also have a $400.0 accordion feature available on our credit Third Amended and Restated Credit Agreement, 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 for the foreseeable future. In the event that economic conditions were to severely worsen for a protracted period of time, we would have several options available to ensure liquidity in addition to increased 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 28, 2024 | September 30, 2023 | $ Change |
| --- | ---: | ---: | ---: |
| Net cash provided by operating activities | $86.4 | $50.2 | $36.2 |
| Net cash used in investing activities | (22.1) | (144.5) | 122.4 |
| Net cash (used in) provided by financing activities | (49.4) | 85.7 | (135.1) |
| Effect of exchange rate changes on cash and cash equivalents | (0.6) | 0.1 | (0.7) |
| Net increase (decrease) in cash and cash equivalents | $14.3 | $(8.5) | $22.8 |

Cash on hand increased $14.3 in the first three quarters of 2024 to $46.7 as of September 28, 2024. Changes in exchange rates during the nine months ended September 28, 2024, positively impacted cash and cash equivalents $0.6. 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 increased by $36.2 to $86.4. 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 $1.9 in the first three quarters of 2024 compared to the same period in 2023. Changes in net operating assets and liabilities improved cash flow by $38.1 in the first three quarters of the period, compared to the prior year period, primarily from favorable differences from the prior year in cash flows from inventories and other current assets, offset by an increase in accounts receivable and accrued expenses and other liabilities. Investments in inventory increased cash by $16.2 and reduced cash by and $14.4 in the first three quarters of 2024 and 2023, respectively. Days of inventory on hand increased to 139 days as of September 28, 2024, compared with 133 days as of September 30, 2023. Changes in accounts receivable reduced cash by $5.5 and $1.5 in the first three quarters of 2024 and 2023, respectively. Days sales outstanding decreased slightly to 57 days as of September 28, 2024, compared with 59 days as of September 30, 2023, as a result of initiatives to improve our collection patterns.

#### Investing activities

Cash used in investing activities totaled $22.1 in the first three quarters of 2024, compared to $144.5 in the first three quarters of the prior year. The large difference is a result of $114.8 cash paid, net of cash acquired, for acquisitions in the first three quarters of 2023.

Capital expenditures totaled $19.6, 3.1%, of sales for the first three quarters of 2024, a decrease of $5.9 over the prior year comparable period. Capital expenditures for 2024 are forecasted to be approximately 3%-4% of sales, for investments in machinery and equipment for capacity expansion projects, improvements to manufacturing technology and maintaining or replacing existing machine capabilities.

#### Financing activities

Net cash used in financing activities totaled $49.4 during the first three quarters of 2024, compared with cash provided of $85.7 in the prior year period. In the first three quarters of 2024, repayments, net of borrowings, totaled $42.0. Cash paid for acquisitions in first quarter of 2023 was primarily financed with borrowings on our credit facility; borrowings, net of repayments, totaled $116.7.

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

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

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

In May 2024, $0.5 was paid to the former owners of Balboa in connection with the last payment due on the contingent consideration liability.

During the third quarter of 2024, we declared a quarterly cash dividend of $0.09 per share payable on October 21, 2024, to shareholders of record as of October 4, 2024. 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.

### 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 2024, are disclosed in Note 2 to the Consolidated, Unaudited Financial Statements.

## Market risk

As filed, 1,025 characters.

#### Interest Rate Risk

Our exposure to interest rate risk results from variable rate debt outstanding under our term loans and revolving credit facility. We pay interest on outstanding borrowings at interest rates that fluctuate based upon changes in various base rates. As of September 28, 2024, we had $177.9 in borrowings outstanding under the revolving credit facilities, $306.8 in borrowings outstanding under the term loans. Based on our level of variable rate debt outstanding during the quarter ended September 28, 2024, a one percentage point increase or decrease in the average interest rate would have an impact on our annual financing costs over the next twelve months of approximately $5.0. This analysis excludes any effects from interest rate swap contracts as such contracts were terminated on June 25, 2024.

See “Item 7A – Quantitative and Qualitative Disclosures about Market Risk” in our Form 10-K. Except as described above, there were no material changes during the nine months ended September 28, 2024.

## Controls and procedures

As filed, 1,406 characters.

The Company’s management, with the participation of the Interim 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 Interim 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 6, 2024.
Source: SEC EDGAR, the filing index for accession 0000950170-24-122433. Last ingested by Listed: Nov 5, 2026, 19:51 ET. No prices; not investment advice.