HELIOS TECHNOLOGIES, INC. The operating results of the Hydraulics and Electronics segments included in Management's Discussion and Analysis of Financial Condition and Results of Operations are presented on a basis consistent with our internal management reporting. Segment information included in Note 16 of the Notes to the Consolidated Financial Statements included in this Annual Report is also presented on this basis. All differences between our internal management reporting basis and accounting principles generally accepted in theU.S. ("U.S. GAAP"), specifically the allocation of certain corporate and acquisition-related costs, are included in Corporate and Other. Overview We are an industrial technology leader that develops and manufactures solutions for both the hydraulics and electronics markets, each of which serves as a reportable segment. We were originally founded in 1970 asSun Hydraulics Corporation , which designed and manufactured cartridge valves for hydraulics systems. We changed the Company's legal name onJune 13, 2019 , fromSun Hydraulics Corporation toHelios Technologies, Inc.
On
Strategic Vision Our strategic goals are to achieve$1 billion in sales through a combination of organic growth and acquisitions, while remaining a technology leader and delivering superior profitability, with operating margins in excess of 20%. We are augmenting our strategy with value streams that will help us to execute our goals and potentially accelerate the achievement of our strategic vision. 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. Create greater opportunities for growth while reducing risk and cyclicality
by diversifying our markets and sources of revenue by swarming commercial
opportunities that leverage our products and technologies' value in new
markets such as defense and commercial food service; 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.
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 acquisitions ($100 million to$1 billion in enterprise value). The objective of our acquisition strategy is to enhance Helios by:
• 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.
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We align our internal key performance indicators with our strategy to ensure our short-term actions will deliver long-term expectations.
We employ several tactics to execute our strategies, which include capitalizing
on our unique and deeply rooted values, structured human capital development and
differentiated engineering for both products and processes.
Continued product development is a key factor to organic and synergistic growth
in both the Hydraulics and Electronics segments, including joint development
between the two segments.
In the Hydraulics segment, we continue to invest in our FLeX series of
electro-hydraulic cartridge valves for the mobile and industrial markets in both
high and low pressure applications. We have already released over 25 new FLeX
series valves and will have a significant number of additional introductions to
the FLeX family. These products allow us to compete in parts of the market where
we could not before, including complete valve solutions. Investments in
sustaining engineering and simulation development are delivering performance
improvements of our existing valves by reducing manufacturing costs through
improved first pass yield. In addition, the sophistication process of coupling
solutions and the electrification of these products has now entered the second
phase of its development. We have identified new products to be developed and
tested with selected customers with the goal of reinforcing the technological
advantage we have historically had and so that we can continue to expand in this
market.
In the Electronics segment, we have launched our new line of ACE™-configurable
MCx controllers. Built for market flexibility, the MCx controller series
empowers original equipment manufacturers ("OEMs") and distribution partners
with a machine control hardware and software system solution that can be easily
adapted to any application using our intuitive ACE configuration software or the
widely used CODESYS platform. ACE software allows users to quickly build a
solution using our patented drag-and-drop coding blocks and makes it easy to
rapidly incorporate Sun Hydraulics' components and Enovation Controls'
customizable displays into a project. MCx hardware and ACE software, combined
with Sun's XMD drivers and FLeX Series directional valves, provide customers a
complete solution for a wide range of electro-hydraulic control applications.
Enovation Controls has also launched a complete family of edge-to-edge connected
PowerView displays for existing recreational and off-highway customers. With new
smaller, higher-resolution screen sizes to fit the needs of customers, this new
platform has brought us significant new customer wins.
Acquisitions
Our acquisition activity, driven by our strategic vision, has enabled us to diversify our product offerings and the markets we serve and expand our geographic presence. Prior to 2016, we operated primarily in the Hydraulics market with a small presence in electronics. Since our acquisitions ofEnovation Controls in 2016 and Faster andCustom Fluidpower in 2018, we have entered into several new markets, including, marine, power generation, recreational vehicles and mining. We have also expanded our presence in the agricultural, construction equipment, general industrial and material handling end markets. Our product and service portfolio has grown significantly to include quick release hydraulic coupling solutions, complete system design, installation and commissioning, hydraulic system service and repairs, traditional mechanical and electronic gauge instrumentation, plug and go CAN-based instruments, robust environmentally sealed controllers, engineered panels and application specialists, process monitoring instrumentation, proprietary hardware and software development, printed circuit board assembly and wiring harness design and manufacturing. InNovember 2020 we acquiredBalboa Water Group further diversifying the markets we serve and 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 inCosta Mesa, California , Balboa's manufacturing operations are located inMexico , with sales and warehouse operations inDenmark . This acquisition expanded our electronic control technology with complementary AC (alternating current) capabilities and enabled further diversification of end markets. 33 -------------------------------------------------------------------------------- InJanuary 2021 , we acquired the assets ofBJN Technologies, LLC , an innovative engineering solutions provider that was founded in 2014. With the acquisition, we formed theHelios Center of Engineering Excellence ("Engineering Center") 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. Global Economic Conditions
Impact of COVID-19 on our business
The COVID-19 pandemic has caused, and continues to cause, significant economic disruption globally, and substantial uncertainty exists regarding the magnitude and duration of the pandemic and its economic impact. Broad measures taken by governments, businesses and others to limit the spread of the virus are adversely affecting the Company and its customers. Our primary manufacturing locations are currently fully operational but were impacted throughout the year to differing degrees by various COVID-19 related factors such as:
• Government mandated facility closures.
o Our Chinese locations were closed throughout February, after the
national holiday, and reopened mid-March at about 50% working
capacity. We gradually resumed full production in China by the end of
the first quarter.
o Production in our Faster operation located in
four weeks starting in mid-March. During this time, thefacility was
permitted to ship finished goods to essential businesscustomers and
continue administrative functions through remote working
capabilities. Production resumed in mid-April and Faster has since
remained fully operational.
o Our US locations are considered essential businesses and remained
operational; however, production schedules were adjusted as needed
for deep cleaning and social distancing accommodations.
• Reduced workforce. Employees are exercising caution and have quarantined
when appropriate which has caused a small reduction in the workforce. We
also executed layoffs and furlough programs as cost containment measures.
• Supply chain constraints. The majority of our suppliers remain open and
we have experienced limited disruption to production due to supply chain
issues.
• Delivery constraints. We experienced some delivery delays towards the end
of the first quarter and early in the second quarter, primarily due to
OEM customers in the
• Softening incoming order rates. While we did not experience a significant
number of order cancellations during the year, we have experienced a
decline in incoming orders. Some OEM customers have requested to delay
order delivery dates into later quarters.
Employees continue to work from home when necessary, and we have taken significant measures to ensure the health and safety of those working at our facilities.
As of the date of this filing, pandemic related disruptions to our business are
minimal. Our outlook for the 2021 fiscal year assumes the global economy
continues to recover, however we cannot at this time predict any future impacts.
Refer to Item 1A Risk Factors of this Annual Report for additional COVID-19
related discussion.
34
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Brexit
InJanuary 2020 , theUK exited the EU. During the transition period, which ended onDecember 31, 2020 , existing arrangements between theUK and the EU remained in place while theUK and the EU negotiated a free trade agreement that was entered into onDecember 24, 2020 and went into effect onJanuary 1, 2021 . The Company continues to monitor the situation and plan for potential impact. We have considered the following factors that mitigate the potential impact of Brexit on the import and export of goods to and from theUK :
• Helios locations outside of the
• Parts and raw materials sourced by our
also be sourced from local
• EU customers served by our
subsidiaries;
• Customers who relocate outside of the
global subsidiaries; and
• The level and type of business conducted at our
exposure to new regulatory risk resulting from Brexit.
The ultimate impact of Brexit on the Company's financial results is uncertain. However, based on the above noted mitigating factors, we do not expect the effects of Brexit to have a material impact on our results of operations or financial position.
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 higher level economic conditions.
Hydraulics
According to theNational Fluid Power Association (the fluid power industry's trade association in theU.S. ), theU.S. index of shipments of hydraulic products decreased 17% in 2020, after decreasing 7% in 2019 and increasing 13% in 2018. InEurope , the CEMA Business Barometer reports that inFebruary 2021 , the business climate index for the European agricultural machinery industry has risen to a clear boom level after having reached the positive range in October for the first times since mid-2019. The CECE (Committee for European Construction Equipment) business climate index continued its recovery in November as future business expectations reached pre-pandemic levels and the climate index hit the neutral line for the first time sinceMarch 2020 .
Electronics
TheFederal Reserve's Industrial Production Index, which measures the real output of all relevant establishments located in theU.S. , reports sales of semiconductors and other electronics components improved during the fourth quarter of 2020, exceeding fourth quarter 2019 levels.The Institute of Printed Circuits Association reported that total North American printed circuit board shipments inDecember 2020 increased 4.5% compared with the same month last year; compared withNovember 2020 , December shipments grew 9.8%. In our Electronics segment, we experienced declining sales in excess of the overall market, due to softer demand in recreational and oil and gas end markets as well as a strategic change we made to our customer base during 2019. In addition, several of our large OEM customers had requested to adjust the timing of order request dates into later quarters. For additional information, refer to the discussion of 2020 results of our Electronics segment below. 35
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2020 Results and Comparison of Years Ended
The following table sets forth our consolidated results of operations:
(in millions except net income
per share) For the year ended
January 2, 2021 December 28, 2019 $ Change % Change
Net sales $ 523.0 $ 554.7 $ (31.7 ) (5.7 )%
Gross profit $ 196.2 $ 212.3 $ (16.1 ) (7.6 )%
Gross profit % 37.5 % 38.3 %
Operating income $ 35.4 $ 90.1 $ (54.7 ) (60.7 )%
Operating income % 6.8 % 16.2 %
Net income $ 14.2 $ 60.3 $ (46.1 ) (76.5 )%
Basic and diluted net income per
common share $ 0.44 $
1.88
Consolidated net sales for the 2020 year totaled$523.0 million , down 5.7% compared with 2019. The Company's acquisition of Balboa onNovember 6, 2020 added$26.1 million in sales for the year. Changes in foreign currency exchange rates favorably impacted sales by$2.0 million for the year. A large portion of the decline in sales compared with 2019 is attributed to the effects of the COVID-19 pandemic on our business, customers and end markets. During the month of April, we experienced a considerable impact on sales due to facility closures, customer shut-downs and regulatory restrictions imposed on shipments. Our production capabilities recovered throughout the second quarter, with the third quarter returning to more typical levels while order intake remained soft throughout the year. Towards the end of the year, we began to experience some recovery, with fourth quarter sales of our legacy businesses exceeding second and third quarter levels driven primarily by demand in the European agriculture market and theU.S. recreational marine market. From a geographic perspective, excluding the acquisition and foreign currency impacts, our sales to theAmericas and EMEA regions were impacted significantly during the year, declining 20.4% and 9.1% over 2019, respectively. Increased demand and our recent expansion efforts in the APAC region drove sales growth of 4.6% over 2019. Gross profit margin declined 0.8 percentage points during 2020 from 38.3% to 37.5%. The impact of amortization of acquisition-related inventory step up costs resulting from the Balboa acquisition of$1.9 million accounted for 0.4 percentage points of the decline. Throughout the year, we implemented multiple cost saving measures to mitigate the effects of the downturn, including decreased use of consultants and contractors, adjustments to our fixed cost labor base by implementing salary reductions, furloughs and layoffs, and reduced travel and other discretionary spending. Our cost saving measures have been partially offset as we have incurred costs related to the purchase of safety equipment, personal protective equipment and higher cleaning costs to ensure our employees' safety during the pandemic. During the first quarter of 2020, current and expected economic impacts from the COVID-19 pandemic led to an impairment charge of$31.9 million of goodwill at our Faster reporting unit. Current year profitability was further impacted by non-recurring costs of$2.6 million related to the transition of two of our officers, including our former Chief Executive Officer and$6.6 million of transaction costs for our acquisition of Balboa. Amortization on Balboa intangible assets totaled$4.0 million during 2020. As a result of these impacts, operating margin for the year declined to 6.8%. 36 -------------------------------------------------------------------------------- Segment Results
Hydraulics
The following table sets forth the results of operations for the Hydraulics segment (in millions):
For the year ended
January 2, 2021 December 28, 2019 $ Change % Change
Net sales $ 407.2 $ 442.8 $ (35.6 ) (8.0 )%
Gross profit $ 150.3 $ 161.4 $ (11.1 ) (6.9 )%
Gross profit % 36.9 % 36.4 %
Operating income $ 82.0 $ 86.0 $ (4.0 ) (4.7 )%
Operating income % 20.1 % 19.4 %
Net sales for the Hydraulics segment totaled $407.2 million in 2020,
representing a contraction of $35.6 million , 8.0%, over the prior year. Changes
in foreign currency exchange rates favorably impacted sales for the year by $2.0
million . Disruptions caused by the pandemic, including our facility closures and
regulatory restrictions on shipments experienced during the first and second
quarters, as well as ongoing reduced end market demand and related impacts to
our customers, led to the diminished sales during the year.
The following table presents net sales based on the geographic region of the sale for the Hydraulics segment (in millions):
For the year ended
January 2, 2021 December 28, 2019 $ Change % Change
Americas $ 130.5 $ 162.3 $ (31.8 ) (19.6 )%
EMEA 131.2 141.6 (10.4 ) (7.3 )%
APAC 145.5 138.9 6.6 4.8 %
Total $ 407.2 $ 442.8
Shipments and demand weakened in the Americas region during 2020 with sales
declining $31.8 million , 19.6%, compared with the prior year. Sales to the EMEA
region decreased 9.1% after consideration of positive impacts from foreign
currency fluctuations totaling $2.5 million during 2020. Sales to the APAC
region during 2020 were up $6.6 million , 4.8%, over 2019, due to improved demand
in China as well as our recent expansion efforts in the region. After
consideration of negative impacts from changes in foreign currency exchange
rates of $0.6 million , sales to the APAC region improved 5.2% over 2019.
Hydraulics segment gross profit trended downward in 2020 compared with 2019, due
to lower sales volume. Changes in foreign currency exchange rates had a
favorable impact on gross profit for the year of $0.3 million . Gross profit
margin improved by 0.5 percentage points in 2020 compared with the prior year.
Effective cost management efforts, including adjustment of our fixed cost base
by implementing furloughs and temporary salary reductions, savings from our 2019
organizational restructure at Sun Hydraulics and production efficiencies gained
from our CVT manufacturing consolidation project, which was completed in the
first quarter of 2019 led to the margin gains.
Selling, engineering and administrative expenses ("SEA") were down 3.8% to $68.3
million in 2020, compared with $71.0 million in the prior year as a result of
the aggressive cost management efforts previously noted and reductions in costs
related to wages, travel and marketing, professional fees and other
discretionary costs. The segment incurred increased costs for safety equipment
and cleaning services as well as increased corporate operating costs allocated
to the segment that were incurred to support the growth and change in the
structure of Helios. Reduced leverage of our fixed cost base on lower sales led
to SEA as a percent of sales increasing 0.8 percentage points during the year.
37
-------------------------------------------------------------------------------- In the third quarter of 2019, we incurred one-time costs for an organizational restructure which resulted in$1.7 million of early retirement and severance charges. The restructuring plan was executed at Sun Hydraulics to improve the global cost structure of the business while aligning employee talent with the strategic operational goals of the Company. All actions from this restructuring plan have been completed. Also in the third quarter of 2019, we incurred a one-time cost of$2.7 million for a loss on disposal of an intangible asset from the termination of our technology licensing agreement withSturman Industries, Inc. The termination of the agreement is the result of a phase out of the digital logic valve ("DLV") related products and technologies.
As a result of the impacts to gross profit and SEA costs noted above, 2020
operating income declined
Electronics
The following table sets forth the results of operations for the Electronics
segment (in millions):
For the year ended
January 2, 2021 December 28, 2019 $ Change % Change
Net sales $ 115.8 $ 111.9 $ 3.9 3.5 %
Gross profit $ 47.8 $ 50.9 $ (3.1 ) (6.1 )%
Gross profit % 41.3 % 45.5 %
Operating income $ 19.4 $ 22.0 $ (2.6 ) (11.8 )%
Operating income % 16.8 % 19.7 %
Net sales for the Electronics segment totaled $115.8 million in 2020, an
increase of $3.9 million , 3.5%, over the prior year. The acquisition of Balboa
added $26.1 million to current-year sales. Demand in the health and wellness and
spa and bath industries has been bolstered by the pandemic as consumers invest
in health and home improvements. We have seen the same trend in the recreational
marine industry in which demand has remained strong. Decreased demand in many of
our other legacy end markets caused by the pandemic has had a significant impact
on our 2020 sales, as many of our customers shut down operations for a period of
time during the second quarter and several of our large OEM customers requested
to adjust the timing of order request dates into later quarters. Demand in the
oil and gas end market has been severely impacted, and we continue to experience
some decline resulting from our intentional shift in our customer base which
included the release of certain contractual obligations to customers that
allowed us to leverage all of our products to a broader and more diversified
customer base. Changes in exchange rates had a minimal impact on 2020 sales of
the Electronics segment.
The following table presents net sales based on the geographic region of the sale for the Electronics segment (in millions):
For the year ended
January 2, 2021 December 28, 2019 $ Change % Change
Americas $ 93.9 $ 96.3 $ (2.4 ) (2.5 )%
EMEA 10.8 8.4 2.4 28.6 %
APAC 11.1 7.2 3.9 54.2 %
Total $ 115.8 $ 111.9
Impacted by the Balboa acquisition, sales to the Americas region during 2020
declined $2.4 million , 2.5%, while sales to the EMEA and APAC regions increased
28.6% and 54.2%, respectively.
Gross profit contracted by $3.1 million , 6.1%, in 2020, primarily due to the
lower sales volume. Gross profit margin declined 4.2 percentage points to 41.3%
compared with 45.5% in 2019. Gross margin was heavily impacted by reduced
leverage of our fixed cost base on lower sales throughout the year and the
addition of spa and bath product sales which have a different margin profile
compared with our historical business resulting in higher cost of goods and
lower SEA costs. Cost management efforts and a $0.9 million non-recurring
benefit from the release of contractual obligations to customers during the 2020
first quarter helped to mitigate the impacts.
38
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SEA expenses fell $0.5 million , 1.7%, to $28.4 million in 2020 compared with
$28.9 million during 2019 and SEA costs as a percentage of sales declined 1.3
percentage points to 24.5%, as cost saving measures focused on managing fixed
personnel costs and eliminating non-essential spending. Throughout the year we
have continued to invest in the engineering and research and development ("R&D")
necessary to support new product development that will drive revenue growth in
2021 and beyond.
As a result of the impacts to gross profit and SEA costs noted above, operating
income declined $2.6 million , 11.8%, over the 2019 year while operating margin
decreased 2.9 percentage points, to 16.8%.
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 year endedJanuary 2, 2021 , these costs totaled$65.9 million for (i) goodwill impairment of$31.9 million , (ii) transition costs for two of our officers, including our former Chief Executive Officer totaling$2.6 million , (iii) acquisition-related items such as transaction costs of$6.6 million , (iv) charges related to inventory step-up to fair value of$1.9 million , (v) amortization of acquisition-related intangible assets of$22.1 million and (vi)$0.9 million related to other acquisition and integration activities. For the year endedDecember 28, 2019 , these costs totaled$17.9 million and were for amortization of acquisition-related intangible assets.
Interest Expense, net
Net interest expense decreased$2.1 million during 2020 to$13.3 million compared with$15.4 million in 2019. The decrease is attributable to lower average debt levels during 2020 due to our net debt repayments during the year which totaled$48.3 million , excluding the amendment of our credit facility at the end of October which increased borrowings to fund the Balboa acquisition.
Income Taxes
The provision for income taxes for the year endedJanuary 2, 2021 , was 17.6% of pretax income before non-deductible impairment related charges compared with 20.0% for the year endedDecember 28, 2019 . The 2020 effective tax rate after nondeductible goodwill impairment was 40.9%. These effective rates typically fluctuate relative to the levels of income and different tax rates in effect among the countries in which we sell our products. OnMarch 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 allows employers to defer the deposit and payment of the employer's share ofSocial Security taxes. We deferred the payment of$1.5 million of payroll taxes normally due betweenMarch 27, 2020 andDecember 31, 2020 . These payroll taxes will be paid during the third quarter of 2021 and are included as accrued compensation and benefits in the accompanying Consolidated Balance Sheets.
As of
As of
39--------------------------------------------------------------------------------
2019 Results and Comparison of Years Ended
2018
For the discussion and analysis of our 2019 results compared with our 2018
results, refer to our Annual Report on Form 10-K for the fiscal year ended
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, and during 2018 we raised $240.0 million in net proceeds from
our public offering of our common stock, which was also used to fund acquisition
activity during the year. During 2020, net cash provided by operating activities
totaled $108.6 million and as of January 2, 2021 we had $25.2 million of cash on
hand and $144.0 million of available credit on our revolving credit facility. We
also have a $300.0 million accordion feature available on our credit facility,
which is subject to certain pro forma compliance requirements and is intended to
support potential future acquisitions.
Our principal uses of cash have been paying operating expenses, paying dividends to shareholders, making capital expenditures, servicing debt and making acquisition-related payments.
We believe that the cash generated from operations and our borrowing availability under our credit facilities will be sufficient to satisfy our operating expenses and capital expenditures for the foreseeable future. In the event that economic conditions were to severely worsen for a protracted period of time, we would have several options available to ensure liquidity in addition to increased borrowing. Capital expenditures could be postponed since they primarily pertain to long-term improvements in operations. Additional operating expense reductions could also be made. Finally, the dividend to shareholders could be reduced or suspended.
Cash flows
The following table summarizes our cash flows for the periods (in millions):
For the year ended
January 2, 2021 December 28, 2019 $ Change
Net cash provided by operating
activities $ 108.6 $ 90.5 $ 18.1
Net cash used in investing activities (235.9 ) (22.4 ) (213.5 )
Net cash provided by (used in)
financing activities 137.7 (71.7 ) 209.4
Effect of exchange rate changes on
cash (7.3 ) 2.3 (9.6 )
Net increase (decrease) in cash and
cash equivalents $ 3.1 $
(1.3 )
Cash on hand increased$3.1 million from$22.1 million at the end of 2019 to$25.2 million at the end of 2020. Cash and cash equivalents were unfavorably impacted by changes in exchange rates during the year endedJanuary 2, 2021 by$7.3 million and favorably impacted during the year endedDecember 28, 2019 by$2.3 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 also paying down borrowings on our credit facilities. 40
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Operating activities
Cash from operations increased$18.1 million , 20.0%, compared with the prior year.$10.7 million of the fluctuation resulted from the 2019 payment on the contingent consideration liability related to theEnovation Controls acquisition, which was included in operating cash flows for the 2019 period as the total payments exceeded the acquisition date fair value of the liability. The remaining increase of$7.4 million resulted from improved cash flow from operating assets and liabilities offset by decreased cash earnings. Changes in inventory, net of acquisitions, increased cash by$0.6 million in 2020 compared with a decrease in cash of$1.5 million during 2019. Days of inventory on hand increased to 100 days for the 2020 year, compared with 91 during the 2019 year, impacted by the softer than expected demand during the year and an increase in certain purchased parts inventories to mitigate the risk of potential supplier constraints. There has been no decline in the net realizable value of our inventory as a result of recent economic conditions. Changes in accounts receivable, net of acquisitions, increased cash by$0.7 million in 2020 compared with$5.7 million in 2019. Days sales outstanding for the 2020 year went up to 50 days, from 44 days during 2019. We have not experienced significant delays in collection of accounts receivable balances from customers as a result of the COVID-19 pandemic. Investing activities Cash used in investing activities increased during 2020 by$213.5 million , compared with 2019. The acquisition of Balboa accounted for$217.0 million of the fluctuation. Capital expenditures were$14.6 million during 2020;$10.4 million , 41.6%, lower than the prior year. Due to the economic conditions and uncertainty of future cash flows during the year, capital expenditure projects were evaluated and several were postponed. We only proceeded with high priority and critical projects during the year. Capital expenditures for 2021 are forecasted to be approximately 5% of sales, primarily for investments in machinery and equipment to increase capacity, maintain existing machine efficiencies and improve manufacturing technologies.
Financing activities
Cash provided by financing activities totaled
During the second quarter, we entered into a term facility with Intesa Sanpaolo S.p.A to provide us with additional liquidity of €5.0 million. We also entered into a term loan and a line of credit with Citibank that allows maximum borrowings ofRMB 65.0 million in order to facilitate operational expansion inChina . OnOctober 28, 2020 , we amended and restated our credit agreement withPNC Bank, National Association , as administrative agent, and the lenders party thereto. The amendment increased the term loan credit facility to an aggregate principal amount of$200.0 million . The revolving credit facility's aggregate maximum principal borrowing amount remained unchanged at$400.0 million , and the accordion feature was increased to an aggregate principal amount of$300.0 million . The credit facilities will be available throughOctober 28, 2025 . We plan to use the proceeds of the amended credit agreement for working capital purposes, to finance acquisitions such as the purchase of Balboa, and for general corporate purposes. Borrowings on our revolving credit facility and our long-term non-revolving debt with PNC Bank as ofJanuary 2, 2021 totaled$255.9 million and$200.0 million , respectively. See Note 10 of the Notes to the Consolidated Financial Statements included in this Annual Report for additional information regarding our credit facilities.
During
41
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We have historically declared regular quarterly dividends to shareholders of
$0.09 per share. We paid dividends totaling $11.6 million , $11.5 million , and
$11.0 million for the years ended January 2, 2021 , December 28, 2019 and
December 29, 2018 , respectively. The declaration and payment of future dividends
is subject to the sole discretion of the Board of Directors, and any
determination as to the payment of future dividends will depend upon our
profitability, financial condition, capital needs, acquisition opportunities,
future prospects and other factors deemed pertinent by the Board of Directors.
Contractual obligations
The timing of payments due under our contractual obligations as of
Payments due by Period
CONTRACTUAL OBLIGATIONS TOTAL 2021 2022-2023 2024-2025 Thereafter Revolving lines of credit (1)$ 256,224 $ 315 $ -$ 255,909 $ - Long-term, non-revolving debt (2) 206,770 16,355 30,415 160,000 -
Interest on long-term debt (3) 62,835 13,844 26,470
22,521 -
Contingent consideration (4) 1,919 242 817 860 -
Supplier purchase commitments (5) 43,542 39,555 3,965 22 -
Building purchase commitment (6) 32,586 - - - 32,586
Operating leases 19,798 5,487 6,789 4,602 2,920
Financing leases 734 457 277 - -
Total contractual obligations
$ 443,914 $ 35,506
(1) Our revolving credit facilities expire in
Although we may make earlier principal payments, we have reflected the
principal balances due at expiration.
(2) Amounts represent required payments on long-term non-revolving debt
obligations and exclude debt issuance costs.
(3) Interest on the revolving line of credit assumes the current interest rate
environment and revolver borrowings consistent with
levels. Interest on the non-revolving long-term debt assumes the current
interest rate environment and takes into account future required payments.
(4) Represents the fair value estimate of contractual contingent payments related
to our acquisition of Balboa.
(5) Amounts represent commitments entered into with key suppliers for minimum
purchase quantities. Only obligations that are non-cancelable are included in
the table.
(6) The Company has entered into a lease to buy agreement for the purchase of a
building. We have the option to purchase the building at any time during the
lease period and are committed to buy at the end of the 6-year lease term.
The full purchase price has been presented; however, the actual purchase
price will be reduced by 60% of the payments made during the lease term.
Critical Accounting Policies and Estimates
We prepare our Consolidated Financial Statements in conformity with U.S. GAAP,
which requires management to make certain estimates and assumptions that affect
reported amounts and related disclosures. Actual results could differ from those
estimates. Based on facts and circumstances inherent in developing estimates and
assumptions, we believe it is unlikely that applying other such estimates and
assumptions would have caused materially different amounts to have been
reported. The following policies are considered by management to be the most
critical in understanding the judgements, estimates and assumptions that are
involved in the preparation of our Consolidated Financial Statements.
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Business Combinations
Business combinations are accounted for under the acquisition method of accounting, which requires recognition separately from goodwill, the assets acquired and the liabilities assumed at their acquisition date fair values. Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values, and the values of assets in use, and often requires the application of judgment regarding estimates and assumptions. While the ultimate responsibility resides with management, for certain acquisitions we retain the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets and assumed liabilities, including intangible assets and tangible long-lived assets. Acquired intangible assets, excluding goodwill, are valued using various methodologies such as the discounted cash flow method which is based on future cash flows specific to the type of intangible asset purchased and the relief from royalty method which is based on the present value of savings resulting from the right to manufacture or sell products that incorporate the intangible asset without having to pay a license for its use. These methodologies incorporate various estimates and assumptions, the most significant being estimated royalty rates, projected revenue growth rates, profit margins and forecasted cash flows based on the discount rate.
Goodwill , which represents the excess of the purchase price of an acquisition over the fair value of the net assets acquired, is carried at cost.Goodwill is tested for impairment annually, in our third and fourth fiscal quarters, or more frequently if events or circumstances indicate a reduction in the fair value below the carrying value. The carrying value of assets is calculated at the reporting unit level. An impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value. The assessment of fair value for impairment purposes requires significant judgment by management. We generally use a combination of market and income approach methodologies to estimate the fair value of our reporting units. The income approach is generally based on a discounted cash flow analysis, which estimates the present value of the projected free cash flows to be generated by the reporting unit. Assumptions used in the analysis include estimated future revenues and expenses, weighted average cost of capital, capital expenditures and other variables. Assumptions made for future cash flows are developed based on consideration of current and future economic conditions, recent sales trends, planned timing of product launches or other relevant variables. The market approach estimates the value of reporting units by comparing to guideline public companies or guideline transactions. Various valuation multiples of companies that are economically and operationally similar are used as data points for selecting multiples for the reporting units. Changes in assumptions or estimates could materially affect the estimated fair value of our reporting units and the potential for impairment. During the first quarter of 2020, the Company determined that, based on current economic conditions and potential future impacts from the COVID-19 pandemic, it was more likely than not that the fair value of the Faster reporting unit was less than its carrying value. Upon completion of the interim impairment testing, the Company determined that the carrying value of goodwill was impaired. Upon completion of our subsequent annual goodwill impairment testing for the year endedJanuary 2, 2021 , we determined that the remaining carrying amount of goodwill was not impaired. See Note 8 of the Notes to the Consolidated Financial Statements included in this Annual Report for goodwill amounts.
Income Taxes
Our income tax policy provides for a balance sheet approach under which deferred
income taxes are provided for based upon enacted tax laws and rates applicable
to the periods in which the taxes become payable. These differences result from
items reported differently for financial reporting and income tax purposes,
primarily depreciation, amortization, accrued expenses and reserves.
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Our annual tax rate fluctuates based on our income, statutory tax rates and tax
planning opportunities available to us in the various jurisdictions in which we
operate. Tax laws are complex and subject to different interpretations by the
taxpayer and respective government taxing authorities. Significant judgment is
required in determining our tax expense and in evaluating our tax positions,
including evaluating uncertainties. We review our tax positions quarterly and
adjust the balances as new information becomes available. Indefinite
reinvestment is determined by management's judgment about, and intentions
concerning, our future operations.
We recognize and measure uncertain tax positions in accordance with ASC 740. We
report a liability for unrecognized tax benefits resulting from uncertain tax
positions taken or expected to be taken in a tax return. We file annual income
tax returns in multiple taxing jurisdictions around the world. Many years may
pass before an uncertain tax position is audited by the relevant tax authorities
and finally resolved. While it is often difficult to predict the outcome or the
timing of resolution of any particular uncertain tax position, we believe that
our reserves for income taxes are adequate such that we reflect the benefits
more likely than not to be sustained in an examination. We adjust these
reserves, as well as the related interest and penalties, where appropriate in
light of changing facts and circumstances. Settlement of any particular position
could require the use of cash. We recognize interest and penalties, if any,
related to unrecognized tax benefits in income tax expense.
See Note 12 of the Notes to the Consolidated Financial Statements included in this Annual Report for income tax amounts, including reserves.
Off Balance Sheet ArrangementsWe 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
The impact of inflation on our operating results has been moderate in recent
years, reflecting generally lower rates of inflation in the economy. While
inflation has not had, and we do not expect that it will have, a material impact
upon operating results, there is no assurance that our business will not be
affected by inflation in the future.
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