HELIOS TECHNOLOGIES, INC. 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 which 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 theSecurities and Exchange Commission . These forward-looking statements are subject to risks and uncertainties, including, without limitation, those discussed in this report and those identified in Part I, Item 1A, "Risk Factors" included in our Form 10-K. In addition, new risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. Accordingly, our future results may differ materially from historical results or from those discussed or implied by these forward-looking statements. Given these risks and uncertainties, the reader should not place undue reliance on these forward-looking statements. OVERVIEW We are a global industrial technology leader that develops and manufactures solutions for both the hydraulics and electronics markets. We were originally founded in 1970 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. Today we operate under two business segments: Hydraulics and Electronics. These businesses design and manufacture hydraulic cartridge valves, hydraulic quick release couplings and customized electronic controls systems and displays for a variety of end markets, as well as design complete hydraulic systems.
Strategic Vision
Our strategic goals are to achieve$1 billion in sales by the end of 2023 through a combination of organic growth and acquisitions, while remaining a technology leader and delivering superior profitability, with adjusted EBITDA margins of approximately 25%. We are augmenting our strategy with value streams that we expect to help us to execute our goals and potentially accelerate the achievement of our strategic vision by reaching the$1 billion revenue target two years ahead of our original plan. We believe the value streams will deliver growth, diversification and market leading financial performance as we develop into a more sophisticated, globally oriented, customer centric and learning organization. These are:
1. Protect the business through customer centricity and drive cash generation
through the launch of new products and leveraging existing products;
2. Think and act globally to better leverage our assets, accelerate innovation
and diversify end markets by driving intra- and inter-company initiatives
and by building in the region for the region;
3. Diversify our markets and sources of revenue by swarming commercial
opportunities that leverage our products and technologies' value in
industries in which we currently do not operate, such as defense andcommercial food service, thereby creating greater opportunities for growth
while reducing risk and cyclicality; and
4. Develop our talent, our most critical resource, through a culture ofcustomer-centricity through the embracement of diversity, engagement of the
team, focus on shared, deeply rooted values and promotion of a learning
organization. We provide training, development, educational, and mentoring
opportunities to our existing employees as well as seek to attract and
retain top talent throughout our global workforce.
Our strategy is underpinned by the execution of acquisitions, which we expect to
include bolt-on, flywheel type acquisitions (up to $100 million in enterprise
value) and the evaluation of more transformative type acquisitions ($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;
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• Expanding geographic presence; and • Bringing new customers or markets.
To support the execution of our strategy, our financial strategy is oriented on delivering industry leading margins, a strong balance sheet and sufficient financial flexibility to support organic and acquisitive growth.
We align our internal key performance indicators with our strategy to ensure our short-term actions will deliver long-term expectations.
Recent Acquisitions
InNovember 2020 , we acquiredBalboa Water Group , further diversifying the markets we serve and also expanding our technological capabilities in electronics. Balboa is an innovative market leader of electronic controls for the health and wellness industry with proprietary and patented technology that enables end-to-end electronic control systems for therapy baths and spas. Headquartered inCosta Mesa, California , Balboa has manufacturing operations that support the business 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. The results of Balboa's operations are reported in our Electronics segment and have been included in the Consolidated Financial Statements since the acquisition date. 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 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. InJuly 2021 , we acquired NEM, an innovative hydraulic solutions company providing customized material handling, construction, industrial vehicle and agricultural applications to its global customer base, predominantly inEurope andAsia . NEM enhances our electro-hydraulic product offering, further develops our presence in original equipment manufacturer ("OEM") markets, provides geographic expansion and adds scale to address new markets. InMay 2021 , we entered into a definitive agreement to acquire the assets ofShenzhen Joyonway Electronics & Technology Co., Ltd and its related entities (collectively "Joyonway"). A fast-growing developer of control panels, software, systems and accessories for the health and wellness industry, Joyonway operates in two cities,Shenzhen andDongguan , which are in the hub of electronics and software development inChina . The acquisition is subject to certain pre-closing requirements and is expected to close in the third quarter of 2021 or as soon as practicable.
Global Economic Conditions
COVID-19 Update
During the first half of 2021, we experienced limited disruption to our
operations from the pandemic. Many of our customers and end markets are
recovering from the substantial impacts experienced during 2020. Demand in the
first six months of 2021 for our products exceeded our expectations as end
market recovery occurred sooner and was stronger than we projected. Demand in
the health and wellness and recreational marine markets has been favorably
impacted by the pandemic as consumers are investing in leisure products and
activities. We face constraints on our ability to source certain electronic
components which originated from the high demand for these products caused by
the pandemic; however, we have been able to mitigate the majority of the impact
with our procurement efforts and production schedule adjustments.
Our outlook for the remainder of the 2021 fiscal year assumes the global economy
continues to recover; however, we cannot at this time predict any future
impacts. With the spread of new strains and variants of the coronavirus, the
Company continues to monitor developments, including government requirements and
recommendations at the national, state, and local level to evaluate whether to
reinstate and/or extend certain initiatives it implemented to help contain the
spread of COVID-19. Refer to Part I, Item 1A, "Risk Factors" of our Form 10-K
for additional COVID-19 related discussion.
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Brexit Update
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. This 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. The ultimate impact of Brexit on the Company's financial results is uncertain. However, we do not expect the effects of Brexit to have a material impact on our results of operations or financial position. For additional information, refer to Part I, Item 1A, "Risk Factors" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's Form 10-K. Industry Conditions Market demand for our products is dependent on demand for the industrial goods in which the products are incorporated. The capital goods industries in general, and the Hydraulics and Electronics segments specifically, are subject to economic cycles. We utilize industry trend reports from various sources, as well as feedback from customers and distributors, to evaluate economic trends. We also rely on global government statistics such as Gross Domestic Product and Purchasing Managers Index to understand macro-economic conditions.
Hydraulics
According to theNational Fluid Power Association (the fluid power industry's trade association in theU.S. ), theU.S. index of shipments of hydraulic products increased 12% during the first six months of 2021, after decreasing 17% in 2020. InEurope , the CEMA Business Barometer reports that inJune 2021 , the general business climate index for the European agricultural machinery industry rose to its highest level since 2008. The favorable index peaked inJune 2021 and declined slightly inJuly 2021 . The report further noted that uncertainty exists related to the ability to realize incoming orders due to extreme price increases and supplier shortages.The Committee for European Construction Equipment (CECE) business climate index reports that the boom of the European construction equipment sector continues and the index remains at extremely high levels. Consistent with the CEMA Business Barometer, the CECE business climate index reported that the strong demand has not been fully realized due to supply side bottlenecks. 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 increased slightly during the second quarter of 2021, after decreasing in the first quarter of 2021. The index continues to exceed fourth quarter 2019 levels and surpassed fourth quarter 2020 levels late in the second quarter 2021.The Institute of Printed Circuits Association ("IPC") reported that total North American printed circuit board ("PCB") shipments increased 6.3% inJune 2021 compared with the same month last year; compared withMay 2021 , June shipments grew 17.3%. The IPC also reported that North American electronics manufacturing services ("EMS") shipments were up 14.3% in June compared toJune 2020 ; compared withMay 2021 , June shipments grew 31.3%. While the IPC reported that demand for both PCB and EMS production is high, supply remains constrained. However, the report further indicated that the strong pick up in shipments during the month of June suggests some disruptions are starting to improve. 24
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2021 Second Quarter Results and Comparison of the Three and Six Months Ended
July 3, 2021 andJune 27, 2020
(in millions except per share data)
Three Months Ended
July 3, 2021 June 27, 2020 $ Change % Change
Net sales $ 223.4 $ 119.3 $ 104.1 87.3 %
Gross profit $ 82.2 $ 44.7 $ 37.5 83.9 %
Gross profit % 36.8 % 37.5 %
Operating income $ 42.1 $ 16.7 $ 25.4 152.1 %
Operating income % 18.8 % 14.0 %
Net income $ 30.7 $ 12.9 $ 17.8 138.0 %
Basic and diluted net income per
common share $ 0.95 $ 0.40 $ 0.55 137.5 %
Six Months Ended
July 3, 2021 June 27, 2020 $ Change % Change
Net sales $ 428.3 $ 248.8 $ 179.5 72.1 %
Gross profit $ 157.5 $ 96.6 $ 60.9 63.0 %
Gross profit % 36.8 % 38.8 %
Operating income $ 76.7 $ 6.7 $ 70.0 1,044.8 %
Operating income % 17.9 % 2.7 %
Net income (loss) $ 53.3 $ (4.3 ) $ 57.6 NM*
Basic and diluted net income
(loss) per common share $ 1.65 $ (0.13 ) $ 1.78 NM*
* Not Meaningful
Second quarter consolidated net sales increased $104.1 million , 87.3%, compared
with the prior-year period. Changes in foreign currency exchange rates favorably
impacted sales for the quarter by $6.9 million , 3.1%, and earnings per share by
$0.03 . Pricing changes had minimal impact on the 2021 second quarter organic
sales compared with the prior-year period. Acquisitive growth accounted for a
large portion of the increase in sales, $60.2 million , 57.8%, over the
prior-year period. In addition, we experienced strong organic growth of $43.9
million , 36.8%, compared with the prior-year period, which resulted from
improved demand in all regions as our markets recover from the impacts of the
COVID-19 pandemic. In the second quarter of 2020, we experienced a considerable
negative impact on sales due to facility closures, customer shut-downs and
regulatory restrictions imposed on shipments.
Consolidated net sales for the year-to-date period increased $179.5 million ,
72.1%, compared with the prior-year period. Changes in foreign currency exchange
rates favorably impacted sales for the first six months of 2021 by $12.7
million , 3.0%, and earnings per share by $0.05 . The effect of pricing changes
had minimal impact on organic sales for the six months ended July 3, 2021 ,
compared to the prior-year period. Acquisition related sales for the six-month
period totaled $116.5 million and we experienced significant organic growth of
$63.0 million , 25.3%, when compared with the six months ended June 27, 2020 . The
organic growth was attributable to relaxing COVID-19 restrictions and improved
demand in all regions and most end markets, primarily the European agriculture
and construction equipment markets and the U.S. recreational marine market.
Gross profit trended upward in the second quarter compared with the second
quarter of 2020, due to increased sales volume and a favorable impact from
changes in foreign currency exchange rates of $2.1 million . Second quarter gross
margin declined by 0.7 percentage points compared with the prior-year period, as
manufacturing labor efficiencies and improved leverage of our fixed cost base on
the higher sales were offset by increases in freight and raw material costs and
the addition of sales from our recently acquired businesses, which have
different margin profiles compared to our historical businesses (higher material
and production costs and lower selling, engineering and administrative ("SEA")
costs). Material costs as a percentage of sales, excluding acquisition related
sales, increased in the second quarter by 3.8 percentage points compared to the
prior year second quarter primarily driven by supply shortages, freight costs
and general increases in raw material prices as well as a change in sales mix.
We have passed on certain material cost increases to customers by implementing
price increases, some of which will primarily be realized in future quarters.
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Gross profit for the first six months of 2021 increased $60.9 million , 63.0%,
compared with the same period of 2020, primarily due to increased sales volume
and a favorable impact from changes in foreign currency exchange rates totaling
$4.0 million . Gross margin declined 2.0 percentage points over the prior-year
period due to material and freight cost increases and the different margin
profile of our recently acquired businesses. Material costs as a percentage of
sales, excluding acquisition related sales, increased in the year-to-date period
by 4.2 percentage points compared to the prior year-to-date period, primarily a
result of the supply shortages, higher freight costs and general increases in
raw material prices as well as a change in sales mix.
Operating income as a percentage of sales increased 4.8 percentage points to
18.8% in the second quarter of 2021 compared to 14.0%, as a percentage of sales,
in the prior-year period, primarily from improved leverage of our fixed cost
base on the higher sales volume. This positive impact was reduced by the gross
margin level impacts and an increase in intangible amortization of $3.3 million
from our recent acquisitions and $1.6 million of costs incurred for acquisition
and integration related activities. Additionally, non-recurring costs totaling
$1.6 million were incurred in the second quarter of 2020 related to the
separation of our former Chief Executive Officer ("CEO") and placement of our
current CEO.
For the first six months of 2021, operating income as a percentage of sales
increased 15.2 percentage points to 17.9%. During the first quarter of 2020,
current and expected economic impacts from the COVID-19 pandemic led to a
goodwill impairment charge of $31.9 million . Excluding the impairment charge in
2020, operating income as a percentage of sales for the first six months of 2021
improved 2.4 percentage points, up from 15.5%, as a result of improved leverage
of our fixed cost base on higher sales volume, offset by an increase in
intangible amortization of $9.1 million from our recent acquisitions and $3.1
million incurred for acquisition and integration related activities.
SEGMENT RESULTSHydraulics
The following table sets forth the results of operations for the Hydraulics segment (in millions):
Three Months Ended
July 3, 2021 June 27, 2020 $ Change % Change
Net sales $ 133.0 $ 102.1 $ 30.9 30.3 %
Gross profit $ 50.9 $ 37.5 $ 13.4 35.7 %
Gross profit % 38.3 % 36.7 %
Operating income $ 32.3 $ 22.0 $ 10.3 46.8 %
Operating income % 24.3 % 21.5 %
Six Months Ended
July 3, 2021 June 27, 2020 $ Change % Change
Net sales $ 252.1 $ 205.9 $ 46.2 22.4 %
Gross profit $ 96.3 $ 77.1 $ 19.2 24.9 %
Gross profit % 38.2 % 37.5 %
Operating income $ 60.4 $ 43.5 $ 16.9 38.9 %
Operating income % 24.0 % 21.1 %
Second quarter net sales for the Hydraulics segment totaled $133.0 million , an
increase of $30.9 million , 30.3%, compared with the prior-year period. The 2021
second quarter benefited from improved demand in all regions and many of our end
markets including U.S. and European agriculture and construction equipment
markets as well as mobile and industrial equipment markets. The second quarter
of 2020 was impacted by reduced end market demand, facility closures and
regulatory restrictions imposed on shipments, resulting from the COVID-19
pandemic. Changes in foreign currency exchange rates favorably impacted sales
for the quarter by $6.7 million . Pricing changes had minimal impact on second
quarter sales compared with the prior-year quarter.
Year-to-date net sales totaled $252.1 million , an increase of $46.2 million ,
22.4%, compared with the first six months of 2020 due to end market recovery
from the pandemic. Changes in foreign currency exchange rates favorably impacted
sales for the first half of 2021 by $12.5 million .
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The following table presents net sales based on the geographic region of the sale for the Hydraulics segment (in millions):
Three Months Ended
July 3, 2021 June 27, 2020 $ Change % Change
Americas $ 41.7 $ 34.2 $ 7.5 21.9 %
EMEA 46.6 31.2 15.4 49.4 %
APAC 44.7 36.7 8.0 21.8 %
Total $ 133.0 $ 102.1
Six Months Ended
July 3, 2021 June 27, 2020 $ Change % Change
Americas $ 76.0 $ 71.6 $ 4.4 6.1 %
EMEA 89.9 64.7 25.2 38.9 %
APAC 86.2 69.6 16.6 23.9 %
Total $ 252.1 $ 205.9
Demand in the Americas region improved during the second quarter of 2021
compared to the prior-year second quarter as sales increased $7.5 million ,
21.9%. Increased demand, primarily in the agriculture and construction equipment
end markets, generated an increase in sales to the EMEA region of 36.5% compared
with the 2020 second quarter, excluding positive impacts from foreign currency
fluctuations totaling $4.0 million . Sales to the APAC region grew 14.4% compared
with the second quarter of 2020, excluding positive impacts from foreign
currency exchange rate fluctuations totaling $2.7 million . The APAC growth
primarily resulted from increased demand in Korea and Australia .
During the 2021 year-to-date period we experienced significant sales growth in
the EMEA and APAC regions of $17.6 million , 27.2%, and $11.7 million , 16.8%,
respectively, after adjusting for positive impacts from foreign currency
exchange rate fluctuations totaling $7.6 million and $4.9 million , respectively.
The increase in the EMEA region was driven by demand in the European agriculture
and construction equipment end markets. Demand in China , Korea and Australia
were the primarily contributors to growth in the APAC region.
In the second quarter of 2021, gross profit increased $13.4 million , 35.7%,
compared with the second quarter of the prior year due to higher sales volume,
and a favorable impact from changes in foreign currency rates of $2.1 million .
Gross profit margin improved compared with the second quarter of 2020,
increasing 1.6 percentage point to 38.3%. Fixed cost leverage on the higher
sales and production labor efficiencies led to the improvement. During the 2020
second quarter we experienced production labor inefficiencies caused by the
COVID-19 pandemic. Increases in the cost of freight totaling $1.1 million
negatively impacted second quarter gross margin compared to the prior year
second quarter. Material costs as a percentage of sales increased in the second
quarter by 3.5 percentage points compared to the prior year second quarter, a
result of a change in sales mix, the higher freight costs and general increases
in raw material prices.
During the year-to-date period we experienced a $19.2 million , 24.9%, increase
in gross profit over the comparable prior-year period due to sales volume and a
favorable impact from changes in foreign currency rates of $3.9 million . Gross
margin for the first half of 2021 increased 0.7 percentage points to 38.2% as we
benefited from improved leverage of our fixed manufacturing costs from higher
sales volume, which was offset by increased material and freight costs.
Increases in the cost of freight totaling $2.1 million negatively impacted gross
margin for the year-to-date period compared to the prior-year period. Material
costs as a percentage of sales increased in the first six months of 2021 by 3.9
percentage points compared to the prior-year period, a result of a change in
sales mix, the higher freight costs and general increases in raw material
prices.
SEA expenses increased $3.1 million , 20.0%, in the second quarter of 2021
compared with the same period of the prior year. During the 2020 second quarter,
we instituted strict cost control measures in light of the COVID-19 pandemic and
its expected impacts on the world economies and our operations. While costs
related to travel and marketing continue to be low, 2021 SEA costs represent a
return to a more normalized level. Personnel costs are increasing as we scale up
to support increased demand and expect higher payout of performance-based
incentive compensation. In addition to these factors, increased leverage of our
fixed cost base on higher sales and our cost management efforts led to SEA as a
percent of sales decreasing 1.2 percentage points during the quarter to 14.0%,
compared to the 2020 second quarter.
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Year-to-date SEA expenses increased $2.3 million , 6.8%, in 2021 compared with
the prior-year period and SEA as a percent of sales decreased 2.1 percentage
points to 14.2% in 2021 from 16.3% in 2020. The margin improvement resulted from
improved leverage of fixed costs, continued cost management efforts including
our restructuring activities and reductions in travel and marketing costs.
As a result of the impacts to gross profit and SEA noted above, second quarter
operating income increased $10.3 million , 46.8%, compared with the second
quarter of the prior year, and operating margin improved 2.8 percentage points
to 24.3%. Operating income for the year-to-date period increased $16.9 million ,
38.9%, with operating margin strengthening 2.9 percentage points to 24.0%
compared to the same period in the prior year.
Electronics
The following table sets forth the results of operations for the Electronics segment (in millions):
Three Months Ended
July 3, 2021 June 27, 2020 $ Change % Change
Net sales $ 90.4 $ 17.2 $ 73.2 425.6 %
Gross profit $ 31.2 $ 7.2 $ 24.0 333.3 %
Gross profit % 34.5 % 42.1 %
Operating income $ 19.6 $ 0.9 $ 18.7 2,077.8 %
Operating income % 21.7 % 5.5 %
Six Months Ended
July 3, 2021 June 27, 2020 $ Change % Change
Net sales $ 176.1 $ 42.9 $ 133.2 310.5 %
Gross profit $ 61.2 $ 19.4 $ 41.8 215.5 %
Gross profit % 34.8 % 45.3 %
Operating income $ 37.9 $ 5.7 $ 32.2 564.9 %
Operating income % 21.5 % 13.3 %
Second quarter net sales for the Electronics segment totaled $90.4 million , an
increase of $73.2 million compared with the prior-year period. Sales totaling
$60.2 million were contributed by our recently acquired businesses. The segment
also realized solid organic growth of $13.0 million , 75.6%, compared with the
prior year second quarter, which experienced significant demand reductions
caused by the COVID-19 pandemic as many of our customers shut down operations
for a period of time and several of our large OEM customers requested to adjust
the timing of order request dates into later quarters. Pricing changes had
minimal impact on the 2021 second quarter organic sales compared with the
prior-year period.
Year-to-date net sales for the Electronics segment totaled $176.1 million , an
increase of $133.2 million compared with the prior-year period. Sales totaling
$116.5 million were contributed by our recently acquired businesses. The segment
also realized considerable organic growth in the first half of 2021 totaling
$16.7 million , 38.9%, compared with the first half of 2020. There was no
significant impact from price increases on organic sales during the first six
months of 2021 compared with the prior-year period.
Demand in the health and wellness industries has been strengthened by the
pandemic as consumers invest in health and home improvements. The same trend is
occurring in the U.S. recreational vehicle and recreational marine markets, in
which demand continues to be strong. We have taken swift and successful actions
to expand production capacity in an effort to fulfill the high incoming order
levels for our products. The segments' supply chain is experiencing constraints
on its ability to source certain electronic components. While the effect on
sales has been mitigated by our increased procurement efforts and production
schedule adjustments, we estimate that approximately $4.9 million of sales were
delayed into future quarters due to the supply shortage. Changes in exchange
rates had a minimal impact on second quarter sales.
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The following table presents net sales based on the geographic region of the sale for the Electronics segment (in millions):
Three Months Ended
July 3, 2021 June 27, 2020 $ Change % Change
Americas $ 64.1 $ 13.4 $ 50.7 378.4 %
EMEA 11.0 1.9 9.1 478.9 %
APAC 15.3 1.9 13.4 705.3 %
Total $ 90.4 $ 17.2
Six Months Ended
July 3, 2021 June 27, 2020 $ Change % Change
Americas $ 129.1 $ 35.0 $ 94.1 268.9 %
EMEA 20.4 4.4 16.0 363.6 %
APAC 26.6 3.5 23.1 660.0 %
Total $ 176.1 $ 42.9
During the second quarter and year-to-date period of 2021, we experienced robust
growth in all regions which was primarily attributable to our recent
acquisitions. Second quarter sales to the Americas accounted for 70.9% of total
segment sales, a decrease from 77.9% in the prior comparable period, which is
primarily from a variation in the regional footprint of our acquisitions.
Similarly, sales to EMEA and APAC increased to 12.2% and 16.9% of total segment
sales, respectively.
Second quarter gross profit increased $24.0 million compared with the second
quarter of the prior year due to the increased sales volume. Gross profit margin
for the same period decreased by 7.6 percentage points, primarily due to the
addition of sales from our acquired businesses, which have a different margin
profile compared to our historical business (higher material and production
costs and lower SEA costs). Additionally, the segment experienced an increase in
raw material and freight and logistics costs during the quarter due to the high
demand and materials shortages in the market for electronic components used in
our products. During the year-to-date period, we experienced an increase in
gross profit of $41.8 million compared with the first six months of 2020. Gross
profit margin for the same period decreased 10.5 percentage points driven by our
recent acquisitions, which have a different margin profile from our historical
business and the increase raw material and freight and logistic costs.
SEA expenses increased by $5.3 million in the second quarter of 2021 compared
with the second quarter of 2020 and were primarily impacted by the addition of
our recently acquired companies and an increase in corporate operating costs
allocated to the segment. SEA costs as a percentage of sales decreased to 12.8%
in the second quarter of 2021 compared to 36.6% in the prior-year second
quarter. SEA margin was favorably impacted by the margin profiles of products
sold by our recently acquired businesses. SEA expenses increased by $9.6 million
in the first half of 2021 compared with the first half of 2020. SEA costs as a
percentage of sales decreased to 13.2% in the current year-to-date period
compared to 31.9% in the prior-year period. The improvement in SEA as a
percentage of sales is due largely to the cost structures of our recent
acquisitions as well as increased leverage on our fixed costs due to higher
sales in our legacy businesses, partially offset by increased corporate
operating costs and continued investments in engineering and R&D necessary to
support new product development that will drive future revenue growth.
As a result of the impacts to gross profit and SEA costs noted above, operating
income increased $18.7 million and $32.2 million during the second quarter of
2021 and the first half of 2021, respectively, compared to the prior-year
periods.
Corporate and Other
Certain costs are excluded from business segment results as they are not used in evaluating the results of, or in allocating resources to, our operating segments. For the second quarter of 2021, these costs totaled$9.9 million , of which$7.7 million was amortization of acquisition-related intangible assets,$1.6 million was for other acquisition and integration related costs and$0.6 million was for the costs associated with the separation of a corporate officer. Year-to-date, corporate and other costs totaled$21.6 million , of which$17.9 million was amortization of acquisition-related intangible assets,$3.1 million was for other acquisition and integration related costs and$0.6 million for the separation of a corporate officer. 29
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Interest Expense, net
Net interest expense increased to$4.4 million for the second quarter of 2021 compared with$2.9 million for the prior-year quarter. The change is attributable to increased borrowings used to fund the acquisition of Balboa inNovember 2020 . Average net debt increased to$414.5 million compared with$258.8 million during the second quarter of 2020. Year-to-date net interest expense was up to$9.2 million compared with$5.8 million during the comparable 2020 period. Average net debt for the 2021 year-to-date period totaled$420.0 million compared with$264.4 million in the corresponding period of 2020. The increase is due to borrowings used to fund the acquisition of Balboa.
Income Taxes
The provision for income taxes for the second quarter of 2021 was 17.6% of pretax income compared to 4.7% for the prior-year second quarter. The 2020 tax rate was impacted by favorable one-time benefits inItaly . The 2021 tax rate includes the settlement of a transfer pricing dispute resolved through competent authority betweenthe United States andGermany . 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. 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 . The company expects to pay these payroll taxes during the third quarter of 2021, and they are included in Accrued compensation and benefits in the accompanying Consolidated Balance Sheet as ofJuly 3, 2021 . LIQUIDITY AND CAPITAL RESOURCES Historically, our primary source of capital has been cash generated from operations. In recent years, we have used borrowings on our credit facilities to fund acquisitions. During the first six months of 2021, cash provided by operating activities totaled$49.5 million . At the end of the second quarter, we had$34.4 million of available cash and cash equivalents on hand and$161.4 million of available credit on our revolving credit facilities. We also have a$300.0 million accordion feature available on our credit facility, subject to certain pro forma compliance requirements, intended to support potential future acquisitions. Our principal uses of cash have been paying operating expenses, making capital expenditures, servicing debt, making acquisition-related payments and paying dividends to shareholders. We believe that cash generated from operations and our borrowing availability under our credit facilities will be sufficient to satisfy our operating expenses. In the event that economic conditions were to severely worsen for a protracted period of time, we would have several options available to ensure liquidity in addition to increased borrowings. Capital expenditures could be postponed since they primarily pertain to long-term improvements in operations. Additional operating expense reductions also could 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):
Six Months Ended
July 3, 2021 June 27, 2020 $ Change
Net cash provided by operating activities $ 49.5 $ 40.3 $ 9.2
Net cash used in investing activities (14.2 ) (5.5 ) (8.7 )
Net cash used in financing activities (28.7 ) (19.7 ) (9.0 )
Effect of exchange rate changes on cash 2.5 (0.3 ) 2.8
Net increase in cash $ 9.1 $ 14.8 $ (5.7 )
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-------------------------------------------------------------------------------- Cash on hand increased$9.1 million from$25.3 million at the end of 2020 to$34.4 million atJuly 3, 2021 . Changes in exchange rates during the six months endedJuly 3, 2021 favorably impacted cash and cash equivalents by$2.5 million . Cash balances on hand are a result of our cash management strategy which focuses on maintaining sufficient cash to fund operations while reinvesting cash in the Company and paying down borrowings on our credit facilities.
Operating activities
Cash from operations totaled$49.5 million during the first two quarters of 2021, an increase of$9.2 million compared to the prior-year period. Year-to-date cash earnings increased by$41.4 million over the prior-year period; however, increases in net operating assets and liabilities grew by$32.2 million , compared to the prior-year period, in order to support our considerable increase in operations. Changes in inventory reduced cash by$22.9 million and$0.7 million in the first six months of 2021 and 2020, respectively. Days of inventory on hand decreased to 81 days as ofJuly 3, 2021 , compared with 105 days as ofJune 27, 2020 , positively impacted by the higher sales levels, the addition of Balboa's operations and improved demand planning and supply chain management during the year. Changes in accounts receivable reduced cash by$37.4 million and$7.0 million in the first six months of 2021 and 2020, respectively. Days sales outstanding improved slightly to 55 days as ofJuly 3, 2021 from 56 days as ofJune 27, 2020 , as our collection patterns remain consistent with the prior period. Investing activities Capital expenditures totaled$10.3 million for the first six months of 2021, an increase of$5.1 million over the prior-year comparable period. Capital expenditures for 2021 are forecasted to be approximately$30.0 to$32.0 million , primarily for investments in machinery and equipment for capacity expansion projects, improvements to manufacturing technology and maintaining/replacing existing machine capabilities. Cash used for acquisition related activities in the first half of 2021 totaled$3.4 million . The cash outflows consisted of the acquired assets ofBJN Technologies, LLC and a contractual purchase price adjustment related to the Balboa acquisition. Financing activities Cash used in financing activities totaled$28.7 million during the first six months of 2021, compared with cash used of$19.7 million in the prior-year period. The additional cash used this quarter was due to higher debt repayments, net of additional borrowings which totaled$22.1 million for the year-to-date period. During the second quarter of 2021, we declared a quarterly cash dividends of$0.09 per share payable onJuly 20, 2021 , to shareholders of record as ofJuly 5, 2021 . The declaration and payment of future dividends is subject to the sole discretion of the Board of Directors, and any determination as to the payment of future dividends will depend upon our profitability, financial condition, capital needs, future prospects and other factors deemed pertinent by the Board of Directors.
Off Balance Sheet Arrangements
We do not engage in any off-balance sheet financing arrangements. In particular, we do not have any material interest in variable interest entities, which include special purpose entities and structured finance entities.
Inflation
We do not believe that inflation has had a material effect on our business to date. However, as more fully described in Item 2 above, we are experiencing supply shortages and increasing material and logistics costs. Continued increases in the global demand for the materials used in our products could result in significant increases in the costs of the components we purchase, and we may not be able to fully offset such higher costs through price increases. There is no assurance that our business will not be materially affected by inflation in the future.
Critical Accounting Policies and Estimates
We currently apply judgment and estimates which may have a material effect on
the eventual outcome of assets, liabilities, revenues and expenses for
impairment of long-lived assets, inventory, goodwill, accruals, income taxes and
fair value measurements. Our critical accounting policies and estimates are
included in our Form 10-K, and any changes made during the first six months of
2021, are disclosed in Note 2 to the Consolidated, Unaudited Financial
Statements.
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