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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 28, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-21835

 

HELIOS TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

 

Florida

 

59-2754337

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

1500 WEST UNIVERSITY PARKWAY

SARASOTA, Florida

 

34243

(Address of Principal Executive Offices)

 

(Zip Code)

941/362-1200

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock $.001 Par Value

 

HLIO

 

The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes      No  

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes     No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller Reporting Company

Emerging growth company

 

 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The aggregate market value of the shares of voting common stock held by non-affiliates of the Registrant, computed by reference to the closing sales price of such shares on the Nasdaq Stock Market, LLC, as of the last business day of the Registrant’s most recently completed second fiscal quarter was $1,351,300,941.

The Registrant had 32,057,032 shares of common stock, par value $.001, outstanding as of February 14, 2020.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the 2020 Annual Meeting of Shareholders to be held June 5, 2020, which is expected to be filed with the Securities and Exchange Commission on or about April 24, 2020, have been incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K.  

 



PART 1

ITEM 1. BUSINESS

Our Business

Overview

Helios Technologies, Inc. (“Helios,” the “Company,” “we,” “us” or “our”), and its wholly-owned subsidiaries, is a global industrial technology leader that develops and manufactures solutions for both the hydraulics and electronics markets. On June 13, 2019, the Company changed its legal name from Sun Hydraulics Corporation to Helios Technologies, Inc. Sun Hydraulics, LLC (“Sun Hydraulics” or “Sun”), a Florida limited liability company that holds the historical net operating assets of the Sun Hydraulics brand entities and Custom Fluidpower Pty Ltd, (“Custom Fluidpower”), along with Enovation Controls, LLC (“Enovation Controls”) and Faster S.r.l. (“Faster”), are the wholly-owned operating subsidiaries of Helios.  Details of our legal entities are below.

 

Sun Hydraulics was founded in 1970 and is a wholly owned subsidiary of Helios with its headquarters in Sarasota, Florida.  The majority of Sun’s manufacturing operations reside in Sarasota with additional operations in the United Kingdom (“UK”), Germany, South Korea and China, as well as sales offices in India and South America.  In 2019, Sun also opened a subsidiary in Vietnam which will facilitate sales, marketing and service arrangements with customers in the Southeast Asian market.

 

Enovation Controls, a wholly owned subsidiary of Helios, which we acquired on December 5, 2016, was formed in 2009 in connection with the reorganization of Murphy Group, Inc. and EControls Group, Inc.  Enovation Controls operates the majority of its manufacturing in Tulsa, Oklahoma with sales and engineering capabilities in Texas, the UK, China and India.  

 

Faster was acquired on April 5, 2018.  Headquartered near Milan, Italy, Faster has manufacturing operations co-located with its headquarters as well as in the U.S. and India.  Additionally, the company has sales offices in China, Brazil and Germany.  

 

Helios acquired Custom Fluidpower on August 1, 2018.  Custom Fluidpower has eight locations throughout Australia where engineering solutions are provided, four of which operate as value-add distributors.  The remaining four locations conduct repair work for hydraulics systems.

Until 2016, we operated primarily in the hydraulics market with a small presence in the electronics market. The expansion of our electronic and digital capabilities through the acquisition of Enovation Controls diversified our business and granted us access to the new, highly specialized marine, power generation and recreational vehicle markets and customers seeking complete machine control.  The Enovation Controls team has a proven track record of new product development and technical innovation, complementing our existing competencies.  

We believe our 2018 acquisitions of Faster and Custom Fluidpower are also in alignment with our Vision 2025 goals, advancing the Company as a global technology leader in the industrial goods sector while maintaining superior profitability and financial strength.  Faster further diversified the Company more deeply into the global agriculture market and broadened the Company’s global footprint, advancing our “in the region, for the region” initiative by providing a manufacturing hub in Europe.  Custom Fluidpower provided regional value-add capabilities to continue successful penetration of the Asia Pacific (“APAC”) region and particularly Southeast Asia.

The Company’s executive offices are located at 1500 West University Parkway, Sarasota, Florida 34243, and our telephone number is (941) 362-1200. Our websites include www.heliostechnologies.com, www.sunhydraulics.com, www.enovationcontrols.com, www.fastercouplings.com and www.custom.com.au.

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Strategy & Vision 2025

In 2016, we announced our Vision 2025, our strategic growth plan.  This plan, through which we seek to reach a critical mass of $1 billion in annual sales by 2025, consists of two significant components to reaching the revenue goal: organic growth and acquisitions.  We expect that, by 2025, up to $920 million of the anticipated annual $1 billion in revenue will result from organic growth of our existing segments (approximately $700 million from our Hydraulics segment and $220 million from our Electronics segment), with the remaining $80 million to be derived from acquisitions of companies that advance our technology position with adjacent products for the industrial goods sector and broaden our geographic reach.  We will seek acquisition targets that will bring us advanced technologies in the industrial goods sector.  Our current initiatives for organic growth include new product development, penetrating new geographic markets, expanding sales and marketing efforts in existing geographies, developing new channels to market to reach customers not currently in Helios’s purview and further diversifying our end market penetration.

Helios’s strategic roadmap includes product and service differentiation, disciplined and thoughtful leadership throughout our global organization and ensuring that all processes and activities consider the view of the customer.  We have identified and have begun applying 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.  Internal key performance indicators are used on a daily basis to align our short-term actions with our long-term strategy.

A primary focus of our strategic thinking is the identification of megatrends that will impact the future capital equipment and industrial goods markets.  We have identified three megatrends: globalization, growing sophistication of safe machinery and equipment and increased computing power, as further described below:

Globalization. We believe global population growth and urbanization, driven predominantly by Asian mega-cities, will generate ongoing demand for infrastructure projects, resources and food production, all of which require equipment and machinery from our key end markets.  

Sophistication of safe machinery and equipment.  Machine users increasingly demand safety, productivity, efficiency, and automated control. Advancements in the design of these machines require continuous evolution of critical components such as hydraulic and electronic functionality and control.  

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Increased computing power.  In the current electronic and digital age, electronics are increasingly used to activate processes which were once activated only manually or mechanically.  Information is increasingly being converted into a form that allows it to be processed, stored and transmitted digitally, resulting in both time and energy savings.  

Our culture of innovation is at the core of our business. We have approximately 250 engineers in support of product innovation, as well as technical support and customer service.  We believe our product innovation will aid organic growth and fill the expected demand resulting from the identified megatrends.  All growth initiatives are intended to preserve Helios’s history of superior profitability and financial strength.

Business Segments

We are organized into two operating and reporting segments: Hydraulics and Electronics.  The Hydraulics segment includes products sold under the Sun Hydraulics, Faster and Custom Fluidpower brands.  The Electronics segment includes products sold under the Enovation Controls and Murphy brands. Financial information about our business segments is presented in Note 17 of the Notes to the Consolidated Financial Statements included in this Annual Report.  

Hydraulics

There are three key technologies within our Hydraulics segment:  cartridge valve technology (“CVT”), quick-release hydraulic couplings solutions (“QRC”) and hydraulic system design (“Systems”).

Our CVT products provide functions important to a hydraulic system: to control rates and direction of fluid flow and to regulate and control pressures, and use a fundamentally different design platform compared to most other competitive product offerings. The floating construction that we pioneered results in a self-alignment characteristic that provides performance and reliability advantages compared to most competitors’ product offerings. This floating construction differentiates our products from those of most of our competitors, who design and manufacture rigid screw-in cartridge valves that fit a common cavity.  Our cartridge valves, offered in five size ranges and including both electrically actuated and non-electrically actuated products, are designed to be able to operate reliably at higher pressures, making them equally suitable for both industrial and mobile applications.  

Hydraulic systems are increasingly taking signals from on-board electronic control systems, making it necessary for hydraulic products to be capable of digital communication.  In response to this we have recently aggressively expanded our CVT offering of electrically-actuated cartridge valves.  In 2017, we introduced FLeX™, a new electro-hydraulic product line offering high-performance electro-hydraulic products.  Throughout 2018 and 2019, we continued to introduce new products under the FLeX™ Series, further expanding our electro-hydraulic product offering for both the mobile and industrial hydraulics markets. The valves are designed to outperform comparable valves in the market. They are virtually leak-proof poppet-style valves that deliver consistently better pressure drop. Coil options include interchangeable low-power, high power and hazardous location (explosion-proof) versions for expanded configuration flexibility.  The FLeX™ Series valves use Sun’s unique floating-style design, adding an extra layer of security in those harsh applications where torque and force can become excessive.

QRC products allow users to connect and disconnect quickly from any hydraulic circuit without leakage and ensure high-performance under high temperature and pressure using one or multiple couplers.  Quick connection of multiple hydraulic lines can be accomplished through the use of a MultiFaster or casting solution.  Simultaneous connection of several lines is an important feature in many applications and allows for dramatic reduction of connection time, even when the system is under pressure. Faster is a leading global manufacturer of QRC solutions. We design, engineer and distribute hydraulic coupling solutions focused in the agriculture, construction equipment and industrial markets.  

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Systems provide engineered solutions for machine users, manufacturers or designers to fulfill complete system design requirements including electro-hydraulic, remote control, electronic control and programmable logic controller systems, as well as automation of existing equipment.  The systems we manufacture are:

 

highly efficient;

 

increase and optimize productivity;

 

introduce safer operating procedures;

 

are smaller in size than competitive products;

 

allow for ease of maintenance; and

 

reduce energy costs.

Our hydraulics products are sold globally through a combination of wholly-owned companies, representative sales offices, independent channel partners that include value-add distributors and integrators, and original equipment manufacturers (“OEM”).  Our global channel partner network includes representation in many industrialized markets. Business activities at our global locations include new product development, component and system design, manufacturing, sales, technical support, inventory warehousing and distributor management.

Electronics

We are an international leader in fully-tailored solutions for engines, engine-driven equipment and specialty vehicles with a broad range of rugged and reliable instruments such as displays, controls and instrumentation products through our Enovation Controls, Zero Off, Murphy and HCT brands. As an innovative manufacturer of electronic controls and displays, we serve a variety of markets including off-highway, recreational and commercial marine, power sports and specialty vehicles, agriculture and water pumping, power generation and engine-driven industrial equipment.  We partner directly with OEMs and support a worldwide network of authorized distributors and systems integrators. We make significant investments to garner an intense understanding of unique applications to solve complex system challenges. Our focus is on creating customized systems that solve complex problems for niche mid-market volume customers.  This allows us to target customers or industries that see value in this level of integration, and as a result, our customer list contains a wide variety of OEM applications. Product categories include traditional mechanical and electronic gauge instrumentation, plug and go CAN-based instruments, after-market support through global distribution, robust environmentally sealed controllers, hydraulics controllers, engineered panels and application specialists, process monitoring instrumentation, proprietary hardware and software development, printed circuit board assembly and wiring harness design and manufacturing.

We offer our customers the ability to customize software on their products from the graphics for our PowerView®™ line of LCD displays with focus on the customization of the operator interface: to larger, full-graphic displays; flexible hardware configurations; multi-language support; class-leading environmental protection; and software tools that deliver the ultimate solution for OEM and distributor display customization and CAN control.  Our displays offer easy-to-read, bonded LCD graphical views with the industry's best readability even in direct sunlight or harsh water conditions.  Our controllers are built with the ability to withstand a wide ambient temperature range.  User friendly software configuration tools allow engineers and non-engineers alike to create customized systems that solve complex problems on their equipment making the user experience more seamless.  

Our panel solutions offer customized design and simple, turnkey solutions. Our Industrial Panel Division offers engineers dedicated to applications, wire harnesses, panels and software development. Engineers focus entirely on custom and standard solutions built to desired specifications.  Our services for design and development include on-site installation and testing with reviews to ensure the solution works with the application out of the box.  

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Globally, electronics products are sold primarily direct to OEM customers, with about 20% sold through independent, authorized channel partners.  Beginning in 2018, we commenced a strategic initiative to further diversify our channels to market as well as our geographic reach.  Our expansion efforts require the development of distribution partners globally, including on-boarding and training of these partners.  These efforts assist in our ability to diversify our global customer base, allowing us to grow more quickly, diversify the end-markets we serve, and expand our customer base.  We are currently making investments in a manufacturing facility in India, furthering our “in the region, for the region” initiative. Production in India is expected to begin in 2020.

Engineering

Engineers in both our segments play an important role in all aspects of our business including design, manufacturing, sales, marketing and technical support. Engineers work within a disciplined set of design parameters that encourage the reuse and incorporation of existing parts and platforms into new products. Product design engineers work closely with manufacturing personnel to define the processes required to manufacture products reliably and consistently.

There are ongoing joint product development efforts among the engineering groups of Hydraulics and Electronics.  Electrification of machines is one of the global needs that served as the rationale to our acquisition of Enovation Controls and will drive the megatrends identified in our strategic review.  The know-how and technical competence of the engineers in the Electronics segment are being utilized to bring electrification to products and systems designed and manufactured within the Hydraulics segment.

The joint development efforts between our segments are a key driver of the revenue synergies identified for our acquisitions.  We have a small focused group of engineers involved in these development projects to concentrate efforts and drive results. The core competencies of each of our companies have been critical to our companies’ historical success and will remain important in the future.  However, we see significant opportunities in bringing together the technology of hydraulics and electronics to create new products to better serve future market trends.    

Manufacturing

Hydraulics

We utilize process-intensive manufacturing operations that make extensive use of automated handling and assembly technology (including robotics), where possible, to perform repetitive tasks, thus promoting manufacturing efficiencies and workplace safety. We employ lean techniques to continually improve our productivity and efficiency. Our hydraulics business is capital intensive which affords us the ability to choose whether we produce in-house and/or out-source component parts and finishing processes. We have manufacturing hubs in the U.S., Europe, the Middle East and Africa (“EMEA”) and APAC as we work toward our “in the region, for the region” goal.  In 2019, we added manufacturing capacity and capability in China, further extending our global footprint. 

We hold significant raw materials, work in process and finished goods in all of the businesses within the Hydraulics segment. The raw materials used, primarily aluminum and steel, are commercially available from multiple sources.  Finished goods consist of customer orders that are completed but have not been shipped.  

We have negotiated certain long term agreements (“LTA”) with our key suppliers.  Terms and conditions of these agreements include pricing, annual quantity estimates, quality standards, safety stock quantities and lead time expectations.  The LTAs are intended to provide the Company and the supplier with a framework for effective long-term planning and utilization of assets.

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Electronics

We offer a wide range of advanced manufacturing and engineering capabilities, including mechanical and electrical hardware design, software design, product testing, harness engineering and more.  State-of-the-art manufacturing and test capabilities include LCD bonding, surface mount technology (“SMT”) with 3D solder paste inspection, 3D automated optical inspection, x-ray inspection and highly accelerated life test and highly accelerated stress screen (“HALT” and “HASS”) chambers for accelerated product lifecycle testing. Multipoint functional testing is conducted to ensure quality control of our products before they are delivered to our customers. Products are serialized, and test data is captured against serial numbers and stored in a manufacturing execution system (“MES”) database. 

Our global operating system is tied together via an enterprise and manufacturing resource planning system, and we deploy Lean manufacturing and Six Sigma principles and tools to drive ongoing quality and productivity improvements.  This allows us to identify and remove variation and waste in our manufacturing and business processes while driving continuous improvements in lead times and quality. 

We are a customer focused/project-based organization engaging with customers in long-term product plans and contracts, backed by vertically integrated manufacturing capabilities. Our strategic investment in vertically integrated manufacturing processes such as wire processing, sheet metal fabrication, LCD bonding, and surface mount technology enable speed to market in developing highly engineered electronics engine and machine control solutions for OEMs.  

Our globally aligned raw materials and finished goods inventory strategies allow us to maintain high service levels for customers.  Electronics raw materials long lead times are carefully planned and managed to ensure we are able to fill orders based on customer request dates which are often less than three weeks. 

Sales and Marketing

In 2019, no single customer made up more than 5% of consolidated net sales.  

Hydraulics

Approximately 80% of Helios’s sales are derived from the Hydraulics segment. Our 2019 Hydraulics segment sales are distributed fairly evenly among our three major geographic regions with 37% to the Americas, 32% to EMEA and 31% to APAC. Given our acquisitions in 2018, we have increased our global reach into the EMEA and APAC regions.

We market and sell hydraulic products through value-add distributors and directly to OEMs.  Globally, approximately 69% of sales are attributed to our channel partners who generally combine our products with other hydraulic components to design a complete hydraulic system.  Sales direct to OEMs for integration in their machines make up the remaining 31%.  We rely heavily on our distribution network in the U.S. with the majority of sales in this region going through channel partners.  In EMEA and APAC, sales are split more evenly between OEMs and distributors.  Technical support is provided by local experts based at each of our global operations.

We provide end users with technical information through the websites of our operating companies and catalogs in multiple languages, including all information necessary to specify and obtain our products. We believe this approach helps stimulate demand for our products.  

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Electronics

Electronic products are sold globally both to OEM customers and through distributors.  OEM sales constitute 80% of total Electronics segment sales.  Building strong partnerships with OEMs is a priority.  We rely on direct customer contacts to stimulate demand for our products.  We work closely with our OEM customers to design and deliver innovative reliable products for specific applications.  Our hardware and software products are designed and modified with the customer utilizing our extensive application knowledge to create unique system level products that cannot be easily replaced by simply switching out components.  Twenty-four hour customer service support and an in-house technical service department is available before, during and after the initial sale to create sustainable partnerships with our customers.  

Our OEM sales team collaborates with large OEMs, whereas the Distributor sales team works with a large number of distributors of varying sizes.  Over the last few years, we reconstituted our sales teams to create a heavier focus on distributor sales.  Overall, approximately 20% of segment sales are derived from independent, authorized distributor channel partners.

Geographically, our 2019 Electronics segment sales represent 86% to the Americas, 8% to EMEA and 6% to APAC.  There is a well-defined initiative to grow sales in EMEA and APAC as part of Vision 2025.  Additionally, synergies identified at the time of acquisition utilize customer relationships from the Hydraulics segment to create pull through of electronic products, and joint product development has created additional sales opportunities for both segments.  

Competition

Hydraulics

Competitors in the hydraulics market are broken down into three categories:  full-line hydraulics system producers, component-only producers of CVT or QRC products, and low-cost producers. Most competitors market globally.  Full-line producers can provide complete hydraulic systems to their customers, including components functionally like those manufactured in our Hydraulics segment.  Similar to Helios, component-only producers are entities that offer only CVT or QRC products, while additional parts of the hydraulics system are obtained from other manufacturers.  Low cost producers are competitors who have emerged in low cost production areas such as APAC and Eastern Europe. These competitors will typically copy our products and like products designed by competitors. Low cost producers typically have a limited product range compared to full line or cartridge valve only producers, which limits their ability to be competitive.

We believe that we compete based upon the quality, reliability, price, value, speed of delivery and technological characteristics of our products and services.

Electronics

Competition within the electronics market is very broad with competitors ranging from large multinational companies with full electronics offering to small niche companies that specialize in one product type.  Enovation Controls is a niche player in the displays, controllers, gauges and instrumentation panel markets.

The market for products designed and manufactured by Enovation Controls is relatively fragmented with the top four to six companies comprising the majority of the market, mostly servicing the automotive space.  Enovation Controls differentiates itself through product quality, customization ability and service with a focus on mid-market niche markets that are not well served by the large competitors. Our engagement and speed to market set us apart from larger competitors.

Our overall position in our key markets is defensible due to high barriers to switching suppliers, such as up-front engineering and programming costs, and positive perceptions among core customers on key selection criteria, including quality and service.

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Employees

As of December 28, 2019, we had approximately 1,960 full-time employees with 1,080 in the Americas, 545 in EMEA and 335 in APAC.  We believe that relations with our employees are good. Approximately 420 of our employees in Italy are represented by a union.  We have constructive and productive dialog on a regular basis with union leaders.  To the best of our knowledge, there is no labor dispute, strike, controversy, slowdown, work stoppage or lockout pending or threatened against or affecting the Company, nor is there any basis for any of the foregoing. 

Patents and Trademarks

In addition to trade secrets, unpatented know-how, and other intellectual property rights, we own approximately 150 active patents and trademarks relating to certain of our products and businesses.  We believe that the growth of our business is dependent upon the quality and functional performance of our products and our relationship with the marketplace, rather than on any single patent, trademark, copyright, or other item of intellectual property or group of patents, trademarks or copyrights.  However, our patents are important in the defense of our intellectual property from competitors who exploit product development that is not otherwise legally protected by its creator.

Available Information

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, as well as our proxy statements and other materials which are filed with or furnished to the Securities and Exchange Commission (“SEC”) are made available, free of charge, on or through the Helios website under the heading “Investors” and “SEC Filings” as soon as reasonably practicable after they are filed with, or furnished to, the SEC.

 

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ITEM 1A. - RISK FACTORS

FACTORS INFLUENCING FUTURE RESULTS - FORWARD-LOOKING STATEMENTS This Annual Report contains “forward-looking statements” (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on current expectations, estimates, forecasts, projections, our beliefs, and assumptions made by us, including (i) our strategies regarding growth, including our intention to develop new products and undertake acquisitions; (ii) our financing plans; (iii) trends affecting our financial condition or results of operations; (iv) our ability to continue to control costs and to meet our liquidity and other financing needs; (v) the declaration and payment of dividends; and (vi) our ability to respond to changes in customer demand domestically and internationally, including as a result of standardization.  In addition, we may make other written or oral statements, which constitute forward-looking statements, from time to time.  Words such as “may,” “expects,” “projects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words, and similar expressions are intended to identify such forward-looking statements.  Similarly, statements that describe our future plans, objectives or goals also are forward-looking statements.  These statements are not guaranteeing future performance and are subject to a number of risks and uncertainties, including those discussed below and elsewhere in this report.  Our actual results may differ materially from what is expressed or forecasted in such forward-looking statements, and undue reliance should not be placed on such statements.  All forward-looking statements are made as of the date hereof, and we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Factors that could cause actual results to differ materially from what is expressed or forecasted in such forward-looking statements include, but are not limited to: (i) conditions in the capital markets, including the interest rate environment and the availability of capital; (ii) changes in the competitive marketplace that could affect our revenue and/or cost bases, such as increased competition, lack of qualified engineering, marketing, management or other personnel, and increased labor and raw materials costs; (iii) new product introductions, product sales mix and the geographic mix of sales nationally and internationally; and (iv) the following risk factors:

Risks Relating to Our Business

General global economic trends and industry trends may affect our sales. The capital goods industry in general, and our businesses, are subject to economic cycles, which directly affect customer orders, lead times and sales volume. Economic downturns generally have a material adverse effect on our business and results of operations, as they did in 2009. Cyclical economic expansions such as those of 2017 and 2018, provide a context where demand for capital goods is stimulated, creating higher incoming order rates for the products we produce. Higher demand can lead to part shortages which drive costs up.  If demand gets too strong, lead times can be extended which may cause some customers to cancel orders.  In the Electronics segment, our business is dependent on the general economy and widespread adoption of advanced digital control solutions that integrate technologies such as high-resolution displays, configurable software GPS navigation, vehicle management systems, engine safety diagnostics, and engine energy efficiency. If one or more of these expected industry trends fails to occur, or occurs at a slower rate than expected, our sales growth will be negatively impacted, and our business will be adversely affected. In the future, continued weakening or improvement in the economy will directly affect orders and influence results of operations.

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Our business could be harmed by adverse global and regional economic and political conditions. In June 2016, voters in the UK approved the UK’s exit (“Brexit”) from the European Union (EU), and the British government will continue to negotiate the terms of its withdrawal. The exit officially occurred on January 31, 2020.  Brexit has created significant economic uncertainty in the UK and in Europe, the Middle East, and Asia, which may negatively impact our business results in those regions. In addition, the terms of Brexit, once negotiated, could potentially disrupt the markets we serve and the tax jurisdictions in which we operate and adversely change tax benefits or liabilities in these or other jurisdictions, and may cause us to lose customers, suppliers, and employees. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the UK determines which EU laws to replace or replicate.  Any of these effects could adversely affect our business and results of operations.

Our operations and transactions also depend upon favorable trade relations between the U.S. and those foreign countries in which our customers and suppliers have operations. A protectionist trade environment in either the U.S. or those foreign countries in which we do business or sell products, such as a change in the current tariff structures, export compliance laws, government subsidies, or other trade policies, may adversely affect our ability to economically source materials, sell our products, or do business in foreign markets. Trade restrictions, including withdrawal from or modification of existing trade agreements, negotiation of new trade agreements, and imposition of new (and retaliatory) tariffs against certain countries or covering certain products, including developments in U.S.-China trade relations, could limit our ability to capitalize on current and future growth opportunities in international markets and impair our ability to expand the business. These trade restrictions, and changes in–or uncertainty surrounding–global trade policies may affect our competitive position. Our overall success as a global business depends, in part, upon our ability to succeed in differing economic, social and political conditions. We may not succeed in developing and implementing policies and strategies to counter the foregoing factors effectively in each location where we do business and the foregoing factors may cause a reduction in our sales, profitability, or cash flows, or cause an increase in our liabilities.

We are subject to intense competition.

Hydraulics 

The Hydraulics segment is intensely competitive, and competition comes from many companies, some of which are full-line hydraulic system producers and others that are niche suppliers like us. Full-line producers can provide total hydraulic systems to customers, including components functionally similar to those manufactured by us. We believe that we compete based upon quality, reliability, price, value, speed of delivery and technological characteristics. Many Hydraulics segment competitors are owned by corporations that are significantly larger and have greater financial resources than us. Also, competitors have emerged in low cost production areas such as Asia and Eastern Europe with look-alike products. We cannot provide assurance that we will continue to be able to compete effectively with these companies.

In addition, we compete in the sale of hydraulic valves, manifolds and integrated packages with certain of our customers, that also may be competitors. Generally, these customers purchase cartridge valves from us to meet a specific need in a system that cannot be filled by any valve they make themselves. To the extent that we introduce new products in the future that increase competition with such customers, it may have an adverse effect on our relationships with them.

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Electronics

In the Electronics segment, our products face, and will continue to face, significant competition, including from incumbent technologies. New developments in technology may negatively affect the development or sale of some or all of our products or make our products uncompetitive or obsolete. Other companies, many of which have substantially longer operating histories, larger customer bases, name recognition, and financial and marketing resources than we do, are currently engaged in the development of products and technologies that are similar to, or may compete with, certain of our products and technologies.

We sell products into competitive markets. Within our primary markets, we compete with a range of companies that offer certain individual components of our full system solutions. The components of our overall systems most commonly include displays, panels, sensors, valves, and other end-devices.

We also face competition from customers developing products internally. Customers for our products generally have substantial technological capabilities and financial resources. Some customers have traditionally used these resources to develop their own products internally. The future prospects for our products are dependent upon our customers acceptance of our products as an alternative to their internally developed products. Future sales prospects also are dependent upon acceptance of third-party sourcing for products as an alternative to in-house development. In the future, customers may continue to use internally developed components. They also may decide to develop or acquire products that are similar to, or that may be substituted for, our products. If our customers fail to accept our products as an alternative, if they develop or acquire the technology to develop such products internally rather than purchase our products, or if we are otherwise unable to develop or maintain strong relationships with them, our business, financial condition and results of operations would be materially and adversely affected. 

Competitive actions, such as price reductions, consolidation in the industry, improved delivery and other actions, could adversely affect our revenue and earnings. We could experience a material adverse effect to the extent that our competitors are successful in reducing our customers purchases of products and services from us. Competition could also cause us to lower our prices, which could reduce our margins and profitability.

We are subject to risks relating to international sales.  International sales represent a significant proportion of our consolidated sales.  Approximately 59% and 55% of our net sales were outside of the U.S. during 2019 and 2018, respectively. We will continue to expand the scope of operations outside the U.S., both through direct investment and distribution, and expect that international sales will continue to account for a substantial portion of net sales in future periods.

Our future results could be harmed by a variety of factors, including:

 

changes in the political and economic conditions in the countries in which we operate, including civil uprisings and terrorist acts;

 

unexpected changes in regulatory requirements;

 

the imposition of duties and tariffs and other trade barriers;

 

import and export controls;

 

potentially negative consequences from changes in U.S. and international tax laws;

 

fluctuations in currency exchange rates and the value of the U.S. dollar;

 

exchange controls and currency restrictions;

 

expropriation of property without fair compensation;

 

governmental actions that result in the deprivation of contract or proprietary rights;

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the acceptance of business practices that are not consistent with or are antithetical to prevailing business practices we are accustomed to in the U.S., including bribery and corruption;

 

difficulty in staffing and managing geographically widespread operations;

 

the unionization of, or increased union activity, such as strikes or work stoppages, with respect to, our workforce outside the U.S.;

 

differing labor regulations;

 

global and/or regional pandemics;

 

requirements relating to withholding taxes on remittances and other payments by subsidiaries;

 

different regulatory regimes controlling the protection of our intellectual property;

 

difficulty in enforcement of contractual obligations under non-U.S. law;

 

refusal or inability of foreign banks to make payment on letters of credit in connection with foreign sales, and our inability to collect from our foreign customers in such circumstances;

 

restrictions on our ability to own or operate subsidiaries, repatriate dividends or earnings from our foreign subsidiaries, or to make investments or acquire new businesses in these jurisdictions; and

 

the burden of complying with multiple and potentially conflicting laws.

Our international operations and sales also expose us to different local political, regulatory, and business risks and challenges. For example, we are faced with potential difficulties in staffing and managing local operations and we have to design local solutions to manage credit and legal risks of local customers and channel partners, which may not be effective. In addition, because some of our international sales are to suppliers that perform work for foreign governments, we are subject to the political and legal risks associated with foreign government projects. For example, certain foreign governments may require suppliers for a project to obtain products solely from local manufacturers or may prohibit the use of products manufactured in certain countries.

International growth and expansion into markets such as Europe, Asia, and Latin America may cause us difficulty due to greater regulatory barriers than in the U.S., the necessity of adapting to new regulatory systems, problems related to entering new markets with different economic, social and political systems and conditions, and significant competition from the primary participants in these markets, some of which may have substantially greater resources and political influence than we do. For example, unstable political conditions or civil unrest could negatively impact our order levels and sales in a region or our ability to collect receivables from customers or operate or execute projects in a region.

Our business in and supply chain to/from China may be adversely impacted by an extended shutdown of operation in China due to the recent coronavirus outbreak.  The outbreak of the coronavirus is an evolving concern for our business due to the impact it may have on our employees, suppliers, operations and sales.   We are concerned for the well-being of our employees and the virus has impacted our employees’ ability to resume full employment duties and to travel in and out of the region.  Approximately 9% of our total sales are to Chinese customers and it is a fast-growing region for us from a sales perspective. Our new manufacturing facility in Kunshan, China (opened in 2019) is relied upon to support our growing business in the region.  Our supply chain is dependent on parts made in China that support manufacturing facilities in the region as well as in the U.S. and Europe.  While the closures and limitations on movement in the region are expected to be temporary, the duration of the production, supply chain and sales disruption, and the related financial impact, cannot be estimated at this time. Should the production and distribution closures continue for an extended period of time, the impact on our manufacturing facility, sales/distribution offices and supply chain in China and globally could have a material adverse effect on our results of operations and cash flows.

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Failure to comply with laws, regulations and policies, including the U.S. Foreign Corrupt Practices Act and UK Bribery Act or other applicable anti-corruption legislation, could result in fines, criminal penalties and an adverse effect on our business. We are subject to regulation under a wide variety of U.S. federal and state and non-U.S. laws, regulations and policies, including anti-corruption laws and export-import compliance and trade laws, due to our global operations. In particular, the U.S. Foreign Corrupt Practices Act, or FCPA, the UK Bribery Act of 2010 and similar anti-bribery laws in other jurisdictions generally prohibit companies, their agents, consultants and other business partners from making improper payments to government officials or other persons (i.e., commercial bribery) for the purpose of obtaining or retaining business or other improper advantage.  They also impose recordkeeping and internal control provisions on companies such as ours. We operate and/or conduct business, and any acquisition target may operate and/or conduct business, in some parts of the world, such as China, India and Russia, that are recognized as having governmental and commercial corruption and in such countries, strict compliance with anti-bribery laws may conflict with local customs and practices.  We cannot provide assurance that our or any acquisition target’s internal control policies and procedures have protected us, or will protect us, from unlawful conduct of our employees, agents, consultants and other business partners. In the event that we believe or have reason to believe that violations of anti-corruption laws may have occurred we may be required to investigate and/or have outside counsel investigate the relevant facts and circumstances, which can be expensive and require significant time and attention from senior management. Violation may result in substantial civil and/or criminal fines, disgorgement of profits, sanctions and penalties, debarment from future work with governments, curtailment of operations in certain jurisdictions, and imprisonment of the individuals involved.  As a result, any such violations may materially and adversely affect our business, results of operations or financial condition. In addition, actual or alleged violations could damage our reputation and ability to do business. Any of these impacts could have a material, adverse effect on our business, results of operations or financial condition.

Fluctuations in exchange rates may affect our operating results and impact our financial condition. Fluctuations in the value of the U.S. dollar may increase or decrease our sales or earnings. Because our consolidated financial results are reported in U.S. dollars, when we generate sales or earnings in other currencies, or we pay expenses in other currencies, the translation of those results into U.S. dollars can result in a significant increase or decrease in the reported amount of those sales or earnings. If the U.S. dollar strengthens relative to the value of the local currency, we may be less competitive. In addition, our debt service requirements are predominantly in U.S. dollars and a portion of our cash flow is generated in British pounds, euros and other foreign currencies. Significant changes in the value of the foreign currencies relative to the U.S. dollar could impair our cash flow, results of operations, and financial condition.

In addition, fluctuations in currencies relative to the U.S. dollar may make it more difficult to perform period-to-period comparisons of our reported results of operations. For purposes of accounting, the assets and liabilities of our foreign operations, where the local currency is the functional currency, are translated using period-end exchange rates, and the revenues and expenses of our foreign operations are translated using average exchange rates during each period.

In addition to currency translation risks, we incur currency transaction risk whenever we enter into either a purchase or a sales transaction using a currency other than U.S. dollars. Given the volatility of exchange rates, we may not be able to effectively manage our currency or translation risks. Volatility in currency exchange rates may decrease our sales and profitability and impair our financial condition. We periodically evaluate our need to hedge our exposures to foreign currencies and enter into forward foreign exchange contracts as we deem necessary.

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Our existing indebtedness could adversely affect our business and growth prospects. As of December 28, 2019, we had total indebtedness (including the current portion) of approximately $301 million. Our indebtedness, or any additional indebtedness we may incur, could require us to divert funds identified for other purposes for debt service and impair our liquidity position. If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of assets or issue equity to obtain necessary funds. We do not know whether we would be able to take any of these actions on a timely basis, on terms satisfactory to us or at all.

Our indebtedness, the cash flow needed to satisfy our debt and the covenants contained in our senior credit facility have important consequences, including:

 

limiting funds otherwise available for financing our capital expenditures by requiring us to dedicate a portion of our cash flows from operations to the repayment of debt and the interest on this debt;

 

limiting our ability to incur additional indebtedness;

 

limiting our ability to capitalize on significant business opportunities;

 

placing us at a competitive disadvantage to those of our competitors that are less indebted than we are;

 

making us more vulnerable to rising interest rates; and

 

making us more vulnerable in the event of a downturn in our business.

More specifically, under the terms of our senior credit facility, we have agreed to certain financial covenants. In addition, our senior credit facility places limitations on our ability to acquire other companies. Any failure by us to comply with the financial or other covenants set forth in our senior credit facility in the future, if not cured or waived, could result in our senior lender accelerating the maturity of our indebtedness or preventing us from accessing availability under our senior credit facility. If the maturity of our indebtedness is accelerated, we may not have sufficient cash resources to satisfy our debt obligations and we may not be able to continue our operations as planned.

Changes affecting the availability of the London Interbank Offered Rate (“LIBOR”) may have consequences for Helios that cannot yet reasonably be predicted.  The Company has outstanding debt with fixed and variable interest rates based on LIBOR. The LIBOR benchmark has been subject of national, international, and other regulatory guidance and proposals for reform. In July 2017, the UK Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit rates for calculation of LIBOR after 2021. These reforms may cause LIBOR to perform differently than in the past and LIBOR may ultimately cease to exist after 2021. Alternative benchmark rate(s) may replace LIBOR and could affect the Company's debt and debt payments. At this time, it is not possible to predict the effect of any changes to LIBOR, any phase out of LIBOR or any establishment of alternative benchmark rates. Any new benchmark rate will likely not replicate LIBOR exactly, which could impact our contracts which terminate after 2021. In addition, any changes to benchmark rates may have an uncertain impact on our cost of funds and our access to the capital markets, which could impact our results of operations and cash flows. Uncertainty as to the nature of such potential changes may also adversely affect the trading market for our securities.

We may need additional capital in the future, and it may not be available on acceptable terms, or at all. We may require additional capital in the future to:

 

fund our operations;

 

finance investments in equipment and infrastructure needed to maintain and expand our manufacturing and distribution capabilities;

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enhance and expand the range of products we offer; and

 

respond to potential strategic opportunities, such as investments, acquisitions, and international expansion.

We can give no assurance that additional financing will be available on terms favorable to us, or at all. The terms of available financing may place limits on our financial and operating flexibility. If adequate funds are not available on acceptable terms, we may be forced to reduce our operations or to delay, limit or abandon expansion opportunities. Moreover, even if we are able to continue our operations, the failure to obtain additional financing could reduce our competitiveness. Our senior credit facility limits our ability to incur additional debt and therefore we likely would have to issue additional equity to raise additional capital. If we issue additional equity, a shareholder’s interest in us will be diluted.

We are subject to various risks relating to our growth strategy. In pursuing our growth strategy and Vision 2025, we intend to expand our presence in existing markets, enter new markets, and pursue acquisitions and joint ventures to complement our business. Many of the expenses arising from expansion efforts may have a negative effect on operating results until such time, if at all, that these expenses are offset by increased revenues. We cannot assure that we will be able to improve our market share or profitability, recover our expenditures, or successfully implement our growth strategy.

The expansion strategy also may require substantial capital investment for the construction of new facilities and their effective operation. We can give no assurance that additional financing will be available on terms favorable to us, or at all.

Our culture, by encouraging initiative, and both individual and collaborative responsibility, has substantially contributed to our success and operating results. Because our employees are able to readily shift their job functions to accommodate the demands of the business and changes in the market, we are a nimble, creative and innovative organization. As we increase the number of our employees and grow into new geographic markets, our culture will likely shift and evolve in new ways. Because our culture promotes the drivers of our success, our inability to protect and align our core values and culture with the evolving needs of the business could adversely affect our continued success.

We may fail to successfully acquire or integrate companies that provide complementary products or technologies. A key component of our growth strategy and Vision 2025 depends upon our ability to successfully identify and integrate acquisition targets that complement our existing products and services. Such a strategy involves the potential risks inherent in assessing the value, strengths, weaknesses, contingent or other liabilities, and potential profitability of acquisition candidates, as well as, integrating the operations of acquired companies. In addition, any acquisitions of businesses with foreign operations or sales may increase our exposure to risks inherent in doing business outside the U.S. From time to time, we may have acquisition discussions with potential target companies both domestically and internationally. Any acquisition may or may not occur and, if an acquisition does occur, it may not be successful in enhancing our business for one or more of the following reasons:

 

Any business acquired may not be integrated successfully and may not prove profitable;

 

The price we pay for any business acquired may overstate the value of that business or otherwise be too high;

 

Liabilities we take on through the acquisition may prove to be higher than we expected;

 

Impairment of relationships with employees and customers of the business acquired, as a result of the change in ownership;

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We may fail to achieve acquisition synergies; or

 

The focus on the integration of operations of acquired entities may divert managements attention from the day-to-day operation of our businesses.

Inherent in any future acquisition is the risk of transitioning company cultures and facilities. The failure to efficiently and effectively achieve such transitions could increase our costs and decrease our profitability.

We also may incur significant costs such as transaction fees, professional service fees, and other costs related to future acquisitions, as well as integration costs following the completion of any such acquisitions. Although we expect that the realization of efficiencies related to the integration of any acquired businesses will offset the incremental transaction and acquisition-related costs over time, this net financial benefit may not be achieved in the near term, or at all.

If we are unable to continue our technological innovation and successful introduction of new commercial products, our business will be adversely affected. The industries we serve in the Electronics segment experience ongoing technological change and product improvement. Manufacturers periodically introduce new generations of products or require new technological capacity to develop customized products or to respond to industry developments or needs. Our future growth will depend on our ability to gauge the direction of the commercial and technological progress in our markets, as well as our ability to acquire new product technologies or to fund and successfully develop, manufacture and market products in this constantly changing environment. We must continue to identify, develop, manufacture and market innovative products on a timely basis to replace existing products in order to maintain our profit margins and competitive position. We may not be successful in acquiring and developing new products or technologies and any of our new products may not be accepted by our customers. If we fail to keep pace with evolving technological innovations in the markets we serve, our business will be adversely affected. Technology does not advance as quickly in the Hydraulics segment and, therefore, when there is risk relative to continued technological innovation, there is a lower threat than in the Electronics segment.

Our product development activities may not be successful, may be more costly than currently anticipated, or we may not be able to produce newly developed products at a competitive cost. Our business involves a significant level of product development activities, generally in connection with our customers development activities. Industry standards, customer expectations, or other products may emerge that could render one or more of our products or services less desirable or obsolete. Maintaining our market position requires continued investment in research and development. During an economic downturn or a subsequent recovery, we may need to maintain our investment in research and development, which may limit our ability to reduce these expenses in proportion to a sales shortfall. In addition, increased investments in research and development may divert resources from other potential investments in our business, such as acquisitions or investments in our facilities, processes and operations. If these activities are not as successful as currently anticipated, are not completed on a timely basis, or are more costly than currently anticipated, or if we are not able to produce newly developed products at a cost that meets the anticipated product cost structure, then our future sales, margins and/or earnings could be lower than expected, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

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If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed. In the Electronics segment particularly, we rely significantly on trade secrets, including unpatented software algorithms, know-how, technology, and other proprietary information, to maintain our competitive position. We seek to protect software algorithms through encryption mechanisms in the distribution of our binary files used in programming our engine control products. However, we cannot guarantee that these encryption techniques can protect all or any portion of these binary files. In practice, we seek to protect our trade secrets by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties. In practice, we also enter into confidentiality and noncompetition agreements with certain of our employees and consultants that obligate them to assign to us any inventions developed in the course of their work for us. However, we cannot guarantee that we have executed these agreements with each party that may have or has had access to our trade secrets or that the agreements we have executed will provide adequate protection. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. As a result, we may be forced to bring claims against third parties, or defend claims that they bring against us, to determine ownership of what we regard as our intellectual property. Monitoring unauthorized disclosure is difficult and we do not know whether the procedures we have followed to prevent such disclosure are, or will be, adequate. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the U.S. may be less willing or unwilling to protect trade secrets. If any of our trade secrets were to be disclosed to, or independently developed by, a competitor, our competitive position would be harmed, which could have an adverse effect on our business and financial condition.

The inability to protect our intellectual property could reduce or eliminate any competitive advantage and reduce our sales and profitability, and the cost of protecting our intellectual property may be significant.  We have obtained and applied for some U.S. and foreign trademark and patent registrations and will continue to evaluate the registration of additional trademarks and patents, as appropriate. We cannot guarantee that any of our pending patent and trademark applications will be approved. Moreover, even if the applications are approved, third parties may seek to oppose or otherwise challenge them. An inability to obtain registrations in the U.S. or elsewhere could limit our ability to protect our trademarks and technologies and could impede our business. Further, the protection of our intellectual property rights may require expensive investment in protracted litigation and substantial management time, and there is no assurance we ultimately would prevail or that a successful outcome would lead to an economic benefit that is greater than the investment in the litigation. In the Electronics segment, the key issued patents in our patent portfolio are scheduled to expire between 2020 and 2034. In the Hydraulics segment, the key issued patents in our patent portfolio are schedule to expire between 2020 and 2040.  

We may also face difficulties protecting our intellectual property rights in foreign countries. The laws of foreign countries in which our products are sold or manufactured may not protect our intellectual property rights to the same extent as the laws of the U.S. For example, we are increasing our technical capabilities and sales in China, where laws may not afford the same intellectual property protections.

Our use of open source software may expose us to additional risks. In the Electronics segment particularly, we use open source software in our business, including in some of our products. While we try to monitor all use of open source software in our business to ensure that no open source software is used in such a way as to require us to disclose the source code to critical or fundamental elements of our software or technology, we cannot be certain that such use may not have inadvertently occurred in deploying our solutions. Furthermore, the terms of many open source licenses have not been interpreted by U.S. courts. As a result, there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our products. The risks associated with usage of open source software cannot be eliminated and could potentially have a material adverse effect on our business, financial condition, and results of operations.

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If we are alleged to have infringed upon the intellectual property rights owned by others, our business and results of operations could be materially adversely affected. Competitors or other third parties may allege that we, or consultants or other third parties retained or indemnified by us, infringe on their intellectual property rights. We also may face allegations that our employees have misappropriated intellectual property rights of their former employers or other third parties. From time to time, we receive notices from other companies that allege we may be infringing certain of their patents or other rights. If we are unable to resolve these matters satisfactorily, or to obtain licenses on acceptable terms, we may face litigation. Given the potential risks and uncertainties of intellectual property-related litigation, the assertion of an infringement claim against us may cause us to spend significant amounts to defend the claim (even if we ultimately prevail), pay significant money damages, lose significant revenues, be prohibited from using the relevant technologies or other intellectual property rights, cease offering certain products or services, or incur significant license, royalty, or technology development expenses. Even in instances where we believe that claims and allegations of intellectual property infringement against us are without merit, defending against such claims is time consuming and expensive and could result in the diversion of time and attention of our management and employees. In addition, although in some cases a third party may have agreed to indemnify us for such costs, such indemnifying party may refuse or be unable to uphold its contractual obligations.

We are dependent upon key employees and skilled personnel. Our success depends, to some extent, upon a number of key individuals. The loss of the services of one or more of these individuals could have a material adverse effect on our business. Future operating results depend to a significant degree upon the continued contribution of key management, technical personnel and the skilled labor force. As the Company continues to expand internationally, additional management and other key personnel will be needed. Competition for management and engineering personnel is intense, and other employers may have greater financial and other resources to attract and retain these employees. We conduct a substantial part of our operations in Sarasota, Florida; Tulsa, Oklahoma and Rivolta D’adda, Italy. Our continued success is dependent on our ability to attract and retain a skilled labor force at these locations. There are no assurances that we will continue to be successful in attracting and retaining the personnel required to develop, manufacture and market our products and expand our operations.

We are subject to fluctuations in the prices of parts and raw materials, and dependent on our suppliers of these parts. We are dependent upon suppliers for parts and raw materials used in the manufacture of components that we sell to our customers, and some of our raw material costs are subject to commodity market price fluctuations. We may experience an increase in costs for parts or raw materials that we source from our suppliers, or we may experience a shortage of parts or raw materials for various reasons, such as the loss of a significant supplier, high overall demand creating shortages in parts and supplies we use, financial distress, work stoppages, natural disasters, fluctuations in commodity prices, or production difficulties that may affect one or more of our suppliers. In particular, current or future global economic uncertainty may affect our key suppliers in terms of their operating cash flow and access to financing. This may, in turn, affect their ability to perform their obligations to us. In addition, quality and sourcing issues that our suppliers may experience can also adversely affect the quality and effectiveness of our products and services and may result in liability or reputational harm to us. Our customers rely on us to provide on-time delivery and have certain rights if our delivery standards are not maintained. A significant increase in our supply costs, including for raw materials that are subject to commodity price fluctuations, or a protracted interruption of supplies for any reason, could result in the delay of one or more of our customer contracts, or could damage our reputation and relationships with our customers. Any of these events could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

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Increased IT security threats and more sophisticated and targeted computer crime could pose a risk to our systems, networks, products, solutions and services. We are dependent on various information technologies throughout our Company to administer, store and support multiple business activities. Increased global IT security threats and more sophisticated and targeted computer crime pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. While we attempt to mitigate these risks by employing a number of measures, including employee training, comprehensive monitoring of our networks and systems, and maintenance of backup and protective systems, our systems, networks, products, solutions, and services remain potentially vulnerable to advanced persistent threats. Depending on their nature and scope, such threats could potentially lead to the compromising of confidential information, improper use of our systems and networks, manipulation and destruction of data, defective products, production downtimes, and operational disruptions, which in turn could adversely affect our reputation, competitiveness, and results of operations.

Unforeseen or recurring operational problems at any of our facilities, or other catastrophic loss of one of our key manufacturing facilities, may cause significant lost production and adversely affect our results of operations.  Our manufacturing process could be affected by operational problems that could impair our production capability. Many of our manufacturing facilities contain high cost and sophisticated machines that are used in our manufacturing processes. Disruptions or shut downs at any of our facilities could be caused by: 

 

maintenance outages to conduct maintenance activities that cannot be performed safely during operations;

 

prolonged power failures or reductions;

 

breakdown, failure or substandard performance of any of our machines or other equipment;

 

noncompliance with, and liabilities related to, environmental requirements or permits;

 

disruptions in the transportation infrastructure, including railroad tracks, bridges, tunnels or roads;

 

fires, floods, earthquakes, tornadoes, hurricanes, microbursts or other catastrophic disasters, national emergencies, political unrest, war or terrorist activities; or

 

other operational problems.

If some of our facilities are shut down, they may experience prolonged startup periods, regardless of the reason for the shutdown. Those startup periods could range from several days to several weeks or longer, depending on the reason for the shutdown and other factors. Any prolonged disruption in operations at any of our facilities could cause a significant loss of production and adversely affect our results of operations and negatively impact our customers and dealers.

We currently have operations located in geographies susceptible to severe weather events, such as hurricanes, floods, earthquakes and tornadoes. A catastrophic event, whether resulting from severe weather or otherwise, could result in the loss of the use of all or a portion of one of our manufacturing facilities. Although we carry property and business interruption insurance, our coverage may not be adequate to compensate us for all losses that may occur. Any of these events individually or in the aggregate could have a material adverse effect on our business, financial condition and operating results. 

We are subject to risks relating to changes in our tax rates, unfavorable resolution of tax contingencies, or exposure to additional income tax liabilities. We are subject to income taxes in the U.S. and various non-U.S. jurisdictions. Domestic and international tax liabilities are subject to the allocation of income among various tax jurisdictions. Our effective tax rate could be affected by changes in the mix among earnings in countries with differing statutory tax rates or changes in tax laws. We are subject to on-going tax audits in various jurisdictions. If these audits result in assessments different from amounts reserved, future financial results may include unfavorable adjustments to our tax liabilities, which could have a material adverse effect on our results of operations.

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U.S. federal income tax reform could adversely affect us and our shareholders. On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was signed into law. The TCJA significantly reformed the Internal Revenue Code of 1986, as amended, or the Code. The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, and puts into effect the migration from a “worldwide” system of taxation to a territorial system. Our net deferred tax assets and liabilities have been revalued at the newly-enacted U.S. corporate rate, and the impact was recognized in our tax expense for the 2017 year. As the U.S. Department of Treasury and the IRS continue to issue regulations interpreting the implications of the TCJA, we continue to examine the impact that this tax reform legislation may have on our business. The impact of this tax reform on holders of our common stock is uncertain and could be adverse. We urge our shareholders to consult with their legal and tax advisors with respect to such legislation and the potential tax consequences of investing in our common stock.  

Our operations are subject to environmental, health and safety laws and regulations, and we may face significant costs or liabilities associated with environmental, health and safety matters.  We are subject to a variety of federal, state, local and foreign environmental, health, and safety laws and regulations concerning, among other things, the discharge of pollutants into the soil, air, and water, the generation, storage, handling, use, release, disposal and transportation of hazardous materials and wastes, environmental cleanup, and the health and safety of our employees. Environmental, health, and safety laws and regulations continue to evolve, and we may become subject to increasingly stringent environmental standards in the future, particularly related to air quality and water quality, which could require us to make changes to our operations or incur significant costs relating to compliance. We are also required to obtain and maintain environmental, health and safety permits and approvals for our facilities and operations. In addition, the potential impacts of climate change on our operations are highly uncertain. Although the financial impact of these potential changes is not reasonably estimable at this time, our operations in certain locations and those of our customers and suppliers could potentially be adversely affected, which could adversely affect our sales, profitability and cash flows. Our failure to comply with such laws, regulations, permits and approvals could subject us to increased employee healthcare and workers’ compensation costs, liabilities, fines and other penalties or compliance costs, and could have a material adverse effect on our business, financial condition and results of operations.

Our business is subject to a variety of governmental regulations that may restrict our business and may result in costs and penalties. We are subject to a variety of federal, state, and local laws and regulations relating to foreign business practices, labor and employment, construction, land use, and taxation, among others. These laws and regulations are complex, change frequently and have tended to become more stringent over time. Failure to comply with these laws and regulations may result in a variety of administrative, civil and criminal enforcement measures, including assessment of monetary penalties and the imposition of corrective requirements. From time to time, as part of the regular overall evaluation of our operations, including newly acquired operations, we may be subject to compliance audits by regulatory authorities. In addition, any failure to comply with regulations related to the government procurement process at the federal, state, or local level or restrictions on political activities and lobbying may result in administrative or financial penalties including being barred from providing services to governmental entities, which could have a material adverse effect on our results of operations.

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Our operations expose us to risks of non-compliance with numerous countries’ import and export laws and regulations. Due to our significant foreign sales, we are subject to trade and import and export regulations in multiple jurisdictions, including the U.S. Treasury Departments Office of Foreign Assets Controls regulations. As a result, compliance with multiple trade sanctions and embargoes and import and export laws and regulations pose a constant challenge and risk to us. Furthermore, the laws and regulations concerning import activity, export recordkeeping and reporting, export control and economic sanctions are complex and constantly changing. Any failure to comply with applicable legal and regulatory trading obligations could result in criminal and civil penalties and sanctions, such as fines, imprisonment, debarment from governmental contracts, seizure of shipments, loss of import and export privileges, reputational damage, and a reduction in the value of our common stock.

Regulations related to “conflict minerals” may force us to incur additional expenses and may result in damage to our reputation. We are subject to the SEC’s regulations applicable to companies that use certain minerals, known as conflict minerals, in their products or in the production of their products, whether or not these products are manufactured by third parties. These requirements require us to conduct an inquiry into the country of origin of the conflict minerals used, and if it is determined that the conflict minerals used may have originated in the Democratic Republic of Congo or other covered countries, conduct due diligence on the source and chain of custody of the conflict minerals. These requirements could adversely affect the sourcing, availability and pricing of minerals used in the manufacture of our products. In addition, we incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products or in the manufacturing process. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products be conflict mineral free.

Due to the nature of our business and products, we may be liable for damages based on product liability, other tort, and warranty claims. We face an inherent risk of exposure to claims in the event that the failure, use or misuse of our products results, or is alleged to result, in death, bodily injury, property damage, or economic loss. In the past, we have been subject to product liability claims relating to our products, and we may be subject to additional product liability claims in the future for both past and current products.

Although we currently maintain product liability coverage, which we believe to be adequate for the continued operation of our business, such insurance may become difficult or impossible to obtain in the future on terms acceptable to us. Moreover, our insurance coverage includes customary exclusions and conditions, may not cover certain specialized applications, and generally does not cover warranty or recall claims. A successful product liability claim or series of claims against us, including one or more consumer claims purporting to constitute class actions or claims resulting from extraordinary loss events, in excess of or outside our insurance coverage, or a significant warranty claim or series of claims against us, could materially decrease our liquidity, impair our financial condition and adversely affect our results of operations. Furthermore, regardless of the outcome, product liability claims can be expensive to defend, can divert the attention of management and other personnel for significant periods of time, and can cause reputational damage.

Customer credit risks could result in losses. Customer cash flows may be affected by adverse changes in economic and industry conditions. Further, laws in some jurisdictions in which we operate could make collection difficult or time consuming. We perform ongoing credit evaluations of our customers and do not generally require collateral in support of our trade receivables. While we maintain reserves for expected credit losses, we cannot assure you that these reserves will be sufficient to meet write-offs of uncollectible receivables or that our losses from such receivables will be consistent with our expectations.

23

 


If our long-lived assets, goodwill or other intangible assets become impaired, we may be required to record significant non-cash charges to our earnings. We recognize impairments of goodwill when the fair value of any of our reporting units becomes less than its carrying value. Our estimates of fair value are based on assumptions about future cash flows of each reporting unit, discount rates applied to these cash flows and current market estimates of value. Based on the uncertainty of future revenue growth rates and other assumptions used to estimate our reporting units’ fair value, future reductions in our expected cash flows could cause material non-cash impairment charges, which could have a material adverse effect on our results of operations and financial condition. We also have certain long-lived assets and other intangible assets which could be at risk of impairment or may require reserves based upon anticipated future benefits to be derived from such assets. Any change in the valuation of such assets could have a material effect on our profitability.

Risks Relating to Our Common Stock

Future sales of our common stock in the public market or the issuance of securities senior to our common stock could adversely affect the trading price of our common stock and our ability to raise funds in new stock offerings. Sales by us or our shareholders of a substantial number of shares of our common stock in the public markets, or the perception that these sales might occur, could cause the market price of our common stock to decline or could impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity securities.

We may issue common stock or equity securities senior to our common stock in the future for a number of reasons, including to finance our operations and business strategy, as consideration in acquisitions or for other reasons. We cannot predict the effect, if any, that future sales or issuances of shares of our common stock or other equity securities, or the availability of shares of our common stock or any other equity securities for future sale or issuance, will have on the trading price of our common stock.

Additional issuances of equity securities would dilute the ownership of existing shareholders and could reduce our earnings per share. We may issue equity securities in the future in connection with capital raising activities, acquisitions, strategic transactions or for other purposes. To the extent we issue additional equity securities, the ownership of our existing shareholders would be diluted and our earnings per share could be reduced.

The price of our common stock may fluctuate significantly, which could negatively affect us and holders of our common stock. The trading price of our common stock may fluctuate significantly in response to a number of factors, many of which are beyond our control. For instance, if our financial results are below the expectations of securities analysts and investors, the market price of our common stock could decrease, perhaps significantly. Other factors that may affect the market price of our common stock include announcements relating to significant corporate transactions; operating and stock price performance of companies that investors deem comparable to us; future sales by us or our subsidiaries of equity, equity-related or debt securities; the amount, if any, of dividends that we pay on our common stock; anticipated or pending investigations, proceedings or litigation that involve or affect us; changes in regional, national or global financial markets and economies and general market conditions, such as interest or foreign exchange rates, stock, commodity, credit or asset valuations or volatility; and changes in government regulation or proposals relating to us. In addition, the U.S. and global securities markets have experienced significant price and volume fluctuations. These fluctuations often have been unrelated to the operating performance of companies in these markets. Market fluctuations and broad market, economic and industry factors may negatively affect the price of our common stock, regardless of our operating performance and shareholders may be limited in their ability to sell shares of our common stock. Any volatility of or a significant decrease in the market price of our common stock could also negatively affect our ability to make acquisitions using our common stock.

24

 


Provisions in our amended and restated articles of incorporation and amended and restated bylaws, as well as certain provisions of Florida law, may discourage a takeover attempt. Provisions contained in our amended and restated articles of incorporation and amended and restated bylaws, as well as certain provisions of Florida law, could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our shareholders. Provisions of our amended and restated articles of incorporation and amended and restated bylaws impose various procedural and other requirements which could make it more difficult for shareholders to effect certain corporate actions. For example, our amended and restated articles of incorporation authorize our board of directors to determine the rights, preferences, privileges and restrictions of unissued series of preferred stock, without any vote or action by our shareholders. Thus, our board of directors can authorize and issue shares of preferred stock with voting or conversion rights that could adversely affect the voting or other rights of holders of our common stock. In addition, a change of control of our Company may be delayed or deterred as a result of our having three classes of directors serving staggered three-year terms. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock.

We may not pay dividends on our common stock. Holders of our common stock are only entitled to receive such dividends as our board of directors may declare out of funds legally available for such payments and as permitted by our debt agreements. Although historically we have paid a continuous quarterly dividend and a periodic special dividend, we are not required to declare cash dividends on our common stock and the payment of future quarterly and special dividends is subject to the discretion of our board of directors. In determining the amount of any future quarterly or special dividends, our board of directors will consider economic and market conditions, our financial condition and operating results. Any change in our historical dividend practice could adversely affect the market price of our common stock. If our board of directors decides not to pay dividends in the future, then a return on investment in our common stock will only occur if our stock price appreciates.

Securities analysts may issue negative reports or cease to cover our common stock, which may have a negative impact on the market price of our common stock. The trading market for our common stock may be affected in part by the research and reports that industry or financial analysts publish about us or our business. If one or more of the analysts who elects to cover us downgrades our stock, then our stock price would likely decline rapidly. If one or more of these analysts ceases coverage of Helios, we could lose visibility in the market, which in turn could cause our stock price to decline. This could have a negative effect on the market price of our common stock.


25

 


ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2.  PROPERTIES

Corporate Office

We lease office space in Sarasota, FL that is used as our corporate headquarters.

Segments

The table below presents information on the primary operating facilities in our Hydraulics and Electronics segments. These locations are generally used for manufacturing and distribution activities as well as sales, engineering and administrative functions.

Hydraulics Segment

 

 

Square Footage (in thousands)

 

Region

Owned

 

 

Leased

 

 

Total

 

U.S.

 

1,083

 

 

 

58

 

 

 

1,141

 

Europe

 

91

 

 

 

763

 

 

 

854

 

Asia/Pacific

 

59

 

 

 

183

 

 

 

242

 

Total

 

1,233

 

 

 

1,004

 

 

 

2,237

 

 

 

 

 

 

 

 

 

 

 

 

 

Electronics Segment

 

 

Square Footage (in thousands)

 

Region

Owned

 

 

Leased

 

 

Total

 

U.S.

 

179

 

 

 

6

 

 

 

185

 

Europe

 

18

 

 

 

 

 

 

18

 

Asia/Pacific

 

 

 

 

7

 

 

 

7

 

 

 

197

 

 

 

13

 

 

 

210

 

In addition to our primary operating facilities, we also lease office space that is used for sales, engineering and administrative activities in Argentina, Australia, Brazil, China, Germany, India and Vietnam.

We believe that our properties have been adequately maintained, are generally in good condition, and are suitable and adequate for our business as presently conducted.  The extent of utilization of our properties varies from time to time and among our facilities.

From time to time we are involved in routine litigation incidental to the conduct of our business.  We do not believe that any pending litigation will have a material adverse effect on our consolidated financial position or results of operations.

ITEM 4.  MINE SAFETY DISCLOSURE

Not applicable.

26

 


PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY,

RELATED STOCKHOLDER MATTERS AND

ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our Common Stock has been trading publicly under the symbol HLIO on the Nasdaq Global Select Market since June 17, 2019 and previously under the symbol SNHY since our initial public offering on January 9, 1997.

Holders

There were 215 shareholders of record of Common Stock on February 14, 2020.  The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of Common Stock whose shares are held in the names of securities brokers, dealers, and registered clearing agencies.  

Dividends

We have historically paid regular quarterly dividends of $0.09 per share.  Our board of directors currently intends to continue to pay a quarterly dividend of $0.09 per share during 2020.  However, 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.

Equity Compensation Plans

Information called for by Item 5 is provided in Note 14 of the Notes to the Consolidated Financial Statements included in this Annual Report (Item 8 of this report).

Issuer Purchases of Equity Securities

We did not repurchase any of our stock during the years ended December 28, 2019 and December 29, 2018.


27

 


Five-Year Stock Performance Graph

The following graph compares cumulative total return among Helios, the Russell 2000 Index and the Dow Jones US Diversified Industries Index, from December 27, 2014, to December 28, 2019, assuming $100 invested in each on December 27, 2014.  Total return assumes reinvestment of any dividends for all companies considered within the comparison.  The stock price performance shown in the graph is not necessarily indicative of future price performance.

 

12/27/2014

 

 

1/2/2016

 

 

12/31/2016

 

 

12/30/2017

 

 

12/29/2018

 

 

12/28/2019

 

Helios Technologies

 

100.00

 

 

 

(18.54

)

 

 

27.50

 

 

 

62.95

 

 

 

(48.09

)

 

 

37.62

 

Russell 2000 Index

 

100.00

 

 

 

(5.19

)

 

 

21.31

 

 

 

14.65

 

 

 

(11.72

)

 

 

26.50

 

Dow Jones US Diversified Industries Index

 

100.00

 

 

 

10.86

 

 

 

10.96

 

 

 

(6.59

)

 

 

(25.70

)

 

 

28.20

 

 

28

 


ITEM 6.  SELECTED FINANCIAL DATA

The following summary should be read in conjunction with the Consolidated Financial Statements and related notes contained herein.  See "Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 1.  Business."

We report on a fiscal year that ends on the Saturday closest to December 31st.  Each quarter generally consists of thirteen weeks. The 2019 and 2018 fiscal years ended December 28, 2019 and December 29, 2018, respectively.  The 2015 fiscal year ended January 2, 2016; as a result, the quarter ended January 2, 2016 consisted of fourteen weeks, resulting in a 53-week year.  

 

 

Year ended

 

 

 

Dec 28, 2019

 

 

Dec 29, 2018

 

 

Dec 30, 2017

 

 

Dec 31, 2016

 

 

Jan 2, 2016

 

 

 

(in thousands except per share data)

 

Statement of Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

554,665

 

 

$

508,045

 

 

$

342,839

 

 

$

196,934

 

 

$

200,727

 

Gross profit

 

 

212,282

 

 

 

192,683

 

 

 

136,525

 

 

 

71,349

 

 

 

77,093

 

Operating income

 

 

90,115

 

 

 

75,554

 

 

 

61,491

 

 

 

34,459

 

 

 

46,891

 

Income before income taxes

 

 

75,307

 

 

 

56,395

 

 

 

47,544

 

 

 

34,901

 

 

 

49,230

 

Net income

 

 

60,268

 

 

 

46,730

 

 

 

31,558

 

 

 

23,304

 

 

 

33,138

 

Basic and diluted net income per common share

 

 

1.88

 

 

 

1.49

 

 

 

1.17

 

 

 

0.87

 

 

 

1.24

 

Dividends declared per share

 

 

0.36

 

 

 

0.36

 

 

 

0.38

 

 

 

0.40

 

 

 

0.45

 

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

35,215

 

 

$

39,714

 

 

$

19,190

 

 

$

11,318

 

 

$

9,557

 

Capital expenditures

 

 

25,025

 

 

 

28,380

 

 

 

22,205

 

 

 

6,187

 

 

 

6,106

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,123

 

 

$

23,477

 

 

$

63,882

 

 

$

74,221

 

 

$

81,932

 

Working capital

 

 

116,136

 

 

 

103,866

 

 

 

100,913

 

 

 

110,192

 

 

 

145,336

 

Total assets

 

 

1,021,751

 

 

 

1,042,165

 

 

 

459,766

 

 

 

444,777

 

 

 

241,540

 

Total debt

 

 

300,393

 

 

 

352,685

 

 

 

116,000

 

 

 

140,000

 

 

 

 

Shareholders’ equity

 

 

577,636

 

 

 

530,768

 

 

 

272,673

 

 

 

236,397

 

 

 

222,187

 

 

Our acquisition activity impacts the comparability of the selected financial information presented above. We completed the following acquisitions during the periods presented above: Enovation Controls, LLC acquired on December 5, 2016, Faster S.r.l. acquired on April 5, 2018 and Custom Fluidpower Pty Ltd acquired on August 1, 2018. The results of operations and estimated fair value of assets acquired and liabilities assumed are included in our financial statements for all periods subsequent to the acquisition dates. Additional details of our acquisitions are provided in Note 3 of the Notes to the Consolidated Financial Statements included in this Annual Report (Item 8 of this report).

29

 


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 17 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 the U.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.  There are three key technologies within our Hydraulics segment:  cartridge valve technology (CVT), quick-release hydraulic couplings solutions (QRC) and hydraulic system design (Systems). CVT products provide functions important to a hydraulic system: to control rates and direction of fluid flow and to regulate and control pressures.  QRC products allow users to connect and disconnect quickly from any hydraulic circuit without leakage and ensure high-performance under high temperature and pressure using one or multiple couplers.  Systems provide engineered solutions for machine users, manufacturers or designers to fulfill complete system design requirements including electro-hydraulic, remote control, electronic control and programmable logic controller systems, as well as automation of existing equipment. In our Electronics segment, we provide complete, fully-tailored display and control solutions for engines, engine-driven equipment and specialty vehicles. Our broad range of products are complemented by extensive application expertise and unparalleled depth of our software, embedded programming, hardware and sustaining engineering teams. This technology is referred to as Electronic Controls.

On June 13, 2019, we changed our legal name from Sun Hydraulics Corporation to Helios Technologies, Inc.  Sun Hydraulics, LLC (a Florida limited liability company that holds the historical net operating assets of the Sun Hydraulics brand entities and Custom Fluidpower), along with Enovation Controls and Faster are the three wholly-owned operating subsidiaries of Helios.  Our corporate name change is a reflection of the tremendous growth the Company has accomplished over the last few years, including the addition of various operating companies under our umbrella. On June 17, 2019, shares of Helios began trading on the Nasdaq under the new ticker symbol “HLIO”.

Vision 2025

In 2016, we introduced our vision for the Company for the next decade.  We believe it is important to reach a critical mass of $1 billion in sales by 2025 while remaining a technology leader in the industrial goods sector.  To achieve our goal, we are targeting organic sales of our Hydraulics segment of $700 million, sales of our Electronics segment of $220 million and acquisitions at or exceeding $80 million of revenue.  Through this growth, our decision-making process will consider our desire to maintain superior profitability and financial strength. While acquisitions remain an important component of our long-term strategy, our near-term focus is on integrating our recently acquired businesses and improving operating performance.

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, our most recent product introductions have been electro-hydraulics products: the FLeX™ Series Solenoid Valves and the XMD Bluetooth-configurable electro-hydraulics driver.  XMD was jointly engineered by a team comprised of Hydraulics and Electronics segment personnel. We expect the trend for development of similar types of products to continue as capital goods markets move toward further electrification and digitalization of machines.  

Acquisitions of companies that advance our technology capabilities will be critical to achieving our Vision 2025.  Target product offerings include hydraulic components and/or systems, electronic controls and instrumentation, and linked technologies such as electro-mechanical actuators, factory automation, software, products relevant to the Internet of Things or high-precision manufacturing.

30

 


Acquisitions

In April 2018, we completed our acquisition of Faster, an Italian company headquartered near Milan, Italy.  Faster is a worldwide leader in engineering, manufacturing, marketing and distribution of hydraulic coupling solutions. The completion of this acquisition brings us another step closer to the realization of our Vision 2025. Faster fits this strategy well and has a highly innovative culture, driving new product development and market leadership. Faster further diversifies the Company more deeply into the global agriculture market. The business also broadens our global footprint, advancing our “in the region, for the region” initiative.

In August 2018, we completed our acquisition of Custom Fluidpower, a leading provider of hydraulic, pneumatic, electronic and instrumentation solutions. The company supplies hydraulic, pneumatic, filtration and lubrication products and offers complete system design, installation and commissioning, and service and repairs, to a broad range of industries including agriculture, aerospace, exploration, industrial, marine, mobile, mining and material handling.  Headquartered in Newcastle, NSW, Australia, Custom Fluidpower has operational branches co-located with its headquarters as well as throughout Australia.  Custom Fluidpower further diversifies our hydraulics product and service portfolio and provides regional value-add capabilities to continue successful penetration of the APAC region and particularly Southeast Asia.

Global Economic Conditions

In January 2020, the UK exited the EU. During the transition period, which ends on December 31, 2020, the details of the UK’s withdrawal and the nature of its future relationship with the EU will be decided. The Company continues to monitor the status of the negotiations 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 the UK:

 

Helios locations outside of the UK do not source raw materials or parts from UK suppliers;

 

Parts and raw materials sourced by our UK locations from EU suppliers can also be sourced from local UK suppliers;

 

EU customers served by our UK entities can be serviced by any of our global subsidiaries;

 

Customers who relocate outside of the UK can be serviced by any of our global subsidiaries; and

 

The level and type of business conducted at our UK entities limits 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. We are not aware of any material contracts that may require renegotiation or termination due to the impact of Brexit.  

Additionally, international trade disputes with China could result in tariffs and other measures that could adversely affect the Company’s business. We have multiple entities in China, including our first manufacturing facility which opened in 2019.  We also source components from Chinese suppliers in both of our segments.  While these are not in significant quantities, increased costs of these components or inability to receive them could cause damage to our business.  Our sales to Chinese customers are growing more rapidly than any other geography.  Revenues and cost reduction efforts associated with our China business are important to our success. Therefore, our business, financial condition and results of operations may be materially adversely affected by economic, political, legal, regulatory, competitive and other factors in China.  

31

 


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 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 7% in 2019, after increasing 13% and 11% in 2018 and 2017, respectively. During 2019, we did not experience this magnitude of decline in our North American hydraulics shipments as our growth out-paced market demand. In Europe, the CEMA Business Barometer reports the European agricultural machinery industry has been in a recession phase, however incoming orders from Europe showed an average increase in January 2020 after several months of decline. The CECE (Committee for European Construction Equipment) business climate index indicates the downturn in European construction equipment business is losing pace and a soft landing seems to be expected.

Electronics

Institute of Printed Circuits Association reports that slowing growth continues for the North American electronics industry, but most growth rates remain positive. Sales growth for printed circuit boards (PCB) strengthened to 3.5% and sales growth for electronics manufacturing services (EMS) slowed to 0.8%, compared to the prior year.  Semiconductor sales growth has remained in negative territory. Indicators suggest that sales growth is likely to continue but remain slow in the coming months for the North American EMS and PBC industry segments.  In our electronics segment, we are experiencing sales declining in excess of the overall market, primarily due to a strategic change we made to our customer base. For additional information, refer to the discussion of 2019 results of our electronics segment below.

2019 Results and Comparison of Years Ended December 28, 2019 and December 29, 2018

Faster and Custom Fluidpower were acquired on April 5, 2018 and August 1, 2018, respectively. Their results are included in our consolidated financials subsequent to their respective acquisition dates. To analyze the results on a comparable basis we refer to organic and acquisition-related results. The results of Faster are included in acquisition results for the first quarter of 2019 and the results of Custom Fluidpower are included in acquisition results for the first seven months of 2019.

The following table sets forth our consolidated results of operations:

(in millions except net income per share)

 

For the year ended

 

 

 

 

 

 

 

 

 

 

 

December 28, 2019

 

 

December 29, 2018

 

 

$ Change

 

 

% Change

 

Net sales

 

$

554.7

 

 

$

508.0

 

 

$

46.7

 

 

 

9.2

%

Gross profit

 

$

212.3

 

 

$

192.7

 

 

$

19.6

 

 

 

10.2

%

Gross profit %

 

 

38.3

%

 

 

37.9

%

 

 

 

 

 

 

 

 

Operating income

 

$

90.1

 

 

$

75.6

 

 

$

14.5

 

 

 

19.2

%

Operating income %

 

 

16.2

%

 

 

14.9

%

 

 

 

 

 

 

 

 

Net income

 

$

60.3

 

 

$

46.7

 

 

$

13.6

 

 

 

29.1

%

Basic and diluted net income per common share

 

$

1.88

 

 

$

1.49

 

 

$

0.39

 

 

 

26.2

%

32

 


Consolidated sales for the 2019 year improved to $554.7 million; a 9.2% increase over the prior year. Organic sales declined $18.8 million, 3.7%, compared to 2018, of which $8.1 million is attributable to a negative impact from changes in foreign currency exchange rates during the year. Price increases positively impacted sales for the year by $5.4 million. In 2019 we experienced softening in certain end markets leading to a decline in order intake across both segments. The agriculture market in Europe and the oil and gas market in the U.S. have weakened. We have also seen a decline in both the construction equipment market in the APAC region and the recreational market in the Americas. During the year, we maintained an elevated order backlog of CVT and Systems products that has softened the impact of the slowdown of incoming orders.

Gross profit margin increased 0.4 percentage points during 2019 from 37.9% to 38.3%.  Gross margin for the 2018 year was affected by $4.4 million of amortization of acquisition-related inventory step up costs resulting from the Faster and Custom Fluidpower acquisitions. Changes in foreign currency exchange rates negatively impacted gross profit during 2019 by $3.4 million. Production efficiencies, price increases and successful cost management efforts positively impacted 2019 gross margin. These gains were somewhat offset by decreased sales volume which resulted in reduced leverage of fixed costs as well as increased material costs and an unfavorable change in the margin profile of products sold.

Operating income margin improved 1.3 percentage points compared to the prior year, primarily due to acquisition-related impacts during the 2018 year: inventory step-up amortization referred to above, an additional $5.1 million in acquisition-related amortization of intangible assets compared to 2019 and $5.5 million in transaction costs for the Faster and Custom Fluidpower acquisitions. Comparability of operating income results was further impacted by one-time costs incurred in 2019 for organizational restructuring of $1.7 million and a loss on the disposal of our licensing agreement intangible asset totaling $2.7 million.

2020 Outlook

Consolidated revenue for the full year 2020 is expected to be between $520 million and $555 million, with the Hydraulics segment contributing between $415 million and $443 million and the Electronics segment contributing between $105 million and $112 million. Consolidated U.S. GAAP EPS is expected to be $1.55 to $1.88 for the full year 2020. Consolidated non-GAAP cash EPS, which excludes amortization expense and certain one-time costs, is expected to be between $2.00 and $2.30. The full year adjusted EBITDA margin, prior to certain one-time costs, is anticipated to be 22.0% to 23.0%.

Given the economic backdrop including uncertainty surrounding the impact of coronavirus, we are approaching 2020 guidance cautiously, with wider ranges than we have historically provided.  While our current end markets continue to be challenging globally, with limited pockets of growth, the economic indicators that we track signal optimism that growth will resume in other markets in the second half of the year.  

Segment Results

Hydraulics

The following table sets forth the results of operations for the Hydraulics segment (in millions):

 

 

For the year ended

 

 

 

 

 

 

 

 

 

 

 

December 28, 2019

 

 

December 29, 2018

 

 

$ Change

 

 

% Change

 

Net sales

 

$

442.8

 

 

$

381.8

 

 

$

61.0

 

 

 

16.0

%

Gross profit

 

$

161.4

 

 

$

141.7

 

 

$

19.7

 

 

 

13.9

%

Gross profit %

 

 

36.4

%

 

 

37.1

%

 

 

 

 

 

 

 

 

Operating income

 

$

86.0

 

 

$

83.9

 

 

$

2.1

 

 

 

2.5

%

Operating income %

 

 

19.4

%

 

 

22.0

%

 

 

 

 

 

 

 

 

33

 


The following table presents organic and acquisition-related results for 2019 (in millions):

 

 

For the Year Ended December 28, 2019

 

 

 

Organic

 

 

Acquisition

 

Net sales

 

$

377.3

 

 

$

65.5

 

Gross profit

 

$

139.4

 

 

$

22.0

 

Gross profit %

 

 

36.9

%

 

 

33.6

%

Operating income

 

$

75.3

 

 

$

10.7

 

Operating income %

 

 

20.0

%

 

 

16.3

%

Net sales for the Hydraulics segment totaled $442.8 million in 2019, representing growth of $61.0 million, 16.0%, over the prior year.  Organic sales declined $4.5 million, 1.2%, compared to 2018. After consideration of the negative $7.6 million impact from changes in foreign currency exchange rates, organic sales improved $3.1 million, 0.8%, over 2018. During 2019, we experienced softening end market demand resulting in a reduction of incoming orders, however we have continued to ship certain CVT and Systems product orders from our backlog due to extended lead times. Price increases of $4.2 million also contributed to the year-over-year improvement. Our Sarasota manufacturing consolidation project was completed in the first half of 2019. The project involved consolidating our three U.S. manufacturing operations into two adjacent facilities in Sarasota, implementing lean manufacturing and streamlining the production process and resulted in increased capacity and improved productivity as we progressed through the year. The third facility will be utilized as an expanded state-of-the-art testing center for our engineering teams.

Exchange rate fluctuations since the acquisitions of Faster in April 2018 and Custom Fluidpower in August 2018, resulted in a further unfavorable impact on sales of $3.1 million 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

 

 

 

 

 

 

 

 

 

 

 

December 28, 2019

 

 

December 29, 2018

 

 

$ Change

 

 

% Change

 

Americas

 

$

162.3

 

 

$

148.7

 

 

$

13.6

 

 

 

9.1

%

EMEA

 

 

141.6

 

 

 

129.6

 

 

$

12.0

 

 

 

9.3

%

APAC

 

 

138.9

 

 

 

103.5

 

 

$

35.4

 

 

 

34.2

%

Total

 

$

442.8

 

 

$

381.8

 

 

 

 

 

 

 

 

 

Comparability of sales by region is impacted by our 2018 acquisitions. To analyze the results on a comparable basis we refer to organic and acquisition-related sales. Acquisition related 2019 sales totaled $11.6 million, $21.7 million and $32.2 million to the Americas, EMEA and APAC regions, respectively. Faster sales for the first quarter of 2019 and Custom Fluidpower sales for the first seven months of 2019 are referred to as acquisition related.

Shipments continued to grow in the Americas region during 2019 with organic sales increasing $2.0 million, 1.3%, compared to the prior year. Organic sales to the EMEA region decreased $9.7 million, 7.5%. Exchange rate fluctuations had an unfavorable impact on organic sales to the EMEA region of $5.0 million during 2019, compared to 2018. EMEA region sales were impacted by softening end market demand in the European agriculture market. Organic sales to the APAC region during 2019 were up $3.1 million, 3.0%, over 2018, due to increased shipments to China. Exchange rate fluctuations had a negative impact on organic sales to the APAC region during 2019 of $2.6 million, compared to 2018.  

Hydraulics segment gross profit grew $19.7 million, 13.9%, in 2019 while gross profit margin declined 0.7 percentage points. Organic gross profit declined $2.3 million, 0.2 percentage points. Price increases, net of related material cost increases, positively influenced organic gross profit by $2.1 million during 2019 while changes in foreign currency exchange rates had a negative effect on gross profit of $3.2 million compared to the prior year.  Production efficiency improved over the prior year, however gross profit margin was reduced by higher material costs and an overall unfavorable sales mix.   

34

 


Selling, engineering and administrative expenses (“SEA”) were up $13.2 million, 22.8%, to $71.0 million in 2019, compared to $57.8 million in the prior year. Organic SEA costs increased $1.9 million, 3.3%. During the 2019 year we realized increases in corporate operating costs allocated to the Hydraulics segment for salaries and benefits, travel, insurance, talent development programs and legal and professional fees to support the growth and change in structure of Helios that has occurred over the past year and is expected to continue into future periods.

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. The restructuring is expected to reduce our total cost base by $3.0 million to $3.5 million, annually. Also in the third quarter, 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 with Sturman 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, 2019 operating income increased $2.1 million, 2.5%, to $86.0 million compared to $83.9 million during the prior year. Organic operating income fell $8.6 million, and organic operating margin fell 2.0 percentage points compared to the prior year.

Electronics

The following table sets forth the results of operations for the Electronics segment (in millions):

 

 

For the year ended

 

 

 

 

 

 

 

 

 

 

 

December 28, 2019

 

 

December 29, 2018

 

 

$ Change

 

 

% Change

 

Net sales

 

$

111.9

 

 

$

126.2

 

 

$

(14.3

)

 

 

(11.3

)%

Gross profit

 

$

50.9

 

 

$

55.4

 

 

$

(4.5

)

 

 

(8.1

)%

Gross profit %

 

 

45.5

%

 

 

43.9

%

 

 

 

 

 

 

 

 

Operating income

 

$

22.0

 

 

$

25.0

 

 

$

(3.0

)

 

 

(12.0

)%

Operating income %

 

 

19.7

%

 

 

19.8

%

 

 

 

 

 

 

 

 

Net sales for our Electronics segment totaled $111.9 million in 2019, a decrease of $14.3 million, 11.3%, over the prior year. The decline was due to softer demand in the recreational and oil and gas end markets, as well as our intentional shift in customer base which included the release of certain contractual obligations to customers that allowed us to leverage all products to a broader and more diverse customer base. Price increases positively impacted sales for 2019 by $1.2 million while changes in exchange rates had an unfavorable impact of $0.6 million.

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

 

 

For the year ended

 

 

 

 

 

 

 

 

 

 

 

December 28, 2019

 

 

December 29, 2018

 

 

$ Change

 

 

% Change

 

Americas

 

$

96.3

 

 

$

108.9

 

 

$

(12.6

)

 

 

(11.6

)%

EMEA

 

 

8.4

 

 

 

10.1

 

 

$

(1.7

)

 

 

(16.8

)%

APAC

 

 

7.2

 

 

 

7.2

 

 

$

 

 

 

(—

)%

Total

 

$

111.9

 

 

$

126.2

 

 

 

 

 

 

 

 

 

During 2019, sales to the Americas and EMEA regions declined 11.6% and 16.8% respectively while sales to the APAC region were flat. Exchange rate changes unfavorably impacted sales to the EMEA and APAC regions by $0.4 million and $0.2 million, respectively, compared to 2018.  

35

 


Gross profit contracted by $4.5 million, 8.1%, in 2019, primarily the result of reduced sales volume. Price increases, net of material costs increases, improved gross profit by $1.0 million during 2019. Gross profit margin grew 1.6 percentage points, up to 45.5% from 43.9% in 2018. Margin improvement was further driven by material cost reductions and cost management efforts which resulted in production efficiencies.

SEA expenses fell $1.5 million, 4.9%, to $28.9 million in 2019 compared to $30.4 million during 2018 primarily due to a reorganization of global administrative functions, reduced performance-based incentive compensation and various other cost savings initiatives, partially offset by an increase in corporate operating costs allocated to the segment compared to the prior year.

As a result of the impacts to full year gross profit and SEA costs noted above, operating income declined $3.0 million, 12.0%, over the 2018 year while operating margin remained fairly consistent, decreasing 0.1 percentage point, to 19.7% from 19.8% in 2018.

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. Corporate and other costs decreased from 2018 by $15.5 million, which was due to a reduction of Faster and Custom Fluidpower acquisition-related charges.  For the year ended December 28, 2019, these costs totaled $17.9 million and primarily included amortization of acquisition-related intangible assets. For the year ended December 29, 2018, these costs totaled $33.4 million for acquisition-related items such as Faster and Custom Fluidpower transaction costs of $5.5 million, charges related to inventory step-up to fair value of $4.4 million, amortization of acquisition-related intangible assets of $23.0 million and $0.5 million related to other acquisition activities and corporate projects and initiatives.

Interest Expense, net

Net interest expense increased $1.5 million during 2019 to $15.4 million compared to $13.9 million in 2018. The increase is attributable to a full year of the 2018 borrowings on our credit facility to fund acquisition activity, offset by debt repayments during the year. Average net debt for the year ended December 28, 2019, totaled $303.8 million compared to $190.7 million for the year ended December 29, 2018.

Income Taxes

The provision for income taxes for the year ended December 28, 2019, was 20.0% of pretax income compared to 17.1% for the year ended December 29, 2018. 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.

As of December 2018, the company has recorded $0.6 million of expense related to the one-time transition tax on mandatory deemed repatriation of foreign earnings. The Company elected to pay the transition tax in full.

36

 


In accordance with SAB 118, we continued evaluating our permanent reinvestment assertion as further consideration is given to how the Tax Cuts and Jobs Act of 2017 (the “Act”) impacts the future cash flow position of the Company.  Our foreign subsidiaries generate earnings that are not subject to U.S. income taxes so long as they are permanently reinvested in our operations outside of the U.S. Pursuant to ASC Topic No. 740-30 (formerly APB 23), undistributed earnings of foreign subsidiaries that are no longer permanently reinvested would become subject to deferred income taxes under U.S. tax law. In determining if the undistributed earnings of our foreign subsidiaries are permanently reinvested, we consider the following: (i) the forecasts, budgets, debt commitments, and cash requirements of our U.S business and our foreign subsidiaries, both for the short and long term; (ii) the tax consequences of any decision to reinvest foreign earnings, including any changes in U.S. income tax law relating to the treatment of these undistributed foreign earnings; and (iii) any U.S. and foreign government programs or regulations relating to the repatriation of these unremitted earnings. We assert that $17.9 million of undistributed earnings are permanently reinvested in our foreign operations and have no current plans to repatriate those earnings.

In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Act.  The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations.  The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or treating any taxes on GILTI inclusions as a period cost are acceptable methods subject to an accounting policy election.  We have elected to treat any taxes on GILTI inclusions as period costs.

2018 Results and Comparison of Years Ended December 29, 2018 and December 30, 2017

For the discussion and analysis of our 2018 results compared to our 2017 results, refer to our Annual Report on Form 10-K for the fiscal year ended December 29, 2018, filed with the SEC on February 26, 2019. The discussion is incorporated herein by reference.

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 million in net proceeds from our public offering of our common stock, which was also used to fund acquisition activity during the year. During 2019, net cash provided by operating activities totaled $90.5 million and as of December 28, 2019 we had $22.2 million of cash on hand and $191.3 million of available credit on our revolving credit facility. We also have a $200 million accordion feature available on our credit facility, which is subject to certain pro forma compliance requirements.

Our principal uses of cash have been paying operating expenses, paying dividends to shareholders, making capital expenditures, acquisition-related payments and servicing debt.

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.

37

 


Cash flows

The following table summarizes our cash flows for the periods (in millions):

 

 

For the year ended

 

 

 

 

 

 

 

December 28, 2019

 

 

December 29, 2018

 

 

$ Change

 

Net cash provided by operating activities

 

$

90.5

 

 

$

77.5

 

 

$

13.0

 

Net cash used in investing activities

 

 

(22.4

)

 

 

(565.5

)

 

 

543.1

 

Net cash (used in) provided by financing activities

 

 

(71.7

)

 

 

447.3

 

 

 

(519.0

)

Effect of exchange rate changes on cash

 

 

2.3

 

 

 

0.3

 

 

 

2.0

 

Net decrease in cash and cash equivalents

 

$

(1.3

)

 

$

(40.4

)

 

$

39.1

 

Cash on hand decreased $1.3 million from $23.5 million at the end of 2018 to $22.2 million at the end of 2019. Cash and cash equivalents were favorably impacted by changes in exchange rates during the years ended December 28, 2019 and December 29, 2018 totaling $2.3 million and $0.3 million, respectively. 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.

Operating activities

Cash from operations increased $13.0 million, 16.8%, compared to the prior year. $10.7 million of the payment made on the contingent consideration liability related to the Enovation acquisition was included in operating cash flows for the period as the total payments exceeded the acquisition date fair value of the liability. The net increase of $23.7 million of operating cash flows resulted from higher cash earnings and improved net working capital management. Changes in inventory and accounts receivable, net of acquisitions, increased cash by $4.2 million in 2019 compared to a reduction of cash of $17.7 million during 2018. Days sales outstanding for the 2019 year went down to 44 days, from 52 days during 2018, due to increased AR collection efforts as well as a decrease in Q4 sales compared to 2018. Days of inventory on hand went down to 91 for the 2019 year, from 96 during 2018, due to improvements in inventory management and reduced supplier constraints.

Investing activities

Cash used in investing activities decreased during 2019 by $543.1 million, compared with 2018. Acquisitions during 2018 accounted for $534.7 million of the fluctuation. Capital expenditures were $25.0 million for the year ended December 28, 2019; $3.4 million, 12.0%, lower than the prior year. Current year capital expenditures were primarily made up of purchases of machinery and equipment, our Sarasota manufacturing consolidation project, construction of our state-of-the-art engineering center and equipment and leasehold improvements for our new China facility. Capital expenditures for 2020 are estimated to be between $20 million and $25 million, primarily for investments in machinery and equipment to improve manufacturing technologies and increase capacity and completion of our state-of-the-art engineering center in Sarasota.

Financing activities

Cash flows used in financing activities totaled $71.7 million in 2019, compared to cash provided by financing activities of $447.3 million in 2018.

On February 6, 2018, the Company issued and sold 4.4 million shares of its common stock at $57.50 per share in a registered public offering.  The net increase to shareholders’ equity and cash proceeds from the offering was approximately $240 million.  

38

 


On April 1, 2018, we amended our credit facility to increase the limit on our revolving credit facility to $400 million and add a term loan of $100 million. We also increased the accordion feature to $200 million. During the second quarter of 2018, we paid cash of approximately $175.0 million and borrowed $358.0 million on our term loan and line of credit to complete the acquisition of Faster. During the third quarter of 2018, we borrowed additional amounts on our revolving credit facility to fund the acquisition of Custom Fluidpower. Cash paid for the Custom Fluidpower acquisition totaled approximately $9.3 million. During 2019, net cash outflows from borrowings and payments on our revolving line of credit and term loan totaled $52.3 million. Amounts due on our revolving credit facility and our long-term non-revolving debt as of December 28, 2019 totaled $208.7 million and $92.5 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 April 2019 and July 2018, we paid $17.8 million and $17.3 million, respectively, to the former owners of Enovation Controls in connection with the last two payments due on the contingent consideration liability.

We have historically declared regular quarterly dividends to shareholders of $0.09 per share. In addition to the regular quarterly dividends, we declared special cash dividends in 2017 of $0.02. We paid dividends totaling $11.5 million, $11.0 million, and $10.3 million for the years ended December 28, 2019, December 29, 2018, and December 30, 2017, 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 December 28, 2019, are summarized in the table below (in thousands):

 

 

Payments due by Period

 

CONTRACTUAL OBLIGATIONS

 

TOTAL

 

 

2020

 

 

2021-2022

 

 

2023-2024

 

 

Thereafter

 

Revolving line of credit (1)

 

$

208,708

 

 

$

 

 

$

 

 

$

208,708

 

 

$

 

Long-term, non-revolving debt (2)

 

 

92,488

 

 

 

7,872

 

 

 

17,112

 

 

 

67,504