# HELIOS TECHNOLOGIES, INC. (HLIO) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from HELIOS TECHNOLOGIES, INC.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1024795/000095017024021107/hlio-20231230.htm
Accession: 0000950170-24-021107
Filing date: 2024-02-27
Report date: 2023-12-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/HLIO/
All MD&A years: /company/HLIO/mda/
Previous year: /company/HLIO/mda/fy2022/ (FY 2022)
Next year: /company/HLIO/mda/fy2024/ (FY 2024)

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 16 of the Notes to the Consolidated Financial Statements included in this Annual Report is also presented on this basis. All differences between our internal management reporting basis and accounting principles generally accepted in 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 a global leader in highly engineered motion control and electronic controls technology for diverse end markets, including construction, material handling, agriculture, industrial, mobile, energy, recreational vehicles, marine and health and wellness.

We operate under two business segments: Hydraulics and Electronics. The Hydraulics segment designs and manufactures hydraulic motion control and fluid conveyance technology products, including cartridge valves, manifolds, quick release couplings as well as engineers hydraulic solutions and in some cases complete systems. The Electronics segment designs and manufactures customized electronic controls systems, displays, wire harnesses, and software solutions for a variety of end markets.

During 2021, we augmented our strategy to transform our business from a holding company to a global integrated operating company. At that same time, we introduced the framework of the Helios Business System, “HBS” (pictured in Item 1 of Part 1), which is at the heart of all we do. We are accomplishing this transformation into a global integrated operating company by leveraging sales, marketing, innovation, customer relationships and operational excellence across all our businesses. Our progress to date, through a very complex macro operating environment, is a direct reflection of the commitment of our talented workforce executing our augmented strategy.

Acquisitions

Our acquisition activity, driven by our strategic vision, has enabled us to diversify our product offerings and the markets we serve and expand our geographic presence. Prior to 2016, we operated primarily in the hydraulics market with a small presence in electronics.

In January 2021, we acquired the assets of BJN Technologies, LLC, an innovative engineering solutions provider that was founded in 2014. With the acquisition, we formed the Helios Center of Engineering Excellence to centralize our innovation and technology advancements to better leverage existing talents across the electronics segment initially, and then throughout all of Helios.

In July 2021, we completed another flywheel acquisition of NEM S.r.l., an innovative hydraulic solutions company providing customized material handling, construction, industrial vehicle and agricultural applications to its global customer base, predominantly in Europe and Asia. NEM enhances the Helios electro-hydraulic product offering, provides geographic expansion and adds scale to address new markets.

In October 2021, we completed the acquisition of Joyonway, a developer of control panels, software, systems and accessories for the health and wellness industry. Joyonway operates from two locations in China, Shenzhen and Dongguan, both of which are in the hub of electronics and software development in China and give us a foothold for electronics manufacturing in Asia.

In July 2022, we completed the acquisition of the assets of Taimi R&D, Inc., a Canadian manufacturer of innovative hydraulic components that offers ball-less design swivel products, which improve hydraulic reliability of equipment, increase the service life of components and help protect the environment by reduced leakage. Taimi brings a differentiated, yet complementary product line to our hydraulics platform as well as strong engineering breadth.

In September 2022, we completed another flywheel acquisition of Daman Products Company, headquartered in Mishawaka, Indiana. Daman is a leading designer and manufacturer of standard and custom precision hydraulic manifolds and other fluid conveyance products for its customer base, predominantly in North America. The acquisition of Daman

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expands the Company's technologies and markets and provides an opportunity to produce integrated package offerings with multiple Helios brands.

In January 2023, we completed the acquisition of Schultes Precision Manufacturing, Inc. Schultes is a highly trusted specialist in manufacturing precision machined components and assemblies for customers requiring very tight tolerances, superior quality, and exceptional value-added manufacturing processes. Currently serving the hydraulic, aerospace, communication, food services, medical device, and dental industries, Schultes brings the manufacturing quality, reliability, and responsiveness critical to its customers’ success. Schultes provides additional manufacturing know-how and expands our business into new end markets with attractive secular tailwinds.

In May 2023, we completed the acquisition of i3 Product Development. i3 is a custom engineering services firm, with over 55 engineers specializing in electronics, mechanical, industrial, embedded and software engineering. i3 specializes in working to transform customer’s ideas into industrial design solutions through rapid prototyping and creating 3D models in-house. Their solutions are used across many sectors, including medical, off-highway, recreational and commercial marine, power sports, health and wellness, agriculture, consumer goods, industrial, sports and fitness.

Global Economic Conditions

Geo-Political Conflict

We continue to monitor the ongoing conflicts between Russia and Ukraine and the Israel-Hamas war and evaluate the broader economic impact those conflicts could have on our operations, supply channels and the operations of our partners and customers. We do not have operations in these regions at this time and those conflicts have not and are not expected to have a material impact on our financial condition or results. Refer to Item 1A Risk Factors of this Annual Report for additional discussion about geo-political risks.

COVID-19 Pandemic

In the first half of 2022, we experienced mild impacts from the pandemic. At the beginning of the second quarter our locations in China began to shut down periodically due to regulatory lockdown measures associated with a COVID-19 outbreak. The shutdown of our locations and our customers' locations impacted operations and sales through May with recovery occurring in June as the lockdowns were lifted. We also faced disruption to our workforce from the pandemic. While the impact was not significant, the absenteeism caused labor inefficiencies in production. Additionally, in certain locations we faced pressure from competitive labor markets. Since the first half of 2022, there have been no COVID-related shutdowns or other significant new disruption to our business from the pandemic.

Throughout 2022, and continuing into 2023, we faced constraints related to sourcing certain electronic and other components, which originated from the high demand for these products caused by the pandemic. We were able to mitigate some of the impact with our procurement efforts, production schedule adjustments and product redesigns. The availability of components improved as 2023 progressed.

Demand in the health and wellness market was favorably impacted by the pandemic in 2020 and 2021, as consumers invested in leisure products and activities. However, during 2022, we experienced a sharp decline in sales in this end market as demand declined and inventory levels in the channel increased. By the second half of 2023, inventory levels in the market began to normalize, and we saw an uptick in demand as we exited the year.

Refer to Item 1A Risk Factors of this Annual Report for additional COVID-19 related discussion.

Industry Conditions

The capital goods industries in general, and the Hydraulics and Electronics segments specifically, are subject to economic cycles. We utilize industry trend reports from various sources, as well as feedback from customers and distributors, to evaluate economic trends. We also rely on global government statistics such as Gross Domestic Product and Purchasing Managers Index to understand higher level economic conditions.

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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 4% in 2023, after increasing 20% in 2022 and increasing 21% in 2021. In Europe, the CEMA Business Barometer reported in January 2024 that the general business climate index for the European agricultural machinery industry has continued its downward slide in the area of deep recession territory. CEMA further reported that the direct customers of the manufacturers, the dealers, are not able to pass on their numerous orders to the end customers. The CECE (Committee for European Construction Equipment) business climate index bounced back slightly in November after seven consecutive months of decline. They reported the favorability was driven by both current business evaluation and future expectations.

Electronics

The Federal Reserve’s Industrial Production Index, which measures the real output of all relevant establishments located in the U.S., reports production of semiconductors and other electronics components met the lowest level in the first quarter of 2023 when compared to the prior two years; however, this improved notably and consistently throughout 2023, to reach the record high in the fourth quarter of 2023 when compared to the prior two years. The Institute of Printed Circuits Association (“IPC”) reported that North American printed circuit board (“PCB”) shipments and bookings decreased in December 2023 by 18.3% and 28.7%, respectively, compared with the same month last year. PCB shipments increased and bookings decreased in December 2023 by 1.0% and 14.1%, respectively, compared with November 2023. The IPC also reported that North American electronics manufacturing services (“EMS”) shipments increased and bookings decreased in December 2023 by 1.3% and 7.0%, respectively when compared with the same month last year. EMS shipments and bookings in December 2023 were up 6.2% and 2.3%, respectively when compared with November 2023.

2023 Results and Comparison of Years Ended December 30, 2023 and December 31, 2022

(In millions, except per share data)

The following is a discussion of our results of operations and liquidity and capital resources for the year ended December 30, 2023; comparisons are with the corresponding reporting period of 2022, unless otherwise noted.

The following table presents our consolidated results of operations:

[[GREPCENT_TABLE]]
[["","","For the year ended"],["","","December 30, 2023","","","December 31, 2022","","","$ Change","","","% Change"],["Net sales","","$","835.6","","","$","885.4","","","$","(49.8",")","","","(5.6",")%"],["Gross profit","","$","261.7","","","$","298.5","","","$","(36.8",")","","","(12.3",")%"],["Gross profit %","","","31.3","%","","","33.7","%"],["Operating income","","$","79.9","","","$","137.3","","","$","(57.4",")","","","(41.8",")%"],["Operating income %","","","9.6","%","","","15.5","%"],["Net income","","$","37.5","","","$","98.4","","","$","(60.9",")","","","(61.9",")%"],["Diluted net income per share","","$","1.14","","","$","3.02","","","$","(1.88",")","","","(62.3",")%"]]
[[/GREPCENT_TABLE]]

Consolidated net sales for the 2023 year declined $49.8, 5.6%. We experienced organic net sales decline of $102.6, which was offset partially by sales from acquisitions totaling $52.8. Sales were impacted most by reduced demand for products in our health and wellness end market, which continued to be below the prior year. Sales in this end market were previously strengthened by the pandemic as consumers invested in health and leisure products. Other declines included sales into the industrial, marine and mobile end markets, offset partially by increases in the off-road vehicles end market. Consolidated net sales were down in all regions in the year-to-date period. Year-to-date organic sales were positively impacted by pricing changes of $18.6, 2.1%. Also, there were minimal effects on consolidated net sales from changes in foreign currency exchange rates during the year.

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Gross profit declined $36.8, 12.3%, in 2023 driven by lower volume, different margin profiles of acquired businesses, higher restructuring costs of $4.7, higher wage and benefit costs of $2.4 and unfavorable foreign currency of $0.4, partially offset by pricing adjustments. Material costs as a percentage of sales, excluding pricing changes and acquisition-related sales, was the same year-over-year on a consolidated basis. Gross margin declined by 240 basis points, impacted by lower fixed costs leverage on lower volume and cost impacts noted above. Changes in foreign currency exchange rates compared to 2022 reduced gross profit by $0.4.

During 2023, we incurred $12.1 of costs related to our restructuring activities. In the Hydraulics segment, we executed an operational restructure that involved the creation of our two new regional operational Centers of Excellence. In our Electronics segment, we executed an organizational restructure to shift several product lines to the expanded facility in Tijuana and to adjust our labor base in line with current demand levels. The restructuring costs are comprised of non-recurring severance and termination benefits of $7.8 and $4.3 of travel and other expenses. The restructuring plans are expected to improve the global cost structure of the business.

Operating income as a percentage of sales decreased 5.9 percentage points to 9.6% in 2023 compared with the prior year period. Operating margin was unfavorably impacted during 2023 by different margin profiles of acquired businesses and a $4.8 increase in acquisition-related amortization, primarily from the new intangibles added during the first half of the 2023 for the Schultes and i3 acquisitions. These negative impacts were compounded by higher restructuring costs included in Selling, engineering and administrative (“SEA”) expenses of $2.2 and the gross margin level changes. However, these unfavorable impacts were partially offset by lower M&A and integration related costs of $5.3.

Net income and earnings per share (“EPS”) were unfavorably impacted by foreign currency transaction losses of $0.6 in 2023 compared to gains of $0.9 in 2022. The prior year benefited from gains on sale of property, plant and equipment primarily related to restructuring activities totaling $1.8, and the current year benefited from a decrease in tax expense of $11.7 compared to 2022.

Segment Results

Hydraulics

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

[[GREPCENT_TABLE]]
[["","","For the year ended"],["","","December 30, 2023","","","December 31, 2022","","","$ Change","","","% Change"],["Net sales","","$","565.8","","","$","551.3","","","$","14.5","","","","2.6","%"],["Gross profit","","$","181.8","","","$","195.5","","","$","(13.7",")","","","(7.0",")%"],["Gross profit %","","","32.1","%","","","35.5","%"],["Operating income","","$","93.3","","","$","122.7","","","$","(29.4",")","","","(24.0",")%"],["Operating income %","","","16.5","%","","","22.3","%"]]
[[/GREPCENT_TABLE]]

Net sales for the Hydraulics segment grew by $14.5, 2.6%. We experienced organic net sales decline of $32.5, 5.9%, and acquisition sales totaled $47.0. Organic sales declined in 2023 due to decreased demand in all regions, as well as in several of our end markets including the mobile and industrial equipment markets. Discrete impacts to our organic sales included pricing changes that were favorable by $13.4, 2.4%, and favorable changes in foreign currency exchange rates of $0.3, 0.1%.

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

[[GREPCENT_TABLE]]
[["","","For the year ended"],["","","December 30, 2023","","","December 31, 2022","","","$ Change","","","% Change"],["Americas","","$","234.4","","","$","199.5","","","$","34.9","","","","17.5","%"],["EMEA","","","177.6","","","","186.5","","","","(8.9",")","","","(4.8",")%"],["APAC","","","153.8","","","","165.3","","","","(11.5",")","","","(7.0",")%"],["Total","","$","565.8","","","$","551.3"]]
[[/GREPCENT_TABLE]]

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Regional sales performance in 2023 compared to the prior year was driven by:

Americas - pricing and our recent acquisitions contributed to a 17.5% increase in sales

EMEA - excluding favorable changes in foreign currency rates of $3.3, sales declined $12.2, 6.5%, from softer demand in the region

APAC - excluding unfavorable changes in foreign currency rates of $3.0, sales declined $8.5, 5.1%, from softer demand in the region

In 2023, we continued our restructuring activities within our Hydraulics segment related to the creation of our two new regional operational Centers of Excellence. We incurred $10.2 of restructuring costs including labor, travel and other expenses associated with the manufacturing relocation; $6.0 of the costs are included in cost of goods sold and $4.2 are reflected in SEA expenses.

During 2023, gross profit declined $13.7, 7.0%, from volume while gross margin declined by 340 basis points, primarily from different margin profiles of acquired businesses, $4.9 of increased restructuring costs comprised of labor, travel and other expenses associated with the manufacturing relocation, $0.6 of unfavorable change in foreign currency exchange rates, which were partially offset by pricing amounts noted above. Material costs as a percentage of sales increased by 110 basis points, excluding pricing changes and acquisition-related sales.

Operating income as a percentage of sales decreased 580 basis points to 16.5%. SEA expenses increased $15.7, 21.6%, mainly due to acquisitions and corporate activities. Other increases to SEA were for restructuring costs of $1.3, professional fees of $0.7, R&D costs of $0.7 and travel and marketing costs of $0.6. SEA as a percent of sales increased 240 basis points to 15.6% in 2023, negatively impacted from lost leverage of our fixed costs on the lower sales.

In the third quarter of 2023, the Company experienced aggregate losses related to a fire and a weather-related incident at one of its manufacturing locations in Italy resulting in the shut-down of operations for a period of time and disruption in production as recovery efforts ensued. Impacted operations have been restored. There are insurance claims open related to these incidents and the Company is working closely with the insurance carrier to assess the claims and evaluate potential recoveries. Losses from damage to the building, equipment and supplies have been fully offset by probable insurance recoveries, which represents anticipated insurance proceeds not in excess of the associated losses, for which receipt has been deemed probable. Any recoveries in excess of losses incurred will be recognized when all contingencies related to the claim have been resolved.

Electronics

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

[[GREPCENT_TABLE]]
[["","","For the year ended"],["","","December 30, 2023","","","December 31, 2022","","","$ Change","","","% Change"],["Net sales","","$","269.8","","","$","334.1","","","$","(64.3",")","","","(19.2",")%"],["Gross profit","","$","79.9","","","$","103.0","","","$","(23.1",")","","","(22.4",")%"],["Gross profit %","","","29.6","%","","","30.8","%"],["Operating income","","$","24.7","","","$","52.5","","","$","(27.8",")","","","(53.0",")%"],["Operating income %","","","9.2","%","","","15.7","%"]]
[[/GREPCENT_TABLE]]

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Net sales for the Electronics segment declined by $64.3, 19.2%. We experienced organic net sales decline of $70.1, 21.0%, which was partially offset by acquisition sales of $5.8. Organic sales declined in 2023 from decreased demand in all regions, as well as in several of our end markets including the health and wellness end market. The marine market also experienced a notable decline; however, this was partially offset by improvement in the mobile and off-road vehicles end markets. Discrete impacts to our organic sales included pricing changes that were favorable by $5.2, 1.6%, partially offset by unfavorable changes in foreign currency exchange rates of $0.2, 0.1%.

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

[[GREPCENT_TABLE]]
[["","","For the year ended"],["","","December 30, 2023","","","December 31, 2022","","","$ Change","","","% Change"],["Americas","","$","226.5","","","$","270.9","","","$","(44.4",")","","","(16.4",")%"],["EMEA","","","25.2","","","","37.1","","","","(11.9",")","","","(32.1",")%"],["APAC","","","18.1","","","","26.1","","","","(8.0",")","","","(30.7",")%"],["Total","","$","269.8","","","$","334.1"]]
[[/GREPCENT_TABLE]]

In 2023, we executed restructuring activities within our Electronics segment to shift product lines to the expanded facility in Tijuana and to adjust our labor base in line with current demand levels. We incurred $1.9 of restructuring costs including labor, travel and other expenses associated with the manufacturing relocation; $0.4 of the costs are included in cost of goods sold and $1.5 are reflected in SEA expenses.

During 2023, gross profit declined $23.1, 22.4%, primarily due to lower sales volume and material cost increases. Gross margin for 2023 declined by 120 basis points primarily from the higher material costs, unfavorable margin profile of acquired businesses, $0.7 of increased restructuring costs comprised of labor, travel and other expenses associated with the manufacturing relocation, partially offset by favorable impacts from changes in foreign currency exchange rates compared to the prior year of $0.1 and the pricing amounts noted above. Material costs as a percentage of sales decreased by 80 basis points, excluding pricing changes and acquisition-related sales.

SEA expenses increased $4.7, 9.3%, in 2023 primarily from acquisitions and wages and benefits of $2.4 for the rolling impact of previous merit increases, market adjustments and new hires for investments in engineering, sales and corporate activities. SEA as a percent of sales increased 5.4 percentage points to 20.5% in 2023 from 15.1% in 2022, negatively impacted by reduced leverage of our fixed costs on the lower sales.

Corporate and Other

Certain costs are excluded from business segment results as they are not used in evaluating the results of, or allocating resources to, our operating segments. For the year ended December 30, 2023, these costs totaled $38.1 for: amortization of acquisition-related intangible assets of $32.9, $4.0 related to other acquisition and integration activities and $1.2 officer transition costs.

For the year ended December 31, 2022, these costs totaled $37.9 for: amortization of acquisition-related intangible assets of $28.1, $9.5 related to other acquisition and integration activities and $0.3 officer transition costs.

Interest Expense, net

Net interest expense increased $14.5 during 2023 to $31.2 compared with $16.7 in 2022. The change is attributable to higher average debt levels during 2023, as borrowings used to fund acquisitions exceeded repayments in addition to higher interest rates when compared to 2022. Average net debt increased by $37.9 during 2023 to $447.4 compared with $409.5 in 2022.

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Income Taxes

The provision for income taxes for the year ended December 30, 2023, was 23.8% of pretax income compared with 19.2% for the year ended December 31, 2022. The difference relates principally to a shift in the mix of the Company's worldwide income and increase in valuation allowance established. The effective rate typically fluctuates relative to the levels of income and different tax rates in effect from year to year among the countries in which we sell our products.

On August 16, 2022, the Inflation Reduction Act was enacted into law, and includes, among other things, a new 15% corporate alternative minimum tax and 1% excise tax on stock repurchases after December 31, 2022. The corporate alternative minimum tax is not expected to have a material impact on current and future financial results due to the Company’s ability to qualify for a safe-harbor exclusion, however we will continue to evaluate its impact in future periods.

The Organization for Economic Cooperation and Development (“OECD”), under its Pillar Two initiative, recently has proposed a set of Global Anti-Base Erosion (“GloBE”) rules to impose a minimum tax on income earned by multinational enterprises (“MNE”). Specifically, the GloBE rules impose a minimum tax of 15 percent on MNE income that arises in each participating jurisdiction. Several countries, including the UK and EU member states, have agreed to adopt the OECD’s minimum tax rules and several countries, including the UK, have already implemented these rules.

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

The Helios Technologies, Inc. Group is a MNE group that is within the scope and subject to the GloBE rules. The United States has not currently made any public announcement regarding implementation of Pillar Two initiative.

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

As of December 30, 2023, the Company had approximately $29.3 million of undistributed earnings of its non-U.S. subsidiaries for which it has not provided for non-U.S. withholding taxes and state taxes because such earnings are intended to be reinvested indefinitely in international operations.

2022 Results and Comparison of Years Ended December 31, 2022 and January 1, 2022

For the discussion and analysis of our 2022 results compared with our 2021 results, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on February 28, 2023. The discussion is incorporated herein by reference.

Liquidity and Capital Resources

Historically, our primary source of capital has been cash generated from operations. We also use borrowings on our credit facilities to fund acquisitions. During 2023, net cash provided by operating activities totaled $83.9 and as of December 30, 2023, we had $32.4 of cash on hand and $200.1 of available credit on our revolving credit facilities. At year end 2023, more than half of the cash on hand was held in institutions in APAC, approximately a quarter held in institutions in EMEA, and the remainder held in institutions in the Americas. We also have a $300.0 accordion feature available on our credit facility, which is subject to certain pro forma compliance requirements and is intended to support potential future acquisitions.

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

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We believe that 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, operating expense reductions could be made and the dividend to shareholders could be reduced or suspended.

Cash flows

The following table summarizes our cash flows for the periods:

[[GREPCENT_TABLE]]
[["","","For the year ended"],["","","December 30, 2023","","","December 31, 2022","","","$ Change"],["Net cash provided by operating activities","","$","83.9","","","$","109.9","","","$","(26.0",")"],["Net cash used in investing activities","","","(153.9",")","","","(90.8",")","","","(63.1",")"],["Net cash provided by (used in) financing activities","","","57.9","","","","(6.9",")","","","64.8"],["Effect of exchange rate changes on cash and cash equivalents","","","0.8","","","","3.0","","","","(2.2",")"],["Net (decrease) increase in cash and cash equivalents","","$","(11.3",")","","$","15.2","","","$","(26.5",")"]]
[[/GREPCENT_TABLE]]

Cash on hand decreased $11.3 to $32.4 at the end of 2023. Cash and cash equivalents were favorably impacted by changes in exchange rates by $0.8 and $3.0 during the years ended December 30, 2023, and December 31, 2022, 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

Net cash from operations totaled $83.9 in 2023, a decrease of $26.0, 23.7%, compared with the prior year. Cash earnings (calculated as net income plus adjustments to reconcile net income to net cash provided by operating activities, excluding changes in net operating assets and liabilities) decreased by $47.4 compared to the prior year. However, changes in net operating assets and liabilities increased cash by $21.4 compared to 2022, primarily from favorable cash flows from AR, inventories and AP. Investments in inventory, net of acquisitions, reduced cash by $17.9 and $27.0 in 2023 and 2022, respectively. Inventory on hand as of December 30, 2023, increased by $23.5, 12.3%, compared to the 2022 year end. The increase is driven primarily by lower volume of sales, temporary build-up due to constrained supply chain environment, and buildup of inventory to support the creation of the Centers of Excellence. Days of inventory on hand increased to 130 days for the 2023 year, compared with 111 days during the 2022 year. Changes in accounts receivable, net of acquisitions, increased cash by $16.3 in 2023 compared with a decrease in cash of $9.1 in 2022, a result of higher sales in the last few months of the 2023 year compared to 2022. Days sales outstanding for the 2023 year decreased slightly to 50 days, from 52 days during 2022, as our collection patterns remain consistent with the prior year.

Investing activities

Cash used in investing activities totaled $153.9 in 2023, an increase of $63.1, 69.5%, compared with the prior year. The increase in acquisition-related payments accounted for $46.9 of the fluctuation. Capital expenditures were $34.3 during 2023, $2.4, or 7.5%, higher than the prior year primarily from investments in machinery and equipment. These increases in cash used were partially offset by $0.3 in proceeds from dispositions of property, plant and equipment, a decrease of $6.9 compared with the prior year, which was inflated by the sale of a building related to our restructuring projects. Capital expenditures for 2024 are forecasted to be approximately 3%-4% of sales, for investments in machinery and equipment for capacity expansion projects, improvements to manufacturing technology and maintaining/replacing existing machine capabilities.

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Financing activities

Net cash provided by financing activities totaled $57.9 in 2023, compared with net cash used in financing activities of $6.9 in 2022. Cash paid for acquisitions in 2023 was primarily financed with borrowings on our credit facility; borrowings, net of repayments, during 2023 totaled $75.7. In 2022, borrowings, net of repayments, totaled $8.0.

Borrowings on our term loans and revolving credit facilities as of December 30, 2023, totaled $322.1 and $203.3, respectively. See Note 10 of the Notes to the Consolidated Financial Statements included in this Annual Report for additional information regarding our credit facilities.

In May 2023, we entered into an incremental facility amendment to our credit agreement with PNC Bank, National Association, as administrative agent, and various lenders party thereto. With the amendment we incurred a new term loan with an aggregate principal amount of $150.0 for which the proceeds were used to repay outstanding balances on our revolving credit facility. The new term loan is payable in full in October 2025 and is not subject to any required repayments prior to that date. As part of the amendment, we continue to have the ability to increase our revolving credit facility or incur a new term loan up to an additional borrowing limit of $300.0.

We have historically declared regular quarterly dividends to shareholders of $0.09 per share. We paid dividends totaling $11.8 and $11.7 for the years ended December 30, 2023 and December 31, 2022, 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

Credit facilities

Information on our credit facilities, including future maturities, is presented in Note 10 of the Notes to the Consolidated Financial Statements included in this Annual Report. Our revolving credit facility with PNC Bank matures and is payable in full in October 2025; however, we may make earlier payments. Our term loan with PNC Bank is payable in quarterly installments of $5.0 through the maturity date of October 2025, at which time the remaining balance will be due in full. Our new term loan with PNC Bank is payable in full in October 2025 and is not subject to any required repayments prior to that date.

Interest rates on our credit facilities range from 5.4% to 7.7% as of December 30, 2023. Future interest payments are estimated to total $68.5, with annual payments ranging from $38.1 to $30.2 payable through the last maturity date of June 2026. Future payments assume the current interest rate environment, current currency exchange rates, future required payments on term loans and revolver borrowings consistent with December 30, 2023 debt levels. Future payments do not include an estimate of impacts from our derivative instruments.

Contingent consideration payments

Our contingent consideration liabilities total $0.5 as of December 30, 2023. The balance represents the fair value estimate of contractual contingent payment related to our acquisition of Balboa, which is payable in the last quarter of 2024.

Supplier purchases

We regularly place purchase orders with our suppliers for inventory and capital expenditures to be used in the ordinary course of business. Open purchase orders as of December 30, 2023 total $83.3 for purchases expected in 2024 and $3.3 for purchases expected in 2025.

Building purchase commitment

The Company is negotiating a lease-to-buy agreement for the purchase of a building with the option to purchase the building at any time during the lease period. Under the draft agreement, the company would commit to purchasing the building at the end of the 6-year lease term. The expected purchase price is €26.7; however, the actual purchase price will be reduced by 60% of the payments made during the lease term.

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Leases

We regularly enter into operating lease agreements for the use of machinery, equipment, vehicles, buildings and office space. Future maturities of our operating lease liabilities are presented in Note 7 of the Notes to the Consolidated Financial Statements included in this Annual Report.

Critical Accounting Policies and Estimates

We prepare our Consolidated Financial Statements in conformity with U.S. GAAP, which requires management to make certain estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The following policies are considered by management to be the most critical in understanding the judgments, estimates and assumptions that are involved in the preparation of our Consolidated Financial Statements.

Business Combinations

Business combinations are accounted for under the acquisition method of accounting, which requires recognition separately from goodwill, the assets acquired and the liabilities assumed at their acquisition date fair values. Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values, and the values of assets in use, and often requires the application of judgment regarding estimates and assumptions. While the ultimate responsibility resides with management, for certain acquisitions we retain the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets and assumed liabilities, including intangible assets and tangible long-lived assets. Acquired intangible assets, excluding goodwill, are valued using various methodologies such as the discounted cash flow method, which is based on future cash flows specific to the type of intangible asset purchased and the relief from royalty method, which is based on the present value of savings resulting from the right to manufacture or sell products that incorporate the intangible asset without having to pay a license for its use. These methodologies incorporate various estimates and assumptions, the most significant being estimated royalty rates, projected revenue growth rates, profit margins and forecasted cash flows based on the discount rate.

Intangible assets consist primarily of customer relationships, technology, trade names and brands and supply agreements. Amortization is on a straight-line basis over their estimated useful lives and the amortization is reflected in the Consolidated Statements of Operations. The useful lives used are as follows: Customer Relationships - 8 to 26 years; Trade Names and Brands - 10 to 20 years; Technology - 5 to 13 years; and Supply Agreements - 10 years. Intangible assets are tested for impairment if certain circumstances arise that would indicate the carrying amount of the assets may not be recoverable. Such circumstances can include, but are not limited to, a decrease in market price, economic decline, changes in the market, change in business operations or plans for disposition. The assessment of fair value for impairment purposes requires significant judgment by management, which could be negatively impacted by economic decline, market deterioration and changes in other market conditions. Additional information about intangible assets, including the gross and net carrying values for the reported periods and historical and future estimated amortization expense is presented in Note 8 of the Notes to the Consolidated Financial Statements included in this Annual Report. Additional information about our acquisitions, including acquired intangible assets deemed material to the Company’s financial results, is presented in Note 3 of the Notes to the Consolidated Financial Statements included in this Annual Report.

Goodwill

Goodwill represents the excess of the purchase price of an acquisition over the fair value of the net assets acquired. The factors we consider for testing goodwill impairment consist of multiple steps. The first step is identification of our operating segments, followed by the identification of the reporting units, such that the reporting unit has discrete financial information, its operating results are reviewed regularly by management, and its economic characteristics are different form the economic characteristics of the other components of the operating segment.

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The Company performed its assessment of segments for financial reporting and deemed there to be no change from the prior year, as the Company continues to review results and manage the business with a focus on the reporting segment level. As part of the annual test of goodwill impairment the Company considers economic factors and current business operations when assessing the reporting unit structures for the purposes of goodwill impairment testing.

We test goodwill for impairment at the reporting unit level, as of the third quarter period end date, on an annual basis and between annual tests whenever events or circumstances indicate the carrying value of a reporting unit may exceed its fair value. Examples of such circumstances could include, but are not limited to, a significant loss of market share, significant decline in operating results, change in management strategy or operations, economic decline, and other such significant disruptions to the business. The carrying value of assets is calculated at the reporting unit level. An impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value.

In certain circumstances the Company may elect to test goodwill using a qualitative assessment, assessing whether it is more likely than not that the fair value of the reporting unit is less than the carrying value. More often the Company will skip the qualitative step and test goodwill using the following valuation methods. The assessment of fair value for impairment purposes requires significant judgment by management. As quoted market prices are not available for our reporting units, determining whether an impairment occurred requires the valuation of the respective reporting unit, which is estimated using both income-based and market-based valuation methods. We generally use a combination of market and income approach methodologies to estimate the fair value of our reporting units. Management’s assumptions include projected future performance, expected future costs, and expected future economic and market conditions (i.e. inflation, tax rates, end-market or market share deterioration). If these assumptions and estimates are not met or operations are impacted by other factors the reporting units could be subject to goodwill impairment.

The income approach is generally based on a discounted cash flow analysis, which estimates the present value of the projected free cash flows to be generated by the reporting unit. Assumptions used in the analysis include estimated future revenues and expenses, working capital, capital expenditures and other variables. Assumptions made for future cash flows are developed based on consideration of current and future economic conditions, recent sales trends, planned timing of product launches or other relevant variables. Each reporting unit regularly prepares discrete operating forecasts and uses these forecasts as the basis for the assumptions in the discounted cash flow analysis. Within the discounted cash flow models, the Company uses a discount rate, commensurate with its cost of capital but adjusted for inherent business risks, and an appropriate terminal growth factor.

The market approach estimates the value of reporting units by comparing to guideline public companies or guideline transactions. Various valuation multiples of companies that are economically and operationally similar are used as data points for selecting multiples for the reporting units, which are deemed to be market-adjusted multiples based on key data points for guideline public companies. Changes in assumptions or estimates could materially affect the estimated fair value of our reporting units and the potential for impairment. We also reconcile the estimated aggregate fair value of our reporting units resulting from these procedures to our overall market capitalization.

The Company completed its annual goodwill impairment testing for 2023, 2022, and 2021 and determined that the carrying amount of goodwill was not impaired. In 2023, a third party was used to assist in the valuation and testing of three reporting units. The third party provides estimates (such as risk premiums, select multiples, discount rates, etc.) used in conjunction with Management’s estimates and assumptions to calculate the fair value of the reporting unit. These reporting units could be subject to impairment if there is economic decline, expectations for growth are not met, a change to management’s operating outlook, or any significant change to the assumptions, estimates or other risks previously mentioned. Such impairment could negatively impact our operating results.

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Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. To the extent the Company determines that it is more likely than not a deferred income tax asset will not be realized, a valuation allowance is established. The recoverability analysis of the deferred income tax assets and the related valuation allowances requires significant judgment and relies on estimates. At December 30, 2023, valuation allowances against deferred tax assets were $3.0. Refer to Note 12 of the Notes to the Consolidated Financial Statements included in this Annual Report for additional information on the composition of these valuation allowances and information on the $1.3 income tax expense resulting from new valuation allowances established against deferred tax assets.

Our annual tax rate fluctuates based on our income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective government taxing authorities. Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties. We review our tax positions quarterly and adjust the balances as new information becomes available. Indefinite reinvestment is determined by management’s judgment about, and intentions concerning, our future operations.

We recognize and measure uncertain tax positions in accordance with ASC 740. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We adjust these reserves, as well as the related interest and penalties, where appropriate in light of changing facts and circumstances. Settlement of any particular position could require the use of cash. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

See Note 12 of the Notes to the Consolidated Financial Statements included in this Annual Report for income tax amounts, including reserves.

Off Balance Sheet Arrangements

We do not engage in any off balance sheet financing arrangements. In particular, we do not have any material interest in variable interest entities, which include special purpose entities and structured finance entities.

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