Helios Technologies, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended April 1, 2023; comparable period ended April 2, 2022. Amounts are in millions of dollars except per-share data. Helios supplies motion-control and electronic-control products through its Hydraulics and Electronics segments.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $213.2 | $240.5 | Down 11.4% |
| Gross profit / margin | $71.0 / 33.3% | $83.6 / 34.8% | Profit down 15.1%; margin down 150 bps |
| Operating income / margin | $24.8 / 11.6% | $42.9 / 17.8% | Income down 42.2% |
| Net income | $13.9 | $30.5 | Down 54.4% |
| Diluted EPS | $0.42 | $0.94 | Down $0.52 |
| Operating cash flow | $12.3 | $14.7 | Down $2.4 |
Net interest expense rose to $6.2 from $3.8, reflecting higher interest rates and higher average net debt. The effective tax rate was 22.8%, versus 22.4%.
Segments and drivers
- Hydraulics: Sales increased 7.7% to $147.7, including $13.7 of acquisition growth; organic sales declined 2.3%. Operating income fell 11.4% to $28.0, and operating margin declined to 19.0% from 23.1%. Pricing and acquisitions supported sales, while currency, supply delays, costs and acquisition mix weighed on results.
- Electronics: Sales declined 36.7% to $65.5; operating income fell 63.4% to $7.5. Reduced health-and-wellness demand and elevated customer channel inventory were key factors. Mobile and industrial machinery end markets grew. Segment operating margin was 11.5%, versus 19.8%.
- Consolidated organic sales declined $41.0, or 17%, partly offset by $13.7 of acquisition growth. Pricing contributed $6.4; currency was an unfavorable $3.5, and estimated delayed sales from supply constraints were $12.4.
Cash, debt and liquidity
- At April 1, 2023, cash was $36.3, down from $43.7 at year-end. Total debt was approximately $526.1, compared with $444.9 at December 31, 2022; cash-adjusted debt was approximately $489.8.
- Revolving borrowings were $346.7, with $54.3 available on revolving facilities. The company also cited a $300.0 accordion feature, subject to pro forma compliance requirements. Helios reported compliance with debt covenants.
- Operating cash flow of $12.3 and financing cash inflows of $73.8 were more than offset in part by $94.6 of investing outflows, including $84.7 net cash paid for Schultes. Capital expenditures were $9.1. Cash declined $7.4 during the quarter.
- Inventory was $202.4, up from $191.6 at year-end. Inventory on hand was 126 days, versus 100 days in the comparable prior-year period; management attributed excess inventory partly to weaker health-and-wellness sales.
Material changes, outlook and risks
- Helios completed its acquisition of Schultes Precision Manufacturing on January 27 for $84.7 net of acquired cash, funded with credit-facility borrowings. The purchase-price allocation remains preliminary and may change.
- In May, Helios signed an agreement to acquire i3 Product Development for initial consideration of $45.2, subject to customary adjustments and closing conditions. Closing was expected in Q2 2023; funding was expected to include cash and equity, with cash funded through credit-facility borrowings.
- The company described a strategic target of more than $1 billion in sales and approximately 25% adjusted EBITDA margin on a run-rate basis by Q4 2023. This is a stated target, not a new quarterly or full-year forecast. 2023 capital expenditures were forecast at approximately 3%–5% of sales.
- Management cited economic uncertainty, the Russia-Ukraine war, inflation, supply constraints and cyclical demand as risks. Pricing and cost actions partially mitigated inflation, but the company said it may not fully offset future cost increases. Restructuring and manufacturing transfers in Hydraulics were underway, with relocation expected to be completed in Q3 2023.
- Management said operating cash generation and borrowing availability should cover operating expenses; in a severe, prolonged downturn, it could postpone capital expenditures, reduce operating costs, or reduce or suspend dividends. The quarterly dividend declared was $0.09 per share.
- Q1 included $1.2 of restructuring costs, $8.1 of acquisition-related intangible amortization, and $1.8 of acquisition and integration costs. Management reported no material changes to risk factors, no material market-risk changes, and no material legal proceedings.
Important facts for investors to verify
- Whether Electronics demand and customer inventory levels improve, and whether the reported recent positive spa and bath order trend persists.
- Whether supply constraints ease and the estimated $12.4 of delayed sales is recovered.
- Schultes integration, final purchase-price allocation and the expected closing, consideration and funding for i3.
- Progress on Hydraulics restructuring, related costs, and expected operational benefits; also assess inventory levels and working-capital needs.
- Debt, interest expense and covenant headroom after acquisitions, including availability under revolving facilities and the accordion feature.
- Progress toward the stated Q4 2023 run-rate targets and the assumptions behind the 3%–5% capital-expenditure forecast.