Helios Technologies, Inc. — Q3 2019 Form 10-Q
Business and period: Industrial technology manufacturer serving hydraulics and electronics markets through its Hydraulics and Electronics segments. The quarter ended September 28, 2019; comparisons are with the quarter ended September 29, 2018. The company changed its name from Sun Hydraulics Corporation to Helios Technologies in June 2019 and began trading as HLIO.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $138.0m | $135.8m | $428.7m | $369.3m |
| Gross margin | 37.8% | 38.1% | 38.5% | 37.9% |
| Operating income | $19.1m | $19.2m | $71.3m | $53.5m |
| Operating margin | 13.8% | 14.1% | 16.6% | 14.5% |
| Net income | $12.8m | $11.6m | $46.5m | $30.3m |
| Diluted EPS | $0.40 | $0.36 | $1.45 | $0.97 |
Q3 sales increased 1.6%; management attributed $3.9m of the increase to acquisitions, while organic sales declined 1.3% as reported but increased 0.6% after currency effects. Q3 operating income was nearly flat, with restructuring and an intangible-asset disposal loss offsetting lower amortization and other cost effects. Nine-month growth reflects, in part, inclusion of Faster and Custom Fluidpower for more of the period than in 2018.
Segments: Q3 Hydraulics sales rose 5.8% to $110.1m, but operating income fell 21.1% to $17.9m and operating margin declined to 16.3%, reflecting mix, material costs and restructuring. Electronics sales declined 11.9% to $28.0m; operating income decreased 4.8% to $6.0m, while operating margin improved to 21.4% following cost reductions. For the first nine months, Hydraulics sales grew 25.9% to $340.3m, while Electronics sales fell 10.6% to $88.5m.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $50.9m, versus $44.2m in 2018. Capital expenditures were $19.6m; operating cash flow less capital expenditures was approximately $31.3m.
- Cash and cash equivalents were $13.7m at September 28, down from $23.5m at year-end. Current assets were $196.4m and current liabilities $76.4m.
- Revolving credit borrowings were $225.5m, with $174.5m available under the $400m facility. Non-revolving debt was $93.7m; total debt was approximately $319.2m. The company reported compliance with debt covenants and a 3.24% effective rate on its credit agreement.
- Cash used in financing activities was $47.9m, including debt repayments, dividends and contingent-consideration payments. The final $17.8m Enovation contingent-consideration payment was made in April 2019.
Outlook, commentary and notable items
- Management forecast 2019 revenue of $550m–$555m, including Hydraulics of $439m–$442m and Electronics of $111m–$113m; GAAP EPS of $1.70–$1.75; non-GAAP cash EPS of $2.24–$2.29; and adjusted EBITDA margin of 22.4%–22.8%. The filing says guidance was updated due to further end-market softening.
- Management cited weaker agriculture demand in Europe, oil and gas in the Americas, construction equipment in Asia/Pacific and recreational markets in the Americas. Hydraulics backlog supported expected fourth-quarter sales, but mix and capacity constraints could limit margins. The company said it would continue cost-management actions and remained committed to its Vision 2025 goal of $1bn in sales by 2025.
- Q3 charges included $1.7m of Sun Hydraulics restructuring costs; the plan was substantially complete and expected to reduce annual costs by $3.0m–$3.5m. Termination of a technology license and phaseout of related products caused a $2.7m intangible-asset disposal loss.
- Inventory was $89.3m; the obsolete/slow-moving inventory provision rose to $7.2m from $3.9m at year-end. Inventory days increased to 99 from 92 a year earlier. A $6.8m interest-rate-swap liability and foreign-exchange exposures are also disclosed.
- Tax examinations include U.S. federal years 2008–2012 and other specified state and foreign returns; management reported no significant unaccounted proposed adjustments but noted outcomes and timing are uncertain. The company said Brexit was not expected to have a material impact, while acknowledging uncertainty.
Most important facts for investors to verify
- Whether the revenue and EPS outlook was subsequently achieved, and how much reported growth was acquisition-related versus organic.
- Whether soft end markets, segment sales mix and Hydraulics capacity constraints continued to pressure gross and operating margins.
- Whether inventory levels and cash conversion improved, given the increase in inventory days and use of cash for investment and debt service.
- Debt maturities, interest-rate exposure, covenant headroom and remaining liquidity under the credit facility.
- Potential effects of tax examinations, currency movements and restructuring or product-transition costs on future earnings.