Helios Technologies, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 29, 2019; comparative periods ended June 30, 2018. Amounts below are in U.S. dollars unless stated otherwise. The company changed its name from Sun Hydraulics Corporation to Helios Technologies on June 13, 2019; its Nasdaq symbol changed to HLIO on June 17.
Business context
Helios develops and manufactures products for two segments: Hydraulics, including cartridge valves, quick-release couplings and hydraulic systems, and Electronics, including display and control integration solutions. Results include Custom Fluidpower, acquired in August 2018; Faster, acquired in April 2018, was included for the full first half of 2019 but only from its acquisition date in the prior-year comparison.
Financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $143.8m | $136.2m | $290.7m | $233.5m |
| Gross profit / margin | $56.2m / 39.1% | $50.4m / 37.0% | $112.7m / 38.8% | $88.0m / 37.7% |
| Operating income / margin | $26.4m / 18.4% | $17.0m / 12.5% | $52.2m / 18.0% | $34.3m / 14.7% |
| Net income | $17.3m | $6.8m | $33.7m | $18.7m |
| Diluted EPS | $0.54 | $0.22 | $1.05 | $0.61 |
Q2 sales rose 5.6% year over year, while first-half sales rose 24.5%. Q2 reported growth included $12.6m from Custom Fluidpower, offset by a $5.0m decline in organic sales; foreign exchange reduced sales of historical businesses by $2.6m, while price increases added $2.0m. First-half growth reflects acquisition contributions as well as organic growth.
For Q2, Hydraulics sales increased 9.7% to $113.7m, but segment operating income fell 5.1% to $24.1m and operating margin declined to 21.2% from 24.5%. Electronics sales declined 7.4% to $30.1m; operating income was approximately flat at $6.5m, with margin improving to 21.6% from 20.0%. For the first half, Hydraulics sales were $230.2m and Electronics sales were $60.5m.
Q2 gross margin improved 2.1 percentage points, reflecting lower acquisition-related inventory step-up amortization and improved production efficiencies and cost management in both segments; Custom Fluidpower’s lower-margin integrator business partly offset the benefit. Reported operating-income growth also reflects lower prior-year acquisition-related expenses, including transaction costs and inventory step-up amortization. First-half net interest expense increased to $8.4m from $4.6m, primarily because of debt used to fund the Faster acquisition.
Cash flow, debt and liquidity
- First-half operating cash flow was $25.4m, down from $31.1m. The company cited a $10.7m operating cash-flow payment on Enovation contingent consideration and increased working-capital needs. Receivables and inventory together used $21.9m of cash.
- Capital expenditures were $15.4m, versus $10.6m in the prior-year period. Full-year 2019 capital expenditures were estimated at $30m–$35m.
- Cash and cash equivalents were $13.3m at June 29, down from $23.5m at December 29, 2018. Total debt was approximately $346.0m: $251.0m on the revolving facility and $95.0m of non-revolving debt. The company reported $149.1m of available revolving credit and an additional $200m accordion feature, subject to compliance requirements.
- The revolving facility matures in 2023; the effective interest rate on the credit agreement was 3.68%. The company reported compliance with debt covenants as of the filing date. A $200m interest-rate swap hedges variable-rate exposure and had a $6.3m liability fair value at quarter-end.
- The company declared a quarterly dividend of $0.09 per share. Management said operating cash flow and borrowing availability should be sufficient for operating expenses and capital expenditures for the foreseeable future.
Outlook, commentary and risks
Management forecast 2019 revenue of $565m–$575m, including $453m–$458m from Hydraulics and $112m–$117m from Electronics; U.S. GAAP EPS of $1.95–$2.05; non-GAAP cash EPS of $2.40–$2.50; and adjusted EBITDA margin of 23.5%–24.0%, before certain one-time costs. Management said revenue guidance reflected unfavorable foreign exchange, softer end markets and potential tariff impacts, partly offset by a strong backlog; it expected only a modest effect on adjusted EBITDA margin and still expected bottom-line growth.
Management noted weaker order intake and softness in European agriculture, Americas oil and gas and recreational markets, and Asia/Pacific construction equipment. CVT backlog remained large, but product mix and Sarasota capacity constraints limited manufacturing throughput. The company cited the cyclical nature of capital-goods demand, currency movements, tariffs and Brexit uncertainty. It did not expect Brexit to have a material impact, based on identified mitigating factors. Vision 2025 targets $1bn of sales by 2025; management said near-term priorities include integrating acquisitions, improving performance and investing in products, manufacturing and global operations.
Other items: the company adopted lease accounting guidance in 2019, recording approximately $13.9m of lease right-of-use assets and liabilities at adoption. Tax authorities were examining specified U.S., Florida and Italian returns; the company reported no significant proposed adjustments not already accounted for, but noted outcomes remain uncertain. Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reports no material litigation or material changes in market risk.
Key facts for investors to verify
- How much of reported revenue and earnings growth is acquisition-related versus organic, particularly given Q2 organic sales weakness and the different acquisition comparison periods.
- Whether softer end-market demand, tariffs and foreign exchange continue to weigh on sales, and whether the CVT backlog converts despite capacity constraints and product-mix challenges.
- Whether the 2019 revenue, EPS and adjusted EBITDA margin guidance remains achievable as segment conditions evolve.
- Working-capital trends, especially inventory, receivables and inventory obsolescence; first-half inventory rose to $97.2m from $86.0m at year-end.
- Debt, liquidity and interest-rate exposure, including covenant compliance, revolving-credit availability and the effect of the 2023 debt maturities.
- Tax examination outcomes and the remaining contingent-consideration liability, which was $1.9m at quarter-end after substantial payments during the first half.