Helios Technologies, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 30, 2023 (52 weeks); comparisons are with the 52 weeks ended December 31, 2022. This is an annual report, not a stand-alone fourth-quarter results report. Amounts are in U.S. dollars unless noted.
Business context
Helios designs and manufactures engineered hydraulic motion-control and fluid-conveyance products and customized electronic controls, displays, wiring and software. It reports Hydraulics and Electronics segments and serves diverse end markets globally. The 2023 strategy emphasized integrating operations, regional manufacturing centers, system sales, product innovation and acquisitions. Two 2023 acquisitions were Schultes Precision Manufacturing and i3 Product Development.
Financial performance and liquidity
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Net sales | $835.6 million | $885.4 million | Down 5.6% |
| Gross profit / margin | $261.7 million / 31.3% | $298.5 million / 33.7% | Profit down 12.3%; margin down 2.4 percentage points |
| Operating income / margin | $79.9 million / 9.6% | $137.3 million / 15.5% | Income down 41.8%; margin down 5.9 points |
| Net income | $37.5 million | $98.4 million | Down 61.9% |
| Diluted EPS | $1.14 | $3.02 | Down 62.3% |
| Operating cash flow | $83.9 million | $109.9 million | Down $26.0 million |
- Revenue declined organically by $102.6 million, partly offset by $52.8 million from acquisitions; pricing added $18.6 million. Health and wellness was a major source of weakness. Sales declined in all regions.
- Hydraulics: sales rose 2.6% to $565.8 million, as $47.0 million of acquired sales more than offset a 5.9% organic decline. Operating income fell 24.0% to $93.3 million; operating margin was 16.5%, down from 22.3%.
- Electronics: sales fell 19.2% to $269.8 million, including a 21.0% organic decline. Operating income fell 53.0% to $24.7 million; operating margin was 9.2%, down from 15.7%.
- Net interest expense increased to $31.2 million from $16.7 million, reflecting higher average debt and rates. The effective tax rate was 23.8%, versus 19.2%; tax expense nevertheless fell to $11.7 million from $23.4 million as pretax income declined.
- Cash and cash equivalents were $32.4 million at year-end. The company reported $200.1 million of available revolving credit. Current assets were $396.7 million and current liabilities $144.9 million.
- Total debt was approximately $525.4 million, versus $444.9 million at the prior year-end; debt less cash was approximately $493.0 million. Interest rates on credit facilities ranged from 5.4% to 7.7%. The company was in compliance with credit covenants at year-end.
- Investing cash outflow was $153.9 million, including $114.2 million for acquisitions and $34.3 million of capital expenditures. Operating cash flow less capital expenditures was approximately $49.6 million, before acquisitions and other investing items.
- Inventory increased 12.3% to $215.1 million; days inventory on hand rose to 130 from 111. Dividends declared were $0.36 per share, and $11.8 million was paid during the year.
Material changes, outlook and commentary
- Consolidated gross margin contracted on lower volume, reduced fixed-cost absorption, acquisition mix and restructuring costs. Restructuring charges totaled $12.1 million, including manufacturing relocations and organizational changes; management expects the actions to improve the cost structure.
- Health and wellness sales remained below the prior year after pandemic-era demand and channel inventory buildup. Management said channel inventory began normalizing in the second half of 2023 and demand improved as the year ended.
- Management forecast 2024 capital expenditures of approximately 3%–4% of sales. It stated an intention to continue the quarterly dividend at $0.09 per share in 2024, subject to board discretion. The filing gives no specific revenue or earnings guidance.
- A fire and a weather-related incident disrupted operations at an Italian manufacturing location in the third quarter; impacted operations have been restored. Property and equipment losses were fully offset by probable insurance recoveries, while any recovery exceeding incurred losses will be recognized after contingencies are resolved.
- Debt maturities are concentrated in 2025: $491.2 million of the $525.4 million total is scheduled that year. The PNC revolving facility and principal term loans mature in October 2025; estimated future interest payments were $68.5 million, based on stated assumptions. The company had $300 million of additional accordion capacity, subject to requirements.
- The annual goodwill impairment test found no impairment. Litigation was described as routine and not expected to materially affect results or financial position. The independent auditor issued unqualified opinions on the financial statements and internal controls; management also concluded disclosure controls were effective.
Key risks and contingencies
- Exposure to cyclical capital-goods demand, weaker customer orders, inflation, raw-material and labor costs, supply-chain disruption, tariffs and geopolitical or foreign-exchange volatility.
- Acquisition integration and execution risks, including achieving expected synergies; ongoing operational restructuring and regional-center transfers may cost more, take longer or deliver fewer benefits than expected.
- Variable-rate debt, covenant restrictions and the substantial 2025 maturity concentration create refinancing, liquidity and interest-rate risks. A one-percentage-point rise in the reference rate was estimated to increase 2023 financing costs by about $3.1 million, after swaps.
- Goodwill was $514.0 million and other intangible assets were $426.4 million; weaker forecasts or market conditions could result in impairment. i3’s purchase-price allocation remained preliminary.
- Other disclosed exposures include product liability and warranty claims, environmental and workplace-safety requirements, cybersecurity threats, international compliance, and the possibility of future tax adjustments. The filing says no cybersecurity risk or incident had materially affected the company to date.
- The company was negotiating a lease-to-buy arrangement for a building, with an expected purchase price of €26.7 million before a reduction equal to 60% of lease payments; the draft provides for purchase at the end of a six-year lease term. Standby letters of credit totaled $1.0 million.
Important facts for investors to verify
- Whether demand and margins recover, especially in Electronics and health and wellness, and whether reported year-end demand improvement persists.
- Progress in reducing inventory days and delivering the expected savings from restructuring and the Centers of Excellence.
- Plans and available funding to address 2025 debt maturities, interest expense, covenant headroom and refinancing conditions.
- Final acquisition valuations, integration performance and returns from Schultes and i3; monitor goodwill and intangible-asset assumptions.
- Resolution and timing of insurance claims for the Italian incidents, including whether any recoveries exceed recorded losses.
- Whether planned 2024 capital spending and the intended dividend remain supportable from operating cash generation.