Helios Technologies, Inc. (Sun Hydraulics Corporation) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 30, 2019; comparisons are with the three months ended March 31, 2018. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted. The registrant filed under the legal name Sun Hydraulics Corporation, doing business as Helios Technologies.
Business context
Helios develops and manufactures products for hydraulics and electronics markets. Its Hydraulics segment includes cartridge valves, quick-release couplings and hydraulic systems; its Electronics segment provides display and control integration products. The 2019 quarter includes Faster and Custom Fluidpower, acquired in 2018; the comparable 2018 quarter does not, making reported year-over-year growth substantially acquisition-driven.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $146.9 | $97.3 |
| Gross profit / margin | $56.5 / 38.5% | $37.6 / 38.6% |
| Operating income / margin | $25.8 / 17.6% | $17.3 / 17.8% |
| Net income | $16.4 | $11.9 |
| Diluted EPS | $0.51 | $0.40 |
| Operating cash flow | $19.8 | $14.7 |
| Capital expenditures | $8.8 | $4.2 |
Sales rose 51.0%; management attributed $49.0 million of the $49.6 million increase to Faster and Custom Fluidpower. Gross margin was nearly unchanged, while operating margin declined slightly, primarily reflecting higher acquisition-related intangible amortization. Net interest expense increased to $4.4 million from $0.5 million, reflecting acquisition-related debt.
Cash and cash equivalents were $16.7 million at quarter-end, down from $23.5 million at December 29, 2018. Debt comprised $242.6 million drawn on the revolving facility and $96.4 million of non-revolving debt, or $339.0 million in total before cash. The company reported $157.4 million of available revolver capacity and said it was in compliance with debt covenants. Operating cash flow was partly offset by working-capital investment; accounts receivable and inventory reduced cash by a combined $12.6 million. The filing reports a current ratio of no value explicitly; it can be calculated from the balance sheet.
Segment and other material changes
- Hydraulics: Sales were $116.5 million, up 86.1%, with acquisitions contributing $49.0 million. Organic sales grew 7.8%. Segment operating margin was 20.4%, versus 21.4%; early-quarter productivity was affected by the CVT manufacturing consolidation, completed by quarter-end. Management expected capacity to improve thereafter.
- Electronics: Sales declined 12.4% to $30.4 million, attributed to OEM model-year rollout timing and softer end markets. Gross margin improved to 45.7% from 40.9%, while operating income declined 8.5% to $6.5 million.
- Foreign-exchange movements reduced sales, including an unfavorable $2.4 million effect on Faster and Custom Fluidpower versus exchange rates at acquisition. The company recorded a $0.7 million increase in the fair value of acquisition-related contingent consideration, reducing net income by approximately $0.6 million after tax.
- Comprehensive income was $10.5 million, below net income, principally because of foreign-currency translation and an interest-rate-swap loss. Helios adopted the new lease standard in 2019 and recognized approximately $14.2 million of operating lease liabilities at March 30.
Guidance, commentary and risks
For full-year 2019, management forecast revenue of $580–$590 million, including $464–$469 million from Hydraulics and $116–$121 million from Electronics. GAAP EPS guidance was $2.10–$2.20; non-GAAP cash EPS guidance was $2.55–$2.65; adjusted EBITDA margin guidance was 24.0%–24.5%. Management said revenue guidance reflected softer expectations in certain end markets and revised adjusted EBITDA margin guidance to reflect lower top-line expectations; EPS ranges were maintained. Planned 2019 capital expenditures were $30–$35 million.
Management cited strong Hydraulics backlog and expected the completed manufacturing consolidation to support production. It described an intentional Electronics customer-base shift that temporarily weighs on 2019 sales but is intended to broaden customers and support production launches in 2020 and 2021. Agriculture, oil and gas, recreation, construction and material-handling markets were softening. Management did not expect Brexit to have a material effect, while noting the ultimate impact remained uncertain. Results for this quarter are not necessarily indicative of full-year results.
Risks and contingencies include cyclical capital-goods demand, acquisition integration and leverage, foreign-currency exposure, and uncertain tax-audit outcomes. The company disclosed $6.9 million of unrecognized tax benefits and ongoing U.S. federal, Florida and Faster Italian tax examinations; it said no significant unaccounted-for proposed adjustments had been identified to date. Routine litigation was not expected to materially affect results or financial position. In April 2019, after quarter-end, the company made the final $17.8 million contingent-consideration payment to Enovation Controls’ former owners.
Important facts for investors to verify
- How much of reported growth and future guidance depends on acquired businesses versus organic demand, and whether Hydraulics backlog converts as expected.
- Whether Electronics customer transitions lead to the stated 2020–2021 production opportunities and offset near-term sales weakness.
- Working-capital trends, including rising days sales outstanding and inventory days, and their effect on cash conversion.
- Debt reduction, available borrowing capacity, covenant compliance, interest-rate exposure and remaining acquisition-related obligations.
- Actual performance against revenue, EPS, EBITDA-margin and capital-spending guidance, particularly if end-market softness or currency movements intensify.
- Developments in the disclosed tax examinations and any material changes in unrecognized tax benefits.