Helios Technologies, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 27, 2020; financial statements are unaudited. Helios develops and manufactures products for hydraulics and electronics markets. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $119.3 | $143.8 | $248.8 | $290.7 |
| Gross profit / margin | $44.7 / 37.5% | $56.2 / 39.1% | $96.6 / 38.8% | $112.7 / 38.8% |
| Operating income / margin | $16.7 / 14.0% | $26.4 / 18.4% | $6.7 / 2.7% | $52.2 / 18.0% |
| Net income (loss) | $12.9 | $17.3 | ($4.3) | $33.7 |
| Diluted EPS | $0.40 | $0.54 | ($0.13) | $1.05 |
| Operating cash flow | Not separately reported | Not separately reported | $40.3 | $25.4 |
Q2 sales fell 17.0% year over year; gross margin contracted 1.6 percentage points, primarily from lower volume, reduced fixed-cost absorption and COVID-related production inefficiencies. Six-month operating results included a $31.9 million non-cash, non-tax-deductible goodwill impairment charge at Faster. Excluding the impairment, reported six-month operating income would have been approximately $38.5 million; this is a simple arithmetic adjustment, not a company-reported non-GAAP measure.
Segments and material comparisons
- Hydraulics: Q2 sales were $102.1 million, down 10.2%; operating income was $22.0 million, down 8.7%, with operating margin up 0.3 percentage points to 21.5%. APAC sales grew while Americas and EMEA declined. For the first half, sales fell 10.6% and operating income fell 9.2%.
- Electronics: Q2 sales were $17.2 million, down 42.9%; operating income was $0.9 million versus $6.5 million. First-half sales fell 29.1% and operating income fell 56.2%. Management cited pandemic-related customer shutdowns and delayed orders, weakness in oil and gas, and its prior strategic shift in customer base.
- Consolidated Q2 operating income declined less sharply than sales partly because of cost reductions. The quarter included $1.6 million of CEO separation and transition costs. First-half corporate and other costs rose $33.8 million, mainly due to the goodwill impairment and CEO transition costs.
Cash, debt and liquidity
- At June 27, cash and cash equivalents were $37.0 million, versus $22.1 million at year-end 2019. Six-month operating cash flow was $40.3 million; investing cash use was $5.5 million, including $5.2 million of capital expenditures; financing cash use was $19.7 million.
- Revolving credit borrowings were $193.9 million and non-revolving debt totaled $94.2 million, or approximately $288.1 million of total debt before debt issuance costs. Cash less total debt implies net debt of approximately $251.1 million.
- Available revolving credit was $207.4 million; the credit facility also included a $200 million accordion feature subject to pro forma compliance requirements. The company reported compliance with debt covenants. Management said cash from operations and borrowing capacity should cover operating needs and provide adequate liquidity beyond 12 months, while noting uncertainty from COVID-19.
- Quarterly dividends declared were $0.09 per share, unchanged from Q2 2019. Management stated future dividends remain at the board’s discretion and could be reduced or suspended if conditions worsen.
Outlook, risks and unusual items
- Helios withdrew 2020 guidance and said visibility was insufficient to reinstate it. Management expected Q3 to be the year’s trough, citing a lower order book at June-end, followed by a potential recovery in orders; this outlook was explicitly subject to substantial uncertainty.
- COVID-19 disrupted facilities, customer operations, shipments and demand. China operations were closed in February and gradually resumed; Faster’s Italian production was interrupted for about four weeks from mid-March. The company reported facilities were operational at filing, but future restrictions, demand weakness, supply constraints or delayed recovery could further affect results, cash flows and asset values.
- Management implemented labor, salary, hiring, discretionary-spending and capital-spending reductions, and obtained a €5 million term loan in Italy. Further cost actions, additional borrowing and dividend reduction or suspension were identified as possible responses to a prolonged downturn.
- The Q2 tax provision included approximately $2.6 million of one-time benefits, mainly related to Italian tax measures; the effective tax rate before discrete items was 22.7%, versus the reported 4.7% for the quarter.
- The Faster goodwill impairment followed an interim valuation review prompted by COVID-19 impacts, facility closures and weaker end-market outlook, particularly in Europe. Management warned that a more severe or prolonged downturn could cause additional goodwill or other asset impairments.
- Other noted exposures include an $8.6 million unrecognized tax benefit, ongoing Florida and Italian tax examinations, foreign-exchange and interest-rate risks, and uncertainty around Brexit. The filing reported no material legal proceedings or material changes in market-risk disclosures.
Important facts for investors to verify
- Whether sales and order intake recover after the anticipated Q3 trough, especially in Electronics and the Americas and EMEA markets.
- Whether margins and cash generation remain resilient amid lower volumes, production inefficiencies and ongoing cost actions.
- Potential for further Faster goodwill or other asset impairments if forecasts, discount rates or recovery assumptions change.
- Debt repayment, covenant headroom, borrowing availability and the company’s capacity to sustain its dividend under prolonged weakness.
- Resolution and possible financial effects of tax examinations and unrecognized tax benefits, and the impact of currency and interest-rate movements.