Helios Technologies, Inc. — FY2020 Form 10-K
Business and reporting period. Helios designs and manufactures hydraulic components and systems and electronic controls and displays, operating through Hydraulics and Electronics segments. Fiscal 2020 ended January 2, 2021, comprised 53 weeks, including a 14-week fourth quarter; FY2019 comprised 52 weeks. The 2020 results include Balboa Water Group from its November 6 acquisition date.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $523.0 million | $554.7 million |
| Gross profit / margin | $196.2 million / 37.5% | $212.3 million / 38.3% |
| Operating income / margin | $35.4 million / 6.8% | $90.1 million / 16.2% |
| Net income / diluted EPS | $14.2 million / $0.44 | $60.3 million / $1.88 |
| Operating cash flow | $108.6 million | $90.5 million |
| Capital expenditures | $14.6 million | $25.0 million |
- Segment performance: Hydraulics sales were $407.2 million, down 8.0%; operating income was $82.0 million and margin 20.1%. Electronics sales were $115.8 million, up 3.5% including Balboa; operating income was $19.4 million and margin 16.8%.
- Fourth quarter: Sales were $151.6 million, operating income $10.4 million and net income $5.6 million. FY2020 Q4 sales exceeded the comparable 2019 quarter’s $125.9 million, but the 2020 quarter had 14 weeks versus 13 weeks.
- Balance sheet at year-end: Cash was $25.2 million, working capital $126.0 million and total debt approximately $462.4 million. The company reported $144.0 million of available revolving credit. Cash less reported total debt implies net debt of approximately $437 million.
- Operating cash flow increased 20.0% year over year. Investing cash outflow was $235.9 million, primarily reflecting $217.0 million for the Balboa acquisition. Financing provided $137.7 million.
- Quarterly dividends were $0.09 per share, or $0.36 for the year. Management intended to continue the $0.09 quarterly dividend in 2021, subject to board discretion.
Material changes and unusual items
- Sales declined 5.7%. COVID-related shutdowns, weaker order intake and lower end-market demand were major factors; Balboa added $26.1 million of sales and currency movements added $2.0 million. Excluding those impacts, Americas and EMEA sales fell materially, while APAC grew.
- Operating income included a $31.9 million non-cash goodwill impairment at Faster, $6.6 million of Balboa transaction costs, $2.6 million of executive transition costs, $1.9 million of acquisition inventory step-up charges and $22.1 million of acquisition-related intangible amortization. The impairment was nondeductible and contributed to the 40.9% reported effective tax rate; the rate before the impairment effect was 17.6%.
- Balboa was acquired for cash consideration of $223.2 million, with net purchase consideration of $218.5 million after cash acquired and other adjustments. Its post-acquisition results included a $1.5 million pretax loss, including purchase accounting charges.
- In January 2021, after fiscal year-end, Helios acquired BJN Technologies’ assets and established an engineering center. This is a subsequent event, not included in FY2020 results.
Outlook, risks and contingencies
- The company’s longer-term strategic vision is $1 billion in sales and operating margins above 20%, supported by organic growth, product development and acquisitions. Management stated that its FY2021 outlook assumes continued global economic recovery, but provided no specific FY2021 revenue or earnings guidance in the supplied filing text.
- Management reported pandemic-related business disruption was minimal as of the filing date, but warned that renewed disruption could affect operations, suppliers, customers, demand, cash flows and goodwill valuations. FY2020 included Chinese and Italian facility closures, softer orders and customer delivery delays.
- Management expects FY2021 capital expenditures of approximately 5% of sales. It stated cash from operations and borrowing availability should meet foreseeable operating and capital needs, while noting spending reductions or dividend changes could be options if conditions deteriorate.
- Key risks include cyclical capital-goods demand, acquisition integration and leverage, variable interest rates, foreign exchange, supplier and logistics disruptions, competition, product liability, cybersecurity, regulation and environmental matters. Debt covenants limit additional borrowing, acquisitions and certain other actions; the company reported compliance at year-end. Routine litigation was not expected to materially affect results.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management’s controls assessment excluded Balboa while integration continues.
Important facts for investors to verify
- Whether demand and order intake recovered after year-end, and whether the 14-week fourth quarter’s sales increase over the prior-year quarter is sustained on a comparable-week basis.
- How much of FY2020 earnings deterioration reflects recurring operating performance versus the impairment, acquisition costs, amortization and other identified items.
- Balboa’s margins, integration progress, expected synergies and final purchase-price allocation, which was preliminary.
- Debt repayment capacity, covenant headroom, interest-rate exposure and liquidity after financing the Balboa acquisition.
- Whether the Faster reporting unit’s outlook or broader economic conditions could trigger further impairment charges, and whether management achieves its stated long-term growth and margin objectives.