Helios Technologies, Inc. — 2019 Form 10-K Summary
Business context and reporting period. Helios develops and manufactures hydraulic components and systems and electronic controls, displays and instrumentation. Its reporting segments are Hydraulics and Electronics. This annual report covers the 52-week fiscal year ended December 28, 2019; it is not a standalone fourth-quarter filing. Reported comparisons are affected by the 2018 acquisitions of Faster and Custom Fluidpower. The company changed its name from Sun Hydraulics Corporation to Helios Technologies, Inc. in June 2019.
Financial performance
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Net sales | $554.7 million | $508.0 million | +9.2% |
| Gross profit / margin | $212.3 million / 38.3% | $192.7 million / 37.9% | Margin +0.4 percentage points |
| Operating income / margin | $90.1 million / 16.2% | $75.6 million / 14.9% | +19.2% |
| Net income | $60.3 million | $46.7 million | +29.1% |
| Diluted EPS | $1.88 | $1.49 | +26.2% |
| Net cash from operations | $90.5 million | $77.5 million | +$13.0 million |
- Sales quality and segment mix: Organic consolidated sales declined $18.8 million, or 3.7%; acquisitions more than offset the decline in reported sales. Foreign exchange reduced organic sales by $8.1 million. Hydraulics sales rose 16.0% to $442.8 million, including acquisition contribution, while Electronics sales fell 11.3% to $111.9 million.
- Segment profitability: Hydraulics operating income increased 2.5% to $86.0 million, but operating margin fell to 19.4% from 22.0%; organic operating income declined $8.6 million. Electronics operating income decreased 12.0% to $22.0 million, with margin broadly stable at 19.7%.
- Cash, working capital and investment: Cash and cash equivalents were $22.1 million at year-end, versus $23.5 million a year earlier; working capital was $116.1 million. Capital expenditures were $25.0 million. The cash flow statement reports a $1.4 million net decrease in cash, cash equivalents and restricted cash.
- Debt and liquidity: Total debt was approximately $301 million, down from $353 million. The company had $191.3 million of available revolving credit and reported compliance with credit-facility covenants. Net interest expense rose to $15.4 million from $13.9 million. A one-percentage-point increase in reference rates was estimated to add about $1.5 million to annual financing costs.
- Other balance-sheet metrics: Total assets were $1.02 billion and shareholders’ equity was $577.6 million. Goodwill was $377.6 million and other intangible assets were $294.7 million; annual goodwill testing found no impairment.
Material changes and unusual items
- Reported revenue growth was acquisition-led despite weaker organic demand. Management cited softness in European agriculture, U.S. oil and gas, APAC construction equipment and recreational markets in the Americas.
- Gross margin improved year over year partly because 2018 included $4.4 million of acquisition-related inventory step-up amortization. In 2019, production efficiencies, pricing and cost control helped, while lower volume, higher material costs, product mix and currency effects weighed on results.
- 2019 included $1.7 million of restructuring charges and a $2.7 million loss on disposal of an intangible asset following termination of the Sturman licensing agreement and phase-out of related digital logic valve products. The completed restructuring is expected to reduce annual costs by $3.0–$3.5 million.
- Corporate and other costs fell to $17.9 million from $33.4 million, primarily because 2018 included acquisition transaction costs, inventory step-up amortization and higher acquisition-related intangible amortization.
- The effective tax rate increased to 20.0% from 17.1%. Foreign currency translation and interest-rate-swap losses contributed to a $9.1 million other comprehensive loss.
- Fourth-quarter sales were $125.9 million versus $138.7 million a year earlier; net income was $13.8 million versus $16.4 million, and EPS was $0.43 versus $0.51.
Outlook, risks and contingencies
- 2020 guidance: Revenue of $520–$555 million, including Hydraulics of $415–$443 million and Electronics of $105–$112 million; GAAP EPS of $1.55–$1.88; non-GAAP cash EPS of $2.00–$2.30; and adjusted EBITDA margin of 22.0%–23.0%, before certain one-time costs. Management characterized guidance as cautious, with wider ranges due to economic uncertainty, including coronavirus. It anticipated challenging markets but saw indicators suggesting possible improvement in some markets in the second half.
- Investment plans and strategy: Vision 2025 targets $1 billion in annual sales, with organic growth and acquisitions as the principal levers. Management’s 2020 capital expenditure estimate was $20–$25 million. Production at the new India facility was expected to begin in 2020.
- Key risks: Cyclical capital-goods demand; competition and customer insourcing; international, currency and trade exposure; acquisition integration; raw-material and supplier constraints; interest rates and LIBOR transition; and regulatory, tax, product-liability, cyber and operational risks. Coronavirus was an emerging risk at the filing date: about 9% of sales were to Chinese customers, and China operations and suppliers supported production in China, the U.S. and Europe. The duration and financial impact of disruption could not then be estimated.
- Contingencies and controls: Management said routine litigation was not expected to materially affect results or financial position. Certain Florida and Italian tax examinations remained open; management reported no significant proposed adjustments not already accounted for. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; goodwill valuation was identified as a critical audit matter.
- The board intended to continue the quarterly dividend at $0.09 per share in 2020, subject to board discretion and financial and other considerations.
Important facts for investors to verify
- How much of reported sales and earnings growth is sustainable organically, after separating acquisitions, foreign exchange, pricing and volume.
- Whether the Electronics customer-base strategy and weak end markets stabilize, and whether Hydraulics margins recover as demand and product mix change.
- Actual coronavirus-related effects on Chinese sales, facilities and supply chains, and whether 2020 guidance remains achievable.
- Debt repayment capacity, covenant headroom, variable-rate exposure and available revolver capacity as operating conditions evolve.
- Progress on restructuring savings, India facility start-up, planned capital spending and the strategic sales targets.
- The assumptions supporting goodwill and intangible-asset values, and any developments in tax examinations or unrecognized tax benefits.