Helios Technologies, Inc. — Q1 2024 Form 10-Q
Business context and period. Helios designs and manufactures motion-control and electronic-control products for global industrial, mobile, agricultural, marine, recreational-vehicle, and health-and-wellness markets. It reports Hydraulics and Electronics segments. This unaudited filing covers the three months ended March 30, 2024; comparisons are with the three months ended April 1, 2023. Amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $212.0 | $213.2 | (0.6)% |
| Gross profit / margin | $67.2 / 31.7% | $71.0 / 33.3% | Profit down 5.4%; margin down 160 bps |
| Operating income / margin | $20.3 / 9.6% | $24.8 / 11.6% | Income down 18.1%; margin down 200 bps |
| Net income | $9.2 | $13.9 | Down 33.8% |
| Diluted EPS | $0.28 | $0.42 | Down 33.3% |
| Operating cash flow | $17.8 | $12.3 | Up $5.5 |
- Segment sales: Hydraulics $142.4, down 3.6%; Electronics $69.6, up 6.3%. Hydraulics operating income fell to $21.8 from $28.0; Electronics operating income was $7.1 versus $7.5.
- Cash and investment: Cash was $37.3 at quarter-end, up $4.9 from year-end. Investing used $6.3, including $5.5 of capital expenditures; financing used $5.4. Capital expenditures were 2.6% of sales.
- Debt and liquidity: Gross debt was $521.8, comprising $316.4 of non-revolving debt and $205.4 of revolving borrowings. The balance-sheet carrying amount is lower after unamortized issuance costs. The company reported $196.9 of available revolving credit and $300.0 of potential accordion capacity, subject to requirements. Current assets were $409.3 and current liabilities $144.8. The company reported compliance with debt covenants.
- Other metrics: Net interest expense increased to $8.2 from $6.2; the effective tax rate was 23.2% versus 22.8%. Dividends declared were $0.09 per share. Comprehensive income was $2.1, including a $7.1 other comprehensive loss, primarily from currency translation.
Material changes and management commentary
- Organic sales declined $5.1, or 2.4%, partly offset by $3.9 of acquisition sales. Softer demand in mobile, industrial, and agricultural markets was partly offset by health-and-wellness and off-road vehicle growth. Foreign exchange reduced organic sales by $0.3.
- Lower volume, higher material and labor costs, unfavorable currency effects, and product mix pressured gross margin. Selling, engineering, and administrative expenses rose $0.9, mainly due to wages and the 2023 acquisitions. Higher interest rates and increased average net debt also contributed to higher interest expense; average net debt was $488.2 versus $446.0.
- Hydraulics’ organic sales fell 4.9%, with declines in the Americas and EMEA partly offset by APAC growth. Electronics’ organic sales grew 3.2%; sales rose in health and wellness and off-road vehicles, while industrial and marine sales declined.
- Management cited challenging economic conditions and continuing uncertainty, including inflation, political uncertainty, and geopolitical conflicts. It said the cited conflicts had not had, and were not expected to have, a material impact on financial condition or results. Management is emphasizing pricing discipline, cost savings, and production efficiency.
Outlook, risks, and unusual items
- The filing provides no specific revenue or earnings guidance. Management forecasts 2024 capital expenditures of approximately 3%–4% of sales, for capacity, manufacturing technology, and equipment needs.
- Hydraulics restructuring and the creation of two Centers of Excellence were substantially complete, with remaining integration and optimization expected to finish in 2024. European manufacturing transitions are expected to take place largely during 2024.
- The company expects operating cash generation and borrowing availability to fund foreseeable operating needs. It noted that, in a severe and prolonged downturn, it could defer capital spending, reduce operating expenses, delay acquisitions, or reduce or suspend dividends.
- Debt maturity concentration is significant: $493.5 of scheduled maturities fall in 2025, including the PNC term loans and revolving facility maturing in October 2025. Interest-rate swaps had a $220.0 notional amount and expire in October 2025 and April 2028.
- Insurance claims remain open for a prior fire and weather-related incident at an Italian manufacturing location. Management expects probable insurance recoveries to offset losses on damaged property and supplies; any recovery exceeding incurred losses will be recognized only after claim contingencies are resolved. Management hoped to resolve the claims in 2024.
- Management said routine litigation is not expected to materially affect results, financial position, or cash flows; Part II reports no legal proceedings. The filing reports no material changes to the risk factors in the 2023 Form 10-K and no material changes in market risk disclosures.
Important facts for investors to verify
- Whether demand improves in the company’s cyclical end markets and whether the reported Electronics growth offsets continued Hydraulics softness.
- Whether margins recover as volume, labor and material costs, and product mix change.
- How Helios will refinance or repay the substantial 2025 debt maturities, and how borrowing costs and covenant headroom evolve.
- Whether the Italian incident insurance claims are resolved, and the timing and amount of any recoveries.
- Progress and costs of the remaining restructuring and European operational transitions, alongside actual 2024 capital spending.
- Working-capital trends: receivables reduced operating cash flow by $13.1 in the quarter, and inventory days were 135 versus 126 a year earlier.