Helios Technologies, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; comparisons are with the quarter and nine months ended October 1, 2022. Amounts are in millions except per-share data. Helios supplies engineered motion-control and electronic-control products through its Hydraulics and Electronics segments.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $201.4 | $207.2 | $642.2 | $689.4 |
| Gross profit / margin | $59.7 / 29.6% | $69.3 / 33.4% | $206.5 / 32.2% | $235.2 / 34.1% |
| Operating income / margin | $13.8 / 6.9% | $30.7 / 14.8% | $68.0 / 10.6% | $116.6 / 16.9% |
| Net income | $3.5 | $20.4 | $34.1 | $80.9 |
| Diluted EPS | $0.11 | $0.63 | $1.04 | $2.48 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $50.2 | $74.2 |
- Q3 sales decreased 2.8%; organic sales fell 9.2%, partly offset by $13.3 of acquisition sales. Nine-month sales decreased 6.8%; organic sales fell 13.1%, partly offset by $43.4 of acquisition sales.
- Q3 gross margin contracted 380 basis points and operating margin 790 basis points. Lower volume, acquired businesses’ lower margin profile, restructuring and labor costs contributed; acquisitions and increased spending also raised operating expenses.
- Net interest expense rose to $8.7 in Q3 from $4.1 and to $22.6 year to date from $11.7, reflecting higher rates and higher average net debt.
Segments
- Hydraulics: Q3 sales were $132.0, up 0.6%, as $11.0 of acquisition sales partly offset a 7.8% organic decline; operating income was $18.4 versus $29.4. Nine-month sales rose 5.1% to $432.1, while operating income fell to $73.3 from $92.1.
- Electronics: Q3 sales declined 8.7% to $69.4, including an 11.7% organic decline partly offset by $2.3 of acquisition sales; operating income was $4.2 versus $11.0. Nine-month sales declined 24.5% to $210.1 and operating income fell to $23.8 from $51.8. Health and wellness demand was a key source of weakness.
Balance sheet, cash flow and liquidity
- At September 30, cash was $35.2, compared with $43.7 at year-end 2022. Current assets were $410.2 and current liabilities $136.3.
- Total debt was $545.2 in the debt maturity table, versus $446.5 at December 31, 2022; approximate debt less cash was $510.0. Revolving facilities had $183.3 of available credit. The company also reported a $300.0 accordion capacity, subject to compliance requirements.
- Operating cash flow of $50.2 was down $24.0 year over year. Investing used $144.5, including $114.8 for acquisitions and $25.5 of capital expenditures. Financing provided $85.7; cash decreased $8.5.
- Inventory increased to $208.7 from $191.6. Management reported 133 days of inventory on hand, up from 118 a year earlier, citing elevated inventory relative to current health and wellness sales.
- The company reported compliance with debt covenants. Its $150.0 incremental term loan matures in October 2025; the credit agreement’s effective interest rate was 7.4% at quarter-end.
Outlook, commentary and notable matters
- No specific full-year revenue or earnings guidance is stated. Management forecast 2023 capital expenditures of approximately 4%–5% of sales and said operating cash generation and borrowing availability should be sufficient for operating needs. It noted potential actions to preserve liquidity if conditions severely worsen, including delaying capital spending or acquisitions, reducing operating costs, or reducing or suspending the dividend.
- Management cited softer demand in mobile, marine, industrial and health and wellness markets, as well as regional weakness and economic uncertainty. It continued to face component-sourcing constraints, estimating $11.2 of sales delayed into future quarters ($7.8 Hydraulics and $3.4 Electronics). Inflation and higher material costs may not be fully offset by pricing.
- Restructuring and manufacturing transfers to Hydraulics Centers of Excellence continued, with further transfers and integration work expected in Q4 2023. Schultes Precision Manufacturing and i3 Product Development were acquired in January and May, respectively; preliminary purchase-price allocations remain subject to adjustment.
- A fire and weather-related incident disrupted an Italian manufacturing location during Q3; operations have been restored. The company said damage losses were offset by probable insurance recoveries, while claims remain open and any recoveries beyond losses will be recognized after contingencies are resolved.
- Management reported no material changes to the risk factors in its 2022 Form 10-K. Routine legal matters were not expected to materially affect results, financial position or cash flows. The company declared a quarterly dividend of $0.09 per share.
Investor verification priorities
- Assess whether delayed sales from component shortages were recovered and whether demand weakness, particularly in Electronics and health and wellness, persisted.
- Track inventory levels and cash conversion as sales and production schedules change.
- Review debt, interest costs, borrowing availability and covenant headroom given the higher debt balance and 2025 term-loan maturity.
- Monitor acquired-business integration, preliminary purchase accounting and the effect of acquisitions on margins and leverage.
- Check the outcome and timing of the Italian facility insurance claims, and progress and costs of the restructuring and Centers of Excellence transfers.