Helios Technologies, Inc. — Q3 2021 Form 10-Q
Business and period: Helios designs and manufactures motion-control and electronic-control products through its Hydraulics and Electronics segments. This unaudited report covers the quarter and nine months ended October 2, 2021; comparisons are with the periods ended September 26, 2020. Dollar amounts below are in millions unless stated otherwise.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $223.2 | $122.6 | $651.5 | $371.4 |
| Gross profit / margin | $80.9 / 36.2% | $46.9 / 38.3% | $238.5 / 36.6% | $143.5 / 38.6% |
| Operating income / margin | $40.7 / 18.2% | $18.3 / 14.9% | $117.4 / 18.0% | $25.0 / 6.7% |
| Net income | $27.8 | $13.0 | $81.0 | $8.7 |
| Diluted EPS | $0.86 | $0.40 | $2.51 | $0.27 |
| Operating cash flow | Not provided for quarter | $82.0 | $77.0 |
Q3 sales rose 82.1%, including $63.7 million of acquisition-related sales and $36.9 million of organic growth. Nine-month sales increased 75.4%, reflecting $180.2 million from acquisitions and $99.9 million of organic growth. The prior-year nine-month comparison included a $31.9 million goodwill impairment; excluding that charge, management said operating margin improved 2.7 percentage points year over year.
Q3 gross margin fell 2.1 percentage points and nine-month gross margin fell 2.0 points. Management attributed the pressure to raw-material, freight and logistics cost increases, supply constraints, sales mix, and acquired businesses’ lower gross-margin profiles. Higher volume, labor efficiencies, cost controls and fixed-cost leverage supported operating income.
Segments and material changes
- Hydraulics: Q3 sales were $133.4 million, up 35.8%; operating margin was 23.8%, versus 19.2%. Nine-month sales were $385.5 million, up 26.8%, and operating margin was 23.9%, versus 20.5%.
- Electronics: Q3 sales were $89.8 million, up 268.0%, largely reflecting Balboa; operating margin was 20.5%, versus 19.2%. Nine-month sales were $266.0 million, up 295.2%, and operating margin was 21.2%, versus 15.5%. Acquired sales accounted for $59.0 million in Q3 and $175.5 million year to date.
- Balboa, acquired in November 2020, contributed to Electronics. NEM was acquired July 9, 2021, and contributed to Hydraulics. Helios also reported acquiring Joyonway in October 2021, after the reporting period.
Cash, debt and liquidity
- Cash and cash equivalents were $47.7 million at October 2, 2021, compared with $25.2 million at January 2, 2021. Nine-month operating cash flow was $82.0 million; investing cash use was $68.2 million, including $50.9 million for acquisitions and $17.1 million of capital expenditures.
- Working capital absorbed cash: accounts receivable increased cash use by $36.6 million and inventory by $35.8 million. Management cited higher operating levels and buying inventory earlier amid shortages.
- Total debt was approximately $471.8 million, comprising $277.3 million on revolving facilities and $194.4 million of non-revolving debt. Available revolving credit was $120.9 million; the PNC facility also has a $300 million accordion feature subject to compliance requirements. The reported effective interest rate on the PNC credit agreement was 2.09%. The company said it was compliant with debt covenants.
- Dividends declared were $0.09 per share in Q3 and $0.27 per share for the first nine months. Reported capital expenditure outlook for fiscal 2021 was $25–$27 million.
Outlook, risks and unusual items
- Management’s strategic target is $1 billion in sales by the end of 2023, with adjusted EBITDA margins of approximately 25%; it said its value-stream strategy could potentially accelerate the sales target by two years from the prior 2025 plan. These are strategic goals, not specific quarterly guidance.
- Management expected continued economic recovery for the remainder of fiscal 2021 but said future COVID-19 effects were uncertain. Demand was strong, while shortages of electronic components and other inputs, freight costs and labor-market pressure constrained operations. Helios estimated that supply shortages delayed approximately $6.7 million of Hydraulics sales and $9.8 million of Electronics sales into future quarters.
- Management warned that further material-cost inflation might not be fully offset by price increases. Some price increases had been implemented, with benefits expected mainly in future quarters.
- NEM’s purchase-price allocation remained preliminary and subject to post-closing, valuation and tax adjustments. Potential NEM earnout consideration was up to €5.4 million; its estimated fair value was $3.3 million at acquisition and contingent consideration liabilities totaled $5.7 million at quarter end.
- Unrecognized tax benefits, including accrued interest, were $10.6 million; the company estimated up to $1.0 million could be recognized as a benefit within 12 months. Management said routine legal proceedings were not expected to materially affect results or financial position. No material changes to previously disclosed risk factors or market-risk disclosures were reported.
Important facts for investors to verify
- How much of subsequent sales growth and earnings reflects organic demand versus Balboa, NEM and Joyonway, and whether acquisition integration meets expectations.
- Whether component availability, logistics costs and working-capital requirements improve, and whether the estimated delayed sales are recovered.
- Whether pricing offsets inflation without further pressure on gross margins, especially in Electronics.
- Debt repayment, borrowing availability and covenant headroom after acquisitions, alongside cash conversion and planned capital spending.
- Progress toward the $1 billion sales and approximately 25% adjusted EBITDA-margin strategic targets; the filing does not provide a specific earnings forecast.