HELIOS TECHNOLOGIES, INC. quarterly report, Q2 FY2022

Business context and reporting period

Helios Technologies, Inc. designs and manufactures products in two segments: Hydraulics and Electronics, serving industrial, agricultural, construction, marine, recreational, health and wellness, and other markets. This unaudited Form 10-Q covers the quarter and six months ended July 3, 2021; comparisons are to the periods ended June 27, 2020. Dollar amounts below are in millions unless stated otherwise.

Results include Balboa Water Group, acquired in November 2020, and BJN Technologies, acquired in January 2021. Their results and acquisition-related sales make year-over-year comparisons less like-for-like.

Financial results and liquidity

Q2 sales rose 87.3%; management attributed $60.2 million of the increase to acquisitions and $43.9 million to organic growth. Foreign exchange added $6.9 million. For the first six months, sales rose 72.1%, including $116.5 million from acquisitions and $63.0 million of organic growth. Q2 sales grew in both segments: Hydraulics increased 30.3% to $133.0 million, and Electronics increased to $90.4 million from $17.2 million, substantially reflecting acquisitions.

Six-month 2020 operating income included a $31.9 million goodwill impairment charge. Excluding that charge, management reported the prior-year operating margin at 15.5%, versus 17.9% in 2021. The 2021 six-month effective tax rate was 20.1%; Q2 rate was 17.6%.

• Cash flow: Six-month operating cash flow was $49.5 million, versus $40.3 million. Investing used $14.2 million, including $10.3 million of capital expenditures; financing used $28.7 million. Cash increased $9.2 million to $34.4 million.
• Working capital: Accounts receivable was $134.0 million and inventory was $132.3 million at July 3, 2021, up from $97.6 million and $110.4 million, respectively, at January 2, 2021. Management attributed significant operating cash uses to increases in receivables and inventory.
• Debt and liquidity: Total debt was approximately $437.7 million, including $239.2 million on revolving facilities and $198.5 million of non-revolving debt before issuance costs. Cash was $34.4 million; available revolving credit was $161.4 million. A further $300 million accordion was available subject to compliance requirements. The company reported compliance with debt covenants.
• Shareholder returns: The declared quarterly dividend was $0.09 per share. Six-month dividends paid were $5.8 million.

Material changes, outlook and risks

• Higher sales volume and fixed-cost leverage supported operating margin, but gross margin declined year over year due to higher raw-material, freight and logistics costs and acquired businesses’ different margin profiles. Management said some price increases had been implemented, with benefits expected mainly in future quarters.
• Electronics faced shortages of certain components; management estimated approximately $4.9 million of sales were delayed into future quarters. It reported mitigating most supply constraints through procurement and production scheduling.
• Management’s strategic goal is $1 billion in sales by the end of 2023 and adjusted EBITDA margins of approximately 25%; it said its value-stream initiatives could potentially accelerate the revenue goal. This is a strategic target, not quantified quarterly guidance.
• Fiscal 2021 capital expenditures were forecast at approximately $30–$32 million. Management said operating cash and borrowing availability should be sufficient for operating needs and growth plans.
• The outlook assumes continued global economic recovery. Management cautioned that COVID-19 impacts remain uncertain, including possible effects from new variants. Other stated risks include supply shortages, rising material and logistics costs, and the possibility that price increases may not fully offset costs. The filing reported no material changes to the risk factors in the prior Form 10-K.
• After quarter-end, on July 9, 2021, Helios acquired NEM for initial consideration of approximately $57.9 million, net of cash acquired, funded partly with credit-facility borrowings and including 134,621 shares; a further earn-out of up to approximately $6.4 million is possible. A May 2021 agreement to acquire Joyonway was expected to close in Q3 2021, subject to pre-closing requirements.
• Routine litigation was not expected by management to materially affect results, financial position or cash flows. Management concluded disclosure controls were effective; no material change in internal control over financial reporting was identified.

Important facts for investors to verify

1. How much future growth and profitability depend on acquired businesses versus sustainable organic demand, especially given the substantial acquisition contribution to Electronics sales.
2. Whether component availability improves and delayed orders convert to sales, and whether raw-material and freight inflation can be offset by pricing without further margin pressure.
3. Cash conversion and working-capital trends as receivables and inventory have risen, alongside planned capital spending and the debt-funded NEM acquisition.
4. Progress toward the stated revenue and adjusted EBITDA margin goals; the filing does not provide specific quarterly or full-year sales or earnings guidance.
5. The effects of acquisition-related amortization, integration costs, potential earn-outs and the pending Joyonway transaction on reported and underlying results.