Helios Technologies, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 28, 2020; comparable period ended March 30, 2019. Helios develops and manufactures products for hydraulics and electronics markets. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $129.5 | $146.9 | Down 11.8% |
| Gross profit / margin | $51.9 / 40.1% | $56.5 / 38.5% | Profit down 8.1%; margin up 1.6 percentage points |
| Operating income (loss) | $(10.0) | $25.8 | Includes $31.9 goodwill impairment in 2020 |
| Net income (loss) | $(17.2) | $16.4 | EPS $(0.54) vs. $0.51 |
| Operating cash flow | $15.1 | $19.8 | Down $4.7 |
| Capital expenditures | $2.9 | $8.8 | Down $5.9 |
Excluding the goodwill impairment, operating margin was 16.9%, compared with 17.6% a year earlier. Net interest expense was $3.0 million, down from $4.4 million; management attributed the decrease primarily to lower average net debt. The income tax provision was $4.2 million. The reported effective tax rates, adjusted for the impairment, were 22.3% and 22.1%, respectively.
Cash and cash equivalents were $27.3 million at quarter-end. Total debt was approximately $295.2 million, including $204.9 million drawn on the revolving facility; available revolving credit was $195.1 million, with a further $200 million accordion feature subject to requirements. Helios reported compliance with debt covenants. Operating, investing and financing activities generated/used $15.1 million, $(1.3) million and $(8.9) million, respectively. The quarterly dividend declared was $0.09 per share.
Business performance and changes
- Hydraulics: Sales were $103.8 million, down 10.9%; operating income was $21.5 million, down 9.7%. Operating margin increased to 20.7% from 20.4%, while gross margin rose to 38.2% from 36.6%, supported by cost management and manufacturing efficiencies. EMEA sales fell 19.9%; APAC sales were approximately flat before currency effects.
- Electronics: Sales were $25.7 million, down 15.5%; operating income was $4.8 million, down 26.2%, and operating margin declined to 18.7% from 21.4%. Sales weakness reflected softer recreational and oil-and-gas demand and a deliberate customer-base shift. Gross margin improved to 47.5%, including a $0.9 million non-recurring benefit from releasing customer contractual obligations.
- Foreign exchange reduced consolidated sales by approximately $2.1 million and earnings per share by $0.01. Management estimated COVID-19-related closures and shipment restrictions reduced first-quarter sales by approximately $5.0 million, primarily in Hydraulics.
- Days of inventory on hand increased to 101 from 88 in the comparable prior-year period; days sales outstanding rose to 51 from 50.
Outlook, risks and unusual items
- Helios withdrew its previously issued 2020 guidance because of the uncertain magnitude and duration of COVID-19 effects and said it lacked sufficient visibility to reinstate guidance. Management expected continued second-quarter headwinds, with the largest impact then seen in April; some customer orders were postponed and a smaller number cancelled.
- Facilities experienced varying disruptions: China operations gradually returned to full production by quarter-end, and the Italian Faster facility resumed production April 14, 2020. U.S. sites remained operational. Management cited customer shutdowns, possible supply constraints, workforce disruption and potential further production restrictions as risks.
- A $31.9 million non-cash, non-tax-deductible goodwill impairment was recorded for the Faster reporting unit after COVID-19-related economic conditions and outlook triggered interim testing. Further impairment is possible if recovery is weaker or slower than assumed.
- Cost actions included temporary 20% salary reductions for officers, layoffs and temporary pay reductions at Enovation Controls, a hiring freeze, reduced contingent labor and postponed capital spending. Additional measures, including reducing or suspending the dividend, remained possible at the Board’s discretion.
- On April 9, 2020, the Board named CFO Tricia L. Fulton Interim President and CEO and began a search for a permanent CEO. The filing identifies management transition as a potential source of disruption.
- Management said cash from operations and available credit should support liquidity beyond the next 12 months, while noting that a prolonged severe downturn could require additional actions. Brexit was not expected to have a material impact, though its effects remained uncertain. Routine litigation was not expected to materially affect the company; tax examinations and $8.5 million of unrecognized tax benefits remain subject to uncertainty.
Investor verification priorities
- Track subsequent revenue, orders, cancellations and backlog deferrals by segment and region, particularly as COVID-19 restrictions and customer operations change.
- Assess whether the Faster reporting unit or other assets require additional impairment, and review the assumptions used in valuation tests.
- Monitor cash conversion, inventory levels, debt, revolving-credit availability and covenant compliance as sales and working capital evolve.
- Verify the effect and sustainability of cost reductions, the dividend decision, and any updated 2020 outlook.
- Follow the permanent CEO search and resolution of tax examinations and unrecognized tax benefits.