Helios Technologies, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter ended September 26, 2020; comparative quarter ended September 28, 2019. Financial amounts below are in millions except per-share data. Helios develops and manufactures products in two segments: Hydraulics and Electronics. Results reflect the effects of COVID-19 and related disruption.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $122.6 | $138.0 | $371.4 | $428.7 |
| Gross profit | $46.9 | $52.1 | $143.5 | $164.9 |
| Gross margin | 38.3% | 37.8% | 38.6% | 38.5% |
| Operating income | $18.3 | $19.1 | $25.0 | $71.3 |
| Operating margin | 14.9% | 13.8% | 6.7% | 16.6% |
| Net income | $13.0 | $12.8 | $8.7 | $46.5 |
| Diluted EPS | $0.40 | $0.40 | $0.27 | $1.45 |
- Cash flow: Nine-month operating cash flow was $77.0 million, versus $50.9 million. Investing activities used $9.0 million, including $7.2 million of capital expenditures; financing activities used $54.3 million. Cash and restricted cash increased $10.3 million to $32.5 million.
- Liquidity and debt: Cash and cash equivalents were $32.4 million. Revolving facilities had $168.4 million outstanding and $233.5 million available. Gross debt was $261.0 million, comprising revolving borrowings and non-revolving debt. The company reported covenant compliance. Debt figures are stated before cash and exclude operating lease liabilities.
- Balance sheet: Total assets were $999.2 million and shareholders’ equity was $587.8 million at September 26, 2020. Inventories were $77.6 million, down from $85.2 million at year-end 2019.
- Dividend: Q3 dividend declared was $0.09 per share; $0.27 per share was declared for the first nine months.
Changes versus comparable periods
- Q3 sales declined 11.2% year over year; nine-month sales declined 13.4%. Q3 net income rose 1.6%, while nine-month net income fell 81.3%, largely reflecting the 2020 goodwill impairment and lower sales.
- Q3 gross margin rose 0.5 percentage points and operating margin rose 1.1 points. Management cited cost controls and product mix, partly offset by COVID-related costs. Q3 operating income nevertheless decreased 4.2%.
- Nine-month operating income included a $31.9 million non-cash, non-tax-deductible goodwill impairment charge for the Faster reporting unit, recorded in Q1. Without that charge, reported year-to-date operating income and net income comparisons would be materially different.
- Hydraulics Q3 sales decreased 10.8%, while segment operating income increased 5.6%; Electronics sales decreased 12.9% and operating income decreased 21.7%. For the first nine months, Electronics sales declined 24.0%, compared with a 10.6% decline for Hydraulics.
- Q3 sales were weakest in the Americas; APAC sales grew, supported by demand in China and regional expansion. The Electronics segment was additionally affected by weaker recreational and oil-and-gas demand and a prior strategic change in its customer base.
- Interest expense declined to $2.7 million in Q3 from $3.8 million and to $8.6 million for the first nine months from $12.2 million, primarily due to lower average net debt.
Outlook, commentary and risks
- As of November 2, 2020, management expected full-year 2020 net sales of $485 million to $495 million, assuming typical Q4 seasonality in Electronics and recovering order levels in Hydraulics. The outlook excluded Balboa; no EPS guidance was provided.
- Management said the scale and duration of COVID-19’s impact remained uncertain. Disruptions included temporary facility closures, reduced order intake, customer delivery delays and lower demand. Facilities were then fully operational, with limited supply-chain disruption reported.
- Cost and liquidity measures included furloughs, layoffs, temporary salary reductions, hiring controls, reduced discretionary spending and postponed non-essential capital projects. Management stated cash from operations and borrowing availability were expected to support operations beyond the next twelve months, while noting further measures could be taken, including drawing credit lines or reducing or suspending dividends.
- Further deterioration in economic conditions or a slower recovery could cause additional goodwill or other asset impairments. The Faster impairment relied on estimated future cash flows and other valuation assumptions subject to uncertainty.
- On October 9, 2020, Helios agreed to acquire Balboa Water Group for $218.5 million, subject to customary conditions and regulatory approvals. On October 28, it amended and restated its PNC credit agreement: the term loan facility increased to $200 million, the $400 million revolving commitment remained unchanged, the accordion feature increased to $300 million, and facilities became available through October 28, 2025.
- Other items: nine-month income taxes included $2.6 million of one-time benefits; the effective tax rate before discrete items was 22.1%. Florida tax returns for 2015–2016 and Faster’s 2016 pre-acquisition Italian return were under examination; management reported no significant unaccounted-for proposed adjustments. The filing disclosed no material legal proceedings.
Important facts for investors to verify
- Whether the $485–$495 million full-year sales outlook was achieved, and how Q4 demand developed across both segments and regions.
- Whether COVID-19 conditions, customer order timing or end-market weakness led to further sales declines, cost actions or liquidity needs.
- The assumptions supporting the Faster goodwill valuation and whether subsequent performance creates further impairment risk.
- The final Balboa purchase price, closing status, funding mix, integration progress and effect on leverage under the amended credit facilities.
- Debt covenant headroom, cash generation, and the sustainability of the dividend amid acquisition spending and economic uncertainty.