HELIOS TECHNOLOGIES, INC. This report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words "expects," "anticipates," "believes," "intends," "plans" and similar expressions identify forward-looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Form 10-Q with theSecurities and Exchange Commission . These forward-looking statements are subject to risks and uncertainties, including, without limitation, those discussed in this report and those identified in Item 1A, "Risk Factors" included in our Form 10-K. In addition, new risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. Accordingly, our future results may differ materially from historical results or from those discussed or implied by these forward-looking statements. Given these risks and uncertainties, the reader should not place undue reliance on these forward-looking statements. OVERVIEW We are a global industrial technology leader that develops and manufactures solutions for both the hydraulics and electronics markets. We were originally founded in 1970 asSun Hydraulics Corporation , which designed and manufactured cartridge valves for hydraulics systems. We changed the Company's legal name onJune 13, 2019 , fromSun Hydraulics Corporation toHelios Technologies, Inc. Today we operate under two business segments: Hydraulics and Electronics. These businesses design and manufacture hydraulic cartridge valves, hydraulic quick release couplings and customized electronic controls systems and displays for a variety of end markets, as well as design complete hydraulic systems.
Strategic Vision
Our strategic goals are to achieve$1 billion in sales through a combination of organic growth and acquisitions, while remaining a technology leader and delivering superior profitability, with operating margins in excess of 20%. We are augmenting our strategy with value streams that we expect to help us to execute our goals and potentially accelerate the achievement of our strategic vision. We believe the value streams will deliver growth, diversification and market leading financial performance as we develop into a more sophisticated, globally oriented, customer centric and learning organization. These are:
1. Protect the business through customer centricity and drive cash generation
through the launch of new products and leveraging existing products;
2. Think and act globally to better leverage our assets, accelerate innovation
and diversify end markets by driving intra- and inter-company initiatives
and by building in the region for the region;
3. Diversify our markets and sources of revenue by swarming commercial
opportunities that leverage our products and technologies' value in new
markets such as defense and commercial food service, thereby creating
greater opportunities for growth while reducing risk and cyclicality; and
4. Develop our talent, our most critical resource, through a culture of
customer-centricity through the embracement of diversity, engagement of the
team, focus on shared, deeply rooted values and promotion of a learning
organization.
Our strategy is underpinned by the execution of acquisitions, which we expect to include bolt-on, flywheel type acquisitions (up to$100 million in enterprise value) and the evaluation of more transformative type acquisitions ($100 million to$1 billion in enterprise value). The objective of our acquisition strategy is to enhance Helios by:
• Growing our current product portfolio or adding new technologies and
capabilities that complement our current offerings;
• Expanding geographic presence; and
• Bringing new customers or markets.
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To support the execution of our strategy, our financial strategy is oriented on delivering industry leading margins, a strong balance sheet and sufficient financial flexibility to support organic and acquisitive growth.
We align our internal key performance indicators with our strategy to ensure our short-term actions will deliver long-term expectations.
Recent Acquisitions
InNovember 2020 , we acquiredBalboa Water Group , further diversifying the markets we serve and expanding our technological capabilities in electronics. Balboa is an innovative market leader of electronic controls for the health and wellness industry with proprietary and patented technology that enables end-to-end electronic control systems for therapy baths and spas. Headquartered inCosta Mesa, California , manufacturing operations supporting the business are located inMexico , with sales and warehouse operations inDenmark . This acquisition expanded our electronic control technology with complementary AC (alternating current) capabilities and enabled further diversification of end markets. The results of Balboa's operations are reported in our Electronics segment and have been included in the Consolidated Financial Statements since the acquisition date. InJanuary 2021 , we acquired the assets ofBJN Technologies, LLC , an innovative engineering solutions provider that was founded in 2014. With the acquisition, we formed theHelios Center of Engineering Excellence to centralize our technology advancements and new product development and better leverage existing talents across the electronics segment initially, and then throughout all of Helios. Global Economic Conditions COVID-19 Update During the first quarter of 2021, we experienced limited disruption to our operations from the pandemic. We continue to experience pandemic-related softening of sales and orders in certain industries and markets; however, many of our customers and end markets are recovering from the substantial impacts experienced during 2020. First quarter demand for our products exceeded our expectations as end market recovery occurred sooner and was stronger than we projected. Demand in the health and wellness and recreational marine markets has been favorably impacted by the pandemic as consumers are investing in leisure products and activities. We are experiencing constraints on our ability to source certain electronic components which originated from the high demand for these products caused by the pandemic; however, we have been able to mitigate the majority of the impact with our procurement efforts and production schedule adjustments. We are monitoring the effects of the pandemic that are occurring inIndia for potential supply chain impacts related to goods coming from our Hydraulics segment facilities in the country that are supplied to other parts of the world. We do not expect there will be a material impact to our operations. Our outlook for the remainder of the 2021 fiscal year assumes the global economy continues to recover; however, we cannot at this time predict any future impacts. Refer to Item 1A Risk Factors of our Annual Report on Form 10-K for additional COVID-19 related discussion. Brexit Update InJanuary 2020 , theUK exited the EU. During the transition period, which ended onDecember 31, 2020 , existing arrangements between theUK and the EU remained in place while theUK and the EU negotiated a free trade agreement. This was entered into onDecember 24, 2020 and went into effect onJanuary 1, 2021 . The Company continues to monitor the situation and plan for potential impact. The ultimate impact of Brexit on the Company's financial results is uncertain. However, we do not expect the effects of Brexit to have a material impact on our results of operations or financial position. For additional information, refer to Part I, Item 1A, "Risk Factors" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's Form 10-K. 21
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Industry Conditions
Market demand for our products is dependent on demand for the industrial goods in which the products are incorporated. The capital goods industries in general, and the Hydraulics and Electronics segments specifically, are subject to economic cycles. We utilize industry trend reports from various sources, as well as feedback from customers and distributors, to evaluate economic trends. We also rely on global government statistics such as Gross Domestic Product and Purchasing Managers Index to understand macro-economic conditions.
Hydraulics
According to theNational Fluid Power Association (the fluid power industry's trade association in theU.S. ), theU.S. index of shipments of hydraulic products decreased an additional 3% during the first three months of 2021, after decreasing 17% in 2020. InEurope , the CEMA Business Barometer reports that inApril 2021 , the general business climate index for the European agricultural machinery industry has risen to its highest level since 2011. The favorable index is based on a record volume of accumulated incoming orders and high levels of turnover already secured for the upcoming months. The CECE (Committee for European Construction Equipment) business climate index reports that during the first quarter the European construction equipment industry continued its remarkable recovery from the disruptions caused by the COVID-19 crisis. In March, CECE's business climate index reached new heights after 10 consecutive months of expansion. Electronics TheFederal Reserve's Industrial Production Index, which measures the real output of all relevant establishments located in theU.S. , reports sales of semiconductors and other electronics components declined slightly during the first quarter of 2021; however, the index continues to exceed fourth quarter 2019 levels.The Institute of Printed Circuits Association ("ICP") reported that total North American printed circuit board shipments increased 4.7% inMarch 2021 compared with the same month last year; compared withFebruary 2021 , March shipments grew 30.9%. ICP also reported that North American electronics manufacturing services shipments were down 3.6% in March compared toMarch 2020 ; however, up 10.9% compared toFebruary 2021 .
2021 First Quarter Results and Comparison of the Three Months Ended
2021 and March 28, 2020 (in millions except per share data)
Three Months Ended
April 3, 2021 March 28, 2020 $ Change % Change
Net sales $ 204.8 $ 129.5 $ 75.3 58.1 %
Gross profit $ 75.4 $ 51.9 $ 23.5 45.3 %
Gross profit % 36.8 % 40.1 %
Operating income (loss) $ 34.6 $ (10.0 ) $ 44.6 (446.0 )%
Operating income % 16.9 % -7.7 %
Net income (loss) $ 22.6 $ (17.2 ) $ 39.8 (231.4 )%
Basic and diluted net income
(loss) per common share $ 0.70 $ (0.54
)
First quarter consolidated net sales increased$75.3 million , 58.1%, compared with the prior-year period. Changes in foreign currency exchange rates favorably impacted sales for the quarter by$5.8 million , 2.8%, and earnings per share by$0.02 . A large portion of the first quarter sales growth was attributed to our acquisition of Balboa inNovember 2020 . We also experienced strong organic growth compared with the prior-year period which resulted from improved demand in the European agriculture and construction equipment markets and theU.S. recreational marine market.
From a geographic perspective, demand increased in all regions as companies
began to relax COVID-19 restrictions. Excluding the Balboa acquisition and
foreign currency effects, we experienced moderate growth in the
Gross profit trended upward in the first quarter compared with the first quarter of 2020, due to increased sales volume and a favorable impact from changes in foreign currency rates of$1.9 million . Gross margin decreased by 3.3 percentage points compared with the prior-year period, as improved leverage of our fixed cost base on higher sales was offset by the addition of Balboa's sales which have a different margin profile compared to our historical business resulting in higher material and production costs and lower selling, engineering and administrative ("SEA") costs. 22 -------------------------------------------------------------------------------- Operating income as a percentage of sales increased 24.6 percentage points to 16.9% in the first quarter of 2021 compared with an operating loss of 7.7%, as a percentage of sales, in the prior-year period. During the first quarter of 2020, current and expected economic impacts from the COVID-19 pandemic led to an impairment charge of$31.9 million of goodwill. Excluding the impairment charge, operating income as a percentage of sales remained flat with the prior year period at 16.9%, as improved leverage of our fixed cost base on higher sales volume was offset by an increase in intangible amortization of$5.8 million from the Balboa acquisition and$1.5 million of costs incurred for acquisition and integration related activities. SEGMENT RESULTS
Hydraulics
The following table sets forth the results of operations for the Hydraulics segment (in millions):
Three Months Ended
April 3, 2021 March 28, 2020 $ Change % Change
Net sales $ 119.1 $ 103.8 $ 15.3 14.7 %
Gross profit $ 45.4 $ 39.7 $ 5.7 14.4 %
Gross profit % 38.1 % 38.2 %
Operating income $ 28.1 $ 21.5 $ 6.6 30.7 %
Operating income % 23.6 % 20.7 %
First quarter net sales for the Hydraulics segment totaled $119.1 million , an
increase of $15.3 million , 14.7%, compared with the prior-year period. The first
quarter of 2020 was impacted by facility closures and regulatory restrictions
imposed on shipments resulting from the COVID-19 pandemic. The 2021 first
quarter benefited from strong demand in the European agriculture and
construction equipment markets. Changes in foreign currency exchange rates
favorably impacted sales for the quarter by $5.7 million .
The following table presents net sales based on the geographic region of the sale for the Hydraulics segment (in millions):
Three Months Ended
April 3, 2021 March 28, 2020 $ Change % Change
Americas $ 34.3 $ 37.3 $ (3.0 ) (8.0 )%
EMEA 43.3 33.5 9.8 29.3 %
APAC 41.5 33.0 8.5 25.8 %
Total $ 119.1 $ 103.8
Demand in the Americas region improved during the first quarter of 2021 compared
to the prior-year first quarter; however, sales to the region declined 8.0% as
the 2020 first quarter benefited from sales that were shipped from our backlog
due to extended lead times. Demand in the agriculture and construction equipment
end markets generated an increase in sales to the EMEA region of 18.8% compared
with the 2020 first quarter, excluding positive impacts from foreign currency
fluctuations totaling $3.5 million . Sales to the APAC region grew 19.1% compared
with the first quarter of 2020, excluding positive impacts from foreign currency
fluctuations totaling $2.2 million . The growth primarily resulted from increased
demand in China and Korea , as well as the increase in operations in our China
facility.
In the first quarter of 2021, gross profit increased $5.7 million compared with
the first quarter of the prior year due to higher sales volume, and a favorable
impact from changes in foreign currency rates of $1.8 million . Gross profit
margin remained fairly consistent with the first quarter of 2020, decreasing 0.1
percentage point to 38.1%, due to an unfavorable product mix in sales and higher
shipping costs.
SEA expenses decreased $0.9 million , 4.9%, in the first quarter of 2021 compared
with the same period of the prior year, a result of continued cost management
efforts including our restructuring activities and reductions in costs related
to travel and marketing, professional fees and other discretionary spend.
Increased leverage of our fixed cost base on higher sales and our cost
management efforts led to SEA as a percent of sales decreasing 3.0 percentage
points during the quarter, to 14.5%, compared to the 2020 first quarter.
As a result of the impacts to gross profit and SEA noted above, first quarter
operating income increased $6.6 million , 30.7%, compared with the first quarter
of the prior year, and operating margin strengthened 2.9 percentage points to
23.6%.
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Electronics
The following table sets forth the results of operations for the Electronics segment (in millions):
Three Months Ended
April 3, 2021 March 28, 2020 $ Change % Change
Net sales $ 85.7 $ 25.7 $ 60.0 233.5 %
Gross profit $ 30.0 $ 12.2 $ 17.8 145.9 %
Gross profit % 35.0 % 47.5 %
Operating income $ 18.3 $ 4.8 $ 13.5 281.3 %
Operating income % 21.4 % 18.7 %
First quarter net sales for the Electronics segment totaled $85.7 million , an
increase of $60.0 million compared with the prior-year period. A significant
portion of the sales were directly related to the recent acquisition while the
segment also realized solid organic growth compared with the prior year first
quarter. Demand in the health and wellness industries has been strengthened by
the pandemic as consumers invest in health and home improvements. The same trend
is occurring in the U.S. recreational marine market in which demand continues to
be strong. We have taken swift and successful actions to expand production
capacity in an effort to fulfill the high incoming order levels for spa and bath
products. The segments supply chain is experiencing constraints on its ability
to source certain electronic components; however, the effect on sales has been
minimal to date due to increased procurement efforts and production schedule
adjustments. Changes in exchange rates had a minimal impact on first quarter
sales.
The following table presents net sales based on the geographic region of the sale for the Electronics segment (in millions):
Three Months Ended
April 3, 2021 March 28, 2020 $ Change % Change
Americas $ 65.0 $ 21.6 $ 43.4 200.9 %
EMEA 9.3 2.5 6.8 272.0 %
APAC 11.4 1.6 9.8 612.5 %
Total $ 85.7 $ 25.7
During the first quarter of 2021, we experienced robust growth in all regions.
Sales to the Americas accounted for 75.8% of total segment sales, a decrease
from 84.0% in the prior comparable period, which is primarily from a variation
in the regional footprint of the acquisition. Similarly, sales to EMEA and APAC
increased to 10.9% and 13.3% of total segment sales.
First quarter gross profit increased $17.8 million compared with the first
quarter of the prior year due to the increased sales volume. Gross profit margin
for the same period decreased by 12.5 percentage points driven by the addition
of Balboa's sales which have a different margin profile compared to our
historical business resulting in higher material and production costs and lower
SEA costs. The segment experienced an increase in raw material and freight and
logistics costs during the quarter due to the high demand in the market for
electronic components used in our products. Additionally, during the prior-year
first quarter the segment realized a $0.9 million non-recurring benefit from the
release of contractual obligations to customers.
SEA expenses increased by $4.3 million in the first quarter of 2021 compared
with the first quarter of 2020 and were primarily impacted by the addition of
Balboa and an increase in corporate operating costs allocated to the segment
offset by continued cost saving measures which focused on managing fixed
personnel costs and reducing discretionary spend. SEA costs as a percentage of
sales decreased to 13.7% in the first quarter of 2021 compared to 28.8% in the
prior-year first quarter; favorably impacted by the margin profile of Balboa's
product sales, partially offset by continued investments in engineering and R&D
necessary to support new product development that will drive future revenue
growth.
As a result of the impacts to gross profit and SEA costs noted above, operating
income increased
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Corporate and Other
Certain costs are excluded from business segment results as they are not used in evaluating the results of, or in allocating resources to, our operating segments. For the first quarter of 2021, these costs totaled$11.7 million , of which$10.2 million was amortization of acquisition-related intangible assets and$1.5 million was for other acquisition and integration related costs.
Interest Expense, net
Net interest expense increased to$4.8 million for the first quarter of 2021 compared with$3.0 million for the prior-year quarter. The change is attributable to increased borrowings used to fund the acquisition of Balboa inNovember 2020 . Average net debt increased to$431.7 million compared with$272.7 million during the first quarter of 2020.
Income Taxes
The provision for income taxes for the first quarter of 2021 was 23.2% of pretax income compared to 22.3% before the non-deductible impairment charge for the prior-year first quarter. These effective rates fluctuate relative to the levels of income and different tax rates in effect among the countries in which we sell our products. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted into law in response to the COVID-19 pandemic. The Company has evaluated the various income and payroll tax provisions and expects little or no impact to income tax expense. However, the Company is taking advantage of the various payment deferments allowed and employee retention credits afforded by the CARES Act and other similar state and/or foreign liquidity measures. The CARES Act allows employers to defer the deposit and payment of the employer's share ofSocial Security taxes. We deferred the payment of$1.5 million of payroll taxes normally due betweenMarch 27, 2020 andDecember 31, 2020 . These payroll taxes will be paid during the third quarter of 2021 and are included as accrued compensation and benefits in the accompanying consolidated balance sheets. LIQUIDITY AND CAPITAL RESOURCES Historically, our primary source of capital has been cash generated from operations. In recent years, we have used borrowings on our credit facilities to fund acquisitions. During the first three months of 2021, cash provided by operating activities totaled$15.1 million . At the end of the first quarter, we had$26.0 million of cash and cash equivalents on hand and$150.1 million of available credit on our revolving credit facilities. We also have a$300.0 million accordion feature available on our credit facility, subject to certain pro forma compliance requirements, intended to support potential future acquisitions.
Our principal uses of cash have been paying operating expenses, paying dividends to shareholders, making capital expenditures, servicing debt and making acquisition-related payments.
We believe that cash generated from operations and our borrowing availability under our credit facilities will be sufficient to satisfy our operating expenses. In the event that economic conditions were to severely worsen for a protracted period of time, we would have several options available to ensure liquidity in addition to increased borrowings. Capital expenditures could be postponed since they primarily pertain to long-term improvements in operations. Additional operating expense reductions also could be made. Finally, the dividend to shareholders could be reduced or suspended.
Cash Flows
The following table summarizes our cash flows for the periods (in millions):
Three Months Ended
April 3, 2021 March 28, 2020 $ Change
Net cash provided by operating activities $ 15.1 $ 15.1 $ -
Net cash used in investing activities (7.5 ) (1.3 ) (6.2 )
Net cash used in financing activities (9.5 ) (9.0 ) (0.5 )
Effect of exchange rate changes on cash 2.6 0.3 2.3
Net increase in cash $ 0.7 $ 5.1 $ (4.4 )
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-------------------------------------------------------------------------------- Cash on hand increased$0.7 million from$25.3 million at the end of 2020 to$26.0 million atApril 3, 2021 . Changes in exchange rates during the three months endedApril 3, 2021 favorably impacted cash and cash equivalents by$2.6 million . Cash balances on hand are a result of our cash management strategy which focuses on maintaining sufficient cash to fund operations while reinvesting cash in the Company and also paying down borrowings on our credit facilities. Operating activities Cash from operations totaled$15.1 million during the first quarter, which is consistent with the prior-year period. Current quarter cash earnings increased over the prior-year period; however, operating assets and liabilities grew at a similar pace in order to support the increased operations. Changes in inventory reduced cash by$10.8 million and$2.8 million in the first three months of 2021 and 2020, respectively. Days of inventory on hand decreased to 81 as ofApril 3, 2021 , compared with 101 as ofMarch 28, 2020 , positively impacted by the higher sales levels, the addition of Balboa's operations and improved demand planning and supply chain management during the quarter and the latter half of 2020. Changes in accounts receivable reduced cash by$28.1 million and$6.8 million in the first three months of 2021 and 2020, respectively. First quarter days sales outstanding increased slightly from the prior-year comparable period, up to 55 days from 51 days, primarily a result of the timing of Balboa's collections compared to the legacy business.
Investing activities
Capital expenditures totaled$5.0 million for the first three months of 2021, an increase of$2.1 million over the prior-year comparable period. Capital expenditures for 2021 are forecasted to be approximately$30.0 to$35.0 million , primarily for investments in machinery and equipment for capacity expansion projects, improvements to manufacturing technology and maintaining/replacing existing machine capabilities. Cash used for acquisition related activities in the first quarter of 2021 totaled$3.4 million . The cash outflows consisted of the acquired assets ofBJN Technologies, LLC and a contractual purchase price adjustment related to the Balboa acquisition. Financing activities Cash used in financing activities totaled$9.5 million during the first three months of 2021, compared with cash used of$9.0 million in the prior-year period. The additional cash used this quarter was due to higher debt repayments, net of additional borrowings which totaled$5.9 million for the quarter. During the first quarter of 2021, we declared a quarterly cash dividend of$0.09 per share payable onApril 20, 2021 , to shareholders of record as ofApril 5, 2021 . The declaration and payment of future dividends is subject to the sole discretion of the Board of Directors, and any determination as to the payment of future dividends will depend upon our profitability, financial condition, capital needs, future prospects and other factors deemed pertinent by the Board of Directors.
Off Balance Sheet Arrangements
We do not engage in any off-balance sheet financing arrangements. In particular, we do not have any material interest in variable interest entities, which include special purpose entities and structured finance entities.
Inflation
The impact of inflation on our operating results has been moderate in recent years, reflecting generally lower rates of inflation in the economies in which we operate. While inflation has not had, and we do not expect that it will have, a material impact upon operating results, there is no assurance that our business will not be affected by inflation in the future.
Critical Accounting Policies and Estimates
We currently apply judgment and estimates which may have a material effect on
the eventual outcome of assets, liabilities, revenues and expenses for
impairment of long-lived assets, inventory, goodwill, accruals, income taxes and
fair value measurements. Our critical accounting policies and estimates are
included in our Form 10-K, and any changes made during the first three months of
2021, are disclosed in Note 2 to the Consolidated, Unaudited Financial
Statements.
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