Helios Technologies Reports Strong Sequential Growth in the Second Quarter 2023 with Revenue Up 7% and Net Income Up 21%

Helios Technologies, Inc. (NYSE: HLIO) (“Helios” or the “Company”), a global leader in highly engineered motion control and electronic controls technology for diverse end markets, today reported financial results for the second quarter ended July 1, 2023. Results include our most recent flywheel acquisitions including Schultes Precision Manufacturing, Inc. (or “Schultes”), which was acquired on January 27, 2023, and i3 Product Development, Inc. (or “i3”), which was acquired on May 26, 2023.

“Over the last three years, we have methodically invested in change, and it is exciting to see the progress we have made,” said Helios’ President and Chief Executive Officer Josef Matosevic. “Our businesses are working cohesively to drive best-in-class product development providing the innovation our customers require for success. Expanding our capabilities enables us to better serve a more diversified global market. Our results in the quarter and year-to-date demonstrate this progress even against headwinds of the macroenvironment.”

“Our revolutionary technology, products and solutions allow the Company to be well-positioned to address the advancing megatrends of increased electrification, reduced emissions footprint, higher energy efficiency, and convenient user interface for applications that range from heavy-duty construction machines to off-road vehicles, cold-plunge baths, and commercial kitchen equipment. To serve this growing demand, we are pulling forward investments in manufacturing and capacity and will be adjusting our near-term expectations to accommodate for the related disruption to operations. Additionally, there is reduced visibility for the remainder of the year resulting from the lackluster economic situation in Asia Pacific and impacts from a fire and tornado at the Faster facility,” Matosevic concluded.

Second Quarter 2023 Consolidated Results

* Adjusted numbers are not measures determined in accordance with generally accepted accounting principles in the United States, commonly known as GAAP. Nevertheless, Helios believes that providing these specific non-GAAP figures are important for investors and other readers of Helios financial statements, as they are used as analytical indicators by Helios management to better understand operating performance. These Non-GAAP financial measures should be considered in addition to results prepared in accordance with GAAP and should not be considered a substitute for GAAP. Please carefully review the attached Non-GAAP reconciliations to the most directly comparable GAAP measures and the related additional information provided throughout. Because these metrics are non-GAAP measures and are thus susceptible to varying calculations, these figures, as presented, may not be directly comparable to other similarly titled measures used by other companies.

Sales

• Continued Positive Sequential Trends: Total revenue up 7%, Electronics segment revenue up 15% and Hydraulics segment revenue up 3% over first quarter 2023.
• Strong Performance in Various Markets: Year-over-year sales in agriculture, recreational, mining and Aerospace had solid increases reflecting market diversification efforts and acquisitions. On a sequential basis, sales to the health & wellness market were up healthy double digits, recreational sales had a solid increase and agriculture was stable. Sales included $16.4 million in revenue from acquisitions. (See the Organic and Acquired Revenue table in this release that provides acquired revenue by segment by quarter).
• By Region: Sales increased across all regions over the first quarter of 2023. On a year-over-year basis, sales in the Americas and in Europe, the Middle East and Africa (“EMEA”) both declined 5%, while Asia Pacific ("APAC”) declined 10%.
• Other Impacts: Foreign currency translation adjustment on sales was nominal in the quarter at $0.3 million unfavorable. Supply chain constraints delayed an estimated $14.2 million in sales.

Profits and margins

• Gross profit and margin drivers: Gross profit improved sequentially on higher sales but was down $6.5 million compared with the prior-year period on lower volume. Gross margin was unchanged sequentially and declined by 80 basis points compared with the prior-year period primarily due to lower volume and different margin profile from acquisitions offset by favorable pricing.
• Selling, engineering and administrative (“SEA”) expenses: SEA sequentially were down slightly, but up $5.5 million, or 17% compared with the second quarter of 2022. The year-over-year increase was primarily related to incremental SEA from acquisitions and significant investments in integration, growth, and new product development.
• Amortization of intangible assets: $8.3 million up 22% compared with the prior-year period reflecting the Company’s flywheel acquisitions. Compared with the first quarter of 2023, amortization of intangible assets was up $0.2 million reflecting the two fly wheel acquisitions made this year.

Non-operating items

• Net interest expense: up $1.6 million sequentially and up $4.0 million in the quarter compared with the prior-year period reflecting higher average rates and increased average net debt balance related to acquisitions.
• Effective tax rate: 22.9% compared with 22.5% in the prior-year period reflecting mix in income in various tax jurisdictions.

Net income, earnings per share (“EPS”), non-GAAP cash earnings per share and adjusted EBITDA

• Net income and diluted earnings per share: $16.8 million and $0.51 per share, while down from the prior-year period, net income and EPS both grew 21% sequentially.
• Diluted Non-GAAP cash earnings per share: $0.81 compared with $1.18 in the second quarter of 2022 on lower volume, higher operating expenses and increased interest expense of $0.09 per share. Compared with the first quarter of 2023, diluted non-GAAP cash earnings per share increased $0.09, or 13%
• Adjusted EBITDA margin: 22.0% increased 170 basis points sequentially over the first quarter 2023; Compared with the year ago period, adjusted EBITDA margin declined 240 basis points driven by the items discussed previously in this report.

Hydraulics Segment Review

(Refer to sales by geographic region and segment data in accompanying tables)

Second Quarter Hydraulics Segment Review

• Sales: increased 3% sequentially and 7% over the year-ago period to $152.4 million driven by acquisitions which added $15.2 million. By region, sales had strength over the year-ago period in the Americas and EMEA, with a large contribution from the agriculture market, which offset softness in the APAC region. FX had a $0.2 million unfavorable adjustment on sales and supply chain constraints delayed an estimated $9.7 million in sales.
• Gross profit and margin drivers: gross profit improved over the year-ago period driven by price, efficiency, acquisition mix partially offset by rising material costs. Gross margin reflects rising material costs, as well as the different margin profile of our recent acquisitions. Restructuring costs included in cost of sales increased by $1.3 million to $1.9 million in the second quarter of 2023, compared with the 2022 second quarter.
• Operating income and operating margin: reflect integration costs related to acquisitions and investments in operational changes and new product development.

Electronics Segment Review

(Refer to sales by geographic region and segment data in accompanying tables)

Second Quarter Electronics Segment Review

• Sales: increased 15% sequentially while improvements in the recreational, mobile and agriculture markets did not fully offset the year-over-year comparison for the health & wellness market. Weakness over the year-ago period was across all regions. Foreign currency exchange rates had a nominal $0.1 million unfavorable impact on sales and supply chain constraints delayed an estimated $4.4 million in sales.
• Gross profit and margin drivers: gross profit grew 24% sequentially while gross margin expanded 260 basis points over 1Q23 as material costs started to return to more normal levels. Compared with the year-ago period, the lower gross profit reflects decreased sales volume, while gross margin increased 150 basis points to 34.7%, driven primarily by favorable material costs, mix of business and cost control.
• Operating income and operating margin: operating income grew 60% sequentially while operating margin expanded 450 basis points over 1Q23. Compared with the year-ago period declines were the result of lower gross profit and higher SEA expenses related to investments in expansion, new product development and other growth initiatives.

Balance Sheet and Cash Flow Review

• Total debt: at quarter-end was $549.1 million compared with $525.8 million at end of the first quarter of 2023. Higher debt balances reflect the acquisition of i3.
• Cash and cash equivalents: as of July 1, 2023 were $37.5 million, up $1.2 million or 3% from the end of the first quarter of 2023.
• Inventory: increased $3.3 million to $205.7 million from the first quarter of 2023. The increase was the result of the macro issues in the supply chain as well as temporary duplication required from standing up our Centers of Excellence. These issues include the Company purchasing parts ahead of material shortages, holding some inventory for past due orders where one or two components have been delayed in the supply chain.
• Pro-forma net debt-to-adjusted EBITDA: increased to 2.7x at the end of the second quarter of 2023 (pro-forma for Daman Products, Schultes Precision Manufacturing and i3 Product Development.) At the end of second quarter 2023, the Company had $183.4 million available on its revolving lines of credit.
• Net cash provided by operations: was $26.1 million in the second quarter 2023 compared with $29.5 million in the prior-year period.
• Capital expenditures: were $10.5 million in the second quarter 2023, or 4.6% of sales reflecting accelerated investments in capacity expansion. This compares with $7.9 million, or 3.3% of sales, in the year-ago period.
• Dividends: Paid 106^th sequential quarterly cash dividend on July 20, 2023.

Updated 2023 Outlook:

The following provides the Company’s expectations for 2023 as of August 7, 2023. This assumes constant currency, using quarter end rates, and that markets served are not further impacted by the global pandemic or the geo-political environment.