Helios Technologies, Inc.: Form 10-Q for the period ended Mar 29, 2025

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," "will" and similar expressions identify forward-looking statements. In addition, any statements that 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 the Securities 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 Part I, 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 leader in highly engineered motion control and electronic controls technology for diverse end markets, including construction, material handling, agriculture, industrial, mobile, energy, recreational vehicles, marine and health and wellness.

We operate under two business segments: Hydraulics and Electronics. The Hydraulics segment designs and manufactures hydraulic motion control and fluid conveyance technology products, including cartridge valves, manifolds, quick release couplings as well as engineers hydraulic solutions and in some cases complete systems. Our Hydraulics segment includes products sold under the Sun Hydraulics, Faster, Custom Fluidpower, Seungwon, NEM, Taimi, Daman and Schultes brands. The Electronics segment designs and manufactures customized electronic controls systems, displays, wire harnesses and software solutions for a variety of end markets including industrial and mobile, recreational and health and wellness. The Electronics segment includes products sold under the Enovation Controls, Murphy, Zero Off, HCT, Balboa Water Group and Joyonway brands.

Restructuring Activities

Our previously announced restructuring activities within our Hydraulics segment related to the creation of our two new Regional Operational Centers of Excellence ("CoE") are complete. The Hydraulic Manifold Solutions CoE, located in Mishawaka, Indiana, is now doing the manifold machining and integrated package assembly for Sun Hydraulics, Faster Inc., and Daman. The Hydraulic Valve and Coupling Solutions CoE, located in Sarasota, Florida, is manufacturing and assembling cartridge valve technology and quick release couplings. We also continue to add capabilities and activities to our recently expanded Tijuana, Mexico facility to support our Electronics segment. Initial efforts have focused on circuit board assembly and wire harness production. While activities are currently paused, we continue to evaluate plans to move additional production activities to Tijuana in 2025.

The initial phase of the restructuring activities to better optimize our European regional operations are complete. This included transitioning some manufacturing of manifolds and integrated package assembly to our Roncolo, Italy location. To create capacity in Roncolo, we moved some turning and lathing operations from Roncolo to our Rivolta, Italy location. These activities included transferring equipment and operations between facilities. Additional phases of this project are currently paused, we continue to evaluate plans for restructuring activities to optimizing operations in the European Region.

In January 2025, the Company began the early phases of restructuring the Helios Center of Engineering Excellence (“HCEE”). As the next phases of the restructuring plan begin, management plans to close the San Antonio office during the second quarter of 2025, reassign resources to the operations at our other major facilities across the business, and eliminate certain positions. All substantial activities are planned to be moved out of San Antonio during the second quarter of 2025, with $0.1 of tangible assets being transitioned to other facilities throughout 2025. As a result of this planned change in the HCEE business operations, the workforce intangible asset associated with the HCEE acquisition was reviewed by management and it was determined that the remaining net book value of the asset should be accelerated and amortized over a useful life ending June 2025. This resulted in an increase $0.5 amortization expense in the three months ending March 29, 2025.

Restructuring costs totaled $0.3 and $1.4, for the three months ended March 29, 2025 and March 30, 2024.

Global Economic and Geopolitical Conditions

We expect the challenging macroeconomic conditions to continue, characterized by economic uncertainty and market disruption driven inflationary pressures, political uncertainty, potential changes to current global trade policies and modifications of existing trade agreements, the potential negotiation of new trade agreements and imposition of new (and retaliatory) tariffs, including the recently announced and potentially contemplated tariffs by the U.S. presidential administration, the ongoing Russia-Ukraine war and the Israel-Hamas war. We are continuously monitoring these economic and geopolitical conditions and remain focused on liquidity management, pricing discipline, cost savings initiatives and production efficiency as ways to mitigate the risks associated with the uncertainty.

Refer to Item 1A "Risk Factors" of our Form 10-K for additional discussion of risks related to global economic conditions.

Tariffs

During and subsequent to the first quarter of 2025, additional tariffs were imposed on goods imported into the U.S. from China, Mexico and Canada, tariffs on steel and aluminum were increased and a reciprocal tariff on all other countries was imposed. Except for a slight uptick in sales from customers purchasing ahead of potential retaliatory tariffs at the end of the quarter, these additional tariffs did not have a material impact on our financial results for the three months ended March 29, 2025.

We import goods into the U.S. primarily from Mexico, Italy and China. Based on the tariffs in effect as of the date of this Form 10-Q, many of these goods are exempt from the recent tariffs imposed. Due to the dynamic tariff environment, it is not possible to predict if these exemptions will remain in place, or if tariff rates imposed will change. Tariffs on product we import from China represent the greatest exposure, as some of those products imported are subject to tariffs of up to 170% under the current structure.

We export products from our U.S. locations to more than 40 countries. Our total U.S. exports were approximately $28.3 or 14.5% of total sales in the three months ended March 29, 2025, of which exports to China were $6.8 or 3.5% of total sales in the period. Based on the tariffs in effect as of the date of the filing, products we export to China from the U.S. are subject to tariffs up to 125%. Trade relations between the U.S. and other countries are fluid and we are unable to predict if tariffs imposed by other countries on our U.S. exports will change in the future, especially given the recent trend of retaliatory tariffs by several countries, including China.

Due to the fluidity of the tariff environment and potential subsequent changes to effective dates, amounts of announced tariffs, and various exemptions for imports into the U.S., we are unable to fully quantify the impact the tariffs will have on our results of operations when and if enacted. Our current expectation, however, is to leverage our regional production capabilities, source components from local suppliers, and raise our prices, which we believe may mitigate the impact of higher tariff costs, though we are not able to provide assurances that we will be able to offset any or all tariff-related costs. Additionally, increased prices could impact demand for our products, including our ability to attract new customers or cause increases in existing customer attrition. If our attempts to mitigate tariff-related costs are not sufficient to offset our increased tariff-related costs adequately or in a timely manner, our business, results of operations, and our financial and/or operating costs may be adversely affected.

Industry Conditions

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 macroeconomic conditions.

Hydraulics

According to the National Fluid Power Association (the fluid power industry’s trade association in the U.S.), the U.S. index of shipments of hydraulic products decreased 16% during the first three months of 2025 compared to the first three months of the prior year while the U.S. index of orders of hydraulic products declined 12% during the same period. In Europe, the CEMA Business Barometer reported in March 2025 that the general business climate index for the European agricultural machinery industry has improved with both the current business sentiment and expectations for turnover in the next six months trending upward in Q1. The CEMA Barometer report also indicated that the improvement was reflected for most European markets with Poland, Spain and Italy leading the European market ranking. The CECE (Committee for European Construction Equipment) March report noted that the business climate was flat for the month after reporting four consecutive months of improvement in February. The order intake remains in line with prior years for both European and international markets, signaling that sales may be nearing their trough. Concerns about the general economic climate was the number one reported limiting factor while the uncertain tariff situation in the U.S. was reported to have caused evaluations of the North American market to deteriorate.

Electronics

The Federal Reserve’s Industrial Production Index, which measures the real output of all relevant establishments located in the U.S., reports first quarter 2025 output of semiconductors and other electronics components increased from the fourth quarter 2024, the fourth sequential quarterly increase. The Institute of Printed Circuits Association (“IPC”) reported that total North American printed circuit board (“PCB”) shipments were down 3.1% in March after being up 11.3% in February and up 19.9% in January compared with the same months last year. PCB bookings in 2025 were flat in March compared to the prior year but are higher 19.3% for the first three months of the year after strong bookings in January and February. The book to bill ratio, calculated as the value of orders booked over the past three months divided by the value of sales in the same period, was above 1.2 for each month, indicating a strong demand environment to start the year. The IPC also reported that North American electronics manufacturing services (“EMS”) shipments were relatively flat in the first three months compared to the prior year. EMS bookings were up 12.7% in March year over year after being down 3.6% in February and 1.2% in January, with the sentiment buyers were accelerating orders to get ahead of potential tariffs. IPC also indicated that the electronics industry demand index strengthened to its highest level in nearly a year in March, indicating an expansion in manufacturing activity. Electronics manufacturers did express concern about U.S. trade policies and the potential impacts to the overall economy and their business operations however.

Executive Officer and Board Transitions

On January 6, 2025, the Company announced that the Board of Directors ("Board") promoted Sean Bagan to President and Chief Executive Officer of the Company, effective January 6, 2025. The Board subsequently nominated Mr. Bagan for election to the Board at the 2025 Annual Meeting. Mr. Bagan also continues to serve as Chief Financial Officer while the Company conducts a search process, which will include internal and external candidates, to identify a permanent Chief Financial Officer to backfill his previous role. In connection with Mr. Bagan’s appointment, Chairman Philippe Lemaitre, serving as Executive Chairman, resumed his role as Non-Executive Chairman.

On March 13, 2025, Mr. Lemaitre notified the Company of his decision to retire and not seek re-nomination at the 2025 Annual Meeting. He had served on Helios’ Board since 2007 and as Chair since 2013. On March 13, 2025, the Board of the Company elected Laura Dempsey Brown to serve as the new Non-Executive Chair of the Company, effective March 13, 2025.

2025 First Quarter Results and Comparison of the Three Months Ended March 29, 2025, and March 30, 2024

(In millions, except per share data)

The following is a discussion of our first quarter of 2025 results of operations and liquidity and capital resources. Comparisons are with the corresponding reporting period of 2024, unless otherwise noted.

The following table presents our consolidated results of operations:

First quarter consolidated net sales declined $16.5, 7.8%, below the prior-year first quarter. There was no impact from acquisitions. Sales declined in the Hydraulics segment due to lower demand across most end markets, predominantly the agriculture, mobile and industrial end markets. Sales were relatively flat in the Electronics segment, with slight growth in health and wellness and recreational segments offsetting declines in other markets. Changes in foreign currency exchange rates had an unfavorable impact to our first quarter sales of $2.3, 1.1%.

Compared to the prior year, sales in the first quarter were negatively impacted by reduced demand for products in our agriculture, mobile and industrial end markets, offset partially by an increase to the health and wellness end market. Sales in the recreational end market were relatively flat. Sales were down in all regions during the first quarter compared to the prior year.

First quarter gross profit decreased $7.3, 10.9%, below the prior year first quarter primarily from the impact of lower volume and higher material costs as a percentage of sales, partially offset by lower labor and overhead costs. Changes in foreign currency had an unfavorable impact of $0.6. Gross margin decreased by 110 basis points as the impact of lower fixed costs leverage on lower volume and higher material costs more than offset reductions in labor and overhead.

First quarter operating income as a percentage of sales decreased 90 basis points to 8.7%. The decrease is due to the gross margin level changes partially offset by lower operating expenses as a percentage of revenue, primarily from lower payroll and benefit costs, compared with the prior year period.

Net interest expense decreased by $0.8 to $7.4 in the first quarter of 2025. The prior year period interest expense benefited $1.8 from a recognized gain on an interest rate swap agreement. Excluding the impact of the interest rate swap agreement, interest expense was lower by $2.6 due to carrying a lower debt balance throughout the period and lower average interest rates. Average net debt decreased to $402.6 during the first quarter of 2025 compared with $448.9 during the first quarter of 2024. The reduction in average net debt is due to the paying down of debt incurred from prior year acquisitions.

The provision for income taxes for the first quarter of 2025 was 23.5% of pretax income compared to 23.2% 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.

On December 20, 2022, the Organisation for Economic Co-operation and Development (“OECD”) published Pillar Two guidance on safe harbors and penalty relief (the “Safe Harbor Guidance”). The Safe Harbor Guidance includes a Transitional Country-by-Country Report (“CbCR”) Safe Harbor, which would deem a multinational enterprise’s (“MNE’s”) top-up tax for a jurisdiction to be zero and would allow the MNE to avoid undertaking detailed Global Anti-Base Erosion (“GloBE”) calculations in respect of that jurisdiction during the Transition Period if it can demonstrate one of the three transitional tests.

The company is continuing to evaluate the impact of Pillar Two legislation and the availability of transitional safe harbors. Based on its current assessment, the Company does not expect the implementation of Pillar Two to have a material impact on its consolidated effective tax rate for 2025. However, the Company will continue to monitor legislation developments and refine its analysis as additional guidance becomes available.

SEGMENT RESULTS

Hydraulics

The following table presents the results of operations for the Hydraulics segment:

First quarter net sales for the Hydraulics segment decreased by $16.0, 11.2%, compared with the prior year first quarter. The decline in sales in the first quarter was driven by softness across all end markets, most predominantly in the agriculture and mobile end markets. Changes in foreign currency exchange rates had an unfavorable impact of $2.2, 1.5%.

The following table presents net sales based on the geographic region of the sale for the Hydraulics segment:

Regional sales performance in the first quarter compared to the prior year quarter was driven by:

Americas - sales declined $5.9, 10.6%, primarily from generally softer demand in the region.

EMEA - excluding favorable changes in foreign currency rates of $1.0, sales declined $6.6, 14.5%, primarily driven by softness in the agriculture end market.

APAC - excluding favorable changes in foreign currency rates of $1.0, sales increased $1.5, 3.6%, with decreased demand in China, Japan, Korea and India.

First quarter gross profit declined $7.1, 16.0%, primarily from lower volume while gross margin decreased by 170 basis points, primarily due to the impact of lower fixed costs leverage on lower volume. Material and variable costs declined year over year and were relatively flat as a percentage of sales. Changes in foreign currency exchange rates had a favorable impact of $0.6.

Operating income as a percentage of sales decreased 150 basis points to 13.8% in the first quarter of 2025 due to the gross margin decline partially offset by lower operating expenses. SEA expenses went down by $2.7, mainly due to lower labor and benefit costs.

Electronics

The following table presents the results of operations for the Electronics segment:

First quarter net sales for the Electronics segment decreased $0.5, 0.7%, compared with the prior year first quarter. Compared to the prior year period, first quarter sales in the health and wellness and recreational end markets increased slightly, while sales to the industrial, and mobile end markets decreased. Changes in foreign currency exchange rates had minimal impact.

The following table presents net sales based on the geographic region of the sale for the Electronics segment:

Sales were flat to down across end markets in the Americas region compared to the prior year period, while higher sales in health and wellness were offset by year over year declines in other end markets in the EMEA region. APAC sales increased over the comparable period in APAC driven by the health and wellness end market.

First quarter gross profit decreased $0.2, 0.9% compared to the prior year first quarter, primarily due to lower volume. Gross margin was flat with costs in line with prior year on similar sales.

Operating income as a percentage of sales increased 140 basis points to 11.6% in the first quarter of 2025 compared to the prior year period due to lower SEA expenses. SEA expenses decreased $1.1 primarily due to lower labor and benefit costs.

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 2025, these costs totaled $8.4 for: amortization of acquisition-related intangible assets of $8.3 and $0.1 for officer transition costs. Compared to the first quarter of 2024, these costs remained primarily flat.

LIQUIDITY AND CAPITAL RESOURCES

Historically, our primary source of capital has been cash generated from operations. We also use borrowings on our credit facilities to fund acquisitions. During the first three months of 2025, cash provided by operating activities totaled $19.0. At the end of the first quarter, we had $45.9 of available cash and cash equivalents on hand and $352.6 of available credit on our revolving credit facilities. We also have a $400.0 accordion feature available under our Third Amended and Restated Credit Agreement, subject to certain pro forma compliance requirements, intended to support potential future acquisitions.

Our principal uses of cash are operating expenses, capital expenditures, servicing debt, acquisition-related payments and dividends to shareholders.

We believe that cash generated from operations and our borrowing availability under our credit facilities will be sufficient to satisfy our operating expenses for the foreseeable future. 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, operating expense reductions could be made, acquisition activity could be delayed and finally, the dividend to shareholders could be reduced or suspended.

Cash Flows

The following table summarizes our cash flows for the periods:

Cash on hand increased $1.8 in the first quarter of 2025 to $45.9 as of March 29, 2025. Changes in exchange rates during the three months ended March 29, 2025, positively impacted cash and cash equivalents $0.9. 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 paying down borrowings on our credit facilities.

Operating activities

Year-to-date cash from operations increased by $1.2 to $19.0. Cash earnings (calculated as net income plus adjustments to reconcile net income to net cash provided by operating activities, excluding changes in net operating assets and liabilities) decreased by $3.0 in the first quarter of 2025 compared to the same period in 2024. Changes in net operating assets and liabilities improved cash flow by $4.2 in the first quarter, compared to the prior year period, primarily from $4.8 of insurance proceeds received for losses the Company incurred due to a fire and a weather-related incident at one of its manufacturing facilities in Italy in the third quarter of 2023 and from days payable outstanding optimization, partially and offset by an increase in accounts receivable, accrued expenses and other liabilities. Changes in inventory increased cash by $1.1 in comparison to reduction of cash by $0.7 in the first quarter of 2025 and 2024, respectively. Days of inventory on hand decreased to 126 days as of March 29, 2025, compared with 135 days as of March 30, 2024. Changes in accounts receivable reduced cash by $15.3 and $13.1 in the first quarter of 2025 and 2024, respectively. Days sales outstanding increased slightly to 56 days as of March 29, 2025, compared with 54 days as of March 30, 2024. Changes in accounts payable increased cash by $4.8 in comparison to a reduction of cash of $1.8 in 2025 and 2024, respectively. Days payables outstanding for the 2025 year decreased to 41 days from 43 days during 2024.

Investing activities

Cash used in investing activities totaled $6.8 in the first quarter of 2025, compared to $6.3 in the first quarter of the prior year. The relatively flat year-over-year figures reflect our disciplined approach to capital allocation and continued focus on strategic investment priorities.

Capital expenditures totaled $6.1, 3.1%, of sales for the first quarter of 2025, an increase of $0.6 over the prior year comparable period. Capital expenditures for 2025 are forecasted to be approximately 3%-4% of sales, for investments in machinery and equipment, improvements to manufacturing technology and maintaining or replacing existing machine capabilities.

Financing activities

Net cash used in financing activities totaled $11.3 during the first quarter of 2025, compared to $5.4 in the same period of the prior year. In the first quarter of 2025, repayments, net of borrowings, totaled $7.8 compared to $0.7 in the first quarter of 2024.

Borrowings on our term loans and revolving credit facilities as of March 29, 2025, totaled $296.4 and $150.3, respectively. See Note 8 of the Notes to the Consolidated Financial Statements included in this Quarterly Report for additional information regarding our credit facilities.

On June 25, 2024, the Company amended and restated its credit agreement (the “Third Amended and Restated Credit Agreement”) with PNC Bank, National Association, as administrative agent, and the lenders party thereto. The amendment extended the debt maturity for five years and increased the Company’s revolving credit facility (the “Revolving Credit Facility) to $500.0, with the aggregate principal amount of the term loan credit facility (the “Term Loan Facility”) remaining at $300.0. The amendment also revised the accordion feature to permit an increase of up to an additional $400.0. Borrowings under the line of credit bear interest at defined rates plus an applicable margin based on the Company’s leverage ratio. Scheduled principal payments under the Term Loan Facility are payable in quarterly installments beginning on September 28, 2024 and continuing on the last day of each following fiscal quarter, beginning at $3.75 before increasing to $5.6 in June 2026 and $7.5 in June 2028. All remaining principal and unpaid accrued interest are due on the Term Loan Facility maturity date, which is June 25, 2029.

During the first quarter of 2025, we declared a quarterly cash dividend of $0.09 per share payable on April 22, 2025, to shareholders of record as of April 4, 2025. The declaration and payment of future dividends is subject to the sole discretion of the Board, 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.

Share Repurchase Program

On February 20, 2025, the Board approved a multi-year share repurchase program (the "Share Repurchase Program"), authorizing the Company to repurchase up to $100.0 of our outstanding common stock. The Company may purchase shares at management’s discretion from time to time in the open market, through privately negotiated transactions, through investment banking institutions or through other means in accordance with applicable federal securities laws, including Rule 10b5-1 trading plans. To the extent that the Company repurchases its shares, the amount and timing of any repurchases are subject to a variety of factors including, but not limited to, general business and market conditions, share price, regulatory and legal requirements and capital availability. The share repurchase program will be funded with cash on hand and cash generated from operations. As of March 29, 2025, no shares have been repurchased under the Share Repurchase Program.

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.

Critical Accounting Policies and Estimates

We currently apply judgment and estimates that 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 material changes made during the first three months of 2025, are disclosed in Note 2 of the Notes to the Consolidated Unaudited Financial Statements included in this Quarterly Report on Form 10-Q.

Interest Rate Risk

Our exposure to interest rate risk results from variable rate debt outstanding under our term loans and revolving credit facility. We pay interest on outstanding borrowings at interest rates that fluctuate based upon changes in various base rates. As of March 29, 2025, we had $150.3 in borrowings outstanding under the revolving credit facilities and $296.4 in borrowings outstanding under the term loans. Based on our level of variable rate debt outstanding during the quarter ended March 29, 2025, a one percentage point increase or decrease in the average interest rate would have an impact on our annual financing costs over the next twelve months of approximately $4.4. This analysis excludes any effects from interest rate swap contracts as the Company does not have any active interest rate swap contracts.

See “Item 7A – Quantitative and Qualitative Disclosures about Market Risk” in our Form 10-K. Except as described above, there were no material changes during the three months ended March 29, 2025.

The Company’s management, with the participation of the President, Chief Executive Officer, and Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report, have concluded that our disclosure controls and procedures are effective and are designed to ensure that the information we are required to disclose is recorded, processed, summarized and reported within the necessary time periods. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports that we file or submit pursuant to the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our President, Chief Executive Officer, and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Securities Exchange Act of 1934, as amended, during the period covered by this report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors that affect our business and financial results that are discussed in Part I, Item 1A, “Risk Factors” of our Form 10-K. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report. There have been no material changes to such risk factors.