Helios Technologies(HLIO) - 2023 Q4 - Annual Results

Executive Summary & Company Overview Helios Technologies reported Q4 2023 financial results amidst market headwinds, emphasizing transformation and a focus on profitable growth for 2024 Introduction and CEO Commentary Helios Technologies is a global leader in motion and electronic controls, completing two acquisitions in 2023, and focusing on profitable growth and operational execution for 2024 despite macroeconomic challenges - Helios Technologies is a global leader in highly engineered motion control and electronic controls technology for diverse end markets[2] - The company completed two flywheel acquisitions in 2023: Schultes Precision Manufacturing, Inc. (January 27, 2023) and i3 Product Development, Inc. (May 26, 2023)[2] - 2023 was a year of progress despite macroeconomic and geopolitical challenges, marked by executive staff elevation, talent pool deepening, and strategic investments in global facilities and innovation[3] - The company's focus for 2024 is on executing the realization of its transformation into a global integrated operating company, aiming for increasingly profitable growth and attractive returns on investments[4] Q4 & FY23 Highlights and 2024 Outlook Summary Helios Technologies delivered Q4 2023 revenue and earnings in line with guidance, demonstrating disciplined cost control and strong cash generation, anticipating a return to growth in 2024 - Delivered revenue and earnings in line with recent guidance[5] - Demonstrated disciplined cost control during 2H23, resulting in 4Q23 SEA expenses at the lowest quarterly level in FY23[5] - Generated strong cash from operations of $33.7 million in 4Q23, the highest quarter of the year[5] - Paid down $19.7 million of total debt in 4Q23, with debt paydown remaining a capital allocation priority in 2024[5] - Expects return to growth in 2024, leveraging methodical investments, disciplined cost management, and operational efficiencies to elevate profitability[5] Key Financial Highlights and 2024 Guidance | Metric | 4Q23 ($ in millions) | FY23 ($ in millions) | 2024 Guidance ($ in millions) | | :-------------------------------- | :----- | :----- | :-------------- | | Revenue | $193.4 | $835.6 | $840 - $860 (1% to 3% annual growth) | | 4Q23 SEA Expenses | Lowest quarterly level in FY23 | N/A | N/A | | 4Q23 Cash from Operations | $33.7 (highest quarter) | N/A | N/A | | 4Q23 Debt Paid Down | $19.7 | N/A | Maximizing debt paydown is priority | Consolidated Financial Results Helios Technologies experienced a decline in net sales, gross profit, and net income for both Q4 and the full year 2023 compared to the prior year, reflecting market headwinds and increased expenses Overview of Financial Performance Helios Technologies experienced a decline in net sales, gross profit, and net income for both Q4 and the full year 2023 compared to the prior year, reflecting market headwinds and increased expenses Consolidated Financial Results (Unaudited) | Metric ($ in millions, except per share data) | Dec 30, 2023 (3 Months) | Dec 31, 2022 (3 Months) | Change (3 Months) | % Change (3 Months) | Dec 30, 2023 (Year) | Dec 31, 2022 (Year) | Change (Year) | % Change (Year) | | :------------------------------------------ | :---------------------- | :---------------------- | :------------------ | :------------------ | :------------------ | :------------------ | :---------------- | :---------------- | | Net sales | $193.4 | $196.0 | $(2.6) | (1%) | $835.6 | $885.4 | $(49.8) | (6%) | | Gross profit | $55.3 | $63.2 | $(7.9) | (13%) | $261.7 | $298.5 | $(36.8) | (12%) | | Gross margin | 28.6% | 32.2% | (360) bps | N/A | 31.3% | 33.7% | (240) bps | N/A | | Operating income | $11.9 | $20.7 | $(8.8) | (43%) | $79.9 | $137.3 | $(57.4) | (42%) | | Operating margin | 6.2% | 10.6% | (440) bps | N/A | 9.6% | 15.5% | (590) bps | N/A | | Non-GAAP adjusted operating margin* | 12.6% | 16.7% | (410) bps | N/A | 15.6% | 20.4% | (480) bps | N/A | | Net income | $3.3 | $17.5 | $(14.2) | (81%) | $37.5 | $98.4 | $(60.9) | (62%) | | Diluted EPS | $0.10 | $0.54 | $(0.44) | (81%) | $1.14 | $3.02 | $(1.88) | (62%) | | Non-GAAP net income* | $12.4 | $25.4 | $(13.0) | (51%) | $77.1 | $131.3 | $(54.2) | (41%) | | Diluted Non-GAAP EPS* | $0.38 | $0.78 | $(0.40) | (51%) | $2.34 | $4.03 | $(1.69) | (42%) | | Adjusted EBITDA* | $32.3 | $39.2 | $(6.9) | (18%) | $161.4 | $205.3 | $(43.9) | (21%) | | Adjusted EBITDA margin* | 16.7% | 20.0% | (330) bps | N/A | 19.3% | 23.2% | (390) bps | N/A | Sales Performance Consolidated net sales declined 1% in Q4 2023 and 6% for the full year 2023, with Electronics segment growth partially offsetting Hydraulics declines, and acquisitions contributing $9.4 million - Electronics segment revenue improved 7% year-over-year in Q4 2023, primarily driven by Health & Wellness[11] - Hydraulics segment revenue declined 5% year-over-year in Q4 2023, spread across several end markets[11] - Sales in the Americas increased by 4% in Q4 2023, while EMEA declined by 10% and APAC by 5% compared to the prior year[11] - Acquisitions contributed $9.4 million in revenue during Q4 2023[11] - Favorable foreign currency (FX) translation had a $1.7 million impact on sales[11] - Supply chain constraints delayed an estimated $7.4 million in sales, now leveling to a more normalized range[11] Profitability and Margins Gross profit and margin contracted due to lower volume, restructuring costs, higher wage/benefit costs, and unfavorable mix, partially offset by acquisitions and pricing, while SEA expenses decreased due to cost control - Gross profit declined primarily due to lower volume, restructuring costs, higher wage and benefit costs, partially offset by acquisitions and pricing[11] - Gross margin contraction was mainly due to under absorption of overhead on lower volume and unfavorable mix[11] - SEA expenses sequentially decreased by $2.5 million (7%) in Q4 2023, driven by cost control measures deployed in 2H23[11] - Amortization of intangible assets increased 9% to $8.2 million in Q4 2023, reflecting flywheel acquisitions[11] - Lower gross profit and margin year-over-year were also influenced by the different margin profile of acquired businesses[20] - Operating income and margin reflect the impact of lower volume on gross profit and costs related to acquisitions, while maintaining investment levels in new product development[20] Non-Operating Items Net interest expense decreased sequentially due to debt reduction but increased year-over-year due to higher interest rates and increased average net debt from acquisitions, with the effective tax rate significantly higher in Q4 2023 - Net interest expense was down $0.1 million sequentially in Q4 2023 due to a 4% total debt reduction[15] - Net interest expense was up $3.6 million year-over-year in Q4 2023, reflecting higher interest rates and increased average net debt from 1H23 acquisitions[15] - The effective tax rate for Q4 2023 was 23.3%, compared to (2.3%) in Q4 2022[15] - The full-year 2023 effective tax rate was 23.8%, up from 19.2% in 2022, reflecting the mix in income to various tax jurisdictions[15] Key Non-Operating Financials (Q4 2023) | Metric | Value ($ in millions) | | :-------------------- | :---------- | | GAAP Net Income | $3.3 | | Diluted EPS | $0.10 | | Diluted Non-GAAP EPS | $0.38 (vs $0.78 in Q4 2022) | | Adjusted EBITDA Margin | 16.7% (contracted 330 bps YoY) | Segment Performance Review This section details the performance of the Hydraulics and Electronics segments, including sales, gross profit, and operating income, along with organic and acquired net sales and geographic distribution Hydraulics Segment The Hydraulics segment experienced a 5% year-over-year sales contraction in Q4 2023, despite 6% growth in the Americas, due to weakness in EMEA and APAC, with acquisitions contributing $7.1 million Hydraulics Segment Performance (Q4 2023 vs Q4 2022) | Metric ($ in millions) | Dec 30, 2023 | Dec 31, 2022 | Change | % Change | | :--------------------- | :----------- | :----------- | :----- | :------- | | Net Sales (Americas) | $60.2 | $56.8 | $3.4 | 6% | | Net Sales (EMEA) | $38.1 | $43.3 | $(5.2) | (12%) | | Net Sales (APAC) | $35.4 | $40.1 | $(4.7) | (12%) | | Total Segment Sales | $133.7 | $140.2 | $(6.5) | (5%) | | Gross Profit | $41.2 | $48.6 | $(7.4) | (15%) | | Gross Margin | 30.8% | 34.7% | (390) bps | N/A | | SEA Expenses | $21.2 | $18.0 | $3.2 | 18% | | Operating Income | $20.0 | $30.6 | $(10.6) | (35%) | | Operating Margin | 15.0% | 21.8% | (680) bps | N/A | - Acquisitions contributed $7.1 million to Hydraulics segment sales in Q4 2023[14] - Sales improved 1% sequentially compared with Q3 2023, driven by growing throughput levels in North American Centers of Excellence[14] - Foreign currency had a favorable $1.6 million impact on sales, while supply chain constraints delayed an estimated $4.2 million in sales[14] Electronics Segment The Electronics segment's sales improved by 7% year-over-year in Q4 2023, driven by increases across all regions and a double-digit increase in health and wellness, partially offset by softness in marine and industrial markets Electronics Segment Performance (Q4 2023 vs Q4 2022) | Metric ($ in millions) | Dec 30, 2023 | Dec 31, 2022 | Change | % Change | | :--------------------- | :----------- | :----------- | :----- | :------- | | Net Sales (Americas) | $48.8 | $48.0 | $0.8 | 2% | | Net Sales (EMEA) | $5.8 | $5.3 | $0.5 | 9% | | Net Sales (APAC) | $5.1 | $2.5 | $2.6 | 104% | | Total Segment Sales | $59.7 | $55.8 | $3.9 | 7% | | Gross Profit | $14.1 | $14.6 | $(0.5) | (3%) | | Gross Margin | 23.6% | 26.2% | (260) bps | N/A | | SEA Expenses | $13.1 | $13.9 | $(0.8) | (6%) | | Operating Income | $1.0 | $0.7 | $0.3 | 43% | | Operating Margin | 1.7% | 1.3% | 40 bps | N/A | - Acquisitions contributed $2.3 million to Electronics segment sales in Q4 2023[21] - Sales declined 14% sequentially in Q4 2023, as expected from swift market shifts[21] - Operating income and margin grew due to disciplined cost control, with SEA expenses down 6% year-over-year and 9% sequentially[21] Organic and Acquired Net Sales For the full year 2023, total consolidated net sales were $835.6 million, with organic sales contributing $782.8 million and acquisitions contributing $52.8 million Organic and Acquired Net Sales (In millions) (Unaudited) | Segment | For the Three Months Ended Dec 30, 2023 (Organic) | For the Three Months Ended Dec 30, 2023 (Acquisition) | For the Three Months Ended Dec 30, 2023 (Total) | For the Year Ended Dec 30, 2023 (Organic) | For the Year Ended Dec 30, 2023 (Acquisition) | For the Year Ended Dec 30, 2023 (Total) | | :-------- | :------------------------------------------------ | :-------------------------------------------------- | :---------------------------------------------- | :---------------------------------------- | :------------------------------------------- | :--------------------------------------- | | Hydraulics | $126.6 | $7.1 | $133.7 | $518.8 | $47.0 | $565.8 | | Electronics | $57.4 | $2.3 | $59.7 | $264.0 | $5.8 | $269.8 | | Consolidated | $184.0 | $9.4 | $193.4 | $782.8 | $52.8 | $835.6 | - Net Sales is considered to be acquisition related until the acquisition has been included in the Company's financial results for one full year[39] Net Sales by Geographic Region In 2023, the Americas region accounted for 55% of total consolidated sales, followed by EMEA (24%) and APAC (21%), with Americas Hydraulics showing strong growth offsetting Electronics declines Net Sales by Geographic Region and Segment (In millions) (Unaudited) - 2023 | Region | Segment | Q1 | Q2 | Q3 | Q4 | 2023 Total | % Change y/y (2023) | | :------- | :---------- | :----- | :----- | :----- | :----- | :--------- | :------------------ | | Americas | Hydraulics | $57.9 | $60.6 | $55.7 | $60.2 | $234.4 | 17% | | | Electronics | $55.1 | $63.2 | $59.4 | $48.8 | $226.5 | (16%) | | | Consol. Americas | $113.0 | $123.8 | $115.1 | $109.0 | $460.9 | (2%) | | | % of total | 53% | 54% | 57% | 56% | 55% | N/A | | EMEA | Hydraulics | $49.4 | $51.3 | $38.8 | $38.1 | $177.6 | (5%) | | | Electronics | $6.7 | $7.0 | $5.7 | $5.8 | $25.2 | (32%) | | | Consol. EMEA | $56.1 | $58.3 | $44.5 | $43.9 | $202.8 | (9%) | | | % of total | 26% | 26% | 22% | 23% | 24% | N/A | | APAC | Hydraulics | $40.4 | $40.5 | $37.5 | $35.4 | $153.8 | (7%) | | | Electronics | $3.7 | $5.0 | $4.3 | $5.1 | $18.1 | (31%) | | | Consol. APAC | $44.1 | $45.5 | $41.8 | $40.5 | $171.9 | (10%) | | | % of total | 21% | 20% | 21% | 21% | 21% | N/A | | Total | | $213.2 | $227.6 | $201.4 | $193.4 | $835.6 | (6%) | Balance Sheet and Cash Flow This section reviews Helios Technologies' balance sheet, cash flow from operations and investing, and debt and liquidity position, highlighting debt reduction and working capital management Balance Sheet Highlights Helios Technologies reduced total debt sequentially in Q4 2023, prioritizing debt reduction, while cash and cash equivalents decreased and inventory increased due to lower volume and operational integration efforts - Total debt at quarter-end was $524.8 million, down from $544.5 million at the end of Q3 2023, reflecting debt reduction as a capital allocation priority[19] - Cash and cash equivalents were $32.4 million as of December 30, 2023, down 8% sequentially[22] - Inventory increased by $6.4 million to $215.1 million from Q3 2023, attributed to declining volume from macro shifts and inventory build for North American Hydraulics Centers of Excellence integration[22] Cash Flow from Operations and Investing Net cash provided by operations significantly increased in Q4 2023 compared to Q3, demonstrating strong cash conversion, with full-year capital expenditures of $34.3 million primarily for capacity expansion Cash Flow from Operations (In millions) | Metric | Q4 2023 | Q3 2023 | Q4 2022 | FY 2023 | FY 2022 | | :-------------------------- | :------ | :------ | :------ | :------ | :------ | | Net cash from operations | $33.7 | $11.8 | $35.7 | $83.9 | $109.9 | Capital Expenditures (In millions) | Metric | Q4 2023 | % of Sales (Q4 2023) | Q4 2022 | % of Sales (Q4 2022) | FY 2023 | % of Sales (FY 2023) | FY 2022 | % of Sales (FY 2022) | | :----------------- | :------ | :------------------- | :------ | :------------------- | :------ | :------------------- | :------ | :------------------- | | Capital expenditures | $8.8 | 4.6% | $10.0 | 5.1% | $34.3 | 4.1% | $31.9 | 3.6% | - The company paid its 108th sequential quarterly cash dividend on January 19, 2024[22] Debt and Liquidity Helios Technologies maintained a pro-forma net debt-to-adjusted EBITDA ratio of 3.01x at quarter-end, a slight sequential increase, with $200.1 million available on its revolving lines of credit Debt and Liquidity Metrics (In millions) | Metric | As of Dec 30, 2023 | | :---------------------------------- | :----------------- | | Total Debt | $524.8 | | Net Debt | $492.4 | | Pro-forma Net Debt-to-Adjusted EBITDA | 3.01x (vs 2.98x at Q3 2023) | | Available Revolving Lines of Credit | $200.1 | Full Year 2024 Outlook This section outlines Helios Technologies' financial priorities and key projections for 2024, focusing on profitable growth, working capital improvement, and debt reduction Financial Priorities Helios Technologies' CFO outlined three clear financial priorities for 2024: executing on profitable sales growth with cost discipline, shortening the cash conversion cycle, and reducing debt using free cash flow - Execute on profitable sales growth plan by realizing operating leverage and instilling investment and cost discipline[23] - Shorten the cash conversion cycle through sustainable working capital improvement initiatives[23] - Reduce debt utilizing free cash flow conversion proceeds[23] - The company aims for more predictable results in 2024 and to evolve into a scalable, integrated operating company[23] Key Financial Projections For 2024, Helios Technologies projects consolidated revenue between $840 million and $860 million, with net income expected to be $50 million to $63 million, and an improved Adjusted EBITDA margin Full Year 2024 Outlook | Metric | 2023 Actual ($ in millions) | 2024 Outlook ($ in millions) | | :-------------------------- | :------------ | :------------- | | Consolidated revenue | $835.6 | $840 - $860 | | Net income | $37.5 | $50 - $63 | | Adjusted EBITDA | $161.4 | $163 - $180 | | Adjusted EBITDA margin | 19.3% | 19.5% - 21.0% | | Interest expense | $31.2 | $34 - $35 | | Effective tax rate | 24% | 22% - 24% | | Depreciation | $30.2 | $34 - $36 | | Amortization | $33.6 | $33 - $35 | | Capital expenditures % total revenue | 4% of sales | 3% - 4% of sales | | Diluted EPS | $1.14 | $1.50 - $1.90 | | Diluted Non-GAAP EPS | $2.34 | $2.35 - $2.75 | - The 2024 outlook assumes constant currency and no further impact from macroeconomic or geopolitical environments[23] Additional Information This section provides details on the webcast, company overview, forward-looking statements, risk factors, and contact information Webcast Information Helios Technologies hosted a conference call and webcast on February 27, 2024, to discuss its financial and operating results and outlook, with a replay available via phone and on the company's investor relations website - Conference call and webcast held on February 27, 2024, at 9:00 a.m. Eastern Time[25] - Telephonic replay available until March 5, 2024, using conference ID 13743457[26] - Webcast replay and transcript available in the investor relations section of www.heliostechnologies.com[26](index=26&type=chunk) About Helios Technologies Helios Technologies is a global leader in highly engineered motion control and electronic controls technology, serving diverse end markets across over 90 countries, with a growth strategy focused on innovation and acquisitions - Helios Technologies is a global leader in highly engineered motion control and electronic controls technology[27] - Serves diverse end markets including construction, material handling, agriculture, energy, recreational vehicles, marine, and health & wellness[27] - Sells products to customers in over 90 countries worldwide[27] - Growth strategy: leading provider in niche markets with premier products and solutions through innovative product development and acquisition[27] - Has paid a cash dividend to shareholders every quarter since becoming a public company in 1997[27] Forward-Looking Statements & Risk Factors This news release contains forward-looking statements subject to risks and uncertainties, including global economic trends, supply chain disruptions, capital market conditions, geopolitical events, competition, and new product introductions - Forward-looking statements involve risks and uncertainties, and actual results may differ materially from those expressed or implied[28] - Key factors that could cause actual results to differ include global economic trends, changes in customer demand, supply chain disruption, capital market conditions (interest rates, capital availability), global and regional economic/political conditions (inflation, exchange rates, energy costs), competitive marketplace changes, risks related to international operations (e.g., conflict in Ukraine and Middle East), and new product introductions/sales mix[29] - The company undertakes no obligation to update any forward-looking statements[28] Contact Information For further information, interested parties can contact Tania Almond, Vice President of Investor Relations and Corporate Communication, or Deborah Pawlowski of Kei Advisors LLC - Contact: Tania Almond, Vice President, Investor Relations and Corporate Communication, (941) 362-1333, tania.almond@HLIO.com[33] - Contact: Deborah Pawlowski, Kei Advisors LLC, (716) 843-3908, dpawlowski@keiadvisors.com[33] GAAP Financial Statements This section presents Helios Technologies' audited GAAP financial statements, including consolidated statements of operations, balance sheets, and cash flows for the reported periods Consolidated Statements of Operations The Consolidated Statements of Operations provide a detailed breakdown of Helios Technologies' revenues, costs, and expenses, leading to net income for the three months and full year ended December 30, 2023, compared to the prior year - Presents the Consolidated Statements of Operations (In millions, except per share data) for the three months and year ended December 30, 2023, and December 31, 2022[34][35] Consolidated Balance Sheets The Consolidated Balance Sheets present Helios Technologies' financial position, detailing assets, liabilities, and shareholders' equity as of December 30, 2023, and December 31, 2022 - Presents the Consolidated Balance Sheets (In millions, except per share data) as of December 30, 2023, and December 31, 2022[36] Consolidated Statements of Cash Flows The Consolidated Statements of Cash Flows outline the cash generated and used by Helios Technologies across operating, investing, and financing activities for the years ended December 30, 2023, and December 31, 2022 - Presents the Consolidated Statements of Cash Flows (In millions) for the years ended December 30, 2023, and December 31, 2022[37][38] Non-GAAP Reconciliations This section provides reconciliations of various Non-GAAP financial measures to their most directly comparable GAAP measures, offering additional insights into the company's operational performance Non-GAAP Adjusted Operating Income & Margin This section provides a reconciliation of GAAP operating income to Non-GAAP adjusted operating income and margin, adjusting for various non-recurring or non-operational items - Presents the Non-GAAP Adjusted Operating Income & Non-GAAP Adjusted Operating Margin RECONCILIATION (In millions) for the three months and year ended December 30, 2023, and December 31, 2022[42] Non-GAAP Adjusted EBITDA & Margin This section reconciles GAAP net income to Non-GAAP Adjusted EBITDA and Adjusted EBITDA margin, by adding back interest, taxes, depreciation, and amortization, and further adjusting for specific non-operational expenses - Presents the Non-GAAP Adjusted EBITDA & Non-GAAP Adjusted EBITDA Margin RECONCILIATION (In millions) for the three months and year ended December 30, 2023, and December 31, 2022[43] Non-GAAP Adjusted Net Income & Diluted EPS This reconciliation adjusts GAAP net income and diluted EPS for various non-recurring or non-operational items, including amortization of intangible assets, acquisition and financing-related expenses, and restructuring charges - Presents the Non-GAAP Adjusted Net Income & Non-GAAP Adjusted Net Income Per Diluted Share RECONCILIATION (In millions) for the three months and year ended December 30, 2023, and December 31, 2022[44] - Acquisition and financing-related expenses include costs associated with M&A activities, deemed not representative of operational performance[44] - Restructuring activities include costs for creating two new Regional Operational Centers of Excellence, also excluded for operational performance analysis[45] - Acquisition integration activities include costs for integrating recently acquired businesses, typically occurring up to 18 months post-acquisition[46] Non-GAAP Net Sales Growth This section provides a reconciliation of net sales growth, isolating the impact of foreign currency translation and acquisition-related sales to derive organic sales growth in constant currency - Presents the Non-GAAP Net Sales Growth RECONCILIATION (In millions) for Q4 and Full Year 2023[48][49] - The impact from foreign currency translation is calculated by translating current period activity at average prior period exchange rates[49] Net Debt-to-Adjusted EBITDA This reconciliation calculates the net debt-to-TTM pro forma adjusted EBITDA ratio, providing a key leverage metric for the company, adjusted for recent acquisitions - Presents the Net Debt-to-Adjusted EBITDA RECONCILIATION (In millions) as of December 30, 2023[50][51] - The TTM Pro forma adjusted EBITDA is calculated on a pro-forma basis for Schultes and i3 acquisitions[51] Non-GAAP Measures Disclaimer Helios Technologies uses Non-GAAP financial measures to provide investors with a better understanding of operating performance, as these are used by management for analytical purposes, but they are not GAAP compliant and may not be comparable to other companies - Non-GAAP figures are provided as analytical indicators for investors and management to better understand operating performance[8][30][51] - These Non-GAAP financial measures should be considered in addition to GAAP results and not as a substitute for GAAP[8][30][51] - Due to varying calculations, these Non-GAAP figures may not be directly comparable to other similarly titled measures used by other companies[8][30][51] - The company is unable to present a quantitative reconciliation of forward-looking Non-GAAP financial measures to their most directly comparable GAAP measures due to unavailability of information and the variability, complexity, and limited visibility of adjusting items[31][32][51]