hlio-10q_20200328.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 28, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-21835

HELIOS TECHNOLOGIES, INC.

(Exact Name of Registration as Specified in its Charter)

Florida		59-2754337
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1500 WEST UNIVERSITY PARKWAY SARASOTA, Florida		34243
(Address of Principal Executive Offices)		(Zip Code)

941/362-1200

(Registrant’s Telephone Number, Including Area Code)

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock $.001 Par Value

HLIO

The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller Reporting Company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The registrant had 32,081,445 shares of common stock, par value $.001, outstanding as of April 24, 2020.

Helios Technologies, Inc.

INDEX

For the quarter ended

March 28, 2020

			Page

PART I. FINANCIAL INFORMATION

	Item 1.	Financial Statements

	Consolidated Balance Sheets as of March 28, 2020 (unaudited) and December 28, 2019		3

	Consolidated Statements of Operations for the Three Months Ended March 28, 2020 (unaudited) and March 30, 2019 (unaudited)		4

	Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 28, 2020 (unaudited) and March 30, 2019 (unaudited)		5

	Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 28, 2020 (unaudited) and March 30, 2019 (unaudited)		6

	Consolidated Statements of Cash Flows for the Three Months Ended March 28, 2020 (unaudited) and March 30, 2019 (unaudited)		7

	Condensed Notes to the Consolidated, Unaudited Financial Statements		8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

	Item 4.	Controls and Procedures	27

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	28

	Item 1A.	Risk Factors	28

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

	Item 3.	Defaults Upon Senior Securities	29

	Item 4.	Mine Safety Disclosures	29

	Item 5.	Other Information	29

	Item 6.	Exhibits	30

PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS.

Helios Technologies, Inc.

Consolidated Balance Sheets

(in thousands)

	March 28, 2020			December 28, 2019
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	27,257		$	22,123
Restricted cash		37			39
Accounts receivable, net of allowance for doubtful accounts of $1,187 and $1,131		71,638			66,677
Inventories, net		86,727			85,195
Income taxes receivable		1,757			3,196
Other current assets		17,570			15,359
Total current assets		204,986			192,589
Property, plant and equipment, net		141,912			145,854
Deferred income taxes		9,668			5,803
Goodwill		343,815			377,569
Other intangible assets, net		288,989			294,651
Other assets		4,479			5,285
Total assets	$	993,849		$	1,021,751
Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$	33,145		$	29,730
Accrued compensation and benefits		13,376			16,898
Other accrued expenses and current liabilities		12,834			13,549
Current portion of contingent consideration		828			828
Current portion of long-term non-revolving debt, net		7,369			7,623
Dividends payable		2,887			2,884
Income taxes payable		7,954			4,941
Total current liabilities		78,393			76,453
Revolving line of credit		204,865			208,708
Long-term non-revolving debt, net		82,197			84,062
Deferred income taxes		48,680			49,290
Other noncurrent liabilities		28,079			25,602
Total liabilities		442,214			444,115
Commitments and contingencies		—			—
Shareholders' equity:
Preferred stock, par value $0.001, 2,000 shares authorized, no shares issued or outstanding		—			—
Common stock, par value $0.001, 100,000 shares authorized, 32,075 and 32,047 shares issued and outstanding		32			32
Capital in excess of par value		366,521			365,310
Retained earnings		247,548			267,658
Accumulated other comprehensive loss		(62,466	)		(55,364	)
Total shareholders' equity		551,635			577,636
Total liabilities and shareholders' equity	$	993,849		$	1,021,751

The accompanying Condensed Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.

Helios Technologies, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

	Three Months Ended
	March 28, 2020			March 30, 2019
	(unaudited)			(unaudited)
Net sales	$	129,483		$	146,851
Cost of sales		77,633			90,342
Gross profit		51,850			56,509
Selling, engineering and administrative expenses		25,664			26,156
Amortization of intangible assets		4,348			4,521
Goodwill impairment		31,871			—
Operating (loss) income		(10,033	)		25,832
Interest expense, net		2,951			4,385
Foreign currency transaction loss (gain), net		125			(439	)
Miscellaneous (income) expense, net		(94	)		108
Change in fair value of contingent consideration		—			719
(Loss) income before income taxes		(13,015	)		21,059
Income tax provision		4,208			4,655
Net (loss) income	$	(17,223	)	$	16,404
Basic and diluted net (loss) income per common share	$	(0.54	)	$	0.51
Basic and diluted weighted average shares outstanding		32,062			31,978
Dividends declared per share	$	0.09		$	0.09

The accompanying Condensed Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.

Helios Technologies, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

	Three Months Ended
	March 28, 2020			March 30, 2019
	(unaudited)			(unaudited)
Net (loss) income	$	(17,223	)	$	16,404
Other comprehensive loss
Foreign currency translation adjustments, net of tax		(4,901	)		(4,831	)
Unrealized loss on interest rate swap, net of tax		(2,201	)		(1,082	)
Total other comprehensive loss		(7,102	)		(5,913	)
Comprehensive (loss) income	$	(24,325	)	$	10,491

The accompanying Condensed Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.

Helios Technologies, Inc.

Consolidated Statements of Shareholders’ Equity (unaudited)

Three Months Ended

(in thousands)

																Accumulated
										Capital in						other
	Preferred		Preferred		Common			Common		excess of			Retained			comprehensive
	shares		stock		shares			stock		par value			earnings			(loss)			Total

Balance, December 28, 2019		—	$	—		32,047		$	32	$	365,310		$	267,658		$	(55,364	)	$	577,636
Shares issued, restricted stock						21														—
Shares issued, other compensation						5														—
Shares issued, ESPP						12					355									355
Stock-based compensation											1,533									1,533
Cancellation of shares for payment of employee tax withholding						(10	)				(677	)								(677	)
Dividends declared														(2,887	)					(2,887	)
Net loss														(17,223	)					(17,223	)
Other comprehensive loss																	(7,102	)		(7,102	)
Balance at March 28, 2020		—	$	—		32,075		$	32	$	366,521		$	247,548		$	(62,466	)	$	551,635

Balance, December 29, 2018		—	$	—		31,965		$	32	$	357,933		$	219,056		$	(46,253	)	$	530,768
Shares issued, other compensation						6														—
Shares issued, ESPP						13					408									408
Shares issued, ESOP						24					1,092									1,092
Stock-based compensation											1,368									1,368
Cancellation of shares for payment of employee tax withholding						(12	)				(606	)								(606	)
Dividends declared														(2,881	)					(2,881	)
Net income														16,404						16,404
Other comprehensive loss																	(5,913	)		(5,913	)
Impact of adoption of ASU 2016-02, related to leases														(134	)					(134	)
Balance at March 30, 2019		—	$	—		31,996		$	32	$	360,195		$	232,445		$	(52,166	)	$	540,506

The accompanying Condensed Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.

Helios Technologies, Inc.

Consolidated Statements of Cash Flows

(in thousands)

	Three Months Ended
	March 28, 2020			March 30, 2019
	(unaudited)			(unaudited)
Cash flows from operating activities:
Net (loss) income	$	(17,223	)	$	16,404
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		8,376			8,571
Loss on disposal of assets		24			71
Goodwill impairment		31,871			—
Stock-based compensation expense		1,533			1,368
Amortization of debt issuance costs		179			179
Benefit for deferred income taxes		(1,186	)		(322	)
Change in fair value of contingent consideration		—			719
Forward contract (gains) losses, net		(440	)		24
Other, net		136			549
(Increase) decrease in:
Accounts receivable		(6,838	)		(8,848	)
Inventories		(2,818	)		(3,729	)
Income taxes receivable		1,415			—
Other current assets		(2,740	)		(2,455	)
Other assets		1,213			1,088
Increase (decrease) in:
Accounts payable		3,867			662
Accrued expenses and other liabilities		(4,652	)		3,496
Income taxes payable		3,051			2,710
Other noncurrent liabilities		(701	)		(659	)
Net cash provided by operating activities		15,067			19,828
Cash flows from investing activities:
Capital expenditures		(2,937	)		(8,792	)
Proceeds from dispositions of equipment		3			64
Cash settlement of forward contracts		1,634			—
Net cash used in investing activities		(1,300	)		(8,728	)
Cash flows from financing activities:
Borrowings on revolving credit facility		2,000			35,282
Repayment of borrowings on revolving credit facility		(5,500	)		(48,000	)
Repayment of borrowings on long-term non-revolving debt		(2,100	)		(1,623	)
Proceeds from stock issued		355			408
Dividends to shareholders		(2,885	)		(2,878	)
Other financing activities		(815	)		(881	)
Net cash used in financing activities		(8,945	)		(17,692	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		310			(167	)
Net increase (decrease) in cash, cash equivalents and restricted cash		5,132			(6,759	)
Cash, cash equivalents and restricted cash, beginning of period		22,162			23,515
Cash, cash equivalents and restricted cash, end of period	$	27,294		$	16,756

The accompanying Condensed Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.

HELIOS TECHNOLOGIES, INC.

CONDENSED NOTES TO THE CONSOLIDATED, UNAUDITED FINANCIAL STATEMENTS

(Currencies in thousands, except per share data)

1. COMPANY BACKGROUND

Helios Technologies, Inc. (“Helios” or the “Company”), together with its wholly-owned subsidiaries, is an industrial technology leader that develops and manufactures solutions for both the hydraulics and electronics markets. Sun Hydraulics, LLC (“Sun Hydraulics” or “Sun”), Enovation Controls, LLC (“Enovation Controls”), Faster S.r.l. (“Faster”) and Custom Fluidpower Pty Ltd (“Custom Fluidpower”), are the wholly-owned operating subsidiaries of Helios.

The Company operates in two business segments: Hydraulics and Electronics. There are three key technologies within the Hydraulics segment: cartridge valve technology (“CVT”), quick-release hydraulic coupling solutions (“QRC”) and hydraulic system design (“Systems”). CVT products provide functions important to a hydraulic system: to control rates and direction of fluid flow and to regulate and control pressures. QRC products allow users to connect and disconnect quickly from any hydraulic circuit without leakage and ensure high-performance under high temperature and pressure using one or multiple couplers. Systems provide engineered solutions for machine users, manufacturers or designers to fulfill complete system design requirements including electro-hydraulic, remote control, electronic control and programmable logic controller systems, as well as automation of existing equipment. The Electronics segment provides complete, fully-tailored display and control solutions for engines, engine-driven equipment and specialty vehicles. This broad range of products is complemented by extensive application expertise and unparalleled depth of software, embedded programming, hardware and sustaining engineering teams. This technology is referred to as Electronic Controls (“EC”).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Accordingly, certain information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements are not included herein. The financial statements are prepared on a consistent basis (including normal recurring adjustments) and should be read in conjunction with the consolidated financial statements and related notes contained in the Annual Report on Form 10-K for the fiscal year ended December 28, 2019, (“Form 10-K”), filed by Helios with the Securities and Exchange Commission on February 25, 2020. In management’s opinion, all adjustments necessary for a fair presentation of the Company’s financial statements are reflected in the interim periods presented.

The Company faces various risks related to health epidemics, pandemics and similar outbreaks, including the global outbreak of COVID-19. The Company cannot at this time predict the impact of the COVID-19 pandemic, but it could have a material adverse effect on the business, financial position, results of operations and/or cash flows. Operating results for the three months ended March 28, 2020, are not necessarily indicative of the results that may be expected for the fiscal year ending January 2, 2021.

Goodwill

Goodwill, which represents the excess of the purchase price of an acquisition over the fair value of the net assets acquired, is carried at cost. Goodwill is tested for impairment annually, in the third and fourth quarters, or more frequently if events or circumstances indicate a reduction in the fair value below the carrying value. As part of the impairment test, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after this optional qualitative assessment, the Company determines that impairment is more likely than not, then the Company performs the quantitative impairment test. The carrying value of assets is calculated at the reporting unit level. An impairment loss is recorded to the extent that the carrying value of the reporting unit exceeds its fair value, with the impairment loss limited to the amount of goodwill allocated to the reporting unit.

During the first quarter of 2020, the Company determined that, based on current economic conditions and potential future impacts from the COVID-19 pandemic, it was more likely than not that the fair value of the Faster reporting unit was less than its carrying value. Upon completion of the interim impairment testing, the Company determined that the carrying value of goodwill was impaired. See Note 6 for discussion of interim impairment testing.

Contract Assets & Liabilities

Contract assets are recognized when the Company has a conditional right to consideration for performance completed on contracts. Contract asset balances totaled $2,741 and $2,796 at March 28, 2020 and December 28, 2019, respectively, and are presented in Other current assets in the Consolidated Balance Sheets. Accounts receivable balances represent unconditional rights to consideration from customers and are presented separate from contract assets in the Consolidated Balance Sheets.

Contract liabilities are recognized when payment is received from customers prior to revenue being recognized. Contract liabilities totaled $253 and $353 at March 28, 2020 and December 28, 2019, respectively, and are presented in Other accrued expenses and current liabilities in the Consolidated Balance Sheets.

Research and Development

The Company conducts research and development (“R&D”) to create new products and to make improvements to products currently in use. R&D costs are charged to expense as incurred and totaled $4,107, and $3,900 for the three months ended March 28, 2020 and March 30, 2019, respectively.

Earnings Per Share

The following table presents the computation of basic and diluted earnings per common share (in thousands except per share data):

	Three Months Ended
	March 28, 2020			March 30, 2019
Net (loss) income	$	(17,223	)	$	16,404
Basic and diluted weighted average shares outstanding		32,062			31,978
Basic and diluted net (loss) income per common share	$	(0.54	)	$	0.51

Recently Adopted Accounting Standards

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates the second step in the goodwill impairment test, which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The Company adopted the standard for the fiscal year beginning December 29, 2019, and conducted its interim impairment testing accordingly.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. The standard replaces the incurred loss model with the current expected credit loss (“CECL”) model to estimate credit losses for financial assets measured at amortized cost and certain off-balance sheet credit exposures. The CECL model requires a Company to estimate credit losses expected over the life of the financial assets based on historical experience, current conditions and reasonable and supportable forecasts. The Company adopted the standard for the fiscal year beginning December 29, 2019. Adoption of the standard did not have a material impact on the Consolidated, Unaudited Financial Statements.

Recently Issued Accounting Standards

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This update simplifies accounting for income taxes by eliminating some exceptions to the general approach in ASC 740, Income Taxes, related to intraperiod tax allocation, the methodology for calculating income tax in an interim period and the recognition of deferred tax liabilities for outside basis differences. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The amendments in this update should be applied on either a retrospective basis, a modified retrospective basis or prospectively, depending on the provision within the amendment. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

3. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following tables provide information regarding the Company’s assets and liabilities measured at fair value on a recurring basis at March 28, 2020 and December 28, 2019.

March 28, 2020

Quoted Market

Significant Other Observable

Significant Unobservable

Total

Prices (Level 1)

Inputs (Level 2)

Inputs (Level 3)

Assets

Forward foreign exchange contracts

710