SARASOTA, Fla.--(BUSINESS WIRE)--Aug 6, 2018--Helios Technologies (formerly known as Sun Hydraulics) (Nasdaq: SNHY) (“Helios” or the “Company”), a global industrial technology leader that develops and manufactures solutions for both the hydraulics and electronics markets, today reported financial results for the second quarter and first half of 2018, ended June 30, 2018. The results include Faster Group since its acquisition on April 5, 2018.

Wolfgang Dangel, Helios Technologies’ President and Chief Executive Officer, commented, “We are pleased to report record quarterly sales, driven by the inclusion of Faster Group as well as strong organic growth. Faster sales grew 25% over the prior-year second quarter on a pro forma basis and our integration activities have already begun and are progressing well. Our organic businesses grew 9%, with our legacy Hydraulics business growing 7% and our Electronics segment growing 14%. In our legacy Hydraulics business, we have seen record order levels and expect that shipments in the second half of the year will be stronger than the first half.”

He added, “Demand is continuing at very strong levels globally, especially in the Asia-Pacific region. As we are working diligently to keep up with customer demand, we made good progress during the quarter to alleviate the impact of the supply chain constraints that began a couple of quarters ago. We were pleased that our operational progress resulted in a 25.6% adjusted EBITDA margin in the quarter. However, backlog did grow. We anticipate further improvements in our operational results as we progress through the second half of 2018, including a reduction of our backlog.

“Strategically, we recently completed a couple of actions separately announced. First, the change to our new business name, Helios Technologies, is an integral part of our Vision 2025. As we have been growing our portfolio of complementary businesses, it is important to have an identity separate from our operating brands. Second, the acquisition of Custom Fluidpower on August 1 is an important stepping stone to further our growth in the Asia-Pacific region,” Mr. Dangel noted.

Second Quarter 2018 Consolidated Results

Sales in the 2018 second quarter grew by $46.9 million, or 52% over the same period last year, with the Faster business contributing $38.7 million, while organic business sales grew 9%. The Faster sales reflect 25% growth over the 2017 second quarter on a pro forma basis. Order demand remained strong in the organic business but shipments were hampered by ongoing supply chain constraints, which have shown improvement over the first quarter of 2018. Sales to the Americas, Europe/Middle East/Africa (“EMEA”) and Asia Pacific (“APAC”) comprised 50%, 32% and 18% of consolidated sales, respectively. Foreign currency translation favorably impacted consolidated sales by approximately $0.4 million.

Gross profit and gross margin in the second quarter of 2018 were unfavorably impacted by $3.1 million for amortization of inventory valuation step-up resulting from the Faster acquisition. Additionally, while the Faster acquisition and sales growth drove increases in gross profit, gross margin was unfavorably impacted by ongoing supply chain constraints and higher material costs which have lessened as the Company progresses through 2018. These are explained further below in the segment reviews.

The factors that impacted gross profit and gross margin also impacted operating income and operating margin, as well as $3.7 million of acquisition and financing-related expenses. Operating income in the second quarter of 2018 reflects $8.0 million of acquisition-related amortization of intangible assets, compared with $2.0 million in the prior-year second quarter.

Non-GAAP adjusted operating margin was 23.5% in the 2018 quarter compared with 25.5% a year ago. The decrease is primarily due to the supply chain constraints and higher material costs noted above. See the attached tables for additional important disclosures regarding Helios’ use of non-GAAP adjusted operating income and non-GAAP adjusted operating margin as well as a reconciliation of net income to non-GAAP adjusted operating income.

Net interest expense was $4.2 million compared with $1.0 million in the prior-year period, with the increase due to the debt to fund the Faster acquisition.

In the second quarter, Helios incurred a $2.0 million net foreign currency transaction loss associated with locking the Faster Group purchase price in euros, unfavorably impacting results in the second quarter of 2018. Additionally, the Company incurred $1.3 million of net foreign currency transaction losses due to significant currency fluctuation during the 2018 second quarter.

The Company recorded a $0.3 million charge for accretion of the contingent consideration associated with the Enovation Controls acquisition, compared with an $8.2 million increase to the fair value of the liability in last year’s quarter.

The Tax Cuts and Jobs Act was the primary factor resulting in a lower effective tax rate in the 2018 second quarter, at 26.3%, compared with 33.2% in the second quarter of 2017.

Net income was $6.8 million, or $0.22 per share in the second quarter of 2018. Non-GAAP net income was $13.7 million, or $0.43 per share, compared with $12.8 million, or $0.47 per share, in the prior-year second quarter. See the attached tables for additional important disclosures regarding Helios’ use of non-GAAP net income and non-GAAP EPS as well as a reconciliation of net income to non-GAAP net income.

Second quarter 2018 Adjusted EBITDA (earnings before net interest expense, income taxes, depreciation and amortization, and certain amortization and non-recurring charges) was $34.9 million, or 25.6% of sales.

Helios believes that, when used in conjunction with measures prepared in accordance with GAAP, Adjusted EBITDA and Adjusted EBITDA margin (Adjusted EBITDA as a percentage of sales), which are non-GAAP measures, help in the understanding of its operating performance. See the attached tables for additional important disclosures regarding Helios’ use of Adjusted EBITDA and Adjusted EBITDA margin as well as a reconciliation of net income to Adjusted EBITDA.

First Half 2018 Consolidated Results

Sales in the 2018 first half grew $62.8 million, or 37%, over the prior year, with Faster contributing $38.7 million, while organic business sales grew 14%. Foreign currency translation favorably impacted consolidated sales by approximately $2.8 million.

Operating income in the first half of 2018 was impacted by acquisition-related items, including $3.1 million for amortization of inventory valuation, $4.9 million for acquisition and financing-related expenses, $0.2 million for restructuring charges and $10.0 million for acquisition-related amortization of intangible assets. Operating income in the first half of 2017 was similarly impacted by $1.8 million for amortization of inventory valuation, $0.2 million for acquisition and financing-related expenses and $4.3 million for acquisition-related amortization of intangible assets.

Non-GAAP adjusted operating margin was 22.5% in the 2018 first half compared with 25.1% in the prior-year period. The decrease is primarily due to the supply chain constraints and higher material costs noted above, as well as other operational costs noted in the first quarter. See the attached tables for additional important disclosures regarding Helios’ use of non-GAAP adjusted operating income and non-GAAP adjusted operating margin as well as a reconciliation of net income to non-GAAP adjusted operating income.

Net interest expense was $4.6 million compared with $1.6 million for the first half of 2017, with the increase primarily due to debt to fund the Faster acquisition.

A foreign currency transaction loss, change in fair value of contingent consideration and effective tax rate are consistent with the fluctuations described above for the second quarter.

Net income was $18.7 million, or $0.61 per share. Non-GAAP net income was $27.3 million, or $0.89 per share, compared with $24.3 million, or $0.90 per share, last year. See the attached tables for additional important disclosures regarding Helios’ use of non-GAAP net income and non-GAAP EPS as well as a reconciliation of net income to non-GAAP net income.

First half 2018 Adjusted EBITDA was $58.2 million, or 24.9% of sales.

Helios believes that, when used in conjunction with measures prepared in accordance with GAAP, Adjusted EBITDA and Adjusted EBITDA margin, which are non-GAAP measures, help in the understanding of its operating performance. See the attached tables for additional important disclosures regarding Helios’ use of Adjusted EBITDA and Adjusted EBITDA margin as well as a reconciliation of net income to Adjusted EBITDA.

Hydraulics Segment Review

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

Segment sales of $103.6 million grew 70.4% over the prior-year second quarter. The $42.8 million increase included $38.7 million from the Faster business and 7% of organic growth. Growth was driven by increased demand in all geographies and end markets, and was also positively impacted by global sales and marketing initiatives. Orders outpaced revenue, however, supply chain constraints impacted the segment’s ability to complete and ship certain products. This is leading to a stronger back half of the year. Including Faster, sales to the Americas, EMEA and APAC were up 41%, 144% and 46%, respectively. Foreign currency translation favorably impacted segment sales by $0.1 million, of which $0.9 million favorable effect was recognized by the Sun Hydraulics business, offset by $0.8 million unfavorable effect recognized by the Faster business.

Second quarter operating and gross margins were lower than last year but showed sequential improvement over the first quarter of 2018. While significant customer demand continued, the segment realized improvements in its supply chain activities and recognized production efficiencies compared with previous quarters. Material cost increases persisted, but are expected to be alleviated in the third quarter of 2018 as Sun’s price increases take effect.

Higher SEA (selling, engineering and administrative) expenses and R&D (research and development) expenses in the 2018 quarter include $5.3 million for the Faster business, partially offset by reduced costs and efficiencies realized by the historical Sun business.

Second quarter operating income increased $9.0 million, or 55%, to $25.4 million, representing 24.5% of sales.

For the first half, segment sales grew $51.3 million, of which $38.7 million was contributed by Faster and 11% growth was realized organically. Operating income for the first half of 2018 was $38.8 million, or 23.3% of sales.

Electronics Segment Review

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

Segment sales grew to $32.5 million for the second quarter, an increase of 14% over the second quarter of last year. Growth was driven by increased demand in power controls and recreational vehicle end markets. Proactive sales initiatives and increased demand for new products developed in the past year also contributed to the 2018 growth. Foreign currency translation favorably impacted segment sales by $0.3 million.

Similar to the Hydraulics segment, second quarter gross margin was lower than last year but showed sequential improvement over the first quarter of 2018. Improved productivity partially offset ongoing higher material and freight costs, resulting in lower gross margin compared with the prior year. SEA costs increased by $1.0 million due to planned investments in sales and marketing initiatives, and research and development to support the segment’s growth strategy, as well as increased accounting and administrative infrastructure costs.

Given the gross margin pressures and SEA investments, second quarter operating income was relatively flat compared with the prior-year second quarter, at $6.5 million, or 20.0% of sales.

For the first half, segment sales grew $11.4 million, or 20.4%. Operating income for the first half of 2018 was $13.6 million, or 20.2% of sales.

Balance Sheet and Cash Flow Review

Total debt was $355.2 million at June 30, 2018, up from $116.0 million at December 30, 2017, with the increase primarily to fund the Faster acquisition. Cash and cash equivalents at June 30, 2018 were $29.9 million, compared with $63.9 million at the end of 2017.

Cash provided by operations was $31.1 million and $21.7 million for the first half of 2018 and 2017, respectively. The increase was driven by strong second quarter cash flows, primarily due to higher net income and improved working capital utilization, especially inventory.

Capital expenditures were $10.6 million and $3.3 million for the first half of 2018 and 2017, respectively. The increase was primarily for machinery and equipment and costs for the ongoing construction of the Company’s new production facility in South Korea.

2018 Outlook and Guidance

Mr. Dangel stated, “Our organic businesses and the Faster Group remain on track with the revenue expectations we previously reported. However, the addition of Custom Fluidpower has resulted in an increase to our revenue guidance as well as some of our other metrics. Additionally, we are adjusting our consolidated operating margin guidance modestly.”

The following summarizes the Company’s updated expectations for 2018, including Custom Fluidpower since its August 1 acquisition, compared with previously provided guidance:

Mr. Dangel concluded, “Step by step, we are striving to become a leading global designer and manufacturer of intelligent systems and controls. We are diligently and carefully working toward the attainment of our Vision 2025 goals, to achieve global technology leadership in the industrial good section with critical mass exceeding $1 billion in sales while maintaining our superior profitability and financial strength.”

Webcast

The Company will host a conference call and webcast tomorrow morning at 9:00 a.m. Eastern Time to review its financial and operating results, and discuss its corporate strategies and outlook. A question-and-answer session will follow.

The conference call can be accessed by calling (201) 689-8573. The audio webcast can be monitored at www.heliostechnologies.com. Participants will have the ability to ask questions on either the teleconference call or the webcast.

A telephonic replay will be available from 12:00 p.m. ET on the day of the call through Tuesday, August 14, 2018. To listen to the archived call, dial (412) 317-6671 and enter conference ID number 13681117. The webcast replay will be available in the investor relations section of the Company’s website at www.heliostechnologies.com, where a transcript will also be posted once available.

About Helios Technologies

Helios Technologies is the business name for Sun Hydraulics Corporation, a publicly-listed company on the Nasdaq Global Stock Market (SNHY). Helios Technologies is a global industrial technology leader that develops and manufactures hydraulic and electronic control solutions for diverse markets. The Company does business through its operating subsidiaries around the world, including Sun Hydraulics, LLC, Enovation Controls, LLC and Faster S.p.A. Through its Hydraulics segment, the Company serves diverse markets including material handling, construction equipment, agriculture, specialized vehicles, energy and others through its Sun Hydraulics and Faster Group companies, providing high-performance screw-in hydraulic cartridge valves and manifolds as well as quick-release hydraulic coupling solutions. Through its Electronics segment, the Company provides electronic control solutions through Enovation Controls for recreational and off-highway vehicles, as well as industrial stationary and mobile power equipment. Helios Technologies and information about its associated companies is available online at www.heliostechnologies.com.

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