2019 Annual Report

Staying the Path

Executing the Vision

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Shareholder Letter

JOSEF MATOSEVIC
CEO and President

2019 REVENUE

$555M

Up 9% over 2018

In addition to our financial performance, we continued to make tremendous operational progress toward our Vision 2025 goals.

JOSEF MATOSEVIC
CEO and President

Dear Fellow Shareholders,

It is with great pleasure that I address you as the Helios Technologies CEO and President, as well as a member of the Helios Board of Directors, upon joining the Company on June 1, 2020. While very new to the organization, I know that Helios has a rich history of industry leadership and I am excited to lead the team on our path to expand market positions for all of our winning brands, driving achievement of Vision 2025 while we strive to exceed the expectations of our global stakeholders. I believe that the combination of our strong portfolio, talented and experienced management team, and the Vision 2025 strategy serve as a solid foundation for ongoing success.

2019 was a record-setting year by many financial measures, reflecting growth over 2018:

2019 REVENUE

$555M

Up 9% over 2018

  • Full year sales of $555 million, up 9%
  • GAAP net income of $60.3 million, up 29%
  • GAAP EPS of $1.88, up 26%
  • Non-GAAP cash EPS of $2.43, up 6%

We also realized very strong cash flow, allowing us to exceed our adjusted free cash flow goal for the year, coming in at nearly 14% of sales. This, in turn, contributed to $52 million of debt reduction in 2019, closing the year with 2.1x net debt-to-adjusted EBITDA as we approach our goal of less than 2x.

In addition to our financial performance, we continued to make tremendous operational progress toward our Vision 2025 goals. Key accomplishments during 2019 include the following:

Hydraulics Segment

  • Completed our Cartridge Valve Technology (CVT) manufacturing consolidation project in the first quarter, resulting in additional capacity while improving productivity as we progressed through the year.
  • Accelerated our ‘in the region, for the region' initiative by:
    • Starting production of CVT components in Italy to serve the EMEA market. Our next goal with this initiative is to establish full cartridge valve production capability for EMEA.
    • Approving site expansion plans in Italy to serve both Quick Release Couplings (QRC) and CVT, including full cartridge valve production capability.
  • Opened our new facility in China in the second quarter, ahead of schedule. Shipments ramped up as we progressed through the year, in support of growing demand from the China market which has resumed after a COVID-19 government-mandated shutdown.
  • Progressed with our CVT engineering center of excellence project in the U.S., scheduled to open in 2020. This state-of-the-art facility will be the foundation for new, innovative product development.
  • Began E-Volved product initiative, our electro-hydraulic QRC product range.
  • Expanded launch of new valves in the FLeX series CVT electro-hydraulic product line. This portfolio allows us to compete in new applications, facilitating a critical path to more systems business.

Electronics Segment

  • Expanded our ability to offer our products and solutions to a broader, global and more diverse customer base.
  • Made the final earnout payment to the sellers of Enovation Controls, representing full payout of the contingent purchase price and reflecting the strong performance of the business in 2017 and 2018.
  • Successful cost management and productivity improvements drove 160 basis point improvement in gross margin.

Additionally, our Board appointed two new corporate officers during 2019, bringing further diversity to the corporate officer team and aligning the leadership structure with our global businesses. Our current officer team now includes the leaders of each of our businesses, residing in the locale of their respective business’s headquarters. Further, we appreciate the benefits that diversity brings to our organization. We are proud to now have 50% of our corporate officer positions filled by experienced and talented women.

Corporate responsibility and sustainability are reflected in our business strategy. In addition to diversity and safety initiatives, we are committed to reducing emissions, recycling, and minimizing our environmental footprint. We have implemented several strategies to achieve these goals and they are evolving.

As we progress in 2020, in light of the economic impact of the COVID-19 pandemic, a significant amount of uncertainty exists for all companies. We instituted cost containment steps to mitigate the effects of the economic downturn and we have identified additional potential actions in our scenario planning. We at Helios believe that we are well positioned when the recovery does occur. In the meantime, all of our operations are running near full capacity and we implemented substantial procedures to limit the spread of COVID-19. The safety and health of our employees is of utmost importance, while we respond to the needs of our customers.

In closing, I wish to thank all of our stakeholders who contribute to our success, including our employees, customers, and suppliers around the globe, as well as our Board of Directors. The Board expresses its deep appreciation for the sage contributions over the years from Chris Koski, who will retire effective with our 2020 annual meeting, and Dave Grzelak, who retired from our Board in December 2019. Additionally, we welcome Laura Dempsey Brown, Cary Chenanda and Gregory Yadley who were newly appointed to our Board in April 2020.

Finally, I wish to thank all of our shareholders for their confidence in the Helios organization as we continuously strive to reach our Vision 2025 goals and expand shareholder value.

With best regards,

JOSEF MATOSEVIC
CEO and President
June 8, 2020

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In addition to our financial performance, we continued to make tremendous operational progress toward our Vision 2025 goals.

Strategic Progress

Vision 2025

Achieve global technology leadership in the Industrial Goods sector by 2025 with critical mass exceeding $1B in sales while maintaining superior profitability and financial strength.

* Refer to the Financial Highlights section for non-GAAP reconciliations and disclaimers regarding the use of non-GAAP financial information.

      Note: As of December 31, 2019
Denotes manufacturing & customizing locations

Hydraulics Segment

While maintaining superiority in hydraulic couplings and load-holding technologies, our Hydraulics segment continued to invest aggressively in strategic initiatives. In 2019, we made substantial gains in operational efficiencies while investing in innovation and product development:

  • Consolidated our manufacturing operations by applying LEAN enterprise principles at our U.S. cartridge valve technology (CVT) facilities to improve efficiency and expand capacity
  • Opened a new manufacturing facility in China, ahead of schedule, to serve the Asia-Pacific market, with production volume ramping as we progressed through the year
  • Began production of hydraulic cartridge components at our facility in Italy, to serve the European market, with plans to further expand this campus
  • Introduced E-Volved initiative to drive innovation in electro-hydraulic coupling solutions
  • Continued expansion of the FLeX Series of electro-hydraulic valves, responding to the growing digitalization of the cartridge valve market
  • Invested in our new U.S. CVT engineering center of excellence, scheduled to open in 2020

Electronics Segment

Our Electronics segment is a global leader in electronic control system solutions. With our vertically integrated manufacturing capabilities, we are able to quickly prototype and build fully-tailored solutions for engines, engine-driven equipment and specialty vehicles using our broad range of display, control and instrumentation platforms. During 2019, we advanced several key initiatives, including the following:

  • Invested in new product development and designed new platforms that leverage our in-depth engineering design knowledge
  • Expanded our global network of channel partners with new distributors capable of delivering deep electronics integration to smaller OEMs around the world
  • Worked directly with large OEM customers and our channel partners, focusing on creating customized systems that solve complex problems for a specific application or machine
  • Worked closely with the Hydraulics segment to develop the new MCx controller platform launching in 2020 capable of intelligently delivering simple and effective fluid power control
  • Launched new products to drive opportunities to reach into targeted growth markets and compete for additional share in existing target markets

Corporate

Our corporate entity is evolving to support our operational growth. During 2019, we completed several key initiatives, including the following:

  • At our 2019 annual meeting, our shareholders approved an amendment to our articles of incorporation to change our legal name to Helios Technologies, Inc.
  • To align with our new legal name, we changed our Nasdaq ticker symbol to “HLIO” effective June 17, 2019
  • Our Board of Directors elected three new corporate officers, bringing further diversity to the corporate officer team and aligning the leadership structure with the global business
  • We revised our compensation practices for executive officers to tie compensation more closely to Company performance; the new philosophy includes specific, performance-based short-term and long-term compensation that is more fully aligned with the Company’s strategy and its shareholders

2019 At A Glance

$555M

Revenue

Up 9% over 2018

$112.6M

Adjusted Operating income*

20.3% OF SALES

$101.2M

Adjusted Cash FROM operations*

18.2% OF SALES

$131.1M

Adjusted EBITDA*

23.6% OF SALES

222%

10-year tsr

87

# OF countries sold into

1,960

# OF EMPLOYEES

13%

ENGINEERS AS A PERCENT OF TOTAL EMPLOYEES

* Refer to the Financial Highlights section for non-GAAP reconciliations and disclaimers regarding the use of non-GAAP financial information.

Financial Highlights

Net Sales

(IN MILLIONS)

 

ADJUSTED CASH FROM OPERATIONS*

(IN MILLIONS)

NON-GAAP cash eps*
 

 

Adjusted EBITDA Margin*

(AS A PERCENT OF SALES)

 

YEAR ENDED
(IN THOUSANDS EXCEPT PER SHARE DATA) DEC. 28, 2019 DEC. 29, 2018 DEC. 30, 2017 DEC. 31, 2016 JAN. 2, 2016

Statement Of Operations

Net Sales $554,665 $508,045 $342, 839 $196,934 $200,727
Gross Profit 212,282 192,683 136,525 71,349 77,093
Operating Income 90,115 75,554 61,491 34,459 46,891
Adjusted Operating Income* 112,614 108,871 77,076 38,562 46,891
Net Income 60,268 46,730 31,558 23,304 33,138
Non-GAAP Cash Net Income* 77,737 72,135 48,811 26,068 33,138
Basic and Diluted Net Income per Common Share 1.88 1.49 1.17 0.87 1.24
Basic and Diluted non-GAAP Cash Net Income per Common Share* 2.43 2.30 1.81 0.97 1.24
Dividends per Common Share 0.36 0.36 0.38 0.40 0.45

Other Financial Data

Depreciation and Amortization $35,215 $39,714 $19,190 $11,318 $9,557
Capital Expenditures 25,025 28,380 22,205 6,187 6,106

Balance Sheet Data

Cash and Cash Equivalents $22,123 $23,477 $63,882 $74,221 $81,932
Working Capital 116,136 103,866 100,913 110,192 145,336
Total Assets 1,021,751 1,042,165 459,766 444,777 241,540
Total Debt 300,393 352,685 116,000 140,000 -
Shareholders' Equity 577,636 530,768 272,673 236,397 222,187

MD&A Results Of Operations

Gross Margin 38.3% 37.9% 39.8% 36.2% 38.4%
Adjusted Operating Margin* 20.3% 21.4% 22.5% 19.6% 23.4%
Adjusted EBITDA Margin* 23.6% 24.5% 25.4% 24.4% 28.6%
Adjusted Net Income Margin* 14.0% 14.2% 14.2% 13.2% 16.5%
Adjusted Cash from Operations as a Percent of Sales* 18.2% 15.2% 14.4% 19.6% 24.9%

Non-GAAP Adjusted Operating Income Reconciliation

GAAP Operating Income $90,115 $75,554 $61,491 $34,459 $46,891
Acquisition-related Amortization of Inventory Step-up 4,441 1,774 1,021
Acquisition and Financing-related Expenses 11 5,685 1,019 1,537
Restructuring Charges 1,724 170 1,462
One-time Operational Items 2,907
Loss on Disposal of Intangible Asset 2,713
Acquisition-related Amortization of Intangible Assets 17,924 23,021 8,423 1,545
Other 127
Non-GAAP Adjusted Operating Income* $112,614 $108,871 $77,076 $38,562 $46,891
Adjusted Operating Margin* 20.3% 21.4% 22.5% 19.6% 23.4%

Adjusted EBITDA Reconciliation

Net Income $60,268 $46,730 $31,558 $23,304 $33,138
Interest Expense (Income), Net 15,387 13,876 3,781 (790) (1,422)
Income Tax Provision 15,039 9,665 15,986 11,597 16,092
Depreciation and Amortization 35,215 39,714 19,190 11,318 9,557
Acquisition-related Amortization of Inventory Step-up 4,441 1,774 1,021
Acquisition and Financing-related Expenses 11 5,685 1,019 1,537
Restructuring Charges 1,724 170 1,462
One-time Operational Items 2,907
Loss on Disposal of Intangible Asset 2,713
Foreign Currency Forward Contract Loss 2,535
Change in Fair Value of Contingent Consideration 652 1,482 9,476
Other 127
Adjusted EBITDA* $131,136 $124,298 $87,153 $47,987 $57,365
Adjusted EBITDA Margin* 23.6% 24.5% 25.4% 24.4% 28.6%

Non-GAAP Cash Net Income Reconciliation

Net Income $60,268 $46,730 $31,558 $23,304 $33,138
Acquisition-related Amortization of Inventory Step-up 4,441 1,774 1,021
Acquisition and Financing-related Expenses 11 5,685 1,019 1,537
Restructuring Charges 1,724 170 1,462
One-time Operational Items 2,907
Loss on Disposal of Intangible Asset 2,713
Foreign Currency Forward Contract Loss 2,535
Change in Fair Value of Contingent Consideration 652 1,482 9,476
Amortization of Intangible Assets 18,065 23,262 8,423 1,545
Other 127
Impact of Tax Reform (1,400) 463
Other One-time Tax Related Items (1,920)
Tax Effect of Above (5,823) (8,850) (8,271) (1,339)
Non-GAAP Cash Net Income* $77,737 $72,135 $48,811 $26,068 $33,138
Non-GAAP Cash Net Income per Diluted Share* $2.43 $2.30 $1.81 $0.97 $1.24
Non-GAAP Cash Net Income Margin* 14.0% 14.2% 14.2% 13.2% 16.5%

Non-GAAP Adjusted Cash from Operations

Net Cash Provided by Operating Activities $90,480 $77,450 $49,382 $38,506 $49,902
Contingent Consideration Payment in Excess of Acquisition Date Fair Value 10,731
Adjusted Net Cash Provided by Operating Activities* $101,211 $77,450 $49,382 $38,506 $49,902
Non-GAAP Adjusted Cash from Operations as a Percent of Sales* 18.2% 15.2% 14.4% 19.6% 24.9%

* Adjusted operating income, adjusted operating margin, adjusted EBITDA, adjusted EBITDA margin, cash net income, cash net income per diluted share, cash net income margin, adjusted net cash provided by operating activities and adjusted cash from operations as a percent of sales are not measures determined in accordance with generally accepted accounting principles in the United States, commonly known as GAAP. Nevertheless, Helios believes that providing non-GAAP information such as adjusted operating income, adjusted operating margin, adjusted EBITDA, adjusted EBITDA margin, cash net income, cash net income per diluted share, cash net income margin, adjusted net cash provided by operating activities and adjusted cash from operations as a percent of sales are important for investors and other readers of Helios’s financial statements, as they are used as analytical indicators by Helios’s management to better understand operating performance. Because adjusted operating income, adjusted operating margin, adjusted EBITDA, adjusted EBITDA margin, cash net income, cash net income per diluted share, cash net income margin, adjusted net cash provided by operating activities and adjusted cash from operations as a percent of sales are non-GAAP measures and are thus susceptible to varying calculations, adjusted operating income, adjusted operating margin, adjusted EBITDA, adjusted EBITDA margin, cash net income, cash net income per diluted share, cash net income margin, adjusted net cash provided by operating activities and adjusted cash from operations as a percent of sales, as presented, may not be directly comparable to other similarly titled measures used by other companies.

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Corporate Information

Directors

  • Philippe Lemaitre
    Chairman of the Board
    Helios Technologies
    Chairman, President, CEO retired
    Woodhead Industries, Inc.
  • Marc Bertoneche, PhD
    Emeritus Professor, Business Administration
    University of Bordeaux
  • Douglas M. Britt
    President, Chief Executive Officer
    Boyd Corporation
  • Laura Dempsey Brown1
    Senior VP, Communications and Investor Relations retired
    W.W. Grainger, Inc.
  • Cariappa (Cary) Chenanda1
    Vice President
    Cummins, Inc.
  • David W. Grzelak2
    Chairman, CEO retired
    Komatsu America Corporation
  • Kennon H. Guglielmo, PhD
    Chief Executive Officer
    Genisys Controls, LLC
  • Christine L. Koski3
    President, Chief Executive Officer
    nMetric, LLC
  • Josef Matosevic4
    President, Chief Executive Officer
    Helios Technologies
  • Alexander Schuetz, PhD
    Chief Executive Officer
    Knauf Engineering GmbH
  • Gregory C. Yadley1
    Partner
    Shumaker, Loop & Kendrick, LLP

    1 Appointed effective April 20, 2020
    2 Retired effective December 12, 2019
    3 Retiring effective August 6, 2020
    4 Appointed effective June 1, 2020

Corporate Officers

  • Josef Matosevic4
    President, Chief Executive Officer
  • Tricia L. Fulton
    Chief Financial Officer
  • Matteo Arduini
    President of QRC (Quick-Release Couplings)
  • Jinger J. McPeak
    President of EC (Electronic Controls)
  • Rajasekhar (“Raj”) Menon
    President of CVT (Cartridge Valve Technology)
  • Melanie M. Nealis, Esq.
    Chief Legal & Compliance Officer and Secretary

Corporate Headquarters

  • Helios Technologies
    1500 West University Parkway
    Sarasota, FL 34243
    941.362.1200
    www.heliostechnologies.com

Common Stock Information

  • NASDAQ Global Select Market Symbol: HLIO
  • Registered shareholders of record at June 1, 2020: 202
  • Beneficial owners of record at June 1, 2020: 9,900
  • Closing stock price at June 1, 2020: $35.49

Annual Meeting

  • Thursday, August 6, 2020
    10:00 AM EDT
    Jones Day
    901 Lakeside Ave. E
    Cleveland, OH 44114

Independent Auditors

  • Grant Thornton, LLP
    Tampa, Florida

Transfer Agent

  • Computershare
    Canton, Massachusetts

Investors Relations

  • KEI Advisors LLC
    Christopher M. Gordon
    cgordon@keiadvisors.com
  • Deborah K. Pawlowski
    dpawlowski@keiadvisors.com
  • A copy of the Company’s Form 10-K, filed with the Securities and Exchange Commission, will be furnished free of charge on written request to:
  • KEI Advisors LLC
    7606 Transit Road, Suite 300
    Buffalo, NY 14221

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2019 Annual Report

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2019 Annual Report on Form 10-K

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Forward-Looking Information

This annual report contains "forward‐looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward‐looking statements involve risks and uncertainties, and actual results may differ materially from those expressed or implied by such statements. They include statements regarding current expectations, estimates, forecasts, projections, our beliefs, and assumptions made...

This annual report contains "forward‐looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward‐looking statements involve risks and uncertainties, and actual results may differ materially from those expressed or implied by such statements. They include statements regarding current expectations, estimates, forecasts, projections, our beliefs, and assumptions made by Helios Technologies, Inc. ("Helios" or the "Company"), its directors or its officers about the Company and the industry in which it operates, and assumptions made by management, and include among other items, (i) the Company's strategies regarding growth, including its intention to develop new products and make acquisitions; (ii) the Company's financing plans; (iii) trends affecting the Company's financial condition or results of operations; (iv) the Company's ability to continue to control costs and to meet its liquidity and other financing needs; (v) the declaration and payment of dividends; and (vi) the Company's ability to respond to changes in customer demand domestically and internationally, including as a result of standardization. In addition, we may make other written or oral statements, which constitute forward-looking statements, from time to time. Words such as "may," "expects," "projects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words, and similar expressions are intended to identify such forward-looking statements. Similarly, statements that describe our future plans, objectives or goals also are forward-looking statements. These statements are not guaranteeing future performance and are subject to a number of risks and uncertainties. Our actual results may differ materially from what is expressed or forecasted in such forward-looking statements, and undue reliance should not be placed on such statements. All forward-looking statements are made as of the date hereof, and we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Factors that could cause the actual results to differ materially from what is expressed or forecasted in such forward-looking statements include, but are not limited to, (i) conditions in the capital markets, including the interest rate environment and the availability of capital; (ii) changes in the competitive marketplace that could affect the Company’s revenue and/or cost bases, such as increased competition, lack of qualified engineering, marketing, management or other personnel, and increased labor and raw materials costs; and (iii) new product introductions, product sales mix and the geographic mix of sales nationally and internationally. Further information relating to factors that could cause actual results to differ from those anticipated is included but not limited to information under the heading Item 1. “Business” and Item 1A. “Risk Factors” in the Company’s Form 10-K for the year ended December 28, 2019 and under the heading Item 1A. “Risk Factors” in the Company’s Form 10-Q for the quarter ended March 28, 2020.

Helios has presented forward-looking statements regarding non-GAAP cash EPS and Adjusted EBITDA margin. These non-GAAP financial measures are derived by excluding certain amounts, expenses or income from the corresponding financial measures determined in accordance with GAAP. The determination of the amounts that are excluded from these non-GAAP measures is a matter of management judgment and depends upon, among other factors, the nature of the underlying expense or income recognized in a given period. Helios is unable to present a quantitative reconciliation of forward-looking non-GAAP cash EPS and Adjusted EBITDA margin to their most directly comparable forward-looking GAAP financial measures because such information is not available, and management cannot reliably predict all the necessary components of such GAAP measures without unreasonable effort or expense. In addition, the Company believes that such reconciliations would imply a degree of precision that would be confusing or misleading to investors. The unavailable information could have a significant impact on Helios's full year 2020 financial results. These non-GAAP financial measures are preliminary estimates and are subject to risks and uncertainties, including, among others, changes in connection with quarter-end and year-end adjustments. Any variation between Helios's actual results and preliminary financial data set forth above may be material.

This annual report will discuss some historical non-GAAP financial measures, which the Company believes are useful in evaluating its performance. You should not consider the inclusion of this additional information in isolation or as a substitute for results prepared in accordance with GAAP.

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