Helios Technologies Reports First Quarter 2019 Results

Helios
Technologies, Inc. (formerly known as Sun Hydraulics Corporation)
(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 first quarter ended March 30, 2019. The results include Faster Group
since its acquisition on April 5, 2018 and Custom Fluidpower (CFP) since
its acquisition on August 1, 2018.

Wolfgang Dangel, the Company’s President and Chief Executive Officer,
commented, “We continue to make steady progress with our strategic
initiatives. After absorbing the two major acquisitions we made last
year in Europe and Asia-Pacific, we recorded record revenue in both
segments in 2018. Our 12-month comprehensive Cartridge Valve Technology
(“CVT”) manufacturing consolidation project was completed at the end of
the quarter, as planned, resulting in capacity and margin expansion as
we moved through the quarter. We experienced some inefficiencies at the
beginning of the quarter that impacted gross profit margin, but we were
pleased with the progress made for the remainder of the quarter as we
worked toward the project completion. We expect the additional capacity
to further drive organic revenue growth and margin expansion throughout
2019.

“Now that the CVT manufacturing consolidation project is complete, we
can proceed with the CVT engineering center of excellence in the
available space in our third Sarasota factory without disruption to the
day-to-day operations,” stated Mr. Dangel. “The state-of-the-art
engineering center will be the foundation for new, innovative product
development in CVT for years to come. The facility transformation, which
represents an approximate $10 million investment, has already begun and
is planned to be completed in the fourth quarter of this year.”

He added, “In furtherance of our ‘in the region, for the region’
initiative, we have begun producing CVT components from our Faster
manufacturing facility near Milan. The purpose of the project is
vertical integration in the short-term, with full cartridge valve
production capability for the EMEA market as a mid-term goal. This first
phase of the project represents cost savings to the CVT business, which
we expect to realize in its entirety by mid-2020. Producing valves in
Italy was a synergy opportunity identified as part of the Faster
acquisition. Faster’s strong manufacturing hub in Europe provides a
platform for us to eventually make complete cartridges for the European
market. Also, we are ahead of our original schedule with our new
facility in China and expect to have test and assembly capabilities by
the beginning of the third quarter, again furthering our ‘in the region,
for the region’ initiative.

“Our new product development investments remain an important priority.
On May 1st, our legacy Sun business launched 16 new valves for its FLeX
series electro-hydraulics line, expanding its total offering to 41
valves. Development and expansion of this product portfolio allows us to
compete in electro-hydraulic applications where we could not before and
creates a critical path to systems business,” concluded Mr. Dangel.

First Quarter 2019 Consolidated Results

See the attached tables for additional important disclosures
regarding Helios’s use of non-GAAP adjusted operating income, non-GAAP
adjusted operating margin, non-GAAP cash net income, non-GAAP cash EPS,
adjusted EBITDA (earnings before net interest expense, income taxes,
depreciation and amortization, and certain non-recurring charges) and
adjusted EBITDA margin (adjusted EBITDA as a percentage of sales) as
well as reconciliations of GAAP operating income to non-GAAP adjusted
operating income and GAAP net income to non-GAAP cash net income and
adjusted EBITDA. Helios believes that, when used in conjunction
with measures prepared in accordance with GAAP, non-GAAP measures
described above help in the understanding of its operating performance.

Sales

• Acquisition growth – Faster and CFP contributed $49.0 million
• Organic growth – 2%, excluding the effect of currency
• Foreign currency translation on organic sales – $1.3 million
  unfavorable
• Foreign currency translation on acquired businesses’ sales – $2.4
  million unfavorable (compared with exchange rates in effect at the
  respective acquisition dates)

Profits and margins

• Gross profit and margin drivers – Acquisitions, price increases and
  cost management efforts, partially offset by lower productivity early
  in the quarter related to the CVT manufacturing consolidation project
• Selling, engineering and administrative (SEA) expenses – Increased
  primarily due to Faster and CFP acquisitions; improved as a percent of
  sales
• Acquisition-related amortization of intangible assets – $4.5 million
  ($2.0 million in prior year)
• Other operating profit and margin factors – Last year included $1.2
  million for acquisition and financing related expenses

Non-operating items

• Net interest expense – Higher due to debt to fund the Faster and CFP
  acquisitions
• Effective tax rate – 22.1%, down from 25.1% from last year

EPS, Non-GAAP cash EPS and adjusted EBITDA

• Driven by growth and operational performance noted above

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

Segment sales of $116.5 million increased 86% over the prior-year first
quarter. The $53.9 million increase included $49.0 million from the
Faster and CFP businesses, and 8% of organic growth. Organic growth was
driven by demand in all geographies and price increases. Orders
continued to outpace revenue. The CVT manufacturing consolidation
project was completed at the end of the quarter; expanded capacity and
improved profit margins are expected as 2019 progresses. Foreign
currency translation for the Sun Hydraulics business had a $1.0 million
unfavorable impact compared with the 2018 first quarter.

First quarter 2019 gross margin of 36.6% was down slightly from the
prior year’s 37.4%. While the Faster business demonstrated strong gross
margin achievement in the quarter, the inclusion of CFP unfavorably
affected the quarter by 100 basis points due to the nature of their
value-add integrator business model. The remainder of the segment was up
20 basis points despite a slow start in January for the organic CVT
business.

Higher SEA expenses in the 2019 first quarter included $8.2 million for
the Faster and CFP businesses.

As a result of the above, first quarter operating income grew 78% to
$23.8 million, representing 20.4% of sales, compared with 21.4% last
year.

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

Segment sales were $30.4 million for the 2019 first quarter, a 12%
decrease compared with the first quarter of last year. The decline was
due to timing of OEM customer model year rollouts and some softening end
market conditions. Foreign currency translation had a $0.3 million
unfavorable impact on segment sales in the quarter.

First quarter 2019 gross margin improved substantially to 45.7%, up from
40.9% last year. Productivity efficiency and cost management efforts
drove the improvement in margin.

SEA costs increased by $0.3 million in the quarter compared with last
year.

First quarter operating income was $6.5 million, or 21.4%, compared with
$7.1 million, or 20.5%, in last year’s first quarter. This was driven
primarily by the improved gross margin.

Balance Sheet and Cash Flow Review

Total debt was $338.0 million at March 30, 2019, down from $352.7
million at the end 2018, further improving the net debt to EBITDA ratio
to 2.3x. Cash and cash equivalents at March 30, 2019 were $16.8 million,
down from $23.5 million at December 29, 2018.

Cash provided by operations was $19.8 million and $14.7 million in the
first quarters of 2019 and 2018, respectively. The increase was
primarily due to higher cash from earnings, partially offset by a net
increase in working capital.

Capital expenditures were $8.8 million and $4.2 million for the first
quarters of 2019 and 2018, respectively. The increase was primarily for
manufacturing technology enhancements, equipment to complete the
Company’s CVT manufacturing consolidation project in Sarasota, machinery
and leasehold improvements for the Company’s new China facility, and the
addition of the Faster business. Capital expenditures in 2019 are
estimated to be $30 million to $35 million, in support of the Company’s
ongoing investments to drive its innovative leadership.

2019 Outlook and Guidance

The Company updated its guidance for 2019:

Mr. Dangel noted, “Our updated 2019 consolidated revenue guidance
demonstrates growth over 2018 revenue. We reiterate our Hydraulics
Segment revenue guidance. Our strong backlog and the completion of our
CVT manufacturing consolidation project give us confidence to maintain
Hydraulics revenue guidance for the year, even though we are starting to
see slower growth in certain industries and geographies.”

He added, “In Electronics, after organic growth of greater than 50% over
the past two years since acquisition, we initiated an intentional shift
in our customer base which materialized in the first quarter. We believe
this change is in the best interest of our long-term business and
positions us to take market share. This initiative includes the release
of certain contractual obligations to customers that allows us to
leverage all products to a broader and more diversified customer base.
While this is temporarily dampening Electronics sales for 2019, it gives
us the ability to secure new and important customer commitments for the
start of production in 2020 and 2021.

“In the overall macroeconomic environment, agriculture, oil and gas,
recreational and, most recently, construction and material handling end
markets are softening,” stated Dangel. “There has been a shift in the
outlook of these markets over the last few months that has caused us to
take a closer look at our expectations.”

Mr. Dangel concluded, “We have revised our adjusted EBITDA margin to
reflect the lower top line guidance. Our GAAP EPS and Non-GAAP Cash EPS
remain the same even on the lower overall sales estimates, benefiting
from a reduction in our depreciation estimates for the year. Our focus
remains on making investments to further globalize our business,
advancing our state-of-the-art manufacturing technologies, and
introducing innovative market-leading products and solutions that result
in market share gains. We reiterate the goals we established for Vision
2025.”

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, May 14, 2019. To listen to the archived call,
dial (412) 317-6671 and enter conference ID number 13689828. 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, Enovation
Controls, and Faster Group. The Company operates in two business
segments, Hydraulics and Electronics. There are three key technologies
within our Hydraulics segment: cartridge valve technology (“CVT”),
quick-release hydraulic coupling solutions (“QRC”) and hydraulic system
design (“Systems”). Within CVT, our 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. In our Electronics segment, we are a leader in
display and control integration solutions offering rugged and reliable
instruments, coupled with expertise in J1939 engine protocol, to produce
an industry-leading array of easy-to-read displays and gauges for
controller area network (“CAN”) transmitted engine data and faults. We
refer to this technology as Electronic Controls (“EC”). Helios
Technologies and information about its associated companies is available
online at www.heliostechnologies.com.

FORWARD-LOOKING INFORMATION

This news release 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 the intent, belief or current
expectations, estimates, vision or projections of Sun Hydraulics
Corporation (“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) the Company’s expectations regarding our sales, expenses, gross
margins and other results of operations; (iv) trends affecting the
Company’s financial condition or results of operations; (v) the
Company’s ability to continue to control costs and to meet its liquidity
and other financing needs; (vi) the declaration and payment of
dividends; (vii) the Company’s ability to respond to changes in customer
demand domestically and internationally, including as a result of
standardization; and (viii) potential challenges relating to changes in
and compliance with governmental laws and regulations affecting our U.S.
and international business. Although the Company believes that its
expectations are based on reasonable assumptions, it can give no
assurance that the anticipated results will occur. Important
factors that could cause the actual results to differ materially from
those in the forward‐looking statements include, among other items, (i)
the economic cyclicality of the capital goods industry in general and
the hydraulics industry in particular, which directly affect customer
orders, lead times and sales volume; (ii) fluctuations in global
business conditions, including the impact of economic recessions in the
U.S. and other parts of the world, (iii) conditions in the capital
markets, including the interest rate environment and the availability of
capital; (iv) changes in the competitive marketplace that could affect
the Company’s revenue and/or costs, such as increased competition, lack
of qualified engineering, marketing, management or other personnel, and
increased labor and raw materials costs; (v) risks related to the
integration of the businesses of the Company, Enovation Controls and
Faster Group; (vi) changes in technology or customer requirements, such
as standardization of the cavity into which screw‐in cartridge valves
must fit, which could render the Company’s products or technologies
noncompetitive or obsolete; (vii) new product introductions, product
sales mix and the geographic mix of sales nationally and
internationally; and (viii) changes relating to the Company’s
international sales, including changes in regulatory requirements or
tariffs, compliance with anti-corruption laws and trade laws, including
export and import compliance, trade or currency restrictions,
fluctuations in exchange rates, and tax and collection issues. 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 29, 2018. The Company
disclaims any intention or obligation to update or revise
forward‐looking statements, whether as a result of new information,
future events or otherwise.

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

Financial Tables Follow.

Non-GAAP Financial Measures:

Adjusted operating income, adjusted operating margin, adjusted
EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income
per diluted share, cash net income and cash net income per diluted share
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, adjusted net income, adjusted net income per diluted
share, cash net income and cash net income per diluted share 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, adjusted net income, adjusted net income per
diluted share, cash net income and cash net income per diluted share are
non-GAAP measures and are thus susceptible to varying calculations,
adjusted operating income, adjusted operating margin, adjusted EBITDA,
adjusted EBITDA margin, adjusted net income, adjusted net income per
diluted share, cash net income and cash net income per diluted share, as
presented, may not be directly comparable to other similarly titled
measures used by other companies.

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