Helios Technologies, Inc. (HLIO) Earnings

Management highlights

- Core Strategy Progress * Two quarters into the 2030 strategic plan, the company has completed its business stabilization phase and entered a new phase of sustained growth supported by a fortified balance sheet * First half 2026 performance is tracking ahead of organic growth and margin commitments laid out at Investor Day * The company has delivered four consecutive quarters of double-digit pro forma sales and adjusted earnings growth - Operational Highlights * Completed footprint optimization actions: closed the Faster facility in Canada and consolidated Faster North American operations to improve efficiency and reduce costs, with benefits expected to begin in H2 2026 * Generated record Q2 operating cash flow of $42 million and free cash flow of $31 million; CapEx was $11 million (4.9% of sales), reflecting increased strategic organic investment * Improved the trailing 12 months net debt to adjusted EBITDA leverage ratio to 1.4x, down from 2.6x year-over-year, and below the 1.5x-2.5x target range; net debt declined to $264 million, the lowest level since Q3 2020 * Updated capital allocation priorities to prioritize organic growth investment, maintain increased shareholder capital returns, and pursue strategic acquisitions * Returned $18 million to shareholders year-to-date via dividends and share repurchases, up 40% year-over-year; extended consecutive quarterly dividend payments to 118 quarters (over 29 years) - Demand and End Market Trends * Order intake grew double digits year-over-year for the fourth consecutive quarter, driven by ramping of 2025 business wins and continued healthy new business growth across both segments * SunSat (hydraulics) is seeing record growth in China across mobile and industrial end markets, and is on pace for a record year in the APAC region; Faster (hydraulics) is benefiting from strengthening construction and agriculture customer demand * Electronics segment is seeing growth across recreational, health and wellness, and industrial applications, though core marine end markets remain soft; Innovation Controls delivered a Q2 record, supported by strong demand from a large key OEM customer * Margins have expanded for four consecutive quarters, driven by higher volumes, favorable mix, operational initiatives, and footprint optimization, reflecting inherent operating leverage in the company's business model

Guidance

- Full year 2026 guidance has been raised from prior levels, with overall sales now expected in the range of $880 to $900 million, representing 12% year-over-year growth at the midpoint. At this midpoint, Helios will achieve the highest annual sales in company history, even after divesting $60 million in annualized CFP sales in 2025 - Full year 2026 segment guidance: Hydraulics sales expected between $555 and $565 million (13% pro forma year-over-year growth at the midpoint); Electronics sales expected between $325 and $335 million (11% year-over-year growth at the midpoint) - Full year 2026 adjusted EBITDA margin guidance is raised to 20.2% to 21%, with the bottom of the prior range lifted upward, reflecting gross margin expansion, operating expense discipline, and full-year benefits from portfolio and footprint actions - Full year 2026 adjusted diluted EPS guidance is set at $3.05 to $3.25, representing 23% growth at the midpoint - Q3 2026 sales guidance is $215 to $222 million, representing 8% year-over-year growth at the midpoint (adjusted for the CFP divestiture); Q3 segment guidance: Hydraulics $133 to $138 million (9% pro forma growth at midpoint), Electronics $82 to $84 million (5% growth at midpoint) - Q3 2026 consolidated adjusted EBITDA margin is expected between 19.8% and 20.6%, and adjusted diluted EPS between $0.70 and $0.77 per share (2% growth at the midpoint) - No 2026 full year revenue from the new data center thermal management market entry is included in guidance, as the company takes a cautious approach to this new opportunity

Segment performance

1. Hydraulics Segment: Q2 2026 sales were $146 million, up 14% year-over-year on a pro forma basis (adjusted for divestiture and foreign exchange impacts). Gross profit increased 9% year-over-year, with gross margin expanding 160 basis points to 34.6%, driven by higher volumes, favorable end-market mix, and IEPA tariff refunds. Segment operating income grew 16% to $29 million, with operating margin expanding 200 basis points to 19.7%. Operating expenses were flat year-over-year in absolute terms and lower as a percentage of sales. This segment contributed 63% of total Q2 2026 revenue. 2. Electronics Segment: Q2 2026 sales were $86 million, up 19% year-over-year, with broad-based growth across all regions. Gross profit increased 41% year-over-year, with gross margin expanding 530 basis points to 34.6%, driven by fixed cost leverage from higher volume, direct labor cost efficiencies from footprint optimization, and IEPA tariff refunds. Segment operating income nearly doubled to $11 million, with operating margin expanding 490 basis points to 13.1%. This segment contributed 37% of total Q2 2026 revenue.

Risks & headwinds

- External macro risks include rising energy and fuel prices, ongoing tariff dynamics, broader inflationary pressures, and global geopolitical tensions - The company faces tougher year-over-year comparable periods in the second half of 2026, driven by timing of end-market recoveries and ramp timelines for commercial wins - Order visibility is limited to approximately one quarter out for most of the business, due to shorter order cycles for distribution and Balboa business; OEMs only lock in forecasts close to the delivery quarter, creating uncertainty around near-term demand - Cost pressures persist for key input components including printed circuit boards, memory chips, and aluminum components, which require ongoing mitigation - Core marine end markets in the electronics segment remain depressed, and interest rate stagnation has limited demand for interest-sensitive OEM products in recreational and marine markets - Entry into the new data center thermal management market requires extensive product validation and qualification, which carries execution risk and ramp uncertainty

Analyst Q&A

• Q: What footprint restructuring is underway for Faster in hydraulics, what are the primary areas of current CapEx investment, and how is capacity being managed? /

  A: The company is consolidating Faster North American operations, closing the Canadian Faster facility and moving that production to Italy, while expanding capacity at the existing Mishawaka, Indiana facility for manifold assembly growth, which has recently hit a record order week. This consolidation also frees up capacity to support the upcoming data center thermal coupling market entry in the U.S., the largest market for that opportunity. CapEx is currently guided at 4-4.5% of sales, with primary investments including: capacity and clean room buildout for data center couplings, expansion of low-cost engineering and manufacturing centers in Mexico, India, and China, and targeted upgrades to older equipment and automation to improve productivity. The higher CapEx percentage this year reflects the company's raised sales outlook, and it is expected to moderate to a sustainable 3-4% of sales longer-term.

• Q: Electronics segment organic growth is outpacing its underlying end markets; what is driving this outperformance, and how sustainable is it? /

  A: The outperformance is driven by an aggressive go-to-market strategy and a continuous pipeline of new customer wins that began before 2026 and has continued through the first half. While the marine market (a large core electronics end market) remains depressed due to high interest rates limiting consumer demand, organizational restructuring has combined business units to create engineering and manufacturing synergies, and moving production to lower-cost Tijuana facilities has improved margins. The health and wellness end market has stabilized after post-COVID volatility and is now delivering consistent growth, and the company is focused on expanding product breadth and deepening relationships with existing customers to continue outgrowing underlying end markets. First half growth benefited from easier year-over-year comparisons, and the company expects slower mid-single-digit growth in Q3, but remains on track for full-year double-digit growth.

• Q: What is the current status of the data center thermal management market entry, what is the ramp timeline, and what is the addressable market size? /

  A: The company has completed product development, has product samples with approximately a dozen prospective customers, and is building inventory and manufacturing capacity in preparation for commercialization, but no revenue from this opportunity is included in 2026 guidance. Product validation for data center use is far more stringent than for traditional end markets, requiring hyperscaler approval even for sales to equipment integrators (the company's primary go-to-market channel). The company expects first orders in the second half of 2026, with initial modest revenue in 2027 and a gradual ramp from there. The total addressable market for this opportunity is nearly as large as Helios' combined existing addressable market for agriculture and construction end markets, making it the company's single largest current growth opportunity. Helios' existing coupling expertise and the current market-wide product shortage create a strong opportunity to gain share despite being a late entry.

• Q: After two quarters of the 2030 core strategy, what progress has been made, what are the biggest challenges, and what are M&A priorities now that the balance sheet is strong? /

  A: Organic growth is outpacing the 5% annual outperformance target set at Investor Day, and margin expansion is also tracking ahead of plan, so early progress is stronger than expected. The biggest challenge is sustaining this growth on tougher year-over-year comparisons in the second half and beyond, though the company notes growth is still accelerating on a multi-year basis. With leverage now below the target range, the company's top capital allocation priority is organic investment in its existing high-return growth opportunities, which the company views as lower risk than M&A. For M&A, the company will take a disciplined approach, focusing on targets that complement its existing portfolio, fill strategic white space, and accelerate growth in emerging areas the company has identified via long-range planning, with a preference for acquisitions that can speed up market entry vs. building new capabilities internally.