Executive Summary / Key Takeaways

• Strategic Transformation Underway: Helios Technologies is actively reshaping its portfolio and operations, exemplified by the divestiture of Custom Fluidpower (CFP) and internal restructuring, to enhance its margin profile and focus on core, high-value opportunities.
• Innovation-Driven Growth: The company is accelerating new product launches across its Hydraulics and Electronics segments, targeting incremental revenue streams and leveraging differentiated technology to expand its competitive moat.
• Financial Discipline and Strengthening Balance Sheet: Helios has consistently reduced debt, improved its leverage ratio to 2.6x, and initiated a share repurchase program, demonstrating a commitment to disciplined capital allocation and shareholder returns.
• Market Stabilization and Outlook: Despite persistent weakness in some end markets, management observes signs of stabilization in agriculture, mobile, European construction, and health & wellness, projecting a return to year-over-year sales growth in the second half of 2025.
• Competitive Edge Amidst Tariffs: Helios' "in-the-region-for-the-region" strategy and U.S. manufacturing footprint provide a competitive advantage against rivals reliant on imports, offering opportunities for market share gains and tariff mitigation.

A Legacy of Innovation Meets a Future of Focused Growth

Helios Technologies, Inc. (HLIO) operates at the intersection of engineered motion control and electronic controls technology, serving diverse end markets from construction and agriculture to marine and health & wellness. Founded in 1970 as Sun Hydraulics, the company has undergone a significant transformation, evolving from a specialized hydraulics provider into a diversified technology solutions leader through strategic acquisitions like Enovation Controls in 2016, Joyonway in China, and NEM. This journey has equipped Helios with a broad product portfolio and a global manufacturing footprint, positioning it as a critical supplier in its niche markets.

The industrial landscape in which Helios operates is characterized by cyclical demand, with recent periods marked by persistent weakness across many end markets. For instance, the U.S. index of hydraulic product shipments decreased 9% in the first half of 2025, with orders down 3%. However, there are emerging green shoots, such as the European agricultural machinery industry showing upward trends in sentiment and turnover expectations for the next six months, and European construction equipment sales growing in June for the first time in 23 months. The semiconductor and electronics components sector also saw its fifth sequential quarterly output increase in Q2 2025. Against this backdrop, Helios is executing a strategic repositioning, shedding non-core assets and reorganizing operations to enhance its margin profile and accelerate profitable organic growth.

Technological Moats and the Innovation Engine

Helios' competitive advantage is deeply rooted in its differentiated technology across both its Hydraulics and Electronics segments. In Hydraulics, the company's cartridge valve technology, pioneered by Sun Hydraulics, features a fundamentally different design platform employing a floating nose construction. This design provides self-alignment characteristics, offering superior performance and reliability advantages compared with most competitors' offerings. These valves are designed to operate reliably at higher pressures, making them suitable for demanding industrial and mobile applications. This proprietary technology translates into tangible benefits for customers, such as enhanced system efficiency and durability, and for Helios, it supports premium pricing and fosters strong customer loyalty.

Recent innovations further underscore this technological leadership. Sun Hydraulics launched a High Capacity Electro-Proportional Flow Control Valve solution, the FPJP valve, co-developed with Helios' Electronics operating company, Enovation Controls. This collaboration exemplifies Helios' integrated strategy, delivering advanced electro-hydraulic solutions. Additionally, ENERGEN has been commercialized with multiple pilot customers, poised for production.

In the Electronics segment, Helios provides complete, fully-tailored display and control solutions. Its expertise spans software, embedded programming, hardware, and sustaining engineering. The company's Enovation Controls brand, for example, does not compete on price but on differentiation, winning business through its robust, environmentally sealed controllers, plug-and-go CAN-based instruments, and advanced software. New product launches include the S35 and P70 displays for recreational off-road and commercial vehicle markets, and Balboa Water Group's Compact Clim8zone II Heat Pump and SpaTouch4 display with upgraded software for the health & wellness market.

A significant area of technological advancement is in software and services. The Cygnus Reach remote support technology, integrated into Alto-Shaam's commercial kitchen solution, provides real-time insights into oven performance and remote diagnostic capabilities, enabling preventive maintenance. Furthermore, Helios' strategic partnership with WaterGuru involves designing and manufacturing hardware and cassettes for the spa market, integrated with a mobile app. This initiative not only represents a new revenue stream but also a "conquest win" as Helios displaced a China-based supplier for WaterGuru's manufacturing, leveraging its "in-the-region-for-the-region" strategy. These technological differentiators are critical to Helios' competitive moat, enabling higher average selling prices, lower costs through efficient design, and better margins, all contributing to its long-term growth strategy.

Competitive Landscape and Strategic Positioning

Helios operates in a competitive environment alongside larger, more diversified players like Parker Hannifin Corporation (PH), Eaton Corporation plc (ETN), and Emerson Electric Co. (EMR). While these competitors boast greater scale, broader product portfolios, and extensive R&D resources, Helios carves out its niche through specialized expertise and a nimble operational structure.

Compared to Parker Hannifin, Helios' specialized cartridge valve technology offers superior performance in specific fluid control applications, potentially allowing it to capture premium pricing and market share in demanding segments where precision and reliability are paramount. However, PH's vast global distribution and comprehensive system integration capabilities present a challenge to Helios' overall market reach.

Against Eaton, Helios' Electronics segment, particularly Enovation Controls, differentiates through tailored solutions for specific applications like recreational marine and off-highway vehicles, often with greater reliability in harsh environments. Eaton's emphasis on broader power management and integrated electrical-hydraulic systems, however, could offer more bundled solutions, potentially pressuring Helios' market share in overlapping areas.

Emerson Electric, with its focus on automation and digital transformation, represents a formidable competitor in the electronics space. While Helios' components are renowned for durability, EMR's digital prowess and IoT-enabled products could challenge Helios' technological adaptability. Helios' response is to double down on app development and hardware-enabled software sales, ensuring its products remain at the forefront of innovation.

A key strategic differentiator for Helios is its "in-the-region-for-the-region" manufacturing strategy. This approach, which involves producing products closer to where they are consumed, has proven invaluable in navigating the complex and fluid tariff environment. With tariffs on products imported from China reaching up to 55% under current structures, Helios' U.S. and Mexico (Tijuana facility, over 95% USMCA compliant) manufacturing capabilities offer a significant cost advantage over competitors reliant on Chinese imports. This has created "sales conquest opportunities," allowing Helios to win business from rivals facing punitive tariffs. For instance, in the health & wellness market, Helios' Joyonway acquisition in China has enabled local manufacturing for Chinese OEMs, with 65% of Balboa-branded products now built in China for local customers, up from 0% two years ago. This adaptability allows Helios to play offense, even as the tariff landscape remains unpredictable.

Financial Performance: A Turnaround in Progress

Helios delivered a better-than-expected first half of 2025, demonstrating resilience despite challenging end markets. In Q2 2025, consolidated net sales declined 3.4% year-over-year to $212.5 million, yet exceeded internal expectations, aided by a $1.6 million favorable foreign exchange impact. This performance reflects solid progress against the company's 2025 key focus areas.

Profitability metrics, while still impacted by lower volume, show signs of improvement. Q2 2025 gross profit decreased 4.4% to $67.5 million, with gross margin contracting 30 basis points to 31.8%. However, sequentially, gross margin expanded 120 basis points on higher volume, primarily in the Hydraulics segment. Consolidated operating income decreased 15.8% to $21.9 million, with operating margin at 10.3%. Adjusted EBITDA margin for Q2 2025 was 18.6%, above outlook, despite being somewhat dampened by unfavorable product mix and tariff impacts. Net interest expense decreased by $1.5 million to $7.0 million due to lower debt outstanding.

Segment performance highlights the mixed market conditions. The Hydraulics segment saw sales decline 3.3% to $140.9 million, primarily due to softness in industrial and mobile markets, though agriculture sales were flat year-over-year. Despite this, Hydraulics gross profit grew 3.6% to $46.5 million, with gross margin expanding 220 basis points to 33.0%, driven by lower material and direct labor costs. Operating income for Hydraulics increased 4.6% to $25.0 million.

The Electronics segment experienced a 3.5% sales decline to $71.6 million, with recreational markets showing the most significant weakness. Gross profit for Electronics decreased 18.3% to $21.0 million, and gross margin declined 530 basis points to 29.3%. This was primarily due to higher freight and duties costs, including a $2.4 million expense from a product import classification change, higher material costs, and an unfavorable product mix towards lower-margin Balboa sales.

Helios' commitment to financial discipline is evident in its robust cash flow generation and debt reduction efforts. The company generated a near-record $37 million in cash from operations in Q2 2025, a 10% improvement year-over-year despite lower sales, driven by effective working capital management. This marks the lowest cash conversion cycle since the first half of 2022. Helios has reduced its total debt by $67 million from the year-ago period, bringing its net debt to adjusted EBITDA leverage ratio down to 2.6x, with a target of sub-2x for greater capital allocation flexibility. Capital expenditures in Q2 2025 were $5.4 million, prioritized for maintenance and productivity enhancements. The company also initiated its $100 million share repurchase program, buying back 200,000 shares at an average price of $32 per share in Q2 2025, with $93.5 million remaining.

A significant strategic move is the definitive agreement to sell Custom Fluidpower (CFP) for AUD 83 million (approximately $54 million USD). While CFP generated AUD 92 million ($61 million equivalent) in sales and $8 million in adjusted EBITDA in fiscal year 2024, its EBITDA profile was dilutive to Helios' consolidated margins. The divestiture, expected to close in 60-90 days, will reduce sales and earnings run rates but is anticipated to improve margin rates for the Hydraulics segment and the consolidated company. Proceeds will primarily be used for further debt reduction and investment in core manufacturing and innovation.

Outlook and Growth Catalysts

Helios' management is cautiously optimistic about the remainder of 2025, projecting a return to year-over-year sales growth in the second half. This optimism is underpinned by a strengthening order backlog, which has grown every month so far this year—a trend not seen since early 2021. The company anticipates Q3 2025 sales in the range of $208 million to $215 million, representing approximately 9% growth over the prior year at the midpoint, including CFP's contribution. Adjusted EBITDA margin is projected to be between 19.5% and 20.5% for Q3, showing sequential improvement, and diluted non-GAAP earnings per share are expected to be $0.60 to $0.68.

For the full year 2025, Helios has expressed confidence in growing annual sales above 2024 levels, with a possible outcome of exceeding the high-end of its initial $825 million estimate, depending on the CFP transaction timing. Management expects fourth-quarter sales growth to accelerate further, driven by the strengthening order book, anticipated end-market performance, and softer year-ago comparables.

Key market inflections are expected to drive this growth. Agriculture, mobile, European construction, and health & wellness markets are showing signs of stabilization, with EMEA regional sales strengthening for the first time in approximately two years. While industrial and recreational markets have seen persistent weakness, management anticipates stabilization in industrial and an acceleration in recreational markets based on customer orders. Distributor inventories have also declined to levels suggesting a potential restocking phase.

Tariff impacts, initially estimated at $15 million for the second half of 2025, have been reduced to about $8 million in direct costs, with management confident in offsetting a large portion through mitigation efforts. These include alternative sourcing, transferring manufacturing to APAC facilities for China-based customers, and targeted surcharges. Helios' significant investments in capacity over the past few years mean it will not require further expansions for multiple years, allowing it to leverage existing infrastructure for strong incremental margins as volume returns.

Conclusion

Helios Technologies is at a pivotal juncture, strategically repositioning itself to capitalize on its foundational strengths in highly engineered motion control and electronic technologies. The company's disciplined approach to capital allocation, highlighted by consistent debt reduction and the strategic divestiture of Custom Fluidpower, underscores a clear commitment to enhancing its margin profile and focusing on core, high-return opportunities.

Through accelerated innovation and a renewed customer-centric "hunting" strategy, Helios is building momentum for profitable organic growth. Its differentiated technology, from advanced cartridge valves to sophisticated electronic controls and software solutions, provides a robust competitive moat, enabling market share gains even against larger rivals. As industrial end markets show signs of stabilization and the company's operational efficiencies take hold, Helios is well-positioned to translate this strategic transformation into expanded margins and superior shareholder value. The path ahead requires continued execution amidst macroeconomic uncertainties and evolving trade dynamics, but Helios' proactive measures and technological leadership offer a compelling investment thesis for discerning investors.