Executive Summary / Key Takeaways

• Helios Technologies has reached a significant turning point, returning to year-over-year sales growth of 13% in Q3 2025, driven by strong Electronics segment performance and market share gains in Hydraulics despite challenging end markets.
• The company's strategic realignment, including the divestiture of Custom Fluidpower and the refocusing of i3 Product Development, is enhancing its margin profile and concentrating resources on core, high-return opportunities.
• Helios boasts a robust technological moat in highly engineered motion control and electronic solutions, with proprietary cartridge valve designs and advanced software platforms like Cygnus Reach, providing tangible performance and efficiency benefits over competitors.
• Strong cash flow generation has enabled consistent debt reduction, improving the net debt-to-adjusted EBITDA leverage ratio to 2.4x, with a target of approximately 2x by year-end 2025, providing significant capital allocation flexibility for future organic and inorganic growth.
• Management's outlook for Q4 2025 and full-year 2025 indicates continued growth and margin expansion, underpinned by improving market sentiment, a strengthening order book, and an accelerated pace of new product introductions.

The Engineered Ascent: Helios's Strategic Evolution and Technological Edge

Helios Technologies, Inc. (NYSE: HLIO) stands as a global leader in highly engineered motion control and electronic controls technology, serving diverse end markets from construction and agriculture to recreational vehicles and health and wellness. Founded in 1970 as Sun Hydraulics Corporation, the company embarked on a transformative journey in 2016 with the acquisition of Enovation Controls, marking its strategic entry into the electronics segment and diversifying its product portfolio. This evolution culminated in its rebranding to Helios Technologies in 2019, reflecting a broader ambition to offer integrated system solutions.

The company's overarching strategy centers on being a premier provider in niche markets, delivering innovative products and solutions through both organic development and strategic acquisitions. This approach is now underpinned by a "in-the-region-for-the-region" operating model and a revitalized customer-centric, sales-oriented culture, shifting from a passive "fishing" approach to an aggressive "hunting" for new business wins.

Helios's competitive advantage is deeply rooted in its technological differentiation across both its Hydraulics and Electronics segments. In Hydraulics, the company's proprietary cartridge valve technology, pioneered by Sun Hydraulics, features a unique floating nose construction. This design ensures self-alignment, delivering superior performance and reliability compared to many competitors' offerings. These valves are engineered to operate reliably at higher pressures, making them suitable for demanding industrial and mobile applications. Furthermore, its fluid conveyance technology, including quick-release couplings from brands like Faster, allows for rapid, leak-free connection and disconnection in hydraulic circuits, ensuring high performance under extreme temperatures and pressures. These innovations provide tangible benefits such as enhanced operational efficiency, reduced downtime, and extended equipment lifespan, contributing to stronger customer loyalty and pricing power in targeted markets.

The Electronics segment differentiates itself through complete, fully-tailored display and control solutions, complemented by extensive application expertise and deep capabilities in software, embedded programming, and hardware engineering. A key technological differentiator is the Cygnus Reach software platform, acquired through i3 Product Development. Cygnus Reach offers remote diagnostic capabilities, enabling real-time insights into equipment performance, preventive maintenance reminders, and early detection of potential failures. This technology has already found application in the commercial foodservice market with partners like Alto-Shaam, providing a significant value proposition for OEMs by reducing service costs and improving operational uptime. Another innovation, the No Roads application, is targeting the recreational marine and off-road sectors, aiming to conquest sales from competitors through advanced software-driven features. Helios is committed to accelerating its pace of new product launches, with management indicating "more product coming in the next 18 months than we have launched in the last 10 years." Recent introductions like the new Multi-Faster (offering higher flow rates and more applications), Multi-Slide for compact excavation equipment, Balboa's PureZone water chemistry management solution, and Enovation Controls' S35 and P70 displays, are designed to generate incremental revenue and expand into adjacent markets.

Competitive Positioning and Market Dynamics

Helios operates within a competitive landscape dominated by larger, more diversified players such as Parker Hannifin Corporation (PH), Eaton Corporation plc (ETN), and Emerson Electric Co. (EMR). While these rivals possess broader global reach, extensive R&D budgets, and greater economies of scale, Helios carves out its niche through specialized expertise and customized solutions. For instance, in hydraulics, Helios's focus on high-performance cartridge valves and quick-release couplings allows it to offer superior durability and efficiency in specific applications, potentially outperforming PH's broader offerings in niche customization. Similarly, in electronics, Helios's targeted solutions for specialty vehicles and marine applications provide a more focused and efficient approach to custom instrumentation compared to ETN's or EMR's wider power management and automation portfolios.

The company's "in-the-region-for-the-region" strategy has proven to be a crucial competitive advantage, particularly in light of evolving global trade policies and tariffs. Helios can leverage its manufacturing footprint in the Americas (including Mexico), EMEA, and APAC (including China) to mitigate tariff impacts and capitalize on opportunities. For example, U.S.-based manufacturing provides a competitive edge against Chinese-manufactured imports, creating "sales conquest opportunities" for Helios. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, the company's strong performance in specific segments suggests effective market penetration. However, Helios's smaller operational scale compared to its larger rivals can lead to higher manufacturing costs and potential supply chain dependencies, which could impact profitability and market share in price-sensitive segments.

Financial Performance and Operational Momentum

Helios Technologies has demonstrated resilience and a return to growth in a dynamic market environment. For the three months ended September 27, 2025, the company reported net sales of $220.30 million, a significant 13.3% increase year-over-year. This growth was particularly strong in the Electronics segment, which saw sales surge by 21.4% year-over-year, driven by a record quarter for Enovation Controls due to returning demand in the recreational industry. The Hydraulics segment also contributed positively, with a 9.2% year-over-year sales increase, benefiting from improved demand in mobile and agriculture markets.

Profitability metrics reflect this positive momentum. Gross profit for Q3 2025 rose 20.7% year-over-year to $73.0 million, with the gross profit margin expanding by 200 basis points to 33.1%. This improvement was primarily attributed to better capacity utilization from higher volumes, a favorable product mix, and operational efficiency gains, which more than offset tariff headwinds. Sequentially, gross margin improved 130 basis points from Q2 2025 to Q3 2025, demonstrating strong incremental leverage from increased volume, particularly in the Electronics segment.

Operating income for Q3 2025 was $1.30 million, a decrease of 94.1% year-over-year. This decline was primarily due to a $25.90 million non-cash goodwill impairment charge related to i3 Product Development (i3PD) within the Electronics segment. Prior to this impairment, operating income as a percentage of sales would have increased by 97 basis points to 12.40%, highlighting the underlying operational improvements. Net income for the quarter was $10.30 million, and diluted non-GAAP earnings per share (EPS) increased 22% year-over-year to $0.72, showcasing the strong operating leverage of the business.

For the nine months ended September 27, 2025, net sales were $628.20 million, a modest 0.3% increase over the prior year, while net income stood at $28.90 million. The company's rigorous focus on cash management has yielded impressive results, with a trailing 12-month free cash flow conversion rate of 223% as of Q3 2025. Cash provided by operating activities totaled $81.30 million for the nine-month period.

Liquidity and Capital Allocation Discipline

Helios has consistently prioritized strengthening its balance sheet and improving financial flexibility. The company has reduced debt for nine consecutive quarters, bringing its net debt-to-adjusted EBITDA leverage ratio down to a healthy 2.4x as of Q3 2025, a notable improvement from 3x a year prior. With $54.90 million in cash and cash equivalents and $360.30 million of available credit on its revolving facilities, Helios possesses substantial liquidity. The company aims to further reduce its leverage ratio to approximately 2x by year-end 2025, leveraging Q4 cash flow from operations and the proceeds from the Custom Fluidpower (CFP) divestiture.

The divestiture of CFP on September 27, 2025, for approximately $54 million USD equivalent, was a strategic move to optimize the portfolio and improve margin rates. While CFP was a growing business, its margin profile was dilutive to the consolidated entity, and its sales were largely unrelated to Helios's core offerings. The proceeds from this sale are earmarked primarily for further debt reduction and investment in core manufacturing and innovation, reinforcing the company's disciplined capital allocation strategy. Helios also initiated a multi-year share repurchase program, authorizing up to $100 million in repurchases, with $90.80 million remaining as of September 27, 2025, demonstrating a commitment to maximizing shareholder value. The company has also maintained its long-standing dividend history for over 28 years.

Outlook and Forward Trajectory

Management's outlook for the remainder of 2025 and into 2026 reflects cautious optimism and a clear path for continued growth. For the fourth quarter of 2025, Helios expects sales in the range of $192 million to $202 million, representing a 10% increase year-over-year at the midpoint, or a 20% growth rate when adjusted for the $15.6 million in CFP sales from the prior year. Full-year 2025 sales, adjusted for CFP, are projected to grow 4% over fiscal 2024 at the midpoint.

Adjusted EBITDA margin for Q4 2025 is anticipated to be between 20% and 21%, maintaining the company's return to the "20% plus level." For the full year, adjusted EBITDA margin is expected in the range of 19.1% to 19.4%, with the midpoint exceeding the original guidance from February by 25 basis points. Diluted non-GAAP EPS for Q4 2025 is projected to be $0.67 to $0.74, more than doubling over the prior year at the midpoint, and full-year diluted non-GAAP EPS is expected to be $2.43 to $2.50, 12% above the high end of the original guidance.

This positive outlook is predicated on several key assumptions: a turning upward in broader macro and customer sentiment, stabilizing industrial indicators, and improving early cycle demand patterns across end markets. The recreational and agriculture markets, in particular, are showing signs of recovery with healthier dealer inventory levels. Management expresses "conviction that we will enter the year in 2026 with growth," benefiting from easier year-over-year comparisons in the first half. The company's "self-help initiatives," including operational streamlining and strategic investments in innovation, are expected to continue driving results.

Risks and Challenges

Despite the positive momentum, Helios faces several risks. Macroeconomic uncertainty, inflationary pressures, and ongoing geopolitical conflicts in Ukraine and the Middle East continue to pose challenges. Tariffs, particularly on goods imported into the U.S. from China, represent a significant exposure, with some products facing tariffs up to 55%. While Helios is actively implementing mitigation strategies—such as leveraging regional production, alternative sourcing, and targeted pricing actions—there is no assurance that all tariff-related costs can be offset, and increased prices could potentially impact demand. The capital goods industries, including Hydraulics and Electronics, remain subject to economic cycles, and a prolonged downturn could impact demand. Furthermore, exposure to variable rate debt creates interest rate risk, with a one percentage point increase potentially impacting annual financing costs by approximately $4.30 million.

Conclusion

Helios Technologies is emerging from a period of market headwinds with renewed vigor, demonstrating a compelling investment thesis built on strategic realignment, technological leadership, and disciplined financial management. The return to year-over-year sales growth in Q3 2025, coupled with expanding margins and robust cash flow generation, signals a significant turning point for the company. Through its proprietary cartridge valve technology, advanced electronic control solutions, and innovative software platforms like Cygnus Reach, Helios maintains a strong competitive moat, delivering tangible benefits to its diverse customer base.

The company's proactive portfolio optimization, exemplified by the CFP divestiture and i3PD refocus, along with its "in-the-region-for-the-region" strategy, positions it to enhance profitability and mitigate external risks like tariffs. With a rapidly improving balance sheet and a clear capital allocation framework that prioritizes organic growth, debt reduction, and shareholder returns, Helios is well-prepared to capitalize on improving market conditions. The outlook for continued growth and margin expansion, supported by a strengthening order book and an accelerated pace of innovation, underscores management's confidence in the company's ability to deliver lasting value to its shareholders.