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helios technologies inc (NASDAQ:HLIO)
Q1 2020 Earnings Call
May 5, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Helios Technologies First Quarter 2020 Financial Results. [Operator Instructions]

I would now like to turn the conference over to your host, Ms. Karen Howard, Investor Relations for Helios Technologies. Thank you. You may begin.

Karen L. Howard -- Investor Relations

Thank you, operator, and good morning, everyone. Welcome to the Helios Technologies First Quarter 2020 Financial Results Conference Call. On the line with me is Tricia Fulton, our Interim President and Chief Executive Officer. Tricia was appointed to this interim role as announced on April 9, upon separation from the company of our former President and CEO. Tricia also continues to serve as our Chief Financial Officer. She will review the results that were published in the press release distributed after yesterday's market close. If you do not have that release, it's available on our website at www.hlio.com. You'll also find slides there that will accompany our discussions today. If you look through the slide deck, on slide two, you'll find our safe harbor statement.

As you may be aware, we will make some forward-looking statements during this presentation and also during the Q&A. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from where we are today. These risks and uncertainties and other factors are provided in the earnings release as well as in other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our website or at www.sec.gov.

I also want to point out that during today's call, we will discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of comparable GAAP to non-GAAP measures in the tables that accompany today's earnings release as well as in the slides. Tricia will summarize our financial performance and strategic progress during the first quarter of 2020 as well as her perspective on our outlook. After that, she will go through the details of our financial results for the first quarter before we open up the line for questions and answers.

And with that, it's now my pleasure to introduce Tricia.

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Thank you, Karen. Good morning, everyone. I will start on slide three. We were pleased with our first quarter results, demonstrating strong top line revenue and operating performance. We realized consolidated sales of almost $130 million. Our backlog continued to support our sales, and order levels are relatively stable throughout the quarter. Most of the quarter was business as usual for us until the COVID-19 pandemic conditions began to affect our operations in mid-March. The shutdown of our factory in Italy due to government mandate had about a $5 million unfavorable impact on first quarter sales. Our strong operational execution in Q1 was offset by a noncash goodwill impairment charge for our faster reporting unit. This goodwill adjustment of $39.1 million was driven by the uncertainty of the longer-term impacts of COVID-19 and reduced EPS by $0.99 per share, resulting in a GAAP EPS loss for the quarter. However, from an operational performance standpoint, we realized a solid adjusted EBITDA margin and non-GAAP cash EPS relative to our sales levels.

Please turn to slide four, and I'll summarize our strategic business highlights for the first quarter of 2020. Despite lower sales, we reported gross margin expansion compared with the prior year, evidencing our ability to manage cost and continue productivity improvements. Recall that at the beginning of last year, we completed the facility consolidation project for our cartridge valve technology, or CVT business. As we progressed during 2019, we experienced productivity improvements from that initiative and further continuation was evidenced in our first quarter 2020 results as well. We have completed the infrastructure of the CVT engineering center of excellence, and it is mostly operational. The final pieces of equipment should arrive and be installed by late summer. This facility will provide us with the R&D and testing capability needed for our new product development to feed our organic growth objectives for CVT as part of Vision 2025.

Importantly, increasing cash flow and reducing debt have historically been focused goals for us, and we have made very good progress over the past couple of years. Additionally, in the first quarter of 2020, we have reduced our net debt by over $11 million, expanding our already strong liquidity position and maintaining our 2.1 times net debt to adjusted EBITDA ratio. New product development has been and continues to be an important component of our Vision 2025 strategic plan. We intended to introduce our new ACE software tool and MCx hydraulic controllers at the CONEXPO trade show in Las Vegas in early March. Due to safety concerns for the health and well-being of our employees, we were unable to attend this event. We believe this product is critical to our electrohydraulic strategy, and therefore, did not want to delay its launch.

Our team has been conducting significant virtual new product introductions and training for our channel partners and customers. ACE enabled system experts with little to no software coding experience to create full-featured machine control applications efficiently. Paired with our new MCx hydraulic controllers, ACE brings together the entire control system and intelligently integrates displays, power distribution modules, valves, actuators, joysticks and engine data for robust and exceptional control. The game-changing speed and accuracy of ACE, combined with robust highly configurable hardware of MCX controllers, is unlocking a host of possibilities for our customers. The versatility of the products lends themselves to a variety of applications and end markets.

Let's turn to slide five for our perspective on outlook in light of the COVID-19 pandemic before we review our financial performance in more detail. These are certainly unprecedented times. As a result of government mandates, our China operations were shut down for about six weeks beginning in February through mid-March. Production at our Italian facility was shut down for about four weeks in March and April. Although customer shipping activities continued. After three additional weeks, where our ability to manufacture at full capacity in that facility was limited to only certain government-approved activities, I'm pleased to report that as of yesterday, we are now able to engage in full production at our faster facility in Italy. All of our other significant operations were deemed essential and are running near full capacity. In all facilities, we implemented substantial procedures to limit the spread of COVID-19 and keep our employees safe and healthy while responding to the needs of our customers.

Several of our customers' facilities were shut down under government mandates, especially in Europe. For the most part, our supply chain hasn't been significantly impacted. When we provided you with our business update at the end of March, we withdrew our 2020 guidance. At that time, most of our businesses had not yet been significantly impacted by COVID-19. However, the economic impact of the pandemic has negatively affected our sales and orders for April. We expect second quarter headwinds, but anticipate that the largest impact was in the month of April due to shutdowns of many of our global OEM customers. A portion of our backlog has been postponed from April to later in the second quarter and a smaller number of orders have been canceled. In other cases, we do not have updated order schedules from OEMs due to their extended shutdowns.

Given this heightened uncertainty, we don't have sufficient visibility to comment on the remainder of the year. Accordingly, we have completed multiple planning scenarios for 2020 at varying demand levels. We have already instituted certain cost-containment steps in an effort to mitigate the effects of the downturn. These include the following: a 20% temporary salary reduction for all corporate officers; permanent layoffs and temporary salary reductions at Enovation Controls; reduction in the use of contingent labor; a hiring freeze; deferral of some capital expenditures; and our Board has agreed to temporarily reduce their compensation by 20%.

We have identified additional actions that we could take if needed to further protect the health and liquidity of our business. These include actions such as postponing additional nonessential capital expenditures, eliminating our temporary workforce, reducing or eliminating overtime, applying additional salary reductions, reducing working hours to lower payroll expense, executing furlough programs and/or additional layoffs and further reducing discretionary spending. The extent of such actions will be determined by the magnitude and duration of the economic downturn. Our management team will continue to monitor and assess the impact of economic changes on our businesses and take the necessary actions.

I will now turn to slide six to review the financial results for the first quarter in a bit more detail. Sales were down $15.3 million or 10% compared with last year's quarter, excluding a $2.1 million unfavorable currency impact. Approximately $5 million of the decline was attributable to the COVID-19 pandemic. On a regional basis, during the first quarter of 2020, our sales to APAC were about the same as last year's first quarter despite a pause in China for COVID-19. Sales to the Americas and EMEA markets declined by 13% and 19%, respectively. As a percent of the consolidated total, sales to the Americas, EMEA and APAC regions were 45%, 28% and 27%, respectively, in the first quarter.

As I mentioned a few moments ago, our GAAP EPS looks distorted for the quarter, reporting a loss of $0.54. It includes a $0.99 per share noncash charge for goodwill impairment relating to our faster business unit, resulting from the uncertainty of our end markets in this COVID-19 environment. Despite lower revenue in the quarter, operational profitability remained relatively comparable with the prior year with consolidated adjusted EBITDA margin at 23.5% versus 23.7% last year. In dollars, our adjusted EBITDA was down only 12% on the 12% reduction in consolidated sales. Non-GAAP cash earnings per share were $0.56 compared to $0.63 in last year's first quarter, an 11% decline.

Again, solid performance on a 12% reduction in sales. The adjustment to arrive at non-GAAP cash earnings consist primarily of the goodwill impairment charge in this year's quarter and amortization of intangible assets in both years as well as some other nonrecurring items and the tax impact of these adjustments. These are shown in the reconciliation tables in the back of the slide deck and release.

Please turn to slide seven for a review of our Hydraulics segment first quarter operating results. Consistent with prior periods, I want to point out that acquisition-related costs, including amortization and the goodwill impairment charge, are not included in our operating segment numbers. They are accumulated in our corporate and other segment reported in the tables in the back of our earnings release and slides. Sales for the Hydraulics segment declined 9%, excluding currency, which had a $2 million unfavorable impact. The COVID-19 pandemic reduced sales by approximately $5 million in the quarter. From a geographic perspective, excluding the effects of currency, we saw 3% year-over-year growth for the quarter in the APAC region, which was offset by a 10% decline in the Americas and an 18% decline in the EMEA market.

The primary drivers for the decline in the Americas and EMEA regions were softer end market demand and the impact of regulatory mandates associated with COVID-19. Due to the lower sales volume, gross profit declined 7% for the quarter, but gross margin grew by 160 basis points. The gross margin expanded as improved productivity and cost management efforts more than offset unfavorable foreign currency and the government-mandated closure of the facility in Italy due to COVID-19. Hydraulics segment operating income decreased $2.3 million due to lower revenue in the quarter. However, cost management efforts drove a $600,000 reduction in FDA expenses, which, together with the gross margin expansion, resulted in a 30 basis point increase in operating margin to 20.7% in the quarter.

Please turn to slide eight for a review of our Electronics segment first quarter operation results. Revenue was down 16% compared with the first quarter of last year. The decrease was due to continued softer demand in the recreational and oil and gas end markets as well as the impact of the customer contracts that we renegotiated last year. Foreign currency and COVID-19 pandemic had a minimal impact on electronic sales this quarter. First quarter gross margin improved 180 basis points to 47.5%, reflecting continued cost management efforts and a nonrecurring benefit from the release of contractual obligations. Due to the lower revenue, operating margin in the first quarter of 2020 was 18.7% of sales compared with 21.4% in the first quarter of 2019.

Please turn to slide nine for a review of our cash flow and capitalization. In the first quarter of 2020, we generated over $15 million of net cash from operating activities and over $12 million of free cash flow, up from $11 million of free cash flow in the first quarter of 2019. Our capex for the quarter was $2.9 million, down from $8.8 million in the same period of 2019 due to a conscious reduction in light of reduced end market demand in the COVID-19 pandemic. Due to the current economic conditions and uncertainty of future cash flows, capital expenditure projects are being evaluated and several have been reprioritized and deferred. We are currently only proceeding with high priority and critical projects. Regarding capitalization in the first quarter, we reduced our gross debt by $6 million and our net debt by over $11 million. At the end of the first quarter, our net debt to adjusted EBITDA remained at 2.1 times, consistent with year-end 2019 We continue to have ample liquidity.

At the end of the quarter, we had over $195 million available on our revolving credit facility. We also have a $200 million accordion, which is subject to certain pro forma compliance requirements. Our scenario analyses consider the impact on cash flows, and we believe that we have sufficient liquidity to cover our operating cash needs for at least the next 12 months. These analyses also indicate that we maintain compliance with the covenants under our credit facility and remain cash flow positive for the year under all scenarios.

Please turn to slide 10 for our conclusion before we open the lines for Q&A. While we are faced with significant near-term uncertainty, which may require adjustments to the timing of some of our investments, we remain committed to our Vision 2025 strategy. Our goal is to achieve global technology leadership in the industrial goods sector by exceeding $1 billion in sales while maintaining superior profitability and financial strength. We have confidence in the abilities of our operating unit Presidents to lead their businesses through this economic downturn and drive long-term organic growth. We are fortunate to have well-respected brands, a dedicated global employee base and ample liquidity. Leveraging this solid foundation, we believe that we will emerge as an even stronger Helios organization.

Now let's open the lines for Q&A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Brian Drab with William Blair. Please proceed with your question.

Brian Drab -- William Blair -- Analyst

Good morning, thanks for taking my questions.

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Hey, Brian.

Brian Drab -- William Blair -- Analyst

Hey. Trish, can you just rewind just 30 seconds and say talk about that scenario where you said we have ample, I think you said ample liquidity or ample cash for the next 12 months. What was that scenario?

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Yes. Yes. I mean we expect cash flow to be positive for the year. How that plays out throughout the year in the quarters is still, I think, a little open. But each quarter, we still expect to be cash flow positive in all of our scenarios.

Brian Drab -- William Blair -- Analyst

Okay. So you weren't highlighting some scenario like a really worst-case scenario in which you would run out of cash in 12 months that wasn't...

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

No. No, no. That's just to show that for the next 12 months that we have ample liquidity. That's also in the Q and was a requirement to be included in the Q.

Brian Drab -- William Blair -- Analyst

Yes. Okay. I just wanted to clarify that. And then I know the backlog was has been very supportive of the revenue here throughout the year, and you said some of it was pushed into the back half of the second quarter. I guess can you kind of update us on what that level of backlog is now relative to where it was beginning of the quarter and the beginning of the year? And how much should that support revenue throughout the back half of 2020?

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Yes. So our overall backlog is still very consistent at the end of April with what we were seeing at the beginning of the year. So overall, the backlog hasn't changed significantly. We do still have significant past due backlog in the CVT business that we've said before and still believe will carry us through most of Q2 from a shipment perspective. But we have seen a little bit of the backlog shift out of Q2 and into Q3 and Q4 from some of the OEM shutdowns that have happened mostly in April.

Brian Drab -- William Blair -- Analyst

Okay. Is there any way you can say like how much backlog there is in that business relative to revenue expectations for or you're not giving any guidance. So I don't sorry, I'm just curious is that sustained revenue potentially around these levels? Or is it only a fraction of kind of the revenue that you've been running at that run rate?

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Yes. The run rates on the backlog have remained pretty consistent, and we've been happy with that. It's just a little bit of a shift in when those need to be delivered. But the backlog has held up pretty well through this. It's really just the movement between the months. We've had some cancellations, as we noted in the prepared remarks, but they've been pretty minimal at this point. As you know, we get changing information every day from customers, from OEMs and from the distribution network. So we're having to adapt almost daily to changes that we're seeing coming through. But overall, it's holding up pretty well from a backlog perspective.

Brian Drab -- William Blair -- Analyst

Okay. And then just one last one, on the Electronics side, is there any change in your in the programs and platform opportunities that you have going into 2021, any conversations around those being delayed or pushed out? Or is 2021 still expected to be a good growth year for Electronics?

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Yes. 2021 programs are still holding up. We haven't really seen any changes at all in those programs. We have seen some of the 2020 rollout extend by one month at this point, which is pretty much reflective of what the OEMs were shut down. But no changes to 2021 at this point. So we're happy to hear that.

Brian Drab -- William Blair -- Analyst

Okay, thanks very much.

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Yeah. Thank you.

Operator

Thank you. Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Please proceed with questions.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Hey, good morning. So just I guess if you can, obviously, no guidance, but if you could give us a sense of what you're seeing from a sales standpoint in April or in order trends, just to kind of give us a sense of, I think most companies are seeing April is maybe the worst, and I know some of your peers have been talking about orders or sales and the decline magnitude of 30%, 35%. I'm just trying to understand what you're seeing because it seems like it's holding up better?

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Yes. So as we haven't done in the past, we also are not going to give numbers specifically on orders and backlog related to April at this point since we're not giving guidance. We aren't going to talk a lot about the specifics of sales. But sales and orders did both drop significantly in April, I would say deep into the double digits in both Hydraulics and Electronics segments, with electronics dropping more than what we saw in Hydraulics. Many of the OEM customers were shut down in the Electronics segment. So orders had to be pushed out to later in the quarter or the year. And in some cases, as I stated before, there were smaller amounts of cancellations.

In April, Hydraulics is still supported by backlog, especially in CVT. Shipments were maybe a little bit lower than we expected due to employees being out from COVID-related absences and also the implementation of COVID safety procedures that we put in place in April. Faster also does have some backlog past due that was created as part of their shutdown, and they'll be able to ship some of that. But April was tough for them as well in that regard, but we're able to push it into the back half of Q2.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay. So it's fair to say that like the trend in Electronics is going to be certainly worse than in 2Q than 1Q as well as Hydraulics. Maybe just on the decrementals, I mean they were pretty impressive certainly in Hydraulics. As you see maybe a sharper drop into 2Q, how do you think the decrementals hold up?

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Yes. Just real quick, going back to your first question. I would say, overall, if you're looking at some of our peer reports, our hydraulics did not drop as much as their overall hydraulics did in April, based on some of the information that we've read that came out last week. So I just wanted to point that out before we move on.

With regard to decrementals, in our scenario planning, which consists primarily of scenarios that are down both 15% and 25% on annual sales drops. And those aren't indicative necessarily of what we're seeing, but we wanted to model those out. The decrementals are probably a little bit higher than what some of the peers have come out with. We're looking in the range of 40% to 45% at the adjusted income line. We will pull out all of the costs that we can to protect the decrementals. But certainly, we also want to make sure that we are prepared to return when the economy rebounds.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay, that's helpful, thanks.

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Mig Dobre with Baird. Please proceed with your question.

Mig Dobre -- Baird -- Analyst

Thank you. Good morning, Trish. I mean, on the so you outlined considerable amount of measures on slide five. And I'm wondering as you look at everything that you have listed there, what is the net impact on a company from a dollar standpoint?

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Yes. So it's a little bit difficult to tell for the full year what the impact will be because there are so many options on there and we aren't exactly sure which ones of those will need to trigger. But certainly in Q2, we're looking at somewhere around a $4 million impact from the steps that we have taken in Q2. Those will can continue throughout the rest of the year, but there are additional steps listed there that will further drop our overall cost structure, at least on a temporary basis. And most of these are temporary. There are very few that are a permanent charge for us, but we are able on a temporary basis to control the cost pretty well.

Mig Dobre -- Baird -- Analyst

Okay. If we're looking at a continued sort of challenging environment beyond Q2, and looking at this $4 million savings figure, is the right way to think about it is that we can run rate these savings into the second half? Or are we likely to see additional action on top of the $4 million as you adjust down the line?

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Yes. So the $4 million doesn't necessarily run rate into Q3 and Q4 because some of those were onetime pops that aren't necessarily repeating costs. So the overall cost for the year is something less than the run rate of that $4 million. If we implement only the items that have been put in place so far, it's probably closer to maybe something like $10 million to $10.5 million. But if we implement additional steps, we certainly have additional savings that we can take, probably the largest pop out of that list comes from furlough programs that we could implement, where we could have rolling furloughs for employees if we see a decline in demand that would allow employees to collect unemployment or get supplemental income from the government in addition to the wages we would pay them for reduced hours.

Mig Dobre -- Baird -- Analyst

I see. Okay. And then relative to your comment versus peers that have reported and how your Hydraulics business has trended, when you kind of look at the historical relationship of your business versus your larger peers, what is it that you would call out maybe in April that felt a little bit different that maybe helped your business perform a little bit better than peers?

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Yes. I mean through a lot of April, I mean we still were getting pretty strong demand on the distributor side, even though the OEMs were shutdown and kind of in flux. So I think that we got maybe a little bit of a pop there. But also, I would say our ability to continue to ship out of our past due backlog has carried us. Certainly, don't always want past due backlogs. That means you're not delivering something to a customer at the time that they want it. But we had such high demand throughout 2019 that we went into the year with past due. And I think that we now have the ability to wind that down through Q2 and get that product out to customers. But it certainly supported our sales in Q1.

Mig Dobre -- Baird -- Analyst

Yes. I appreciate that. And I think Brian was trying to understand the dynamic earlier on the call, given that it's hard for us to appreciate how backlog really plays into your revenue and financials for the rest of the year. But I guess what I'm wondering here, and this is my final question, when we're talking to OEM customers and even some of your peers, there is sort of a broad recognition of the fact that the challenge stem is not just from the fact that certain operations have been shut down because of COVID, that clearly has been the case. The broader challenge is that we're in a recession and production schedules have to be adjusted and demand has to be adjusted to reflect that economic reality.

So as you think about how you're managing your business and you're sort of managing the cost structure, I'm wondering if you're sort of internalizing that reality as well or if you're looking at this as being more sort of shutdown-driven with a quicker path to recovery in the back half of the year. And if that's the case, why are you may be thinking different than some of the other folks out there?

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Yes. Clearly, we have a lot of information that's flowing at us at a pretty rapid pace. And it's difficult sometimes to tell exactly which scenario we should be considering at that point. We try to consider all of the scenarios to play it out for a V-shaped recovery, a U-shaped recovery and L-shaped recovery and understand what our triggers were from a cost perspective and when we would need to pull those. I would say all three of the businesses are really running at different cases right now and have to take different steps to mitigate any changes in the order books that we're seeing.

I also think that there's probably some order book changes that have not been reflected in what we're seeing in our backlog yet and that may just be in the form of small delays. It may be that they're trying to figure out their end markets before they adjust their build schedules. So I think we have a couple more weeks probably ahead of us before we can see more clearly what's coming at us, especially from the OEMs that just came back to work this week in Europe primarily, but we also have had some of our recreational end market OEMs that have been off for quite a while as well.

So we're still trying to get through all of those discussions and understand where we are. But honestly, there's some good news out there that we're hearing that's counteracting some of what the macroeconomic negative news has been. We're getting anecdotal information back from some of our OEMs that they brought build schedules down a couple of weeks ago. And then this week, they're bringing them back up. So it takes some time for us to figure out what each of those customer bases are doing and what they are projecting for the rest of the year as well. That's why we are unable to give guidance at this point.

Mig Dobre -- Baird -- Analyst

Totally fair. Thank you, Trish, good luck.

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Jim Sheehan with SunTrust. Please proceed with your question.

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Hi, Jim. Good morning.

Jim Sheehan -- SunTrust -- Analyst

Thank you for taking my question. What kind of working capital release might you realize this year and in which quarter might that occur in your scenarios?

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

So from a working capital perspective, when we looked at our scenario planning and cash flow specifically, we were, I think, relatively conservative and expect that we will see working capital increases throughout Q2 and possibly into Q3 with some better results than in Q4 as we're able to wear through some of that. So overall, I think we were conservative in the way we looked at working capital overall. But even with that, we still have the cash flow necessary for the business.

Jim Sheehan -- SunTrust -- Analyst

And could you describe your rationale for taking the goodwill impairment in the quarter for faster? Was that really necessary? And does that are you effectively saying that the business is impaired longer term?

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

So basically, the goodwill impairment was driven primarily from let me step back one step. We do our goodwill impairment analysis in Q3 of each year. So we did it in Q3 of 2019, and we had provided a forecast on the at least the part of the model that looks at DCF to the auditors. And when we went back and updated that or started speaking with them about how that forecast looked relative to COVID. We did need to make some changes specifically to the 2020 and potentially because we did multiple scenarios for this to 2021.

So yes, it was necessary to take the impairment this quarter because it did show that under the scenario planning that we're doing relative to COVID, that there was an impairment of that goodwill based on primarily the near term because the long-term goals, as we stated for Vision 2025, haven't changed hasn't changed by business and it hasn't changed overall. But certainly, the COVID effects on a short-term basis did impact that analysis.

Jim Sheehan -- SunTrust -- Analyst

Very helpful. And on your debt covenants, could you give some more color on that? What earnings level or EBITDA level would trip a covenant? And what levers can you pull to stay cash positive if the downturn is actually longer than 12 months?

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Yes. So we have two covenants, interest coverage, which, honestly, we're not even close to and adjusted our net debt to adjusted EBITDA to not exceed 3.5 times. And so in our scenario planning, we have verified that we don't trip those covenants in even in our deeper downside scenario. From a cash preservation perspective, we've cut back on noncritical capex at this point. And I think some of the bigger triggers of what I was mentioning to Mig in the furlough programs, if we start to see that we have a decline in demand that we are able to preserve cash through a program like that, but also keep our employees relatively whole from their cash perspective as well because that's equally as important to us to make sure that they're there as well. We're somewhere probably around an $80 million EBITDA trigger on the net debt-to-EBITDA ratio.

Jim Sheehan -- SunTrust -- Analyst

Very helpful, thank you so much.

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Jonathan Braatz with Kansas City Capital. Please proceed with your question.

Jonathan Braatz -- Kansas City Capital -- Analyst

Good morning, Tricia. Tricia, on an earlier question, you talked about the 2021, 2020 prospects for the Electronics segment and things still look pretty good. Yet, you mentioned there were some permanent layoffs at Electronics. And I don't think there are permanent layoffs at the Hydraulics segment. What's why the permanent layoffs at Electronics?

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

So as I mentioned when we were talking about April, April was a tough month for the Electronics segment. And in looking at our different scenario planning options, there were things like the furloughs. There were things like permanent layoffs. There were salary cuts. So the Enovation management team, I think, did a very good job in assessing what their best options were going forward, and they determined that a permanent layoff as well as temporary salary reductions that are implemented for May and June were the best way for them to go for the business going forward. So they went ahead and moved forward with that. We do still have the option of furloughs if we see business continue to decline in Electronics. But at this point, we don't believe that's probably going to be necessary with the current order book that we have.

Jonathan Braatz -- Kansas City Capital -- Analyst

Okay. How much of their business there is some oil and gas exposure, but how much of their business is exposed to that area?

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Yes. We actually saw oil and gas affect their business last year as well, and it probably will continue to have an impact given what's going on in the oil and gas space right now. In total, it's 10% or 15% 15% of their overall business.

Jonathan Braatz -- Kansas City Capital -- Analyst

Okay. Thank you, Tricia.

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Nathan Jones with Stifel. Please proceed with your question.

Adam Farley -- Stifel -- Analyst

Yeah, good morning. This is Adam Farley on for Nathan. A quick housekeeping question. Could you quantify the benefit, the onetime benefit in the Electronics segment?

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Yes. The onetime benefit, I assume you're referring to the gross margin comments that we made, it's about $860,000 additional revenue in Q1. So even with that, our gross margins were still at 45.5% versus 45.7%. So we were even without that, we were able to generate very strong margins. But it was on a last time buy related to the customer that we released the contractual obligations with in Q1 last year.

Adam Farley -- Stifel -- Analyst

Okay. That's helpful. And then turning to the supply chain. I know you mentioned you haven't seen very much disruption, but are you having any difficulty sourcing components? Are you building any inventory? Just any color there would be helpful.

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Yes. We have built a little bit of inventory from a component perspective in Electronics. At the end of Q1 and into Q2, we started buying some Electronics components that we thought might go scarce a little bit. So we have added inventory in that business as a result of that, that will wean off over a couple of quarters. But we wanted to get ahead of that. So that's really the only space that we've had to specifically buy inventory ahead based on potential scarcity.

Adam Farley -- Stifel -- Analyst

Okay. Thanks for taking my questions.

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Yeah. Thank you.

Operator

Thank you. Our final question this morning comes from the line of Joe Mondillo with Sidoti & Company. Please proceed with your question.

Joe Mondillo -- Sidoti and Company -- Analyst

Hi, good morning, Tricia be doing well. So my first question related to the consolidation down in your Sarasota facility last year. I'm just wondering when does when do we anniversary that? I know that was it seemed like a pretty big driver to the margins in the first quarter. So I'm just curious of when does that year-over-year comp get maybe a little tougher because you don't see the year-over-year benefits due to the productivity improvements related to that?

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Yes. I mean I kind of have to preface that with under normal conditions because certainly, we aren't in normal conditions. I expect that we probably would have seen tougher comps even in Q2 if COVID hadn't hit because we started to see some improvements in Q2 last year. But we saw the majority of them in Q4 and then again in Q1. The good news is that once the business does come back and come out of COVID, which I'm sure we all will, that we will still have those productivity improvements in place and be able to take full advantage of them. They also help us in a downturn, making sure that we're more effective and productive, even when we start to see throughput go down a bit as we work through the issues with COVID.

Joe Mondillo -- Sidoti and Company -- Analyst

Okay. And then just a follow-up with a question that Jeff asked earlier regarding the decrementals. You said 40% to 45%. Is that for the year where you're referring to? Or was that just the second quarter? And in the last call, you sort of talked about 30% to 40% for Hydraulics and 20% for Electronics. So could you just clarify the expectations for decrementals there?

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Yes. The 40% to 45% decrementals is for the remainder of the year, Q2 to Q4. We clearly had better decrementals in Q1. So for the year, it will be something less than that. The Hydraulics side is much closer to the 40% of that with Electronics being closer to the 45% of that. And some of that's driven by the fact that we as we mentioned on the call in February that we're making some incremental investments in the Electronics business relative to engineering and R&D resources. And while in our scenario planning, we have cut those a bit, we've left the majority of those costs in.

Some of them have occurred already because we've already hired the resources. But we don't want to put the 2021 rollouts at jeopardy. So some of the reason that Electronics has higher decrementals is that we have left in some of those incremental step costs that we planned for the year.

Joe Mondillo -- Sidoti and Company -- Analyst

Okay. And then regarding your APAC geographic region, could you just help us understand what's driving that business so well? How is that holding up so well? I mean down 1%, just given that China was that whole overall region seemed to be the biggest hit in terms of COVID in the first quarter. I was surprised to see that it was just down 1%.

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Yes, definitely. So China and Australia are the primary drivers of what's pushing our APAC region. We're still seeing strong mining in the mining end markets, we're still seeing strong demand. In China, it's really being driven by us taking new business. Still, we've been talking about that for a while, but we have some very strong distributors in the China region that are taking on a lot of new business, and that's really what's driving our China growth. And it's for applications like alternative energy, windmills and things like that, that are being driven by government initiatives in China as well.

Joe Mondillo -- Sidoti and Company -- Analyst

Okay, thanks. That's all I have for you. Good luck with everything. Thanks a lot.

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Thank you.

Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Ms. Fulton for any final comments.

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Thank you for your interest in Helios Technologies and for your participation this morning. Also thank you to all of the hard-working Helios employees who are driving these results. We look forward to updating all of you on our second quarter results in August. Thank you very much. Have a great day and stay healthy.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Karen L. Howard -- Investor Relations

Tricia L. Fulton -- Interim President and Chief Executive Officer and Chief Financial Officer

Brian Drab -- William Blair -- Analyst

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Mig Dobre -- Baird -- Analyst

Jim Sheehan -- SunTrust -- Analyst

Jonathan Braatz -- Kansas City Capital -- Analyst

Adam Farley -- Stifel -- Analyst

Joe Mondillo -- Sidoti and Company -- Analyst

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