snhy-10q_20190330.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 30, 2019

Commission file number 0-21835

SUN HYDRAULICS CORPORATION

(Exact Name of Registration as Specified in its Charter)

FLORIDA		59-2754337
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1500 WEST UNIVERSITY PARKWAY SARASOTA, FLORIDA		34243
(Address of Principal Executive Offices)		(Zip Code)

941/362-1200

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller Reporting Company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock $.001 Par Value

SNHY

The NASDAQ Global Select Market

The Registrant had 32,011,375 shares of common stock, par value $.001, outstanding as of April 26, 2019.

Sun Hydraulics Corporation

Doing Business as Helios Technologies

INDEX

For the quarter ended

March 30, 2019

			Page

PART I. FINANCIAL INFORMATION

	Item 1.	Financial Statements

	Consolidated Balance Sheets as of March 30, 2019 (unaudited) and December 29, 2018		3

	Consolidated Statements of Operations for the Three Months Ended March 30, 2019 (unaudited) and March 31, 2018 (unaudited)		4

	Consolidated Statements of Comprehensive Income for the Three months Ended March 30, 2019 (unaudited) and March 31, 2018 (unaudited)		5

	Consolidated Statements of Shareholders’ Equity for the Three months Ended March 30, 2019 (unaudited) and March 31, 2018 (unaudited)		6

	Consolidated Statements of Cash Flows for the Three months Ended March 30, 2019 (unaudited) and March 31, 2018 (unaudited)		7

	Notes to the Consolidated, Unaudited Financial Statements		8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30

	Item 4.	Controls and Procedures	30

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	31

	Item 1A.	Risk Factors	31

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

	Item 3.	Defaults Upon Senior Securities	31

	Item 4.	Mine Safety Disclosure	31

	Item 5.	Other Information	31

	Item 6.	Exhibits	32

PART I: FINANCIAL INFORMATION

Item 1.

Sun Hydraulics Corporation

Doing Business as Helios Technologies

Consolidated Balance Sheets

(in thousands, except share data)

	March 30, 2019			December 29, 2018
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	16,717		$	23,477
Restricted cash		39			38
Accounts receivable, net of allowance for doubtful accounts of $1,482 and $1,336		81,252			72,806
Inventories, net		88,896			85,989
Income taxes receivable		761			4,549
Other current assets		12,465			9,997
Total current assets		200,130			196,856
Property, plant and equipment, net		145,147			126,868
Deferred income taxes		8,411			9,463
Goodwill		377,606			383,131
Other intangibles, net		311,885			320,548
Other assets		4,619			5,299
Total assets	$	1,047,798		$	1,042,165
Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$	41,328		$	40,879
Accrued compensation and benefits		15,226			13,260
Other accrued expenses and current liabilities		13,096			9,941
Current portion of contingent consideration		18,812			18,120
Current portion of long-term non-revolving debt, net		5,757			5,215
Dividends payable		2,881			2,878
Income taxes payable		1,457			2,697
Total current liabilities		98,557			92,990
Revolving line of credit		242,648			255,750
Long-term non-revolving debt, net		89,612			91,720
Contingent consideration, less current portion		867			840
Deferred income taxes		50,781			57,783
Other noncurrent liabilities		24,827			12,314
Total liabilities		507,292			511,397
Commitments and contingencies		—			—
Shareholders' equity:
Preferred stock, 2,000,000 shares authorized, par value $0.001, no shares outstanding		—			—
Common stock, 50,000,000 shares authorized, par value $0.001, 31,995,700 and 31,964,775 shares outstanding		32			32
Capital in excess of par value		360,195			357,933
Retained earnings		232,445			219,056
Accumulated other comprehensive loss		(52,166	)		(46,253	)
Total shareholders' equity		540,506			530,768
Total liabilities and shareholders' equity	$	1,047,798		$	1,042,165

The accompanying Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.

Sun Hydraulics Corporation

Doing Business as Helios Technologies

Consolidated Statements of Operations

(in thousands, except per share data)

	Three months ended
	March 30, 2019			March 31, 2018
	(unaudited)			(unaudited)
Net sales	$	146,851		$	97,318
Cost of sales		90,342			59,701
Gross profit		56,509			37,617
Selling, engineering and administrative expenses		26,156			18,315
Amortization of intangible assets		4,521			2,049
Operating income		25,832			17,253
Interest expense, net		4,385			483
Foreign currency transaction (gain) loss, net		(439	)		511
Miscellaneous expense (income), net		108			(36	)
Change in fair value of contingent consideration		719			402
Income before income taxes		21,059			15,893
Income tax provision		4,655			3,982
Net income	$	16,404		$	11,911
Basic and diluted net income per common share	$	0.51		$	0.40
Basic and diluted weighted average shares outstanding		31,978			29,811
Dividends declared per share	$	0.09		$	0.09

The accompanying Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.

Sun Hydraulics Corporation

Doing Business as Helios Technologies

Consolidated Statements of Comprehensive Income

(in thousands)

	Three months ended
	March 30, 2019			March 31, 2018
	(unaudited)			(unaudited)
Net income	$	16,404		$	11,911
Other comprehensive (loss) income
Foreign currency translation adjustments, net of tax		(4,831	)		2,495
Unrealized loss on interest rate swap, net of tax		(1,082	)		—
Total other comprehensive (loss) income		(5,913	)		2,495
Comprehensive income	$	10,491		$	14,406

The accompanying Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.

Sun Hydraulics Corporation

Doing Business as Helios Technologies

Consolidated Statements of Shareholders’ Equity (unaudited)

(in thousands)

																Accumulated
										Capital in						other
	Preferred		Preferred		Common			Common		excess of			Retained			comprehensive
	shares		stock		shares			stock		par value			earnings			income (loss)			Total

Balance, December 29, 2018		—	$	—		31,965		$	32	$	357,933		$	219,056		$	(46,253	)	$	530,768
Shares issued, other compensation						6														—
Shares issued, ESPP						13					408									408
Shares issued, ESOP						24					1,092									1,092
Stock-based compensation											1,368									1,368
Cancellation of shares for payment of employee tax withholding						(12	)				(606	)								(606	)
Dividends declared														(2,881	)					(2,881	)
Net income														16,404						16,404
Other comprehensive loss																	(5,913	)		(5,913	)
Impact of adoption of ASU 2016-02, related to leases														(134	)					(134	)
Balance, March 30, 2019		—	$	—		31,996		$	32	$	360,195		$	232,445		$	(52,166	)	$	540,506

Balance, December 30, 2017		—	$	—		27,077		$	27	$	95,354		$	183,770		$	(6,478	)	$	272,673
Shares issued, restricted stock						100														—
Shares issued, other compensation						7														—
Shares issued, ESPP						9					371									371
Shares issued, public offering						4,400			5		239,788									239,793
Stock-based compensation											916									916
Cancellation of shares for payment of employee tax withholding						(5	)				(240	)								(240	)
Dividends declared														(2,843	)					(2,843	)
Net income														11,911						11,911
Other comprehensive income																	2,495			2,495
Balance, March 31, 2018		—	$	—		31,588		$	32	$	336,189		$	192,838		$	(3,983	)	$	525,076

The accompanying Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.

Sun Hydraulics Corporation

Doing Business as Helios Technologies

Consolidated Statements of Cash Flows

(in thousands)

	Three months ended
	March 30, 2019			March 31, 2018
	(unaudited)			(unaudited)
Cash flows from operating activities:
Net income	$	16,404		$	11,911
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		8,571			4,729
Loss on disposal of assets		71			—
Stock-based compensation expense		1,368			916
Amortization of debt issuance costs		179			98
(Benefit) provision for deferred income taxes		(322	)		55
Change in fair value of contingent consideration		719			402
Forward contract losses, net		24			505
Other, net		549			(15	)
(Increase) decrease in:
Accounts receivable		(8,848	)		(9,683	)
Inventories		(3,729	)		940
Other current assets		(2,455	)		(219	)
Other assets		1,088			(251	)
Increase (decrease) in:
Accounts payable		662			1,114
Accrued expenses and other liabilities		3,496			1,469
Income taxes payable		2,710			2,671
Other noncurrent liabilities		(659	)		17
Net cash provided by operating activities		19,828			14,659
Cash flows from investing activities:
Capital expenditures		(8,792	)		(4,237	)
Proceeds from dispositions of equipment		64			3
Net cash used in investing activities		(8,728	)		(4,234	)
Cash flows from financing activities:
Borrowings on revolving credit facility		35,282			—
Repayment of borrowings on revolving credit facility		(48,000	)		(116,000	)
Borrowings on long-term non-revolving debt		—			932
Repayment of borrowings on long-term non-revolving debt		(1,623	)		—
Proceeds from stock issued		408			240,163
Dividends to shareholders		(2,878	)		(2,437	)
Other financing activities		(881	)		(240	)
Net cash (used in) provided by financing activities		(17,692	)		122,418
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(167	)		1,805
Net (decrease) increase in cash, cash equivalents and restricted cash		(6,759	)		134,648
Cash, cash equivalents and restricted cash, beginning of period		23,515			63,922
Cash, cash equivalents and restricted cash, end of period	$	16,756		$	198,570

The accompanying Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.

SUN HYDRAULICS CORPORATION

Doing Business as Helios Technologies

NOTES TO THE CONSOLIDATED, UNAUDITED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

1. COMPANY BACKGROUND

Sun Hydraulics Corporation, doing business as Helios Technologies (“Helios” or the “Company”), and its wholly-owned subsidiaries, is an industrial technology leader that develops and manufactures solutions for both the hydraulics and electronics markets. On August 6, 2018, the Company announced that it had adopted Helios Technologies as its business name. Sun Hydraulics, LLC (“Sun Hydraulics” or “Sun”), a newly-formed Florida limited liability company that holds the historical net operating assets of the Sun Hydraulics brand entities and Custom Fluidpower Pty Ltd (“Custom Fluidpower”), along with Enovation Controls, LLC (“Enovation Controls”) and Faster S.r.l. (“Faster”) are the wholly-owned operating subsidiaries of Helios Technologies under the new holding company name.

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”).

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Accordingly, certain information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements are not included herein. The financial statements are prepared on a consistent basis (including normal recurring adjustments) and should be read in conjunction with the consolidated financial statements and related notes contained in the Annual Report on Form 10-K for the fiscal year ended December 29, 2018, filed by Sun Hydraulics Corporation with the Securities and Exchange Commission on February 26, 2019. In Management’s opinion, all adjustments necessary for a fair presentation of the Company’s financial statements are reflected in the interim periods presented. Operating results for the three-month period ended March 30, 2019, are not necessarily indicative of the results that may be expected for the period ending December 28, 2019.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Leases

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires an entity to recognize both assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. The guidance is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company adopted the standard for the fiscal year beginning December 30, 2018, using the effective date method which required a cumulative-effect adjustment to be recorded to the opening balance of retained earnings. Under the effective date method, financial results reported in periods prior to fiscal year 2019 are unchanged. The Company also elected the package of practical expedients, which among other things, does not require reassessment of lease classification. As of the adoption date, recorded right-of-use (“ROU”) assets and liabilities of approximately $13,918 were added to the balance sheet and a cumulative-effect adjustment of $134 was recognized in retained earnings.

The Company determines whether an arrangement is a lease at its inception. Operating lease ROU assets represent the Company’s right to use an underlying asset for the lease term and are presented in Property, plant and equipment in the Consolidated Balance Sheets. Operating lease liabilities represent the Company’s obligation to make lease payments arising from the leases and are presented in Other accrued expenses and current liabilities and Other noncurrent liabilities in the Consolidated Balance Sheets. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.

The Company utilizes an estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. The Company considers its existing credit facilities when calculating the incremental borrowing rate.

Lease terms include options to extend the lease when it is reasonably certain that the Company will exercise the option. Leases with a term of 12 months or less are not recorded on the balance sheet. There are no residual value guarantees included in the Company’s leases.

Contract Assets & Liabilities

Contract assets are recognized when the Company has a conditional right to consideration for performance completed on contracts. Contract asset balances totaled $2,175 and $2,851 at March 30, 2019 and December 29, 2018, respectively, and are presented in Other current assets in the Consolidated Balance Sheets. Accounts receivable balances represent unconditional rights to consideration from customers and are presented separate from contract assets in the Consolidated Balance Sheets.

Contract liabilities are recognized when payment is received from customers prior to revenue being recognized. Contract liabilities totaled $265 and $138 at March 30, 2019 and December 29, 2018, respectively, and are presented in Other accrued expenses and current liabilities in the Consolidated Balance Sheets.

Derivative Instruments and Hedging Activities

All derivative instruments are recorded gross in the Consolidated Balance Sheets at their respective fair values. The accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is initially reported as a component of accumulated other comprehensive income (“AOCI”) and is subsequently reclassified into the line item within the Consolidated Statements of Operations in which the hedged items are recorded in the same period in which the hedged item affects earnings.

The Company enters into foreign exchange currency contracts that are not designated as hedging instruments for accounting purposes. Changes in the fair value of foreign exchange currency contracts not designated as hedging instruments are recognized in earnings. Derivative financial instruments are utilized as risk management tools and are not used for trading or speculative purposes.

The Company utilizes foreign currency denominated debt to hedge currency exposure in foreign operations. The Company designates certain foreign currency denominated debt as hedges of net investments in foreign operations which reduces the Company’s exposure to changes in currency exchange rates on investments in non-US subsidiaries. Gains and losses on net investments in non-U.S. operations are economically offset by losses and gains on foreign currency borrowings. The change in the U.S dollar value of foreign currency denominated debt is recorded in Foreign currency translation adjustments, a component of Accumulated other comprehensive income (loss).

Research and Development

The Company conducts research and development (“R&D”) to create new products and to make improvements to products currently in use. R&D costs are charged to expense as incurred and totaled approximately $3,900, and $2,500 for the three months ended March 30, 2019 and March 31, 2018, respectively.

Recently Issued Accounting Standards

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates the second step in the goodwill impairment test, which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The standard is effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

Earnings Per Share

The following table presents the computation of basic and diluted earnings per common share (in thousands except per share data):

	Three Months Ended
	March 30, 2019		March 31, 2018
Net income	$	16,404	$	11,911
Basic and diluted weighted average shares outstanding		31,978		29,811
Basic and diluted net income per common share	$	0.51	$	0.40

3. BUSINESS ACQUISITIONS

Acquisition of Faster

On April 5, 2018, the Company completed the acquisition of Faster S.p.A, a worldwide leader in engineering, manufacturing, marketing and distribution of quick release hydraulic coupling solutions headquartered near Milan, Italy. Pursuant to the Share Purchase Agreement, the Company acquired all of the outstanding equity interests of Polyusus Lux IV S.a.r.l., a Luxembourg limited liability company and the owner of 100% of the share capital of Faster S.p.A. The acquisition was completed for cash consideration totaling $532,408 and was financed with cash on hand from the Company’s registered public stock offering and borrowings of $358,000 on its credit facility. Subsequent to the acquisition, the legal structure of Faster was changed to Faster S.r.l.

Faster adds adjacent hydraulics products to the Company’s portfolio of products and broadens end market reach, increasing the Company’s presence in the growing agriculture market. The results of Faster’s operations are reported in the Company’s Hydraulics segment and have been included in the consolidated financial statements since the acquisition date.

The Share Purchase Agreement allows for future payments to the sellers for certain tax benefits realized within two years of the acquisition date. The estimated fair value of the contingent liability was determined to be $938 as of the acquisition date. See Note 4 for a summary of the change in estimated fair value of the contingent liability.

The fair value of total purchase consideration consisted of the following:

Cash	$	532,408
Acquisition date fair value of contingent consideration		938
Total purchase consideration		533,346
Less: cash acquired