Helios Technologies, Inc. (Sun Hydraulics Corporation) — 2018 Form 10-K
Reporting period: Fiscal year ended December 29, 2018. The filing is an annual report, not a standalone Q4 filing; quarterly results are also reported. The company adopted Helios Technologies as its business name in August 2018 and trades as SNHY.
Business context
Helios develops and manufactures products for two segments: Hydraulics (Sun Hydraulics, Faster and Custom Fluidpower) and Electronics (Enovation Controls). Faster was acquired in April 2018 and Custom Fluidpower in August 2018. Their post-acquisition results are included in 2018, limiting comparability with 2017. Management’s Vision 2025 targets $1 billion of annual sales by 2025 through organic growth and acquisitions.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Net sales | $508.0 million | $342.8 million | +48.2% |
| Gross profit / margin | $192.7 million / 37.9% | $136.5 million / 39.8% | Margin down 1.9 pts |
| Operating income / margin | $75.6 million / 14.9% | $61.5 million / 17.9% | Income +22.9%; margin down 3.0 pts |
| Net income | $46.7 million | $31.6 million | +47.8% |
| Diluted EPS | $1.49 | $1.17 | +27.4% |
| Cash from operations | $77.5 million | $49.4 million | +$28.1 million |
| Capital expenditures | $28.4 million | $22.2 million | +$6.2 million |
Sales growth included $106.5 million from Faster, $20.3 million from Custom Fluidpower and $38.4 million of organic growth. Hydraulics sales rose 65.5% to $381.8 million; Electronics sales rose 12.5% to $126.2 million. Electronics margins improved, with gross margin at 43.9% versus 41.5% and operating margin at 19.8% versus 16.0%. Hydraulics gross and operating margins declined to 37.1% and 22.0%, respectively.
Gross margin was pressured by acquired-business mix and $4.4 million of acquisition inventory step-up amortization. Operating income also reflected $23.0 million of acquisition-related intangible amortization and $5.5 million of transaction costs. Net interest expense rose to $13.9 million from $3.8 million as borrowings increased to fund acquisitions. The effective tax rate fell to 17.1% from 33.6%, reflecting tax reform and other tax items.
At year-end, cash and cash equivalents were $23.5 million, working capital was $103.9 million, total debt was approximately $352.7 million and shareholders’ equity was $530.8 million. The company reported $146.4 million of available credit on revolving facilities and stated operating cash and borrowing availability should meet foreseeable operating and capital needs. 2018 cash used in investing activities was $565.5 million, primarily reflecting $534.7 million of acquisitions. Financing activities provided $447.3 million, including net public-offering proceeds of approximately $239.8 million. Dividends paid were $11.0 million; the board intended to continue a quarterly dividend of $0.09 per share in 2019, subject to its discretion.
Q4 context: Fourth-quarter 2018 sales were $138.7 million versus $84.2 million in Q4 2017; net income was $16.4 million versus $2.8 million, and EPS was $0.51 versus $0.10.
Material changes, outlook and risks
- The Faster acquisition was completed for $532.4 million cash consideration, funded with public-offering proceeds and credit-facility borrowings. Custom Fluidpower consideration was $26.7 million, including shares and cash. The company issued 4.4 million shares in its February 2018 offering.
- Sun reported strong demand but supply-chain and capacity constraints increased backlog. A Sarasota manufacturing consolidation project was expected to be completed by the end of Q1 2019, with capacity expected to improve at least 15% during 2019.
- For 2019, management forecast revenue of $590–$600 million, GAAP EPS of $2.10–$2.20, non-GAAP cash EPS of $2.55–$2.65, and adjusted EBITDA margin of 24.5%–25.5%, before certain one-time costs. Planned 2019 capital expenditures were $30–$35 million.
- Key risks include cyclical capital-goods demand, acquisition integration and realization of synergies, substantial debt and variable interest rates, foreign-exchange movements, tariffs and raw-material costs, supply/capacity constraints, international political and regulatory exposure, competition and technology changes, and product liability. The filing says a 1-percentage-point increase in weighted-average rates would have increased 2018 financing costs by approximately $2.2 million.
- Faster and Custom Fluidpower were excluded from management’s year-end internal-control assessment while integration was ongoing; management concluded controls were effective for the assessed operations, and the auditor gave unqualified opinions on the financial statements and internal control. The auditor reported no material adverse litigation; management said routine litigation was not expected to materially affect results.
Most important facts for investors to verify
- How much of reported growth and future performance is attributable to acquisitions versus organic growth, and whether acquired businesses meet expected profitability and synergy targets.
- Whether the company can convert strong demand and backlog into shipments while completing the Sarasota consolidation and managing supplier constraints.
- Debt-service capacity, covenant headroom, refinancing exposure around the 2023 facility maturity, and sensitivity to higher rates; also verify the scheduled 2019 contingent-consideration payment of approximately $16.7 million plus interest.
- Whether 2019 guidance assumptions remain achievable, particularly margin recovery, integration costs, foreign exchange, and capital spending.
- Final purchase-price allocations for Faster and Custom Fluidpower, including goodwill and intangible valuations, and the outcome of open tax examinations and unrecognized tax-benefit exposures.