Business context and reporting period
This filing is Sun Hydraulics Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. The supplied request identifies Helios Technologies, Inc., but the filing itself names Sun Hydraulics Corporation as the registrant. Sun operates Hydraulics and Electronics segments; its December 2016 acquisition of Enovation Controls materially affects comparisons because 2017 includes its results while the 2016 reported periods generally do not.
Financial performance
Amounts are in millions, except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $88.0 | $45.2 | $258.7 | $147.1 |
| Gross profit | $36.3 | $15.5 | $107.7 | $54.0 |
| Operating income | $17.4 | $7.2 | $53.9 | $29.6 |
| Net income | $11.3 | $5.0 | $28.8 | $20.2 |
| Diluted EPS | $0.42 | $0.19 | $1.07 | $0.75 |
| Gross margin | 41.2% | 34.4% | 41.6% | 36.7% |
| Operating margin | 19.8% | 16.0% | 20.8% | 20.1% |
- Q3 sales rose 95%; nine-month sales rose 76%. Management attributed growth to the acquisition, stronger demand across both segments and regions, and sales and marketing initiatives. Hydraulics Q3 sales increased 27.5%; Electronics’ reported sales were $31.4 million. On a pro forma basis, Enovation Controls’ PC and VT sales increased 34% in Q3 and 38% year to date.
- Q3 net income increased 126%, while nine-month net income increased 43%, slower than sales growth. Nine-month results included $8.9 million of expense from the change in fair value of acquisition-related contingent consideration; this reduced year-to-date net income by $5.7 million after tax, according to management.
- Operating cash flow was $38.4 million for nine months, compared with $31.3 million. Working-capital investment was significant: accounts receivable and inventory together used $29.5 million of cash. Capital expenditures were $8.3 million; investing activities used $5.8 million.
- At September 30, cash and cash equivalents were $81.2 million, short-term investments $3.8 million, and total current assets $173.1 million versus current liabilities of $66.2 million. Revolver borrowings were $116.0 million, down from $140.0 million at year-end; $184.0 million of capacity remained, subject to covenant compliance. The stated interest rate was 2.98%, and the company reported compliance with debt covenants.
- Contingent consideration liability was $50.2 million, including $33.9 million classified current. In October, the company paid the first installment of approximately $17.0 million to Enovation Controls’ former owners.
Material changes, outlook and risks
- Reported growth is not directly comparable with 2016 because Enovation Controls was acquired in December 2016. The acquisition also added substantial intangible assets and related amortization; nine-month amortization was $6.4 million versus $0.4 million in the prior-year period.
- Management forecast 2017 revenue of $330–$340 million, including $225–$230 million from Hydraulics and $105–$110 million from Electronics. It expected full-year operating margin, before acquisition-related amortization, of 22%–24%; interest expense of $4.2–$4.4 million before interest income; an effective tax rate of 32%–34%; capital expenditures of $20–$25 million; depreciation of $11–$12 million and amortization of $8–$9 million.
- Management cited improved industry demand, while noting that capital-goods markets are cyclical. It stated that cash from operations and revolver availability should fund foreseeable operating and capital needs; the dividend could be reduced or suspended if needed.
- Working-capital indicators worsened: days sales outstanding increased to 42 from 36 year over year, and inventory days rose to 72 from 38. Management linked this partly to Enovation Controls’ business model and inventory needs.
- The company disclosed an IRS examination of federal tax years 2007–2012 and $3.2 million of unrecognized tax benefits, with potential resolution or changes within 12 months. It reported no material legal proceedings, no material changes in market risk, and no identified goodwill impairment. A Tulsa facility purchase for $11.25 million was expected to close in Q4 2017.
Important facts for investors to verify
- Confirm the issuer and security identity: this supplied filing is for Sun Hydraulics Corporation, notwithstanding the request metadata naming Helios Technologies, Inc.
- Assess underlying growth excluding acquisition effects, using the filing’s pro forma information and segment disclosures; reported year-over-year sales comparisons include a major acquisition.
- Track the contingent consideration valuation, payment schedule and earnings impact, including the October payment and remaining liability.
- Monitor receivables, inventory, operating cash conversion, revolver borrowings and covenant headroom as demand and integration evolve.
- Compare the 2017 guidance with subsequent reported results, particularly adjusted operating margin, taxes, capital spending and the Tulsa facility purchase.