Business context and reporting period
The filing is for the three months ended March 31, 2018, with comparative results for the three months ended April 1, 2017. Although the request identifies Helios Technologies, Inc., the filing itself is filed by Sun Hydraulics Corporation, the company name shown on the report. Sun reported two segments: Hydraulics and Electronics (Enovation Controls).
The interim statements are unaudited. The company cautioned that first-quarter results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2018 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $97.3 million | $81.4 million | +19.5% |
| Gross profit / margin | $37.6 million / 38.6% | $32.8 million / 40.3% | Profit +14.6%; margin down 1.7 percentage points |
| Operating income / margin | $17.3 million / 17.8% | $15.8 million / 19.4% | Income +9.5%; margin down 1.6 percentage points |
| Net income | $11.9 million | $10.2 million | +16.7% |
| Diluted EPS | $0.40 | $0.38 | +5.3% |
| Operating cash flow | $14.7 million | $12.4 million | +$2.3 million |
| Capital expenditures | $4.2 million | $0.8 million | Increased investment |
Sales rose in both segments: Hydraulics increased 15.7% to $62.6 million and Electronics increased 27.6% to $34.7 million. Segment operating income was $13.4 million for Hydraulics, down 2.9%, and $7.1 million for Electronics, up 14.5%. Both segments reported lower gross and operating margins than a year earlier.
At March 31, cash and cash equivalents were $198.5 million, versus $63.9 million at December 30, 2017. Current assets were $290.8 million and current liabilities $52.3 million. The company had no balance on its $300 million revolving facility at quarter-end and reported $0.9 million of long-term debt. The cash increase principally reflected the February stock offering, which generated $239.8 million net proceeds; $116 million was used to repay revolving debt. Dividends declared were $0.09 per share, compared with $0.11 in the prior-year quarter.
Material changes and notable items
- Revenue growth reflected stronger demand across regions and end markets, sales and marketing initiatives, and favorable currency effects. Foreign exchange increased Q1 sales by about $2.4 million and EPS by about $0.01.
- Margins were pressured by costs to meet higher demand, including supply-chain constraints, expedited freight, overtime and temporary labor, material costs, product mix, customer incentives and scrap. Spending on sales, marketing and research and development also increased.
- The effective tax rate fell to 25.1% from 32.6%, principally reflecting the U.S. tax rate reduction under the Tax Cuts and Jobs Act. The company was still evaluating certain tax-law impacts. Its $5.1 million unrecognized tax benefit included matters under IRS examination for 2007–2012; outcomes and timing remain uncertain.
- The company recorded a $0.4 million expense from an increase in the fair value of contingent consideration related to Enovation Controls. Total contingent consideration was $34.3 million at quarter-end; a payment of $16.7 million plus accrued interest was expected in Q3 2018.
- On April 5, 2018, after quarter-end, the company acquired Faster S.p.A. for approximately €430 million (about $528 million), subject to purchase-price adjustments. It funded the transaction with cash and borrowings. The amended credit facilities provide a $400 million revolver and a $100 million term loan, with an additional $200 million accordion feature. The filing says the acquisition was expected to be accretive to GAAP earnings in 2018 and beyond; purchase accounting and pro forma disclosure were incomplete.
Outlook, risks and contingencies
For full-year 2018, including Faster, management forecast revenue of $490–$505 million, comprising $368–$378 million from Hydraulics and $122–$127 million from Electronics. Adjusted operating margin, before acquisition-related amortization and one-time costs, was expected at 22.7%–24.0%. Forecast net interest expense was $10.5–$12 million, the effective tax rate 24.5%–26.5%, and capital expenditures $20–$25 million. Depreciation and amortization estimates were $14.5–$15.5 million and $20–$21 million, respectively.
Management described demand as strong and cited industry indicators for continued growth, while noting that the capital-goods markets are cyclical and electronics indicators could be volatile. Key execution and financial risks include keeping pace with demand and managing related costs, foreign-exchange movements, acquisition integration and financing, and uncertain tax-audit outcomes. Management said operating cash generation and available borrowing capacity were expected to meet foreseeable operating and capital needs. Routine litigation was reported; management did not expect it to materially affect results, financial position or cash flows. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Confirm the reporting entity and its relationship to Helios Technologies, since this filing is under Sun Hydraulics Corporation.
- Assess whether higher volume can be sustained while recovering the quarter’s gross-margin and operating-margin declines.
- Review Faster’s post-close contribution, integration progress, final purchase accounting and the effect of acquisition financing on debt, interest and liquidity.
- Track the contingent-consideration payment and any changes in its estimate, as well as the IRS examination and remaining tax-reform accounting.
- Compare full-year results with the stated revenue, margin, tax, interest and capital-spending outlook; the filing provides no guarantee that forecasts will be achieved.