Filing and reporting period
The supplied filing is Sun Hydraulics Corporation’s audited Form 10-K for the fiscal year ended December 30, 2017, filed February 27, 2018. This does not identify Helios Technologies, Inc. as the registrant; investors should confirm that this is the intended filing. The 2017 fourth quarter is included in the annual results and quarterly data below.
Sun designs and manufactures hydraulic valves, manifolds and integrated systems, and electronic controls, displays and instrumentation. Its two reporting segments are Hydraulics and Electronics. Electronics results include Enovation Controls, acquired December 5, 2016, so the 2017 annual comparison is not like-for-like.
Financial results
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $342.8 million | $196.9 million |
| Gross profit / margin | $136.5 million / 39.8% | $71.3 million / 36.2% |
| Operating income / margin | $61.5 million / 17.9% | $34.5 million / 17.5% |
| Net income | $31.6 million | $23.3 million |
| Diluted earnings per share | $1.17 | $0.87 |
| Operating cash flow | $49.4 million | $38.5 million |
| Capital expenditures | $22.2 million | $6.2 million |
| Cash and cash equivalents at year-end | $63.9 million | $74.2 million |
| Working capital at year-end | $100.9 million | $110.2 million |
| Total debt at year-end | $116.0 million | $140.0 million |
Sales rose 74.1%, largely because 2017 included a full year of Enovation Controls; management also reported 21% organic growth in the historical business. Gross margin expanded 3.6 percentage points, aided by volume, fixed-cost leverage, continuous improvement and the higher-margin Electronics business. The 2017 effective tax rate was 33.6%.
Fourth-quarter 2017 sales were $84.2 million, gross profit $28.9 million, operating income $7.6 million and net income $2.8 million, or $0.10 per diluted share. Compared with third-quarter 2017, sales declined while gross profit and operating income fell more sharply. Management cited $5.7 million of fourth-quarter operational items across the segments, including freight, hurricane-related recovery costs, scrap and inventory write-offs, product mix, warranty and temporary labor.
Segments and material changes
- Hydraulics: FY 2017 sales were $230.7 million, up 21.7%; operating income was $54.9 million, up 40.4%, with a 23.8% margin. Growth came from demand across regions and end markets; no significant price increases were reported.
- Electronics: FY 2017 sales were $112.2 million and operating income $17.9 million, versus $7.4 million sales and an operating loss in the short post-acquisition 2016 period. On a pro forma basis, management reported Enovation sales growth of 32.6% versus 2016.
- Consolidated international sales were approximately 47% of revenue, versus 59% in 2016; the change in mix reflects the acquisition and comparison period.
- Sun merged HCT’s operations into Enovation Controls on December 29, 2017. Restructuring charges were $1.4 million, primarily severance.
Cash, debt and liquidity
Operating cash flow increased to $49.4 million, but higher receivables and inventory used $24.1 million of cash. Days sales outstanding rose to 40 from 34, and inventory days rose to 64 from 36. The company paid $17.0 million on Enovation contingent consideration and repaid $24.0 million of revolving debt during 2017. The $300 million revolver, available through November 2021, had $116 million outstanding and $184 million of stated additional availability at year-end, subject to covenant compliance. The company reported compliance with its debt covenants.
After year-end, Sun sold 4.4 million shares in a February 2018 offering, receiving approximately $239.8 million net; it used $116 million to repay the revolver. The filing’s year-end debt and cash figures therefore do not reflect that repayment or offering proceeds.
Outlook, transactions and notable items
- Management forecast 2018 revenue of $370 million to $385 million, with Hydraulics at $250 million to $258 million and Electronics at $120 million to $127 million. Adjusted operating margin, before acquisition-related amortization and one-time costs, was forecast at 22.7% to 24.0%. This outlook was stated before the announced Faster acquisition.
- On February 19, 2018, Sun agreed to acquire Faster S.p.A. for €430 million, approximately $531 million, subject to customary closing conditions and expected to close in the second quarter of 2018. The stated funding plan included about $161 million of cash and $370 million of revolver borrowings, including the accordion. Management expected the acquisition to be accretive to GAAP earnings in 2018 and beyond; this is forward-looking and not assured.
- The Enovation contingent consideration remeasurement increased the liability by $9.5 million in 2017 and reduced net income by $6.1 million after tax, or $0.22 per share. A $17.0 million installment was paid during the year; $33.9 million remained recorded at year-end.
- The Tax Cuts and Jobs Act produced a net estimated $0.5 million additional tax expense in 2017, including a provisional $2.0 million transition-tax charge and $1.5 million deferred-tax benefit. The filing says these estimates and related tax accounting were still under review.
- The board intended to continue the regular quarterly dividend of $0.09 per share in 2018, subject to its discretion and financing restrictions.
Risks, contingencies and controls
Key risks include cyclical capital-goods demand; competition and customer in-house development; international, currency, trade and regulatory exposure; supplier and raw-material availability and cost; technology and product-development execution; acquisition financing and integration; variable-rate debt and covenant limits; and operational disruption, including hurricanes affecting Florida facilities. The company reported no material pending litigation and no off-balance-sheet financing arrangements. Auditors gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Investor verification points
- Confirm the registrant: the supplied 10-K is for Sun Hydraulics Corporation, not Helios Technologies, Inc.
- Reconcile annual growth with the Enovation acquisition and distinguish reported from pro forma organic performance.
- Assess whether fourth-quarter operational disruptions and working-capital increases persisted after year-end.
- Verify the final accounting for provisional tax-reform estimates and the timing and amount of remaining Enovation earnout payments.
- Review Faster’s closing status, actual financing, integration costs and results against the stated accretion expectation and 2018 outlook.
- Confirm post-offering liquidity, debt levels and covenant headroom, as well as the sustainability of dividends.