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 September 29, 2018

 

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  

The Registrant had 31,967,570 shares of common stock, par value $.001, outstanding as of October 26, 2018.


Sun Hydraulics Corporation

Doing Business as Helios Technologies

INDEX

For the quarter ended

September 29, 2018

 

 

 

 

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets as of September 29, 2018 (unaudited) and December 30, 2017

 

3

 

 

 

 

 

Consolidated Statements of Operations for the Three Months Ended September 29, 2018 (unaudited) and September 30, 2017 (unaudited)

 

4

 

 

 

 

 

Consolidated Statements of Operations for the Nine Months Ended September 29, 2018 (unaudited) and September 30, 2017 (unaudited)

 

5

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 29, 2018 (unaudited) and September 30, 2017 (unaudited)

 

6

 

 

 

 

 

Consolidated Statement of Shareholders’ Equity for the Nine Months Ended September 29, 2018 (unaudited)

 

7

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 29, 2018 (unaudited) and September 30, 2017 (unaudited)

 

8

 

 

 

 

 

Notes to the Consolidated, Unaudited Financial Statements

 

10

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

31

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

31

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

32

 

 

 

 

 

 

Item 1A.

Risk Factors

 

32

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

32

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

32

 

 

 

 

 

 

Item 4.

Mine Safety Disclosure

 

32

 

 

 

 

 

 

Item 5.

Other Information

 

32

 

 

 

 

 

 

Item 6.

Exhibits

 

33

 

 

2


PART I: FINANCIAL INFORMATION

Item 1.

Sun Hydraulics Corporation

Doing Business as Helios Technologies

Consolidated Balance Sheets

(in thousands, except share data)

 

 

 

September 29, 2018

 

 

December 30, 2017

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

15,875

 

 

$

63,882

 

Restricted cash

 

 

39

 

 

 

40

 

Accounts receivable, net of allowance for doubtful accounts of $1,047 and $358

 

 

77,867

 

 

 

37,503

 

Inventories, net

 

 

88,438

 

 

 

41,545

 

Income taxes receivable

 

 

2,242

 

 

 

 

Other current assets

 

 

11,821

 

 

 

3,806

 

Total current assets

 

 

196,282

 

 

 

146,776

 

Property, plant and equipment, net

 

 

122,660

 

 

 

91,931

 

Deferred income taxes

 

 

7,848

 

 

 

4,654

 

Goodwill

 

 

350,306

 

 

 

108,869

 

Other intangibles, net

 

 

327,667

 

 

 

104,131

 

Other assets

 

 

3,849

 

 

 

3,405

 

Total assets

 

$

1,008,612

 

 

$

459,766

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

36,076

 

 

$

15,469

 

Accrued expenses

 

 

25,287

 

 

 

8,977

 

Current portion of contingent consideration

 

 

17,468

 

 

 

17,102

 

Current portion of long-term non-revolving debt, net

 

 

4,950

 

 

 

 

Dividends payable

 

 

2,877

 

 

 

2,437

 

Income taxes payable

 

 

3,005

 

 

 

1,878

 

Other current liabilities

 

 

2,248

 

 

 

 

Total current liabilities

 

 

91,911

 

 

 

45,863

 

Revolving line of credit

 

 

267,000

 

 

 

116,000

 

Long-term non-revolving debt, net

 

 

92,836

 

 

 

 

Contingent consideration, less current portion

 

 

938

 

 

 

16,780

 

Deferred income taxes

 

 

20,230

 

 

 

2,068

 

Other noncurrent liabilities

 

 

9,187

 

 

 

6,382

 

Total liabilities

 

 

482,102

 

 

 

187,093

 

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, 31,957,429

   and 27,077,145 shares outstanding

 

 

32

 

 

 

27

 

Capital in excess of par value

 

 

356,772

 

 

 

95,354

 

Retained earnings

 

 

205,510

 

 

 

183,770

 

Accumulated other comprehensive loss

 

 

(35,804

)

 

 

(6,478

)

Total shareholders' equity

 

 

526,510

 

 

 

272,673

 

Total liabilities and shareholders' equity

 

$

1,008,612

 

 

$

459,766

 

 

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

 

 

3


Sun Hydraulics Corporation

Doing Business as Helios Technologies

Consolidated Statements of Operations

(in thousands, except per share data)

 

 

 

Three months ended

 

 

 

September 29, 2018

 

 

September 30, 2017

 

 

 

(unaudited)

 

 

(unaudited)

 

Net sales

 

$

135,837

 

 

$

88,001

 

Cost of sales

 

 

84,102

 

 

 

51,707

 

Gross profit

 

 

51,735

 

 

 

36,294

 

Selling, engineering and administrative expenses

 

 

25,440

 

 

 

16,854

 

Amortization of intangible assets

 

 

7,049

 

 

 

2,038

 

Operating income

 

 

19,246

 

 

 

17,402

 

Interest expense, net

 

 

4,622

 

 

 

1,121

 

Foreign currency transaction gain, net

 

 

(42

)

 

 

(24

)

Miscellaneous expense (income), net

 

 

141

 

 

 

(337

)

Change in fair value of contingent consideration

 

 

275

 

 

 

664

 

Income before income taxes

 

 

14,250

 

 

 

15,978

 

Income tax provision

 

 

2,651

 

 

 

4,683

 

Net income

 

$

11,599

 

 

$

11,295

 

Basic and diluted net income per common share

 

$

0.36

 

 

$

0.42

 

Basic and diluted weighted average shares outstanding

 

 

31,843

 

 

 

27,059

 

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.

 

4


Sun Hydraulics Corporation

Doing Business as Helios Technologies

Consolidated Statements of Operations

(in thousands, except per share data)

 

 

 

Nine months ended

 

 

 

September 29, 2018

 

 

September 30, 2017

 

 

 

(unaudited)

 

 

(unaudited)

 

Net sales

 

$

369,322

 

 

$

258,689

 

Cost of sales

 

 

229,567

 

 

 

151,018

 

Gross profit

 

 

139,755

 

 

 

107,671

 

Selling, engineering and administrative expenses

 

 

69,078

 

 

 

47,398

 

Amortization of intangible assets

 

 

17,174

 

 

 

6,386

 

Operating income

 

 

53,503

 

 

 

53,887

 

Interest expense, net

 

 

9,256

 

 

 

2,710

 

Foreign currency transaction loss (gain), net

 

 

3,770

 

 

 

(64

)

Miscellaneous expense, net

 

 

185

 

 

 

365

 

Change in fair value of contingent consideration

 

 

928

 

 

 

8,855

 

Income before income taxes

 

 

39,364

 

 

 

42,021

 

Income tax provision

 

 

9,058

 

 

 

13,231

 

Net income

 

$

30,306

 

 

$

28,790

 

Basic and diluted net income per common share

 

$

0.97

 

 

$

1.07

 

Basic and diluted weighted average shares outstanding

 

 

31,093

 

 

 

27,017

 

Dividends declared per share

 

$

0.27

 

 

$

0.29

 

 

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

 

 

5


Sun Hydraulics Corporation

Doing Business as Helios Technologies

Consolidated Statements of Comprehensive Income

(in thousands)

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 29, 2018

 

 

September 30, 2017

 

 

September 29, 2018

 

 

September 30, 2017

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

Net income

 

$

11,599

 

 

$

11,295

 

 

$

30,306

 

 

$

28,790

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(4,727

)

 

 

1,766

 

 

 

(29,445

)

 

 

6,957

 

Unrealized (loss) gain on available-for-sale securities

 

 

 

 

 

(53

)

 

 

 

 

 

69

 

Unrealized gain on interest rate swap

 

 

119

 

 

 

 

 

 

119

 

 

 

 

Total other comprehensive (loss) income

 

 

(4,608

)

 

 

1,713

 

 

 

(29,326

)

 

 

7,026

 

Comprehensive income

 

$

6,991

 

 

$

13,008

 

 

$

980

 

 

$

35,816

 

 

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

 

 

6


Sun Hydraulics Corporation

Doing Business as Helios Technologies

Consolidated Statement 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 30, 2017

 

 

 

 

$

 

 

 

27,077

 

 

$

27

 

 

$

95,354

 

 

$

183,770

 

 

$

(6,478

)

 

$

272,673

 

Shares issued, restricted stock

 

 

 

 

 

 

 

 

 

 

109

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued, other compensation

 

 

 

 

 

 

 

 

 

 

16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued, ESPP

 

 

 

 

 

 

 

 

 

 

27

 

 

 

 

 

 

 

1,167

 

 

 

 

 

 

 

 

 

 

 

1,167

 

Shares issued, public offering

 

 

 

 

 

 

 

 

 

 

4,400

 

 

5

 

 

 

239,788

 

 

 

 

 

 

 

 

 

 

 

239,793

 

Shares issued, acquisition

 

 

 

 

 

 

 

 

 

 

333

 

 

 

 

 

 

 

17,339

 

 

 

 

 

 

 

 

 

 

 

17,339

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,364

 

 

 

 

 

 

 

 

 

 

 

3,364

 

Cancellation of shares for payment of employee tax withholding

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

 

(240

)

 

 

 

 

 

 

 

 

 

 

(240

)

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,566

)

 

 

 

 

 

 

(8,566

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30,306

 

 

 

 

 

 

 

30,306

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(29,326

)

 

 

(29,326

)

Balance, September 29, 2018

 

 

 

 

$

 

 

 

31,957

 

 

$

32

 

 

$

356,772

 

 

$

205,510

 

 

$

(35,804

)

 

$

526,510

 

 

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

 

 

7


Sun Hydraulics Corporation

Doing Business as Helios Technologies

Consolidated Statements of Cash Flows

(in thousands)

 

 

Nine months ended

 

 

 

September 29, 2018

 

 

September 30, 2017

 

 

 

(unaudited)

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

30,306

 

 

$

28,790

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

28,801

 

 

 

14,559

 

Loss on disposal of assets

 

 

53

 

 

 

812

 

Stock-based compensation expense

 

 

3,364

 

 

 

3,180

 

Amortization of debt issuance costs

 

 

550

 

 

 

334

 

Benefit for deferred income taxes

 

 

(393

)

 

 

(2,660

)

Amortization of acquisition related inventory step-up

 

 

5,217

 

 

 

1,774

 

Change in fair value of contingent consideration

 

 

928

 

 

 

8,855

 

Forward contract losses, net

 

 

3,573

 

 

 

 

Other, net

 

 

386

 

 

 

188

 

(Increase) decrease in, net of acquisition:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(10,595

)

 

 

(14,419

)

Inventories

 

 

(13,754

)

 

 

(15,063

)

Income taxes receivable

 

 

(1,723

)

 

 

512

 

Other current assets

 

 

(1,329

)

 

 

12

 

Other assets

 

 

121

 

 

 

(359

)

Increase (decrease) in, net of acquisition:

 

 

 

 

 

 

 

 

Accounts payable

 

 

1,413

 

 

 

7,146

 

Accrued expenses and other liabilities

 

 

2,210

 

 

 

3,005

 

Income taxes payable

 

 

(4,762

)

 

 

2,378

 

Other noncurrent liabilities

 

 

(144

)

 

 

(623

)

Net cash provided by operating activities

 

 

44,222

 

 

 

38,421

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(18,702

)

 

 

(8,268

)

Proceeds from dispositions of equipment

 

 

20

 

 

 

37

 

Proceeds from sale of short-term investments

 

 

 

 

 

2,887

 

Acquisition of business, net of cash acquired

 

 

(534,662

)

 

 

(500

)

Cash settlement of forward contract

 

 

(2,535

)

 

 

 

Net cash used in investing activities

 

 

(555,879

)

 

 

(5,844

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings on revolving credit facility

 

 

285,000

 

 

 

 

Repayment of borrowings on revolving credit facility

 

 

(134,000

)

 

 

(24,000

)

Borrowings on long-term non-revolving debt

 

 

101,035

 

 

 

 

Repayment of borrowings on long-term non-revolving debt

 

 

(2,527

)

 

 

 

Borrowings under factoring arrangements

 

 

2,891

 

 

 

 

Repayment of borrowings under factoring arrangements

 

 

(2,040

)

 

 

 

Payments on capital lease obligations

 

 

(638

)

 

 

 

Proceeds from stock issued

 

 

240,959

 

 

 

776

 

Dividends to shareholders

 

 

(8,126

)

 

 

(7,824

)

Debt issuance costs

 

 

(1,763

)

 

 

 

Payment of employee tax withholding

 

 

(240

)

 

 

 

Payment of contingent consideration liability

 

 

(17,342

)

 

 

 

Change in restricted cash

 

 

 

 

 

88

 

Net cash provided by (used in) financing activities

 

 

463,209

 

 

 

(30,960

)

Effect of exchange rate changes on cash and cash equivalents

 

 

441

 

 

 

5,353

 

Net (decrease) increase in cash and cash equivalents

 

 

(48,007

)

 

 

6,970

 

Cash and cash equivalents, beginning of period

 

 

63,882

 

 

 

74,221

 

Cash and cash equivalents, end of period

 

$

15,875

 

 

$

81,191

 

8


Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid:

 

 

 

 

 

 

 

 

Income taxes

 

$

15,554

 

 

$

13,045

 

Interest

 

$

8,326

 

 

$

3,103

 

Supplemental disclosure of noncash transactions:

 

 

 

 

 

 

 

 

Common stock issued for shared distribution through accrued expenses and other liabilities

 

$

 

 

$

628

 

Unrealized gain on available for sale securities

 

$

 

 

$

69

 

Measurement period adjustment to goodwill and contingent consideration

 

$

938

 

 

$

6,314

 

Stock issued for acquisition

 

$

17,339

 

 

$

 

 

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

9


SUN HYDRAULICS CORPORATION

Doing Business as Helios Technologies

NOTES TO THE CONSOLIDATED, UNAUDITED FINANCIAL STATEMENTS

(In thousands, except share and 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, a newly-formed Florida limited liability company that holds the historical net operating assets of the Sun Hydraulics brand entities and the newly acquired Custom Fluidpower, along with the previously acquired Enovation Controls, LLC and Faster S.p.A. 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.  The Hydraulics segment consists of the global Sun Hydraulics companies (“Sun Hydraulics” or “Sun”), Faster S.p.A (“Faster”), acquired in the second quarter of this fiscal year, and Custom Fluidpower Pty Ltd (“Custom Fluidpower”), acquired in the third quarter of this fiscal year. Sun Hydraulics serves the hydraulics market as a leading manufacturer of high-performance screw-in hydraulic cartridge valves, electro-hydraulics, manifolds, and integrated package solutions for the worldwide industrial and mobile hydraulics markets. Faster is a leading global manufacturer of quick release hydraulic coupling solutions focused in the agriculture, construction equipment and industrial markets.  Custom Fluidpower is a global provider of hydraulic, pneumatic, electronic and instrumentation solutions to a broad range of industries including agriculture, industrial, mining and material handling.  The Electronics segment, which consists of Enovation Controls, LLC (“Enovation Controls”), is a global provider of innovative electronic control, display and instrumentation solutions for both recreational and off-highway vehicles, as well as stationary and power generation equipment. 

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 30, 2017, filed by Sun Hydraulics Corporation with the Securities and Exchange Commission on February 27, 2018. 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 nine month period ended September 29, 2018, are not necessarily indicative of the results that may be expected for the period ending December 29, 2018.

 

 

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers.  Subsequent updates to the guidance were issued in 2016.  The core principle of the new guidance is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The standard provides a five-step analysis of transactions to determine the amount and timing of revenue to be recognized.  Additionally, the guidance requires disaggregated disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized. The Company adopted the standard for the fiscal year beginning December 31, 2017, using the cumulative catch-up transition method. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

Revenue recognition is evaluated through the following five steps: 1) identification of the contracts with customers; 2) identification of the performance obligations in the contracts; 3) determination of the transaction price; 4) allocation of the transaction price to the performance obligations in the contract; and 5) recognition of revenue as or when performance obligations are satisfied.

The Company disaggregates revenue by reporting segment as well as by geographic destination of the sale. See disaggregated revenue balances in Note 13, Segment Reporting. These categories depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

Revenue from Product Sales

The significant majority of the Company’s contracts with its customers are for standard product sales under standard ship and bill arrangements. The contracts have a single distinct performance obligation for the sale of product and are short term in nature. The transaction price is agreed upon in the contract. Revenue is recognized at a point in time when control is transferred to customers. Typically control is transferred upon shipment to the customer but can also occur upon delivery to the customer, depending on contract terms.

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The Company also sells custom products. Custom product sales are not considered a significant revenue stream for the Company as they represent less than 3% of total revenue. Contracts for custom products are typically completed within one quarter and do not exceed one year in duration. These contracts are generally accounted for as having a single performance obligation for the manufacture of product, which is considered the only distinct promise in the contract. The transaction price is agreed upon in the contract. Revenue is recognized upon satisfaction of the performance obligations which is typically at a point in time when control is transferred to the customer. Revenue recognition can also occur over time for these contracts when the following criteria are met: the Company has no alternative use for the product; and the Company has an enforceable right to payment (including a reasonable margin) for performance completed to date.

Revenue is recognized in an amount that reflects the consideration the Company expects to be entitled to in exchange for the goods. Consideration for product sales is primarily fixed in nature with insignificant amounts recognized for sales discounts, rebates and product returns. The Company’s estimates for sales discounts, rebates and product returns reduce revenue recognized at the time of the sale.

Revenue from Services

The Company generates revenue from various services provided to customers including system design, maintenance, repairs, installation and commissioning and various other services. This is not a significant revenue stream for the Company, as it represents less than 3% of total revenue. Service contracts are typically completed within one quarter and do not exceed one year in duration. These contracts are generally accounted for as having a single distinct performance obligation for the performance of the service. The transaction price is agreed upon in the contract and can be based on a fixed amount or on a time and material arrangement. Revenue is recorded over time for service contracts as the customer receives and consumes the benefits as the Company performs. The method of over time recognition considers total costs incurred to date and the applicable margin on the total expected efforts to complete the performance obligation. This method appropriately depicts the pattern of transfer of value to the customer.

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 $2,553 at September 29, 2018 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 $150 at September 29, 2018 and are presented in other current liabilities in the Consolidated Balance Sheets.  

Other Revenue Recognition Considerations

Contracts do not have significant financing components and payment terms do not exceed one year from the date of the sale. The Company does not incur significant credit losses from contracts with customers.

The Company’s warranties provide assurance that products will function as intended. Estimated costs of product warranties are recognized at the time of the sale.

Derivative Instruments

All derivative instruments are recorded gross on the Consolidated Balance Sheet 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 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.

Accounts Receivable, net

Accounts receivable are stated at amounts owed by customers, net of an allowance for estimated doubtful accounts. The allowance for doubtful accounts is determined on a specific identification basis by a review of those accounts that are significantly in arrears. Account balances are charged against the allowance when it is probable the receivable will not be recovered. See the Consolidated Balance Sheets for the allowance amounts.

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The Company has a factoring agreement with a third party financial institution to sell the rights, with recourse, to accounts receivable balances due from a specific customer. Under the terms of the agreement, the Company may receive advances in amounts up to 1,000,000 based on the amounts invoiced to the customer. The Company maintains the collectability risk of all outstanding balances; therefore, customer balances are included in accounts receivable, including any allowance for risk of collectability, and amounts due to the financial institution are included in other current liabilities in the Consolidated Balance Sheet.

Recently Adopted Accounting Standards

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedged items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The Company adopted the standard for the fiscal quarter beginning July 1, 2018. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

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.

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. As part of the Company’s assessment to-date, the Company has formed an implementation team, identified the Company’s population of operating leases and is extracting relevant lease terms. The Company expects the adoption of ASU 2016-02 will materially gross up its consolidated balance sheet with the recognition of right-of-use assets and operating lease liabilities. The impact to the Company’s consolidated statements of operations and cash flows are not expected to be material. The new standard will also require additional disclosures for financing and operating leases.

Earnings Per Share

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 29, 2018

 

 

September 30, 2017

 

 

September 29, 2018

 

 

September 30, 2017

 

Net income

 

$

11,599

 

 

$

11,295

 

 

$

30,306

 

 

$

28,790

 

Basic and diluted weighted average shares outstanding

 

 

31,843

 

 

 

27,059

 

 

 

31,093

 

 

 

27,017

 

Basic and diluted net income per common share

 

$

0.36

 

 

$

0.42

 

 

$

0.97

 

 

$

1.07

 

 

 

3.  BUSINESS ACQUISITIONS

Acquisition of Faster S.p.A.

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, as discussed in further detail in Note 8 and Note 9.

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.

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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 and September 29, 2018.

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

 

Cash

 

$

532,408

 

Fair value of contingent consideration

 

 

938

 

Total purchase consideration

 

 

533,346

 

Less: cash acquired

 

 

(5,265

)

Total purchase consideration, net of cash acquired

 

$

528,081

 

 

The purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The fair value of identifiable intangible assets acquired was based on estimates and assumptions made by management at the time of the acquisition.  As additional information becomes available, as of the acquisition date, management will finalize its analysis of the estimated fair value of the identified intangible assets and tax related items including the evaluation of deductibility of goodwill and valuation of deferred taxes. As management completes its evaluation, the preliminary purchase price allocation may be revised during the remainder of the measurement period (which will not exceed 12 months from the acquisition date). Any such revisions or changes to the fair values of the tangible and intangible assets acquired and liabilities assumed may be material.  

The preliminary allocation of the total purchase price, net of cash acquired, is as follows:

 

Accounts receivable

 

$

24,638

 

Inventories

 

 

35,882

 

Other current assets

 

 

6,488

 

Property, plant and equipment

 

 

20,242

 

Goodwill

 

 

249,850

 

Intangible assets

 

 

246,371

 

Other assets

 

 

4,622

 

Total assets acquired

 

 

588,093

 

Accounts payable

 

 

(18,668

)

Accrued expenses

 

 

(11,740

)

Incomes taxes payable

 

 

(4,862

)

Other current liabilities

 

 

(1,289

)

Other noncurrent liabilities

 

 

(23,453

)

Total liabilities assumed

 

 

(60,012

)

Fair value of net assets acquired

 

$

528,081

 

Goodwill is primarily attributable to Faster’s assembled workforce and anticipated synergies and economies of scale expected from the operations of the combined company. The synergies include certain cost savings, operating efficiencies, and other strategic benefits projected to be achieved as a result of the acquisition.

Transaction costs of $4,271 incurred in connection with the acquisition are included in selling, engineering and administrative expenses in the Consolidated Statement of Operations for the nine months ended September 29, 2018.

Net sales and loss before income taxes of Faster included in the Consolidated Statement of Operations for the period from the acquisition date through September 29, 2018 totaled $70,501 and $1,924, respectively. Included in Faster’s loss for the period are $5,086 of charges related to the purchase accounting effects of inventory step up to fair value and $10,717 of amortization of acquisition related intangibles assets.

Intangible Assets

The preliminary fair value of identified intangible assets and their respective useful lives are as follows:

 

 

Fair Value

 

 

Weighted-

Average

Amortization

Periods (Yrs)

 

Trade name

 

$

25,740

 

 

 

18

 

Technology

 

 

13,483

 

 

 

13

 

Customer relationships

 

 

201,019

 

 

 

26

 

Sales order backlog

 

 

6,129

 

 

 

0.4

 

Identified intangible assets

 

$

246,371

 

 

 

24

 

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Unaudited Pro Forma Information

The following unaudited pro forma financial information presents combined results of operations for each of the periods presented, as if Faster had been acquired as of the beginning of 2017.  The pro forma information includes adjustments to amortization and depreciation for intangible assets and property, plant and equipment and interest expense from borrowings to fund the acquisition.  Non-recurring pro forma adjustments directly attributable to the acquisition included in the pro forma information presented below include the purchase accounting effect of inventory step up to fair value of $5,086, transaction costs totaling $4,271, amortization of sales order backlog intangible asset totaling $5,895, accelerated amortization of Faster pre-acquisition loan costs of $2,328 and loss on forward contract entered into in connection with the acquisition totaling $2,535.  

The pro forma information does not reflect any operating efficiencies or potential cost savings that may result from the acquisition. Accordingly, the pro forma information is for illustrative purposes only and is not intended to present or be indicative of the actual results of operations of the combined company that may have been achieved had the acquisition actually occurred at the beginning of 2017, nor is it intended to represent or be indicative of future results of operations of the combined business. Consequently, actual results will differ from the unaudited pro forma information presented below:

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 29, 2018

 

 

September 30, 2017

 

 

September 29, 2018

 

 

September 30, 2017

 

Net sales

 

$

135,837

 

 

$

116,213

 

 

$

410,263

 

 

$

347,975

 

Operating income

 

 

21,207

 

 

 

21,380

 

 

 

74,161

 

 

 

66,598

 

Net income

 

 

12,929

 

 

 

12,547

 

 

 

43,403

 

 

 

33,249

 

Basic and diluted net income per common share

 

 

0.41

 

 

 

0.40

 

 

 

1.37

 

 

 

1.06

 

 

Acquisition of Custom Fluidpower Pty Ltd

On August 1, 2018, the Company acquired all of the outstanding equity interests of Custom Fluidpower Pty Ltd, an Australian proprietary limited liability company. The acquisition was completed pursuant to a Share Sale Agreement among the Company and the shareholders of Custom Fluidpower. The fair value of consideration paid at closing totaled $26,655 and included 333,065 shares of the Company’s common stock and cash of $9,315; cash paid net of cash acquired totaled $7,518. The cash consideration was funded with borrowings on the Company’s credit facility.

Custom Fluidpower was acquired to further diversify the Company’s hydraulics product and service portfolio and broaden the Company’s global footprint. The results of Custom Fluidpower’s operations are reported in the Company’s Hydraulics segment and have been included in the consolidated financial statements since the date of acquisition. Supplemental pro forma information has not been provided as the acquisition did not have a material impact on the Company’s consolidated results of operations.

Transaction costs of $1,179 incurred in connection with the acquisition are included in selling, engineering and administrative expenses in the Consolidated Statement of Operations for the nine months ended September 29, 2018.

The Company recorded $5,111 in goodwill and $7,556 in other identifiable intangible assets in connection with the acquisition; however, the purchase price allocation is preliminary, pending final intangibles valuation and tax related adjustments, and may be revised during the remainder of the measurement period (which will not exceed 12 months from the acquisition date). Any such revisions or changes to the fair values of the tangible and intangible assets acquired and liabilities assumed may be material.  

 

 

4.  FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company applies fair value accounting guidelines for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Under these guidelines, fair value is defined as the price that would be received for the sale of an asset or paid to transfer a liability (i.e. an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

Level 3 - Unobservable inputs that are supported by little, infrequent, or no market activity and reflect the Company’s own assumptions about inputs used in pricing the asset or liability.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

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The fair value of the Company’s cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued expenses and other current liabilities approximate their carrying value, due to their short-term nature.  Contingent consideration and newly acquired intangible assets are measured at fair value using level 3 inputs. Forward foreign exchange contracts are measured at fair value based on quoted foreign exchange forward rates at the reporting date. The fair value of interest rate swap contracts is based on the expected cash flows over the life of the trade. Expected cash flows are determined by evaluating transactions with a pricing model using a specific market environment. The values are estimated using the closing mid-market market rate/price environment as of the end of the period.

The following tables provide information regarding the Company’s assets and liabilities measured at fair value on a recurring basis at September 29, 2018 and December 30, 2017.

 

 

September 29, 2018

 

 

 

 

 

 

 

Quoted  Market

 

 

Significant Other Observable

 

 

Significant Unobservable

 

 

 

Total

 

 

Prices (Level 1)

 

 

Inputs (Level 2)

 

 

Inputs (Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap contract

 

$

119

 

 

$

 

 

$

119

 

 

$