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 March 31, 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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 31,594,734 shares of common stock, par value $.001, outstanding as of April 27, 2018.


Sun Hydraulics Corporation

INDEX

For the quarter ended

March 31, 2018

 

 

 

 

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2018 (unaudited) and December 30, 2017

 

3

 

 

 

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2018 (unaudited) and April 1, 2017 (unaudited)

 

4

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 (unaudited) and April 1, 2017 (unaudited)

 

5

 

 

 

 

 

Consolidated Statement of Shareholders’ Equity for the Three Months Ended March 31, 2018 (unaudited)

 

6

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 (unaudited) and April 1, 2017 (unaudited)

 

7

 

 

 

 

 

Notes to the Consolidated, Unaudited Financial Statements

 

8

 

 

 

 

 

 

Item 2.

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

 

17

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

22

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

22

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

23

 

 

 

 

 

 

Item 1A.

Risk Factors

 

23

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

23

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

23

 

 

 

 

 

 

Item 4.

Mine Safety Disclosure

 

23

 

 

 

 

 

 

Item 5.

Other Information

 

23

 

 

 

 

 

 

Item 6.

Exhibits

 

24

 

 

2


PART I: FINANCIAL INFORMATION

Item 1.

Sun Hydraulics Corporation

Consolidated Balance Sheets

(in thousands, except share data)

 

 

 

March 31, 2018

 

 

December 30, 2017

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

198,528

 

 

$

63,882

 

Restricted cash

 

 

42

 

 

 

40

 

Accounts receivable, net of allowance for doubtful accounts of $419 and $358

 

 

47,371

 

 

 

37,503

 

Inventories, net

 

 

40,862

 

 

 

41,545

 

Other current assets

 

 

3,961

 

 

 

3,806

 

Total current assets

 

 

290,764

 

 

 

146,776

 

Property, plant and equipment, net

 

 

93,922

 

 

 

91,931

 

Deferred income taxes

 

 

4,601

 

 

 

4,654

 

Goodwill

 

 

108,880

 

 

 

108,869

 

Other intangibles, net

 

 

102,082

 

 

 

104,131

 

Other assets

 

 

3,560

 

 

 

3,405

 

Total assets

 

$

603,809

 

 

$

459,766

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

16,556

 

 

$

15,469

 

Accrued expenses and other liabilities

 

 

11,068

 

 

 

8,977

 

Current portion of contingent consideration

 

 

17,231

 

 

 

17,102

 

Dividends payable

 

 

2,843

 

 

 

2,437

 

Income taxes payable

 

 

4,562

 

 

 

1,878

 

Total current liabilities

 

 

52,260

 

 

 

45,863

 

Revolving line of credit

 

 

 

 

 

116,000

 

Long-term debt

 

 

942

 

 

 

 

Contingent consideration, less current portion

 

 

17,053

 

 

 

16,780

 

Deferred income taxes

 

 

2,080

 

 

 

2,068

 

Other noncurrent liabilities

 

 

6,398

 

 

 

6,382

 

Total liabilities

 

 

78,733

 

 

 

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, 31,587,608

   and 27,077,145 shares outstanding

 

 

32

 

 

 

27

 

Capital in excess of par value

 

 

336,189

 

 

 

95,354

 

Retained earnings

 

 

192,838

 

 

 

183,770

 

Accumulated other comprehensive loss

 

 

(3,983

)

 

 

(6,478

)

Total shareholders' equity

 

 

525,076

 

 

 

272,673

 

Total liabilities and shareholders' equity

 

$

603,809

 

 

$

459,766

 

 

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

 

 

3


Sun Hydraulics Corporation

Consolidated Statements of Operations

(in thousands, except per share data)

 

 

 

Three months ended

 

 

 

March 31, 2018

 

 

April 1, 2017

 

 

 

(unaudited)

 

 

(unaudited)

 

Net sales

 

$

97,318

 

 

$

81,353

 

Cost of sales

 

 

59,701

 

 

 

48,559

 

Gross profit

 

 

37,617

 

 

 

32,794

 

Selling, engineering and administrative expenses

 

 

18,315

 

 

 

14,700

 

Amortization of intangible assets

 

 

2,049

 

 

 

2,310

 

Operating income

 

 

17,253

 

 

 

15,784

 

Interest expense, net

 

 

483

 

 

 

625

 

Foreign currency transaction loss (gain), net

 

 

511

 

 

 

(46

)

Miscellaneous (income) expense, net

 

 

(36

)

 

 

66

 

Change in fair value of contingent consideration

 

 

402

 

 

 

 

Income before income taxes

 

 

15,893

 

 

 

15,139

 

Income tax provision

 

 

3,982

 

 

 

4,928

 

Net income

 

$

11,911

 

 

$

10,211

 

Basic and diluted net income per common share

 

$

0.40

 

 

$

0.38

 

Basic and diluted weighted average shares outstanding

 

 

29,811

 

 

 

26,946

 

Dividends declared per share

 

$

0.09

 

 

$

0.11

 

 

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

 

 

4


Sun Hydraulics Corporation

Consolidated Statements of Comprehensive Income

(in thousands)

 

 

 

Three months ended

 

 

 

March 31, 2018

 

 

April 1, 2017

 

 

 

(unaudited)

 

 

(unaudited)

 

Net income

 

$

11,911

 

 

$

10,211

 

Other comprehensive income

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

2,495

 

 

 

1,951

 

Unrealized gain on available-for-sale securities, net of tax

 

 

 

 

 

129

 

Total other comprehensive income

 

 

2,495

 

 

 

2,080

 

Comprehensive income

 

$

14,406

 

 

$

12,291

 

 

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

 

 

5


Sun Hydraulics Corporation

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

 

 

 

 

 

 

 

 

 

 

100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued, other compensation

 

 

 

 

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued, ESPP

 

 

 

 

 

 

 

 

 

 

9

 

 

 

 

 

 

 

371

 

 

 

 

 

 

 

 

 

 

 

371

 

Shares issued, public offering

 

 

 

 

 

 

 

 

 

 

4,400

 

 

5

 

 

 

239,788

 

 

 

 

 

 

 

 

 

 

 

239,793

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

916

 

 

 

 

 

 

 

 

 

 

 

916

 

Cancellation of shares for payment of employee tax withholding

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

 

(240

)

 

 

 

 

 

 

 

 

 

 

(240

)

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,843

)

 

 

 

 

 

 

(2,843

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,911

 

 

 

 

 

 

 

11,911

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,495

 

 

 

2,495

 

Balance, March 31, 2018

 

 

 

 

$

 

 

 

31,588

 

 

$

32

 

 

$

336,189

 

 

$

192,838

 

 

$

(3,983

)

 

$

525,076

 

 

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

 

 

6


Sun Hydraulics Corporation

Consolidated Statements of Cash Flows

(in thousands)

 

 

Three months ended

 

 

 

March 31, 2018

 

 

April 1, 2017

 

 

 

(unaudited)

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

11,911

 

 

$

10,211

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,729

 

 

 

5,091

 

Loss on disposal of assets

 

 

 

 

 

139

 

Stock-based compensation expense

 

 

916

 

 

 

975

 

Amortization of debt issuance costs

 

 

98

 

 

 

70

 

Allowance for doubtful accounts

 

 

65

 

 

 

63

 

Provision for slow moving inventory

 

 

(80

)

 

 

466

 

Provision (benefit) for deferred income taxes

 

 

55

 

 

 

(12

)

Amortization of acquisition related inventory step-up

 

 

 

 

 

1,774

 

Change in fair value of contingent consideration

 

 

402

 

 

 

 

Unrealized forward contract losses

 

 

505

 

 

 

 

(Increase) decrease in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(9,683

)

 

 

(11,766

)

Inventories

 

 

940

 

 

 

(3,952

)

Income taxes receivable

 

 

 

 

 

371

 

Other current assets

 

 

(219

)

 

 

(1,183

)

Other assets

 

 

(251

)

 

 

197

 

Increase (decrease) in:

 

 

 

 

 

 

 

 

Accounts payable

 

 

1,114

 

 

 

4,566

 

Accrued expenses and other liabilities

 

 

1,469

 

 

 

1,508

 

Income taxes payable

 

 

2,671

 

 

 

3,765

 

Other noncurrent liabilities

 

 

17

 

 

 

150

 

Net cash provided by operating activities

 

 

14,659

 

 

 

12,433

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(4,237

)

 

 

(758

)

Proceeds from dispositions of equipment

 

 

3

 

 

 

 

Proceeds from sale of short-term investments

 

 

 

 

 

2,096

 

Net cash (used in) provided by investing activities

 

 

(4,234

)

 

 

1,338

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayment of borrowings on revolving credit facility

 

 

(116,000

)

 

 

(16,000

)

Borrowings on long-term debt

 

 

932

 

 

 

 

Proceeds from stock issued

 

 

240,163

 

 

 

205

 

Dividends to shareholders

 

 

(2,437

)

 

 

(2,963

)

Payment of employee tax withholding

 

 

(240

)

 

 

 

Net cash provided by (used in) financing activities

 

 

122,418

 

 

 

(18,758

)

Effect of exchange rate changes on cash and cash equivalents

 

 

1,803

 

 

 

1,172

 

Net increase (decrease) in cash and cash equivalents

 

 

134,646

 

 

 

(3,815

)

Cash and cash equivalents, beginning of period

 

 

63,882

 

 

 

74,221

 

Cash and cash equivalents, end of period

 

$

198,528

 

 

$

70,406

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid:

 

 

 

 

 

 

 

 

Income taxes

 

$

1,068

 

 

$

366

 

Interest

 

$

939

 

 

$

658

 

Supplemental disclosure of noncash transactions:

 

 

 

 

 

 

 

 

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

 

$

 

 

$

601

 

Unrealized gain on available for sale securities

 

$

 

 

$

129

 

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

7


SUN HYDRAULICS CORPORATION

NOTES TO THE CONSOLIDATED, UNAUDITED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

 

1. COMPANY BACKGROUND

Sun Hydraulics Corporation (“Sun” 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. Sun operates in two business segments:  Hydraulics and Electronics. The Hydraulics segment consists of all of the global, historical Sun Hydraulics companies and 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. The Electronics segment, which consists of 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 three month period ended March 31, 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 is recognized.  Additionally, the guidance requires disaggregated disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized.  The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). 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 continues to be recognized at a point in time, typically when product is shipped to customers.  

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 segment as well as by geographic destination of the sale. See disaggregated revenue balances in Note 11, Segment Reporting. The Company’s contracts with customers are generally similar in nature and terms.

The Company’s contracts with its customers are for 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. Revenue is recognized at a point in time when control is transferred to customers, typically upon shipment to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for the goods.

Account receivable balances are recorded upon recognition of revenue until payment is collected from the customers. 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. Consideration is primarily fixed in nature with insignificant amounts recognized related to 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.

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.

8


Foreign Exchange Currency Contracts

The Company enters into foreign exchange currency contracts that are not designated as hedging instruments for accounting purposes. Changes in fair value of foreign exchange currency contracts not designated as hedging instruments are reported in net income as part of foreign currency transaction loss (gain), net.

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. The Company is currently evaluating the effects, if any, adoption of this guidance will have on the Company’s consolidated financial statements.

Earnings Per Share

The following table represents the computation of basic and diluted earnings per common share:

 

 

 

Three Months Ended

 

 

 

March 31, 2018

 

 

April 1, 2017

 

Net income

 

$

11,911

 

 

$

10,211

 

Basic and diluted weighted average shares outstanding

 

 

29,811

 

 

 

26,946

 

Basic and diluted net income per common share

 

$

0.40

 

 

$

0.38

 

 

 

3.  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.

The fair value of the Company’s cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued expenses and other 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.  

9


The following tables provide information regarding the Company’s assets and liabilities measured at fair value on a recurring basis at March 31, 2018 and December 30, 2017.

 

 

March 31, 2018

 

 

 

 

 

 

 

Quoted  Market

 

 

Significant Other Observable

 

 

Significant Unobservable

 

 

 

Total

 

 

Prices (Level 1)

 

 

Inputs (Level 2)

 

 

Inputs (Level 3)

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward foreign exchange contract

 

$

505

 

 

$

 

 

$

505

 

 

$

 

Contingent consideration

 

 

34,284

 

 

 

 

 

 

 

 

 

34,284

 

Total

 

$

34,789

 

 

$

 

 

$

505

 

 

$

34,284

 

 

 

 

December 30, 2017

 

 

 

 

 

 

 

Quoted  Market

 

 

Significant Other Observable

 

 

Significant Unobservable

 

 

 

Total

 

 

Prices (Level 1)

 

 

Inputs (Level 2)

 

 

Inputs (Level 3)

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

33,882

 

 

$

 

 

$

 

 

$

33,882

 

Total

 

$

33,882

 

 

$

 

 

$

 

 

$

33,882

 

 

During the quarter ended March 31, 2018, the Company entered into a forward foreign exchange currency contract, for the purchase of 370 million euros, to economically hedge transactional exposure associated with the acquisition of Faster, S.p.A., which was denominated in euros. The contract was not designated as a hedging instrument for accounting purposes. The Company recognized a loss during the quarter ended March 31, 2018, of $505, which was reported in foreign currency loss (gain), net for the period.  The fair value of the derivative instrument is included in the accrued expenses and other liabilities line item in the consolidated balance sheet.

A summary of the changes in the estimated fair value of contingent consideration at March 31, 2018 is as follows:

 

Balance at December 30, 2017

 

$

33,882

 

Change in estimated fair value

 

 

149

 

Accretion in value

 

 

253

 

Balance at March 31, 2018

 

$

34,284

 

 

The fair value of the contingent consideration arrangement was estimated using a risk-adjusted probability analysis. During the three months ended March 31, 2018, adjustments to the fair value of contingent consideration were recorded based on Enovation Controls’ results of operations during the period and management’s revision of revenue and EBITDA forecasts.

 

 

4.  INVENTORIES

 

 

 

March 31, 2018

 

 

December 30, 2017

 

Raw materials

 

$

25,803

 

 

$

26,426

 

Work in process

 

 

7,975

 

 

 

6,910

 

Finished goods

 

 

8,735

 

 

 

9,920

 

Provision for slow moving inventory

 

 

(1,651

)

 

 

(1,711

)

Total

 

$

40,862

 

 

$

41,545

 

 

 

5.  GOODWILL AND INTANGIBLE ASSETS

A summary of changes in goodwill at March 31, 2018, is as follows:

 

 

 

Hydraulics

 

 

Electronics

 

 

Total

 

Balance at December 30, 2017

 

$

2,496

 

 

$

106,373

 

 

$

108,869

 

Currency translation

 

 

11

 

 

 

 

 

 

11

 

Balance at March 31, 2018

 

$

2,507

 

 

$

106,373

 

 

$

108,880

 

 

10


Goodwill is tested for impairment annually, in the third and fourth quarters, or more frequently if events or changes in circumstances indicate that goodwill might be impaired. Valuation models reflecting the expected future cash flow projections are used to value reporting units.  

At March 31, 2018, and December 30, 2017, intangible assets consisted of the following:

 

 

 

March 31, 2018

 

 

December 30, 2017

 

 

 

Gross carrying

amount

 

 

Accumulated

amortization

 

 

Net carrying

amount

 

 

Gross carrying

amount

 

 

Accumulated

amortization

 

 

Net carrying

amount

 

Definite-lived intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade name and brands

 

$

30,774

 

 

$

(2,509

)

 

$

28,265

 

 

$

30,774

 

 

$

(2,115

)

 

$

28,659

 

Non-compete agreements

 

 

950

 

 

 

(253

)

 

 

697

 

 

 

950

 

 

 

(206

)

 

 

744

 

Technology

 

 

18,435

 

 

 

(3,185

)

 

 

15,250

 

 

 

18,435

 

 

 

(2,671

)

 

 

15,764

 

Supply agreement

 

 

21,000

 

 

 

(2,800

)

 

 

18,200

 

 

 

21,000

 

 

 

(2,275

)

 

 

18,725

 

Customer relationships

 

 

39,751

 

 

 

(3,116

)

 

 

36,635

 

 

 

39,751

 

 

 

(2,607

)

 

 

37,144

 

Licensing agreement

 

 

3,716

 

 

 

(681

)

 

 

3,035

 

 

 

3,716

 

 

 

(621

)

 

 

3,095

 

 

 

$

114,626

 

 

$

(12,544

)

 

$

102,082

 

 

$

114,626

 

 

$

(10,495

)

 

$

104,131

 

 

Amortization expense of intangible assets for the three months ended March 31, 2018, and April 1, 2017, was $2,049 and $2,310, respectively. The remaining amortization for 2018 is approximately $6,111. Total estimated amortization expense of intangible assets for the years 2019 through 2023 is presented below.  

 

Year:

 

 

 

 

2019

 

$

8,148

 

2020

 

 

8,148

 

2021

 

 

8,113

 

2022

 

 

7,842

 

2023

 

 

7,750

 

Total

 

$

40,001

 

 

 

 

6.  LONG-TERM DEBT

The Company has a revolving line of credit under a credit agreement with PNC Bank, National Association, that provides for up to $300,000 of available credit, available through November 22, 2021. At March 31, 2018, and December 30, 2017, the balance on the revolving line was $0 and $116,000, respectively, with $300,000 and $184,000 of additional credit available, respectively, subject to pro forma compliance with debt covenants.  Interest expense recognized during the three months ended March 31, 2018, and April 1, 2017, totaled $702 and $725, respectively. As of the date of this filing, the Company was in compliance with all debt covenants related to the credit agreement.

The Company entered into a credit agreement with Shinhan Bank that provides a term loan of 1,000,000 Korean won, approximately $932. The proceeds from the term loan will be used to fund the construction of the new production facility in South Korea. The loan matures in March 2020, at which time the full amount will become due. Interest on the loan is charged at a one year variable rate, 2.05% at March 31, 2018.

 

 

7. PUBLIC STOCK OFFERING

On February 6, 2018, the Company completed a public offering of its common stock, pursuant to which the Company sold 4,400,000 shares at a public offering price of $57.50 per share. The Company received net proceeds from the sale totaling $239,793, after deducting the underwriting discount and other offering expenses. The Company used the net proceeds for the repayment of debt under its credit facility and to partially fund the acquisition of Faster, S.p.A., which closed on April 5, 2018.  

 

 

8. INCOME TAXES

At March 31, 2018, the Company had an unrecognized tax benefit of $5,056 including accrued interest. If recognized, the unrecognized tax benefit would have a favorable effect on the effective tax rate in future periods. The Company recognizes interest and penalties related to income tax matters in income tax expense. Interest accrued as of March 31, 2018 is not considered material to the Company’s consolidated financial statements.

11


The Company files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The Company is no longer subject to income tax examinations by tax authorities for years prior to 2007 for the majority of tax jurisdictions where the Company files tax returns.

The Company’s federal returns are currently under examination by the Internal Revenue Service (IRS) in the United States for the periods 2007 through 2012. To date, there have not been any significant proposed adjustments that have not been accounted for in the Company’s consolidated financial statements.

Audit outcomes and the timing of audit settlements are subject to significant uncertainty. It is reasonably possible that within the next twelve months the Company will resolve some or all of the matters presently under consideration for 2007 through 2012 with the IRS and there could be significant increases or decreases to unrecognized tax benefits.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act.  In accordance with SAB 118, Management calculated their best estimate of the impact of the Act in the 2017 year-end income tax provision in accordance with their understanding of the Act and available guidance. Also pursuant to SAB 118, certain additional impacts of the Act remain open during the measurement period to include other indirect correlative impacts of the Act, the Company’s position with regards to its permanent reinvestment assertion, the state tax impacts of the Act as well as the Company’s position as to whether to account for global intangible low-taxed income (GILTI) as a period cost or via deferred tax accounting.   As of the close of the first quarter, the Company is still analyzing the Act in its entirety and refining its calculations, which could potentially impact the measurement of tax balances.  Any subsequent adjustment to these amounts will be recorded to tax expense in the quarter of 2018 when the analysis is complete. 

 

 

9.  STOCK-BASED COMPENSATION

The Company’s 2011 Equity Incentive Plan (“2011 Plan”) provides for the grant of up to an aggregate of 1,000,000 shares of restricted stock, restricted share units, stock appreciation rights, dividend or dividend equivalent rights, stock awards and other awards valued in whole or in part by reference to or otherwise based on the Company’s common stock, to officers, employees and directors of the Company. The 2011 Plan was approved by the Company’s shareholders at the 2012 Annual Meeting. At March 31, 2018, 361,438 shares remained available to be issued under the 2011 Plan. Compensation cost is measured at the date of the grant and is recognized in earnings over the period in which the shares vest. Restricted stock expense for the three months ended March 31, 2018, and April 1, 2017, totaled $495 and $697, respectively.

The following table summarizes restricted stock activity from December 30, 2017 through March 31, 2018:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

average

 

 

 

Number of shares

 

 

grant-date

 

 

 

(in thousands)

 

 

fair value

 

Nonvested balance at December 30, 2017

 

 

88

 

 

$

34.44

 

Granted

 

 

101

 

 

 

53.81

 

Vested

 

 

(24

)

 

 

35.45

 

Forfeitures

 

 

(5

)

 

 

35.00

 

Nonvested balance at March 31, 2018

 

 

160

 

 

$

46.51

 

 

The Company had $6,908 of total unrecognized compensation cost related to restricted stock awards granted under the 2011 Plan as of March 31, 2018. That cost is expected to be recognized over a weighted average period of 2.24 years.

The Company maintains an Employee Stock Purchase Plan (“ESPP”) in which only Sun Hydraulics US employees are eligible to participate. Employees in the United States who choose to participate are granted an opportunity to purchase common stock at 85 percent of market value on the first or last day of the quarterly purchase period, whichever is lower. Employees in the United Kingdom, under a separate plan, are granted an opportunity to purchase the Company’s common stock at market value, on the first or last day of the quarterly purchase period, whichever is lower, with the Company issuing one additional free share of common stock for each six shares purchased by the employee under the plan. The ESPP and U.K. plans authorize the issuance, and the purchase by employees, of up to 1,096,875 shares of common stock through payroll deductions. No U.S. employee is allowed to buy more than $25 of common stock in any year, based on the market value of the common stock at the beginning of the purchase period, and no U.K. employee is allowed to buy more than the lesser of £1.5 or 10% of his or her annual salary in any year. Employees purchased 8,110 shares at a weighted average price of $45.79, and 6,627 shares at a weighted average price of $30.96, under the ESPP and U.K. plans during the three months ended March 31, 2018, and April 1, 2017, respectively. The Company recognized $63 and $34 of

12


compensation expense during the three months ended March 31, 2018, and April 1, 2017, respectively. At March 31, 2018, 538,199 shares remained available to be issued through the ESPP and the U.K. plan.

In March 2012, the Board of Directors adopted the Sun Hydraulics Corporation 2012 Nonemployee Director Fees Plan (the “2012 Directors Plan”), which was approved by the shareholders of the Company at the 2012 Annual Meeting. Under the 2012 Directors Plan, Nonemployee Directors are compensated for their Board service solely in shares of common stock.  In February 2015, the Board adopted amendments to the 2012 Directors Plan, which revised the compensation for Nonemployee Directors. Each Nonemployee Director now receives an annual retainer of 2,000 shares of common stock. The Chairman’s retainer is twice that of a regular director, and the retainer for the chairs of each Board Committee is 150% that of a regular director.  In addition, each Nonemployee Director receives 250 shares of common stock for attendance at each Board meeting and each meeting of each committee of the Board on which he or she serves when the committee meeting is not held within one day of a meeting of the Board. In June 2015, the Company's shareholders approved the amendments to the 2012 Directors Plan.

The Board has the authority to change from time to time, in any manner it deems desirable or appropriate, the share compensation to be awarded to all or any one or more Nonemployee Directors under the 2012 Directors Plan, provided that, with limited exceptions, such changes are subject to prior shareholder approval. The aggregate number of shares which may be issued during any single calendar year is limited to 35,000 shares. The 2012 Directors Plan authorizes the issuance of up to 270,000 shares of common stock. At March 31, 2018, 142,249 shares remained available for issuance under the 2012 Directors Plan. Directors were granted 6,625 and 6,375 shares for the three months ended March 31, 2018 and April 1, 2017, respectively. The Company recognized director stock compensation expense of $365 and $226 for the three months ended March 31, 2018 and April 1, 2017, respectively.

 

 

10.  ACCUMULATED OTHER COMPREHENSIVE LOSS

Changes in Accumulated Other Comprehensive Loss by Component

 

 

 

Unrealized

Gains and

Losses on

Available-for-

Sale

Securities

 

 

Foreign

Currency

Items

 

 

Total

 

Balance at December 30, 2017

 

$

 

 

$

(6,478

)

 

$

(6,478

)

Other comprehensive income before reclassifications

 

 

 

 

 

2,495

 

 

 

2,495

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 

 

 

 

 

 

 

Net current period other comprehensive income

 

 

 

 

 

2,495

 

 

 

2,495

 

Balance at March 31, 2018

 

$

 

 

$

(3,983

)

 

$

(3,983

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized

Gains and

Losses on

Available-for-

Sale

Securities

 

 

Foreign

Currency

Items

 

 

Total

 

Balance at December 31, 2016

 

$

(391

)

 

$

(15,442

)

 

$

(15,833

)

Other comprehensive income before reclassifications

 

 

(39

)

 

 

1,951

 

 

 

1,912

 

Amounts reclassified from accumulated other comprehensive loss

 

 

168