The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements.
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements.
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements
.
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements.
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements.
NOTES TO THE CONSOLIDAT
ED FINANCIAL STATEMENTS
(Dollars in thousands, except 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 Custom Fluidpower, along with Enovation Controls, LLC and Faster S.r.l. 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, Faster, acquired in the second quarter of this fiscal year, and 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. Customer 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.
On December 29, 2017 the Company merged the operations of two of its wholly owned subsidiaries in the Electronics segment, HCT and Enovation Controls. Enovation Controls was the surviving legal entity and will continue to sell HCT products under the HCT™ brand. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts and operations of Helios Technologies and its direct subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash, Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances.
64
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.
Inventory
Inventories are valued at the lower of cost and net realizable value, on a first-in, first-out basis.
On an ongoing basis, component parts found to be obsolete through design or process changes are disposed of and charged to material cost. The Company reviews on-hand balances of products and component parts against specific criteria. Products and component parts without usage or that have excess quantities on hand are evaluated. An inventory reserve is then established for the appropriate inventory value of those products and component parts deemed to be obsolete or slow moving. See Note 5 for inventory reserve amounts.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Expenditures for repairs and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Repairs and maintenance are expensed as incurred. Depreciation is computed using the straight line method over the following useful lives:
|
|
Years
|
Machinery and equipment
|
|
4 - 12
|
Office furniture and equipment
|
|
3 - 10
|
Buildings
|
|
25 - 40
|
Building and land improvements
|
|
7 - 40
|
Gains or losses on the retirement, sale, or disposition of property, plant, and equipment are reflected in the Consolidated Statement of Operations in the period in which the assets are taken out of service.
Fair Value Measurements
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 which 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.
65
The fair value of the Company’s cash and cash equivalents, accounts receivable, other current assets, accounts payable
,
accrued expenses and other liabilities approximate their carrying value, due to their short-term nature. Contingent considerat
ion and newly acquired intangible assets are measured at fair value using level 3 inputs.
The
Company utilizes
risk-adjusted probability analysis
to estimate the fair value of contingent consideration arrangements
.
Forward foreign exchange contracts are measured at fair value based on quoted foreign exchange forward rates at the reporting dates. The fair value of interest rate swap contracts is based on the expected cash flows over the life of the trade. Expected cas
h flows are determined by evaluating transactions with a pricing model using a specific market environment. The values are estimated using the closing and mid-market market rate/price environment as of the end of the period.
See Note 4 for detail on the l
evel of inputs used in determining the fair value of assets and liabilities.
Business Combinations
Business combinations are accounted for under the acquisition method of accounting, which requires recognition separately from goodwill, the assets acquired and the liabilities assumed at their acquisition date fair values. While best estimates and assumptions are used to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, when applicable, the e
stimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, adjustments that are based on new information obtained about facts and circumstances that existed as of the acquisition date are recorded to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in the Consolidated Statements of Operations.
Goodwill and Other Intangible Assets
Goodwill, which represents the excess of the purchase price of an acquisition over the fair value of the net assets acquired, is carried at cost. Goodwill is tested for impairment annually, in the third and fourth quarters, or more frequently if events or circumstances indicate a reduction in the fair value below the carrying value. As part of the impairment test, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If after this optional qualitative assessment, the Company determines that impairment is more likely than not, then the Company performs the quantitative impairment test. The carrying value of assets is calculated at the reporting unit level. An impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value.
The Company completed its annual goodwill impairment testing and determined that the carrying amount of goodwill was not impaired. See Note 7 for goodwill amounts.
Other intangible assets with definite lives consist primarily of technology, customer relationships, trade names and brands and a favorable supply agreement, and are amortized over their respective estimated useful lives, ranging from one to twenty-six years.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the asset is measured by comparison of its carrying amount to future net cash flows the asset is expected to generate. If such assets are considered impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value.
66
Accrued Expenses and Other Liabilities
The Company makes estimates related to certain employee benefits and miscellaneous accruals. Estimates for employee benefit accruals are based on management’s assessment of estimated liabilities related to workers’ compensation and health care benefits. Estimates for miscellaneous accruals are based on management’s assessment of estimated liabilities for costs incurred.
The Company accrues for the estimated cost of product warranties at the time revenue is recognized. The estimates are based upon current and historical warranty trends and other related information known to the Company.
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 17, 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 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, and are short term in nature, typically completed within one quarter and not exceeding one year in duration. The transaction price is agreed upon in the contract. Revenue is recognized upon satisfaction of the performance obligation which is typically at a point in time when control is transferred to the customer. Typically, control is transferred upon shipment to the customer but can also occur upon delivery to the customer, depending on contract terms. 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.
67
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 recognized 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 input 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 $2,851 at December 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 $138 at December 29, 2018 and are presented in Other current liabilities in the Consolidated Balance Sheets.
The timing of customer payments most often occurs after performance obligations are satisfied which results in the recognition of a contract asset.
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 applies the practical expedient as permitted by the Financial Accounting Standards Board, which allows the omission of certain disclosures related to remaining performance obligations, as contract duration does not exceed one year.
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.
The Company treats shipping and handling activities that occur after control of the product transfers as fulfillment activities, and therefore, does not account for shipping and handling costs as a separate performance obligation. Shipping and handling costs billed to customers are recorded in revenue. Shipping costs incurred by the Company are recorded in cost of goods sold.
68
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.
Foreign Currency Translation and Transactions
The financial statements of foreign subsidiaries are translated into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates for operating results. Unrealized translation gains and losses are included in accumulated other comprehensive income (loss) in shareholders’ equity. When a transaction is denominated in a currency other than the subsidiary’s functional currency, the Company recognizes a transaction gain or loss in foreign currency transaction (gain) loss, net when the transaction is settled.
Income Taxes
The Company’s income tax policy provides for a liability approach under which deferred income taxes are provided for based upon enacted tax laws and rates applicable to the periods in which the taxes become payable. These differences result from items reported differently for financial reporting and income tax purposes, primarily depreciation, accrued expenses and reserves.
The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company recognizes potential interest and penalties related to its unrecognized tax benefits in income tax expense.
Research and Development
The Company conducts research and development (“R&D”) to create new products and to make improvements to products currently in use. R&D costs are charged to expense as incurred and totaled $14,122, $10,624 and $4,334 for the 2018, 2017 and 2016 fiscal years, respectively.
Stock-Based Compensation
All share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense in earnings over the requisite service period. Forfeitures are recognized in compensation cost when they occur. Benefits or deficiencies of tax deductions in excess of recognized compensation costs are reported within operating cash flows.
Reclassifications
Certain reclassifications have been made to the prior period consolidated financial statements to conform to the current year presentation.
69
Other
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. Upon adoption, the Company will apply the new standard retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment. The Company is still evaluating the impacts of this new guidance but expects the adoption of ASU 2016-02 will materially gross up its consolidated balance sheet, by approximately $14,000, 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 is not expected to be material. The new standard will also require additional disclosures for financing and operating leases.
3. BUSINESS ACQUISITIONS
Acquisition of Faster
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. Subsequent to the acquisition, the legal structure of Faster was changed to Faster S.r.l.
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.
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. See Note 4 for a summary of the change in estimated fair value of the contingent liability.
70
The fair value of total pur
chase consideration consisted of the following:
Cash
|
|
$
|
532,408
|
|
Acquisition date 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
|
|
|
34,835
|
|
Other current assets
|
|
|
6,488
|
|
Property, plant and equipment
|
|
|
20,242
|
|
Goodwill
|
|
|
288,792
|
|
Intangible assets
|
|
|
248,823
|
|
Other assets
|
|
|
6,870
|
|
Total assets acquired
|
|
|
630,688
|
|
Accounts payable
|
|
|
(18,668
|
)
|
Accrued expenses
|
|
|
(12,223
|
)
|
Income taxes payable
|
|
|
(4,862
|
)
|
Other current liabilities
|
|
|
(1,289
|
)
|
Other noncurrent liabilities
|
|
|
(65,565
|
)
|
Total liabilities assumed
|
|
|
(102,607
|
)
|
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 year ended December 29, 2018.
Net sales and income before income taxes of Faster included in the Consolidated Statement of Operations for the period from the acquisition date through December 29, 2018 totaled $106,519 and $3,058, respectively. Included in Faster’s income for the period are $4,115 of charges related to the purchase accounting effects of inventory step up to fair value and $14,297 of amortization of acquisition related intangibles assets.
71
The
preliminary
fair value
of identified intangible assets and their respective useful lives are as follows:
|
|
Fair Value
|
|
|
Weighted-
Average
Amortization
Periods (Yrs)
|
|
Brands
|
|
$
|
25,740
|
|
|
|
18
|
|
Technology
|
|
|
13,483
|
|
|
|
13
|
|
Customer relationships
|
|
|
202,245
|
|
|
|
26
|
|
Sales order backlog
|
|
|
7,355
|
|
|
|
0.4
|
|
Identified intangible assets
|
|
$
|
248,823
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Custom Fluidpower
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 year ended December 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.
Acquisition of Enovation Controls
On December 5, 2016, the Company completed the acquisition of Enovation Controls, LLC, a global provider of electronic control, display and instrumentation solutions. Historically Enovation Controls sold products to four customer markets: natural gas production controls (NGPC), engine controls and fuel systems (ECFS), power controls (PC) and vehicle technologies (VT). Prior to the closing date, and pursuant to an Asset Transfer Agreement, Enovation Controls transferred the assets and liabilities of their lines of business associated with the NGPC and ECFS customer markets to a separate legal entity, leaving Enovation Controls with only the lines of business associated with the PC and VT customer markets and the related agreed upon assets and liabilities to be acquired by Helios.
The acquisition of Enovation Controls enables the Company to expand the current complete system solution portfolio and develop product and end market diversification. The results of Enovation Controls’ operations have been included in the consolidated financial statements since the acquisition date.
72
Pursuant to a Unit Purchase Agreement,
Helios
acquired all of the outstanding membership units of Enovation Controls for initial cash consideration of $201
,020 and additional cash earn-out potential of $50,000. Total consideration for the acquisition was subject to a post-closing adjustment for working capital in accordance with the terms of the Purchase Agreement. The consideration paid for the acquisitio
n was funded with cash on hand and proceeds from the
Company’s
existing revolving line of credit.
The contingent consideration arrangement requires the Company to pay up to $50,000 of additional consideration to Enovation Controls’s former owners based on defined revenue and EBITDA targets. The potential payments are due in three installments, to be paid immediately following the 9, 18 and 27 month periods after closing, of which the first two payments were made in October 2017 and July 2018. See Note 4 for a summary of the changes in estimated fair value of the contingent consideration liability.
The fair value of total purchase consideration consisted of the following:
Cash
|
|
$
|
201,020
|
|
Acquisition date fair value of contingent consideration
|
|
|
41,391
|
|
Post-closing adjustment for working capital
|
|
|
500
|
|
Total purchase consideration
|
|
|
242,911
|
|
Less: cash acquired
|
|
|
(964
|
)
|
Total purchase consideration, net of cash acquired
|
|
$
|
241,947
|
|
The purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The allocation of the total purchase price, net of cash acquired, is as follows:
Accounts receivable
|
|
$
|
9,502
|
|
Inventories
|
|
|
16,979
|
|
Other current assets
|
|
|
176
|
|
Property, plant and equipment
|
|
|
10,546
|
|
Goodwill
|
|
|
103,671
|
|
Intangible assets
|
|
|
108,070
|
|
Other assets
|
|
|
8
|
|
Total assets acquired
|
|
|
248,952
|
|
Accounts payable
|
|
|
(3,260
|
)
|
Accrued expenses and other liabilities
|
|
|
(3,745
|
)
|
Total liabilities assumed
|
|
|
(7,005
|
)
|
Fair value of net assets acquired
|
|
$
|
241,947
|
|
Goodwill is primarily attributable to the assembled workforce, new product development capabilities 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. All goodwill is expected to be deductible for tax purposes.
Transaction costs of $1,537 incurred in connection with the acquisition are included in selling, engineering and administrative expenses in the Consolidated Statement of Operations for the year ended December 31, 2016.
The net sales and loss before income taxes of Enovation Controls, included in the Consolidated Statement of Operations for the period from December 5, 2016 through December 31, 2016 totaled approximately $4,136 and $2,151, respectively. Included in Enovation Controls’ loss for the period are $2,006 of charges related to the purchase accounting effects of inventory step-up to fair value and amortization of acquisition-related intangible assets.
73
The fair value of identified intangible assets and their respective useful lives are as follows:
|
|
Fair Value
|
|
|
Weighted-
Average
Amortization
Periods (Yrs)
|
|
Brands
|
|
$
|
30,000
|
|
|
|
20
|
|
Non-compete agreements
|
|
|
950
|
|
|
|
5
|
|
Technology
|
|
|
17,500
|
|
|
|
9
|
|
Supply agreement
|
|
|
21,000
|
|
|
|
10
|
|
Sales order backlog
|
|
|
620
|
|
|
|
1
|
|
Customer relationships
|
|
|
38,000
|
|
|
|
20
|
|
Identified intangible assets
|
|
$
|
108,070
|
|
|
|
16
|
|
Unaudited Pro Forma Information
The following unaudited pro forma financial information presents combined results of operations for each of the periods presented, as if Enovation Controls had been acquired as of the beginning of 2015 and Faster had been acquired as of the beginning of 2017. The financial results of Enovation Controls included in the pro forma information provided below reflect net sales and direct costs and operating expenses related to the acquired lines of business only.
The PC and VT lines of business are not separate legal entities and were never operated as stand-alone businesses, divisions or subsidiaries and Enovation Controls has never maintained the distinct and separate accounts necessary to prepare full carve out financial statements. Due to the impracticability of obtaining full financial information for the carve-out operations, certain costs of Enovation Controls, primarily related to corporate overhead, foreign currency translation gains and losses and interest expense are not included in the pro forma results prior to the acquisition date.
The pro forma information includes adjustments to amortization and depreciation for intangible assets and property, plant and equipment, net sales and cost of sales for the effects of the Enovation Controls supply agreement and interest expense from borrowings to fund the acquisitions. Non-recurring pro forma adjustments directly attributable to the Enovation Controls acquisition included in the pro forma information presented below include the purchase accounting effect of inventory step up to fair value of $1,021 and transaction costs totaling $1,537. Non-recurring pro forma adjustments directly attributable to the Faster acquisition included in the pro forma information presented below include the purchase accounting effect of inventory step up to fair value of $4,115, transaction costs totaling $4,271, amortization of sales order backlog intangible asset totaling $7,032, 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 acquisitions. 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 acquisitions actually occurred at the beginning of 2015 and 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:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net sales
|
|
$
|
548,986
|
|
|
$
|
463,468
|
|
|
$
|
277,706
|
|
Operating income
|
|
|
98,640
|
|
|
|
79,476
|
|
|
|
47,673
|
|
Net income
|
|
|
61,661
|
|
|
|
37,723
|
|
|
|
31,064
|
|
Basic and diluted net income per common share
|
|
|
1.97
|
|
|
|
1.20
|
|
|
|
1.16
|
|
74
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following tables provide information regarding the Company’s assets and liabilities measured at fair value on a recurring basis at December 29, 2018, and December 30, 2017.
|
|
December 29, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Quoted Market
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Total
|
|
|
Prices (Level 1)
|
|
|
Inputs (Level 2)
|
|
|
Inputs (Level 3)
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contract
|
|
$
|
2,309
|
|
|
$
|
—
|
|
|
$
|
2,309
|
|
|
$
|
—
|
|
Forward foreign exchange contracts
|
|
|
137
|
|
|
|
—
|
|
|
|
137
|
|
|
|
—
|
|
Contingent consideration
|
|
|
18,960
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,960
|
|
Total
|
|
$
|
21,406
|
|
|
$
|
—
|
|
|
$
|
2,446
|
|
|
$
|
18,960
|
|
|
|
December 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Quoted Market
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Total
|
|
|
Prices (Level 1)
|
|
|
Inputs (Level 2)
|
|
|
Inputs (Level 3)
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
33,882
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
33,882
|
|
Total
|
|
$
|
33,882
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
33,882
|
|
A summary of changes in the estimated fair value of contingent consideration at December 29, 2018 and December 30, 2017 is as follows:
Balance at December 31, 2016
|
|
$
|
35,077
|
|
Measurement period adjustment
|
|
|
6,314
|
|
Change in estimated fair value
|
|
|
8,299
|
|
Accretion in value
|
|
|
1,177
|
|
Payment on liability
|
|
|
(16,985
|
)
|
Balance at December 30, 2017
|
|
$
|
33,882
|
|
Contingent consideration incurred in connection with Faster acquisition
|
|
|
938
|
|
Change in estimated fair value
|
|
|
391
|
|
Accretion in value
|
|
|
1,091
|
|
Payment on liability
|
|
|
(17,342
|
)
|
Balance at December 29, 2018
|
|
$
|
18,960
|
|
During 2017, management completed the valuation of the acquisition date fair value of contingent consideration incurred in connection with the Enovation Controls acquisition resulting in a measurement period adjustment which increased the fair value of the liability by $6,314. During the years ended December 29, 2018 and December 30, 2017, adjustments to the fair value of contingent consideration were recorded based on Enovation Controls’ results of operation during the period and managements’ revision of revenue and EBITDA forecasts. The adjustments were not considered measurement period adjustments and were therefore recognized in earnings for the period.
As part of the Faster acquisition, a contingent liability was recorded pursuant to the Share Purchase Agreement that allows for future payments to the sellers for certain tax benefits realized within two years of the acquisition date.
75
5. INVENTORIES
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
Raw materials
|
|
$
|
39,086
|
|
|
$
|
26,426
|
|
Work in process
|
|
|
26,871
|
|
|
|
6,910
|
|
Finished goods
|
|
|
23,963
|
|
|
|
9,920
|
|
Provision for obsolete and slow moving inventory
|
|
|
(3,931
|
)
|
|
|
(1,711
|
)
|
Total
|
|
$
|
85,989
|
|
|
$
|
41,545
|
|
6. PROPERTY, PLANT, AND EQUIPMENT
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
Machinery and equipment
|
|
$
|
134,244
|
|
|
$
|
103,024
|
|
Office furniture and equipment
|
|
|
17,902
|
|
|
|
15,160
|
|
Buildings
|
|
|
54,592
|
|
|
|
48,977
|
|
Building and land improvements
|
|
|
9,781
|
|
|
|
9,513
|
|
Land
|
|
|
17,717
|
|
|
|
16,977
|
|
|
|
$
|
234,236
|
|
|
$
|
193,651
|
|
Less: Accumulated depreciation
|
|
|
(120,571
|
)
|
|
|
(107,251
|
)
|
Construction in progress
|
|
|
13,203
|
|
|
|
5,531
|
|
Total
|
|
$
|
126,868
|
|
|
$
|
91,931
|
|
Depreciation expense for the years ended December 29, 2018, December 30, 2017, and December 31, 2016 totaled $16,452, $10,767, and $9,184, respectively.
7. GOODWILL AND INTANGIBLE ASSETS
Goodwill
A summary of changes in goodwill by segment for the years ended December 29, 2018 and December 30, 2017 is as follows:
|
|
Hydraulics
|
|
|
Electronics
|
|
|
Total
|
|
Balance as December 31, 2016
|
|
$
|
2,214
|
|
|
$
|
101,369
|
|
|
$
|
103,583
|
|
Working capital adjustment, Enovation Controls acquisition
|
|
|
—
|
|
|
|
500
|
|
|
|
500
|
|
Measurement period adjustment, Enovation Controls acquisition
|
|
|
—
|
|
|
|
4,504
|
|
|
|
4,504
|
|
Currency translation
|
|
|
282
|
|
|
|
—
|
|
|
|
282
|
|
Balance as December 30, 2017
|
|
$
|
2,496
|
|
|
$
|
106,373
|
|
|
$
|
108,869
|
|
Acquisition of Faster
|
|
|
288,792
|
|
|
|
—
|
|
|
|
288,792
|
|
Acquisition of Custom Fluidpower
|
|
|
5,111
|
|
|
|
—
|
|
|
|
5,111
|
|
Currency translation
|
|
|
(19,641
|
)
|
|
|
—
|
|
|
|
(19,641
|
)
|
Balance as December 29, 2018
|
|
$
|
276,758
|
|
|
$
|
106,373
|
|
|
$
|
383,131
|
|
76
Intangibles
At December 29, 2018, and December 30, 2017, intangible assets consisted of the following:
|
|
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
|
|
Useful life (years)
|
|
Gross carrying
amount
|
|
|
Accumulated
amortization
|
|
|
Net carrying
amount
|
|
|
Gross carrying
amount
|
|
|
Accumulated
amortization
|
|
|
Net carrying
amount
|
|
Definite-lived intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names and brands
|
|
10-20
|
|
$
|
56,604
|
|
|
$
|
(4,712
|
)
|
|
$
|
51,892
|
|
|
$
|
30,774
|
|
|
$
|
(2,115
|
)
|
|
$
|
28,659
|
|
Non-compete agreements
|
|
5
|
|
|
950
|
|
|
|
(396
|
)
|
|
|
554
|
|
|
|
950
|
|
|
|
(206
|
)
|
|
|
744
|
|
Technology
|
|
7 - 13
|
|
|
32,004
|
|
|
|
(5,488
|
)
|
|
|
26,516
|
|
|
|
18,435
|
|
|
|
(2,671
|
)
|
|
|
15,764
|
|
Supply agreement
|
|
10
|
|
|
21,000
|
|
|
|
(4,375
|
)
|
|
|
16,625
|
|
|
|
21,000
|
|
|
|
(2,275
|
)
|
|
|
18,725
|
|
Sales order backlog
|
|
1
|
|
|
7,355
|
|
|
|
(7,355
|
)
|
|
|
—
|
|
|
|
620
|
|
|
|
(620
|
)
|
|
|
—
|
|
Customer relationships
|
|
15 - 26
|
|
|
232,275
|
|
|
|
(10,168
|
)
|
|
|
222,107
|
|
|
|
39,751
|
|
|
|
(2,607
|
)
|
|
|
37,144
|
|
Licensing agreement
|
|
15
|
|
|
3,716
|
|
|
|
(862
|
)
|
|
|
2,854
|
|
|
|
3,716
|
|
|
|
(621
|
)
|
|
|
3,095
|
|
|
|
|
|
$
|
353,904
|
|
|
$
|
(33,356
|
)
|
|
$
|
320,548
|
|
|
$
|
115,246
|
|
|
$
|
(11,115
|
)
|
|
$
|
104,131
|
|
Total amortization expense for the years ended 2018, 2017 and 2016 was approximately $23,262, $8,423 and $1,545, respectively. Total estimated amortization expense for the years 2019 through 2023 is presented below.
Year:
|
|
|
|
|
2019
|
|
$
|
18,377
|
|
2020
|
|
|
18,344
|
|
2021
|
|
|
18,243
|
|
2022
|
|
|
17,980
|
|
2023
|
|
|
17,921
|
|
Total
|
|
$
|
90,865
|
|
8. DERIVATIVE FINANCIAL INSTRUMENTS
The Company addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. The Company enters into foreign currency forward contracts to reduce the effects of fluctuating foreign currency exchange rates. In addition, the Company enters into interest rate derivatives to manage the effects of interest rate movements on the Company’s credit facilities.
For each derivative contract entered into where the Company looks to obtain hedge accounting treatment, the Company formally and contemporaneously documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking the hedge transaction, the nature of the risk being hedged, how the hedging instruments’ effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively. This process includes linking all derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the inception of the hedges and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. If it is determined that a derivative is not highly effective, or that it has ceased to be a highly effective hedge, the Company will discontinue hedge accounting with respect to that derivative prospectively.
77
The fair value of the Company’s derivative financial instruments included in the Consolidated Balance Sheets
is
presented as follows:
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
Balance Sheet
|
|
Fair Value
(1)
|
|
|
Balance Sheet
|
|
Fair Value
(1)
|
|
|
Location
|
|
December 29, 2018
|
|
|
Location
|
|
December 29, 2018
|
|
Derivatives designated as
hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contract
|
Other assets
|
|
$
|
—
|
|
|
Other non-current liabilities
|
|
$
|
2,309
|
|
Derivatives not designated as
hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Forward foreign exchange contract
|
Other current assets
|
|
|
—
|
|
|
Other current liabilities
|
|
|
137
|
|
Total derivatives
|
|
|
$
|
—
|
|
|
|
|
$
|
2,446
|
|
(1)
See Note 4 for further information about how the fair value of derivative assets and liabilities are determined
|
|
The amount of the gains and losses related to the Company’s derivative financial instruments are presented as follows:
|
|
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
|
|
|
Location of Gain or (Loss) Reclassified from AOCI
|
|
Amount of Gain or (Loss) Reclassified from AOCI into Earnings (Effective Portion)
|
|
|
|
December 29, 2018
|
|
|
into Earnings (Effective Portion)
|
|
December 29, 2018
|
|
Derivatives in cash flow
hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contract
|
|
$
|
(2,309
|
)
|
|
Interest expense, net
|
|
$
|
(547
|
)
|
Interest expense presented in the Consolidated Statements of Operations, in which the effects of cash flow hedges are recorded, totaled $13,876 for the year ended December 29, 2018.
|
|
Amount of Gain or (Loss) Recognized
in Earnings on Derivatives
|
|
|
Location of Gain or (Loss) Recognized
|
|
|
December 29, 2018
|
|
|
in Earnings on Derivatives
|
Derivatives not designated
as hedging instruments:
|
|
|
|
|
|
|
Forward foreign exchange contracts
|
|
$
|
(3,496
|
)
|
|
Foreign currency transaction gain loss, net
|
Interest Rate Swap Contract
Helios primarily utilizes variable-rate debt which exposes the Company to variability in interest payments. The Company enters into various types of derivative instruments to manage fluctuations in cash flows resulting from interest rate risk attributable to changes in the benchmark interest rates.
The Company assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.
The Company maintains risk management control systems to monitor interest rate cash flow risk attributable to both the Company’s outstanding and forecasted debt obligations as well as the Company’s offsetting hedge positions. The risk management control systems involve the use of analytical techniques to estimate the expected impact of changes in interest rates on the Company’s future cash flows.
78
During the third quarter of fiscal year 2018, the Company entered into an
interest
rate
swap transaction to hedge the variable interest rate payments on the cred
it facilities. In connection with this transaction, the Company pays interest based upon a fixed rate as agreed upon with the respective counterparties and receives variable rate interest payments based on the one-month LIBOR. The
interest
rate
swap has an
aggregate
notional amount of $200,000
, which decreases by $25,000 annually starting in September 2019,
and has been designated as a hedging instrument and accounted for as a cash flow hedge. The
interest
rate
swap was effective on August 2, 2018 and is
scheduled to expire on April 3, 2023. The contract will be settled with the respective counterparties on a net basis at each settlement date.
Forward Foreign Exchange Contracts
The Company enters into forward contracts to economically hedge transactional exposure associated with commitments arising from transactions denominated in a currency other than the functional currency of the respective operating entity. The Company’s forward contracts are not designated as hedging instruments for accounting purposes.
During the year ended December 29, 2018, the Company entered into a forward foreign exchange currency contract, for the purchase of €370,000, to economically hedge transactional exposure associated with the acquisition of Faster, which was denominated in euros. The contract settled upon closing of the acquisition of Faster.
At December 29, 2018, the Company had forward foreign exchange contracts to buy euros with a notional amount of $2,500. These contracts are at various exchange rates and expire in February 2019.
9. CREDIT FACILITIES
Total long-term non-revolving debt consists of the following:
|
Maturity Date
|
|
December 29, 2018
|
|
Long-term non-revolving debt:
|
|
|
|
|
|
Term loan credit facility with PNC Bank
|
4/3/2023
|
|
$
|
96,250
|
|
Term loan credit facility with Shinhan Bank
|
3/30/2020
|
|
|
895
|
|
Other long-term debt
|
Various
|
|
|
838
|
|
Total long-term non-revolving debt
|
|
|
|
97,983
|
|
Less: current portion of long-term non-revolving debt
|
|
|
|
5,215
|
|
Less: unamortized debt issuance costs
|
|
|
|
1,048
|
|
Total long-term non-revolving debt, net
|
|
|
$
|
91,720
|
|
Information on the Company's revolving credit facilities is as follows:
|
|
|
Balance
|
|
|
Available credit
|
|
|
Maturity Date
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
Revolving credit facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving line of credit with PNC
|
4/3/2023
|
|
$
|
255,750
|
|
|
$
|
116,000
|
|
|
$
|
144,250
|
|
|
$
|
184,000
|
|
Revolving line of credit with NAB
|
1/31/2019
|
|
|
—
|
|
|
|
—
|
|
|
|
2,155
|
|
|
|
—
|
|
Total revolving credit facilities
|
|
|
$
|
255,750
|
|
|
$
|
116,000
|
|
|
$
|
146,405
|
|
|
$
|
184,000
|
|
79
Future maturities of total debt are as follows:
Year:
|
|
|
|
2019
|
$
|
5,460
|
|
2020
|
|
7,281
|
|
2021
|
|
7,655
|
|
2022
|
|
8,833
|
|
2023
|
|
324,504
|
|
|
$
|
353,733
|
|
On April 1, 2018, the Company entered into an amendment to its credit agreement with PNC Bank, National Association, as administrative agent, and the lenders party thereto. The amendment increased the revolving credit facility up to an aggregate maximum principal amount of $
400,000
, up from $300,000 under the original agreement, added a new term loan credit facility in an aggregate principal amount of $100,000, and increased the accordion feature to permit the increase of the Amended and Restated Facility by up to an additional $200,000. Borrowings under the line of credit bear interest at defined rates plus an applicable margin based on the Company’s leverage ratio. The agreement requires quarterly term loan payments of $1,250. The required payments increase to $1,875 in July 2020, and $2,500 in July 2022, with the balance due on the maturity date.
The amendment was entered into contemporaneously with the transfer of substantially all of the Company’s historical net operating assets of the Sun Hydraulics brand entities to the Company’s wholly-owned subsidiary, Sun Hydraulics, LLC, a newly-formed Florida limited liability company, and in preparation for the acquisition of Faster. Sun Hydraulics, LLC was added as an additional guarantor of the amended facility. In addition, Sun Hydraulics, LLC joined the existing Security Agreement between the Company, Enovation Controls and PNC Bank, for the benefit of the lenders, granting a security interest in substantially all of their respective assets.
The credit agreement requires the Company to comply with a number of restrictive covenants. These covenants limit, in certain circumstances, the Company’s ability to take a variety of actions, including but not limited to: incur indebtedness; create or maintain liens on its property or assets; make investments, loans and advances; repurchase shares of its common stock; engage in acquisitions, mergers, joint ventures, consolidation and asset sales; and pay dividends and distributions.
The line of credit is guaranteed by the Company’s U.S. domestic subsidiaries and requires any future U.S. domestic subsidiaries to join as guarantors. In addition, the line of credit is required to be secured by substantially all of the assets of the Company and its current and future U.S. domestic subsidiaries of the Company. Accordingly, (i) the Company entered into a security agreement granting a security interest in substantially all of its respective assets; (ii) the Company entered into a pledge agreement granting a security interest in certain equity ownership in certain of its subsidiaries, and (iii) the Company and/or certain of its subsidiaries entered into certain other additional agreements further granting security interests in certain specific assets, including intellectual property rights, in each case to secure amounts borrowed under the credit agreement.
The Faster acquisition was completed on April 5, 2018, at which time the Company borrowed $258,000 on the revolving credit facility and executed the term loan. The interest rate in effect on this credit agreement at December 29, 2018 was 4.51%. Interest expense recognized on this credit agreement during the year ended December 29, 2018, December 30, 2017 and December 31, 2016 was
$12,799, $4,082 and $483, respectively.
As of December 29, 2018, the Company was in compliance with all debt covenants related to the credit agreement.
80
On March 30, 2018, the Company entered into a credit agreement with Shinhan Bank that provides a term loan of
1,000,000
Korean won. The proceeds from the term loan were used to fund the construction of the new productio
n facility in South Korea. The loan matures in
March 2020
, at which time the full amount will become due. Interest is charged at a one-year variable rate,
2.05%
as of
December
29, 2018.
The Company has a revolving line of credit with National Australia Bank which is primarily used to meet short-term working capital requirements. The agreement allows for maximum borrowings of 3,000 Australian dollars. Interest is payable monthly at the daily interest rate plus a fixed margin of 1.6%, 5.6% as of December 29, 2018. Principal and interest are due on the maturity date. The loan is secured by assets of Custom Fluidpower.
The Company’s other long-term debt primarily consists of auto loans payable to National Australia Bank. Principal and interest payments are due monthly. The loans mature at various dates through June 2023. Interest is charged at various rates ranging from 3.9% to 5.1%.
10. 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, which closed on April 5, 2018.
11. DIVIDENDS TO SHARE
HOLDERS
The Company declared dividends of $11,444, $10,273, and $10,757 to shareholders in 2018, 2017, and 2016, respectively.
The Company declared the following regular quarterly dividends to shareholders during 2018, 2017 and 2016. The dividends were primarily declared to shareholders of record on the 5
th
day following the respective quarter end and paid on the 20
th
day of each month following the date of declaration.
|
|
|
2018
|
|
|
|
2017
|
|
|
|
2016
|
|
First quarter
|
|
$
|
0.09
|
|
|
$
|
0.09
|
|
|
$
|
0.09
|
|
Second quarter
|
|
|
0.09
|
|
|
|
0.09
|
|
|
|
0.09
|
|
Third quarter
|
|
|
0.09
|
|
|
|
0.09
|
|
|
|
0.09
|
|
Fourth quarter
|
|
|
0.09
|
|
|
|
0.09
|
|
|
|
0.09
|
|
In addition to the regular quarterly dividends, the Company declared special cash dividends in 2017 and 2016 equal to $0.02 and $0.04, respectively. The 2017 dividend was paid on March 31, 2017, to shareholders of record on March 15, 2017, and the 2016 dividend was paid on March 31, 2016, to shareholders of record on March 15, 2016.
12. INCOME TAXES
Deferred income tax assets and liabilities are provided to reflect the future tax consequences of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements.
81
For financial reporting purposes, in
come before income taxes includes the following components:
|
|
For the year ended
|
|
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
|
December 31, 2016
|
|
United States
|
|
$
|
44,693
|
|
|
$
|
37,005
|
|
|
$
|
30,562
|
|
Foreign
|
|
|
11,702
|
|
|
|
10,539
|
|
|
|
4,339
|
|
Total
|
|
$
|
56,395
|
|
|
$
|
47,544
|
|
|
$
|
34,901
|
|
The Company derives its pretax income based on the consolidated results of its legal entities. Products manufactured in the U.S. are sold worldwide and are the primary reason that pretax income in the U.S. is higher than foreign pretax income. The U.S. legal entities had third party export sales of $98,876, $85,479, and $62,661 for the 2018, 2017 and 2016 years, respectively. Foreign pretax income is impacted by the level of foreign manufacturing, sales at varying market levels, as well as direct sales to large OEM customers.
The components of the income tax provision (benefit) are as follows:
|
|
For the year ended
|
|
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
|
December 31, 2016
|
|
Current tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
4,229
|
|
|
$
|
17,165
|
|
|
$
|
9,740
|
|
State and local
|
|
|
2,522
|
|
|
|
3,095
|
|
|
|
923
|
|
Foreign
|
|
|
3,707
|
|
|
|
2,496
|
|
|
|
1,377
|
|
Total current
|
|
|
10,458
|
|
|
|
22,756
|
|
|
|
12,040
|
|
Deferred tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
380
|
|
|
|
(4,922
|
)
|
|
|
(341
|
)
|
State and local
|
|
|
110
|
|
|
|
(986
|
)
|
|
|
387
|
|
Foreign
|
|
|
(1,283
|
)
|
|
|
(862
|
)
|
|
|
(489
|
)
|
Total deferred
|
|
|
(793
|
)
|
|
|
(6,770
|
)
|
|
|
(443
|
)
|
Total income tax provision
|
|
$
|
9,665
|
|
|
$
|
15,986
|
|
|
$
|
11,597
|
|
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. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. As a result of the Act, the Company recorded in the 2017 year-end income tax provision $459 of additional income tax expense, including a benefit of $1,541 related to remeasurement of deferred tax assets and liabilities and $2,000 of expense related to one-time transition tax on mandatory deemed repatriation of foreign earnings. Refinements to these items were made during 2018 for the purpose of 2017 tax return reporting, and provision-to-return adjustments have been recorded in the 2018 year-end provision to adjust the transition tax to $630. The Company elected to pay the transition tax over an eight year period, as permitted by the legislation.
82
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to add
ress 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,
the Company
determined the $1,541 of deferred tax benefit recorded related to remeasurement of deferred tax assets and liabilities and $2,000 of current tax expense recorded related to transition tax on mandatory deemed repatriation of foreign earnings we
re provisional amounts and reasonable estimates at December 30, 2017. For 2018 year-end provision purposes
,
additional work was performed to complete a more detailed analysis of deferred tax assets and liabilities, historical attributes giving rise to the
transition tax calculation inputs, and potential correlative adjustments of each of these items. Adjustments to these amounts were recorded to current tax expense in 2018.
Further, in accordance with SAB 118, the Company continued evaluating the permanent reinvestment assertion as further consideration is given to how the Act impacts the future cash flow position of the Company. Helios’s foreign subsidiaries generate earnings that are not subject to U.S. income taxes so long as they are permanently reinvested in the Company’s operations outside of the U.S. Pursuant to ASC Topic No. 740-30 (formerly APB 23), undistributed earnings of foreign subsidiaries that are no longer permanently reinvested would become subject to deferred income taxes under U.S. tax law. In determining if the undistributed earnings of Helios’s foreign subsidiaries are permanently reinvested, management considers the following: (i) the forecasts, budgets, debt commitments, and cash requirements of the U.S business and the foreign subsidiaries, both for the short and long term; (ii) the tax consequences of any decision to reinvest foreign earnings, including any changes in U.S. income tax law relating to the treatment of these undistributed foreign earnings; and (iii) any U.S. and foreign government programs or regulations relating to the repatriation of these unremitted earnings. As of December 29, 2018, the Company recognized deferred income taxes of approximately $31 on earnings that are no longer permanently reinvested in foreign operations. Management asserts that approximately $19,700 of undistributed earnings are permanently reinvested in the Company’s foreign operations and have no current plans to repatriate those earnings.
In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or treating any taxes on GILTI inclusions as a period cost are acceptable methods subject to an accounting policy election. The Company has elected to treat any taxes on GILTI inclusions as period costs.
The Company also recorded estimates in the 2017 year-end provision in accordance with SAB 118 for certain directly- and indirectly-correlated effects in the year end income tax provision including, but not limited to, state and local income taxes, domestic production activities deduction, and fixed asset depreciation. These effects have been further evaluated and final determinations recorded of the appropriate accounting for the Act.
83
The reco
nciliation between the effective income tax rate and the U.S. federal statutory rate is as follows:
|
|
For the year ended
|
|
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
|
December 31, 2016
|
|
U.S. federal taxes at statutory rate
|
|
$
|
11,843
|
|
|
$
|
16,640
|
|
|
$
|
12,245
|
|
Increase (decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign tax credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Domestic production activity deduction
|
|
|
—
|
|
|
|
(1,909
|
)
|
|
|
(1,032
|
)
|
Foreign income taxed at different rate
|
|
|
1,292
|
|
|
|
(1,177
|
)
|
|
|
(381
|
)
|
FDII deduction
|
|
|
(2,195
|
)
|
|
|
—
|
|
|
|
—
|
|
Change in estimates related to prior years
|
|
|
(2,049
|
)
|
|
|
—
|
|
|
|
—
|
|
US income tax reform
|
|
|
—
|
|
|
|
459
|
|
|
|
—
|
|
State and local taxes, net
|
|
|
1,462
|
|
|
|
1,208
|
|
|
|
586
|
|
Current year tax credits
|
|
|
(633
|
)
|
|
|
—
|
|
|
|
—
|
|
Foreign deferred other true up
|
|
|
(810
|
)
|
|
|
—
|
|
|
|
—
|
|
Change in reserve
|
|
|
578
|
|
|
|
829
|
|
|
|
(284
|
)
|
Foreign patent box benefit
|
|
|
(937
|
)
|
|
|
—
|
|
|
|
—
|
|
Global intangible low-taxed income
|
|
|
526
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
588
|
|
|
|
(64
|
)
|
|
|
463
|
|
Income tax provision
|
|
$
|
9,665
|
|
|
$
|
15,986
|
|
|
$
|
11,597
|
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income taxes. The temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 29, 2018, and December 30, 2017, are presented below:
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Foreign tax benefit of U.S. reserves
|
|
$
|
3,853
|
|
|
$
|
3,741
|
|
Net operating losses
|
|
|
443
|
|
|
|
529
|
|
Inventory
|
|
|
1,155
|
|
|
|
860
|
|
Intangible assets and goodwill
|
|
|
1,924
|
|
|
|
2,354
|
|
Accrued expenses and other
|
|
|
4,743
|
|
|
|
1,418
|
|
Currency hedging
|
|
|
519
|
|
|
|
—
|
|
Total deferred tax assets
|
|
|
12,637
|
|
|
|
8,902
|
|
Less: Valuation Allowance
|
|
|
(291
|
)
|
|
|
(346
|
)
|
Net deferred tax assets
|
|
|
12,346
|
|
|
|
8,556
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(7,097
|
)
|
|
|
(5,948
|
)
|
Intangible assets and goodwill
|
|
|
(52,543
|
)
|
|
|
—
|
|
Other
|
|
|
(1,026
|
)
|
|
|
(22
|
)
|
Total deferred tax liabilities
|
|
|
(60,666
|
)
|
|
|
(5,970
|
)
|
Net deferred tax (liabilities) assets
|
|
$
|
(48,320
|
)
|
|
$
|
2,586
|
|
A valuation allowance to reduce the deferred tax assets reported is required if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. For the fiscal years ended 2018 and 2017 management has determined that no material valuation allowances were required.
The Company prescribes a recognition threshold and measurement attribute for an uncertain tax position taken or expected to be taken in a tax return.
84
The following is a roll-forward of the Company’s unrecognized tax benefits:
Unrecognized tax benefits - January 2, 2016
|
|
$
|
2,049
|
|
Increases from positions taken during prior periods
|
|
|
157
|
|
Settled positions and reclassifications
|
|
|
1,295
|
|
Lapse of statute of limitations
|
|
|
—
|
|
Unrecognized tax benefits - December 31, 2016
|
|
$
|
3,501
|
|
Increases from positions taken during prior periods
|
|
|
1,525
|
|
Increases from positions taken during current period
|
|
|
558
|
|
Settled positions
|
|
|
—
|
|
Lapse of statute of limitations
|
|
|
(1,042
|
)
|
Unrecognized tax benefits - December 30, 2017
|
|
$
|
4,542
|
|
Increases from positions taken during prior periods
|
|
|
372
|
|
Increases from positions taken during current period
|
|
|
2,036
|
|
Settled positions
|
|
|
—
|
|
Lapse of statute of limitations
|
|
|
(837
|
)
|
Unrecognized tax benefits - December 29, 2018
|
|
$
|
6,113
|
|
At December 29, 2018, the Company had an unrecognized tax benefit of $6,113 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 related to the unrecognized tax benefit has been recognized and included in income tax expense. Interest accrued as of December 29, 2018, is not considered material to the Company’s consolidated financial statements. Of the $2,036 recorded by the Company for increases from positions taken during the current period, $1,784 was related to entries recorded through purchase accounting and therefore did not impact current period tax expense.
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 2008 for the majority of tax jurisdictions.
The Company’s U.S. federal returns are not currently under examination by the Internal Revenue Service (IRS); Florida returns are under examination for tax years 2015 and 2016. Faster’s pre-acquisition 2016 Italian return is also under examination. 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 by the Florida Department of Revenue and that there could be significant increases or decreases to unrecognized tax benefits.
13. 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. As of December 29, 2018, 361,298 shares remained available to be issued through 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 twelve months ended December 29, 2018, December 30, 2017, and December 31, 2016, totaled $2,728, $2,376 and $3,676, respectively.
85
The following table summarizes restricted stock activity for the years ended
December 29, 2018
,
December 30, 2017
, and
December
31
, 2016:
|
|
Number
of shares
(in thousands)
|
|
|
Weighted
average
grant-date
fair value
|
|
Nonvested balance at January 2, 2016
|
|
|
164
|
|
|
$
|
33.54
|
|
Granted
|
|
|
45
|
|
|
|
33.22
|
|
Vested
|
|
|
(100
|
)
|
|
|
34.63
|
|
Forfeited
|
|
|
(5
|
)
|
|
|
33.10
|
|
Nonvested balance at December 31, 2016
|
|
|
104
|
|
|
$
|
32.42
|
|
Granted
|
|
|
74
|
|
|
|
35.45
|
|
Vested
|
|
|
(84
|
)
|
|
|
32.97
|
|
Forfeited
|
|
|
(6
|
)
|
|
|
32.60
|
|
Nonvested balance at December 30, 2017
|
|
|
88
|
|
|
$
|
34.44
|
|
Granted
|
|
|
111
|
|
|
|
53.55
|
|
Vested
|
|
|
(37
|
)
|
|
|
33.54
|
|
Forfeited
|
|
|
(16
|
)
|
|
|
39.62
|
|
Nonvested balance at December 29, 2018
|
|
|
146
|
|
|
$
|
48.66
|
|
The Company had $4,789 of total unrecognized compensation cost related to restricted stock awards granted under the 2011 Plan as of December 29, 2018. That cost is expected to be recognized over a weighted average period of 1.77 years.
The Company maintains an Employee Stock Purchase Plan (“ESPP”) in which the U.S. employees of Helios, Sun Hydraulics and Enovation Controls 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 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 ESPP. The ESPP authorizes 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 40,714 shares at a weighted average price of $38.01, and 31,983 shares at a weighted average price of $36.20, under the ESPP during the twelve months ended December 29, 2018, and December 30, 2017, respectively. The Company recognized $324, $429 and $312 of compensation expense during the twelve months ended December 29, 2018, December 30, 2017, and December 31, 2016, respectively. At December 29, 2018, 505,595 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 its 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.
86
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, provided that, wit
h 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 s
hares of common stock. At
December 29, 2018
, 1
24
,
62
4 shares remained available for issuance under the 2012 Directors Plan. Directors were granted 2
4
,
25
0 and 2
6
,
0
00 shares for the twelve months ended
December 29, 2018
, and
December 30, 2017
, respectively. The Company recognized director stock compensation expense of
$1,2
13
, $
1,240
, and $8
31
for the twelve months ended
December 29, 2018
,
December 30, 2017
, and
December 31
, 2016, respectively.
14. EARNINGS PER SHARE
The following table represents the computation of basic and diluted net income per common share:
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
|
December 31, 2016
|
|
Net income
|
|
$
|
46,730
|
|
|
$
|
31,558
|
|
|
$
|
23,304
|
|
Basic and diluted weighted average shares outstanding
|
|
|
31,309
|
|
|
|
27,031
|
|
|
|
26,892
|
|
Basic and diluted net income per common share
|
|
$
|
1.49
|
|
|
$
|
1.17
|
|
|
$
|
0.87
|
|
15
. EMPLOYEE BENEFITS
The Company has three defined contribution retirement plans, under the provisions of Section 401(k) of the Internal Revenue Code, covering substantially all of its eligible United States employees. Employer contribution costs recognized under the retirement plans amounted to approximately $3,807, $3,290, and $1,938 during 2018, 2017, and 2016, respectively.
The Company provides supplemental pension benefits to its employees of foreign operations in addition to mandatory benefits included in local country payroll statutes. These benefits amounted to approximately $1,865, $328, and $369 during 2018, 2017, and 2016, respectively.
In the U.S., Sun Hydraulics used an Employee Stock Ownership Plan (“ESOP”) to make discretionary contributions to employees who were eligible participants in its 401(k) retirement plan. Under the ESOP, which was 100% company funded, the Company allocated common stock to each participant's account. The allocation was generally a percentage of a participant’s compensation as determined by the Board of Directors on an annual basis. There were no restrictions on the shares contributed to the ESOP which allowed participants to sell their shares within their individual 401(k) accounts. The Company does not have any repurchase obligations under the ESOP. Effective January 1, 2019, the Company terminated the ESOP feature of the 401(k) plan and replaced it with a company stock fund. The company stock fund may be used in the future for discretionary contributions.
The Company did not contribute to the ESOP during 2018. The Company contributed 16,241 shares into the ESOP in March 2017. The Company incurred retirement benefit expense under the ESOP of approximately $1,016 and $567 during 2017 and 2016, respectively. These amounts are included in the total employer contributions to the retirement plan noted above.
87
1
6
. ACCUMULATED OTHER COMPREHENSIVE
LOSS
Changes in Accumulated Other Comprehensive Loss by Component
|
|
Unrealized
Gains and
Losses on
Available-for-Sale
Securities
|
|
|
Unrealized
Gains and
Losses on Derivative Instruments
|
|
|
Foreign
Currency
Items
|
|
|
Total
|
|
Balance at January 2, 2016
|
|
$
|
(1,262
|
)
|
|
$
|
—
|
|
|
$
|
(8,781
|
)
|
|
$
|
(10,043
|
)
|
Other comprehensive income (loss) before
reclassifications
|
|
|
621
|
|
|
|
—
|
|
|
|
(6,661
|
)
|
|
|
(6,040
|
)
|
Amounts reclassified from accumulated
other comprehensive income
|
|
|
250
|
|
|
|
—
|
|
|
|
—
|
|
|
|
250
|
|
Net current period other comprehensive income (loss)
|
|
|
871
|
|
|
|
—
|
|
|
|
(6,661
|
)
|
|
|
(5,790
|
)
|
Balance at December 31, 2016
|
|
$
|
(391
|
)
|
|
$
|
—
|
|
|
$
|
(15,442
|
)
|
|
$
|
(15,833
|
)
|
Other comprehensive (loss) income before
reclassifications
|
|
|
(37
|
)
|
|
|
—
|
|
|
|
8,964
|
|
|
|
8,927
|
|
Amounts reclassified from accumulated
other comprehensive income
|
|
|
428
|
|
|
|
—
|
|
|
|
—
|
|
|
|
428
|
|
Net current period other comprehensive income
|
|
|
391
|
|
|
|
—
|
|
|
|
8,964
|
|
|
|
9,355
|
|
Balance at December 30, 2017
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(6,478
|
)
|
|
$
|
(6,478
|
)
|
Other comprehensive loss before
reclassifications
|
|
|
—
|
|
|
|
(2,741
|
)
|
|
|
(37,466
|
)
|
|
|
(40,207
|
)
|
Amounts reclassified from accumulated
other comprehensive income
|
|
|
—
|
|
|
|
432
|
|
|
|
—
|
|
|
|
432
|
|
Net current period other comprehensive loss
|
|
|
—
|
|
|
|
(2,309
|
)
|
|
|
(37,466
|
)
|
|
|
(39,775
|
)
|
Balance at December 29, 2018
|
|
$
|
—
|
|
|
$
|
(2,309
|
)
|
|
$
|
(43,944
|
)
|
|
$
|
(46,253
|
)
|
Reclassifications out of Accumulated Other Comprehensive Loss
Details about Accumulated Other
|
Affected Line Item in the Consolidated
|
For the year Ended
|
|
Comprehensive Income Components
|
Statements of Operations
|
December 29, 2018
|
|
|
December 30, 2017
|
|
|
December 31, 2016
|
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
Interest expense, net
|
$
|
(547
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Tax benefit
|
|
115
|
|
|
|
—
|
|
|
|
—
|
|
|
Net of tax
|
$
|
(432
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Unrealized gains and losses on
available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain/(loss) on sale of
securities
|
Miscellaneous expense, net
|
$
|
—
|
|
|
$
|
(459
|
)
|
|
$
|
(119
|
)
|
Other than temporary impairment
|
Miscellaneous expense, net
|
|
—
|
|
|
|
(220
|
)
|
|
|
(276
|
)
|
|
Total before tax
|
|
—
|
|
|
|
(679
|
)
|
|
|
(395
|
)
|
|
Tax benefit
|
|
—
|
|
|
|
251
|
|
|
|
145
|
|
|
Net of tax
|
$
|
—
|
|
|
$
|
(428
|
)
|
|
$
|
(250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
(432
|
)
|
|
$
|
(428
|
)
|
|
$
|
(250
|
)
|
88
1
7
. SEGMENT REPORTING
The Company has two reportable segments: Hydraulics and Electronics. These segments are organized primarily based on the similar nature of products offered for sale, the types of customers served and the methods of distribution and are consistent with how the segments are managed, how resources are allocated and how information is used by the chief operating decision makers.
In the Hydraulics segment, Sun Hydraulics provides the global capital goods industries with hydraulic components and systems used to transmit power and control force, speed and motion. On a component level, Sun designs and manufactures screw-in hydraulic cartridge valves, manifolds, and integrated fluid power packages and subsystems used in hydraulic systems. The Hydraulics segment also includes the results of Faster subsequent to its acquisition on April 5, 2018, and the results of Custom Fluidpower subsequent to its acquisition on August 1, 2018. On a component level, Faster designs and manufactures quick release couplings, multi connections and casting solutions for all hydraulics applications at medium, high and extremely high pressures. Custom Fluidpower is a supplier of hydraulics, pneumatic, filtration and lubrication products and offers complete system design, installation and commissioning, and service and repairs.
In the Electronics segment, Enovation Controls designs and manufactures electronic control, display and instrumentation solutions for recreational and off-highway vehicles and stationary and power generation equipment. Product categories include traditional mechanical and electronic gauge instrumentation; plug and go CAN-based instruments; after-market support through global distribution; complete, custom panel and console offerings; engineering and application specialists; 3D solid modeling; proprietary hardware and software development and wiring harness design and manufacturing.
The Company evaluates performance and allocates resources based primarily on segment operating income. Certain costs were not allocated to the business segments as they are not used in evaluating the results of, or in allocating resources to the Company’s segments. These costs are presented in the Corporate and other line item below. For the year ended December 29, 2018, the unallocated costs included certain corporate costs not deemed to be allocable to either business segment of $438, acquisition related costs including Faster and Custom Fluidpower transaction costs of $5,450, charges related to inventory step-up to fair value of $4,441, and amortization of acquisition-related intangible assets of $23,021. The accounting policies of the Company’s operating segments are the same as those used to prepare the accompanying consolidated financial statements.
89
The following table presents financial information b
y reportable segment:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hydraulics
|
|
$
|
381,845
|
|
|
$
|
230,662
|
|
|
$
|
189,523
|
|
Electronics
|
|
|
126,200
|
|
|
|
112,177
|
|
|
|
7,411
|
|
|
|
$
|
508,045
|
|
|
$
|
342,839
|
|
|
$
|
196,934
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hydraulics
|
|
$
|
83,858
|
|
|
$
|
54,934
|
|
|
$
|
39,134
|
|
Electronics
|
|
|
25,046
|
|
|
|
17,943
|
|
|
|
(627
|
)
|
Corporate and other
|
|
|
(33,350
|
)
|
|
|
(11,386
|
)
|
|
|
(4,048
|
)
|
|
|
$
|
75,554
|
|
|
$
|
61,491
|
|
|
$
|
34,459
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hydraulics
|
|
$
|
25,782
|
|
|
$
|
8,140
|
|
|
$
|
5,898
|
|
Electronics
|
|
|
2,598
|
|
|
|
14,065
|
|
|
|
289
|
|
|
|
$
|
28,380
|
|
|
$
|
22,205
|
|
|
$
|
6,187
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hydraulics
|
|
$
|
771,409
|
|
|
$
|
185,300
|
|
|
$
|
193,722
|
|
Electronics
|
|
|
263,412
|
|
|
|
274,466
|
|
|
|
251,055
|
|
Corporate
|
|
|
7,344
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
1,042,165
|
|
|
$
|
459,766
|
|
|
$
|
444,777
|
|
Geographic Region Information:
Net sales are measured based on the geographic destination of sales. Tangible long-lived assets are shown based on the physical location of the assets and primarily include net property, plant and equipment:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
257,684
|
|
|
$
|
198,922
|
|
|
$
|
94,816
|
|
Europe/Middle East/Africa
|
|
|
139,776
|
|
|
|
76,988
|
|
|
|
58,720
|
|
Asia/Pacific
|
|
|
110,585
|
|
|
|
66,929
|
|
|
|
43,398
|
|
Total
|
|
$
|
508,045
|
|
|
$
|
342,839
|
|
|
$
|
196,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
83,664
|
|
|
$
|
78,429
|
|
|
$
|
71,802
|
|
Europe/Middle East/Africa
|
|
|
26,724
|
|
|
|
7,803
|
|
|
|
7,116
|
|
Asia/Pacific
|
|
|
16,480
|
|
|
|
5,699
|
|
|
|
1,597
|
|
Total
|
|
$
|
126,868
|
|
|
$
|
91,931
|
|
|
$
|
80,515
|
|
18. RELATED PARTY TRANSACTIONS
Enovation Controls purchases and sells inventory to an entity partially owned by one of its officers. For the years ended December 29, 2018, December 30, 2017 and December 31, 2016, inventory sales to the entity totaled $2,584, $2,507 and $214, respectively, and inventory purchases from the entity totaled $6,178, $11,050 and $533, respectively.
90
In addition to these inventory transactions, Enovation Controls entered into a transition service ag
reement with the related party to provide, and receive, certain transition services for a period of up to one year for specified services. For the year
s
ended
December 29, 2018
and December 30, 2017
, sales, and related costs incurred, recognized by Enovation Controls under the agreement both totaled
$39 and
$1,757
,
respectively,
and are included in miscellaneous expense, net in the Consolidated Statement of Operations. For the year
s
ended
December 2
9, 2018
and December 30, 2017
, purchases from the related party under the agreement totaled
$22 and
$1,160
, respectively
.
At December 29, 2018 and December 30, 2017, total amounts due from the entity totaled $296 and $186, respectively, and total amounts due to the entity totaled $631 and $727, respectively.
19. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is not a party to any legal proceedings other than routine litigation incidental to its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the results of operations, financial position or cash flows of the Company.
Operating Leases
The Company leases manufacturing facilities, production support facilities and office space in various locations around the world. Total rental expense under these leases for the 2018, 2017 and 2016 years was approximately $2,751, $1,197 and $584, respectively.
The following table summarizes the future minimum lease payments under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 29, 2018:
2019
|
|
$
|
3,094
|
|
2020
|
|
|
2,618
|
|
2021
|
|
|
2,350
|
|
2022
|
|
|
650
|
|
2023
|
|
|
139
|
|
Thereafter
|
|
|
—
|
|
Total minimum lease payments
|
|
$
|
8,851
|
|
Insurance
The Company accrues for certain health care benefit costs under a self-funded plan and records a liability for all unresolved claims at the anticipated cost to the Company at the end of the period based on management’s assessment. The Company believes it has adequate reserves for all self-insured claims.
91
2
0
. UNAUDITED QUARTERLY FINANC
IAL INFORMATION