The accompanying Condensed Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.
The accompanying Condensed Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.
The accompanying Condensed Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.
The accompanying Condensed Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.
CONDENSED NOTES TO THE CONSOLIDATED, UNAUDITED FINANCIAL STATEMENTS
(Currencies in thousands, except per share data)
1. COMPANY BACKGROUND
Helios Technologies, Inc. (“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 June 13, 2019, the Company changed its legal name from Sun Hydraulics Corporation to Helios Technologies, Inc. Sun Hydraulics, LLC (“Sun Hydraulics” or “Sun”), a Florida limited liability company that holds the historical net operating assets of the Sun Hydraulics brand entities and Custom Fluidpower Pty Ltd (“Custom Fluidpower”), along with Enovation Controls, LLC (“Enovation Controls”) and Faster S.r.l. (“Faster”) are the wholly-owned operating subsidiaries of Helios.
The Company operates in two business segments, Hydraulics and Electronics. There are three key technologies within the Hydraulics segment: cartridge valve technology (“CVT”), quick-release hydraulic coupling solutions (“QRC”) and hydraulic system design (“Systems”). CVT products provide functions important to a hydraulic system: to control rates and direction of fluid flow and to regulate and control pressures. QRC products allow users to connect and disconnect quickly from any hydraulic circuit without leakage and ensure high-performance under high temperature and pressure using one or multiple couplers. Systems provide engineered solutions for machine users, manufacturers or designers to fulfill complete system design requirements including electro-hydraulic, remote control, electronic control and programmable logic controller systems, as well as automation of existing equipment. The Electronics segment provides complete, fully-tailored display and control solutions for engines, engine-driven equipment and specialty vehicles. This broad range of products is complemented by extensive application expertise and unparalleled depth of software, embedded programming, hardware and sustaining engineering teams. This technology is referred to as Electronic Controls (“EC”).
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 29, 2018, filed by Helios Technologies, Inc. (at that time known as Sun Hydraulics Corporation) with the Securities and Exchange Commission on February 26, 2019. In Management’s opinion, all adjustments necessary for a fair presentation of the Company’s financial statements are reflected in the interim periods presented. Operating results for the nine months ended September 28, 2019, are not necessarily indicative of the results that may be expected for the period ending December 28, 2019.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Leases
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 adopted the standard for the fiscal year beginning December 30, 2018, using the effective date method which required a cumulative-effect adjustment to be recorded to the opening balance of retained earnings. Under the effective date method, financial results reported in periods prior to fiscal year 2019 are unchanged. The Company also elected the package of practical expedients, which among other things, does not require reassessment of lease classification. As of the adoption date, the Company recorded right-of-use (“ROU”) assets and liabilities of approximately $13,918 to the balance sheet and a cumulative-effect adjustment of $134 was recognized in retained earnings.
10
The Company determines whether an arrangement is a lease at its inception. Operating lease ROU assets represent the Company’s right to use an underlying asset for the lease term and are presented in Property, plant and equipment in the Consolidated Balance Sheets. Operating lease liabilities represent the Company’s obligation to make lease payments arising from the leases and are presented in Other accrued expenses and current liabilities and Other noncurrent liabilities in the Consolidated Balance Sheets. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
The Company utilizes an estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. The Company considers its existing credit facilities when calculating the incremental borrowing rate.
Lease terms include options to extend the lease when it is reasonably certain that the Company will exercise the option. Leases with a term of 12 months or less are not recorded on the balance sheet. There are no residual value guarantees included in the Company’s leases.
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 $2,398 and $2,851 at September 28, 2019 and December 29, 2018, respectively, 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 $629 and $138 at September 28, 2019 and December 29, 2018, respectively, and are presented in Other accrued expenses and current liabilities in the Consolidated Balance Sheets.
Derivative Instruments and Hedging Activities
All derivative instruments are recorded gross in the Consolidated Balance Sheets 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 (“AOCI”) 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.
The Company utilizes foreign currency denominated debt to hedge currency exposure in foreign operations. The Company designates certain foreign currency denominated debt as hedges of net investments in foreign operations which reduces the Company’s exposure to changes in currency exchange rates on investments in non-U.S. subsidiaries. Gains and losses on net investments in non-U.S. operations are economically offset by losses and gains on foreign currency borrowings. The change in the U.S. dollar value of foreign currency denominated debt is recorded in Foreign currency translation adjustments, a component of AOCI.
11
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 $11,635, and $10,450 for the nine months ended September 28, 2019 and September 29, 2018, respectively.
Restructuring Charges
During the third quarter of 2019, the Company incurred $1,724 of early retirement and severance costs associated with an organizational restructure at Sun Hydraulics. The restructuring plan was initiated to improve the global cost structure of the business while aligning employee talent with the strategic operational goals of the Company. Substantially all actions from this restructuring plan have been completed.
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.
Earnings Per Share
The following table presents the computation of basic and diluted earnings per common share (in thousands except per share data):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 28, 2019
|
|
|
September 29, 2018
|
|
|
September 28, 2019
|
|
|
September 29, 2018
|
|
Net income
|
|
$
|
12,791
|
|
|
$
|
11,599
|
|
|
$
|
46,460
|
|
|
$
|
30,306
|
|
Basic and diluted weighted average shares outstanding
|
|
|
32,027
|
|
|
|
31,843
|
|
|
|
32,006
|
|
|
|
31,093
|
|
Basic and diluted net income per common share
|
|
$
|
0.40
|
|
|
$
|
0.36
|
|
|
$
|
1.45
|
|
|
$
|
0.97
|
|
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 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.
12
The fair value of total purchase 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 allocation of the total purchase price, net of cash acquired, is as follows:
Accounts receivable
|
|
$
|
24,638
|
|
Inventories
|
|
|
34,835
|
|
Other current assets
|
|
|
6,661
|
|
Property, plant and equipment
|
|
|
20,242
|
|
Goodwill
|
|
|
288,449
|
|
Intangible assets
|
|
|
248,823
|
|
Other assets
|
|
|
7,040
|
|
Total assets acquired
|
|
|
630,688
|
|
Accounts payable
|
|
|
(18,668
|
)
|
Accrued expenses
|
|
|
(12,223
|
)
|
Incomes 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, 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. Of the total goodwill acquired, approximately $4,337 is expected to be deductible for tax purposes.
Transaction costs of $4,271 incurred in connection with the acquisition are included in Selling, engineering and administrative expenses in the Consolidated Statement of Operations for the nine months ended September 29, 2018.
Intangible Assets
The fair value of identified intangible assets and their respective useful lives are as follows:
|
|
Fair Value
|
|
|
Weighted-
Average
Amortization
Periods (Yrs)
|
|
Trade name
|
|
$
|
25,740
|
|
|
|
18
|
|
Technology
|
|
|
13,483
|
|
|
|
13
|
|
Customer relationships
|
|
|
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, including 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.
13
Custom Fluidpower was acquired to further diversify the Company’s hydraulics product and service portfolio and broaden the Company’s global footprint. The results of Custom Fluidpower’s operations are reported in the Company’s Hydraulics segment and have been included in the consolidated financial statements since the date of acquisition. Supplemental pro forma information has not been provided as the acquisition did not have a material impact on the Company’s consolidated results of operations.
Transaction costs of $1,179 incurred in connection with the acquisition are included in Selling, engineering and administrative expenses in the Consolidated Statement of Operations for the nine months ended September 29, 2018.
The Company recorded $6,316 in goodwill and $7,556 in other identifiable intangible assets in connection with the acquisition.
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 September 28, 2019 and December 29, 2018.
|
|
September 28, 2019
|
|
|
|
|
|
|
|
Quoted Market
|
|
|
Significant Other Observable
|
|
|
Significant Unobservable
|
|
|
|
Total
|
|
|
Prices (Level 1)
|
|
|
Inputs (Level 2)
|
|
|
Inputs (Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward foreign exchange contracts
|
|
$
|
1,741
|
|
|
$
|
—
|
|
|
$
|
1,741
|
|
|
$
|
—
|
|
Total
|
|
$
|
1,741
|
|
|
$
|
—
|
|
|
$
|
1,741
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contract
|
|
$
|
6,849
|
|
|
$
|
—
|
|
|
$
|
6,849
|
|
|
$
|
—
|
|
Contingent consideration
|
|
|
1,795
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,795
|
|
Total
|
|
$
|
8,644
|
|
|
$
|
—
|
|
|
$
|
6,849
|
|
|
$
|
1,795
|
|
|
|
December 29, 2018
|
|
|
|
|
|
|
|
Quoted Market
|
|
|
Significant Other Observable
|
|
|
Significant 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
|
|
A summary of the changes in the estimated fair value of contingent consideration at September 28, 2019 is as follows:
Balance, December 29, 2018
|
|
$
|
18,960
|
|
Change in estimated fair value
|
|
|
703
|
|
Payment on liability
|
|
|
(17,795
|
)
|
Currency translation
|
|
|
(73
|
)
|
Balance, September 28, 2019
|
|
$
|
1,795
|
|
During the nine months ended September 28, 2019, the Company recorded an adjustment to the estimated fair value of the contingent consideration liability incurred in connection with the acquisition of Faster. The adjustment was the result of revised estimates of future payments owed to the sellers for certain tax benefits to be realized.
14
5. INVENTORIES
|
|
September 28, 2019
|
|
|
December 29, 2018
|
|
Raw materials
|
|
$
|
37,869
|
|
|
$
|
39,086
|
|
Work in process
|
|
|
28,752
|
|
|
|
26,871
|
|
Finished goods
|
|
|
29,945
|
|
|
|
23,963
|
|
Provision for obsolete and slow moving inventory
|
|
|
(7,228
|
)
|
|
|
(3,931
|
)
|
Total
|
|
$
|
89,338
|
|
|
$
|
85,989
|
|
6. OPERATING LEASES
The Company leases machinery, equipment, vehicles, buildings and office space throughout its locations, which are classified as operating leases. Remaining terms on these leases range from less than one year to eleven years. For the nine months ended September 28, 2019, operating lease costs totaled $2,724.
Supplemental balance sheet information related to operating leases is as follows:
|
|
September 28, 2019
|
|
Right-of-use assets
|
|
$
|
12,645
|
|
|
|
|
|
|
Lease liabilities:
|
|
|
|
|
Current lease liabilities
|
|
$
|
3,075
|
|
Non-current lease liabilities
|
|
|
9,713
|
|
Total lease liabilities
|
|
$
|
12,788
|
|
|
|
|
|
|
Weighted average remaining lease term (in years):
|
|
|
5.6
|
|
|
|
|
|
|
Weighted average discount rate:
|
|
|
4.7
|
%
|
Supplemental cash flow and other information related to leases is as follows:
|
|
For the Nine Months Ended
|
|
|
|
September 28, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
2,737
|
|
ROU assets obtained in exchange for new operating lease liabilities
|
|
$
|
1,465
|
|
Maturities of lease liabilities are as follows:
2019 Remaining
|
|
$
|
944
|
|
2020
|
|
|
3,594
|
|
2021
|
|
|
3,464
|
|
2022
|
|
|
1,700
|
|
2023
|
|
|
1,345
|
|
2024
|
|
|
941
|
|
Thereafter
|
|
|
2,773
|
|
Total lease payments
|
|
|
14,761
|
|
Less: Imputed interest
|
|
|
(1,973
|
)
|
Total lease obligations
|
|
|
12,788
|
|
Less: Current lease liabilities
|
|
|
(3,075
|
)
|
Non-current lease liabilities
|
|
$
|
9,713
|
|
15
7. GOODWILL AND INTANGIBLE ASSETS
Goodwill
A summary of changes in goodwill by segment for the nine months ended September 28, 2019, is as follows:
|
|
Hydraulics
|
|
|
Electronics
|
|
|
Total
|
|
Balance at December 29, 2018
|
|
$
|
276,758
|
|
|
$
|
106,373
|
|
|
$
|
383,131
|
|
Faster acquisition measurement period adjustment
|
|
|
(343
|
)
|
|
|
—
|
|
|
|
(343
|
)
|
Custom Fluidpower acquisition measurement period adjustment
|
|
|
1,205
|
|
|
|
—
|
|
|
|
1,205
|
|
Currency translation
|
|
|
(12,190
|
)
|
|
|
—
|
|
|
|
(12,190
|
)
|
Balance at September 28, 2019
|
|
$
|
265,430
|
|
|
$
|
106,373
|
|
|
$
|
371,803
|
|
Intangible Assets
At September 28, 2019, and December 29, 2018, intangible assets consisted of the following:
|
|
September 28, 2019
|
|
|
December 29, 2018
|
|
|
|
Gross carrying
amount
|
|
|
Accumulated
amortization
|
|
|
Net carrying
amount
|
|
|
Gross carrying
amount
|
|
|
Accumulated
amortization
|
|
|
Net carrying
amount
|
|
Definite-lived intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names and brands
|
|
$
|
55,483
|
|
|
$
|
(6,862
|
)
|
|
$
|
48,621
|
|
|
$
|
56,604
|
|
|
$
|
(4,712
|
)
|
|
$
|
51,892
|
|
Non-compete agreements
|
|
|
950
|
|
|
|
(538
|
)
|
|
|
412
|
|
|
|
950
|
|
|
|
(396
|
)
|
|
|
554
|
|
Technology
|
|
|
31,414
|
|
|
|
(7,821
|
)
|
|
|
23,593
|
|
|
|
32,004
|
|
|
|
(5,488
|
)
|
|
|
26,516
|
|
Supply agreement
|
|
|
21,000
|
|
|
|
(5,951
|
)
|
|
|
15,049
|
|
|
|
21,000
|
|
|
|
(4,375
|
)
|
|
|
16,625
|
|
Customer relationships
|
|
|
223,854
|
|
|
|
(16,847
|
)
|
|
|
207,007
|
|
|
|
232,275
|
|
|
|
(10,168
|
)
|
|
|
222,107
|
|
Licensing agreement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,716
|
|
|
|
(862
|
)
|
|
|
2,854
|
|
|
|
$
|
332,701
|
|
|
$
|
(38,019
|
)
|
|
$
|
294,682
|
|
|
$
|
346,549
|
|
|
$
|
(26,001
|
)
|
|
$
|
320,548
|
|
During the third quarter of 2019, the Company terminated its technology licensing agreement with Sturman Industries, Inc. A phase out of all digital logic valve (“DLV”) related products was completed and no further sales of any related products or technologies will occur. The termination of the agreement resulted in the recognition of a loss on disposal of the related intangible asset totaling $2,713.
Amortization expense for the nine months ended September 28, 2019, and September 29, 2018, was $13,544 and $17,174, respectively. Total estimated amortization expense for the remainder of 2019 and for the years 2020 through 2024 is presented below.
Year:
|
|
|
|
|
2019 Remaining
|
|
$
|
4,492
|
|
2020
|
|
|
17,660
|
|
2021
|
|
|
17,560
|
|
2022
|
|
|
17,297
|
|
2023
|
|
|
17,237
|
|
2024
|
|
|
16,582
|
|
Total
|
|
$
|
90,828
|
|
8. DERIVATIVE INSTRUMENTS & HEDGING ACTIVITIES
The Company addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments and hedging activities.
16
The fair value of the Company’s derivative financial instruments included in the Consolidated Balance Sheets are presented as follows:
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
Balance Sheet
|
|
Fair Value (1)
|
|
Fair Value (1)
|
|
|
Balance Sheet
|
|
Fair Value (1)
|
|
Fair Value (1)
|
|
|
Location
|
|
September 28, 2019
|
|
December 29, 2018
|
|
|
Location
|
|
September 28, 2019
|
|
December 29, 2018
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contract
|
Other assets
|
|
$
|
—
|
|
$
|
—
|
|
|
Other non-current liabilities
|
|
$
|
6,849
|
|
$
|
2,309
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Forward foreign exchange contracts
|
Other current assets
|
|
|
1,336
|
|
|
—
|
|
|
Other current liabilities
|
|
|
—
|
|
|
137
|
|
Forward foreign exchange contracts
|
Other assets
|
|
|
405
|
|
|
—
|
|
|
Other non-current liabilities
|
|
|
—
|
|
|
—
|
|
Total derivatives
|
|
|
$
|
1,741
|
|
$
|
—
|
|
|
|
|
$
|
6,849
|
|
$
|
2,446
|
|
(1) See Note 4 for further information about how the fair value of derivative assets and liabilities are determined
|
|
The amount of gains and losses related to the Company’s derivative financial instruments are presented as follows:
|
|
Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)
|
|
|
Location of Gain or (Loss) Reclassified from AOCI
|
|
Amount of Gain or (Loss) Reclassified from AOCI into Earnings (Effective Portion)
|
|
|
|
September 28, 2019
|
|
September 29, 2018
|
|
|
into Earnings (Effective Portion)
|
|
September 28, 2019
|
|
September 29, 2018
|
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contract
|
|
$
|
(4,539
|
)
|
$
|
119
|
|
|
Interest expense, net
|
|
$
|
(658
|
)
|
$
|
(254
|
)
|
Interest expense presented in the Consolidated Statements of Operations, in which the effects of cash flow hedges are recorded, totaled $12,223 for the nine months ended September 28, 2019.
|
|
Amount of Gain or (Loss) Recognized
in Earnings on Derivatives
|
|
|
Location of Gain or (Loss) Recognized
|
|
|
September 28, 2019
|
|
September 29, 2018
|
|
|
in Earnings on Derivatives
|
Derivatives not designated as hedging instruments:
|
|
|
|
Forward foreign exchange contracts
|
|
$
|
3,973
|
|
$
|
(3,573
|
)
|
|
Foreign currency transaction gain loss, net
|
Interest Rate Swap Contract
Helios primarily utilizes variable-rate debt to finance its operations. The debt obligations expose 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 has entered into an interest rate swap transaction to hedge the variable interest rate payments on the credit 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 $175,000, which decreases by $25,000 annually, has been designated as a hedging instrument and is 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 is settled with the respective counterparties on a net basis at each settlement date.
17
Forward Foreign Exchange Contracts
The Company has entered 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.
As of September 28, 2019, the Company had seven forward foreign exchange contracts with an aggregate notional value of €64,526, maturing at various dates through April 1, 2021.
During the quarter ended March 31, 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.
Net Investment Hedge
The Company utilizes foreign currency denominated debt to hedge currency exposure in foreign operations. During the nine months ended September 28, 2019, the Company designated €80,000 of borrowings on the revolving credit facility as a net investment hedge of a portion of the Company’s European operations. The carrying value of the euro denominated debt totaled $87,489 as of September 28, 2019 and is included in the Revolving line of credit line item on the Consolidated Balance Sheets. The gain or loss on the net investment hedge recorded in AOCI as part of the currency translation adjustment was a gain of $1,882, net of tax, for the nine months ended September 28, 2019. No amounts associated with the net investment hedge were reclassified from AOCI into income for the quarter ended September 28, 2019.
9. CREDIT FACILITIES
Total long-term non-revolving debt consists of the following:
|
Maturity Date
|
|
September 28, 2019
|
|
|
December 29, 2018
|
|
Long-term non-revolving debt:
|
|
|
|
|
|
|
|
|
|
Term loan credit facility with PNC
|
4/3/2023
|
|
$
|
92,500
|
|
|
$
|
96,250
|
|
Term loan credit facility with Shinhan Bank
|
3/30/2020
|
|
|
832
|
|
|
|
895
|
|
Other long-term debt
|
Various
|
|
|
391
|
|
|
|
838
|
|
Total long-term non-revolving debt
|
|
|
|
93,723
|
|
|
|
97,983
|
|
Less: current portion of long-term non-revolving debt
|
|
|
|
6,946
|
|
|
|
5,215
|
|
Less: unamortized debt issuance costs
|
|
|
|
864
|
|
|
|
1,048
|
|
Total long-term non-revolving debt, net
|
|
|
$
|
85,913
|
|
|
$
|
91,720
|
|
Information on the Company’s revolving credit facilities is as follows:
|
|
|
Balance
|
|
|
Available credit
|
|
|
Maturity Date
|
|
September 28, 2019
|
|
|
December 29, 2018
|
|
|
September 28, 2019
|
|
|
December 29, 2018
|
|
Revolving line of credit with PNC
|
4/3/2023
|
|
$
|
225,489
|
|
|
$
|
255,750
|
|
|
$
|
174,511
|
|
|
$
|
144,250
|
|
Future maturities of total debt are as follows:
Year:
|
|
|
|
2019 Remaining
|
$
|
1,277
|
|
2020
|
|
7,838
|
|
2021
|
|
7,649
|
|
2022
|
|
9,455
|
|
2023
|
|
292,993
|
|
Total
|
$
|
319,212
|
|
18
The Company has a revolving line of credit and term loan credit facility with PNC Bank, National Association, as administrative agent, and the lenders party thereto. The revolving line of credit allows for up to an aggregate maximum principal amount of $400,000. During the nine months ended September 28, 2019, the Company exchanged a portion of the USD denominated borrowings for €80,000 in order to hedge currency exposure in foreign operations. The Company designated the borrowings as a net investment hedge, see additional discussion in Note 8.
The effective interest rate on the credit agreement at September 28, 2019 was 3.24%. Interest expense recognized on the credit agreement during the nine months ended September 28, 2019 and September 29, 2018, totaled $11,442 and $8,577, respectively. As of the date of this filing, the Company was in compliance with all debt covenants related to the credit agreement.
The Company has a credit agreement with Shinhan Bank that provides a term loan of 1,000,000 Korean won. The loan matures in March 2020, at which time the full amount will become due. Interest is charged at a one-year variable rate, 1.87% as of September 28, 2019.
The Company had a revolving line of credit with National Australia Bank that allowed for maximum borrowings of 3,000 Australian dollars. Principal and interest were paid in full on January 31, 2019, at which time the facility was closed.
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 July 2023. Interest is charged at various rates ranging from 4.5% to 5.3%.
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. INCOME TAXES
At September 28, 2019, the Company had an unrecognized tax benefit of $7,037 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 September 28, 2019 is not considered material to the Company’s consolidated financial statements.
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 where the Company files tax returns.
The Company’s U.S. federal income tax returns are currently under examination by the Internal Revenue Service (IRS) in the United States for the periods 2008 through 2012 as well as the pre-acquisition 2016 return for Enovation Controls LLC. Florida income tax returns for tax years 2015 and 2016 are under examination. The 2016 pre-acquisition Italian income tax return for Faster 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 for both its federal and state examinations and there could be significant increases or decreases to unrecognized tax benefits.
19
12. STOCK-BASED COMPENSATION
Equity Incentive Plan
The Company’s 2019 Equity Incentive Plan and its predecessor equity plan provide for the grant of 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.
Restricted Stock and Restricted Stock Units
The Company grants restricted shares of common stock and restricted stock units (“RSU”) in connection with a long-term incentive plan. Awards with time-based vesting requirements primarily vest ratably over a three-year period. Awards with performance-based vesting requirements cliff vest after a three-year performance cycle and only after the achievement of certain performance criteria over that cycle.
Compensation expense recognized for restricted stock and RSUs totaled $2,783 and $2,101, respectively, for the nine months ended September 28, 2019, and September 29, 2018.
The following table summarizes restricted stock and RSU activity for the nine months ended September 28, 2019:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
average
|
|
|
|
Number of shares
|
|
|
grant-date
|
|
|
|
(in thousands)
|
|
|
fair value
|
|
Nonvested balance at December 29, 2018
|
|
|
146
|
|
|
$
|
48.66
|
|
Granted (1)
|
|
|
132
|
|
|
|
37.67
|
|
Vested
|
|
|
(45
|
)
|
|
|
47.29
|
|
Forfeited
|
|
|
(31
|
)
|
|
|
45.77
|
|
Nonvested balance at September 28, 2019
|
|
|
202
|
|
|
$
|
42.76
|
|
(1) As of September 28, 2019, approximately 35,000 unvested performance-based RSUs are included in the table above. The number of shares ultimately issued for the performance-based units may vary from 0% to 150% of their target amount based on the achievement of defined performance targets.
The Company had $6,287 of total unrecognized compensation cost related to the restricted stock and RSU awards as of September 28, 2019. That cost is expected to be recognized over a weighted average period of 1.9 years.
Employee Stock Purchase Plans
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 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. Employees purchased 37,217 shares at a weighted average price of $33.65, and 27,454 shares at a weighted average price of $42.51, under the ESPP and U.K. plans during the nine months ended September 28, 2019, and September 29, 2018, respectively. The Company recognized $398 and $259 of compensation expense during the nine months ended September 28, 2019, and September 29, 2018, respectively.
Nonemployee Director Fees Plan
The Company’s 2012 Nonemployee Director Fees Plan compensates nonemployee Directors for their board service with shares of common stock. Directors were granted 18,875 and 18,375 shares for the nine months ended September 28, 2019 and September 29, 2018, respectively. The Company recognized director stock compensation expense of $856 and $999 for the nine months ended September 28, 2019 and September 29, 2018, respectively.
20
13. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables present changes in accumulated other comprehensive loss by component:
|
|
Unrealized
Gains and
(Losses) on
Derivative Instruments
|
|
|
Foreign
Currency
Items
|
|
|
Total
|
|
Balance at December 29, 2018
|
|
$
|
(2,309
|
)
|
|
$
|
(43,944
|
)
|
|
$
|
(46,253
|
)
|
Other comprehensive loss before reclassifications
|
|
|
(5,053
|
)
|
|
|
(17,675
|
)
|
|
|
(22,728
|
)
|
Amounts reclassified from accumulated other comprehensive loss, net of tax
|
|
|
514
|
|
|
|
—
|
|
|
|
514
|
|
Tax effect
|
|
|
1,027
|
|
|
|
5,358
|
|
|
|
6,385
|
|
Net current period other comprehensive loss
|
|
|
(3,512
|
)
|
|
|
(12,317
|
)
|
|
|
(15,829
|
)
|
Balance at September 28, 2019
|
|
$
|
(5,821
|
)
|
|
$
|
(56,261
|
)
|
|
$
|
(62,082
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
Gains and
(Losses) on
Derivative Instruments
|
|
|
Foreign
Currency
Items
|
|
|
Total
|
|
Balance at December 30, 2017
|
|
$
|
—
|
|
|
$
|
(6,478
|
)
|
|
$
|
(6,478
|
)
|
Other comprehensive loss before reclassifications
|
|
|
(135
|
)
|
|
|
(29,445
|
)
|
|
|
(29,580
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
254
|
|
|
|
—
|
|
|
|
254
|
|
Net current period other comprehensive income (loss)
|
|
|
119
|
|
|
|
(29,445
|
)
|
|
|
(29,326
|
)
|
Balance at September 29, 2018
|
|
$
|
119
|
|
|
$
|
(35,923
|
)
|
|
$
|
(35,804
|
)
|
14. SEGMENT REPORTING
The Company has two reportable business 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.
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 nine months ended September 28, 2019, the unallocated costs included certain corporate costs not deemed to be allocable to either business segment of $13,387 which primarily relate to the amortization of acquisition-related intangible assets. The accounting policies of the Company’s business segments are the same as those used to prepare the accompanying consolidated financial statements.
21
The following table presents financial information by reportable segment:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 28, 2019
|
|
|
September 29, 2018
|
|
|
September 28, 2019
|
|
|
September 29, 2018
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hydraulics
|
|
$
|
110,089
|
|
|
$
|
104,055
|
|
|
$
|
340,262
|
|
|
$
|
270,297
|
|
Electronics
|
|
|
27,956
|
|
|
|
31,782
|
|
|
|
88,476
|
|
|
|
99,025
|
|
Total
|
|
$
|
138,045
|
|
|
$
|
135,837
|
|
|
$
|
428,738
|
|
|
$
|
369,322
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hydraulics
|
|
$
|
17,867
|
|
|
$
|
22,723
|
|
|
$
|
65,752
|
|
|
$
|
61,567
|
|
Electronics
|
|
|
5,977
|
|
|
|
6,321
|
|
|
|
18,977
|
|
|
|
19,960
|
|
Corporate and other
|
|
|
(4,706
|
)
|
|
|
(9,798
|
)
|
|
|
(13,387
|
)
|
|
|
(28,024
|
)
|
Total
|
|
$
|
19,138
|
|
|
$
|
19,246
|
|
|
$
|
71,342
|
|
|
$
|
53,503
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hydraulics
|
|
$
|
3,774
|
|
|
$
|
7,047
|
|
|
$
|
17,606
|
|
|
$
|
17,196
|
|
Electronics
|
|
|
397
|
|
|
|
1,074
|
|
|
|
1,978
|
|
|
|
1,506
|
|
Total
|
|
$
|
4,171
|
|
|
$
|
8,121
|
|
|
$
|
19,584
|
|
|
$
|
18,702
|
|
|
|
September 28, 2019
|
|
|
December 29, 2018
|
|
Total assets
|
|
|
|
|
|
|
|
|
Hydraulics
|
|
$
|
756,613
|
|
|
$
|
771,409
|
|
Electronics
|
|
|
255,568
|
|
|
|
263,412
|
|
Corporate
|
|
|
8,769
|
|
|
|
7,344
|
|
Total
|
|
$
|
1,020,950
|
|
|
$
|
1,042,165
|
|
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 and exclude ROU assets:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 28, 2019
|
|
|
September 29, 2018
|
|
|
September 28, 2019
|
|
|
September 29, 2018
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
67,340
|
|
|
$
|
65,809
|
|
|
$
|
202,974
|
|
|
$
|
189,832
|
|
Europe/Middle East/Africa
|
|
|
34,020
|
|
|
|
37,268
|
|
|
|
116,802
|
|
|
|
102,853
|
|
Asia/Pacific
|
|
|
36,685
|
|
|
|
32,760
|
|
|
|
108,962
|
|
|
|
76,637
|
|
Total
|
|
$
|
138,045
|
|
|
$
|
135,837
|
|
|
$
|
428,738
|
|
|
$
|
369,322
|
|
|
|
September 28, 2019
|
|
|
December 29, 2018
|
|
Tangible long-lived assets
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
86,203
|
|
|
$
|
83,664
|
|
Europe/Middle East/Africa
|
|
|
27,905
|
|
|
|
26,724
|
|
Asia/Pacific
|
|
|
17,477
|
|
|
|
16,480
|
|
Total
|
|
$
|
131,585
|
|
|
$
|
126,868
|
|
15. RELATED PARTY TRANSACTIONS
Enovation Controls purchases and sells inventory to entities partially owned by a director of Helios. For the nine months ended September 28, 2019, and September 29, 2018, inventory sales to the entities totaled $1,113 and $2,080, respectively, and inventory purchases from the entities totaled $3,857 and $5,184, respectively.
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At September 28, 2019, and December 29, 2018, amounts due from the entities totaled $198 and $296, respectively, and amounts due to the entities totaled $317 and $631, respectively.
16. 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.
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