UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 2020
OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-21835 |
|
HELIOS TECHNOLOGIES, INC.
(Exact Name of Registration as Specified in its Charter)
Florida |
| 59-2754337 |
(State or Other Jurisdiction of Incorporation or Organization) |
| (I.R.S. Employer Identification No.) |
|
|
|
1500 WEST UNIVERSITY PARKWAY SARASOTA, Florida |
| 34243 |
(Address of Principal Executive Offices) |
| (Zip Code) |
941/362-1200
(Registrant’s Telephone Number, Including Area Code)
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Common Stock $.001 Par Value |
| HLIO |
| The NASDAQ Global Select Market |
Indicate by check mark whether the Registrantregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |
| ☒ |
| Accelerated filer |
| ☐ | ||
Non-accelerated filer |
| ☐ |
| Smaller Reporting Company |
| ☐ | ||
|
|
|
|
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The Registrantregistrant had 32,044,27232,081,445 shares of common stock, par value $.001, outstanding as of October 25, 2019.April 24, 2020.
Helios Technologies, Inc.
INDEX
For the quarter ended
SeptemberMarch 28, 20192020
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| Condensed Notes to the Consolidated, Unaudited Financial Statements |
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 1. |
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| Item 5. |
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| Item 6. |
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2
PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
Helios Technologies, Inc.
Consolidated Balance Sheets
(in thousands, except share data)thousands)
|
| September 28, 2019 |
|
| December 29, 2018 |
|
| March 28, 2020 |
|
| December 28, 2019 |
| ||||
|
| (unaudited) |
|
|
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|
|
| (unaudited) |
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| ||
Assets |
|
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Current assets: |
|
|
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|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 13,706 |
|
| $ | 23,477 |
|
| $ | 27,257 |
|
| $ | 22,123 |
|
Restricted cash |
|
| 37 |
|
|
| 38 |
|
|
| 37 |
|
|
| 39 |
|
Accounts receivable, net of allowance for doubtful accounts of $1,427 and $1,336 |
|
| 77,315 |
|
|
| 72,806 |
| ||||||||
Accounts receivable, net of allowance for doubtful accounts of $1,187 and $1,131 |
|
| 71,638 |
|
|
| 66,677 |
| ||||||||
Inventories, net |
|
| 89,338 |
|
|
| 85,989 |
|
|
| 86,727 |
|
|
| 85,195 |
|
Income taxes receivable |
|
| 590 |
|
|
| 4,549 |
|
|
| 1,757 |
|
|
| 3,196 |
|
Other current assets |
|
| 15,397 |
|
|
| 9,997 |
|
|
| 17,570 |
|
|
| 15,359 |
|
Total current assets |
|
| 196,383 |
|
|
| 196,856 |
|
|
| 204,986 |
|
|
| 192,589 |
|
Property, plant and equipment, net |
|
| 144,230 |
|
|
| 126,868 |
|
|
| 141,912 |
|
|
| 145,854 |
|
Deferred income taxes |
|
| 8,697 |
|
|
| 9,463 |
|
|
| 9,668 |
|
|
| 5,803 |
|
Goodwill |
|
| 371,803 |
|
|
| 383,131 |
|
|
| 343,815 |
|
|
| 377,569 |
|
Other intangible assets, net |
|
| 294,682 |
|
|
| 320,548 |
|
|
| 288,989 |
|
|
| 294,651 |
|
Other assets |
|
| 5,155 |
|
|
| 5,299 |
|
|
| 4,479 |
|
|
| 5,285 |
|
Total assets |
| $ | 1,020,950 |
|
| $ | 1,042,165 |
|
| $ | 993,849 |
|
| $ | 1,021,751 |
|
Liabilities and shareholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 34,845 |
|
| $ | 40,879 |
|
| $ | 33,145 |
|
| $ | 29,730 |
|
Accrued compensation and benefits |
|
| 16,365 |
|
|
| 13,260 |
|
|
| 13,376 |
|
|
| 16,898 |
|
Other accrued expenses and current liabilities |
|
| 14,209 |
|
|
| 9,941 |
|
|
| 12,834 |
|
|
| 13,549 |
|
Current portion of contingent consideration |
|
| 923 |
|
|
| 18,120 |
|
|
| 828 |
|
|
| 828 |
|
Current portion of long-term non-revolving debt, net |
|
| 6,946 |
|
|
| 5,215 |
|
|
| 7,369 |
|
|
| 7,623 |
|
Dividends payable |
|
| 2,884 |
|
|
| 2,878 |
|
|
| 2,887 |
|
|
| 2,884 |
|
Income taxes payable |
|
| 218 |
|
|
| 2,697 |
|
|
| 7,954 |
|
|
| 4,941 |
|
Total current liabilities |
|
| 76,390 |
|
|
| 92,990 |
|
|
| 78,393 |
|
|
| 76,453 |
|
Revolving line of credit |
|
| 225,489 |
|
|
| 255,750 |
|
|
| 204,865 |
|
|
| 208,708 |
|
Long-term non-revolving debt, net |
|
| 85,913 |
|
|
| 91,720 |
|
|
| 82,197 |
|
|
| 84,062 |
|
Contingent consideration, less current portion |
|
| 872 |
|
|
| 840 |
| ||||||||
Deferred income taxes |
|
| 48,057 |
|
|
| 57,783 |
|
|
| 48,680 |
|
|
| 49,290 |
|
Other noncurrent liabilities |
|
| 25,782 |
|
|
| 12,314 |
|
|
| 28,079 |
|
|
| 25,602 |
|
Total liabilities |
|
| 462,503 |
|
|
| 511,397 |
|
|
| 442,214 |
|
|
| 444,115 |
|
Commitments and contingencies |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Shareholders' equity: |
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Preferred stock, par value $0.001, 2,000,000 shares authorized, 0 shares issued or outstanding |
|
| — |
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|
| — |
| ||||||||
Common stock, par value $0.001, 100,000,000 and 50,000,000 shares authorized, 32,032,882 and 31,964,775 shares issued and outstanding |
|
| 32 |
|
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| 32 |
| ||||||||
Preferred stock, par value $0.001, 2,000 shares authorized, 0 shares issued or outstanding |
|
| — |
|
|
| — |
| ||||||||
Common stock, par value $0.001, 100,000 shares authorized, 32,075 and 32,047 shares issued and outstanding |
|
| 32 |
|
|
| 32 |
| ||||||||
Capital in excess of par value |
|
| 363,762 |
|
|
| 357,933 |
|
|
| 366,521 |
|
|
| 365,310 |
|
Retained earnings |
|
| 256,735 |
|
|
| 219,056 |
|
|
| 247,548 |
|
|
| 267,658 |
|
Accumulated other comprehensive loss |
|
| (62,082 | ) |
|
| (46,253 | ) |
|
| (62,466 | ) |
|
| (55,364 | ) |
Total shareholders' equity |
|
| 558,447 |
|
|
| 530,768 |
|
|
| 551,635 |
|
|
| 577,636 |
|
Total liabilities and shareholders' equity |
| $ | 1,020,950 |
|
| $ | 1,042,165 |
|
| $ | 993,849 |
|
| $ | 1,021,751 |
|
The accompanying Condensed Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.
3
Helios Technologies, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
|
| Three Months Ended |
| |||||
|
| September 28, 2019 |
|
| September 29, 2018 |
| ||
|
| (unaudited) |
|
| (unaudited) |
| ||
Net sales |
| $ | 138,045 |
|
| $ | 135,837 |
|
Cost of sales |
|
| 85,926 |
|
|
| 84,102 |
|
Gross profit |
|
| 52,119 |
|
|
| 51,735 |
|
Selling, engineering and administrative expenses |
|
| 24,066 |
|
|
| 25,440 |
|
Restructuring charges |
|
| 1,724 |
|
|
| — |
|
Amortization of intangible assets |
|
| 4,478 |
|
|
| 7,049 |
|
Loss on disposal of intangible asset |
|
| 2,713 |
|
|
| — |
|
Operating income |
|
| 19,138 |
|
|
| 19,246 |
|
Interest expense, net |
|
| 3,790 |
|
|
| 4,622 |
|
Foreign currency transaction loss (gain), net |
|
| 30 |
|
|
| (42 | ) |
Miscellaneous (income) expense, net |
|
| (72 | ) |
|
| 141 |
|
Change in fair value of contingent consideration |
|
| (72 | ) |
|
| 275 |
|
Income before income taxes |
|
| 15,462 |
|
|
| 14,250 |
|
Income tax provision |
|
| 2,671 |
|
|
| 2,651 |
|
Net income |
| $ | 12,791 |
|
| $ | 11,599 |
|
Basic and diluted net income per common share |
| $ | 0.40 |
|
| $ | 0.36 |
|
Basic and diluted weighted average shares outstanding |
|
| 32,027 |
|
|
| 31,843 |
|
Dividends declared per share |
| $ | 0.09 |
|
| $ | 0.09 |
|
The accompanying Condensed Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.
4
Helios Technologies, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
|
| Nine Months Ended |
| |||||
|
| September 28, 2019 |
|
| September 29, 2018 |
| ||
|
| (unaudited) |
|
| (unaudited) |
| ||
Net sales |
| $ | 428,738 |
|
| $ | 369,322 |
|
Cost of sales |
|
| 263,884 |
|
|
| 229,567 |
|
Gross profit |
|
| 164,854 |
|
|
| 139,755 |
|
Selling, engineering and administrative expenses |
|
| 75,531 |
|
|
| 69,078 |
|
Restructuring charges |
|
| 1,724 |
|
|
| — |
|
Amortization of intangible assets |
|
| 13,544 |
|
|
| 17,174 |
|
Loss on disposal of intangible asset |
|
| 2,713 |
|
|
| — |
|
Operating income |
|
| 71,342 |
|
|
| 53,503 |
|
Interest expense, net |
|
| 12,223 |
|
|
| 9,256 |
|
Foreign currency transaction loss, net |
|
| 92 |
|
|
| 3,770 |
|
Miscellaneous (income) expense, net |
|
| (122 | ) |
|
| 185 |
|
Change in fair value of contingent consideration |
|
| 703 |
|
|
| 928 |
|
Income before income taxes |
|
| 58,446 |
|
|
| 39,364 |
|
Income tax provision |
|
| 11,986 |
|
|
| 9,058 |
|
Net income |
| $ | 46,460 |
|
| $ | 30,306 |
|
Basic and diluted net income per common share |
| $ | 1.45 |
|
| $ | 0.97 |
|
Basic and diluted weighted average shares outstanding |
|
| 32,006 |
|
|
| 31,093 |
|
Dividends declared per share |
| $ | 0.27 |
|
| $ | 0.27 |
|
|
|
|
|
|
|
|
|
|
The accompanying Condensed Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements. |
|
5
Helios Technologies, Inc.
Consolidated Statements of Comprehensive Income
(in thousands)
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 28, 2019 |
|
| September 29, 2018 |
|
| September 28, 2019 |
|
| September 29, 2018 |
| ||||
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
| ||||
Net income |
| $ | 12,791 |
|
| $ | 11,599 |
|
| $ | 46,460 |
|
| $ | 30,306 |
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of tax |
|
| (10,984 | ) |
|
| (4,727 | ) |
|
| (12,317 | ) |
|
| (29,445 | ) |
Unrealized (loss) gain on interest rate swap, net of tax |
|
| (388 | ) |
|
| 119 |
|
|
| (3,512 | ) |
|
| 119 |
|
Total other comprehensive loss |
|
| (11,372 | ) |
|
| (4,608 | ) |
|
| (15,829 | ) |
|
| (29,326 | ) |
Comprehensive income |
| $ | 1,419 |
|
| $ | 6,991 |
|
| $ | 30,631 |
|
| $ | 980 |
|
|
| Three Months Ended |
| |||||
|
| March 28, 2020 |
|
| March 30, 2019 |
| ||
|
| (unaudited) |
|
| (unaudited) |
| ||
Net sales |
| $ | 129,483 |
|
| $ | 146,851 |
|
Cost of sales |
|
| 77,633 |
|
|
| 90,342 |
|
Gross profit |
|
| 51,850 |
|
|
| 56,509 |
|
Selling, engineering and administrative expenses |
|
| 25,664 |
|
|
| 26,156 |
|
Amortization of intangible assets |
|
| 4,348 |
|
|
| 4,521 |
|
Goodwill impairment |
|
| 31,871 |
|
|
| — |
|
Operating (loss) income |
|
| (10,033 | ) |
|
| 25,832 |
|
Interest expense, net |
|
| 2,951 |
|
|
| 4,385 |
|
Foreign currency transaction loss (gain), net |
|
| 125 |
|
|
| (439 | ) |
Miscellaneous (income) expense, net |
|
| (94 | ) |
|
| 108 |
|
Change in fair value of contingent consideration |
|
| — |
|
|
| 719 |
|
(Loss) income before income taxes |
|
| (13,015 | ) |
|
| 21,059 |
|
Income tax provision |
|
| 4,208 |
|
|
| 4,655 |
|
Net (loss) income |
| $ | (17,223 | ) |
| $ | 16,404 |
|
Basic and diluted net (loss) income per common share |
| $ | (0.54 | ) |
| $ | 0.51 |
|
Basic and diluted weighted average shares outstanding |
|
| 32,062 |
|
|
| 31,978 |
|
Dividends declared per share |
| $ | 0.09 |
|
| $ | 0.09 |
|
The accompanying Condensed Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.
6
4
Helios Technologies, Inc.
Consolidated Statements of Shareholders’ Equity (unaudited)
Three Months EndedComprehensive Income (Loss)
(in thousands)
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|
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| Accumulated |
|
|
|
|
| |
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
| Capital in |
|
|
|
|
|
| other |
|
|
|
|
| ||
|
| Preferred |
|
| Preferred |
|
| Common |
|
| Common |
|
| excess of |
|
| Retained |
|
| comprehensive |
|
|
|
|
| |||||||
|
| shares |
|
| stock |
|
| shares |
|
| stock |
|
| par value |
|
| earnings |
|
| income (loss) |
|
| Total |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 29, 2019 |
|
| — |
|
| $ | — |
|
|
| 32,017 |
|
| $ | 32 |
|
| $ | 362,104 |
|
| $ | 246,828 |
|
| $ | (50,710 | ) |
| $ | 558,254 |
|
Shares issued, restricted stock |
|
|
|
|
|
|
|
|
|
| (1 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
Shares issued, other compensation |
|
|
|
|
|
|
|
|
|
| 6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
Shares issued, ESPP |
|
|
|
|
|
|
|
|
|
| 12 |
|
|
|
|
|
|
| 408 |
|
|
|
|
|
|
|
|
|
|
| 408 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,277 |
|
|
|
|
|
|
|
|
|
|
| 1,277 |
|
Cancellation of shares for payment of withholding tax |
|
|
|
|
|
|
|
|
|
| (1 | ) |
|
|
|
|
|
| (27 | ) |
|
|
|
|
|
|
|
|
|
| (27 | ) |
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2,884 | ) |
|
|
|
|
|
| (2,884 | ) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 12,791 |
|
|
|
|
|
|
| 12,791 |
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (11,372 | ) |
|
| (11,372 | ) |
Balance at September 28, 2019 |
|
| — |
|
| $ | — |
|
|
| 32,033 |
|
| $ | 32 |
|
| $ | 363,762 |
|
| $ | 256,735 |
|
| $ | (62,082 | ) |
| $ | 558,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2018 |
|
| — |
|
| $ | — |
|
|
| 31,604 |
|
| $ | 32 |
|
| $ | 337,772 |
|
| $ | 196,787 |
|
| $ | (31,196 | ) |
| $ | 503,395 |
|
Shares issued, restricted stock |
|
|
|
|
|
|
|
|
|
| 6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
Shares issued, other compensation |
|
|
|
|
|
|
|
|
|
| 4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
Shares issued, ESPP |
|
|
|
|
|
|
|
|
|
| 10 |
|
|
|
|
|
|
| 358 |
|
|
|
|
|
|
|
|
|
|
| 358 |
|
Shares issued, acquisition |
|
|
|
|
|
|
|
|
|
| 333 |
|
|
|
|
|
|
| 17,339 |
|
|
|
|
|
|
|
|
|
|
| 17,339 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,303 |
|
|
|
|
|
|
|
|
|
|
| 1,303 |
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2,876 | ) |
|
|
|
|
|
| (2,876 | ) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 11,599 |
|
|
|
|
|
|
| 11,599 |
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (4,608 | ) |
|
| (4,608 | ) |
Balance at September 29, 2018 |
|
| — |
|
| $ | — |
|
|
| 31,957 |
|
| $ | 32 |
|
| $ | 356,772 |
|
| $ | 205,510 |
|
| $ | (35,804 | ) |
| $ | 526,510 |
|
|
| Three Months Ended |
| |||||
|
| March 28, 2020 |
|
| March 30, 2019 |
| ||
|
| (unaudited) |
|
| (unaudited) |
| ||
Net (loss) income |
| $ | (17,223 | ) |
| $ | 16,404 |
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of tax |
|
| (4,901 | ) |
|
| (4,831 | ) |
Unrealized loss on interest rate swap, net of tax |
|
| (2,201 | ) |
|
| (1,082 | ) |
Total other comprehensive loss |
|
| (7,102 | ) |
|
| (5,913 | ) |
Comprehensive (loss) income |
| $ | (24,325 | ) |
| $ | 10,491 |
|
The accompanying Condensed Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.
75
Helios Technologies, Inc.
Consolidated Statements of Shareholders’ Equity (unaudited)
NineThree Months Ended
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Capital in |
|
|
|
|
|
| other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Capital in |
|
|
|
|
|
| other |
|
|
|
|
| ||||
|
| Preferred |
|
| Preferred |
|
| Common |
|
| Common |
|
| excess of |
|
| Retained |
|
| comprehensive |
|
|
|
|
|
| Preferred |
|
| Preferred |
|
| Common |
|
| Common |
|
| excess of |
|
| Retained |
|
| comprehensive |
|
|
|
|
| ||||||||||||||
|
| shares |
|
| stock |
|
| shares |
|
| stock |
|
| par value |
|
| earnings |
|
| income (loss) |
|
| Total |
|
| shares |
|
| stock |
|
| shares |
|
| stock |
|
| par value |
|
| earnings |
|
| (loss) |
|
| Total |
| ||||||||||||||||
Balance at December 29, 2018 |
|
| — |
|
| $ | — |
|
|
| 31,965 |
|
| $ | 32 |
|
| $ | 357,933 |
|
| $ | 219,056 |
|
| $ | (46,253 | ) |
| $ | 530,768 |
| ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||
Balance, December 28, 2019 |
|
| — |
|
| $ | — |
|
|
| 32,047 |
|
| $ | 32 |
|
| $ | 365,310 |
|
| $ | 267,658 |
|
| $ | (55,364 | ) |
| $ | 577,636 |
| ||||||||||||||||||||||||||||||||
Shares issued, restricted stock |
|
|
|
|
|
|
|
|
|
| (2 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
|
|
|
|
|
|
|
|
|
| 21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
Shares issued, other compensation |
|
|
|
|
|
|
|
|
|
| 5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
| ||||||||||||||||||||||||||||||||
Shares issued, ESPP |
|
|
|
|
|
|
|
|
|
| 12 |
|
|
|
|
|
|
| 355 |
|
|
|
|
|
|
|
|
|
|
| 355 |
| ||||||||||||||||||||||||||||||||
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,533 |
|
|
|
|
|
|
|
|
|
|
| 1,533 |
| ||||||||||||||||||||||||||||||||
Cancellation of shares for payment of employee tax withholding |
|
|
|
|
|
|
|
|
|
| (10 | ) |
|
|
|
|
|
| (677 | ) |
|
|
|
|
|
|
|
|
|
| (677 | ) | ||||||||||||||||||||||||||||||||
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2,887 | ) |
|
|
|
|
|
| (2,887 | ) | ||||||||||||||||||||||||||||||||
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (17,223 | ) |
|
|
|
|
|
| (17,223 | ) | ||||||||||||||||||||||||||||||||
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (7,102 | ) |
|
| (7,102 | ) | ||||||||||||||||||||||||||||||||
Balance at March 28, 2020 |
|
| — |
|
| $ | — |
|
|
| 32,075 |
|
| $ | 32 |
|
| $ | 366,521 |
|
| $ | 247,548 |
|
| $ | (62,466 | ) |
| $ | 551,635 |
| ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||
Balance, December 29, 2018 |
|
| — |
|
| $ | — |
|
|
| 31,965 |
|
| $ | 32 |
|
| $ | 357,933 |
|
| $ | 219,056 |
|
| $ | (46,253 | ) |
| $ | 530,768 |
| ||||||||||||||||||||||||||||||||
Shares issued, other compensation |
|
|
|
|
|
|
|
|
|
| 19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
|
|
|
|
|
|
|
|
|
| 6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
Shares issued, ESPP |
|
|
|
|
|
|
|
|
|
| 40 |
|
|
|
|
|
|
| 1,252 |
|
|
|
|
|
|
|
|
|
|
| 1,252 |
|
|
|
|
|
|
|
|
|
|
| 13 |
|
|
|
|
|
|
| 408 |
|
|
|
|
|
|
|
|
|
|
| 408 |
|
Shares issued, ESOP |
|
|
|
|
|
|
|
|
|
| 24 |
|
|
|
|
|
|
| 1,152 |
|
|
|
|
|
|
|
|
|
|
| 1,152 |
|
|
|
|
|
|
|
|
|
|
| 24 |
|
|
|
|
|
|
| 1,092 |
|
|
|
|
|
|
|
|
|
|
| 1,092 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 4,058 |
|
|
|
|
|
|
|
|
|
|
| 4,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,368 |
|
|
|
|
|
|
|
|
|
|
| 1,368 |
|
Cancellation of shares for payment of employee tax withholding |
|
|
|
|
|
|
|
|
|
| (13 | ) |
|
|
|
|
|
| (633 | ) |
|
|
|
|
|
|
|
|
|
| (633 | ) |
|
|
|
|
|
|
|
|
|
| (12 | ) |
|
|
|
|
|
| (606 | ) |
|
|
|
|
|
|
|
|
|
| (606 | ) |
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (8,647 | ) |
|
|
|
|
|
| (8,647 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2,881 | ) |
|
|
|
|
|
| (2,881 | ) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 46,460 |
|
|
|
|
|
|
| 46,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 16,404 |
|
|
|
|
|
|
| 16,404 |
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (15,829 | ) |
|
| (15,829 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (5,913 | ) |
|
| (5,913 | ) |
Impact of adoption of ASU 2016-02, related to leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (134 | ) |
|
|
|
|
|
| (134 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (134 | ) |
|
|
|
|
|
| (134 | ) |
Balance at September 28, 2019 |
|
| — |
|
| $ | — |
|
|
| 32,033 |
|
| $ | 32 |
|
| $ | 363,762 |
|
| $ | 256,735 |
|
| $ | (62,082 | ) |
| $ | 558,447 |
| ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||
Balance at December 30, 2017 |
|
| — |
|
| $ | — |
|
|
| 27,077 |
|
| $ | 27 |
|
| $ | 95,354 |
|
| $ | 183,770 |
|
| $ | (6,478 | ) |
| $ | 272,673 |
| ||||||||||||||||||||||||||||||||
Shares issued, restricted stock |
|
|
|
|
|
|
|
|
|
| 109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
| ||||||||||||||||||||||||||||||||
Shares issued, other compensation |
|
|
|
|
|
|
|
|
|
| 16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
| ||||||||||||||||||||||||||||||||
Shares issued, ESPP |
|
|
|
|
|
|
|
|
|
| 27 |
|
|
|
|
|
|
| 1,167 |
|
|
|
|
|
|
|
|
|
|
| 1,167 |
| ||||||||||||||||||||||||||||||||
Shares issued, public offering |
|
|
|
|
|
|
|
|
|
| 4,400 |
|
|
| 5 |
|
|
| 239,788 |
|
|
|
|
|
|
|
|
|
|
| 239,793 |
| ||||||||||||||||||||||||||||||||
Shares issued, acquisition |
|
|
|
|
|
|
|
|
|
| 333 |
|
|
|
|
|
|
| 17,339 |
|
|
|
|
|
|
|
|
|
|
| 17,339 |
| ||||||||||||||||||||||||||||||||
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3,364 |
|
|
|
|
|
|
|
|
|
|
| 3,364 |
| ||||||||||||||||||||||||||||||||
Cancellation of shares for payment of employee tax withholding |
|
|
|
|
|
|
|
|
|
| (5 | ) |
|
|
|
|
|
| (240 | ) |
|
|
|
|
|
|
|
|
|
| (240 | ) | ||||||||||||||||||||||||||||||||
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (8,566 | ) |
|
|
|
|
|
| (8,566 | ) | ||||||||||||||||||||||||||||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 30,306 |
|
|
|
|
|
|
| 30,306 |
| ||||||||||||||||||||||||||||||||
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (29,326 | ) |
|
| (29,326 | ) | ||||||||||||||||||||||||||||||||
Balance at September 29, 2018 |
|
| — |
|
| $ | — |
|
|
| 31,957 |
|
| $ | 32 |
|
| $ | 356,772 |
|
| $ | 205,510 |
|
| $ | (35,804 | ) |
| $ | 526,510 |
| ||||||||||||||||||||||||||||||||
Balance at March 30, 2019 |
|
| — |
|
| $ | — |
|
|
| 31,996 |
|
| $ | 32 |
|
| $ | 360,195 |
|
| $ | 232,445 |
|
| $ | (52,166 | ) |
| $ | 540,506 |
|
The accompanying Condensed Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.
86
Helios Technologies, Inc.
Consolidated Statements of Cash Flows
(in thousands)
|
| Nine Months Ended |
|
| Three Months Ended |
| ||||||||||
|
| September 28, 2019 |
|
| September 29, 2018 |
|
| March 28, 2020 |
|
| March 30, 2019 |
| ||||
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 46,460 |
|
| $ | 30,306 |
| ||||||||
Net (loss) income |
| $ | (17,223 | ) |
| $ | 16,404 |
| ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 26,006 |
|
|
| 28,801 |
|
|
| 8,376 |
|
|
| 8,571 |
|
Loss on disposal of assets |
|
| 2,793 |
|
|
| 53 |
|
|
| 24 |
|
|
| 71 |
|
Goodwill impairment |
|
| 31,871 |
|
|
| — |
| ||||||||
Stock-based compensation expense |
|
| 4,058 |
|
|
| 3,364 |
|
|
| 1,533 |
|
|
| 1,368 |
|
Amortization of debt issuance costs |
|
| 545 |
|
|
| 550 |
|
|
| 179 |
|
|
| 179 |
|
Benefit for deferred income taxes |
|
| (1,381 | ) |
|
| (393 | ) |
|
| (1,186 | ) |
|
| (322 | ) |
Amortization of acquisition related inventory step up |
|
| — |
|
|
| 5,217 |
| ||||||||
Change in fair value of contingent consideration |
|
| 630 |
|
|
| 928 |
|
|
| — |
|
|
| 719 |
|
Forward contract (gains) losses, net |
|
| (3,973 | ) |
|
| 3,573 |
|
|
| (440 | ) |
|
| 24 |
|
Other, net |
|
| 1,304 |
|
|
| 386 |
|
|
| 136 |
|
|
| 549 |
|
(Increase) decrease in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (6,533 | ) |
|
| (10,595 | ) |
|
| (6,838 | ) |
|
| (8,848 | ) |
Inventories |
|
| (6,674 | ) |
|
| (13,754 | ) |
|
| (2,818 | ) |
|
| (3,729 | ) |
Income taxes receivable |
|
| (1,598 | ) |
|
| (1,723 | ) |
|
| 1,415 |
|
|
| — |
|
Other current assets |
|
| (3,448 | ) |
|
| (1,329 | ) |
|
| (2,740 | ) |
|
| (2,455 | ) |
Other assets |
|
| 1,259 |
|
|
| 121 |
|
|
| 1,213 |
|
|
| 1,088 |
|
Increase (decrease) in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
| (5,046 | ) |
|
| 1,413 |
|
|
| 3,867 |
|
|
| 662 |
|
Accrued expenses and other liabilities |
|
| 6,249 |
|
|
| 2,210 |
|
|
| (4,652 | ) |
|
| 3,496 |
|
Income taxes payable |
|
| 3,363 |
|
|
| (4,762 | ) |
|
| 3,051 |
|
|
| 2,710 |
|
Other noncurrent liabilities |
|
| (2,386 | ) |
|
| (144 | ) |
|
| (701 | ) |
|
| (659 | ) |
Contingent consideration payments in excess of acquisition date fair value |
|
| (10,731 | ) |
|
| — |
| ||||||||
Net cash provided by operating activities |
|
| 50,897 |
|
|
| 44,222 |
|
|
| 15,067 |
|
|
| 19,828 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (19,584 | ) |
|
| (18,702 | ) |
|
| (2,937 | ) |
|
| (8,792 | ) |
Proceeds from dispositions of equipment |
|
| 124 |
|
|
| 20 |
|
|
| 3 |
|
|
| 64 |
|
Acquisition of business, net of cash acquired |
|
| — |
|
|
| (534,662 | ) | ||||||||
Cash settlement of forward contract |
|
| 2,256 |
|
|
| (2,535 | ) | ||||||||
Cash settlement of forward contracts |
|
| 1,634 |
|
|
| — |
| ||||||||
Net cash used in investing activities |
|
| (17,204 | ) |
|
| (555,879 | ) |
|
| (1,300 | ) |
|
| (8,728 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on revolving credit facility |
|
| 107,814 |
|
|
| 285,000 |
|
|
| 2,000 |
|
|
| 35,282 |
|
Repayment of borrowings on revolving credit facility |
|
| (135,750 | ) |
|
| (134,000 | ) |
|
| (5,500 | ) |
|
| (48,000 | ) |
Borrowings on long-term non-revolving debt |
|
| — |
|
|
| 101,035 |
| ||||||||
Repayment of borrowings on long-term non-revolving debt |
|
| (4,188 | ) |
|
| (2,527 | ) |
|
| (2,100 | ) |
|
| (1,623 | ) |
Borrowings under factoring arrangements |
|
| — |
|
|
| 2,891 |
| ||||||||
Repayment of borrowings under factoring arrangements |
|
| — |
|
|
| (2,040 | ) | ||||||||
Proceeds from stock issued |
|
| 1,252 |
|
|
| 240,959 |
|
|
| 355 |
|
|
| 408 |
|
Dividends to shareholders |
|
| (8,641 | ) |
|
| (8,126 | ) |
|
| (2,885 | ) |
|
| (2,878 | ) |
Debt issuance costs |
|
| — |
|
|
| (1,763 | ) | ||||||||
Payment of contingent consideration liability |
|
| (7,064 | ) |
|
| (17,342 | ) | ||||||||
Other financing activities |
|
| (1,370 | ) |
|
| (878 | ) |
|
| (815 | ) |
|
| (881 | ) |
Net cash (used in) provided by financing activities |
|
| (47,947 | ) |
|
| 463,209 |
| ||||||||
Net cash used in financing activities |
|
| (8,945 | ) |
|
| (17,692 | ) | ||||||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
| 4,482 |
|
|
| 440 |
|
|
| 310 |
|
|
| (167 | ) |
Net decrease in cash, cash equivalents and restricted cash |
|
| (9,772 | ) |
|
| (48,008 | ) | ||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
| 5,132 |
|
|
| (6,759 | ) | ||||||||
Cash, cash equivalents and restricted cash, beginning of period |
|
| 23,515 |
|
|
| 63,922 |
|
|
| 22,162 |
|
|
| 23,515 |
|
Cash, cash equivalents and restricted cash, end of period |
| $ | 13,743 |
|
| $ | 15,914 |
|
| $ | 27,294 |
|
| $ | 16,756 |
|
The accompanying Condensed Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.
9
7
HELIOS TECHNOLOGIES, INC.
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”), andtogether with 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 entitiesEnovation Controls, LLC (“Enovation Controls”), Faster S.r.l. (“Faster”) 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 2 business segments,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”).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
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 (“U.S. GAAP”) 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, 2018,28, 2019, (“Form 10-K”), filed by Helios Technologies, Inc. (at that time known as Sun Hydraulics Corporation) with the Securities and Exchange Commission on February 26, 2019.25, 2020. In Management’smanagement’s opinion, all adjustments necessary for a fair presentation of the Company’s financial statements are reflected in the interim periods presented.
The Company faces various risks related to health epidemics, pandemics and similar outbreaks, including the global outbreak of COVID-19. The Company cannot at this time predict the impact of the COVID-19 pandemic, but it could have a material adverse effect on the business, financial position, results of operations and/or cash flows. Operating results for the ninethree months ended SeptemberMarch 28, 2019,2020, 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, usingending January 2, 2021.
Goodwill
Goodwill, which represents the effective date method which requiredexcess 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 cumulative-effect adjustmentreduction in the fair value below the carrying value. As part of the impairment test, the Company has the option to befirst 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 opening balance of retained earnings. Underextent that 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. Ascarrying value of the adoption date,reporting unit exceeds its fair value, with the impairment loss limited to the amount of goodwill allocated to the reporting unit.
8
During the first quarter of 2020, the Company recorded right-of-use (“ROU”) assetsdetermined that, based on current economic conditions 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 arisingpotential future impacts from the leases and are presented in Other accrued expenses and current liabilities and Other noncurrent liabilities inCOVID-19 pandemic, it was more likely than not that the Consolidated Balance Sheets. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated presentfair value of lease payments over the lease term.
TheFaster reporting unit was less than its carrying value. Upon completion of the interim impairment testing, the Company utilizes an estimated incremental borrowing rate, which is derived from information available atdetermined that the lease commencement date, in determining the presentcarrying 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 termgoodwill was impaired. See Note 6 for discussion of 12 months or less are not recorded on the balance sheet. There are no residual value guarantees included in the Company’s leases.interim impairment testing.
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$2,741 and $2,851$2,796 at SeptemberMarch 28, 20192020 and December 29, 2018,28, 2019, 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$253 and $138$353 at SeptemberMarch 28, 20192020 and December 29, 2018,28, 2019, 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,$4,107, and $10,450$3,900 for the ninethree months ended SeptemberMarch 28, 20192020 and September 29, 2018,March 30, 2019, respectively.
Restructuring ChargesEarnings Per Share
DuringThe following table presents the third quartercomputation of 2019, the Company incurred $1,724 of early retirementbasic 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.diluted earnings per common share (in thousands except per share data):
|
| Three Months Ended |
| |||||
|
| March 28, 2020 |
|
| March 30, 2019 |
| ||
Net (loss) income |
| $ | (17,223 | ) |
| $ | 16,404 |
|
Basic and diluted weighted average shares outstanding |
|
| 32,062 |
|
|
| 31,978 |
|
Basic and diluted net (loss) income per common share |
| $ | (0.54 | ) |
| $ | 0.51 |
|
Recently IssuedAdopted Accounting Standards
In January 2017, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“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 Company adopted the standard for the fiscal year beginning December 29, 2019, and conducted its interim impairment testing accordingly.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. The standard replaces the incurred loss model with the current expected credit loss (“CECL”) model to estimate credit losses for financial assets measured at amortized cost and certain off-balance sheet credit exposures. The CECL model requires a Company to estimate credit losses expected over the life of the financial assets based on historical experience, current conditions and reasonable and supportable forecasts. The Company adopted the standard for the fiscal year beginning December 29, 2019. Adoption of the standard did not have a material impact on the Consolidated, Unaudited Financial Statements.
9
Recently Issued Accounting Standards
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This update simplifies accounting for income taxes by eliminating some exceptions to the general approach in ASC 740, Income Taxes, related to intraperiod tax allocation, the methodology for calculating income tax in an interim period and the recognition of deferred tax liabilities for outside basis differences. This update is effective for annualfiscal years, and interim goodwill impairment tests conducted inperiods within those fiscal years, beginning after December 15, 2019,2020, with early adoption permitted. The amendments in this update should be applied on either a retrospective basis, a modified retrospective basis or prospectively, depending on the provision within the amendment. 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 SeptemberMarch 28, 20192020 and December 29, 2018.28, 2019.
|
| September 28, 2019 |
|
| March 28, 2020 |
| ||||||||||||||||||||||||||
|
|
|
|
|
| Quoted Market |
|
| Significant Other Observable |
|
| Significant Unobservable |
|
|
|
|
|
| Quoted Market |
|
| Significant Other Observable |
|
| Significant Unobservable |
| ||||||
|
| Total |
|
| Prices (Level 1) |
|
| Inputs (Level 2) |
|
| Inputs (Level 3) |
|
| Total |
|
| Prices (Level 1) |
|
| Inputs (Level 2) |
|
| Inputs (Level 3) |
| ||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward foreign exchange contracts |
| $ | 1,741 |
|
| $ | — |
|
| $ | 1,741 |
|
| $ | — |
|
| $ | 710 |
|
| $ | — |
|
| $ | 710 |
|
| $ | — |
|
Total |
| $ | 1,741 |
|
| $ | — |
|
| $ | 1,741 |
|
| $ | — |
|
| $ | 710 |
|
| $ | — |
|
| $ | 710 |
|
| $ | — |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contract |
| $ | 6,849 |
|
| $ | — |
|
| $ | 6,849 |
|
| $ | — |
|
| $ | 9,821 |
|
| $ | — |
|
| $ | 9,821 |
|
| $ | — |
|
Forward foreign exchange contracts |
|
| 1,309 |
|
|
| — |
|
|
| 1,309 |
|
|
| — |
| ||||||||||||||||
Contingent consideration |
|
| 1,795 |
|
|
| — |
|
|
| — |
|
|
| 1,795 |
|
|
| 828 |
|
|
| — |
|
|
| — |
|
|
| 828 |
|
Total |
| $ | 8,644 |
|
| $ | — |
|
| $ | 6,849 |
|
| $ | 1,795 |
|
| $ | 11,958 |
|
| $ | — |
|
| $ | 11,130 |
|
| $ | 828 |
|
|
| 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 |
|
|
| December 28, 2019 |
| |||||||||||||
|
|
|
|
|
| Quoted Market |
|
| Significant Other Observable |
|
| Significant Unobservable |
| |||
|
| Total |
|
| Prices (Level 1) |
|
| Inputs (Level 2) |
|
| Inputs (Level 3) |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward foreign exchange contracts |
| $ | 815 |
|
| $ | — |
|
| $ | 815 |
|
| $ | — |
|
Total |
| $ | 815 |
|
| $ | — |
|
| $ | 815 |
|
| $ | — |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contract |
| $ | 5,792 |
|
| $ | — |
|
| $ | 5,792 |
|
| $ | — |
|
Forward foreign exchange contracts |
|
| 219 |
|
|
| — |
|
|
| 219 |
|
|
| — |
|
Contingent consideration |
|
| 828 |
|
|
| — |
|
|
| — |
|
|
| 828 |
|
Total |
| $ | 6,839 |
|
| $ | — |
|
| $ | 6,011 |
|
| $ | 828 |
|
6.4. INVENTORIES
At March 28, 2020 and December 28, 2019, inventory consisted of the following:
|
| March 28, 2020 |
|
| December 28, 2019 |
| ||
Raw materials |
| $ | 35,760 |
|
| $ | 34,340 |
|
Work in process |
|
| 31,189 |
|
|
| 28,667 |
|
Finished goods |
|
| 27,183 |
|
|
| 29,711 |
|
Provision for obsolete and slow moving inventory |
|
| (7,405 | ) |
|
| (7,523 | ) |
Total |
| $ | 86,727 |
|
| $ | 85,195 |
|
10
5. 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 eleventen years. For the ninethree months ended SeptemberMarch 28, 2020 and March 30, 2019, operating lease costs totaled $2,724.$908 in each period.
Supplemental balance sheet information related to operating leases is as follows:
|
| September 28, 2019 |
|
| March 28, 2020 |
|
| December 28, 2019 |
| |||
Right-of-use assets |
| $ | 12,645 |
|
| $ | 10,841 |
|
| $ | 12,310 |
|
|
|
|
|
| ||||||||
Lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Current lease liabilities |
| $ | 3,075 |
|
| $ | 3,092 |
|
| $ | 3,155 |
|
Non-current lease liabilities |
|
| 9,713 |
|
|
| 7,911 |
|
|
| 9,312 |
|
Total lease liabilities |
| $ | 12,788 |
|
| $ | 11,003 |
|
| $ | 12,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (in years): |
|
| 5.6 |
|
|
|
|
|
|
| 5.3 |
|
|
|
|
|
| ||||||||
Weighted average discount rate: |
|
| 4.7 | % |
|
|
|
|
|
| 4.7 | % |
Supplemental cash flow and other information related to leases is as follows:
|
| For the Nine Months Ended |
|
| Three Months Ended |
| ||||||
|
| September 28, 2019 |
|
| March 28, 2020 |
|
| March 30, 2019 |
| |||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases |
| $ | 2,737 |
|
| $ | 915 |
|
| $ | 913 |
|
ROU assets obtained in exchange for new operating lease liabilities |
| $ | 1,465 |
| ||||||||
Right-of-use assets obtained in exchange for new operating lease liabilities |
| $ | 15 |
|
| $ | 901 |
|
Maturities of lease liabilities are as follows:
2019 Remaining |
| $ | 944 |
| ||||||
2020 |
|
| 3,594 |
| ||||||
2020 Remaining |
|
|
| $ | 2,656 |
| ||||
2021 |
|
| 3,464 |
|
|
|
|
| 3,419 |
|
2022 |
|
| 1,700 |
|
|
|
|
| 1,638 |
|
2023 |
|
| 1,345 |
|
|
|
|
| 1,289 |
|
2024 |
|
| 941 |
|
|
|
|
| 903 |
|
2025 |
|
|
|
| 631 |
| ||||
Thereafter |
|
| 2,773 |
|
|
|
|
| 2,053 |
|
Total lease payments |
|
| 14,761 |
|
|
|
|
| 12,589 |
|
Less: Imputed interest |
|
| (1,973 | ) |
|
|
|
| (1,586 | ) |
Total lease obligations |
|
| 12,788 |
|
|
|
|
| 11,003 |
|
Less: Current lease liabilities |
|
| (3,075 | ) |
|
|
|
| (3,092 | ) |
Non-current lease liabilities |
| $ | 9,713 |
|
|
|
| $ | 7,911 |
|
15
7.6. GOODWILL AND INTANGIBLE ASSETS
Goodwill
A summary of changes in goodwill by segment for the ninethree months ended SeptemberMarch 28, 2019,2020, 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 |
|
|
| Hydraulics |
|
| Electronics |
|
| Total |
| |||
Balance at December 28, 2019 |
| $ | 271,196 |
|
| $ | 106,373 |
|
| $ | 377,569 |
|
Impairment charge |
|
| (31,871 | ) |
|
| — |
|
|
| (31,871 | ) |
Currency translation |
|
| (1,883 | ) |
|
| — |
|
|
| (1,883 | ) |
Balance at March 28, 2020 |
| $ | 237,442 |
|
| $ | 106,373 |
|
| $ | 343,815 |
|
11
During the first quarter of 2020, the global economy was significantly impacted by the COVID-19 pandemic. Given the economic impact, primarily in Europe, government mandated facility closures and an unfavorable outlook for certain end markets, the Company concluded that this change in circumstances triggered the need for an interim impairment review of its Faster reporting unit. The interim review was performed as of March 28, 2020. A recoverability test for the long-lived assets within the Faster reporting unit was performed first and resulted in the conclusion that the carrying value of the long-lived assets was fully recoverable. An interim quantitative impairment test for goodwill was then performed.
The fair value of the Faster reporting unit was determined based on a combination of income and market approach methodologies. The income approach utilized a discounted cash flow analysis, which estimates the present value of the projected free cash flows to be generated by the reporting unit. Principal assumptions used in the analysis include the Company's estimates of future revenue and terminal growth rates, margin assumptions and discount rates. While assumptions utilized are subject to a high degree of judgment and complexity, the Company has made every effort to estimate future cash flows as accurately as possible, given the high degree of economic uncertainty that currently exists. The market approaches estimate fair value by comparing to guideline public companies and guideline transactions. Various valuation multiples of companies that are economically and operationally similar were used as data points for selecting multiples. The Company concluded that the estimated fair value of the Faster reporting unit was less than its carrying value, and as a result, recorded a non-cash, non-tax-deductible goodwill impairment charge of $31,871. If the economic impact from the COVID-19 pandemic is more severe than anticipated, or if the economic recovery takes longer to materialize or does not materialize as strongly as anticipated, it could result in further goodwill impairment charges.
The Company considered the known and anticipated impacts of the COVID-19 pandemic on its other reporting units and concluded that it was more likely than not that their fair value exceeded their carrying value.
Intangible Assets
At SeptemberMarch 28, 2019,2020, and December 29, 2018,28, 2019, intangible assets consisted of the following:
|
| September 28, 2019 |
|
| December 29, 2018 |
|
| March 28, 2020 |
|
| December 28, 2019 |
| ||||||||||||||||||||||||||||||||||||
|
| Gross carrying amount |
|
| Accumulated amortization |
|
| Net carrying amount |
|
| Gross carrying amount |
|
| Accumulated amortization |
|
| Net carrying amount |
|
| 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 |
|
| $ | 55,747 |
|
| $ | (8,362 | ) |
| $ | 47,385 |
|
| $ | 56,032 |
|
| $ | (7,658 | ) |
| $ | 48,374 |
|
Non-compete agreements |
|
| 950 |
|
|
| (538 | ) |
|
| 412 |
|
|
| 950 |
|
|
| (396 | ) |
|
| 554 |
|
|
| 950 |
|
|
| (633 | ) |
|
| 317 |
|
|
| 950 |
|
|
| (586 | ) |
|
| 364 |
|
Technology |
|
| 31,414 |
|
|
| (7,821 | ) |
|
| 23,593 |
|
|
| 32,004 |
|
|
| (5,488 | ) |
|
| 26,516 |
|
|
| 31,544 |
|
|
| (9,414 | ) |
|
| 22,130 |
|
|
| 31,704 |
|
|
| (8,661 | ) |
|
| 23,043 |
|
Supply agreement |
|
| 21,000 |
|
|
| (5,951 | ) |
|
| 15,049 |
|
|
| 21,000 |
|
|
| (4,375 | ) |
|
| 16,625 |
|
|
| 21,000 |
|
|
| (7,000 | ) |
|
| 14,000 |
|
|
| 21,000 |
|
|
| (6,475 | ) |
|
| 14,525 |
|
Customer relationships |
|
| 223,854 |
|
|
| (16,847 | ) |
|
| 207,007 |
|
|
| 232,275 |
|
|
| (10,168 | ) |
|
| 222,107 |
|
|
| 226,835 |
|
|
| (21,678 | ) |
|
| 205,157 |
|
|
| 227,844 |
|
|
| (19,499 | ) |
|
| 208,345 |
|
Licensing agreement |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,716 |
|
|
| (862 | ) |
|
| 2,854 |
| ||||||||||||||||||||||||
|
| $ | 332,701 |
|
| $ | (38,019 | ) |
| $ | 294,682 |
|
| $ | 346,549 |
|
| $ | (26,001 | ) |
| $ | 320,548 |
|
| $ | 336,076 |
|
| $ | (47,087 | ) |
| $ | 288,989 |
|
| $ | 337,530 |
|
| $ | (42,879 | ) |
| $ | 294,651 |
|
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 ninethree months ended SeptemberMarch 28, 2020, and March 30, 2019, was $4,348 and September 29, 2018, was $13,544 and $17,174,$4,521, respectively. TotalFuture 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 |
| ||||
2020 Remaining |
| $ | 13,413 |
| ||||
2021 |
|
| 17,560 |
|
|
| 17,674 |
|
2022 |
|
| 17,297 |
|
|
| 17,411 |
|
2023 |
|
| 17,237 |
|
|
| 17,352 |
|
2024 |
|
| 16,582 |
|
|
| 16,697 |
|
2025 |
|
| 16,642 |
| ||||
Thereafter |
|
| 189,800 |
| ||||
Total |
| $ | 90,828 |
|
| $ | 288,989 |
|
8.7. 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 areis presented as follows:
| Asset Derivatives |
|
| Liability Derivatives |
| Asset Derivatives |
|
| Liability Derivatives |
| ||||||||||||||||||||||||
| Balance Sheet |
| Fair Value (1) |
| Fair Value (1) |
|
| Balance Sheet |
| Fair Value (1) |
| Fair Value (1) |
| 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 |
| Location |
| March 28, 2020 |
| December 28, 2019 |
|
| Location |
| March 28, 2020 |
| December 28, 2019 |
| ||||||||
Derivatives designated as hedging instruments: | Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
| Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
| ||||||||||||||
Interest rate swap contract | Other assets |
| $ | — |
| $ | — |
|
| Other non-current liabilities |
| $ | 6,849 |
| $ | 2,309 |
| Other assets |
| $ | — |
| $ | — |
|
| Other non-current liabilities |
| $ | 9,821 |
| $ | 5,792 |
|
Derivatives not designated as hedging instruments: | Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
| Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
| ||||||||||||||
Forward foreign exchange contracts | Other current assets |
|
| 1,336 |
| — |
|
| Other current liabilities |
|
| — |
| 137 |
| Other current assets |
|
| 547 |
| 509 |
|
| Other current liabilities |
|
| 1,228 |
| 213 |
| ||||
Forward foreign exchange contracts | Other assets |
|
| 405 |
| — |
|
| Other non-current liabilities |
|
| — |
| — |
| Other assets |
|
| 163 |
| 306 |
|
| Other non-current liabilities |
|
| 81 |
| 6 |
| ||||
Total derivatives |
|
| $ | 1,741 |
| $ | — |
|
|
|
| $ | 6,849 |
| $ | 2,446 |
|
|
| $ | 710 |
| $ | 815 |
|
|
|
| $ | 11,130 |
| $ | 6,011 |
|
(1) See Note 4 for further information about how the fair value of derivative assets and liabilities are determined |
| |||||||||||||||||||||||||||||||||
(1) See Note 3 for information regarding the inputs used in determining the fair value of derivative assets and liabilities. | (1) See Note 3 for information regarding the inputs used in determining the fair value of derivative assets and liabilities. |
|
The amount of gains and losses related to the Company’s derivative financial instruments for the three months ended March 28, 2020 and March 30, 2019, 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) |
|
| Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives (Effective Portion) |
|
| Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income | Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Earnings (Effective Portion) |
| |||||||||||||||||
|
| September 28, 2019 |
| September 29, 2018 |
|
| into Earnings (Effective Portion) |
| September 28, 2019 |
| September 29, 2018 |
|
| March 28, 2020 |
| March 30, 2019 |
|
| into Earnings (Effective Portion) |
| March 28, 2020 |
| March 30, 2019 |
| ||||||||
Derivatives in cash flow hedging relationships: | Derivatives in cash flow hedging relationships: |
|
|
|
|
|
|
|
|
| Derivatives in cash flow hedging relationships: |
|
|
|
|
|
|
|
|
| ||||||||||||
Interest rate swap contract |
| $ | (4,539 | ) | $ | 119 |
|
| Interest expense, net |
| $ | (658 | ) | $ | (254 | ) |
| $ | (4,029 | ) | $ | (1,521 | ) |
| Interest expense, net |
| $ | (525 | ) | $ | (183 | ) |
Interest expense presented in the Consolidated Statements of Operations, in which the effects of cash flow hedges are recorded, totaled $12,223$2,951 and $4,385 for the ninethree months ended SeptemberMarch 28, 2019.2020 and March 30, 2019, respectively.
|
| Amount of Gain or (Loss) Recognized in Earnings on Derivatives |
|
| Location of Gain or (Loss) Recognized |
| 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 |
| March 28, 2020 |
| March 30, 2019 |
|
| in Earnings on Derivatives | ||||
Derivatives not designated as hedging instruments: | Derivatives not designated as hedging instruments: |
|
|
| Derivatives not designated as hedging instruments: |
|
|
| ||||||||||
Forward foreign exchange contracts |
| $ | 3,973 |
| $ | (3,573 | ) |
| Foreign currency transaction gain loss, net |
| $ | 440 |
| $ | (24 | ) |
| 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 iswill be settled with the respective counterparties on a net basis at each settlement date.
1713
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 SeptemberAt March 28, 2019,2020, the Company had 711 forward foreign exchange contracts with an aggregate notional value of €64,526,€61,843, maturing at various dates through AprilOctober 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, theThe Company has designated €80,000€100,000 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$111,365 as of SeptemberMarch 28, 20192020 and is included in the Revolving line of credit line item onin the Consolidated Balance Sheets. The gain or loss on the net investment hedge recorded in AOCIaccumulated other comprehensive income (“AOCI”) as part of the currency translation adjustment was a gain of $1,882,$265, net of tax, for the ninethree months ended SeptemberMarch 28, 2019.2020. NaN amounts associated with the net investment hedge were reclassified from AOCI into income for the quarterthree months ended SeptemberMarch 28, 2019.2020.
9.8. CREDIT FACILITIES
Total long-term non-revolving debt consists of the following:
| Maturity Date |
| September 28, 2019 |
|
| December 29, 2018 |
| Maturity Date |
| March 28, 2020 |
|
| December 28, 2019 |
| ||||
Long-term non-revolving debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan credit facility with PNC | 4/3/2023 |
| $ | 92,500 |
|
| $ | 96,250 |
| |||||||||
Term loan credit facility with PNC Bank | 4/3/2023 |
| $ | 90,000 |
|
| $ | 91,250 |
| |||||||||
Term loan credit facility with Shinhan Bank | 3/30/2020 |
|
| 832 |
|
|
| 895 |
| 3/30/2020 |
|
| — |
|
|
| 862 |
|
Other long-term debt | Various |
|
| 391 |
|
|
| 838 |
| Various |
|
| 307 |
|
|
| 376 |
|
Total long-term non-revolving debt |
|
|
| 93,723 |
|
|
| 97,983 |
|
|
|
| 90,307 |
|
|
| 92,488 |
|
Less: current portion of long-term non-revolving debt |
|
|
| 6,946 |
|
|
| 5,215 |
|
|
|
| 7,369 |
|
|
| 7,623 |
|
Less: unamortized debt issuance costs |
|
|
| 864 |
|
|
| 1,048 |
|
|
|
| 741 |
|
|
| 803 |
|
Total long-term non-revolving debt, net |
|
| $ | 85,913 |
|
| $ | 91,720 |
|
|
| $ | 82,197 |
|
| $ | 84,062 |
|
Information on the Company’s revolving credit facilitiesfacility 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 |
|
|
|
| Balance |
|
| Available credit |
| ||||||||||
| Maturity Date |
| March 28, 2020 |
|
| December 28, 2019 |
|
| March 28, 2020 |
|
| December 28, 2019 |
| ||||
Revolving line of credit with PNC Bank | 4/3/2023 |
| $ | 204,865 |
|
| $ | 208,708 |
|
| $ | 195,135 |
|
| $ | 191,292 |
|
Future maturities of total debt are as follows:
Year: |
|
|
|
|
|
|
2019 Remaining | $ | 1,277 |
| |||
2020 |
| 7,838 |
| |||
2020 Remaining | $ | 5,720 |
| |||
2021 |
| 7,649 |
|
| 7,636 |
|
2022 |
| 9,455 |
|
| 9,448 |
|
2023 |
| 292,993 |
|
| 272,368 |
|
Total | $ | 319,212 |
| $ | 295,172 |
|
18
The Company has a credit agreement that includes 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 SeptemberMarch 28, 20192020 was 3.24%2.34%. Interest expense recognized on the credit agreement during the ninethree months ended SeptemberMarch 28, 20192020 and September 29, 2018,March 30, 2019, totaled $11,4422,408 and $8,577,$4,164, respectively. As of the date of this filing, the Company was in compliance with all debt covenants related to the credit agreement.
The Company hashad a credit agreement with Shinhan Bank that providesprovided a term loan of 1,000,000 Korean won. The loan maturesmatured 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 werebalance was paid in full on January 31, 2019, at which time the facility was closed.full.
14
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%5.1%.
9. INCOME TAXES
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 proceedsprovision for income taxes for the repaymentthree months ended March 28, 2020 and March 30, 2019, was 22.3% and 22.1% of debt under its credit facility and to partially fundpretax income, respectively, after adjusting for the acquisitionimpact of Faster, which closed on April 5, 2018.
11. INCOME TAXESthe goodwill impairment charge.
At SeptemberMarch 28, 2019,2020, the Company had an unrecognized tax benefit of $7,037$8,491 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 SeptemberMarch 28, 20192020 is not considered material to the Company’s consolidated financial statements.
The Company files United States (“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 not 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
12.10. 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 options, 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%200% of their target amount based on the achievement of defined performance targets.
Compensation expense recognized for restricted stock and RSUs totaled $1,253 and $811, respectively, for the three months ended March 28, 2020, and March 30, 2019.
The following table summarizes restricted stock and RSU activity for the three months ended March 28, 2020:
|
| Number of |
|
| Weighted average |
| ||
|
| shares / units |
|
| grant-date |
| ||
|
| (in thousands) |
|
| fair value per share |
| ||
Nonvested balance at December 28, 2019 |
|
| 203 |
|
| $ | 42.73 |
|
Granted |
|
| 112 |
|
|
| 38.88 |
|
Vested |
|
| (58 | ) |
|
| 43.15 |
|
Forfeited |
|
| (24 | ) |
|
| 43.33 |
|
Nonvested balance at March 28, 2020 (1) |
|
| 233 |
|
| $ | 41.55 |
|
(1) Includes 82,528 unvested performance-based RSUs.
15
The Company had $6,287$8,481 of total unrecognized compensation cost related to the restricted stock and RSU awards as of SeptemberMarch 28, 2019.2020. That cost is expected to be recognized over a weighted average period of 1.92.2 years.
Stock Options
During the first quarter of 2020, the Company granted 18,121 stock options to its officers. The exercise price of $39.75 per share is equal to the market price of Helios stock on the grant date. The options vest ratably over a three-year period and have a 10-year expiration. The weighted average grant date fair value of the options is $12.81 per share and was estimated using a Black Scholes valuation model. At March 28, 2020, the Company had $226 of unrecognized compensation cost related to the options which is expected to be recognized over a weighted average period of 2.9 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 (“UK”), 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 six6 shares purchased by the employee under the plan. Employees purchased 37,21710,927 shares at a weighted average price of $33.65,$32.46, and 27,45414,387 shares at a weighted average price of $42.51,$28.37, under the ESPP and U.K.UK plans during the ninethree months ended SeptemberMarch 28, 2019,2020, and September 29, 2018,March 30, 2019, respectively. The Company recognized $398$60 and $259$255 of compensation expense during the ninethree months ended SeptemberMarch 28, 2019,2020, and September 29, 2018,March 30, 2019, respectively.
Nonemployee Director Fees Plan
The Company’s 2012 Nonemployee Director Fees Plan compensates nonemployee Directorsdirectors for their board service with shares of common stock. Directors were granted 18,8755,500 and 18,3755,875 shares for the ninethree months ended SeptemberMarch 28, 20192020 and September 29, 2018,March 30, 2019, respectively. The Company recognized director stock compensation expense of $856$235 and $999$285 for the ninethree months ended SeptemberMarch 28, 20192020 and September 29, 2018,March 30, 2019, respectively.
20
16
13.11. 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 |
|
| Unrealized Gains and (Losses) on Derivative Instruments |
|
| Foreign Currency Items |
|
| Total |
| ||||||
Balance at December 29, 2018 |
| $ | (2,309 | ) |
| $ | (43,944 | ) |
| $ | (46,253 | ) | ||||||||||||
Balance at December 28, 2019 |
| $ | (5,372 | ) |
| $ | (49,992 | ) |
| $ | (55,364 | ) | ||||||||||||
Other comprehensive loss before reclassifications |
|
| (5,053 | ) |
|
| (17,675 | ) |
|
| (22,728 | ) |
|
| (4,423 | ) |
|
| (5,950 | ) |
|
| (10,373 | ) |
Amounts reclassified from accumulated other comprehensive loss, net of tax |
|
| 514 |
|
|
| — |
|
|
| 514 |
|
|
| 394 |
|
|
| — |
|
|
| 394 |
|
Tax effect |
|
| 1,027 |
|
|
| 5,358 |
|
|
| 6,385 |
|
|
| 1,828 |
|
|
| 1,049 |
|
|
| 2,877 |
|
Net current period other comprehensive loss |
|
| (3,512 | ) |
|
| (12,317 | ) |
|
| (15,829 | ) |
|
| (2,201 | ) |
|
| (4,901 | ) |
|
| (7,102 | ) |
Balance at September 28, 2019 |
| $ | (5,821 | ) |
| $ | (56,261 | ) |
| $ | (62,082 | ) | ||||||||||||
Balance at March 28, 2020 |
| $ | (7,573 | ) |
| $ | (54,893 | ) |
| $ | (62,466 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unrealized Gains and (Losses) on Derivative Instruments |
|
| Foreign Currency Items |
|
| Total |
|
| Unrealized Gains and (Losses) on Derivative Instruments |
|
| Foreign Currency Items |
|
| Total |
| ||||||
Balance at December 30, 2017 |
| $ | — |
|
| $ | (6,478 | ) |
| $ | (6,478 | ) | ||||||||||||
Balance at December 29, 2018 |
| $ | (2,309 | ) |
| $ | (43,944 | ) |
| $ | (46,253 | ) | ||||||||||||
Other comprehensive loss before reclassifications |
|
| (135 | ) |
|
| (29,445 | ) |
|
| (29,580 | ) |
|
| (1,666 | ) |
|
| (7,239 | ) |
|
| (8,905 | ) |
Amounts reclassified from accumulated other comprehensive loss |
|
| 254 |
|
|
| — |
|
|
| 254 |
|
|
| 144 |
|
|
| — |
|
|
| 144 |
|
Net current period other comprehensive income (loss) |
|
| 119 |
|
|
| (29,445 | ) |
|
| (29,326 | ) | ||||||||||||
Balance at September 29, 2018 |
| $ | 119 |
|
| $ | (35,923 | ) |
| $ | (35,804 | ) | ||||||||||||
Tax effect |
|
| 440 |
|
|
| 2,408 |
|
|
| 2,848 |
| ||||||||||||
Net current period other comprehensive loss |
|
| (1,082 | ) |
|
| (4,831 | ) |
|
| (5,913 | ) | ||||||||||||
Balance at March 30, 2019 |
| $ | (3,391 | ) |
| $ | (48,775 | ) |
| $ | (52,166 | ) |
14.12. SEGMENT REPORTING
The Company has 2 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.item. For the ninethree months ended SeptemberMarch 28, 2019,2020, the unallocated costs included certain corporate costs not deemed to be allocable to either business segment of $13,387 whichtotaled $36,293 and primarily relate to the amortization of acquisition-related intangible assets.assets and the goodwill impairment charge. The accounting policies of the Company’s businessoperating segments are the same as those used to prepare the accompanying consolidated financial statements.Consolidated, Unaudited Financial Statements.
2117
The following table presents financial information by reportable segment:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
| |||||||||||||||
|
| September 28, 2019 |
|
| September 29, 2018 |
|
| September 28, 2019 |
|
| September 29, 2018 |
|
| March 28, 2020 |
|
| March 30, 2019 |
| ||||||
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hydraulics |
| $ | 110,089 |
|
| $ | 104,055 |
|
| $ | 340,262 |
|
| $ | 270,297 |
|
| $ | 103,818 |
|
| $ | 116,463 |
|
Electronics |
|
| 27,956 |
|
|
| 31,782 |
|
|
| 88,476 |
|
|
| 99,025 |
|
|
| 25,665 |
|
|
| 30,388 |
|
Total |
| $ | 138,045 |
|
| $ | 135,837 |
|
| $ | 428,738 |
|
| $ | 369,322 |
|
| $ | 129,483 |
|
| $ | 146,851 |
|
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Operating (loss) income |
|
|
|
|
|
|
|
| ||||||||||||||||
Hydraulics |
| $ | 17,867 |
|
| $ | 22,723 |
|
| $ | 65,752 |
|
| $ | 61,567 |
|
| $ | 21,482 |
|
| $ | 23,762 |
|
Electronics |
|
| 5,977 |
|
|
| 6,321 |
|
|
| 18,977 |
|
|
| 19,960 |
|
|
| 4,778 |
|
|
| 6,512 |
|
Corporate and other |
|
| (4,706 | ) |
|
| (9,798 | ) |
|
| (13,387 | ) |
|
| (28,024 | ) |
|
| (36,293 | ) |
|
| (4,442 | ) |
Total |
| $ | 19,138 |
|
| $ | 19,246 |
|
| $ | 71,342 |
|
| $ | 53,503 |
|
| $ | (10,033 | ) |
| $ | 25,832 |
|
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hydraulics |
| $ | 3,774 |
|
| $ | 7,047 |
|
| $ | 17,606 |
|
| $ | 17,196 |
|
| $ | 2,394 |
|
| $ | 8,145 |
|
Electronics |
|
| 397 |
|
|
| 1,074 |
|
|
| 1,978 |
|
|
| 1,506 |
|
|
| 543 |
|
|
| 647 |
|
Total |
| $ | 4,171 |
|
| $ | 8,121 |
|
| $ | 19,584 |
|
| $ | 18,702 |
|
| $ | 2,937 |
|
| $ | 8,792 |
|
|
| September 28, 2019 |
|
| December 29, 2018 |
|
| March 28, 2020 |
|
| December 28, 2019 |
| ||||
Total assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hydraulics |
| $ | 756,613 |
|
| $ | 771,409 |
|
| $ | 733,632 |
|
| $ | 768,324 |
|
Electronics |
|
| 255,568 |
|
|
| 263,412 |
|
|
| 250,818 |
|
|
| 251,252 |
|
Corporate |
|
| 8,769 |
|
|
| 7,344 |
|
|
| 9,399 |
|
|
| 2,175 |
|
Total |
| $ | 1,020,950 |
|
| $ | 1,042,165 |
|
| $ | 993,849 |
|
| $ | 1,021,751 |
|
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 ROUright-of-use assets:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
| |||||||||||||||
|
| September 28, 2019 |
|
| September 29, 2018 |
|
| September 28, 2019 |
|
| September 29, 2018 |
|
| March 28, 2020 |
|
| March 30, 2019 |
| ||||||
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
| $ | 67,340 |
|
| $ | 65,809 |
|
| $ | 202,974 |
|
| $ | 189,832 |
|
| $ | 58,950 |
|
| $ | 67,706 |
|
Europe/Middle East/Africa |
|
| 34,020 |
|
|
| 37,268 |
|
|
| 116,802 |
|
|
| 102,853 |
| ||||||||
Asia/Pacific |
|
| 36,685 |
|
|
| 32,760 |
|
|
| 108,962 |
|
|
| 76,637 |
| ||||||||
EMEA |
|
| 35,971 |
|
|
| 44,220 |
| ||||||||||||||||
APAC |
|
| 34,562 |
|
|
| 34,925 |
| ||||||||||||||||
Total |
| $ | 138,045 |
|
| $ | 135,837 |
|
| $ | 428,738 |
|
| $ | 369,322 |
|
| $ | 129,483 |
|
| $ | 146,851 |
|
|
| September 28, 2019 |
|
| December 29, 2018 |
|
| March 28, 2020 |
|
| December 28, 2019 |
| ||||
Tangible long-lived assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
| $ | 86,203 |
|
| $ | 83,664 |
|
| $ | 86,490 |
|
| $ | 87,104 |
|
Europe/Middle East/Africa |
|
| 27,905 |
|
|
| 26,724 |
| ||||||||
Asia/Pacific |
|
| 17,477 |
|
|
| 16,480 |
| ||||||||
EMEA |
|
| 27,842 |
|
|
| 28,436 |
| ||||||||
APAC |
|
| 16,739 |
|
|
| 18,004 |
| ||||||||
Total |
| $ | 131,585 |
|
| $ | 126,868 |
|
| $ | 131,071 |
|
| $ | 133,544 |
|
15.13. RELATED PARTY TRANSACTIONS
Enovation Controls purchases and sells inventory to entities partially owned by a director of Helios. For the ninethree months ended SeptemberMarch 28, 2019,2020 and September 29, 2018,March 30, 2019, inventory sales to the entities totaled $1,113$414 and $2,080,$482, respectively, and inventory purchases from the entities totaled $3,857$999 and $5,184,$1,455, respectively.
22
At SeptemberMarch 28, 2019,2020 and December 29, 2018,28, 2019, amounts due from the entities totaled $198$166 and $296,$73, respectively, and amounts due to the entities totaled $317$243 and $631,$361, respectively.
16.18
14. 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.
2319
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOPERATIONS.
This report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words "expects," "anticipates," "believes," "intends," "plans" and similar expressions identify forward-looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Form 10-Q with the Securities and Exchange Commission. These forward-looking statements are subject to risks and uncertainties, including, without limitation, those discussed in this sectionreport and those identified in Item 1A, "Risk Factors" included in our 2018 Annual Report on Form 10-K. In addition, new risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. Accordingly, our future results may differ materially from historical results or from those discussed or implied by these forward-looking statements. Given these risks and uncertainties, the reader should not place undue reliance on these forward-looking statements.
OVERVIEW
We are an industrial technology leader that develops and manufactures solutions for both the hydraulics and electronics markets, each of which serves as a reportable segment. There are three key technologies within our Hydraulics segment: cartridge valve technology (“CVT”), quick-release hydraulic couplings 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. In our Electronics segment, we provide complete, fully-tailored display and control solutions for engines, engine-driven equipment and specialty vehicles. Our broad range of products are complemented by extensive application expertise and unparalleled depth of our software, embedded programming, hardware and sustaining engineering teams. This technology is referred to as Electronic Controls (“EC”).
On June 13, 2019, we changed our legal name from Sun Hydraulics Corporation to Helios Technologies, Inc. Sun Hydraulics, LLC (a Florida limited liability company that holds the historical net operating assets of the Sun Hydraulics brand entities and Custom Fluidpower), along with Enovation Controls and Faster are the three wholly-owned operating subsidiaries of Helios. Our corporate name change is a reflection of the tremendous growth the Company has accomplished over the last two years, including the addition of various operating companies under our umbrella. On June 17, 2019, shares of Helios began trading on the Nasdaq under the new ticker symbol “HLIO”.
The operating results of the Hydraulics and Electronics segments included in this MD&A are presented on a basis consistent with our internal management reporting. Segment information included in Note 1412 to the Consolidated, Unaudited Financial Statements is also presented on this basis. All differences between our internal management reporting basis and accounting principles generally accepted in the United States (“U.S. GAAP”),GAAP, specifically the allocation of certain corporate and acquisition-related costs, are included in Corporate and Other.
Vision 2025
In 2016, we introduced our vision for the Company for the next decade. We believe it is important to reach a critical mass of $1 billion in sales by 2025 while remaining a technology leader in the industrial goods sector. To achieve our goal, we are targeting organic sales of our Hydraulics segment including Faster and Custom Fluidpower, of $730$700 million, sales of our Electronics segment of $200$220 million and acquisitions at or exceeding $70$80 million of revenue. Through this growth, our decision-making process will consider our desire to maintain superior profitability and financial strength. While acquisitions remain an important component of our long-term strategy, our near-term focus is on integrating our recently acquired businesses and improving operating performance.
24
Product development is a key factor to organic and synergistic growth in both the Hydraulics and Electronics segments, including joint development between the two segments. In the Hydraulics segment, our most recent product introductions have been electro-hydraulics products: the FLeX™ Series Solenoid Valves and the XMD Bluetooth-configurable electro-hydraulics driver. XMD represents the second of its kind from Sun Hydraulics and was jointly engineered by a team comprised of Hydraulics and Electronics segment personnel. We expect the trend for development of similar types of products to continue as capital goods markets move toward further electrification and digitalization of machines.
AcquisitionsWhile not a near-term focus, acquisitions of companies that advance our technology capabilities will be critical to achieving our Vision 2025. Target product offerings include additional CVT, CVT-adjacent hydraulic products,components and/or systems, electronic controls and instrumentation and linked technologies such as electro-mechanical actuators, factory automation, software, or products relevant to the Internet of Things. Cultivating relationships with potential acquisition targets can often be a lengthy process,Things or high-precision manufacturing.
Global Economic Conditions
Impact of COVID-19 on our business
The COVID-19 pandemic has caused significant economic disruption and substantial uncertainty exists regarding magnitude and duration of the pandemic. Broad measures taken by governments, businesses and others to limit the spread of the virus are adversely affecting the Company and its customers.
20
Currently our primary manufacturing locations are fully operational but have been impacted to differing degrees by various COVID-19 related factors such as:
• | Government mandated facility closures. |
o | Our Chinese locations were closed throughout February, after the national holiday, and reopened mid-March at about 50% working capacity. We gradually resumed full production in China by the end of the quarter. |
o | Production in our Faster operation located in Italy was down for four weeks starting in mid-March. During this time, the facility was permitted to ship finished goods to essential business customers and continue administrative functions through remote working capabilities. Production resumed on April 14th, 2020 and the location is currently fully operational. |
o | Our US locations are considered essential businesses and have remained operational; however, production schedules have been adjusted as needed for deep cleaning and social distancing accommodations. |
• | Reduced workforce. Employees are exercising caution and have self-quarantined when appropriate which has caused a reduction in workforce. |
• | Supply chain constraints. The majority of our suppliers remain open and we have experienced minimal disruption to production from supply chain. We have seen a small increase in past due orders recently within our Electronics segment due to some supply shortages; however, we are actively managing the situation and have not been significantly impacted to date. |
• | Delivery constraints. We have experienced some delivery delays primarily due to original equipment manufacturer (“OEM”) customers in the U.S. and Europe having temporarily shut down. Some OEM customers have requested to push out delivery dates until later in the second quarter, and/or out of the second quarter into the third and fourth quarters. We have not seen a significant number of order cancellations to date. Distributor customers remain open across the globe as they are deemed essential. |
Employees are working from home when possible, and we believe it is keyhave taken significant measures to creating successful acquisitions with sustainable business results. ensure the health and safety of those working at our facilities.
We have an established listupdated our risk factors in Part II, Item 1A, of potential targets at any given timethis Quarterly Report, in light of the continued and entertain reviewing other opportunities for acquisition as they become known to us.expected impact of COVID-19 on our business.
AcquisitionsThe impact of the COVID-19 pandemic on our results of operations, liquidity and financial resources and 2020 outlook are discussed later within their respective sections.
Brexit
In April 2018 we completed our acquisition of Faster, an Italian company headquartered near Milan, Italy. Faster is a worldwide leader in engineering, manufacturing, marketing and distribution of quick release hydraulic coupling solutions. The completion of this acquisition brings us another step closer toJanuary 2020, the realization of our Vision 2025. Faster fits this strategy well and upholds a strongly innovative culture, driving new product development and market leadership. Faster further diversifies the Company more deeply into the global agriculture market. The business also broadens our global footprint, advancing our ‘in the region, for the region’ initiative.
On August 1, 2018, we completed our acquisition of Custom Fluidpower, a leading provider of hydraulic, pneumatic, electronic and instrumentation solutions. The company supplies hydraulic, pneumatic, filtration and lubrication products and offers complete system design, installation and commissioning, and service and repairs, to a broad range of industries including agriculture, aerospace, exploration, industrial, marine, mobile, mining and material handling. Headquartered in Newcastle, NSW, Australia, Custom Fluidpower has operational branches co-located with its headquarters as well as throughout Australia. Custom Fluidpower further diversifies our hydraulics product and service portfolio and broadens our global footprint.
Global economic conditions
In June 2016, voters in the United Kingdom (“UK”) approved the UK’s exit fromUK exited the European Union (“EU”) (“Brexit”). The timing ofDuring the UK’s exit fromtransition period, which ends on December 31, 2020, the EU remains uncertain; the EU has extended the deadline for the UK to exit the EU until January 31, 2020. With the termsdetails of the UK’s withdrawal and the nature of its future relationship with the EU still being decided, thewill be decided. The Company continues to monitor the status of the negotiations and plan for potential impact. We have considered the following factors that mitigate the potential impact of Brexit on the import and export of goods to and from the UK:
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25
The ultimate impact of Brexit on the Company’s financial results is uncertain. However, based on the above noted mitigating factors, we do not expect the effects of Brexit to have a material impact on our results of operations or financial position. We are not aware of any material contracts that may require renegotiation or termination due to the impact of Brexit. For additional information, refer to the “Item 1A—RiskPart I, Item 1A, “Risk Factors” sectionand Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s 2018 Annual Report on Form 10-K filed on February 26, 2019.10-K.
Industry conditionsConditions
Market demand for our products is dependent on demand for the industrial goods in which the products are incorporated. The capital goods industries in general, and the Hydraulics and Electronics segments specifically, are subject to economic cycles. According to the National Fluid Power Association (the fluid power industry’s trade association in the United States), the U.S. index of shipments of hydraulic products decreased 4% during 2019 while orders decreased 9% during the same period. The Institute of Printed Circuits Association reported that North American electronics industry sales growth has flattened. Printed circuit boards (PCB) sales growth is essentially flat, electronics manufacturing services (EMS) growth remained positive but slow, and semiconductor sales growth has declined into negative territory but has flattened out in recent months.
We utilize industry trend reports from various sources, as well as feedback from customers and distributors, to evaluate economic trends. We also rely on global government statistics such as Gross Domestic Product and Purchasing Managers Index to understand macroeconomicmacro-economic conditions.
21
Hydraulics
According to the National Fluid Power Association (the fluid power industry’s trade association in the U.S.), the U.S. index of shipments of hydraulic products decreased an additional 13% during the first three months of 2020, after decreasing 7% in 2019. In Europe, the CEMA Business Barometer reported the general business climate index for the European agricultural machinery industry dropped sharply in April, although the impact of COVID-19 on future periods remains uncertain. The CECE (Committee for European Construction Equipment) business climate index saw a sharp drop in March after three months of strong recovery, primarily attributable to deteriorating future business expectations.
Electronics
According to the Federal Reserve’s Industrial Production Index, which measures the real output of all relevant establishments located in the U.S., sales of semiconductors and other electronics components peaked at the end of the 2019 Thirdfourth quarter and have since declined slowly back to mid-fourth quarter 2019 levels. The Institute of Printed Circuits Association reports that total North American printed circuit board shipments in February 2020 were down 1.1% compared to the same month last year; however, compared to January 2020, February shipments rose 1.5%. In our electronics segment, we are experiencing sales declining in excess of the overall market, primarily due to a strategic change we made to our customer base during 2019. For additional information, refer to the discussion of 2020 results of our electronics segment below.
2020 First Quarter Results and Comparison of the Three and Nine Months Ended
September March 28, 20192020 and September 29, 2018
Our acquisition activity impacts the comparability of our financial information. Faster was acquired on April 5, 2018 and Custom Fluidpower was acquired on August 1, 2018. The results of operations and estimated fair value of assets acquired and liabilities assumed from these acquisitions are included in our financial information for all periods subsequent to the acquisition dates.March 30, 2019
(in millions except net income per share)share data)
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| Three Months Ended |
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| September 28, 2019 |
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| September 29, 2018 |
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| March 28, 2020 |
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| March 30, 2019 |
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| % Change |
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Net sales |
| $ | 138.0 |
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| $ | 135.8 |
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| $ | 2.2 |
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| 1.6 | % |
| $ | 129.5 |
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| $ | 146.9 |
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| $ | (17.4 | ) |
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| (11.8 | )% |
Gross profit |
| $ | 52.1 |
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| $ | 51.7 |
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| $ | 0.4 |
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| 0.8 | % |
| $ | 51.9 |
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| $ | 56.5 |
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| $ | (4.6 | ) |
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| (8.1 | )% |
Gross profit % |
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| 37.8 | % |
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| 38.1 | % |
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| 40.1 | % |
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| 38.5 | % |
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Operating income |
| $ | 19.1 |
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| $ | 19.2 |
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| $ | (0.1 | ) |
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| (0.5 | )% | ||||||||||||||||
Operating (loss) income |
| $ | (10.0 | ) |
| $ | 25.8 |
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| $ | (35.8 | ) |
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| (138.8 | )% | ||||||||||||||||
Operating income % |
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| 13.8 | % |
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| 14.1 | % |
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| (7.7 | )% |
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| 17.6 | % |
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Net income |
| $ | 12.8 |
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| $ | 11.6 |
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| $ | 1.2 |
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| 10.3 | % | ||||||||||||||||
Basic and diluted net income per common share |
| $ | 0.40 |
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| $ | 0.36 |
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| $ | 0.04 |
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| 11.1 | % | ||||||||||||||||
Net (loss) income |
| $ | (17.2 | ) |
| $ | 16.4 |
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| $ | (33.6 | ) |
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| (204.9 | )% | ||||||||||||||||
Basic and diluted net (loss) income per common share |
| $ | (0.54 | ) |
| $ | 0.51 |
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| $ | (1.05 | ) |
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| (205.9 | )% | ||||||||||||||||
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| September 28, 2019 |
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| September 29, 2018 |
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Net sales |
| $ | 428.7 |
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| $ | 369.3 |
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| $ | 59.4 |
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| 16.1 | % | ||||||||||||||||
Gross profit |
| $ | 164.9 |
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| $ | 139.8 |
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| $ | 25.1 |
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| 18.0 | % | ||||||||||||||||
Gross profit % |
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| 38.5 | % |
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| 37.9 | % |
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Operating income |
| $ | 71.3 |
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| $ | 53.5 |
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| $ | 17.8 |
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| 33.3 | % | ||||||||||||||||
Operating income % |
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| 16.6 | % |
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| 14.5 | % |
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Net income |
| $ | 46.5 |
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| $ | 30.3 |
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| $ | 16.2 |
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| 53.5 | % | ||||||||||||||||
Basic and diluted net income per common share |
| $ | 1.45 |
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| $ | 0.97 |
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| $ | 0.48 |
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| 49.5 | % |
26
ThirdFirst quarter consolidated net sales improved $2.2declined $17.4 million, 1.6%11.8%, over the prior-year period; $3.9 million of the Q3 increase in sales were acquisition related. Organic business sales declined $1.7 million, 1.3%, over the prior year third quarter, however after consideration of a negative $2.5 million impact from changesperiod. Changes in foreign currency exchange rates organicunfavorably impacted sales improved $0.8for the quarter by $2.1 million, 0.6%. The unfavorable impact of foreign currency exchange rates reduced1.6%, and earnings per share (“EPS”) by $0.01$0.01. Pricing changes had minimal impact on the 2020 first quarter compared to the prior-year first quarter. We estimate that we lost approximately $5.0 million of sales during the third quarter. Continuedfirst quarter from facility closures and regulatory restrictions imposed on shipments as a result of the COVID-19 pandemic. Additionally, we continue to experience softening demand in certain end markets led to a decline inand reduced order intake across both segments compared to the prior thirdprior-year first quarter. The agriculture market in Europe remains weak as does the oil and gas market in the Americas. We have also seen a decline in both the construction equipment market in the Asia/Pacific region and the recreational market in the Americas. We continued to maintain a solid order backlog in our Hydraulics segment throughout the quarter due to an unfavorable product mix which impacted our ability to maximize manufacturing capacity at our Sarasota facilities.
Gross profit margin decreased 0.3 percentage points duringtrended downward in the thirdfirst quarter of 2020, compared to the first quarter of 2019, due to 37.8% comparedsales volume and an unfavorable impact from changes in foreign currency rates of $0.7 million. Gross margin improved over the prior year period by 1.6 percentage points, up to 38.1% in the prior-year third quarter. The fluctuation included a benefit from a $2.1 million reduction of amortization of acquisition related inventory step up costs included in the third quarter 2018 results. During the third quarter of 2019, production efficiencies and successful40.1%, driven primarily by continued cost management efforts positively impacted gross margin, however these gains were offset by increased material costs and production efficiencies gained from our CVT manufacturing consolidation project which was completed at the end of the 2019 first quarter.
Current and expected economic impacts from the COVID-19 pandemic led to an unfavorable changeimpairment charge of $31.9 million of goodwill at our Faster reporting unit. Continued negative impacts to the global economy and reductions in the margin profile of products sold. our expected future cash flows could cause further impairment to our goodwill or other assets.
Operating income as a percentage of sales, prior to the goodwill impairment charge, declined slightly0.7 percentage points to 13.8%16.9% in the thirdfirst quarter of 20192020 compared to 14.1%17.6% in the prior-year period. Comparability was impacted by increases from organizational restructuring costs of $1.7 million, a loss on disposal of intangible assets of $2.7 million and decreases from 2018 acquisition related costs such as the inventory step up amortization costs noted above, $0.7 million of transaction costs incurred for the acquisition of Custom Fluidpower and $2.6 million less of amortization of intangible assets.
2019 Outlook
Consolidated revenue for the full year 2019 is expectedperiod primarily due to be between $550 million and $555 million, with the Hydraulics segment contributing between $439 million and $442 million and the Electronics segment contributing between $111 million and $113 million. Consolidated U.S. GAAP EPS is expected to be $1.70 to $1.75 for the full year 2019. Consolidated non-GAAP cash EPS, which excludes amortization expense and certain one-time costs, is expected to be between $2.24 and $2.29. The full year adjusted EBITDA margin, prior to certain one-time costs, is anticipated to be 22.4% to 22.8%.
We are updating our 2019 guidance given the further softening of mostreduced leverage of our end markets globally. While we have backlogfixed cost base on lower sales volume and an increase in our Hydraulics segment that will support fourth quarter sales, this will be offset by softening demand in specific end markets as well as mix issues that create reserve capacity continuing from past quarters. We will realize the results of our cost management efforts including the restructuring, but the lower revenue will reduce margins and net income. We will continue to monitor the economic climate and its impact on our business, further adjusting costs as needed. And, given our market positioning, we will be ready to react when our end markets do recover. As economic cycles are a normal part of business, we remain committed to the goals we established for Vision 2025.corporate operating costs.
2722
SEGMENT RESULTS
Hydraulics
The following table sets forth the results of operations for the Hydraulics segment (in millions):
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| Three Months Ended |
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| September 28, 2019 |
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| September 29, 2018 |
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| March 28, 2020 |
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| March 30, 2019 |
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Net sales |
| $ | 110.1 |
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| $ | 104.1 |
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| $ | 6.0 |
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| 5.8 | % |
| $ | 103.8 |
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| $ | 116.5 |
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| $ | (12.7 | ) |
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| (10.9 | )% |
Gross profit |
| $ | 39.1 |
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| $ | 39.1 |
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| $ | — |
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| (— | )% |
| $ | 39.7 |
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| $ | 42.6 |
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| $ | (2.9 | ) |
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| (6.8 | )% |
Gross profit % |
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| 35.5 | % |
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| 37.6 | % |
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| 38.2 | % |
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| 36.6 | % |
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Operating income |
| $ | 17.9 |
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| $ | 22.7 |
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| $ | (4.8 | ) |
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| (21.1 | )% |
| $ | 21.5 |
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| $ | 23.8 |
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| $ | (2.3 | ) |
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| (9.7 | )% |
Operating income % |
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| 16.3 | % |
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| 21.8 | % |
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| 20.7 | % |
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| 20.4 | % |
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| Nine Months Ended |
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| September 28, 2019 |
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| September 29, 2018 |
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Net sales |
| $ | 340.3 |
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| $ | 270.3 |
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| $ | 70.0 |
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| 25.9 | % | ||||||||||||||||
Gross profit |
| $ | 124.2 |
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| $ | 101.9 |
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| $ | 22.3 |
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| 21.9 | % | ||||||||||||||||
Gross profit % |
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| 36.5 | % |
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| 37.7 | % |
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Operating income |
| $ | 65.8 |
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| $ | 61.6 |
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| $ | 4.2 |
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| 6.8 | % | ||||||||||||||||
Operating income % |
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| 19.3 | % |
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| 22.8 | % |
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The following table presents organic and acquisition related results for the year-to-date period of 2019 (in millions). The results of Faster, acquired in April of 2018, are included in acquisition results for the first quarter of 2019 and the results of Custom Fluidpower, acquired in August of 2018, are included in acquisition results for the first seven months of 2019.
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| Nine Months Ended September 28, 2019 |
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| Organic |
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| Acquisition |
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Net sales |
| $ | 274.8 |
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| $ | 65.5 |
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Gross profit |
| $ | 102.2 |
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| $ | 22.0 |
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Gross profit % |
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| 37.2 | % |
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| 33.6 | % |
Operating income |
| $ | 55.1 |
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| $ | 10.7 |
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Operating income % |
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| 20.1 | % |
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| 16.3 | % |
ThirdFirst quarter net sales for the Hydraulics segment totaled $110.1$103.8 million, representing growtha decline of $6.0$12.7 million, 5.8%10.9%, over the prior-year period; $3.9period. Changes in foreign currency exchange rates accounted for $2.0 million of the increase was acquisition related. Organic business sales increased $2.1 million, 2.0%, overfluctuation. Pricing changes had minimal impact on the thirdfirst quarter of 2018. After consideration2020 compared to the prior-year first quarter. We estimate that approximately $5.0 million of a negative $2.3 million impact from changesthe first quarter sales fluctuation in exchange rates, organic sales improved $4.4 million, 4.2%. Sales growththe Hydraulics segment was limited during the quarter due to softerfacility closures and regulatory restrictions imposed on shipments as a result of the COVID-19 pandemic. Softening end market demand and capacity constraints at our Sarasota facilities related to specific CVT product families. Weresulted in reduced incoming orders; however, we continue to ship certain CVT and Systems product orders from our backlog due to extended lead times.
Year-to-date net sales totaled $340.3 million, an increase of $70.0 million, 25.9%, over the prior comparable period. Organic sales grew by $4.5 million, 1.7%, during the year-to-date period. After consideration of a negative $5.9 million impact from changes in exchange rates, organic sales improved $10.4 million, 3.8%. The improvement was driven by price increases of approximately $3.2 million and increased sales to the Americas and Asia/Pacific regions. Exchange rate fluctuations since the acquisitions of Faster in April 2018 and Custom Fluidpower in August 2018, resulted in a further unfavorable impact on sales of $3.1 million during the year-to-date period.
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The following table presents net sales based on the geographic region of the sale for the Hydraulics segment (in millions):
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| September 28, 2019 |
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| September 29, 2018 |
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| March 28, 2020 |
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Americas |
| $ | 43.3 |
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| $ | 38.4 |
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| $ | 4.9 |
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| 12.8 | % |
| $ | 37.3 |
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| $ | 41.6 |
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| $ | (4.3 | ) |
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| (10.3 | )% |
Europe/Middle East/Africa |
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| 31.9 |
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| 34.6 |
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| (2.7 | ) |
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| (7.8 | )% | ||||||||||||||||
Asia/Pacific |
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| 34.9 |
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| 31.1 |
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| 3.8 |
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| 12.2 | % | ||||||||||||||||
EMEA |
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| 33.5 |
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| 41.8 |
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| (8.3 | ) |
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| (19.9 | )% | ||||||||||||||||
APAC |
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| 33.0 |
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| 33.1 |
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| (0.1 | ) |
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| (0.3 | )% | ||||||||||||||||
Total |
| $ | 110.1 |
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| $ | 104.1 |
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|
|
|
|
|
|
| $ | 103.8 |
|
| $ | 116.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
| Nine Months Ended |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
| September 28, 2019 |
|
| September 29, 2018 |
|
| $ Change |
|
| % Change |
| ||||||||||||||||||||
Americas |
| $ | 126.2 |
|
| $ | 104.4 |
|
| $ | 21.8 |
|
|
| 20.9 | % | ||||||||||||||||
Europe/Middle East/Africa |
|
| 110.4 |
|
|
| 94.8 |
|
|
| 15.6 |
|
|
| 16.5 | % | ||||||||||||||||
Asia/Pacific |
|
| 103.7 |
|
|
| 71.1 |
|
|
| 32.6 |
|
|
| 45.9 | % | ||||||||||||||||
Total |
| $ | 340.3 |
|
| $ | 270.3 |
|
|
|
|
|
|
|
|
|
For the third quarter, comparability of sales by region was impacted by July Custom Fluidpower sales of $3.9 millionShipments and demand weakened in the Asia/Pacific region. ForAmericas region during the year-to-date period, comparabilityfirst quarter of 2020 with sales by region was impacted by Faster and Custom Fluidpower sales of $11.6 million, $21.7 million and $32.2 million indeclining 10.3% over the Americas,prior-year first quarter. Sales to Europe, the Middle East and Africa (“EMEA”) and Asia/Pacific regions, respectively.
Shipments continued to be strong in the Americas region with organic sales increasing 12.8%, in the third quarterdecreased 19.9%. This was primarily a result of 2019 and 9.8% year to date. Organic sales to the EMEA region decreased 7.8%, in the third quarter of 2019 and decreased 6.4%, year-to-date. After consideration ofCOVID-19 related factors as well as negative impacts from changes in exchange rates, totaling $1.3which accounted for $0.8 million and $4.2 million forof the three and nine months ended September 28, 2019, respectively, organic salesfluctuation. Sales to the EMEAAsia Pacific (“APAC”) region declined 4.0% and 2.0% forremained fairly consistent with the third quarter and year to date period, respectively. Organic sales to the Asia/Pacific region fell 0.3%, in the thirdfirst quarter of 2019 and increased 0.6%, year to date.2019. After consideration of the negative impactsimpact from changes in exchange rates, totaling $1.0$1.2 million, and $1.7 million for the three and nine months ended September 28, 2019, respectively, organic sales to the Asia/PacificAPAC region improved 2.9% and 3.0% for3.3% over the thirdfirst quarter and year-to-date period, respectively.of 2019.
ThirdFirst quarter gross profit remained flattrended downward compared to the thirdfirst quarter of the prior year; $1.2 millionyear due to sales volume and an unfavorable impact from changes in foreign currency rates of Q3 2019 gross profit was acquisition related. Organic gross profit decreased $1.2 million while organic gross$0.7 million. Gross profit margin declined 1.9improved 1.6 percentage points to 35.7%38.2%, from 37.6%36.6% in the prior-year period. Price increases, netThe main drivers of related materialthe increased profitability were effective cost increases, positively impactedmanagement efforts and production efficiencies gained from our CVT manufacturing consolidation project, partially offset by the gross profitclosure of production at our organic businesses by approximately $0.3 millionItalian facility during the quarter while changes in foreign currency negatively impacted gross profit for the quarter by approximately $0.8 million. Overall production efficiency improved over the prior year third quarter, however gross profit margin was impacted by higher material costs and an overall unfavorable sales mix; specifically, higher sales of lower margin products.
Year-to-date gross profit grew $22.3 million, 21.9% compared to the 2018 comparable period. Organic gross profit margin fell 0.5 percentage points year over year to 37.2%, while acquisitions contributed $22.0 million and 33.6% gross margin for the nine months ended September 28, 2019. Price increases, net of related material cost increases, positively impacted the gross profit of our organic businesses by approximately $1.1 million year to date. Changes in foreign currency had a negative impact of approximately $2.7 million on gross profit during the year-to-date period.quarter.
Selling, engineering and administrative expenses (“SEA”) rose $0.4decreased $0.6 million in the thirdfirst quarter of 20192020 compared to the third quarter of 2018; $0.8 millionsame period of the Q3 2019 costs were acquisition related. The SEA costs of our organic business decreased $0.4 million over the prior-year quarter and organicprior year. SEA as a percent of sales decreased 0.7increased 1.4 percentage points. Cost reduction efforts drove the decline as well as a reductionpoints primarily due to reduced leverage of the management performance-based incentive accrual that occurred during the period.
29
Year-to-date SEA expenses grew $13.7 million, 5.1%, to $54.0 million from $40.3 million in 2018. Acquisitions contributed $11.3 million to the increase while organic SEAour fixed costs grew $2.4 million, 6.0%, to $42.7 million. During the 2019 year we realized increases inbase on lower sales. In addition, corporate operating costs allocated to the Hydraulics segment forwere $0.5 million higher than the prior-year first quarter due to salaries and benefits, travel, insurance costs and talent development programs and legal and professional fees to support the growth and change in structure of Helios that has occurred over the past year and is expected to continue into future periods. These costs were partially offset by the third quarter reduction of management’s performance-based incentive accrual.
In the third quarter of 2019 we incurred one-time costs for an organizational restructure which resulted in $1.7 million of early retirement and severance charges. The restructuring plan was executed at Sun Hydraulics 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. The restructuring is expected to reduce our total cost base by $3.0 - $3.5 million, annually. Also in the third quarter, we incurred a one-time cost of $2.7 million for a loss on disposal of an intangible asset due to the termination of our technology licensing agreement with Sturman Industries, Inc. The termination of the agreement is the result of a phase out of the DLV related products and technologies.programs.
As a result of the impacts to gross profit and SEA costs noted above, thirdfirst quarter operating income declined $4.8$2.3 million, 21.1%9.7%, compared to the thirdfirst quarter of the prior year. Year-to-date operating income increased $4.2 million, 6.8%, to $65.8 million compared to $61.6 million during the prior-year period. Acquisitions contributed $10.7 million to year-to-date operating income, representing a 16.3%year, while operating margin while organic operating margin fell 2.7strengthened 0.3 percentage points compared to the prior-year period.20.7%.
23
Electronics
The following table sets forth the results of operations for the Electronics segment (in millions):
|
| Three Months Ended |
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
|
|
|
|
|
|
|
| ||||||||||
|
| September 28, 2019 |
|
| September 29, 2018 |
|
| $ Change |
|
| % Change |
|
| March 28, 2020 |
|
| March 30, 2019 |
|
| $ Change |
|
| % Change |
| ||||||||
Net sales |
| $ | 28.0 |
|
| $ | 31.8 |
|
| $ | (3.8 | ) |
|
| (11.9 | )% |
| $ | 25.7 |
|
| $ | 30.4 |
|
| $ | (4.7 | ) |
|
| (15.5 | )% |
Gross profit |
| $ | 13.0 |
|
| $ | 14.8 |
|
| $ | (1.8 | ) |
|
| (12.2 | )% |
| $ | 12.2 |
|
| $ | 13.9 |
|
| $ | (1.7 | ) |
|
| (12.2 | )% |
Gross profit % |
|
| 46.4 | % |
|
| 46.5 | % |
|
|
|
|
|
|
|
|
|
| 47.5 | % |
|
| 45.7 | % |
|
|
|
|
|
|
|
|
Operating income |
| $ | 6.0 |
|
| $ | 6.3 |
|
| $ | (0.3 | ) |
|
| (4.8 | )% |
| $ | 4.8 |
|
| $ | 6.5 |
|
| $ | (1.7 | ) |
|
| (26.2 | )% |
Operating income % |
|
| 21.4 | % |
|
| 19.8 | % |
|
|
|
|
|
|
|
|
|
| 18.7 | % |
|
| 21.4 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
| September 28, 2019 |
|
| September 29, 2018 |
|
| $ Change |
|
| % Change |
| ||||||||||||||||||||
Net sales |
| $ | 88.5 |
|
| $ | 99.0 |
|
| $ | (10.5 | ) |
|
| (10.6 | )% | ||||||||||||||||
Gross profit |
| $ | 40.7 |
|
| $ | 43.0 |
|
| $ | (2.3 | ) |
|
| (5.3 | )% | ||||||||||||||||
Gross profit % |
|
| 46.0 | % |
|
| 43.4 | % |
|
|
|
|
|
|
|
| ||||||||||||||||
Operating income |
| $ | 19.0 |
|
| $ | 20.0 |
|
| $ | (1.0 | ) |
|
| (5.0 | )% | ||||||||||||||||
Operating income % |
|
| 21.5 | % |
|
| 20.2 | % |
|
|
|
|
|
|
|
|
ThirdFirst quarter net sales for the Electronics segment totaled $28.0$25.7 million, a decrease of $3.8$4.7 million, 11.9%15.5%, over the prior-year period. The decline was due to softer demand in recreational and oil and gas end markets, as well as our intentional shift in customer base which included the release of certain contractual obligations to customers that allowed us to leverage all products to a broader and more diversified customer base. The segment experienced a minimal impact from the COVID-19 pandemic during the first quarter of 2020. Changes in exchange rates had a negative impact on thirdfirst quarter sales of $0.2$0.1 million.
Net sales for the Electronics segment during the nine months ended September 28, 2019 totaled $88.5 million, a decrease of $10.5 million, 10.6%, from the prior-year period. The decline was related to softening end market conditions and the intentional shift in customer base. Price increases positively impacted year-to-date sales by approximately $1.2 million while changes in exchange rates had a negative impact of $0.5 million.
30
The following table presents net sales based on the geographic region of the sale for the Electronics segment (in millions):
|
| Three Months Ended |
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
|
|
|
|
|
|
|
| ||||||||||
|
| September 28, 2019 |
|
| September 29, 2018 |
|
| $ Change |
|
| % Change |
|
| March 28, 2020 |
|
| March 30, 2019 |
|
| $ Change |
|
| % Change |
| ||||||||
Americas |
| $ | 24.1 |
|
| $ | 27.4 |
|
| $ | (3.3 | ) |
|
| (12.0 | )% |
| $ | 21.6 |
|
| $ | 26.1 |
|
| $ | (4.5 | ) |
|
| (17.2 | )% |
Europe/Middle East/Africa |
|
| 2.1 |
|
|
| 2.7 |
|
|
| (0.6 | ) |
|
| (22.2 | )% | ||||||||||||||||
Asia/Pacific |
|
| 1.8 |
|
|
| 1.7 |
|
|
| 0.1 |
|
|
| 5.9 | % | ||||||||||||||||
EMEA |
|
| 2.5 |
|
|
| 2.5 |
|
|
| — |
|
|
| — | % | ||||||||||||||||
APAC |
|
| 1.6 |
|
|
| 1.8 |
|
|
| (0.2 | ) |
|
| (11.1 | )% | ||||||||||||||||
Total |
| $ | 28.0 |
|
| $ | 31.8 |
|
|
|
|
|
|
|
|
|
| $ | 25.7 |
|
| $ | 30.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
| September 28, 2019 |
|
| September 29, 2018 |
|
| $ Change |
|
| % Change |
| ||||||||||||||||||||
Americas |
| $ | 76.8 |
|
| $ | 85.4 |
|
| $ | (8.6 | ) |
|
| (10.1 | )% | ||||||||||||||||
Europe/Middle East/Africa |
|
| 6.4 |
|
|
| 8.1 |
|
|
| (1.7 | ) |
|
| (21.0 | )% | ||||||||||||||||
Asia/Pacific |
|
| 5.3 |
|
|
| 5.5 |
|
|
| (0.2 | ) |
|
| (3.6 | )% | ||||||||||||||||
Total |
| $ | 88.5 |
|
| $ | 99.0 |
|
|
|
|
|
|
|
|
|
During the three months ended September 28, 2019,first quarter of 2020, sales to the Americas decreased 12.0%17.2%, sales to EMEA decreased 22.2%remained flat and sales to Asia/Pacific increased 5.9%the APAC region declined 11.1% over the prior-year thirdfirst quarter. Exchange rates had a negative impact on sales to EMEA of $0.1 million and minimally impacted sales to Asia/PacificAPAC during the third quarter. For the year-to-date period, sales to the Americas decreased 10.1%, sales to EMEA decreased 21.0% and sales to Asia/Pacific decreased 3.6%. Exchange rates had a negative impact on sales to EMEA and Asia/Pacific of $0.4 million and $0.1 million, respectively, during the nine months ended September 28, 2019.
ThirdFirst quarter gross profit decreased $1.8dropped $1.7 million, 12.2%, compared to the thirdfirst quarter of the prior year, primarily due to sales volume, while gross profit margin remained consistent with 2018.strengthened by 1.8 percentage points. Gross profit formargin benefited from cost management efforts and a $0.9 million non-recurring benefit from the nine months ended September 28, 2019 decreased $2.3 million, 5.3%,release of contractual obligations to customers.
SEA expenses were flat in the first quarter of 2020 compared to the same periodfirst quarter of the prior year,2019 while gross profitSEA margin expanded 2.6increased 4.5 percentage points to 46.0% from 43.4% in 2018. The improvement in margin was28.8% due to material cost reductions, price increases and cost management efforts which resulted in production efficiencies.
SEA expenses declined $1.5 million, 17.6%, to $7.0 million in the third quarterreduced leverage of 2019, compared to $8.5 million in the third quarter of the prior year. SEAour fixed costs for the nine months ended September 28, 2019 totaled $21.7 million, a decrease from the prior year period of $1.3 million. The third quarter and year-to-date cost reductions primarily related to a reorganization of global administrative functions, the reduction of management’s performance-based incentive accrual and other various cost savings initiatives.base on lower sales volume.
As a result of the impacts to gross profit and SEA costs during the periods noted above, thirdfirst quarter operating income declined $0.3$1.7 million 4.8%, compared to the thirdfirst quarter of 2018 while2019 and operating income margin increased 1.6was reduced by 2.7 percentage points to 21.4%. Operating income for the nine months ended September 28, 2019 declined $1.0 million, 5.0%, while operating income margin increased 1.3 percentage points to 21.5%18.7%.
31
Corporate and Other
Certain costs are excluded from business segment results as they are not used in evaluating the results of, or in allocating resources to, our operating segments. For the three months and nine months ended September 28, 2019,first quarter of 2020, these costs totaled $4.7$36.3 million, and $13.4of which $4.3 million respectively, primarily forwas amortization of acquisition-related intangible assets. Year-to-date corporateassets and other costs decreased $14.6$31.9 million overwas a goodwill impairment charge which resulted from the prior year periodglobal economic disruption and uncertainty due to 2018 Faster and Custom Fluidpower transaction costs of $5.5 million, reduced amortization of inventory step upthe COVID-19 pandemic. Refer to fair value costs totaling $5.2 million, reduced amortization of acquisition related intangibles assets of $3.6 million and a reduction in costs relatedNote 6 to corporate projects and initiatives of $0.4 million.the Consolidated, Unaudited Financial Statements for further discussion.
Interest Expense, net
Net interest expense was $3.8$3.0 million for the thirdfirst quarter of 20192020 compared to $4.6$4.4 million for the prior-year quarter. Average net debt declined to $318.2$272.7 million compared to $337.1$325.3 million during the thirdfirst quarter of 2018.2019. The decreases primarily resulted from debt repayments during the past year. Year-to-date net interest expense was $12.2 million compared to $9.3 million during the comparable period of 2018. Average net debt for the 2019 year to date period totaled $316.9 million compared to $200.5 million in the comparable period of 2018. The increases were due to debt issued to fund the Faster acquisition in April of 2018 and the Custom Fluidpower acquisition in August of 2018.repayments.
24
Income Taxes
The provision for income taxes for the thirdfirst quarter of 20192020 was 17.3%22.3% of pretax income compared to 18.6%22.1% for the prior-year third quarter. The year-to-date provisionfirst quarter after adjusting for income taxes was 20.5%the impact of pretax income comparedgoodwill impairment related to 23.0% in the prior year.our Italian subsidiary. These effective rates fluctuate relative to the levels of income and different tax rates in effect among the countries in which we sell our products.
On March 27, 2020, the President of the U.S. signed the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, a substantial tax-and-spending package intended to provide additional economic stimulus to address the impact of the COVID-19 pandemic. The Company has evaluated the various income and payroll tax provisions and expects little or no impact to tax expense. However, the Company is taking advantage of the various payment deferments allowed by the CARES Act and other similar state and/or foreign liquidity measures.
2020 OUTLOOK
As a result of the evolving economic impact of COVID-19, we believe that our 2020 financial results will continue to be impacted, but the magnitude and duration of the impact is uncertain. In addition, production at any of our facilities may be further affected as a result of possible future government, market or Company actions due to COVID-19. For these reasons, we have withdrawn our previously issued guidance.
In the decreasenear term, we expect there will be continued impacts to our business that will hinder our ability to meet our previous sales forecast. We cannot accurately estimate this impact due to the significant level of unknown conditions that may be created by the pandemic. The economic impact of the pandemic has negatively affected our sales and orders for April. We expect second quarter headwinds, but anticipate that the largest impact was in the third quarter 2019 effective tax rate versus the third quarter 2018 effective tax rate was primarily relatedmonth of April due to a significant decreaseshutdowns of many of our global OEM customers. A portion of our backlog has been postponed from April to later in the inclusionsecond quarter and a smaller number of orders have been cancelled. In other cases, we do not have updated order schedules from OEMs due to their extended shutdowns. With ongoing significant uncertainty, we do not have sufficient visibility to reinstate guidance for Global Intangible Low-Taxed Income (GILTI), offset2020.
To be prepared, we have undertaken scenario analyses at varying potential demand levels. The Company has already instituted certain cost containment steps in part byan effort to mitigate the effects of the downturn. These actions include a decreasetemporary 20% salary reduction for all officers of the Company, layoffs and temporary salary reductions at Enovation Controls, a hiring freeze, reduction in the Foreign Derived Intangible Income (FDII) deduction. We continueuse of contingent labor and the elimination and postponement of capital expenditures. Additionally, our Board of Directors has agreed to experience favorable impactsreduce director compensation by 20% for the remainder of the year. To further protect the health and liquidity of our business, additional guidance issuedactions included in our scenario planning consist of:
• | Postponing additional non-essential capital expenditures; |
• | Reducing our temporary labor force; |
• | Reducing overtime; |
• | Applying additional salary reductions; |
• | Reducing working hours to lower payroll expense; |
• | Executing furlough programs and/or additional layoffs; |
• | Further reducing discretionary spending; and |
• | Reducing or suspending the dividend to shareholders. |
The extent of such actions will be determined by the tax authorities inmagnitude and duration of the U.S. related to the Tax Cuts and Jobs Act along with a favorable change in the mix of earnings between jurisdictions with differing tax rates.economic downturn.
25
LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary source of capital has been cash generated from operations. In recent years, we have used borrowings on our credit facilities to fund acquisitions, and during 2018 we raised $240 million in net proceeds from our public stock offering which was also used to fund acquisition activity. During the nine months ended September 28, 2019,first quarter of 2020, cash provided by operating activities totaled $50.9$15.1 million and as ofat the end of the third quarter we had $13.7$27.3 million of cash and cash equivalents on hand and $174.5$195.1 million of available credit on our revolving credit facility. We also have a $200 million accordion feature available on our credit facility, subject to certain pro forma compliance requirements.requirements, intended to support potential future acquisitions. As of the date of this filing, the Company was in compliance with all debt covenants related to the credit agreement.
Our principal uses of cash have beenare paying operating expenses, paying dividends to shareholders, making capital expenditures, servicing debt and acquisition-related payments and servicing debt.payments.
We believe that cash generated from operations and our borrowing availability under our credit facilities will be sufficient to satisfy our operating expensesexpenses. In light of current economic uncertainty, we are actively managing operating costs and capital expenditures, forwhich is expected to provide adequate liquidity beyond the foreseeable future.next twelve months. In the event that economic conditions were to severely worsen for a protracted period of time, we would have several options available to ensure liquidity in addition to increased borrowing. Capital expenditures could be postponed since they primarily pertainborrowing to long-term improvements in operations. Additional operating expense reductions also could be made. Finally, the dividend to shareholders could be reduced or suspended.ensure liquidity, as discussed previously.
32
Cash Flows
The following table summarizes our cash flows for the periods (in millions):
|
| Nine Months Ended |
|
|
|
|
| |||||
|
| September 28, 2019 |
|
| September 29, 2018 |
|
| $ Change |
| |||
Net cash provided by operating activities |
| $ | 50.9 |
|
| $ | 44.2 |
|
| $ | 6.7 |
|
Net cash used in investing activities |
|
| (17.2 | ) |
|
| (555.8 | ) |
|
| 538.6 |
|
Net cash (used in) provided by financing activities |
|
| (48.0 | ) |
|
| 463.2 |
|
|
| (511.2 | ) |
Effect of exchange rates on cash |
|
| 4.5 |
|
|
| 0.4 |
|
|
| 4.1 |
|
Net decrease in cash |
| $ | (9.8 | ) |
| $ | (48.0 | ) |
| $ | 38.2 |
|
|
| Three Months Ended |
|
|
|
|
| |||||
|
| March 28, 2020 |
|
| March 30, 2019 |
|
| $ Change |
| |||
Net cash provided by operating activities |
| $ | 15.1 |
|
| $ | 19.8 |
|
| $ | (4.7 | ) |
Net cash used in investing activities |
|
| (1.3 | ) |
|
| (8.7 | ) |
|
| 7.4 |
|
Net cash used in financing activities |
|
| (9.0 | ) |
|
| (17.7 | ) |
|
| 8.7 |
|
Effect of exchange rate changes on cash |
|
| 0.3 |
|
|
| (0.2 | ) |
|
| 0.5 |
|
Net increase (decrease) in cash |
| $ | 5.1 |
|
| $ | (6.8 | ) |
| $ | 11.9 |
|
Cash on hand declined $9.8increased $5.1 million from $23.5$22.2 million at the end of 20182019 to $13.7$27.3 million at SeptemberMarch 28, 2019.2020. Cash and cash equivalents were favorably impacted by changes in exchange rates during the quarter by $0.3 million. Cash balances on hand are a result of our cash management strategy which focuses on maintaining sufficient cash to fund operations while reinvesting cash in the Company and also paying down borrowings on our credit facilities. Cash andDuring the first quarter of 2020, we increased our cash equivalents were favorably impacted by changes in exchange rates duringon hand to provide liquidity for potential future cash flow needs due to the nine months ended September 28, 2019 by $4.5 million.economic impact of the COVID-19 pandemic.
Operating activities
Cash from operations increased $6.7declined $4.7 million, 15.2%23.7%, compared to the prior-year period. $10.7 millionperiod, a result of the second quarter payment made on the contingent consideration liability related to the Enovation acquisition was included in operatinglower cash flows for the period as the total payments exceeded the acquisition date fair value of the liability. The net increase of $17.4 million of operating cash flows resulted from higher cash earnings and improved net working capital management.earnings. Changes in inventory and accounts receivable reduced cash by $13.2$9.7 million and $24.3 million$12.6 during the nine months ended September 28,first quarter of 2020 and 2019, and September 29, 2018, respectively. Days sales outstanding decreasedincreased slightly during the current period, downup to 51 days from 5250 days as of September 29, 2018.March 30, 2019. We have not experienced significant delays in collection of accounts receivable balances from customers as a result of the COVID-19 pandemic. Days of inventory on hand went up to 99101 as of SeptemberMarch 28, 2019,2020, compared to 9288 as of September 29, 2018. March 30, 2019, a result of increased inventory levels and lower sales compared to the prior-year quarter. There has been no decline in the net realizable value of our inventory as a result of recent economic conditions.
We have considered the impacts of the current economic environment on our long-lived assets and determined that there have been no indications that the recorded value of our long-lived assets may not be recoverable.
Investing activities
Capital expenditures totaled $19.6$2.9 million for the nine months ended September 28, 2019, an increasefirst quarter of $0.92020, a decrease of $5.9 million over the prior yearprior-year comparable period. Current year expenditures primarily consist of purchases of machinery and equipment, Sun’s manufacturing consolidation project, constructionequipment. Due to the current economic conditions and uncertainty of Sun’s state-of-the-art engineering centerfuture cash flows, capital expenditure projects are being evaluated and equipment and leasehold improvements for our new China facility. Capital expenditures for the full year 2019several have been postponed. We are estimated to be between $25 million and $28 million.currently only proceeding with critical projects.
26
Financing activities
Cash flows used in financing activities totaled $48.0$9.0 million during the nine months ended September 28, 2019,first quarter of 2020, compared to cash provided by financing activitiesused of $463.2$17.7 million in the prior yearprior-year period.
On February 6, 2018, the Company issued and sold 4.4 million shares of its common stock at $57.50 per share in a registered public offering. The net increasereduction is due to shareholders’ equity and cash proceeds from the offering was approximately $240 million. We initially used $116 million of the proceeds to repay the outstandinglower debt under our credit facility and used the remaining proceeds in April of 2018 to fund the Faster acquisition.
On April 1, 2018, we amended our credit facility to increase the limit on our revolving credit facility to $400 million and add a term loan of $100 million. We also increased the accordion feature to $200 million. During the second quarter of 2018, we paid cash of approximately $175.0 million and borrowed $358.0 million on our term loan and line of credit to complete the acquisition of Faster. During the third quarter of 2018, we borrowed additional amounts on our revolving credit facility to fund the acquisition of Custom Fluidpower. Cash paid for the Custom Fluidpower acquisition totaled approximately $9.3 million. Amounts due on our revolving credit facility and our long-term non-revolving debt as of September 28, 2019 totaled $225.5 million and $93.7 million, respectively.
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In April 2019, we paid $17.8 million to the former owners of Enovation Controls in connection with the third and final payment due on the contingent consideration liability, of which $10.7 million was presented in operating cash flows for the period as it exceeded the acquisition date fair value of the liability, and the remaining $7.1 million was classified as financing cash flows.repayments.
During the thirdfirst quarter of 2019,2020, we declared a quarterly cash dividend of $0.09 per share payable on OctoberApril 20, 2019,2020, to shareholders of record as of OctoberApril 5, 2019.2020. The declaration and payment of future dividends is subject to the sole discretion of the Board of Directors, and any determination as to the payment of future dividends will depend upon our profitability, financial condition, capital needs, future prospects and other factors deemed pertinent by the Board of Directors.
Off Balance Sheet Arrangements
We do not engage in any off balance sheet financing arrangements. In particular, we do not have any material interest in variable interest entities, which include special purpose entities and structured finance entities.
Inflation
The impact of inflation on our operating results has been moderate in recent years, reflecting generally lower rates of inflation in the economies in which we operate. While inflation has not had, and we do not expect that it will have, a material impact upon operating results, there is no assurance that our business will not be affected by inflation in the future.
Critical Accounting Policies and Estimates
We currently apply judgment and estimates which may have a material effect on the eventual outcome of assets, liabilities, revenues and expenses for impairment of long-lived assets, inventory, goodwill, accruals, income taxes and fair value measurements. Our critical accounting policies and estimates are included in our Annual Report on Form 10-K, for the year ended December 29, 2018, and any changes made during the ninefirst three months of 2019, including the adoption of ASC 842,2020, are disclosed in Note 2 to the Consolidated, Unaudited Financial Statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See “Item 7A – Quantitative and Qualitative Disclosures about Market Risk” in our 2018 Annual Report on Form 10-K filed on February 26, 2019.10-K. There were no material changes during the ninethree months ended SeptemberMarch 28, 2019.2020.
Item 4. CONTROLS AND PROCEDURESPROCEDURES.
The Company’s management, with the participation of the Interim Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report, have concluded that our disclosure controls and procedures are effective and are designed to ensure that the information we are required to disclose is recorded, processed, summarized and reported within the necessary time periods. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports that we file or submit pursuant to the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our Interim Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
During the first quarter of 2020, the Company moved to remote work arrangements for the majority of its administrative functions. Management has evaluated the effect of this change on internal control over financial reporting and disclosure controls and procedures and determined that it has not had a material effect on our internal control over financial reporting.
There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Securities Exchange Act of 1934, as amended, during the period covered by this report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
II: OTHER INFORMATION
Item 1. Legal Proceedings.LEGAL PROCEEDINGS.
None.
Item 1A. Risk Factors.RISK FACTORS.
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors that affect our business and financial results that are discussed in Part I, Item 1A, “Risk Factors” of our Form 10-K. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report. Other than as set forth below, there have been no material changes to such risk factors.
We face various risks related to health epidemics, pandemics and similar outbreaks, which may have material adverse effects on our business, financial position, results of operations and/or cash flows.
We face various risks related to health epidemics, pandemics and similar outbreaks, including the global outbreak of COVID-19. In recent weeks, the continued spread of COVID-19 has led to disruption and volatility in the global capital markets, which increases the cost of capital and adversely impacts access to capital. If significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, facility closures or other restrictions in connection with the COVID-19 pandemic, our operations will likely be impacted. We may be unable to perform fully on our contracts and our costs may increase as a result of the COVID-19 outbreak. These cost increases may not be fully recoverable or adequately covered by insurance.
It is possible that the continued spread of COVID-19 could also cause further disruption in our supply chain; cause delay, or limit the ability of customers to perform, including in making timely payments to us; impact investment performance; and cause other unpredictable events.
We continue to work with our stakeholders (including customers, employees, suppliers and local communities) to responsibly address this global pandemic. We continue to monitor the situation to assess further possible implications to our business, supply chain and customers, and to take actions in an effort to mitigate adverse consequences.
As a result of current economic conditions and expected future impacts from the COVID-19 pandemic, the carrying value of goodwill with respect to certain of our assets was impaired, resulting in impairment charges that negatively impacted our results of operations. We may be required to record additional impairment charges in the future if the COVID-19 pandemic continues and we cannot predict the amount and timing of any such additional charges, which could adversely impact our results of operations.
We cannot at this time predict the impact of the COVID-19 pandemic, but it could have a material adverse effect on our business, financial position, results of operations and/or cash flows.
We are currently undergoing a period of management transition, which could be disruptive to, or cause uncertainty in, our business.
On April 9, 2020, Helios announced that its Board of Directors named Tricia L. Fulton, the Company’s Chief Financial Officer, as Interim President and Chief Executive Officer, effective immediately. We are in the process of searching for a new Chief Executive Officer. However, there is no guarantee that we will be able to find a permanent replacement on a timely basis. We face significant competition for an executive with the qualifications and experience we are seeking. The prolonged absence of a permanent Chief Executive Officer could adversely impact our business and results of operations.
For additional information regarding risk factors, please refer to Part I, Item 1A, “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 29, 2018.10-K.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
Item 3. Defaults Upon Senior Securities.DEFAULTS UPON SENIOR SECURITIES.
None.
Item 4. Mine Safety DisclosureMINE SAFETY DISCLOSURES.
Not applicable.
Item 5. Other Information.OTHER INFORMATION.
None.
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Item 6. Exhibits.EXHIBITS.
Exhibits:
Exhibit Number |
| Exhibit Description |
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31.1 | CEO & CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
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32.1 |
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101.INS |
| XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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101.SCH |
| XBRL Schema Document |
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101.CAL |
| XBRL Calculation Linkbase Document |
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101.DEF |
| XBRL Definition Linkbase Document |
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101.LAB |
| XBRL Label Linkbase Document |
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101.PRE |
| XBRL Presentation Linkbase Document |
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104
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| The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended |
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+ | Executive management contract or compensatory plan or arrangement. | |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this Reportreport to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Sarasota, State of Florida on November 5, 2019.authorized.
Date: May 5, 2020 | HELIOS TECHNOLOGIES, INC. | ||
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By: |
| /s/ Tricia L. Fulton | |
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| Tricia L. Fulton | |
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| Interim President and Chief Executive Officer and Chief Financial Officer (Principal Executive, Financial and Accounting Officer) |
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