Exhibit 99.2
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The accompanying unaudited pro forma combined financial statements of Sun Hydraulics Corporation (“Sun” or the “Company”) are presented to illustrate the estimated effects of the acquisition of Polyusus Lux IV S.à.r.l (“Polyusus”), the owner of 100% of the share capital of Faster S.p.A. (“Faster”), on April 5, 2018 (the “acquisition”) and the related financing transactions on the historical financial position and results of operations of the Company.
The unaudited pro forma combined financial statements have been derived from the Company’s historical audited consolidated financial statements as of and for the year ended December 30, 2017 and the audited consolidated financial statements of Faster as of and for the year ended December 31, 2017. The unaudited pro forma combined statement of operations for the year ended December 30, 2017 is presented as if the acquisition was completed on January 1, 2017. The unaudited pro forma combined balance sheet at December 30, 2017 gives effect to the acquisition as if it was completed on December 30, 2017.
Polyusus serves as a holding company and has no operations and, except for the investment in Faster, insignificant assets and liabilities. Therefore Polyusus has not been included in these unaudited pro forma combined financial statements.
The assumptions and estimates underlying the unaudited adjustments to the pro forma combined financial statements are described in the accompanying notes, which should be read together with the pro forma combined financial statements. The unaudited pro forma combined financial statements should be read together with the Company’s historical consolidated financial statements, which are included in the Company’s latest annual report on Form 10-K, and the historical consolidated financial statements of Faster presented in exhibit 99.1 to this Form 8-K/A.
The unaudited pro forma combined financial statements are presented for illustrative purposes only, in accordance with Article 11 of Regulation S-X, and are not indicative of the results of operations that would have been realized had the acquisition actually been completed on the dates indicated, nor are they indicative of the Company’s future financial position or operating results.
1
Unaudited Pro Forma Combined Balance Sheet
As of December 30, 2017
(in thousands)
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| Preliminary |
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| Purchase |
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| Other |
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| Sun |
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| Acquisition |
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| Price |
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| Pro Forma |
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| Hydraulics |
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| Faster |
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| Financing |
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| Allocation |
| Note |
| Adjustments |
| Note |
| Pro Forma |
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| Historical |
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| Historical |
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| (Note 3) |
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| (Note 4) |
| Ref |
| (Note 5) |
| Ref |
| Combined |
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Assets |
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Current assets: |
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Cash and cash equivalents |
| $ | 63,882 |
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| $ | 22,693 |
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| $ | 480,018 |
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| $ | (532,408 | ) |
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| $ | (4,103 | ) | 5(a) |
| $ | 30,082 |
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Restricted cash |
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| 40 |
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| — |
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| — |
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| — |
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| — |
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| 40 |
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Accounts receivable, net of allowance for doubtful accounts |
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| 37,503 |
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| 22,286 |
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| — |
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| — |
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| — |
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| 59,789 |
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Inventories, net |
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| 41,545 |
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| 29,748 |
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| — |
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| 5,287 |
| 4(a) |
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| — |
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| 76,580 |
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Income taxes receivable |
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| — |
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| 449 |
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| — |
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| — |
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| — |
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| 449 |
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Other current assets |
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| 3,806 |
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| 4,480 |
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| — |
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| — |
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| — |
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| 8,286 |
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Total current assets |
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| 146,776 |
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| 79,656 |
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| 480,018 |
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| (527,121 | ) |
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| (4,103 | ) |
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| 175,226 |
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Property, plant and equipment, net |
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| 91,931 |
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| 12,538 |
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| — |
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| 7,340 |
| 4(b) |
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| — |
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| 111,809 |
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Deferred income taxes |
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| 4,654 |
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| 4,374 |
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| — |
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| — |
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| — |
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| 9,028 |
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Goodwill |
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| 108,869 |
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| 143,226 |
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| — |
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| 104,949 |
| 4(c) |
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| — |
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| 357,044 |
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Other intangibles, net |
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| 104,131 |
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| 72,312 |
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| — |
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| 174,059 |
| 4(c) |
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| — |
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| 350,502 |
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Other assets |
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| 3,405 |
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| 824 |
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| 552 |
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| — |
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| — |
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| 4,781 |
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Total assets |
| $ | 459,766 |
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| $ | 312,930 |
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| $ | 480,570 |
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| $ | (240,773 | ) |
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| $ | (4,103 | ) |
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| $ | 1,008,390 |
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Liabilities and shareholders' equity |
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Current liabilities: |
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Accounts payable |
| $ | 15,469 |
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| $ | 22,018 |
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| $ | — |
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| $ | — |
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| $ | — |
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| $ | 37,487 |
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Accrued expenses and other liabilities |
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| 8,977 |
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| 10,603 |
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| — |
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| — |
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| — |
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| 19,580 |
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Current portion of contingent consideration |
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| 17,102 |
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| — |
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| — |
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| — |
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| — |
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| 17,102 |
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Current portion of long-term debt |
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| — |
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| 6,293 |
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| 4,755 |
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| — |
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| (6,293 | ) | 5(b) |
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| 4,755 |
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Dividends payable |
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| 2,437 |
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| — |
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| — |
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| — |
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| — |
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| 2,437 |
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Income taxes payable |
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| 1,878 |
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| 2,130 |
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| — |
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| — |
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| — |
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| 4,008 |
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Total current liabilities |
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| 45,863 |
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| 41,044 |
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| 4,755 |
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| — |
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| (6,293 | ) |
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| 85,369 |
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Revolving line of credit |
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| 116,000 |
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| — |
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| 142,000 |
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| — |
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| — |
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| 258,000 |
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Contingent consideration, less current portion |
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| 16,780 |
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| — |
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| — |
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| — |
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| — |
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| 16,780 |
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Long-term debt, net of current portion |
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| — |
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| 81,135 |
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| 94,022 |
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| — |
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| (81,135 | ) | 5(b) |
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| 94,022 |
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Deferred income taxes |
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| 2,068 |
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| 20,593 |
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| — |
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| — |
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| — |
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| 22,661 |
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Other noncurrent liabilities |
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| 6,382 |
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| 3,107 |
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| — |
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| — |
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| — |
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| 9,489 |
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Total liabilities |
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| 187,093 |
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| 145,879 |
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| 240,777 |
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| — |
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| (87,428 | ) |
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| 486,321 |
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Total shareholders' equity |
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| 272,673 |
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| 167,051 |
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| 239,793 |
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| (240,773 | ) |
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| 83,325 |
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| 522,069 |
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Total liabilities and shareholders' equity |
| $ | 459,766 |
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| $ | 312,930 |
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| $ | 480,570 |
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| $ | (240,773 | ) |
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| $ | (4,103 | ) |
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| $ | 1,008,390 |
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See accompanying notes to the unaudited pro forma combined financial statements.
2
Unaudited Pro Forma Combined Statement of Operations
For the year ended December 30, 2017
(in thousands, except per share data)
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| Preliminary |
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| Purchase |
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| Other |
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| Sun |
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| Acquisition |
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| Price |
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| Pro Forma |
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| Hydraulics |
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| Faster |
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| Financing |
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| Allocation |
| Note |
| Adjustments |
| Note |
| Pro Forma |
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| Historical |
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| Historical |
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| (Note 3) |
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| (Note 4) |
| Ref |
| (Note 5) |
| Ref |
| Combined |
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Net sales |
| $ | 342,839 |
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| $ | 120,629 |
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| $ | — |
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| $ | — |
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| $ | — |
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| $ | 463,468 |
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Cost of sales |
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| 206,314 |
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| 73,704 |
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| — |
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| 1,811 |
| 4(b) |
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| — |
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| 281,829 |
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Gross profit |
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| 136,525 |
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| 46,925 |
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| — |
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| (1,811 | ) |
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| — |
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| 181,639 |
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Selling, engineering and administrative expenses |
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| 65,580 |
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| 19,425 |
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| — |
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| — |
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| (2,495 | ) | 5(a) |
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| 82,510 |
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Restructuring charges |
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| 1,031 |
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| — |
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| — |
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| — |
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| — |
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| 1,031 |
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Amortization of intangible assets |
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| 8,423 |
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| 6,598 |
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| — |
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| 3,601 |
| 4(c) |
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| — |
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| 18,622 |
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Operating income |
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| 61,491 |
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| 20,902 |
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| — |
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| (5,412 | ) |
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| 2,495 |
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| 79,476 |
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Interest expense (income), net |
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| 3,781 |
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| 5,726 |
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| 10,950 |
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| — |
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| (4,152 | ) | 5(b) |
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| 16,305 |
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Foreign currency transaction gain, net |
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| (52 | ) |
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| (2,750 | ) |
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| — |
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| — |
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| — |
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| (2,802 | ) |
Miscellaneous expense, net |
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| 742 |
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| (112 | ) |
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| — |
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| — |
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| — |
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| 630 |
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Change in fair value of contingent consideration |
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| 9,476 |
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| — |
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| — |
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| — |
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| — |
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| 9,476 |
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Income before income taxes |
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| 47,544 |
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| 18,038 |
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| (10,950 | ) |
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| (5,412 | ) |
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| 6,647 |
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| 55,867 |
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Income tax provision |
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| 15,986 |
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| 5,601 |
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| (3,833 | ) |
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| (1,510 | ) | 4(d) |
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| 1,900 |
| 5(c) |
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| 18,144 |
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Net income |
| $ | 31,558 |
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| $ | 12,437 |
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| $ | (7,117 | ) |
| $ | (3,902 | ) |
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| $ | 4,747 |
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| $ | 37,723 |
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Basic and diluted net income per common share |
| $ | 1.17 |
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| $ | 1.20 |
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Basic and diluted weighted average shares outstanding |
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| 27,031 |
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| 4,400 |
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| 31,431 |
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See accompanying notes to the unaudited pro forma combined financial statements.
3
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(in thousands)
Note 1 — Basis of presentation
The unaudited pro forma combined financial statements have been derived from the Company’s historical audited consolidated financial statements as of and for the year ended December 30, 2017 and the audited consolidated financial statements of Faster as of and for the year ended December 31, 2017.
The audited consolidated financial statements of Faster as of and for the year ended December 31, 2017 were prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board, and were presented in euros. Management is still evaluating Faster’s accounting policies and the effects of conversion to U.S generally accepted accounting principles (“U.S. GAAP”). Based on management’s preliminary analysis there were no adjustments necessary to convert the IFRS financial statements into U.S. GAAP. Certain reclassifications among financial statement line items were necessary to conform Faster’s financial information to Sun’s; see Note 2. The historical financial information was translated from euros to U.S. dollars using the following historical rates: average exchange rate for the year ended December 31, 2017 of approximately 1.13 and period end exchange rate as of December 31, 2017 of approximately 1.20.
The unaudited pro forma combined financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of SEC Regulation S-X, and present the pro forma financial position and results of operations of the combined companies after giving effect to the acquisition and related financing transactions.
The historical consolidated financial statements have been adjusted in the pro forma combined financial statements to give effect to pro forma events that are (1) directly attributable to the business combination, (2) factually supportable and (3) with respect to the pro forma combined statements of operations, expected to have a continuing impact on the combined results following the business combination.
The business combination was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. The pro forma combined financial information sets forth the preliminary allocation of the purchase price for the acquisition based upon the estimated fair value of the assets acquired and liabilities assumed at the date of the acquisition using available information. The preliminary purchase price allocation may be adjusted as a result of the finalization of the purchase price accounting.
The combined pro forma financial information does not reflect the realization of any expected cost savings or other synergies from the acquisition of Faster as a result of restructuring activities and other planned cost savings initiatives following the completion of the business combination.
Note 2 — Reclassifications
Certain reclassifications have been made to Faster’s historical financial information to conform to Sun’s financial statement presentation. The following table summarizes the significant reclassifications:
Item reclassified |
| Amount |
| Location on Faster's financial statements | Location on unaudited pro forma financial statements | |
Balance sheet |
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Income taxes receivable |
| $ | 449 |
| Tax receivables | Income taxes receivable |
Other tax related receivables |
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| 1,829 |
| Tax receivables | Other current assets |
Advance payments to vendors |
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| 519 |
| Trade payables | Other current assets |
Purchased software |
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| 1,048 |
| Other intangible assets | Property, plant and equipment, net |
Income taxes payable |
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| 2,130 |
| Tax payables | Income taxes payable |
Other tax related payables |
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| 1,086 |
| Tax payables | Accrued expenses and other liabilities |
Statement of Operations |
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Amortization of intangible assets |
| $ | 6,598 |
| Cost of goods sold - depreciation, amortization and write downs | Amortization of intangible assets |
Certain shipping and indirect production costs |
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| 8,272 |
| Distribution costs | Cost of sales |
Currency derivative gains and losses |
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| 2,734 |
| Other financial income (-) and expenses (+) | Foreign currency transaction gain, net |
4
Note 3 — Acquisition Financing
Sun completed the acquisition for $532,408 in cash. The acquisition was financed with proceeds from the Company’s registered public offering and borrowings on its credit facility. On February 6, 2018, Sun sold 4,400 shares of common stock at a public offering price of $57.50 per share. Net proceeds from the offering totaled $239,793, of which $116,000 was used to repay the outstanding debt under the existing credit facility. On April 1, 2018, the Company amended its credit facility to increase the revolving line of credit to an aggregate maximum principal amount of $400,000 and added a term loan credit facility of $100,000. Debt issuance costs of $1,775 were incurred in relation to the amendment. Concurrent with the closing of the acquisition the Company borrowed $100,000 on the term loan and $258,000 on the revolving credit facility.
The following table presents the net increase to interest expense resulting from the borrowings on our credit facility used to finance the acquisition of Faster and the amortization of related debt issuance cost:
Interest expense on borrowings used to finance Faster acquisition |
| $ | 14,247 |
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Amortization of related debt issuance costs |
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| 355 |
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Historical interest expense on debt repaid with proceeds from public offering |
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| (3,652 | ) |
Pro forma adjustment |
| $ | 10,950 |
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The interest rate assumed for purposes of preparing these pro forma financial statements is 4.0%. This rate comprises the one-month LIBOR rate of 2.0% as of June 2018, plus certain margins specified in the credit facility agreement. A 1/8% increase or decrease in interest rates would result in a change in interest expense of approximately $445 for the year ended December 30, 2017.
The income tax effect of the acquisition financing adjustments are calculated based on Sun’s U.S. statutory tax rate in effect in 2017 (35%).
Note 4 — Preliminary Purchase Price Allocation
The following table presents the preliminary allocation of the purchase consideration for the transaction as of the acquisition date:
Cash |
| $ | 5,264 |
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Accounts receivable |
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| 24,638 |
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Inventories |
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| 35,882 |
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Property, plant and equipment |
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| 20,980 |
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Identifiable intangible assets |
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| 246,371 |
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Goodwill |
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| 248,175 |
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Other assets |
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| 11,111 |
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Total assets acquired |
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| 592,421 |
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Accounts payable |
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| 18,668 |
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Accrued expenses |
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| 11,740 |
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Deferred income taxes |
|
| 20,232 |
|
Other liabilities |
|
| 9,373 |
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Total liabilities assumed |
|
| 60,013 |
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Fair value of net assets acquired |
| $ | 532,408 |
|
The purchase price allocation and related pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma combined financial information:
4(a)Represents the estimated adjustment to step up Faster’s finished goods and work in process inventory to fair value. After the acquisition, the step-up in inventory fair value will increase cost of sales over approximately three months as the inventory is sold. This increase is not reflected in the pro forma combined statements of operations as it does not have a continuing impact.
4(b)Represents the estimated fair value adjustment to Faster's property, plant and equipment based on the preliminary fair value estimate and the related estimated increase in depreciation expense. The estimated useful lives of the assets range from one to fourteen years. The following table summarizes the changes in the estimated depreciation expense:
Estimated depreciation expense |
| $ | 5,122 |
|
Historical depreciation expense |
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| (3,311 | ) |
Pro forma adjustment |
| $ | 1,811 |
|
5
4(c)Represents the adjustments to remove Faster’s historical goodwill, record goodwill associated with the acquisition, record the estimated fair value of the acquired identifiable intangibles assets and the related estimated increase in amortization expense. The following table summarizes the estimated fair values of Faster’s identifiable intangible assets, their estimated useful lives and the estimated amortization for each period presented:
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| Year Ended |
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| Estimated |
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| December 30, 2017 |
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| Estimated Fair Value |
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| Useful life (years) |
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| Amortization Expense |
| |||
Trade Name |
| $ | 25,740 |
|
| 18 |
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| $ | 1,430 |
| |
Customer Relationships |
|
| 201,019 |
|
| 26 |
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|
| 7,732 |
| |
Technology |
|
| 13,483 |
|
| 13 |
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|
| 1,037 |
| |
Sales Order Backlog |
|
| 6,129 |
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|
| 0.4 |
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|
| 6,129 |
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| $ | 246,371 |
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|
| $ | 16,328 |
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Historical amortization expense |
|
|
|
|
|
|
|
|
|
| (6,598 | ) |
Sales order backlog amortization * |
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|
|
|
|
|
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|
| (6,129 | ) |
Pro forma adjustment |
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| $ | 3,601 |
|
* The amortization expense related to the sales order backlog intangible asset was not included in the pro forma adjustments as it will not have a continuing impact on the Company’s results of operations.
These preliminary estimates of fair value and estimated useful lives will likely differ from final amounts the Company will calculate after completing the detailed valuation analysis, and the difference could have a material effect on the accompanying unaudited pro forma condensed combined financial statements.
4(d) The income tax effect of the preliminary purchase price allocation adjustments is calculated based on Faster’s Italian statutory tax rate in effect in 2017 (27.9%).
Note 5 — Other Pro Forma Adjustments
The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma combined financial information:
5(a) Adjustments represent the payment of estimated transaction costs incurred in 2018 in connection with the acquisition totaling $4,103 and the elimination of non-recurring transaction costs incurred by Sun and Faster during the year ended December 30, 2017 that are directly related to the acquisition totaling $2,495.
5(b)Represents the effects of extinguishing Faster’s outstanding debt upon completion of the acquisition.
5(c)The income tax effect of the other pro forma adjustments are calculated based on Sun’s U.S. and Faster’s Italian statutory tax rates in effect in 2017 of 35% and 27.9%, respectively.
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