Sun Hydraulics Reports First Quarter 2018 Results

• Sales of $97.3 million, up 20%
• Net income up 17% to $11.9 million; non-GAAP net income grew 18% to $13.6 million, impacted by supply chain constraints
• Adjusted EBITDA of $23.3 million, 24.0% of sales
• Raising 2018 revenue guidance to $490 million to $505 million, maintaining adjusted operating margin guidance of 22.7% to 24%
  • Updated guidance includes Faster Group since April 5, 2018 acquisition

SARASOTA, Fla.--(BUSINESS WIRE)-- Sun Hydraulics Corporation (NASDAQ: SNHY) (“Sun” or the “Company”), a global industrial technology leader that develops and manufactures solutions for both the hydraulics and electronics markets, today reported financial results for the first quarter ended March 31, 2018.

Wolfgang Dangel, Sun's President and Chief Executive Officer, commented, “We’re off to a solid start in 2018, with our first quarter results generally in line with our internal expectations. The order environment continues to be strong for both our Hydraulics and Electronics segments in all of our geographic markets globally, especially Asia-Pacific.”

He continued, “From an operational perspective, we are working hard to maintain our Hydraulics segment’s best-in-industry lead times and improve the efficiency of our Electronics segment’s new production processes. As expected, some costs that we incurred in the fourth quarter of 2017 as well as inefficiencies caused by supply chain constraints pressured margins in the first quarter of 2018, and will continue into the second quarter but to a lesser degree. We are already realizing efficiency improvements as a result of new long-term agreements that we negotiated with our largest U.S. CVT (cartridge valve technology) component suppliers. Further, our lean enterprise initiative is guiding process improvements to achieve our expected profitability levels.

“As previously announced, we closed on the acquisition of Faster Group in early April. A global leader in hydraulic couplings, Faster performed well in its first quarter of 2018, from both a topline and operational perspective. We anticipate that momentum will continue as we progress in 2018. Additionally, we are already beginning our integration activities. We held our first working session last week, with collaboration among our existing CVT and Electronics sales teams, along with Faster’s sales team. We have confidence that our acquisition synergies and organic investments are driving market share gains, leading us toward our Vision 2025 goals,” Mr. Dangel added.

First Quarter 2018 Consolidated Results

Sales in the 2018 first quarter grew by $15.9 million, or 20% over the same period last year. Demand remained strong with revenue growth in all of the Company’s geographic regions. Sales to the Americas, Europe/Middle East/Africa (“EMEA”) and Asia Pacific (“APAC”) grew 19%, 11% and 32%, respectively. In addition to strong market environments, sales growth also resulted from returns on our investments in global sales and marketing initiatives and new products. Foreign currency translation favorably impacted consolidated sales by approximately $2.4 million.

While sales growth drove increases in gross profit and operating income, gross margin and operating margin were unfavorably impacted by supply chain constraints, higher material costs and other operational costs that began in the fourth quarter of 2017. These are explained further below in the segment reviews. The prior year gross profit included a $1.8 million charge for amortization of an inventory valuation adjustment associated with the Enovation Controls acquisition.

Operating income in the first quarter of 2018 includes $1.2 million for acquisition and financing-related expenses and $0.1 million for restructuring charges. Those items, as well as $2.0 million of amortization of intangibles have been added back to arrive at non-GAAP adjusted operating margin of 21.1% shown in the table above. This is down from 24.6% in the first quarter of 2017, primarily due to the supply chain constraints, higher material costs and other operational costs noted above. See the attached tables for additional important disclosures regarding Sun’s use of non-GAAP adjusted operating income and non-GAAP adjusted operating margin as well as a reconciliation of net income to non-GAAP adjusted operating income.

Net interest expense was $0.5 million, a decrease of 23% from the prior-year period due to lower outstanding debt during the 2018 quarter, upon application of stock offering proceeds in February.

Sun incurred a $0.5 million net foreign currency transaction loss associated with locking the Faster Group purchase price in euros, unfavorably impacting results in the first quarter of 2018. The Company also recorded a $0.4 million charge associated with interest on the change in fair value of contingent consideration associated with the Enovation Controls acquisition. Neither of those charges impacted 2017 first quarter results.

The Tax Cuts and Jobs Act resulted in a lower effective tax rate in the 2018 first quarter, at 25.1%, compared with 32.6% in the first quarter of 2017.

Net income was $11.9 million, or $0.40 per share in the first quarter of 2018. Non-GAAP net income was $13.6 million, or $0.46 per share, compared with $11.5 million, or $0.43 per share, in the prior-year first quarter. See the attached tables for additional important disclosures regarding Sun’s use of non-GAAP net income and non-GAAP EPS as well as a reconciliation of net income to non-GAAP net income.

First quarter 2018 Adjusted EBITDA (consolidated net income before net interest expense/income, income taxes, depreciation and amortization, and certain unusual charges) was $23.3 million, or 24.0% of sales.

Sun believes that, when used in conjunction with measures prepared in accordance with GAAP, Adjusted EBITDA and Adjusted EBITDA margin (Adjusted EBITDA as a percentage of sales), which are non-GAAP measures, help in the understanding of its operating performance. See the attached tables for additional important disclosures regarding Sun’s use of Adjusted EBITDA and Adjusted EBITDA margin as well as a reconciliation of net income to Adjusted EBITDA.

Hydraulics Segment Review

(Refer to sales by geographic region and segment data in accompanying tables)

Segment sales of $62.6 million grew 15.7% over the prior-year first quarter. Growth was driven by increased demand in all geographic and end markets, and also positively impacted by global sales and marketing initiatives. APAC and EMEA showed particular strength, up 35% and 15%, respectively.

“We are still seeing record levels of order intake in our hydraulics business,” stated Dangel. First quarter operating and gross margins were lower, primarily due to significant customer demand which led to constraints in our supply chain, inefficiencies in production and material cost increases. To offset material cost impacts, the segment has announced a price increase that is effective July 1. Sun has negotiated long-term agreements with its key suppliers and is already seeing improved component deliveries thereby reducing supply chain constraints in the second quarter. Sun also continues to make operational improvements, expecting its overall efficiency will increase in the second quarter and thereafter.

Higher SEA (selling, engineering and administrative) expenses and R&D (research and development) expenses in the 2018 quarter are due to planned investments in the Company’s strategic growth initiatives.

First quarter operating income decreased $0.3 million to $13.4 million. Operating margin declined to 21.5%, compared with last year’s 25.4%.

Electronics Segment Review

(refer to sales by geographic region and segment data in accompanying tables)

Segment sales were $34.7 million for the first quarter, an increase of 27.5% over the first quarter of last year. Growth was driven by increased demand in power controls and recreational vehicle end markets. Proactive sales initiatives and increased demand for new products developed in the past year also contributed to the 2018 growth.

“Our electronics business continues to grow significantly even after having already grown 33% in 2017,” commented Dangel. Improved productivity in the first quarter partially offset higher material and freight costs resulting in lower gross and operating margins. The segment is currently in negotiations with key suppliers in order to secure steady supply at the best possible cost. Further, the segment is progressing on its operational improvements, expecting those costs will be lower in the second quarter and thereafter.

Higher SEA and R&D expenses in the 2018 quarter are due to planned investments in the Company’s strategic growth initiatives.

First quarter operating income grew $0.9 million, or 14%, to $7.1 million. However, operating margin declined to 20.5% from 22.9% in the prior-year period.

Balance Sheet and Cash Flow Review

Total debt was $0.9 million at March 31, 2018, down from $116.0 million at December 30, 2017. Cash and cash equivalents at March 31, 2018 were $198.5 million, compared with $63.9 million at the end of 2017.

The Company received $240 million in net proceeds from its public equity offering completed during the quarter, a portion of which was used to pay down its then outstanding debt. Subsequent to the end of the quarter, the Company used approximately $533 million of cash and debt to complete its acquisition of the Faster Group on April 5.

Cash provided by operations was $14.7 million and $12.4 million for the first quarters of 2018 and 2017, respectively. The 18% increase was primarily due to higher net income.

Capital expenditures were $4.2 million and $0.8 million for the first quarters of 2018 and 2017, respectively. The increase was primarily for costs associated with the ongoing construction of the Company’s new production facility in South Korea.

2018 Outlook and Guidance

Mr. Dangel stated, “Given our ongoing strong order rates, we are increasing our organic revenue growth expectations as well as adding Faster Group to our guidance for 2018. Additionally, we remain confident in the consolidated operating margin guidance range previously provided, which will drive incremental EPS growth and enhance shareholder value.”

The following summarizes the Company’s increased expectations for 2018, including Faster since its April 5 acquisition, compared with previously provided guidance:

Mr. Dangel concluded, “We remain focused on our number one priority, which is our growing global customer base. To that end, we are working diligently to improve our operational performance to continue to deliver high quality products and service in the most efficient manner, improving our profitability. We remain steadfast in our quest to reach critical mass of $1 billion of revenue by 2025, while maintaining our superior profitability and financial strength.”

Webcast

The Company will host a conference call and webcast tomorrow morning at 9:00 a.m. Eastern Time to review its financial and operating results, and discuss its corporate strategies and outlook. A question-and-answer session will follow.

The conference call can be accessed by calling (201) 689-8573. The audio webcast can be monitored at www.sunhydraulics.com. Participants will have the ability to ask questions on either the teleconference call or the webcast.

A telephonic replay will be available from 12:00 p.m. ET on the day of the call through Tuesday, May 15, 2018. To listen to the archived call, dial (412) 317-6671 and enter conference ID number 13678573. The webcast replay will be available in the investor relations section of the Company’s website at www.sunhydraulics.com, where a transcript will also be posted once available.

About Sun

Sun Hydraulics Corporation is an industrial technology leader that develops and manufactures solutions for both the hydraulics and electronics markets. In the hydraulics market, the Company is a leading designer and manufacturer of high-performance screw-in hydraulic cartridge valves and manifolds, which control force, speed and motion as integral components in fluid power systems for the worldwide industrial and mobile hydraulics markets. With the addition of Faster Group, the Company is also a leading global manufacturer of quick-release hydraulics coupling solutions and is engaged in the business of designing, engineering and distributing hydraulics coupling solutions focused in the agriculture, construction equipment and industrial markets. In the electronics market, the Company is a global provider of innovative electronic control, display and instrumentation solutions for both recreational and off-highway vehicles, as well as stationary and power generation equipment. For more information about Sun, please visit www.sunhydraulics.com.

FORWARD-LOOKING INFORMATION

This news release contains “forward‐looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward‐looking statements involve risks and uncertainties, and actual results may differ materially from those expressed or implied by such statements. They include statements regarding the intent, belief or current expectations, estimates, vision or projections of Sun Hydraulics Corporation (“Sun” or the “Company”), its directors or its officers about the Company and the industry in which it operates, and assumptions made by management, and include among other items, (i) the Company’s strategies regarding growth, including its intention to develop new products and make acquisitions; (ii) the Company’s financing plans; (iii) trends affecting the Company’s financial condition or results of operations; (iv) the Company’s ability to continue to control costs and to meet its liquidity and other financing needs; (v) the declaration and payment of dividends; and (vi) the Company’s ability to respond to changes in customer demand domestically and internationally, including as a result of standardization. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that the anticipated results will occur. Important factors that could cause the actual results to differ materially from those in the forward‐looking statements include, among other items, (i) the economic cyclicality of the capital goods industry in general and the hydraulic valve and manifold industry in particular, which directly affect customer orders, lead times and sales volume; (ii) fluctuations in global business conditions, including the impact of economic recessions in the U.S. and other parts of the world, (iii) conditions in the capital markets, including the interest rate environment and the availability of capital; (iv) changes in the competitive marketplace that could affect the Company’s revenue and/or costs, such as increased competition, lack of qualified engineering, marketing, management or other personnel, and increased labor and raw materials costs; (v) risks related to the integration of the businesses of the Company and Enovation Controls; (vi) changes in technology or customer requirements, such as standardization of the cavity into which screw‐in cartridge valves must fit, which could render the Company’s products or technologies noncompetitive or obsolete; (vii) new product introductions, product sales mix and the geographic mix of sales nationally and internationally; and (viii) changes relating to the Company’s international sales, including changes in regulatory requirements or tariffs, compliance with anti-corruption laws and trade laws, including export and import compliance, trade or currency restrictions, fluctuations in exchange rates, and tax and collection issues. Further information relating to factors that could cause actual results to differ from those anticipated is included but not limited to information under the headings Item 1. “Business,” Item 1A. “Risk Factors,” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Form 10‐K for the year ended December 30, 2017. The Company disclaims any intention or obligation to update or revise forward‐looking statements, whether as a result of new information, future events or otherwise.

This news release will discuss some non-GAAP financial measures, which the Company believes are useful in evaluating our performance. You should not consider the inclusion of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. The Company has provided reconciliations of comparable GAAP to non-GAAP measures in tables found in the end of this news release.

Non-GAAP Financial Measures:

Adjusted operating income, adjusted operating margin, adjusted EBITDA, adjusted EBITDA margin, adjusted net income and adjusted net income per diluted share are not measures determined in accordance with generally accepted accounting principles in the United States, commonly known as GAAP. Nevertheless, Sun Hydraulics believes that providing non-GAAP information such as adjusted operating income, adjusted operating margin, adjusted EBITDA, adjusted EBITDA margin, adjusted net income and adjusted net income per diluted share are important for investors and other readers of Sun Hydraulics’ financial statements, as they are used as analytical indicators by Sun Hydraulics’ management to better understand operating performance. Because adjusted operating income, adjusted operating margin, adjusted EBITDA, adjusted EBITDA margin, adjusted net income and adjusted net income per diluted share are non-GAAP measures and are thus susceptible to varying calculations, adjusted operating income, adjusted operating margin, adjusted EBITDA, adjusted EBITDA margin, adjusted net income and adjusted net income per diluted share, as presented, may not be directly comparable to other similarly titled measures used by other companies.

View source version on businesswire.com: https://www.businesswire.com/news/home/20180507006068/en/

Kei Advisors LLC
Karen L. Howard / Deborah K. Pawlowski
716-843-3942 / 716-843-3908
khoward@keiadvisors.com / dpawlowski@keiadvisors.com

Source: Sun Hydraulics Corporation

Released May 7, 2018