Sun Hydraulics Corporation, a global industrial technology leader that develops and manufactures solutions for both the hydraulics and electronics markets, has reported financial results for the first quarter of 2017. The results include Enovation Controls since its acquisition on December 5, 2016.
Wolfgang Dangel, Sun's President and Chief Executive Officer, comments, "This is an exciting time for the entire Sun organization, reporting a solid start to 2017. With sales up 59%, driven by organic as well as acquisition growth, we grew our EBITDA by 58%. Additionally, Enovation Controls was approximately $0.04 accretive to GAAP EPS in this first full quarter since closing on the acquisition, net of incremental amortization of $0.10 and incremental interest expense of $0.02.”
He adds, “Importantly, the integration of the Enovation Controls acquisition is progressing very well. Phase 1 has us focusing on four key areas in 2017:
- Achieve 2017 forecast
- Exchange market intelligence within global sales, engineering and purchasing groups
- Compile concrete path for attainment of planned revenue and cost synergies
- Exchange technology know-how for joint product development
Our teams are actively working on all of these initiatives. We are especially proud of the execution exhibited by the Enovation Controls team, while realizing 36% sales growth over the pre-acquisition 2016 first quarter.”
First quarter 2017 results
The 2017 quarter included $26.6 million of Enovation Controls’ sales, while the core business’s sales grew 7%. On a consolidated basis, sales in each of the company’s geographic regions increased considerably, with the Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific (APAC) comprising 58%, 25% and 17% of consolidated sales, respectively. Excluding the acquisition, sales growth was realized in all regions, with APAC and EMEA showing particular strength, growing 16% and 9%, respectively. Additionally, improvement was realized across all end markets, particularly the oil & gas and construction machinery sectors. Foreign currency translation unfavorably impacted sales by approximately $1.0 million.
Gross profit improvement reflects leverage realized on incremental sales volume as well as the financial benefits of the cost reduction initiatives enacted during 2016, partially offset by $1.8 million of amortization of acquisition-related inventory step-up. That amortization is now complete.
Selling, engineering and administrative expense (SEA) included approximately $650,000 of CEO transition costs and professional fees that are not expected to recur going forward.
Operating income expanded 33% on the growth in sales and gross profit, but was partially offset by $2.3 million of amortization of intangible assets, the majority of which resulted from the acquisition, as well as amortization of acquisition-related inventory step-up of $1.8 million noted above. Excluding amortization from both periods, operating income would have grown 65%.
A $1.0 million change in interest expense (income), net, reflects the interest on incremental debt to fund the acquisition as well as the impact of lower investments.
First quarter 2017 EBITDA (consolidated net income before net interest expense/income, income taxes, and depreciation and amortization) benefited from higher gross profit, partially offset by incremental SEA expenses.
Sun believes that, when used in conjunction with measures prepared in accordance with GAAP, EBITDA and EBITDA margin (EBITDA as a percentage of sales), which are non-GAAP measures, help in the understanding of its operating performance.
Balance Sheet and Cash Flow Review
Total debt decreased to $124 million at April 1, 2017 compared with $140 million at the end of 2016, reflecting repayment of debt incurred to fund the acquisition. The company had $176 million of available capacity under its revolving credit facility at April 1, 2017.
Tricia L. Fulton, Sun’s Chief Financial Officer, notes, “We are pleased with the strong cash flows exhibited by our core Sun business as well as the Enovation Controls business, contributing to our repayment of $16 million of acquisition debt during the quarter. We structured our credit facility to allow us to pay down our borrowings without penalty, given the strong cash flow profile anticipated of the combined organization.”
Cash and cash equivalents at April 1, 2017 were $70.4 million compared with $74.2 million at the end of 2016. Short-term investments were $4.7 million and $6.8 million at April 1, 2017 and the end of 2016, respectively.
Cash provided by operations increased to $12.4 million in the first quarter of 2017 compared with $10.5 million in the prior-year first quarter, exhibiting the strong cash flow profile of the newly combined organization. Capital expenditures were approximately $758,000 and $999,000 for the first quarters of 2017 and 2016, respectively.
2017 Outlook and Guidance
Dangel states, “We continue to experience favorable economic conditions globally, driving growing demand for products and services in both our Hydraulics and Electronics segments. The trends are quite positive across all of our end markets and geographic regions. We are on track to meet our full year expectations, recognizing that our first half of the year is typically stronger than our second half.”
The company reconfirmed its expectations for 2017:
- Consolidated revenue is expected to be between $295 million and $310 million, with the Hydraulics segment contributing between $205 million and $215 million and the Electronics segment contributing between $90 million and $95 million
- Consolidated operating margin is expected to be between 20% and 22% for the year, before acquisition-related amortization expense
- Consolidated interest expense is expected to be between $4.2 million and $4.7 million, before considering the offsetting interest income
- The full year effective tax rate is anticipated to be between 32% and 34%
- Capital expenditures are estimated at $8 million to $10 million
- Depreciation is estimated between $12 million and $13 million
- Amortization is estimated between $8 million and $9 million
Dangel concludes, “The positive momentum we are experiencing within our organization and marketplaces indicates that we are progressing well toward achievement of our 2025 Vision, the goals of which are $1 billion in sales, superior profitability and financial strength.”
