Helios Technologies - 10-Q quarterly report FY

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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

SUN HYDRAULICS CORPORATION
(Exact Name of Registration as Specified in its Charter)

941/362-1200
(Registrant’s Telephone Number, Including Area Code)

     Indicate by check mark whether the Registrant (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 Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [   ]

     The Registrant had 6,411,198 shares of common stock, par value $.001, outstanding as of August 6, 2001.

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Sun Hydraulics Corporation
INDEX
For the quarter ended June 30, 2001

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PART I: FINANCIAL INFORMATION
Item 1.

Sun Hydraulics Corporation
Consolidated Balance Sheets
(in thousands)

The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements.

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Sun Hydraulics Corporation
Consolidated Statements of Operations
(in thousands, except per share data)

The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements.

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Sun Hydraulics Corporation
Consolidated Statements of Operations
(in thousands, except per share data)

The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements.

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Sun Hydraulics Corporation
Consolidated Statement of Changes in Shareholders’ Equity and Comprehensive Income
(in thousands)

The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements.

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Sun Hydraulics Corporation
Consolidated Statements of Cash Flows
(in thousands)

The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements.

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SUN HYDRAULICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share data)

1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS

     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 generally accepted accounting principles 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 30, 2000, filed by Sun Hydraulics Corporation (the “Company”) with the Securities and Exchange Commission on March 12, 2001. In Management’s opinion, all adjustments necessary for a fair presentation of the Company’s financial statements are reflected in the interim periods presented.

2. NEW ACCOUNTING PRONOUNCEMENTS

     On June 30, 2001, the Financial Accounting Standards Board finalized FAS 141, Business Combinations, and FAS 142, Goodwill and Other Intangible Assets. FAS 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting. With the adoption of FAS 142 effective January 1, 2002, goodwill is no longer subject to amortization. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value-based test. Under the new rules, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer’s intent to do so. These intangible assets will be required to be amortized over their useful lives.

     As of June 30, 2001, the Company had $0.7 million of goodwill, net of accumulated amortization of $0.1 million. Adoption of FAS 142 effective January 1, 2002 will result in the elimination of approximately $60 of annual amortization, subject to the identification of separately recognized intangibles, which would continue to be amortized under the new rules. The Company is beginning the process of performing the initial impairment testing of all goodwill, and has not determined whether an initial impairment charge will be necessary upon adoption of FAS 142.

3. BUSINESS

     Sun Hydraulics Corporation and its wholly-owned subsidiaries (the “Company”) design, manufacture and sell screw-in cartridge valves and manifolds used in hydraulic systems. The Company has facilities in the United States, the United Kingdom, Germany, Korea, and China. Sun Hydraulics Corporation (“Sun Hydraulics”), with its main offices located in Sarasota, Florida, designs, manufactures and sells through independent distributors, primarily in the United States. Sun Hydraulik Holdings Limited (“Sun Holdings”), a wholly-owned subsidiary of Sun Hydraulics, was formed to provide a holding company for the European market operations; its wholly-owned subsidiaries are Sun Hydraulics Limited (a British corporation, “Sun Ltd.”) and Sun Hydraulik GmbH (a German corporation, “Sun GmbH”). Sun Ltd. operates a manufacturing and distribution facility located in Coventry, England, and Sun GmbH operates a manufacturing and distribution facility located in Erkelenz, Germany. Sun Hydraulics Korea Corporation (“Sun Korea”), a wholly-owned subsidiary of Sun Hydraulics, located in Inchon, South

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Korea, operates a manufacturing and distribution facility. Sun Hydraulics Systems (Shanghai) Co., Ltd. (“Sun China”), a 50/50 joint venture between Sun Hydraulics and Links Lin, the owner of Sun Hydraulics’ Taiwanese distributor, is located in Shanghai, China, and operates a manufacturing and distribution facility.

4. INVENTORY

5. LONG-TERM DEBT (in thousands)

     The Company has three revolving lines of credit totaling approximately $9,548 with various banks. Interest rates on these credit facilities are variable based on the prime rate in the U.S. and the equivalent rate in the U.K. and Germany, respectively. All lines of credit expire in 2002. None of these arrangements contain pre-payment penalties. The total outstanding on these credit facilities was $0 at both June 30, 2001 and December 30, 2000.

     Certain of these debt instruments are subject to covenants including consolidated net working capital not less than $2,000,000 and a current ratio not less than 1.2:1.0 at all times during the term of the loan.

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6. SEGMENT REPORTING

     The individual subsidiaries comprising the Company operate predominantly in a single industry as manufacturers and distributors of hydraulic components. The subsidiaries are multinational with operations in the United States, the United Kingdom, Germany, and Korea. In computing operating profit for the foreign subsidiaries, no allocations of general corporate expenses have been made. Management bases its financial decisions by the geographical location of its operations.

     Identifiable assets of the foreign subsidiaries are those assets related to the operation of those companies. United States assets consist of all other operating assets of the Company.

     Segment information is as follows:

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     Operating profit is total sales and other operating income less operating expenses. Interest expense and net miscellaneous income (expense) have not been included in the computation of segment operating profit.

     Included in U.S. sales to unaffiliated customers were export sales, principally to Canada and Asia, of $3,101 and $3,301 during the six months ended June 30, 2001, and July 1, 2000, respectively.

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Item  2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

     Sun Hydraulics Corporation 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. The Company sells its products globally, primarily though independent distributors. Approximately 66% of product sales are used by the mobile market, characterized by applications where the equipment is not fixed in place, the operating environment is often unpredictable, and duty cycles are generally moderate to low. The remaining 34% of sales are used by industrial markets, which are characterized by equipment that is fixed in place, typically in a controlled environment, with higher pressures and duty cycles. The Company sells to both markets with a single product line. In the first half of 2001, the Company generated 45.2% of its net sales outside of the United States and 40.7% outside North America.

     Orders for the three months ended June 30, 2001, were $16.5 million. This was a $3.8 million, or 18.8%, decrease from the three months ended July 1, 2000, and a $3.4 million, or 16.9%, decrease compared to the previous quarter ended March 31, 2001. Orders for the six months ended June 30, 2001, were $36.3 million, a $5.7 million, or 13.6%, decrease from the same six-month period last year. The United States National Fluid Power Association reported a 19.2% decrease in hydraulic orders for the first six months of 2001 compared to the same period last year.

     The Company’s net sales decreased $1.4 million, or 7.6%, to $17.5 million for the three months ended June 30, 2001, compared to the previous quarter ended March 31, 2001. The 7.6% decrease included a 13.4% decrease in domestic sales and no significant change in international sales. Net income for the quarter ended June 30, 2001, was $0.4 million compared to $1.0 million for the previous quarter ended March 31, 2001. The decrease in net income from the previous quarter was primarily due to the decrease in net sales.

Outlook

     Weekly order rates continued to decline through July. Based on this trend, management estimates that net sales for the three months ending September 29, 2001, will be approximately 7% to 10% lower than the quarter ended June 30, 2001. At these sales levels, net income for the third quarter would approach breakeven.

     The United States manufacturing sector has been in decline for a year. Historically, Sun’s business slows early in the downturn and increases at the beginning of an upturn.

COMPARISON OF THREE MONTHS ENDED JUNE 30, 2001 AND JULY 1, 2000

     Net sales decreased $4.5 million, or 20.5%, to $17.5 million for the quarter ended June 30, 2001, compared to the quarter ended July 1, 2000. Net sales in the United States operation decreased $4.4 million accounting for the majority of the decrease. This decrease is due primarily to the general slow down in the manufacturing sector of the North American economy.

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     Gross profit decreased $2.0 million, or 31.7%, to $4.2 million for the quarter ended June 30, 2001, compared to the quarter ended July 1, 2000. Gross profit as a percentage of net sales decreased to 24.1% compared to 28.0% for the second quarter of 2000. The 3.9% decrease in gross profit as a percent of net sales was primarily due to fixed costs spread over lower net sales.

     Selling, engineering and administrative expenses decreased 4.2%, or $0.1 million, to $3.4 million in the quarter ended June 30, 2001, compared to $3.5 million in the quarter ended July 1, 2000. This decrease is due to lower spending in discretionary expense categories in the United States operations offset by moderate increases in the foreign operations.

     Other income was $38,000 for the quarter ended June 30, 2001, compared to other expense of $193,000 for the quarter ended July 1, 2000. Other expenses in 2000 consisted primarily of the disposal of certain equipment no longer used in production in the United States and United Kingdom operations, which did not occur in 2001.

     The provision for income taxes for the quarter ended June 30, 2001, was 30.8% of pretax income, compared to 35.9% of pretax income for the quarter ended July 1, 2000. This decrease is due to a lower level of taxable income in United States, which has a higher tax rate. In both periods, tax savings were realized in the United States from the Sun Hydraulics Foreign Sales Corporation.

COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2001 AND JULY 1, 2001

     Net sales decreased $5.8 million, or 13.7%, to $36.5 million for the six months ended June 30, 2001, compared to the six months ended July 1, 2000. Net sales in the United States operation decreased $5.6 million accounting for the majority of the decrease. This decrease is due primarily to the general slow down in the manufacturing sector of the North American economy.

     Gross profit decreased $1.7 million, or 15.2%, to $9.5 million for the six months ended June 30, 2001, compared to the six months ended July 1, 2000. Gross profit as a percentage of net sales decreased to 26.2% compared to 26.6% for the six months ended July 1, 2000. The 0.4% decrease in gross profit as a percent of net sales was due to the unfavorable effect of lower sales volume offset by the favorable effect of lower prime or direct manufacturing costs.

     Selling, engineering and administrative expenses decreased $0.3 million, or 4.7%, to $6.8 million for the six months ended June 30, 2001, compared to $7.2 million for the six months ended July 1, 2000. This decrease is due to lower spending in discretionary expense categories in the United States operations offset by moderate increases in the foreign operations.

     Interest expense was $0.5 million for the six months ended June 30, 2001, compared to $0.6 million for the six months ended July 1, 2000. The decrease was due to a decrease in average debt over each six-month period of $1.9 million.

     Other income was $28,000 for the six months ended June 30, 2001, compared to other expense of $140,000 for the six months ended July 1, 2000. Other expenses in 2000 consisted primarily of the disposal of certain equipment no longer used in production in the United States and United Kingdom operations, which did not occur in 2001.

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LIQUIDITY AND CAPITAL RESOURCES

     Historically, the Company’s primary source of capital has been cash generated from operations, although fluctuations in working capital requirements have been met through borrowings under revolving lines of credit. The Company’s principal uses of cash have been to pay operating expenses, make capital expenditures, pay dividends to shareholders, and service debt.

     Cash from operations for the six months ended June 30, 2001, was $3.8 million. This compares with $5.3 million for the three months ended July 1, 2000. The $1.5 million decrease was due to a $0.8 million decrease in net income and an increase in working capital requirements. Days sales outstanding were 35 and 34 at June 30, 2001, and July 1, 2000, respectively. Inventory turns were 6.0 and 7.5 at June 30, 2001, and July 1, 2000, respectively; the decrease in 2001 was due to higher inventory levels in all business segments.

     Capital expenditures, consisting primarily of purchases of machinery and equipment, were $1.6 million for the six months ended June 30, 2001, compared to $3.2 million for the six monts ended July 1, 2000. The company plans to break ground in August of this year to build an addition to the building in the United Kingdom operation that will double the manufacturing space. The project is expected to cost $2.2 million. This investment is key to the growth of the Company in Europe and will improve productivity in the United Kingdom operation.

     The Company believes that cash generated from operations and its borrowing availability under its revolving lines of credit will be sufficient to satisfy the Company’s operating expenses and capital expenditures for the foreseeable future.

     The Company declared a quarterly dividend of $0.04 per share to shareholders of record on June 30, 2001, which was paid on July 15, 2001.

SEASONALITY AND INFLATION

     The Company generally has experienced reduced activity during the fourth quarter of the year, largely as a result of fewer working days due to holiday shutdowns. The Company does not believe that inflation had a material effect on its operations for the periods ended June 30, 2001, and July 1, 2000. There can be no assurance, however, that the Company’s business will not be affected by inflation in the future.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is exposed to market risk from changes in interest rates on borrowed funds, which could affect its results of operations and financial condition. At June 30, 2001, the Company had approximately $4.7 million in variable-rate debt outstanding and, as such, the market risk is immaterial based upon a 10% increase or decrease in interest rates. The Company manages this risk by selecting debt financing that is based on the prime rate or Treasury securities rate in the U.S., or the equivalent rate in the U.K., Germany, and Korea, respectively.

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FORWARD-LOOKING INFORMATION

     Certain oral statements made by management from time to time and certain statements contained herein that are not historical facts are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934 and, because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements, including those in Management’s Discussion and Analysis of Financial Condition and Results of Operations are statements regarding the intent, belief or current expectations, estimates or projections of 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; (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) conditions in the capital markets, including the interest rate environment and the availability of capital; (iii) changes in the competitive marketplace that could affect the Company’s revenue and/or cost bases, such as increased competition, lack of qualified engineering, marketing, management or other personnel, and increased labor and raw materials costs; (iv) 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; (v) new product introductions, product sales mix and the geographic mix of sales nationally and internationally; and (vi) changes relating to the Company’s international sales, including changes in regulatory requirements or tariffs, 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 “Business” (including under the subheading “Business Risk Factors”) in the Company’s Form 10-K for the year ended December 30, 2000, and “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” in this Form 10-Q for the quarter ended June 30, 2001. 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.

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PART II
OTHER INFORMATION

Item 1. Legal Proceedings.

Item 2. Changes in Securities.

Item 3. Defaults upon Senior Securities.

Item 4. Submission of Matters to a Vote of Security Holders.

Item 5. Other Information.

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Item 6. Exhibits and Reports on Form 8-K

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+ Executive management contract or compensatory plan or arrangement.

     (b)  Reports on Form 8-K.

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SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Sarasota, State of Florida on August 8, 2001.

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