SUN HYDRAULICS CORP (SNHY) SPO
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|Company Name||SUN HYDRAULICS CORP|
|Company Address||1500 WEST UNIVERSITY PKWY
SARASOTA, FL 34243
|CEO||Wolfgang H. Dangel|
|Employees (as of 12/31/2016)||1100|
|State of Inc||FL|
|Fiscal Year End||12/27|
|Exchange||NASDAQ Global Select|
|Shares Over Alloted||0|
|Shareholder Shares Offered||--|
|Lockup Period (days)||180|
|Quiet Period Expiration||3/12/2018|
Based upon the public offering price of $ per share, we estimate that the net proceeds from the sale of the shares of common stock offered by us in this offering will be approximately $ million, or approximately $ million if the underwriters exercise in full their option to purchase 600,000 additional shares, in each case after deducting the underwriting discounts and commissions and estimated offering costs payable by us. We intend to use the net proceeds from this offering for the repayment of debt under our credit facility, to fund acquisition activity and for working capital and general corporate purposes. We may temporarily invest such net proceeds in a variety of capital preservation instruments, including short- and immediate-term, interest bearing obligations, investment-grade instruments, certificates of deposit or guaranteed obligations of the U.S. government, until they are used for their stated purpose. Our November 26, 2016, credit facility with PNC Bank, National Association, as administrative agent, and the lenders party thereto, has a term of five years, matures on November 22, 2021, and bears interest at the Euro Rate (as defined therein) or the Base Rate (as defined therein), at the our option, plus the Applicable Margin based on our Leverage Ratio (as defined therein). The Applicable Margin ranges from 1.25% to 2.25% for the Euro Rate and ranges from 0.25% to 1.25% for the Base Rate. At September 30, 2017, we had borrowings under the revolving line of credit of our credit facility of $116 million that bore interest at a rate of 2.98%. An affiliate of SunTrust Robinson Humphrey, Inc. may receive more than 5% of the net proceeds of this offering by reason of the repayment of debt under our credit facility. Accordingly, SunTrust Robinson Humphrey, Inc. is deemed to have a “conflict of interest” within the meaning of Rule 5121 of the Financial Industry Regulatory Authority, and this offering will be conducted in accordance with Rule 5121. We cannot estimate with certainty the amount of net proceeds to be used for the purposes described above. We may find it necessary or advisable to use the net proceeds for other purposes, and we will have broad discretion in the application of the net proceeds. The amount and timing of our expenditures will depend on several factors, which may include our acquisition strategy and the amount of cash used by our operations.
Hydraulics The Hydraulics segment is intensely competitive, and competition comes from a large number of companies, some of which are full-line producers and others that are niche suppliers like us. Full-line producers have the ability to provide total hydraulic systems to customers, including components functionally similar to those manufactured by us. We believe that we compete based upon quality, reliability, price, value, speed of delivery and technological characteristics. Many screw-in cartridge valve competitors are owned by corporations that are significantly larger and have greater financial resources than we have. A new class of competitor has recently emerged in low-cost production areas such as Asia and Eastern Europe with look-alike products. We cannot assure you that we will continue to be able to compete effectively with these companies. Most competitors either manufacture manifolds or have sources that they use on a regular basis. In addition, there are many independent manifold suppliers that produce manifolds incorporating various manufacturers’ screw-in cartridge valves, including those made by us. Finally, there are many small, independent machine shops that produce manifolds at very competitive prices. We believe that competition in the manifold and integrated package business is based upon quality, price, performance, proximity to the customer and speed of delivery. Many competitors have very low overhead structures and we cannot assure you that we will be able to continue to compete effectively with these companies. In addition, we compete in the sale of hydraulic valves, manifolds and integrated packages with certain of our customers, who also may be competitors. Generally, these customers purchase cartridge valves from us to meet a specific need in a system that cannot be filled by any valve they make themselves. To the extent that we introduce new products in the future that increase competition with such customers, it may have an adverse effect on our relationships with them. Electronics In the Electronics segment, our products face, and will continue to face, significant competition, including from incumbent technologies. New developments in technology may negatively affect the development or sale of some or all of our products or make our products uncompetitive or obsolete. Other companies, many of which have substantially longer operating histories and larger customer bases, name recognition, and financial and marketing resources than we do, are currently engaged in the development of products and technologies that are similar to, or may compete with, certain of our products and technologies. We sell products into competitive markets. Within our primary markets, we compete with a range of companies that offer certain individual components of our full system solutions. The components of our overall systems most commonly include displays, panels, sensors, valves, and other end-devices. These competitors include, but are not limited to, LOFA Industries, Inc., Controls, Inc., Medallion Instrumentation Systems LLC, and Faria Beede Instruments, Inc. We also face competition from customers developing products internally. Customers for our products generally have substantial technological capabilities and financial resources. Some customers have traditionally used these resources to develop their own products internally. The future prospects for our products are dependent upon our customers’ acceptance of our products as an alternative to their internally developed products. Future sales prospects also are dependent upon acceptance of third-party sourcing for products as an alternative to in-house development. Customers may in the future continue to use internally developed components. They also may decide to develop or acquire products that are similar to, or that may be substituted for, our products. If our customers fail to accept our products as an alternative, if they develop or acquire the technology to develop such products internally rather than purchase our products, or if we are otherwise unable to develop or maintain strong relationships with them, our business, financial condition and results of operations would be materially and adversely affected. Competitive actions, such as price reductions, consolidation in the industry, improved delivery and other actions, could adversely affect our revenue and earnings. We could experience a material adverse effect to the extent that our competitors are successful in reducing our customers’ purchases of products and services from us. Competition could also cause us to lower our prices, which could reduce our margins and profitability.
Sun, founded in 1970, in Sarasota, Florida, is an industrial technology leader that develops and manufactures solutions for both the hydraulics and electronics markets. In the hydraulics market, we are a leading manufacturer of high-performance screw-in hydraulic cartridge valves,
electro-hydraulics, manifolds, and integrated package solutions for the worldwide industrial and mobile hydraulics markets operating under the brand Sun Hydraulics. In the electronics market, we are 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; these are offered under the brands of Enovation Controls and Murphy Zero Off. We have operated in the North American market for over 47 years. We have expanded our global footprint over the past 30 years to include operations in the United Kingdom, Germany and Korea, as well as sales offices in China and India. Enovation Controls, LLC (“Enovation Controls”), which was acquired by Sun on December 5, 2016 and is a wholly-owned subsidiary of Sun, was formed in 2009 in connection with the reorganization of Murphy Group, Inc. and EControls Group, Inc., which were founded in 1939 and 1994, respectively. Enovation Controls operates the majority of its manufacturing in Tulsa, Oklahoma with sales and engineering capabilities in San Antonio, Texas, the United Kingdom, China and India. Until its dissolution in December 2017, High Country Tek, Inc. (“HCT”), a wholly-owned subsidiary of Sun, operated in Nevada City, California as an independent designer and producer of modular, robust, reliable digital and analog electronic controller products for the fluid power industry sold under the brand of HCT. Subsequent to the Enovation Controls acquisition, the activities of HCT and Enovation Controls were closely coordinated. On December 29, 2017, all of the outstanding shares of HCT were transferred to Enovation Controls. Subsequently, Enovation Controls adopted a plan of liquidation and HCT was dissolved on December 30, 2017. Until 2016, we operated primarily in the hydraulics market with a small presence in the electronics market through HCT. On December 5, 2016, we purchased the power controls and vehicle technologies businesses of Enovation Controls, retaining the legal entity and related brands. The expansion of our electronic and digital capabilities through the acquisition of Enovation Controls was a significant step towards achieving our long-term strategic vision of expanding our electro-hydraulics offerings and providing systems solutions to customers. The acquisition further diversified our business, granting us access to the new, highly specialized marine, power generation and recreational vehicles markets and customers seeking complete machine control. Enovation Controls also brought a strong talent pool with a proven track record of new product development and technical innovation, complementing our existing competencies. We have been profitable every year since 1972 and have paid a dividend every quarter since going public in January 1997. Megatrends and Vision 2025 A primary focus of our strategic thinking is the identification of megatrends which we believe will impact the future capital and industrial goods markets. As part of our strategy we have identified three megatrends: globalization, growing sophistication of safe machinery and equipment, and increased computing power as further described below: • Globalization. We believe global population growth and urbanization, driven predominantly by Asian mega-cities, will generate ongoing demand for infrastructure projects, resources and food production, all of which require equipment and machinery from our key end-markets. • Sophistication of safe machinery and equipment. Machine users increasingly demand safety, productivity, efficiency, and even automated control. Advancements in the design of these machines require continuous evolution of critical components such as hydraulic and electronic functionality control. • Increased computing power. In the current electronic and digital age, electronics are increasingly used to activate processes which were once activated only manually or mechanically. Information is increasingly being converted into a form that allows it to be processed, stored and transmitted digitally, resulting in both time and energy savings. As a result of these megatrends, we developed our Vision 2025, which is focused on growth and reaching a critical mass of $1 billion in annual revenue by 2025. There are two significant components to reaching this goal: organic growth and acquisitions. We expect that by 2025 up to $650 million of the anticipated annual $1 billion in revenue to result from organic growth of our existing products and geographic markets (specifically $450 million from our Hydraulics segment and $200 million from our Electronics segment), with the remaining $350 million to be derived from companies we will have acquired that advance our technology position with adjacent products for the industrial goods sector. Our culture of innovation is at the core of our business. We have over 180 degreed engineers in support of product innovation, as well as technical support and customer service. We believe our product innovation will aid organic growth and fill the expected demand resulting from the identified megatrends. We believe the acquisition of Enovation Controls is the first important step toward becoming a global technology leader. All growth initiatives are intended to preserve Sun’s history of superior profitability and financial strength. --- The Company’s executive offices are located at 1500 West University Parkway, Sarasota, Florida 34243, and our telephone number is (941) 362-1200. Our primary website is www.sunhydraulics.com.
|Auditor||Grant Thornton LLP|
|Company Counsel||Shumaker, Loop and Kendrick, LLP|
|Lead Underwriter||Morgan Stanley & Co. LLC|
|Underwriter||KeyBanc Capital Markets Inc|
|Underwriter||Oppenheimer & Co. Inc.|
|Underwriter||Stifel Nicolaus & Company, Incorporated|
|Underwriter||SunTrust Robinson Humphrey, Inc|
|Underwriter||William Blair and Co., L.L.C.|
|Underwriter Counsel||Davis Polk & Wardwell LLP|
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