HELIOS TECHNOLOGIES, INC. - Quarter Report: 2015 September (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller Reporting Company

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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



For the quarterly period ended September 26, 2015		Commission file number 0-21835

____________________________________________

SUN HYDRAULICS CORPORATION

(Exact Name of Registration as Specified in its Charter)

____________________________________________



FLORIDA		59-2754337
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)



1500 WEST UNIVERSITY PARKWAY SARASOTA, FLORIDA		34243
(Address of Principal Executive Offices)		(Zip Code)

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The Registrant had 26,712,318 shares of common stock, par value $.001, outstanding as of October 23, 2015.

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Sun Hydraulics Corporation

INDEX

For the quarter ended September 26, 2015



			Page
PART I. FINANCIAL INFORMATION

	Item 1.	Financial Statements

	Consolidated Balance Sheets as of September 26, 2015 (unaudited) and December 27, 2014		3

	Consolidated Statements of Operations for the Three Months Ended September 26, 2015 (unaudited) and September 27, 2014 (unaudited)		4

	Consolidated Statements of Operations for the Nine Months Ended September 26, 2015 (unaudited) and September 27, 2014 (unaudited)		5

	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 26, 2015 (unaudited) and September 27, 2014 (unaudited)		6

	Consolidated Statement of Changes in Shareholders’ Equity for the Nine Months Ended September 26, 2015 (unaudited)		7

	Consolidated Statements of Cash Flows for the Nine Months Ended September 26, 2015 (unaudited) and September 27, 2014 (unaudited)		8

	Notes to the Consolidated, Unaudited Financial Statements		9

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

		Forward Looking Information	24

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

	Item 4.	Controls and Procedures	24

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	26

	Item 1A.	Risk Factors	26

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

	Item 3.	Defaults Upon Senior Securities	26

	Item 4.	Mine Safety Disclosure	26

	Item 5.	Other Information	26

	Item 6.	Exhibits	27

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PART I: FINANCIAL INFORMATION

Item 1.

Sun Hydraulics Corporation

Consolidated Balance Sheets

(in thousands, except share data)



	September 26, 2015			December 27, 2014
	(unaudited)			December 27, 2014
Assets
Current assets:
Cash and cash equivalents	$	76,615		$	56,843
Restricted cash	298			319
Accounts receivable, net of allowance for doubtful accounts of $158 and $172	16,874			17,501
Inventories	11,757			14,098
Deferred income taxes	452			467
Short-term investments	45,596			43,353
Other current assets	3,014			2,966
Total current assets	154,606			135,547
Property, plant and equipment, net	75,187			77,716
Goodwill	4,934			5,141
Other assets	5,486			4,360
Total assets	$	240,213		$	222,764
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	5,029		$	4,873
Accrued expenses and other liabilities	5,287			7,908
Income taxes payable	116			559
Dividends payable	2,403			2,392
Total current liabilities	12,835			15,732
Deferred income taxes	8,193			8,501
Other noncurrent liabilities	252			272
Total liabilities	21,280			24,505
Commitments and contingencies	—			—
Shareholders’ equity:
Preferred stock, 2,000,000 shares authorized, par value $0.001, no shares outstanding	—			—
Common stock, 50,000,000 shares authorized, par value $0.001, 26,701,871 and 26,572,774 shares outstanding	27			27
Capital in excess of par value	80,780			73,499
Retained earnings	147,246			128,818
Accumulated other comprehensive income (loss)	(9,120		)	(4,085		)
Total shareholders’ equity	218,933			198,259
Total liabilities and shareholders’ equity	$	240,213		$	222,764

The accompanying Notes to the Consolidated, Unaudited 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)



	Three months ended
	September 26, 2015			September 27, 2014
	(unaudited)			(unaudited)
Net sales	$	48,036		$	55,011
Cost of sales	29,536			32,720
Gross profit	18,500			22,291
Selling, engineering and administrative expenses	7,463			7,656
Operating income	11,037			14,635
Interest (income) expense, net	(361		)	(331		)
Foreign currency transaction (gain) loss, net	(140		)	(226		)
Miscellaneous (income) expense, net	(1,005		)	191
Income before income taxes	12,543			15,001
Income tax provision	4,133			5,124
Net income	$	8,410		$	9,877
Basic net income per common share	$	0.32		$	0.37
Weighted average basic shares outstanding	26,695			26,455
Diluted net income per common share	$	0.32		$	0.37
Weighted average diluted shares outstanding	26,695			26,455
Dividends declared per share	$	0.090		$	1.090

The accompanying Notes to the Consolidated, Unaudited 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)



	Nine months ended
	September 26, 2015			September 27, 2014
	(unaudited)			(unaudited)
Net sales	$	156,438		$	172,870
Cost of sales	95,140			100,756
Gross profit	61,298			72,114
Selling, engineering and administrative expenses	22,077			22,375
Operating income	39,221			49,739
Interest (income) expense, net	(1,021		)	(926		)
Foreign currency transaction (gain) loss, net	(839		)	(256		)
Miscellaneous (income) expense, net	(793		)	548
Income before income taxes	41,874			50,373
Income tax provision	13,839			16,924
Net income	$	28,035		$	33,449
Basic net income per common share	$	1.05		$	1.27
Weighted average basic shares outstanding	26,662			26,425
Diluted net income per common share	$	1.05		$	1.27
Weighted average diluted shares outstanding	26,662			26,425
Dividends declared per share	$	0.360		$	1.360

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

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Sun Hydraulics Corporation

Consolidated Statements of Comprehensive Income (Loss) (unaudited)

(in thousands)



	Three months ended						Nine months ended
	September 26, 2015			September 27, 2014			September 26, 2015			September 27, 2014
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net income	$	8,410		$	9,877		$	28,035		$	33,449
Other comprehensive income (loss)
Foreign currency translation adjustments	(2,007		)	(5,158		)	(4,366		)	(2,490		)
Unrealized gain (loss) on available-for-sale securities	(521		)	(383		)	(669		)	(188		)
Total other comprehensive income (loss)	(2,528		)	(5,541		)	(5,035		)	(2,678		)
Comprehensive income	$	5,882		$	4,336		$	23,000		$	30,771

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

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Sun Hydraulics Corporation

Consolidated Statement of Changes in Shareholders’ Equity (unaudited)

(in thousands)



	Preferred shares	Preferred stock		Common shares		Common stock		Capital in excess of par value		Retained earnings			Accumulated other comprehensive income			Total
Balance, December 27, 2014	—	$	—	26,573		$	27	$	73,499	$	128,818		$	(4,085	)	$	198,259
Shares Issued, Restricted Stock				(6	)											—
Shares issued, other comp				18												—
Shares issued, ESPP				23				772								772
Shares issued, shared distribution				94				3,535								3,535
Stock-based compensation								2,974								2,974
Dividends declared										(9,607		)				(9,607		)
Net income										28,035						28,035
Other comprehensive income (loss)													(5,035		)	(5,035		)
Balance, September 26, 2015	—	$	—	26,702		$	27	$	80,780	$	147,246		$	(9,120	)	$	218,933

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

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Sun Hydraulics Corporation

Consolidated Statements of Cash Flows

(in thousands)



	Nine months ended
	September 26, 2015			September 27, 2014
	(unaudited)			(unaudited)
Cash flows from operating activities:
Net income	$	28,035		$	33,449
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	7,054			6,428
(Gain)Loss on disposal of assets	(1,086		)	155
Provision for deferred income taxes	100			53
Allowance for doubtful accounts	(14		)	29
Stock-based compensation expense	2,975			2,744
(Increase) decrease in, net of assets acquired:
Accounts receivable	641			(2,850		)
Inventories	2,341			204
Income taxes receivable	—			954
Other current assets	(48		)	(1,185		)
Other assets	435			146
Increase (decrease) in, net of liabilities assumed:
Accounts payable	156			1,289
Accrued expenses and other liabilities	914			2,949
Income taxes payable	(443		)	2,329
Other noncurrent liabilities	(20		)	3
Net cash provided by operating activities	41,040			46,697
Cash flows from investing activities:
Investment in licensed technology	(1,425		)	—
Capital expenditures	(4,697		)	(6,953		)
Proceeds from dispositions of equipment	1,645			6
Purchases of short-term investments	(20,666		)	(42,788		)
Proceeds from sale of short-term investments	17,459			25,396
Net cash used in investing activities	(7,684		)	(24,339		)
Cash flows from financing activities:
Proceeds from stock issued	772			623
Dividends to shareholders	(9,596		)	(9,509		)
Change in restricted cash	21			(3		)
Net cash used in financing activities	(8,803		)	(8,889		)
Effect of exchange rate changes on cash and cash equivalents	(4,781		)	(2,286		)
Net increase (decrease) in cash and cash equivalents	19,772			11,183
Cash and cash equivalents, beginning of period	56,843			54,912
Cash and cash equivalents, end of period	$	76,615		$	66,095
Supplemental disclosure of cash flow information:
Cash paid:
Income taxes	$	14,575		$	13,818
Supplemental disclosure of noncash transactions:
Common stock issued for shared distribution through accrued expenses and other liabilities	$	3,535		$	3,226

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

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SUN HYDRAULICS CORPORATION

NOTES TO THE CONSOLIDATED, UNAUDITED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

1. BASIS OF PRESENTATION AND SUMMARY OF BUSINESS

Sun Hydraulics Corporation, and its wholly-owned subsidiaries, 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, South Korea, France, China, and India. Sun Hydraulics Corporation (“Sun Hydraulics”), with its main offices located in Sarasota, Florida, designs, manufactures, and sells its products primarily through distributors. 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 Incheon, South Korea, operates a manufacturing and distribution facility. In 2012, Sun Korea acquired Seungwon Solutions Corporation (“Seungwon”), also located in Incheon, South Korea, a component supplier to Sun Korea and third parties. Sun Hydraulics (France) (“Sun France”), a liaison office located in Bordeaux, France, is used to service the French market. Sun Hydraulics established Sun Hydraulics China Co. Ltd., a representative office in Shanghai in January 2011, to develop new business opportunities in the Chinese market. Sun Hydraulics (India), a liaison office in Bangalore, India, is used to develop new business opportunities in the Indian market. In 2011, Sun Hydraulics purchased the outstanding shares of High Country Tek, Inc. (“HCT”) it did not already own. HCT, now a wholly-owned subsidiary of Sun Hydraulics, is located in Nevada City, California, and designs and manufactures ruggedized electronic/hydraulic control solutions for mobile equipment markets. In 2013, Sun Hydraulics purchased the remaining 60% of WhiteOak Inc., which was merged into HCT. WhiteOak, designs and produces complementary electronic control products.

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 accounting principles generally accepted in the United States of America 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 27, 2014, filed by Sun Hydraulics Corporation (together with its subsidiaries, the “Company”) with the Securities and Exchange Commission on February 24, 2015. In Management’s opinion, all adjustments necessary for a fair presentation of the Company’s financial statements are reflected in the interim periods presented. Operating results for the nine month period ended September 26, 2015, are not necessarily indicative of the results that may be expected for the period ending January 2, 2016.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Earnings per share

The following table represents the computation of basic and diluted earnings per common share (in thousands, except per share data):



	Three Months Ended				Nine Months Ended
	September 26, 2015		September 27, 2014		September 26, 2015		September 27, 2014
Net income	$	8,410	$	9,877	$	28,035	$	33,449
Weighted average basic shares outstanding	26,695		26,455		26,662		26,425
Basic net income per common share	$	0.32	$	0.37	$	1.05	$	1.27
Effect of dilutive stock options	—		—		—		—
Weighted average diluted shares outstanding	26,695		26,455		26,662		26,425
Diluted net income per common share	$	0.32	$	0.37	$	1.05	$	1.27

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3. STOCK-BASED COMPENSATION

The Company’s 2006 Stock Option Plan (“2006 Plan”) provides for the grant of incentive stock options and nonqualified stock options for the purchase of up to an aggregate of 1,125,000 shares of the Company’s common stock by officers, employees and directors of the Company. Under the terms of the plan, incentive stock options may be granted to employees at an exercise price per share of not less than the fair value per common share on the date of the grant (not less than 110% of the fair value in the case of holders of more than 10% of the Company’s voting stock). Nonqualified stock options may be granted at the discretion of the Company’s Board of Directors. The maximum term of an option may not exceed 10 years, and options become exercisable at such times and in such installments as determined by the Board of Directors. No awards have been granted under the 2006 Plan.

The Company’s 2011 Equity Incentive Plan (“2011 Plan”) provides for the grant of up to an aggregate of 1,000,000 shares of restricted stock, restricted share units, stock appreciation rights, dividend or dividend equivalent rights, stock awards and other awards valued in whole or in part by reference to or otherwise based on the Company’s common stock, to officers, employees and directors of the Company. The 2011 Plan was approved by the Company’s shareholders at the 2012 Annual Meeting. At September 26, 2015, 633,962 shares remained available to be issued through the 2011 Plan. Compensation cost is measured at the date of the grant and is recognized in earnings over the period in which the shares vest. Restricted stock expense for the nine months ended September 26, 2015 and September 27, 2014, totaled $2,159 and $2,021, respectively.

The following table summarizes restricted stock activity from December 27, 2014, through September 26, 2015:



	Number of shares		Weighted average grant-date fair value
Nonvested balance at December 27, 2014	191		34.81
Granted	—		—
Vested	—		—
Forfeitures	(6	)	—
Nonvested balance at September 26, 2015	185		—

The Company had $3,141 of total unrecognized compensation cost related to restricted stock awards granted under the 2011 Plan as of September 26, 2015. That cost is expected to be recognized over a weighted average period of 1.04 years.

The Company maintains an Employee Stock Purchase Plan (“ESPP”), in which most employees are eligible to participate. Employees in the United States who choose to participate are granted an opportunity to purchase common stock at 85 percent of market value on the first or last day of the quarterly purchase period, whichever is lower. Employees in the United Kingdom, under a separate plan, are granted an opportunity to purchase common stock at market value, on the first or last day of the quarterly purchase period, whichever is lower, with the Company issuing one additional free share of common stock for each six shares purchased by the employee under the ESPP. The ESPP authorizes the issuance, and the purchase by employees, of up to 1,096,875 shares of common stock through payroll deductions. No U.S. employee is allowed to buy more than $25 of common stock in any year, based on the market value of the common stock at the beginning of the purchase period, and no U.K. employee is allowed to buy more than the lesser of £1.5 or 10% of his or her annual salary in any year. Employees purchased 23,607 shares at a weighted average price of $32.71, and 18,373 shares at a weighted average price of $33.92, under the ESPP during the nine months ended September 26, 2015 and September 27, 2014, respectively. The Company recognized $159 and $138 of compensation expense during the nine months ended September 26, 2015 and September 27, 2014, respectively. At September 26, 2015, 629,786 shares remained available to be issued through the ESPP and the U.K. plan.

In March 2012, the Board of Directors adopted the Sun Hydraulics Corporation 2012 Nonemployee Director Fees Plan (the “2012 Directors Plan”), which was approved by the shareholders of the Company at its 2012 annual meeting. Under the 2012 Directors Plan as initially adopted, as compensation for attendance at each Board meeting and each meeting of each committee of the Board on which he or she serves when the committee meeting is not held within one day of a meeting of the Board, each Nonemployee Director was paid 500 shares of Common Stock. The Chairman’s fee was twice that of a regular director, and the fee for the chairs of each Board Committee was 125% that of a regular director. In February 2015, the Board adopted amendments to the 2012 Directors Plan which revised the compensation for Nonemployee Directors. Each Nonemployee Director now receives an annual retainer of 2,000 shares of Common Stock. The Chairman’s retainer is twice that of a regular director, and the retainer for the chairs of each Board Committee is 150% that of a regular director. In addition, each Nonemployee Director receives 250 shares of Common Stock for attendance at each Board meeting and each meeting of each

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committee of the Board on which he or she serves when the committee meeting is not held within one day of a meeting of the Board. In June 2015, the Company's shareholders approved the amendments to the 2012 Directors Plan.

The Board has the authority to change from time to time, in any manner it deems desirable or appropriate, the share compensation to be awarded to all or any one or more Nonemployee Directors, provided that, with limited exceptions, such changes are subject to prior shareholder approval. The aggregate number of shares which may be issued during any single calendar year is limited to 35,000 shares. The 2012 Directors Plan authorizes the issuance of up to 270,000 shares of common stock. At September 26, 2015, 205,249 shares remained available for issuance under the 2012 Directors Plan. Directors were granted 17,500 and 13,000 shares for the nine months ended September 26, 2015 and September 27, 2014, respectively. The Company recognized director stock compensation expense of $617 and $514 for the nine months ended September 26, 2015 and September 27, 2014, respectively.

4. RESTRICTED CASH

On September 26, 2015, the Company had restricted cash of $298. A restricted cash reserve for customs and excise taxes in the U.K. operation was $46 at September 26, 2015. The restricted amount was calculated as an estimate of two months of customs and excise taxes for items coming into the Company’s U.K. operations and is held with Lloyds TSB in the U.K. Restricted cash of $252 at September 26, 2015, represents the holdback of the purchase price associated with the acquisition of Seungwon on October 18, 2012.

5. INVENTORIES



	September 26, 2015			December 27, 2014
Raw materials	$	5,168		$	6,329
Work in process	3,700			3,979
Finished goods	3,926			4,433
Provision for slow moving inventory	(1,037		)	(643		)
Total	$	11,757		$	14,098

6. GOODWILL AND INTANGIBLE ASSETS

A summary of changes in goodwill at September 26, 2015 is as follows:



Balance, December 27, 2014	$	5,141
Acquisitions	—
Currency translation	(207		)
Balance, September 26, 2015	$	4,934

Valuation models reflecting the expected future cash flow projections are used to value reporting units. A valuation of the reporting unit at December 27, 2014 indicated that there was no impairment of the carrying value of the goodwill at Sun Korea. A valuation of the reporting unit at September 26, 2015 indicated that there was no impairment of the carrying value of the goodwill at HCT.

In 2014, the Company entered into a licensing agreement with Sturman Industries, Inc., recognizing intangible assets of $1,075 in 2014 and $1,425 in the nine months ending September 26, 2015. The agreement is for licensed technology to be used with the Company's electrically actuated hydraulic cartridge valves. Royalties will be paid from the date of the first commercial sale and continue for fifteen years thereafter, or until the last related licensed patent expires, whichever is the later date. The Company recognized $2,658 and $746 in identifiable intangible assets as a result of the acquisitions of HCT and WhiteOak, respectively. Intangible assets are held in other assets on the balance sheet. At September 26, 2015 and December 27, 2014, intangible assets consisted of the following:

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	September 26, 2015							December 27, 2014
	Gross carrying amount		Accumulated amortization			Net carrying amount		Gross carrying amount		Accumulated amortization			Net carrying amount
Definite-lived intangibles:
Trade Name	$	774	$	(321	)	$	453	$	774	$	(264	)	$	510
Non-compete agreement	11		(11		)	—		11		(10		)	1
Technology	935		(282		)	653		868		(216		)	652
Customer relationships	1,751		(340		)	1,411		1,751		(272		)	1,479
Licensing agreement	2,500		(95		)	2,405		1,075		(11		)	1,064
	$	5,971	$	(1,049	)	$	4,922	$	4,479	$	(773	)	$	3,706

Total estimated amortization expense for the years 2016 through 2020 is presented below. The remaining amortization for 2015 is approximately $113.



Year:
2016	473
2017	473
2018	473
2019	473
2020	473
Total	$	2,365

Intangible assets are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use over their expected useful lives and eventual disposition may be less than their net carrying value. No such events or circumstances occurred during the nine months ended September 26, 2015.

7. LONG-TERM DEBT

Effective August 1, 2011, the Company entered into a credit and security agreement in the U.S. with Fifth Third Bank (the “Bank”). The agreement initially provided for three separate credit facilities totaling $50,000. As noted below, at September 26, 2015, two of the original facilities remained available.

Facility A is a $15,000 unsecured revolving line of credit and requires monthly payments of interest. Facility A has a floating interest rate of 1.45% over the 30-day LIBOR Rate (as defined).

Facility B is an accordion feature to increase the revolving line of credit to a $35,000 secured revolving line of credit. Facility B will be secured by the Company’s U.S. assets, including its manufacturing facilities, and requires monthly payments of interest. Facility B will bear interest at the 30-day LIBOR Rate or the Bank’s Base Rate (as defined), at the Company’s discretion, plus a margin based on the Borrower’s Funded Debt to EBITDA Leverage Ratio (as defined). The LIBOR Margin ranges from 1.45% to 2.25% and the Bank’s Base Rate ranges from (0.25)% to 0.00%.

Facility C is a $15,000 construction and term loan. The Company did not activate Facility C for the construction of its new Sarasota factory and access to this facility has expired.

Facility A or Facility B (if activated) is payable in full on August 1, 2016. Maturity may be accelerated by the Bank upon an Event of Default (as defined). Prepayment may be made without penalty or premium at any time upon the required notice to the Bank.

Facility A is subject to debt covenants (capitalized terms are defined therein) including: 1) Minimum Tangible Net Worth of not less than $92,000, increased annually by 50% of Net Income, and 2) Minimum EBITDA of not less than $5,000; and requires the Company to maintain its primary domestic deposit accounts with the bank. At September 26, 2015, the Company was in compliance with all debt covenants related to Facility A as follows:

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Covenant	Required Ratio/Amount	Actual Ratio/Amount
Minimum Tangible Net Worth	$184,435	$	209,077
Minimum EBITDA	Not less than $5 million	$	64,109

If Facility B is activated, covenant 2 above will automatically terminate and two additional covenants will be required: 1) Funded Debt to EBITDA ratio equal to or less than 3.0:1.0, and 2) EBIT to Interest Expense ratio of not less than 2.5:1.0. As of September 26, 2015, the Company had not activated Facility B.

The Company did not have any amounts drawn on Facilities A, B, or C for the periods ended September 26, 2015, and September 27, 2014.

8. INCOME TAXES

At September 26, 2015, the Company had an unrecognized tax benefit of $2,051 including accrued interest. If recognized, the unrecognized tax benefit would have a favorable effect on the effective tax rate in future periods. The Company recognizes interest and penalties related to income tax matters in income tax expense. Interest accrued as of September 26, 2015, is not considered material to the Company’s consolidated financial statements.

The Company files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The Company is no longer subject to income tax examinations by tax authorities for years prior to 2005 for the majority of tax jurisdictions.

The Company’s federal returns are currently under examination by the Internal Revenue Service (IRS) in the United States for the periods 2005 through 2012. To date, there have not been any significant proposed adjustments that have not been accounted for in the Company’s consolidated financial statements.

Audit outcomes and the timing of audit settlements are subject to significant uncertainty. It is reasonably possible that within the next twelve months the Company will resolve some or all of the matters presently under consideration for 2005 through 2012 with the IRS and that there could be significant increases or decreases to unrecognized tax benefits.

9. SEGMENT REPORTING

The individual subsidiaries comprising the Company operate predominantly in a single industry as manufacturers and distributors of hydraulic components. Given the similar nature of products offered for sale, the type of customers, the methods of distribution and how the Company is managed, the Company determined that it has only one operating and reporting segment for both internal and external reporting purposes.

Geographic Region Information:

Net sales are measured based on the geographic destination of sales. Total and long-lived assets are shown based on the physical location of the assets. Long-lived assets primarily include net property, plant and equipment:



	Three Months Ended September 26, 2015		Three Months Ended September 27, 2014		Nine months ended September 26, 2015		Nine months ended September 27, 2014
Net sales
Americas	$	23,678	$	27,399	$	75,507	$	83,242
Europe/Africa/ME	15,578		17,016		48,493		53,937
Asia/Pacific	8,780		10,596		32,438		35,691
Total	$	48,036	$	55,011	$	156,438	$	172,870

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	September 26, 2015		December 27, 2014
Total assets
Americas	$	164,144	$	145,816
Europe/Africa/ME	59,906		59,439
Asia/Pacific	16,163		17,509
Total	$	240,213	$	222,764
Long-lived assets
Americas	$	73,590	$	73,315
Europe/Africa/ME	8,361		9,233
Asia/Pacific	3,657		4,669
Total	$	85,608	$	87,217

10. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company applies fair value accounting guidelines for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Under these guidelines, fair value is defined as the price that would be received for the sale of an asset or paid to transfer a liability (i.e. an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

Level 3 - Unobservable inputs that are supported by little, infrequent, or no market activity and reflect the Company’s own assumptions about inputs used in pricing the asset or liability.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Company’s valuation techniques used to measure the fair value of marketable equity securities, mutual funds, and phantom stock units were derived from quoted prices in active markets for identical assets or liabilities. The valuation techniques used to measure the fair value of all other financial instruments were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data.

The Company’s short-term investments have been classified and accounted for as available-for-sale. Management determines the appropriate classification of its investments at the time of purchase and reevaluates the designation at each balance sheet date. The Company may or may not hold securities with stated maturities greater than 12 months until maturity. As management views these securities as available to support current operations, the Company classifies securities with maturities beyond 12 months as current assets under the caption short-term investments in the accompanying Consolidated Balance Sheets. These investments are carried at fair value, with the unrealized gains and losses reported as a component of shareholder’s equity. Realized gains and losses on sales of investments are generally determined using the specific identification method, and are included in miscellaneous (income) expense in the Consolidated Statements of Operations.

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The following tables provide information regarding the Company’s assets and liabilities measured at fair value on a recurring basis at September 26, 2015 and December 27, 2014.



	September 26, 2015
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value
Assets
Level 1:
Equity securities	$	1,598	$	14	$	(267	)	$	1,345
Mutual funds	3,011		—		(496		)	2,515
Subtotal	$	4,609	$	14	$	(763	)	$	3,860
Level 2:
Corporate fixed income	$	36,477	$	5	$	(1,565	)	$	34,917
Municipal bonds	3,329		1		(111		)	3,219
Certificates of deposit and time deposits	3,041		—		—			3,041
Asset backed securities	565		—		(6		)	559
Subtotal	$	43,412	$	6	$	(1,682	)	$	41,736
Total	$	48,021	$	20	$	(2,445	)	$	45,596
Liabilities
Level 1:
Phantom stock units	$	40	$	—	$	—		$	40
Total	$	40	$	—	$	—		$	40



	December 27, 2014
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value
Assets
Level 1:
Equity securities	$	2,145	$	65	$	(282	)	$	1,928
Mutual funds	3,106		2		(227		)	2,881
Subtotal	$	5,251	$	67	$	(509	)	$	4,809
Level 2:
Corporate fixed income	$	33,740	$	6	$	(868	)	$	32,878
Municipal bonds	2,441		—		(33		)	2,408
Certificates of deposit and time deposits	2,439		—		—			2,439
Asset backed securities	842		—		(23		)	819
Subtotal	$	39,462	$	6	$	(924	)	$	38,544
Total	$	44,713	$	73	$	(1,433	)	$	43,353
Liabilities
Level 1:
Phantom stock units	$	30	$	—	$	—		$	30
Total	$	30	$	—	$	—		$	30

The Company recognized a net realized loss on investments during the nine months ended September 26, 2015 of $241 and a net realized gain of $180 during the nine months ended September 27, 2014. As of September 26, 2015, gross unrealized losses related to individual securities that had been in a continuous loss position for 12 months or longer were not significant. The Company considers these unrealized losses in market value of its investments to be temporary in nature. When evaluating an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s cost basis. There were no other-than-temporary impairments during the nine month period ended September 26, 2015.

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Maturities of investments at September 26, 2015 are as follows:



	Adjusted Cost		Fair Value
Due in less than one year	$	17,742	$	17,589
Due after one year but within five years	17,383		16,781
Due after five years but within ten years	4,673		3,956
Due after ten years	3,614		3,410
Equity securities	1,598		1,345
Mutual Funds	3,011		2,515
Total	$	48,021	$	45,596

The Company reports phantom stock units as a liability. The Company recognized expense relating to this liability of $10 and $26, for the nine month periods ended September 26, 2015 and September 27, 2014, respectively. Phantom stock units vest over a period of three years.

The Company did not have any fair value adjustments for assets and liabilities measured at fair value on a nonrecurring basis during the period ended September 26, 2015.

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11. ACCUMULATED OTHER COMPREHENSIVE INCOME

Changes in Accumulated Other Comprehensive Income by Component

Nine Months Ended September 26, 2015



	Unrealized Gains and Losses on Available-for- Sale Securities			Foreign Currency Items			Total
Balance at December 27, 2014	$	(859	)	$	(3,226	)	$	(4,085	)
Other comprehensive income (loss) before reclassifications	(517		)	(4,366		)	(4,883		)
Amounts reclassified from accumulated other comprehensive income	(152		)	—			(152		)
Net current period other comprehensive income (loss)	(669		)	(4,366		)	(5,035		)
Balance, September 26, 2015	$	(1,528	)	$	(7,592	)	$	(9,120	)

Reclassifications out of Accumulated Other Comprehensive Income

Nine Months Ended September 26, 2015



Details about Accumulated Other Comprehensive Income Components	Nine Months Ended September 26, 2015			Affected Line Item in the Consolidated Statements of Operations
Unrealized gains and losses on available-for-sale securities
Realized gain/(loss) on sale of securities	$	241		Miscellaneous (income) expense, net
	241			Total before tax
	(89		)	Tax benefit
	$	152		Net of tax
Total reclassifications for the period	$	152

12. NEW ACCOUNTING PRONOUNCEMENTS

In July 2015, the FASB issued guidance on Simplifying the Measurement of Inventory. The guidance requires inventory be measured at the lower of cost and net realizable value. Additionally, the guidance defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for reporting periods beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. The guidance should be applied prospectively. The Company does not expect the adoption of this guidance to have a material impact on the Company's consolidated financial statements.

In August 2014, the FASB issued guidance on Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern. The guidance requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued and provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. Certain disclosures will be required if conditions give rise to substantial doubt about an entity’s ability to continue as a going concern. The guidance applies to all entities and is effective for annual and interim reporting periods ending after December 15, 2016, with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact on the Company's consolidated financial statements.

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In May 2014, the FASB issued guidance on Revenue from Contracts with Customers, to clarify the principles used to recognize revenue for all entities. The core principle of the new guidance is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The standard provides a five-step analysis of transactions to determine when and how revenue is recognized. Additionally, the guidance requires disaggregated disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized. The guidance is effective for annual and interim periods beginning after December 15, 2016. The FASB has subsequently delayed this standard by one year. Early adoption is permitted as of the original effective date. The Company is currently evaluating the effects, if any, adoption of this guidance will have on the Company’s consolidated financial statements.

13. COMMITMENTS AND CONTINGENCIES

The Company is not a party to any legal proceedings other than routine litigation incidental to its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the results of operations, financial position or cash flows of the Company.

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

OVERVIEW

Sun 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 through wholly-owned subsidiaries and independent distributors. Sales outside the United States for the year ended December 27, 2014, were approximately 57% of total net sales.

Approximately two-thirds of product sales are used by the mobile market, which is 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. Some examples of the mobile market include equipment used in off-road construction, agriculture, fire and rescue, utilities, oil fields, and mining.

The remaining one-third of sales are used by industrial markets, which are characterized by equipment that is fixed in place, typically in a controlled environment, and which operates at higher pressures and duty cycles. Power units, automation machinery, metal cutting machine tools and plastics machinery are some examples of industrial equipment. The Company sells to both markets with a single product line.

In recent periods, the Company’s products have been used by emerging markets that have characteristics of both the mobile and industrial markets and do not conveniently fit either classification exclusively. These markets include alternative energy equipment including wind, wave and solar equipment, animatronics and staging for theater and cinema. The Company sells to these markets the same products used in its traditional markets.

Management and Operations Philosophy

Since its inception, Sun has operated as an entrepreneurial enterprise, with an emphasis on individual employee empowerment and a disinclination to create bureaucracy, a formal management structure or administrative impediments to innovation, efficiency and customer service. Accordingly, the Company’s organization, management structure, and reporting and decision-making systems are highly unified and unlayered.

In addition to representative and sales offices located throughout the world, Sun has three subsidiaries outside the United States (in the U.K., Germany and Korea) and one U.S. subsidiary. These entity distinctions arose out of historical considerations or as the result of acquisitions. Nevertheless, and increasingly as it has developed into a global enterprise, the Company is operated and managed on a consolidated basis. Much of the Company’s primary financial and operations data is reported from Sun’s various legal entities, which are separate taxpayers and, in many cases, subject to statutory audits in the countries in which they are organized. This information from Sun locations around the world is then compiled and aggregated, with appropriate consolidating entries, on a monthly basis. However, we do not manage or make decisions based on the individual legal entity information. Instead, this is done on the basis of the consolidated information.

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Sun has always employed a leadership model in which all management personnel have line responsibilities and participate across functional lines and in multiple areas, including geographical areas. Through a common vision, shared values and networks of informal, overlapping relationships, the Company has emphasized a unified approach. The CEO oversees the Company with a constant focus on consolidated results.

With oversight from its Board of Directors and an emphasis on transparent communication across the entire Company, Sun’s operating strategy and business is based upon the creation and manufacture of a comprehensive line of functional products which are sold, through distribution and directly, worldwide for use in a host of mobile and industrial applications. This unified focus places a premium on the delivery of Sun products for fluid power solutions anywhere in the world in the most efficient manner, with little regard for traditional geographic or entity differentiation. Instead, Sun’s management looks at where products are sold - the Americas, Europe (which includes the Middle East and Africa), and Asia/Pacific. Decisions as to resource allocation, expansion of facilities and personnel, and capital investment are all made based on information on “sales to” customers, not information about “sales from” Sun subsidiary entities. This reflects the fact that sales are routinely specified, originated or sold beyond and regardless of entity or geographic boundaries. In particular, many of the sales in Europe and Asia come directly from the U.S. and never pass through one of Sun’s subsidiary entities in those regions.

Management’s focus is on overall Company performance and the evaluation of opportunities for additional “sales to” customers. Sun’s CEO truly acts as the chief executive for the entire business; he and the other management leaders oversee operations worldwide, without an intermediate reporting bureaucracy in each location in which Sun has a legal entity. Using “shared offices,” leadership responsibilities are disbursed throughout the Company, with minimal formal reporting relationships and maximum collaboration among employees worldwide. By focusing on total net orders and total net sales, not individual legal entity performance, Sun is able to better serve its customers. This philosophy permeates not only the management approach to decision-making, but also the Company’s compensation system, which is based on company-wide performance, and not individual or entity-level management-by-objective criteria.

Industry conditions

Demand for the Company’s products is dependent on demand for the capital goods into which the products are incorporated. The capital goods industries in general, and the fluid power industry specifically, are subject to economic cycles. According to the National Fluid Power Association (the fluid power industry’s trade association in the United States), the United States index of shipments of hydraulic products increased 6% in 2014 after decreasing 5% in 2013.

The Company’s order trend has historically tracked closely to the United States Purchasing Managers Index (PMI). When PMI is over 50, it indicates economic expansion in the manufacturing sector; when it is below 50, it indicates contraction. The index decreased to 50.2 in September 2015 compared to 56.1 in September 2014. The U.S. PMI index registered 50.1 for October 2015, indicating expansion in the manufacturing sector for the 34st consecutive month, albeit, at a slower rate.

Results for the third quarter

(in millions except net income per share)



	September 26, 2015		September 27, 2014		Increase/(Decrease)
Three Months Ended
Net sales	$	48.0	$	55.0	(13	)%
Net income	$	8.4	$	9.9	(15	)%
Net income per share:
Basic	$	0.32	$	0.37	(14	)%
Diluted	$	0.32	$	0.37	(14	)%
Nine Months Ended
Net sales	$	156.4	$	172.9	(10	)%
Net income	$	28.0	$	33.4	(16	)%
Net income per share:
Basic	$	1.05	$	1.27	(17	)%
Diluted	$	1.05	$	1.27	(17	)%

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Third quarter sales were weaker than expected, with demand down in all geographic markets. Depreciation of global currencies relative to the U.S. dollar continued to influence performance. Third quarter sales in the Americas were down 14%. Asian demand decreased by 17%, driven primarily by the weakening of the South Korean economy. European sales were down 8%, with 5% related to currency. As expected, the strong U.S. Dollar continued to negatively impact sales in Q3 by an estimated $1.8M and reduced EPS by $0.07 over last year.

Management believes we are near the bottom of the current economic cycle. Sun’s focus is on investments to drive future growth. Management's efforts are concentrated on:


•	Operational execution - cross training in production areas, evaluating manufacturing processes for additional improvements and consistently seeking out opportunities to further automation efforts. This down cycle affords Sun the opportunity to implement process improvements.

•

Product Development - Sun is renowned for its broad scope of products which offer a variety of solutions to meet today’s most demanding hydraulic challenges. Sun continues to release innovative products, specifically in the electro-hydraulic market. The introduction of the new Digital Logic Valves (DLV) has Sun's customers exploring where they can apply this product to solve problems that go beyond traditional cartridge valve applications.


•	Market Penetration - Sun is growing worldwide marketing resources to reach more customers by adding field application engineers in all regions - the Americas, Europe and Asia.

Management believes market share gains are made in the beginning of the business cycle and to be prepared requires planning and investment at the bottom of the cycle. When the economy does recover, Sun will be positioned to respond to customer demand with the superior product and service performance that has become our hallmark.

Outlook

Fourth quarter 2015 revenues are expected to be approximately $44 million, down 20% from the fourth quarter of 2014. Earnings per share are estimated to be $0.17 to $0.19 compared to $0.39 in the same period a year ago. This is a result of decreased demand, absorption of fixed costs and currency effects. Currency is responsible for $1.7M of the decline in revenues and approximately $0.06 of the decline in earnings per share in the Q4 estimates. While today's softened demand is expected to continue into 2016, management foresees business conditions strengthening during the year.

COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 26, 2015 AND SEPTEMBER 27, 2014

Net Sales

Net sales were $48.0 million, a decrease of $7.0 million, or 12.7%, compared to $55.0 million in the third quarter of 2014. The decrease in net sales was driven by weaker demand in all markets. A price increase, effective December 1, 2014, contributed approximately 2.7%, or $1.3 million to sales. Changes in exchange rates had a negative impact on sales of approximately $1.8 million. New product sales (defined as products introduced within the last five years) continue to make up 10 - 12% of total sales.

Asia/Pacific sales decreased 17.1% or $1.8 million, to $8.8 million in the third quarter of 2015, primarily related to decreased demand from Korea. Exchange rates had a $0.4 million negative impact on Asia/Pacific sales in the third quarter of 2015. EAME sales decreased 8.5% or $1.4 million, to $15.6 million in the third quarter of 2015, primarily related to decreased demand in Germany, and the United Kingdom. Exchange rates had a negative impact on sales to EAME of approximately $1.4 million in the third quarter of 2015. Sales to the Americas decreased 13.6% or $3.7 million, to $23.7 million in the third quarter of 2015, primarily related to decreased demand in the U.S.

Gross Profit

Gross profit decreased $3.8 million or 17.0%, to $18.5 million in the third quarter of 2015, compared to $22.3 million in the third quarter of last year. Gross profit as a percentage of net sales decreased to 38.5% in the third quarter of 2015, compared to 40.5% in the third quarter of last year. Lower sales volume reduced gross profit by approximately $3.4 million.The remainder of the decrease resulted from higher costs as a percent of sales including, material costs of $0.5 million, labor costs of $0.3, and overhead costs of $1.0 million. These increases were partially offset by pricing.

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Selling, Engineering and Administrative Expenses

Selling, engineering and administrative expenses decreased $0.2 million or 2.5%, to $7.5 million in the third quarter of 2015, compared to $7.7 million in the third quarter of last year.

Operating Income

Operating income decreased $3.6 million or 24.6%, to $11.0 million in the third quarter of 2015, compared to $14.6 million in the third quarter last year, with operating margins of 23.0% and 26.6% for the third quarters of 2015 and 2014, respectively.

The Company derives its operating income based on the consolidated results of its legal entities. The Company has made the decision to consolidate engineering and manufacturing for the most part in the U.S. The Company’s foreign subsidiaries primarily act as part of our sales and distribution channel. This structure results in different operating margins among the legal entities due to the mix of products, channels to market, and industries present in different geographic regions.

Products manufactured in the U.S. are sold worldwide. Pricing, operations and cost structure are the primary reasons that operating income in the U.S. is higher than foreign subsidiary operating income, which we expect will continue. Our German and U.K. entities act as value add distributors. These entities sell to both end use customers in their respective regions, as well as to third party distributors in certain parts of Europe. U.K. margins have historically been lower than in Germany. This is due to the fact that, in the U.K., we manufacture iron manifolds for the European market. This results in higher overhead costs primarily related to machinery and equipment, and the employment of nearly twice as many people as in Germany. Margins are lowest in our Korean entity. Korea, more than any other subsidiary, sells direct to large OEM customers where pricing pressure is most pronounced.

The U.S. legal entity contributed $12.1 million to our consolidated operating income in the third quarter 2015, compared to $11.6 million in the third quarter of 2014, a increase of $0.5 million. The increase is primarily related to volume and pricing. The U.S. legal entity ships products directly to customers around the world. Third party export sales from the U.S. were $13.5 million in the third quarter of 2015 compared to $13.8 million in the third quarter of 2014. As demand strengthens internationally, the U.S. legal entity will benefit from these direct export sales.

Our Korean subsidiary experienced an operating loss of $0.7 million in the third quarter of 2015 compared to operating income of $0.3 million in the third quarter of 2014, a decrease of $1.0 million.

Our German subsidiary experienced an operating loss of $0.9 million in the third quarter of 2015 compared to operating income of $1.8 million during the third quarter of 2014, a decrease of $2.7 million.

Our U.K. subsidiary contributed $0.6 million to our consolidated operating income in the third quarter of 2015 compared to $0.9 million in the third quarter of 2014.

Interest Income, Net

Net interest income was $0.4 million for the quarter ended September 26, 2015 and $0.3 million for the quarter ended September 27, 2014. The Company currently has no outstanding debt. Total average cash and investments for the quarter ended September 26, 2015, was $119.1 million compared to $116.3 million for the quarter ended September 27, 2014.

Miscellaneous (Income) Expense, Net

Net miscellaneous income was $1.0 million for the quarter ended September 26, 2015, compared to net miscellaneous expense of $0.2 million for the quarter ended September 27, 2014. The increase in miscellaneous income is related to the gain on disposal of the building at our Korean operation.

Income Taxes

The provision for income taxes for the quarter ended September 26, 2015, was 33.0% of pretax income compared to 34.2% for the quarter ended September 27, 2014. This effective rate relates to the relative levels of income and different tax rates in effect among the countries in which the Company sells its products.

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COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 26, 2015 AND SEPTEMBER 27, 2014

Net Sales

Net sales were $156.4 million, a decrease of $16.4 million, or 9.5% compared to $172.9 million in 2014. The decrease in net sales was driven by weaker demand in our European and Asian end markets, which primarily include capital goods equipment. A price increase, effective December 1, 2014, contributed approximately 2.6%, or $4.0 million to sales. Changes in exchange rates had a negative impact on sales of approximately $5.5 million. New product sales (defined as products introduced within the last five years) continue to make up 10 - 12% of total sales.

Asia/Pacific sales decreased 9.1% or $3.3 million, to $32.4 million in 2015, primarily related to decreased demand from Korea. Exchange rates had a $1.0 million negative impact on Asia/Pacific sales in 2015. EAME sales decreased 10.1% or $5.4 million, to $48.5 million in 2015, primarily related to decreased demand in Germany, and the United Kingdom. Exchange rates had a negative impact on sales to EAME of approximately $4.5 million in 2015. Sales to the Americas decreased 9.3% or $7.7 million, to $75.5 million in 2015, driven by decreased demand in the U.S.

Gross Profit

Gross profit decreased $10.8 million or 15.0%, to $61.3 million in 2015, compared to $72.1 million in 2014. Gross profit as a percentage of net sales decreased to 39.2% in 2015, compared to 41.7% last year. Lower sales volume reduced gross profit by approximately $8.5 million.The remainder of the decrease resulted from higher costs as a percent of sales including, material costs of $2.2 million, labor costs of $1.2, and overhead costs of $2.8 million. These increases were partially offset by pricing.

Selling, Engineering and Administrative Expenses

Selling, engineering and administrative expenses decreased 0.1%, or $0.3 million, to $22.1 million in 2015, compared to $22.4 million last year.

Operating Income

Operating income decreased $10.5 million or 21.1%, to $39.2 million in 2015, compared to $49.7 million last year, with operating margins of 25.1% and 28.8% for 2015 and 2014, respectively.

Products manufactured in the U.S. are sold worldwide. Pricing, operations and cost structure are the primary reasons that operating income in the U.S. is higher than foreign subsidiary operating income, which we expect will continue. Our German and U.K. entities act as value add distributors. These entities sell to both end use customers in their respective regions, as well as to third party distributors in certain parts of Europe. U.K. margins have historically been lower in Germany. This is due to the fact that, in the U.K., we manufacture iron manifolds for the European market. This results in higher overhead costs primarily related to machinery and equipment, and the employment of nearly twice as many people as in Germany. Margins are lowest in our Korean entity. Korea, more than any other subsidiary, sells direct to large OEM customers where pricing pressure is most pronounced.

The U.S. legal entity contributed $36.6 million to our consolidated operating income in 2015, compared to $39.6 million in 2014, a decrease of $3.0 million. The decrease is primarily related to volume. The U.S. legal entity ships products directly to customers around the world. Third party export sales from the U.S. were $44.7 million in 2015 compared to $45.2 million in 2014. As demand strengthens internationally, the U.S. legal entity will benefit from these direct export sales.

Our Korean subsidiary experienced an operating loss of $0.6 million in 2015 compared to operating income of $1.4 million in 2014.

Our German subsidiary contributed $1.2 million to our consolidated operating income in 2015 compared to $5.6 million during 2014, a decrease of $4.4 million.

Our U.K. subsidiary contributed $2.1 million to our consolidated operating income in 2015 compared to $3.1 million 2014.

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Interest Income, Net

Net interest income was $1.0 million in 2015, compared to $0.9 million in 2014. The Company currently has no outstanding debt. Total average cash and investments for the nine months ended September 26, 2015, was $111.5 million compared to $107.8 million for the nine months ended September 27, 2014.

Miscellaneous (Income) Expense, Net

Net miscellaneous income was $0.8 million in 2015, compared to net miscellaneous expense of $0.5 million in 2014. The increase in miscellaneous income is related to the gain on disposal of the building at our Korean operation.

Income Taxes

The provision for income taxes for the nine months ended September 26, 2015, was 33.0% of pretax income compared to 33.6% in 2014. This effective rate relates to the relative levels of income and different tax rates in effect among the countries in which the Company sells its products.

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 from time to time 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 nine months ended September 26, 2015, was $41.0 million, a decrease of $5.7 million, compared to $46.7 million for the nine months ended September 27, 2014. Net income was down approximately $5.4 million from the prior period. Changes in working capital related to decreases in accounts receivable of $0.6 million during 2015, compared to increases of $2.9 million during 2014. Decreases in inventory were $2.3 million during 2015, compared to a decrease of $ 0.2 million during 2014. These changes are the result of decreased days sales outstanding and improved inventory turns. Increases in accounts payable and accruals were $1.1 million during 2015, compared to $4.2 million during 2014. Cash on hand increased $19.8 million from $56.8 million at the end of 2014 to $76.6 million at September 26, 2015. Days sales outstanding (DSO) were 32 at September 26, 2015, and 33 at September 27, 2014. Inventory turns were 10.0 as of September 26, 2015, and 9.6 as of September 27, 2014.

Capital expenditures were $4.7 million for the nine months ended September 26, 2015, primarily made up of purchases of machinery and equipment. Capital expenditures for 2015 are estimated to be $7.0 million, primarily related to purchases of machinery and equipment.

The Company declared a quarterly cash dividend of $0.09 per share payable on October 15, 2015, to shareholders of record as of September 30, 2015. The declaration and payment of future dividends is subject to the sole discretion of the Board of Directors, and any determination as to the payment of future dividends will depend upon the Company’s profitability, financial condition, capital needs, future prospects and other factors deemed pertinent by the Board of Directors.

The Company believes that cash generated from operations and its borrowing availability under its revolving line of credit will be sufficient to satisfy the Company’s operating expenses and capital expenditures for the foreseeable future. In the event that economic conditions were to severely worsen for a protracted period of time, the Company would have several options available to ensure liquidity in addition to increased borrowing. Capital expenditures could be postponed since they primarily pertain to long-term improvements in operations. Additional operating expense reductions also could be made. Finally, the dividend to shareholders could be reduced or suspended.

Off Balance Sheet Arrangements

The Company does not engage in any off balance sheet financing arrangements. In particular, the Company does not have any material interest in variable interest entities, which include special purpose entities and structured finance entities.

Seasonality

The Company generally has experienced increased sales during the second quarter of the year, largely as a result of the order patterns of our customers. The Company’s second quarter net sales, income from operations and net income historically are the highest of any quarter during the year. However, due to the current economic conditions, this pattern did not continue in 2015.

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Inflation

The impact of inflation on the Company’s operating results has been moderate in recent years, reflecting generally lower rates of inflation in the economy. While inflation has not had, and the Company does not expect that it will have, a material impact upon operating results, there is no assurance that the Company’s business will not be affected by inflation in the future.

Critical Accounting Policies and Estimates

The Company currently applies judgment and estimates which may have a material effect on the eventual outcome of assets, liabilities, revenues and expenses for impairment of long-lived assets, inventory, goodwill, accruals, and income taxes. The Company’s critical accounting policies and estimates are included in its Annual Report on Form 10-K for the year ended December 27, 2014, and did not change during the first nine months of 2015.

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 costs, 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 Item 1. “Business,” and Item 1A. “Risk Factors” in the Company’s Form 10-K for the year ended December 27, 2014, and “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” in this Form 10-Q for the quarter ended September 26, 2015. 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.

Item 3. 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. The Company’s interest rate on its debt financing remains variable based upon the Company’s leverage ratio. The Company had no variable-rate debt outstanding at September 26, 2015. Therefore, a 1% change in interest rates up or down would not have a material effect on the Company’s income statement on an annual basis.

The Company’s exposure to foreign currency exchange fluctuations relates primarily to the direct investment in its facilities in the United Kingdom, Germany and Korea. The Company does not use financial instruments to hedge foreign currency exchange rate changes.

Item 4. CONTROLS AND PROCEDURES

As of September 26, 2015, the Company’s management, under the direction of its Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(f). Our disclosure controls and procedures are designed to

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provide reasonable assurance that the information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of September 26, 2015, in timely alerting them to material information required to be included in the Company’s periodic SEC filings.

There were no changes in the Company’s internal controls over financial reporting during the period ended September 26, 2015, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

For information regarding risk factors, please refer to Part I, Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 27, 2014.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Below is a summary of stock repurchases for the three months ended September 26, 2015.



Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs

June 29 through July 25	—
July 26 through August 22	—
August 23 through September 26	225	$	30.34



(1)	In connection with an award of 750 shares to one of the Company's directors as Board fees under the 2012 Nonemployee Director Fees Plan, the Company withheld 225 shares to satisfy federal tax withholding obligations on the award.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information.

None.

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Item 6.	Exhibits.

Exhibits:



Exhibit Number		Exhibit Description

31.1		CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		CEO Certification pursuant to 18 U.S.C. § 1350.

32.2		CFO Certification pursuant to 18 U.S.C. § 1350.

101.INS		XBRL Instance Document

101.SCH		XBRL Schema Document

101.CAL		XBRL Calculation Linkbase Document

101.DEF		XBRL Definition Linkbase Document

101.LAB		XBRL Label Linkbase Document

101.PRE		XBRL Presentation Linkbase Document

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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 November 3, 2015.




SUN HYDRAULICS CORPORATION

By:		/s/ Tricia L. Fulton
		Tricia L. Fulton
		Chief Financial Officer (Principal Financial and Accounting Officer)