HLIO 10-Q Quarterly Report June 27, 2015 | Alphaminr
HELIOS TECHNOLOGIES, INC.
ALPHAMINR

HLIO 10-Q Quarter ended June 27, 2015

Balance Sheet
Cash Flow
Income Statement
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10-Q 1 snhy-2015627x10q.htm 10-Q SNHY-2015.6.27-10Q
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 June 27, 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):
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller Reporting Company
o
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 26,694,921 shares of common stock, par value $.001, outstanding as of July 24, 2015.

1

Sun Hydraulics Corporation
INDEX
For the quarter ended June 27, 2015
Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

2

PART I: FINANCIAL INFORMATION
Item  1.
Sun Hydraulics Corporation
Consolidated Balance Sheets
(in thousands, except share data)
June 27, 2015
December 27, 2014
(unaudited)
Assets
Current assets:
Cash and cash equivalents
$
71,667

$
56,843

Restricted cash
316

319

Accounts receivable, net of allowance for doubtful accounts of $143 and $172
19,522

17,501

Inventories
12,430

14,098

Deferred income taxes
464

467

Short-term investments
43,749

43,353

Other current assets
3,003

2,966

Total current assets
151,151

135,547

Property, plant and equipment, net
76,478

77,716

Goodwill
5,040

5,141

Other assets
4,675

4,360

Total assets
$
237,344

$
222,764

Liabilities and shareholders’ equity
Current liabilities:
Accounts payable
$
5,638

$
4,873

Accrued expenses and other liabilities
5,423

7,908

Income taxes payable
886

559

Dividends payable
2,402

2,392

Total current liabilities
14,349

15,732

Deferred income taxes
8,509

8,501

Other noncurrent liabilities
269

272

Total liabilities
23,127

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, 26,688,080 and 26,572,774 shares outstanding
27

27

Capital in excess of par value
79,543

73,499

Retained earnings
141,239

128,818

Accumulated other comprehensive income (loss)
(6,592
)
(4,085
)
Total shareholders’ equity
214,217

198,259

Total liabilities and shareholders’ equity
$
237,344

$
222,764


The accompanying Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.
3

Sun Hydraulics Corporation
Consolidated Statements of Operations
(in thousands, except per share data)
Three months ended
June 27, 2015
June 28, 2014
(unaudited)
(unaudited)
Net sales
$
54,016

$
61,050

Cost of sales
32,612

35,294

Gross profit
21,404

25,756

Selling, engineering and administrative expenses
7,329

7,379

Operating income
14,075

18,377

Interest (income) expense, net
(344
)
(284
)
Foreign currency transaction (gain) loss, net
260

(37
)
Miscellaneous (income) expense, net
185

274

Income before income taxes
13,974

18,424

Income tax provision
4,726

6,238

Net income
$
9,248

$
12,186

Basic net income per common share
$
0.35

$
0.46

Weighted average basic shares outstanding
26,684

26,444

Diluted net income per common share
$
0.35

$
0.46

Weighted average diluted shares outstanding
26,684

26,444

Dividends declared per share
$
0.090

$
0.090


The accompanying Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.
4

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

Six months ended
June 27, 2015
June 28, 2014
(unaudited)
(unaudited)
Net sales
$
108,402


$
117,859

Cost of sales
65,603


68,036

Gross profit
42,799

49,823

Selling, engineering and administrative expenses
14,615


14,720

Operating income
28,184

35,103

Interest (income) expense, net
(661
)

(596
)
Foreign currency transaction (gain) loss, net
(699
)

(30
)
Miscellaneous (income) expense, net
212


358

Income before income taxes
29,332

35,371

Income tax provision
9,707


11,800

Net income
$
19,625

$
23,571

Basic net income per common share
$
0.74


$
0.89

Weighted average basic shares outstanding
26,645


26,409

Diluted net income per common share
$
0.74


$
0.89

Weighted average diluted shares outstanding
26,645


26,409

Dividends declared per share
$
0.270


$
0.270


Sun Hydraulics Corporation
Consolidated Statements of Comprehensive Income (Loss) (unaudited)
(in thousands)
Three months ended
Six months ended
June 27, 2015
June 28, 2014
June 27, 2015
June 28, 2014
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Net income
$
9,248

$
12,186

$
19,625

$
23,571

Other comprehensive income (loss)


Foreign currency translation adjustments
2,165

2,741

(2,359
)
2,668

Unrealized gain (loss) on available-for-sale securities
(236
)
126

(148
)
195

Total other comprehensive income (loss)
1,929

2,867

(2,507
)
2,863

Comprehensive income
$
11,177

$
15,053

$
17,118

$
26,434


The accompanying Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.
5

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


11




—

Shares issued, ESPP


16


550



550

Shares issued, shared distribution


94


3,535



3,535

Stock-based compensation




1,959



1,959

Dividends declared





(7,204
)

(7,204
)
Net income





19,625


19,625

Other comprehensive income (loss)






(2,507
)
(2,507
)
Balance, June 27, 2015
—

$
—

26,688

$
27

$
79,543

$
141,239

$
(6,592
)
$
214,217


The accompanying Notes to the Consolidated, Unaudited Financial Statements are an integral part of these financial statements.
6

Sun Hydraulics Corporation
Consolidated Statements of Cash Flows
(in thousands)
Six months ended
June 27, 2015
June 28, 2014
(unaudited)
(unaudited)
Cash flows from operating activities:
Net income
$
19,625

$
23,571

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
4,572

4,212

(Gain)Loss on disposal of assets
94

134

Provision for deferred income taxes
98

50

Allowance for doubtful accounts
(29
)
—

Stock-based compensation expense
1,959

1,853

(Increase) decrease in, net of assets acquired:
Accounts receivable
(1,992
)
(5,682
)
Inventories
1,668

(856
)
Income taxes receivable
—

954

Other current assets
(37
)
(1,601
)
Other assets
373

(99
)
Increase (decrease) in, net of liabilities assumed:
Accounts payable
765

1,346

Accrued expenses and other liabilities
1,050

2,752

Income taxes payable
327

21

Other noncurrent liabilities
(3
)
17

Net cash provided by operating activities
28,470

26,672

Cash flows from investing activities:
Investment in licensed technology
(575
)
—

Capital expenditures
(3,079
)
(5,057
)
Purchases of short-term investments
(12,025
)
(18,990
)
Proceeds from sale of short-term investments
10,611

19,149

Net cash used in investing activities
(5,068
)
(4,898
)
Cash flows from financing activities:
Proceeds from stock issued
550

409

Dividends to shareholders
(7,194
)
(7,129
)
Change in restricted cash
3

(20
)
Net cash used in financing activities
(6,641
)
(6,740
)
Effect of exchange rate changes on cash and cash equivalents
(1,937
)
2,193

Net increase (decrease) in cash and cash equivalents
14,824

17,227

Cash and cash equivalents, beginning of period
56,843

54,912

Cash and cash equivalents, end of period
$
71,667

$
72,139

Supplemental disclosure of cash flow information:
Cash paid:
Income taxes
$
9,369

$
10,775

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.
7

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 six month period ended June 27, 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
Six Months Ended
June 27, 2015
June 28, 2014
June 27, 2015
June 28, 2014
Net income
$
9,248

$
12,186

$
19,625

$
23,571

Weighted average basic shares outstanding
26,684

26,444

26,645

26,409

Basic net income per common share
$
0.35

$
0.46

$
0.74

$
0.89

Effect of dilutive stock options
—

—

—

—

Weighted average diluted shares outstanding
26,684

26,444

26,645

26,409

Diluted net income per common share
$
0.35

$
0.46

$
0.74

$
0.89



8


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 June 27, 2015 , 634,362 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 six months ended June 27, 2015 and June 28, 2014 , totaled $1,402 and $1,357 , respectively.

The following table summarizes restricted stock activity from December 27, 2014, through June 27, 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 June 27, 2015
185

—

The Company had $3,899 of total unrecognized compensation cost related to restricted stock awards granted under the 2011 Plan as of June 27, 2015 . That cost is expected to be recognized over a weighted average period of 1.29 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 16,866 shares at a weighted average price of $32.63 , and 12,304 shares at a weighted average price of $33.35 , under the ESPP during the six months ended June 27, 2015 and June 28, 2014 , respectively. The Company recognized $124 and $104 of compensation expense during the six months ended June 27, 2015 and June 28, 2014 , respectively. At June 27, 2015 , 636,527 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

9

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 June 27, 2015 , 212,124 shares remained available for issuance under the 2012 Directors Plan. Directors were granted 10,625 and 8,500 shares for the six months ended June 27, 2015 and June 28, 2014 , respectively. The Company recognized director stock compensation expense of $409 and $336 for the six months ended June 27, 2015 and June 28, 2014 , respectively.

4. RESTRICTED CASH
On June 27, 2015 , the Company had restricted cash of $316 . A restricted cash reserve for customs and excise taxes in the U.K. operation was $ 47 at June 27, 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 $ 269 at June 27, 2015 , represents the holdback of the purchase price associated with the acquisition of Seungwon on October 18, 2012.

5. INVENTORIES
June 27, 2015
December 27, 2014
Raw materials
$
5,578

$
6,329

Work in process
3,890

3,979

Finished goods
3,616

4,433

Provision for slow moving inventory
(654
)
(643
)
Total
$
12,430

$
14,098


6. GOODWILL AND INTANGIBLE ASSETS
A summary of changes in goodwill at June 27, 2015 is as follows:
Balance, December 27, 2014
$
5,141

Acquisitions
—

Currency translation
(101
)
Balance, June 27, 2015
$
5,040


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 27, 2014 indicated that there was no impairment of the carrying value of the goodwill at HCT. As of June 27, 2015 , no factors were identified that indicated impairment of the carrying value of goodwill.

In 2014, the Company entered into a licensing agreement with Sturman Industries, Inc., recognizing intangible assets of $1,075 in 2014 and $575 in the six months ending June 27, 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 June 27, 2015 and December 27, 2014 , intangible assets consisted of the following:

10

June 27, 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


$
(302
)

$
472


$
774


$
(264
)

$
510

Non-compete agreement
11


(11
)

—


11


(10
)

1

Technology
935


(260
)

675


868


(216
)

652

Customer relationships
1,751


(317
)

1,434


1,751


(272
)

1,479

Licensing agreement
1,650

(60
)
1,590

1,075

(11
)
1,064


$
5,121


$
(950
)

$
4,171


$
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 $150 .
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 six months ended June 27, 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 June 27, 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 June 27, 2015 , the Company was in compliance with all debt covenants related to Facility A as follows:

11

Covenant
Required Ratio/Amount
Actual Ratio/Amount
Minimum Tangible Net Worth
$175,067
$
205,006

Minimum EBITDA
Not less than $5 million
$
66,444

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 June 27, 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 June 27, 2015 , and June 28, 2014 .

8. INCOME TAXES
At June 27, 2015 , the Company had an unrecognized tax benefit of $1,206 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 June 27, 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 June 27, 2015
Three Months Ended June 28, 2014
Six months ended June 27, 2015
Six months ended June 28, 2014
Net sales




Americas
$
25,940

$
30,259

$
51,829

$
55,843

Europe/Africa/ME
16,302

18,773

32,916

36,922

Asia/Pacific
11,774

12,018

23,657

25,094

Total
$
54,016

$
61,050

$
108,402

$
117,859


12

June 27, 2015
December 27, 2014
Total assets


Americas
$
158,798

$
145,816

Europe/Africa/ME
61,559

59,439

Asia/Pacific
16,987

17,509

Total
$
237,344

$
222,764

Long-lived assets


Americas
$
73,070

$
73,315

Europe/Africa/ME
8,802

9,233

Asia/Pacific
4,321

4,669

Total
$
86,193

$
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.

13

The following tables provide information regarding the Company’s assets and liabilities measured at fair value on a recurring basis at June 27, 2015 and December 27, 2014 .
June 27, 2015
Adjusted Cost
Unrealized Gains
Unrealized Losses
Fair Value
Assets




Level 1:




Equity securities
$
1,591

$
32

$
(212
)
$
1,411

Mutual funds
3,488

5

(315
)
3,178

Subtotal
$
5,079

$
37

$
(527
)
$
4,589

Level 2:




Corporate fixed income
$
34,272

$
12

$
(1,013
)
$
33,271

Municipal bonds
3,038

—

(76
)
2,962

Certificates of deposit and time deposits
2,237

—

—

2,237

Asset backed securities
719

—

(29
)
690

Subtotal
$
40,266

$
12

$
(1,118
)
$
39,160

Total
$
45,345

$
49

$
(1,645
)
$
43,749

Liabilities




Level 1:




Phantom stock units
$
47

$
—

$
—

$
47

Total
$
47

$
—

$
—

$
47


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 six months ended June 27, 2015 of $117 and a net realized gain of $160 during the six months ended June 28, 2014 . As of June 27, 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 six month period ended June 27, 2015 .

14

Maturities of investments at June 27, 2015 are as follows:

Adjusted Cost

Fair Value
Due in less than one year
$
15,259


$
15,128

Due after one year but within five years
17,098


16,749

Due after five years but within ten years
4,673


4,184

Due after ten years
3,236


3,099

Equity securities
1,591


1,411

Mutual Funds
3,488


3,178

Total
$
45,345


$
43,749

The Company reports phantom stock units as a liability. The Company recognized expense relating to this liability of $17 and $21 , for the six month periods ended June 27, 2015 and June 28, 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 June 27, 2015 .

15


11. ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in Accumulated Other Comprehensive Income by Component
Six Months Ended June 27, 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
(222
)
(2,359
)
(2,581
)
Amounts reclassified from accumulated other comprehensive income
74

—

74

Net current period other comprehensive income (loss)
(148
)
(2,359
)
(2,507
)
Balance, June 27, 2015
$
(1,007
)
$
(5,585
)
$
(6,592
)
Reclassifications out of Accumulated Other Comprehensive Income
Six Months Ended June 27, 2015
Details about Accumulated Other
Comprehensive Income Components
Six Months Ended
June 27, 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
$
(117
)
Miscellaneous (income) expense, net

(117
)
Total before tax

43

Tax benefit

$
(74
)
Net of tax
Total reclassifications for the period
$
(74
)




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.

16

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.

14. SUBSEQUENT EVENT
The Company sold its 10,000 square foot distribution and manufacturing facility in Incheon, Korea on July 6, 2015. A gain on the disposal of the building of approximately $ 1,300 will be recognized in the third quarter of 2015.

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

17

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.

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 index of shipments of hydraulic products decreased 11% for the three-month period ending June 27, 2015 , compared to the same period of the prior year.
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 53.5 in June 2015 compared to 55.7 in June 2014. The U.S. PMI index registered 52.7 for July 2015, indicating expansion in the manufacturing sector for the 31st consecutive month, albeit, at a slower rate.











18


Results for the second quarter
(in millions except net income per share)
June 27, 2015
June 28, 2014
Increase/(Decrease)
Three Months Ended
Net sales
$
54.0

$
61.1

(12
)%
Net income
$
9.2

$
12.2

(25
)%
Net income per share:
Basic
$
0.35

$
0.46

(24
)%
Diluted
$
0.35

$
0.46

(24
)%
Six Months Ended
Net sales
$
108.4

$
117.9

(8
)%
Net income
$
19.6

$
23.6

(17
)%
Net income per share:
Basic
$
0.74

$
0.89

(17
)%
Diluted
$
0.74

$
0.89

(17
)%

The global business climate continues to be difficult. Unfavorable fluctuations in demand and currency rates impacted second quarter performance in all geographic markets. Second quarter demand in the Americas was down 14%. European sales were down 13%, 6% of which related to currency. Asian sales decreased by 2%. Despite the slowing growth of the Chinese economy, demand in China increased by 9% as a result of Sun's marketing focus over the last couple years. As expected, the strengthening U.S. Dollar continued to negatively impact sales in Q2 by an estimated $1.8M and reduced EPS by $0.05 over last year.

While this continues to be a challenging economic environment, Management remains focused on things that can be controlled. The Company is investing for the long term in both operational excellence and marketing efforts around the world. Operationally, Sun is harnessing advancements in manufacturing technology and automating processes for better efficiency. Globally, the Company has added marketing resources over the last three months which include field application engineers in Europe and Asia, as well as a business development function to work across the organization. QuickDesign, Sun's tool which enables users to quickly configure a custom integrated package through the website, is gaining significant traction. There has been a sizable increase in the quantity of design requests with actual sales following suit. Through these and other resources, Sun continues to create competitive opportunities in the marketplace.

Product development efforts remain in the forefront. The Company's latest endeavor, initially announced as a technology collaboration back in November, has been developed into a commercially viable product line that integrates digital control into Sun’s electrically-actuated cartridge valves. Sun will be the first to bring Digital Logic Valve (DLV) technology to the fluid power market. These valves are lighter and smaller than a comparative electrically-actuated valve and operate faster while consuming significantly less energy. Preliminary prototyping phases are complete and beta testing has begun. Management looks forward to the next generation of applications that will benefit from this technology.


Outlook
Third quarter 2015 revenues are expected to be approximately $50 million, down 8% from the third quarter of 2014. Earnings per share are estimated to be $0.32 to $0.34 compared to $0.37 in the same period a year ago.   Currency is responsible for $1.9M of the decline in revenues and $0.04 of the decline in earnings per share in the Q3 estimates.  Q3 EPS estimates also include a one-time gain of approximately $0.04 related to the sale of a building used in our South Korean operation.  The building was vacated and held for sale in Q4 2014 when the Korean operations were consolidated into a new facility.






19

COMPARISON OF THE THREE MONTHS ENDED JUNE 27, 2015 AND JUNE 28, 2014
Net Sales
Net sales were $54.0 million , a decrease of $7.0 million , or 11.5% , compared to $61.1 million in the second 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 2.5%, or $1.4 million to sales. Changes in exchange rates had a negative impact on sales of approximately $2.1 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 2.0% or $0.2 million , to $11.8 million in the second 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 second quarter of 2015. EAME sales decreased 13.2% or $2.5 million , to $16.3 million in the second 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 $1.8 million in the second quarter of 2015. Sales to the Americas decreased 14.3% or $4.3 million , to $25.9 million in the second quarter of 2015, primarily related to decreased demand in the U.S.
Gross Profit
Gross profit decreased $4.4 million or 16.9% , to $21.4 million in the second quarter of 2015, compared to $25.8 million in the second quarter of last year. Gross profit as a percentage of net sales decreased to 39.6% in the second quarter of 2015, compared to 42.2% in the second quarter of last year. Lower sales volume reduced gross profit by approximately $3.6 million.The remainder of the decrease resulted from higher costs as a percent of sales including, material costs of $1.2 million, labor costs of $0.4, and overhead costs of $0.6 million. These increases were partially offset by pricing.
Selling, Engineering and Administrative Expenses
Selling, engineering and administrative expenses remained flat at $7.3 million in the second quarters of 2015 and 2014.
Operating Income
Operating income decreased $4.3 million or 23.4% , to $14.1 million in the second quarter of 2015, compared to $18.4 million in the second quarter last year, with operating margins of 26.1% and 30.1% for the second 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 $12.5 million to our consolidated operating income in the second quarter 2015, compared to $14.9 million in the second quarter of 2014, a decrease of $2.4 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 $15.9 million in the second quarter of 2015 compared to $16.1 million in the second quarter of 2014. As demand strengthens internationally, the U.S. legal entity will benefit from these direct export sales.

Our Korean subsidiary had a minimal impact on our consolidated operating income in the second quarter of 2015 compared to a contribution of $0.3 million in the second quarter of 2014, a decrease of $0.3 million.


20

Our German subsidiary contributed $1.0 million to our consolidated operating income in the second quarter of 2015 compared to $1.8 million during the second quarter of 2014, a decrease of $0.8 million. Operating margins were 15.4% and 23.8%, in 2015 and 2014, respectively.

Our U.K. subsidiary contributed $0.6 million to our consolidated operating income in the second quarter of 2015 compared to $1.2 million in the second quarter of 2014.
Interest Income, Net
Net interest income was $0.3 million for the quarters ended June 27, 2015 and June 28, 2014 , respectively. The Company currently has no outstanding debt. Total average cash and investments for the quarter ended June 27, 2015 , was $111.1 million compared to $104.1 million for the quarter ended June 28, 2014 .
Miscellaneous (Income) Expense, Net
Net miscellaneous expense was $0.4 million for the quarter ended June 27, 2015 , compared to net miscellaneous expense of $0.3 million for the quarter ended June 28, 2014 .
Income Taxes
The provision for income taxes for the quarter ended June 27, 2015 , was 33.8% of pretax income compared to 33.9% for the quarter ended June 28, 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.

COMPARISON OF THE SIX MONTHS ENDED JUNE 27, 2015 AND JUNE 28, 2014
Net Sales
Net sales were $108.4 million , a decrease of $9.5 million , or 8.0% compared to $117.9 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 2.5%, or $2.7 million to sales. Changes in exchange rates had a negative impact on sales of approximately $3.6 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 5.7% or $1.4 million, to $23.7 million in 2015, primarily related to decreased demand from Korea. Exchange rates had a $0.5 million negative impact on Asia/Pacific sales in 2015. EAME sales decreased 10.9% or $4.0 million, to $32.9 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 $3.1 million in 2015. Sales to the Americas decreased 7.1% or $4.0 million, to $51.8 million in 2015, driven by decreased demand in the U.S.
Gross Profit
Gross profit decreased $7.0 million or 14.1% , to $42.8 million in 2015, compared to $49.8 million in 2014. Gross profit as a percentage of net sales decreased to 39.5% in 2015, compared to 42.3% last year. Lower sales volume reduced gross profit by approximately $5.1 million.The remainder of the decrease resulted from higher costs as a percent of sales including, material costs of $1.8 million, labor costs of $1.0, and overhead costs of $1.8 million. These increases were partially offset by pricing.
Selling, Engineering and Administrative Expenses
Selling, engineering and administrative expenses decreased 0.7%, or $0.1 million, to $14.6 million in 2015, compared to $14.7 million last year.
Operating Income
Operating income decreased 6.9 million or 19.7% , to $28.2 million in 2015, compared to $35.1 million last year, with operating margins of 26.0% and 29.8% for 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

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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 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 $24.5 million to our consolidated operating income in 2015, compared to $27.9 million in 2014, a decrease of $3.4 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 $31.2 million in 2015 compared to $31.4 million in 2014. As demand strengthens internationally, the U.S. legal entity will benefit from these direct export sales.

Our Korean subsidiary contributed $0.1 million to our consolidated operating income in 2015 compared to $1.1 million in 2014.

Our German subsidiary contributed $2.2 million to our consolidated operating income in 2015 compared to $3.7 million during 2014, a decrease of $1.5 million. Operating margins were 16.7% and 24.1%, in 2015 and 2014, respectively.

Our U.K. subsidiary contributed $1.5 million to our consolidated operating income in 2015 compared to $2.3 million 2014.
Interest Income, Net
Net interest income was $0.7 million in 2015, compared to $0.6 million in 2014. The Company currently has no outstanding debt. Total average cash and investments for the six months ended June 27, 2015, was $ 108.1 million compared to $102.5 million for the six months ended June 28, 2014.
Miscellaneous (Income) Expense, Net
Net miscellaneous expense was $0.5 million in 2015, compared to net miscellaneous expense of $0.4 million in 2014.
Income Taxes
The provision for income taxes for the six months ended June 27, 2015, was 33.1% of pretax income compared to 33.4% 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 six months ended June 27, 2015 , was $28.5 million , an increase of $1.8 million , compared to $26.7 million for the six months ended June 28, 2014 . Net income was down approximately $3.9 million from the prior period. Changes in working capital related to increases in accounts receivable of $2.0 million during 2015, compared to $5.7 million during 2014. Decreases in inventory were $1.7 million during 2015, compared to an increase of $ 0.9 million during 2014. These changes are the result of decreased days sales outstanding and improved inventory turns. Increases in accounts payable and accruals were $1.8 million during 2015, compared to $4.1 million during 2014.  Cash on hand increased $14.8 million from $56.8 million at the end of 2014 to $71.7 million at June 27, 2015 . Days sales outstanding (DSO) were 33 at June 27, 2015 , and 34 at June 28, 2014 . Inventory turns were 10.6 as of June 27, 2015 , and 9.6 as of June 28, 2014 .
Capital expenditures were $3.1 million for the six months ended June 27, 2015 , primarily made up of purchases of machinery and equipment. Capital expenditures for 2015 are estimated to be $8.0 million, primarily related to purchases of machinery and equipment.

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The Company declared a quarterly cash dividend of $0.09 per share payable on July 15, 2015, to shareholders of record as of June 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.
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 six 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,

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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 June 27, 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 June 27, 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 June 27, 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 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 June 27, 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 June 27, 2015 , that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

24

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 June 28, 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
March 29 through April 28
—

April 29 through May 28
—

May 29 through June 28
225

$
37.74

(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 August 4, 2015.
SUN HYDRAULICS CORPORATION
By:
/s/ Tricia L. Fulton
Tricia L. Fulton
Chief Financial Officer (Principal Financial and Accounting Officer)

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